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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended May 31, 1999
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER 000-20537
WALTER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3429953
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1500 NORTH DALE MABRY HIGHWAY 33607
TAMPA, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 871-4811
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------- --------------------------------------------------
COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of the Common Stock on August 16, 1999 as
reported by the New York Stock Exchange, was approximately $405.0 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /
Number of shares of common stock outstanding as of August 16, 1999:
50,035,759
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders of the Company to be held October 14, 1999 are incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(a) Narrative Description of Business and Properties
General
Walter Industries, Inc. (the "Company" or "Walter Industries") is a
diversified holding company with major interests in homebuilding/financing and
industrial operations. The Company was organized in 1987 for the purpose of
acquiring Jim Walter Corporation ("Original Jim Walter"). The Company's
financial statements reflect the allocation of the purchase price of Original
Jim Walter based upon the fair value of the assets acquired and the liabilities
assumed. On December 17, 1989, the Company and most of its subsidiaries each
filed a voluntary petition for reorganization under Chapter 11 of Title 11 of
the United Sales Code in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division (the "Bankruptcy Court"). The Company
emerged from bankruptcy on March 17, 1995 (the "Effective Date") pursuant to the
Amended Joint Plan of Reorganization Dated as of December 9, 1994, as modified
on March 1, 1995 (as so modified the "Consensual Plan"). Despite the
confirmation and effectiveness of the Consensual Plan, the Bankruptcy Court
continues to have jurisdiction over, among other things, the resolution of
disputed prepetition claims against the Company and other matters that may arise
in connection with or related to the Consensual Plan. The operations of the
Company are carried out by its operating subsidiaries, the business and
properties of which are described below.
(b) Industry Segments
The Company's industry segment information for the last three fiscal years
is included in Note 15 of "Notes to Consolidated Financial Statements", on pages
F--23 through F--25 included herein.
HOMEBUILDING AND FINANCING
The Homebuilding and Financing segment primarily consists of the operations
of Jim Walter Homes, Inc. and its affiliated construction businesses, ("Jim
Walter Homes"), Mid-State Homes, Inc. ("Mid-State"), and Cardem Insurance Co.,
Ltd. ("Cardem"). In the three years ended May 31, 1999, 1998 and 1997 net sales
and revenues for this segment amounted to $461.3 million, $449.5 million and
$440.7 million, respectively.
Jim Walter Homes
Jim Walter Homes, headquartered in Tampa, Florida, markets and supervises
the construction of detached, single-family residential homes, primarily in the
Southern United States where the weather permits year-round construction, and
provides mortgage financing on such homes. Jim Walter Homes historically has
concentrated on the low to moderately priced segment of the housing market. On
September 23, 1998, Jim Walter Homes acquired Texas-based homebuilder Dream
Homes, Inc. On February 26, 1999, Jim Walter Homes, Inc. acquired Crestline
Homes, Inc. ("Crestline"), a producer of factory-built modular homes, located in
Laurinburg, North Carolina. These acquisitions did not materially affect the
operating results of the Company. Over 332,000 homes have been completed by Jim
Walter Homes since 1946.
Jim Walter Homes' products consist of 100 models of conventionally-built
homes, built of wood on concrete foundations or wood pilings, and ranging in
size from approximately 720 to 2,640 square feet, and 75 modular home models
ranging in size from 990 to 2,500 square feet. Each conventionally-built home is
completely finished on the outside and is unfinished on the inside except for
rough floors, ceiling joists, partition studding and closet framing. The buyer
may elect to purchase optional interior components, including installation
thereof, such as plumbing and electrical materials, heating and air
conditioning, wallboard, interior doors, interior trim and floor finishing. A
buyer selecting all options receives a home considered to be "90% complete",
excluding landscaping and utility connections. Shell homes are those
1
which are completely finished on the outside, with the inside containing only
rough floors, ceiling joists, partition studding and closet framing, but not
interior wallboard, floor finishing, plumbing, electrical wiring and fixtures,
doors and cabinetry. The remaining units are sold at varying stages of interior
finishing. Jim Walter Homes builds all of its conventionally-built homes "on
site" and only after a building contract has been entered into and Jim Walter
Homes is satisfied that the customer has clear title to the land and the site is
suitable for building. The following chart shows the unit sales volume of Jim
Walter Homes and the percent of homes sold (shell, various stages, 90% complete
and modular) in fiscal years ended May 31, 1999, 1998 and 1997.
PERCENT OF UNIT SALES
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FISCAL YEAR ENDED MAY 31, UNITS BUILT SHELL VARIOUS STAGES 90% COMPLETE MODULAR
- -------------------------- ----------- ----- ----------------- --------------- -------------
1999...................... 3,737 12% 9% 75% 4%
1998...................... 3,702 13 7 80 --
1997...................... 3,900 10 1 89 --
During fiscal years 1999, 1998 and 1997 the average net sales price of a
home was $52,000, $48,700 and $47,500, respectively.
Jim Walter Homes' backlog as of May 31, 1999 was 2,683 units compared to
1,883 units at May 31, 1998. The average time to construct a home ranges from
four to sixteen weeks.
At fiscal 1999 year end, Jim Walter Homes operated 121 branch offices
located in 19 states (Alabama, Arizona, Arkansas, Florida, Georgia, Indiana,
Kentucky, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia). In
addition, Jim Walter Homes serves five adjoining states (Delaware, Illinois,
Kansas, Maryland and Pennsylvania). Accordingly, these operations are not
subject to significant concentrations of credit risks. Of such branch offices,
approximately 80% are owned, with the balance on leased land. Substantially all
of these branch offices serve as "display parks" which are designed to allow
customers to view actual models completed to the various stages of interior
finish available. Three new model home parks were opened. Crestline operates two
adjacent facilities (121,000 square feet and 80,000 square feet) on 15 acres of
owned land.
Jim Walter Homes does not own or acquire land for purposes of its operations
and is not a land developer. The actual construction of all conventionally-built
homes sold by Jim Walter Homes is performed by local building sub-contractors
with their own crews, pursuant to subcontracts executed in connection with each
home and inspected by Jim Walter Homes' supervisory personnel. Jim Walter Homes
maintains 27 regional warehouses located throughout its market area from which a
portion of the necessary building materials may be obtained; the balance of
building materials is purchased locally.
A substantial portion of all homes Jim Walter Homes sells are purchased with
financing it arranges. Jim Walter Homes offers qualified customers a fixed
interest rate mortgage without requiring a down payment and does not charge
add-ons such as closing costs, points, credit service fees or private mortgage
insurance. Jim Walter Homes offers credit terms for up to a maximum of 30 years,
usually for 100% of the purchase price of the home. Mortgage instalment notes
currently carry either an 8.5% or 10% "annual percentage rate".
Some portion of the customers who purchase and finance homes through Jim
Walter Homes may not qualify for traditional bank financing of such homes. To
qualify for financing, a potential customer must provide information concerning
monthly income and employment history as well as a legal description of and
evidence that the customer owns the land on which the home is to be built. A
customer's income and employment usually are verified through telephone
conversations with the customer's employer and by examining pay stubs, W-2 forms
or, if the customer is self-employed, income tax returns. An applicant must have
a minimum of one year's continuous employment or, if there has been a change in
employment, the new job must be in the same field of work. Only a small
percentage of secondary income (second jobs or
2
part-time employment) is utilized in qualifying applicants. Ownership of the
land is verified by examining the title record. In addition, Jim Walter Homes'
credit department obtains a credit report which includes, among other
information, a point or grade credit score. If a favorable report is obtained
and the required monthly payment does not exceed 25% of the customer's monthly
gross income, the application usually is approved and a building or instalment
sale contract is executed, a title report is ordered and frequently a survey of
the property is made. Surveys are performed by independent registered surveyors
when, in the opinion of Jim Walter Homes, additional information beyond
examination of the title record is needed. Such additional information is
primarily concerned with verification of legal description, ownership of land
and existence of any encroachments. Particular attention is paid to the credit
information for the most recent three to five years. Attention is also given to
the customer's total indebtedness and other monthly payments. The customer's
credit standing is considered favorable if the employment history, income and
credit report meet the aforementioned criteria.
The building and instalment sale contract is subject to (i) executing a
promissory note which is secured by a first lien on the land and the home to be
built, except in the State of Texas (ii) executing a mortgage, deed of trust,
mechanic's lien contract or other security instrument, (iii) receiving a
satisfactory title report, (iv) inspecting the land to determine that it is
suitable for building and (v) obtaining required permits. Although the mortgage,
deed of trust and similar security instrument constitutes a first lien on the
land and the home to be built, such security instruments are not insured by the
Federal Housing Administration, guaranteed by the Department of Veterans Affairs
or otherwise insured or guaranteed.
Jim Walter Homes does not obtain appraisals or title insurance. Although
consideration is given to the ratio of the amount financed to the estimated
value of the home and the land securing such amount, there is no explicit
appraisal-based loan-to-value test. However, there is a requirement that the
value of the lot on which the home is to be built, as estimated solely on the
basis of Jim Walter Homes' mortgage servicing employees' experience and
knowledge, be at least equal to 10% of the cash selling price of the home
resulting in a maximum initial loan-to-value ratio of approximately 90%. Prior
to occupancy of the new home, the buyer must complete utility hook-ups and any
other components not purchased from Jim Walter Homes, arrange for the final
building inspection and, if required, obtain a certificate of occupancy. The
costs to complete a new home depend on the stage of completion of the home
purchased and whether public water and sewer systems are available or wells and
septic tanks must be installed. Such costs to complete the home could range from
10% to 20% of the sales price (based upon a 90% complete home).
Upon completion of construction of a new home to the agreed-upon percentage
of completion, in the ordinary course of business pursuant to an Agreement of
Purchase and Sale of Instalment Obligations and Servicing of Delinquent
Accounts, Jim Walter Homes sells the building and instalment sale contract, the
note and the related mortgage, deed of trust or other security instrument to
Mid-State and provides servicing on all delinquent payments, including
collection of delinquent payments, recommendations of foreclosure, foreclosure
and resale of foreclosed properties.
Jim Walter Homes' business has tended to be countercyclical to national home
construction activity when interest rates are high. In times of high interest
rates and limited availability of mortgage funds that result in limited new home
construction, Jim Walter Homes' volume of home sales tends to increase due to
the favorable financing it has historically offered.
The single-family residential housing industry is highly competitive. Jim
Walter Homes competes in each of its market areas on the basis of price, design,
finishing options and accessibility to financing with numerous homebuilders,
ranging from regional and national firms to small local companies. Jim Walter
Homes also competes with manufactured and modular housing. Jim Walter Homes'
strategy is to compete in a specific segment of the housing market by offering
customers quality traditionally-built homes, at affordable prices with favorable
financing and no closing costs. For the calendar year 1998, Jim Walter Homes was
the sixteenth largest builder of detached single-family homes in the United
States after having
3
been the twelfth largest builder in 1997, the eleventh largest builder in 1996
and the eighth largest builder in 1995.
Mid-State
Mid-State, headquartered in Tampa, Florida, was established in 1958 to
purchase and service mortgage instalment notes from Jim Walter Homes on
conventionally-built homes constructed and sold by Jim Walter Homes. Mid-State
Trust II ("Trust II"), Mid-State Trust III ("Trust III"), Mid-State Trust IV
("Trust IV"), Mid-State Trust V ("Trust V"), Mid-State Trust VI ("Trust VI") and
Mid-State Trust VII ("Trust VII") are Delaware business trusts organized by
Mid-State, which owns all of the beneficial interest in Trust III, Trust IV,
Trust V, Trust VI and Trust VII. Trust IV owns all of the beneficial interest in
Trust II.
The gross amount of instalment notes receivable, the economic balance and
outstanding indebtedness of each trust as of May 31, 1999 are as follows: (in
thousands)
MAY 31, 1999
----------------------------------------
GROSS ECONOMIC
BALANCE BALANCE DEBT
------------ ------------ ------------
Loan and Security Agreement......................... $ -- $ -- $ 89,300
Trust II............................................ 617,265 398,932 258,400
Trust III........................................... 257,751 145,573 48,576
Trust IV............................................ 1,219,063 561,602 590,783
Trust V............................................. 332,938 126,188 105,000
Trust VI............................................ 925,677 379,118 359,342
Trust VII........................................... 817,339 323,210 306,750
Unpledged........................................... 21,105 8,113 -
------------ ------------ ------------
$ 4,191,138 $ 1,942,736 $ 1,758,151
------------ ------------ ------------
------------ ------------ ------------
On May 27, 1999, Mid-State renewed its 364-day, $90.0 million Loan and
Security Agreement (the "Loan and Security Agreement") with Kitty Hawk Funding
Corporation, an affiliate of Bank of America (as successor to NationsBank), as a
lender, and as agent and bank investor. Advances under the Loan and Security
Agreement are secured by Mid-State's beneficial interest in Trust III and
evidenced by a variable funding note. The facility currently matures on May 25,
2000, but provides for extensions of the maturity through May 31, 2002.
Accordingly, the $89.3 million of borrowings outstanding at May 31, 1999 have
been classified as long-term debt. Principal payments are required on any day in
which the outstanding principal amount of all advances under the Loan and
Security Agreement exceed the borrowing base. Additionally, commencing on May
31, 2001, Mid-State is required to prepay $1.5 million on May 31, August 31,
November 30 and February 28. The outstanding principal of all advances must be
paid when the facility is terminated. Interest must be paid on the last day of
each tranche period at either the commercial paper rate, the prime rate or the
LIBOR rate plus .47% as determined by Mid-State and approved by the lender. The
advances under the Loan and Security Agreement are to be satisfied solely from
the assets of Mid-State and are non-recourse to Walter Industries and any of its
other subsidiaries.
In April 1988, Mid-State sold to Trust II instalment notes and mortgages
which it had acquired from Jim Walter Homes through February 29, 1988 having a
gross value of $3.376 billion and an aggregate outstanding economic balance of
$1.750 billion pursuant to a purchase and sale agreement, in exchange for a
purchase price of $1.327 billion, representing the net cash proceeds from the
public offering of $1.450 billion aggregate face amount of mortgage-backed notes
of Trust II ("Trust II Mortgage-Backed Notes") after paying the expenses
associated with the sale of such Trust II Mortgage-Backed Notes.
Under the Trust II indenture for the Trust II Mortgage-Backed Notes, if
certain criteria as to performance of the pledged instalment notes are met,
Trust II is allowed to make quarterly distributions of cash to Trust IV, its
sole beneficial owner, to the extent that cash collections on such instalment
notes
4
exceed Trust II's cash expenditures for its operating expenses, interest expense
and mandatory debt payments on the Trust II Mortgage-Backed Notes. In addition
to the performance-based distributions, the indenture permits distribution of
additional excess funds, if any, provided such distributions are consented to by
Financial Security Assurance Inc., a property and casualty insurance company and
the guarantor of the Trust II Mortgage-Backed Notes. In June 1998, an agreement
was reached with Financial Security Assurance Inc. to release approximately
$121.6 million of funds held by Trust II, which were subject to retention at
July 1, 1998. Such funds were utilized to pay down Trust IV indebtedness.
On July 1, 1992, mortgage instalment notes having a gross value of $638.1
million and an economic balance of $296.2 million were sold by Mid-State to
Trust III in exchange for the net proceeds from the public issuance, by Trust
III, of $249.9 million of asset-backed notes. Net proceeds were used to repay in
full all outstanding indebtedness due under a revolving credit facility, with
the excess cash used to fund the ongoing operations of the Company and its
subsidiaries.
On March 16, 1995, mortgage instalment notes having a gross value of $2.020
billion and an economic balance of $826.7 million were sold by Mid-State to
Trust IV. On such date Mid-State also sold its beneficial interest in Trust II
to Trust IV. Trust II had a total collateral value of $910.5 million with $605.7
million of Trust II Mortgage-Backed Notes outstanding. These sales were in
exchange for the net proceeds from the public issuance by Trust IV of $959.4
million of asset-backed notes ("Trust IV Asset Backed Notes").
On March 3, 1995, Mid-State established Trust V to provide temporary
financing to Mid-State for its current purchases of instalment notes and
mortgages from Jim Walter Homes. On March 3, 1995, Trust V entered into the
three-year $500.0 million Variable Funding Loan Agreement (the "Trust Variable
Funding Loan Agreement") with Enterprise Funding Corporation, an affiliate of
Bank of America (as successor to NationsBank), as lender and as Administrative
Agent. The agreement was amended to reduce the facility (the "Trust V Variable
Funding Loan") to $400.0 million effective July 31, 1997. The facility is an
evergreen facility renewable annually. Periodic paydowns occur from the proceeds
of permanent financings. The facility currently matures on September 29, 1999.
On June 11, 1997, Mid-State purchased mortgage instalment notes from Trust V
having a gross value of $1.196 billion and an economic balance of $462.3
million. Mid-State subsequently sold such mortgage instalment notes to Trust VI.
These sales were in exchange for the net proceeds from the public issuance of
$439.1 million of asset-backed notes.
On December 10, 1998, Mid-State purchased from Trust V instalment notes
having a gross value of $858.7 million and an economic balance of $335.3
million. Mid-State subsequently sold these notes to Trust VII. These sales were
in exchange for the net proceeds from the public issuance of $313.5 million of
asset-backed notes by Trust VII ("Trust VII Asset Backed Notes"). The notes were
issued in a single class and bear interest at 6.34% payable quarterly beginning
March 15, 1999. The notes have a final maturity of December 1, 2036. The $313.5
million in proceeds were primarily used to repay related asset-backed borrowings
of $284.0 million under the Trust V warehouse facility. Lehman Brothers, Inc.,
an affiliate of Lehman Brothers Holdings, Inc., which owned 2.8 million shares
of the Company's common stock at May 31, 1999, served as an underwriter in
connection with the public issuance of the Trust VII Asset Backed Notes and
received underwriting commissions and fees of $.8 million.
5
The instalment notes sold by Mid-State to Trusts II, III, IV, V, VI and VII
are serviced by Mid-State pursuant to servicing agreements entered into with
each trust. Mid-State, in connection with such servicing agreements, has entered
into sub-servicing agreements with Jim Walter Homes to provide field servicing
such as collections, repossessions and resales.
The assets of Trusts II, III, IV, VI and VII are not available to satisfy
claims of general creditors of Mid-State or the Company and its other
subsidiaries. The liabilities of Trusts II, III, IV, VI and VII for their
publicly issued debt are to be satisfied solely from proceeds of the underlying
instalment notes and are non-recourse to Mid-State and the Company and any of
its other subsidiaries.
Cardem Insurance
Cardem Insurance is a Hamilton, Bermuda-based offshore reinsurance company.
The predominant portion of its business is reinsuring 75% of the risk on fire
and extended coverage insurance policies issued by Westchester Insurance
Company, an unrelated insurance company. Such insurance policies are with
individual owners of homes constructed by Jim Walter Homes.
WATER TRANSMISSION PRODUCTS
U.S. Pipe
United States Pipe and Foundry Company, Inc. ("U.S. Pipe"), comprising the
Water Transmission Products segment, conducts its business through its Pressure
Pipe and Castings Divisions. The Pressure Pipe Division manufactures and sells a
broad line of ductile iron pressure pipe, pipe fittings, valves and hydrants. It
is one of the nation's largest producers of ductile iron pressure pipe. The
Castings Division produces and sells a wide variety of gray and ductile iron
castings. In the three years ended May 31, 1999, 1998 and 1997, net sales and
revenues for this segment amounted to $460.7 million, $426.4 million and $419.8
million, respectively.
PRESSURE PIPE DIVISION
The Pressure Pipe Division manufactures and markets a complete line of
ductile iron pipe ranging from 4" to 64" in diameter as well as equivalent
metric sizes, at lengths up to 20 feet. In addition, this division produces and
sells a full line of fittings, valves and hydrants of various configurations to
meet municipal specifications. Approximately 85%-90% of the ductile iron
pressure pipe produced by this division is used in the transmission and
distribution of potable water and the remaining 10%-15% is used in the
transmission of waste water and industrial applications. The majority of ductile
iron pressure pipe and related fittings, valves and hydrants are for new
distribution systems. The market for rehabilitation, upgrading and replacement
of pipe systems accounts for approximately 15% of ductile iron pressure pipe
sales. Fittings, valves and hydrants produced by this division account for
approximately 19% of sales.
Ductile iron pressure pipe is manufactured by the deLavaud centrifugal
casting process and is typically classified into three size categories: 1) Small
diameter pipe, ranging from 4" to 12" (approximately 58% of the division's pipe
production), used primarily for potable water distribution systems and small
water system grids; 2) Medium diameter pipe, ranging from 14" to 24"
(approximately 25% of the division's pipe production), used primarily in
reinforcing distribution systems, including looping grids and supply lines; and
3) Large diameter pipe, 30" to 64" (which accounts for the remaining 17% of pipe
production), used for major water and waste water transmission and collection
systems.
The ductile iron pressure pipe industry is highly competitive, with a small
number of manufacturers of ductile iron pressure pipe, fittings, valves and
hydrants. U.S. Pipe is one of the nation's largest producers of ductile iron
pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin
Ductile Iron Pipe Company and American Cast Iron Pipe Company.
6
Additional competition for ductile iron pressure pipe comes from pipe
composed of other materials, such as polyvinylchloride, concrete, fiberglass,
reinforced plastic and steel. Although ductile iron pressure pipe is typically
more expensive than competing forms of pipe, customers choose ductile iron for
its quality, longevity, strength, ease of installation and lack of maintenance
problems.
U.S. Pipe also manufacturers ductile iron fittings. The company believes
that McWane, Inc. has the largest market share in this market segment. U.S. Pipe
is not a major manufacturer of valves and hydrants.
Products of the Pressure Pipe Division are sold primarily to contractors,
water works distributors, municipalities, private utilities and other
governmental agencies. Most ductile iron pressure pipe orders result from
contracts which are bid by contractors or directly issued by municipalities or
private utilities. An increasing portion of ductile iron pressure pipe sales are
made through independent water works distributors. The division maintains
numerous supply depots in leased space throughout the country, which are used as
a source of pipe for start-up projects to support ongoing projects and to aid in
completing projects. The Pressure Pipe Division's sales are primarily domestic,
with foreign sales accounting for approximately 5% of dollar sales in fiscal
1999.
The order backlog of pressure pipe at May 31, 1999 was 119,900 tons, which
represents approximately three months shipments, compared to 121,709 tons at May
31, 1998.
While the pipe business is generally sensitive to economic recession because
of its partial dependence on the level of new construction activity, certain
aspects of Pressure Pipe's operations have in the past helped to reduce the
impact of downturn in new construction. First, Pressure Pipe's products have
experienced a strong level of demand in the replacement market. U. S. Pipe
believes that growth of the replacement market will accelerate as a result of
anticipated major expenditures by government entities, such as the New York,
Boston, Washington, D.C., Atlanta and Philadelphia municipalities, to
rehabilitate aging or inadequate water transmission systems. U.S. Pipe believes
that this represents a significant growth opportunity and that it is well
positioned to take advantage of this opportunity. Second, Pressure Pipe's
facilities are located in regions of the country that have exhibited consistent
economic strength. The Burlington, New Jersey plant is adjacent to the
northeastern market with its significant replacement potential and the
division's operations in the South are located in areas of steady economic
growth. The West Coast, served by the Union City, California plant, has a
critical shortage of water for many of the large metropolitan areas which will
require major transmission pipelines in the future. Because freight costs for
pipe are high, locations close to important markets lower transportation costs,
thereby making the Pressure Pipe Division's products more competitive.
CASTINGS DIVISION
The Castings Division produces a wide variety of gray and ductile iron
castings for a diversified customer base, including special hardness castings
for the pollution control industry. In the year ended May 31, 1999,
approximately 62% of the division's castings sales were directed to the Pressure
Pipe Division, with the balance of sales to various capital goods industries.
7
Properties
The administrative headquarters and manufacturing facilities of U. S. Pipe
are summarized as follows:
BUILDING
LAND SQUARE
FACILITY PRINCIPAL PRODUCTS ACREAGE FOOTAGE
- ---------------------------------------------------------- --------------------------------- ----------- ---------
Administrative headquarters:
Birmingham, AL........................................ 6 122,000
Manufacturing facilities:
Bessemer, AL.......................................... Ductile iron pipe 169 648,000
N. Birmingham, AL..................................... Ductile iron pipe 77 360,000
Union City, CA........................................ Ductile iron pipe 70 121,000
Burlington, NJ........................................ Ductile iron pipe 109 329,000
Chattanooga, TN....................................... Fittings, valves & hydrants 91 648,000
Anniston, AL.......................................... Gray & ductile iron castings 21 240,000
ENERGY SERVICES
Applied Industrial Materials Corporation
On October 15, 1997, the Company completed the acquisition of Applied
Industrial Materials Corporation ("AIMCOR"). Through its Carbon Group, AIMCOR is
a leading international provider of products and outsourcing services to the
petroleum, steel, foundry and aluminum industries. Through its Metals Group,
AIMCOR is also a leading supplier of ferrosilicon in the southeastern United
States. The purchase price was approximately $400.0 million, including direct
acquisition costs of $4.8 million, and is subject to certain indemnity
obligations of the parties as required by the Stock Purchase Agreement. The
acquisition was accounted for using the purchase method of accounting and had an
effective date of September 30, 1997.
AIMCOR's net sales and revenues were $351.2 million for the year ended May
31, 1999 and $285.9 million for the period October 1, 1997 through May 31, 1998.
CARBON PRODUCTS
AIMCOR markets and distributes a variety of grades of petroleum coke and
also applies value-added services to large volumes of petroleum coke and other
relatively low-cost bulk raw materials, such as ores, slags and other materials.
These bulk raw materials are delivered to industrial markets throughout the
world from a variety of global sources as discrete products and services
targeted to meet individual customer needs.
The Carbon Group purchases petcoke primarily from oil refiners. Petcoke is a
coal-like, high carbon fuel source, which is a by-product produced when heavy
fuel oil is refined into gasoline. The average refinery produces 3,000 to 4,000
tons of petcoke per day. By combining and processing the petcoke produced by
several refineries, AIMCOR is able to market larger quantities of consistent
quality petcoke, thereby creating a more marketable product than an individual
refiner could produce on its own. Petcoke is used in industrial furnaces, cement
kilns, steel plants, foundries, paper mills, cogeneration plants and home
heating. Calcined coke is low sulfur petcoke which has been further processed to
remove gases and moisture, and is used as the primary ingredient (for which
there is no economic substitute) in anodes for the smelting of aluminum. The
Company believes that AIMCOR is one of the largest suppliers to the worldwide
petcoke market, shipping approximately 6 million metric tons of petcoke
annually.
AIMCOR has marketed petcoke products for more than 30 years. It maintains
strong relationships with all major United States oil refiners and has an
in-depth knowledge of the end-user markets. AIMCOR's petcoke supply comes
primarily from oil refiners on the Gulf Coast (56%) and the West Coast
8
(44%) of the United States. AIMCOR's terminal and services operating group has
entered into long-term contracts with leading refiners including Mobil, Shell
and Citgo. The typical refinery has no means for the handling or storage of this
continuously produced by-product; its primary objective is to have AIMCOR take
possession of the petcoke. Refiners typically sign one or two year take-or-pay
contracts with their petcoke handlers and marketers. Under take-or-pay contracts
with oil refineries, AIMCOR is contractually obligated to take delivery of all
or a certain portion of a refiners petcoke output. Price reset provisions in
AIMCOR's supply contracts typically allow for monthly, bi-monthly, quarterly, or
annual price adjustments based on petcoke's world commodity price. Contractual
hardship provisions protect AIMCOR in most cases from precipitous price
fluctuations by allowing repricing even more rapidly than contractual reset
provisions. In some cases, the "net-back" provisions require the refiner to pay
AIMCOR for the removal of petcoke.
AIMCOR limits the duration of forward sales agreements to manage its
exposure to adverse price movements. Forward sales at a fixed price generally
range from two to four months. AIMCOR may agree to sell petcoke to a customer at
a fixed price for as long as a 12 month period, but it typically does so only
after a refiner has agreed to supply AIMCOR a matching quantity of petcoke for
the same period. In light of its ability to periodically reset the price per ton
paid to petcoke suppliers, AIMCOR's exposure to price fluctuations is largely
limited to petcoke held in inventory, and its margin on petcoke sales has
remained relatively stable over time.
AIMCOR markets its products through three operating groups: carbon
specialties, carbon fuels and calcined specialties. The carbon specialties
operating group is responsible for the marketing and sale of petcoke primarily
for steel/foundry, chemical, special cement, other metallurgical or special fuel
applications. The products marketed by this group usually require processing,
storage, screening, blending and customized delivery. The petcoke sold for these
applications typically has a general specification for sulfur of less than 3%.
The carbon fuels operating group is responsible for the marketing and sale of
petcoke for use as a fuel in the cement industry and for utilities in the
worldwide market. The petcoke sold for these markets typically has a sulfur
content above 3%.
The calcined specialties operating group markets and distributes raw petcoke
for calcination and manages the products which either go into or are supplied
from calciners. AIMCOR believes it is the largest non-producer distributor of
calcined petcoke. In addition, AIMCOR is an equity partner in Rain Calcining,
Ltd., a combination petcoke calciner and independent power supplier in
Visakhapatnam, India which commenced operations in April 1998. AIMCOR derives
revenues from its 5% interest in the joint venture as well as from a marketing
arrangement with the joint venture. Calcined petcoke is used as the main carbon
source for anodes in aluminum smelting, and is also used in the titanium, steel
and foundry industries. Calcined petcoke is reprocessed and therefore commands a
higher price on the open market, roughly three to four times higher than the
regular raw material.
AIMCOR markets petcoke through a combination of its internal sales force and
its strategically located shipping terminals throughout the world. AIMCOR's
principal shipping locations are located in Long Beach, California; Texas City,
Texas; Rotterdam, the Netherlands; Ghent, Belgium; and Red Car, United Kingdom.
AIMCOR has 14 sales offices located in ten countries, including Luxembourg, the
Netherlands, Germany, England, Japan, Mexico, Brazil, Belgium, Australia, and
the United States. Rather than marketing through intermediaries or brokers,
AIMCOR maintains direct relationships with most end users through its 49-person
sales force (eight domestic, 41 international). This approach allows AIMCOR to
develop the optimum petcoke quality that meets the customer's specifications. In
some markets, however, international trading companies serve as the financial
intermediaries.
The Carbon Group also performs (on a service contract basis) value-added
services such as cutting, blending, inventory management, stock piling and
removal of petcoke in the refinery, as well as handling, warehousing and
distribution and shipping of petcoke from the refinery to the terminal and
ultimately to
9
the end user. AIMCOR's value-added approach has distinguished it as a leader in
businesses that many competitors treat in a commodity-like manner.
Like coal and oil, the international petcoke market is dollar-denominated,
which limits AIMCOR's exposure to exchange rate fluctuations. Since the United
States petcoke supply dominates the international petcoke market, AIMCOR's
exchange rate exposure is limited to those few markets where it must compete
against local sources or in foreign retail markets, such as household fuels.
METALS
The Metals Group is a leading manufacturer and marketer of ferrosilicon in
the Southeastern United States and is a producer and distributor of a variety of
ferroalloys, metals, minerals and specialty materials used primarily as alloying
agents, fluxing agents and/or performance improvement additives in steelmaking
and metal casting production processes in North American foundry and steel
industries. A ferroalloy is a refined combination of iron and one key element.
The Metals Group is comprised of five distinct but related businesses,
including two joint ventures. It manufactures and markets ferrosilicon,
ferrovanadium, ferromolybdenum, metallurgical process materials, fluorspar and
various other ferroalloys on both an agency and trading basis.
FERROSILICON. AIMCOR's ferrosilicon business is conducted through Tennessee
Alloys Company (the "Joint Venture"), a joint venture between AIMCOR (75%) and
Allegheny/Ludlum Steel, a major specialty steel producer (25%), that was
established in 1975 to build and operate a 40 megawatt, self-baking electrode
furnace located in Bridgeport, Alabama. This facility is a leading supplier of
ferrosilicon in the Southeastern United States and operates at a current
capacity of 33,000 tons of 50% ferrosilicon or 29,000 tons of 75% ferrosilicon.
Under the terms of the Joint Venture agreement, the company and its joint
venture partner are obligated to purchase their pro rata share of the output of
the facility through the year 2005. The company resells its share of the output
through its sales organization to third party steel producers and foundry
operators. As the managing partner, the company controls the day-to day
operations of the Joint Venture. Historically, over 90% of domestic consumption
of ferrosilicon has gone directly to the production of steel and cast iron and,
as a result, the industry is largely affected by the relative strength of the
domestic steel industry and its end-markets.
FERROVANADIUM. AIMCOR's ferrovanadium business is conducted through
Masterloy Products Limited ("Masterloy") located in Ottawa, Canada.
Ferrovanadium is an alloying agent used to impart strengthening properties in
steel and iron. Masterloy is the only producer of ferrovanadium in Canada and
one of only two North American producers engaged in the conversion of vanadium
pentoxide (V(2) O(5)) into 80% ferrovanadium. Masterloy also converts molybdenum
oxide into ferromolybdenum and markets AIMCOR's United States based products to
the Canadian steel industry. Masterloy currently serves 30 customers in Canada
and the United States.
METALLURGICAL PROCESS MATERIALS. AIMCOR's metallurgical process materials
operating facility produces blends of materials used for the desulfurization of
steel and slag conditioning by North American steel producers. AIMCOR focuses
its efforts on the production of more complex and customized materials which
typically require at least three raw material components (E.G., lime, aluminum
and fluorspar) blended in specific ratios to meet customer requirements and sold
either as bulk product or bagged in a variety of sizes. AIMCOR also processes
and sells acid-grade fluorspar as a finished product.
AIMCOR has dedicated considerable resources to developing its metallurgical
process materials production facility, located in Aurora, Indiana, which AIMCOR
believes possesses the most sophisticated production and testing capabilities in
the industry. AIMCOR's objective is to leverage the advantage of its production
and testing capabilities in order to create technically sophisticated, low-cost
alternatives to higher cost raw materials and to improve profitability and grow
its market share as domestic steel producers search for cost-effective solutions
to purify steel and enhance their production processes.
10
Properties
AIMCOR's facilities are summarized below:
SQUARE FOOTAGE
--------------------
FACILITY LOCATION LEASED OWNED
- -------------------------------------------------- ---------------------- --------- ---------
Administrative headquarters....................... Stamford, Connecticut 18,912
Operations (office buildings, terminals &
warehouses)..................................... Gulf Coast(Texas) 67,400
Operations (office buildings, terminals &
warehouses)..................................... West Coast(California) 2,937 321,453
Operations (office buildings, terminals,
warehouses and manufacturing plant)............. International 122,351 29,702
Operations (manufacturing plant).................. Aurora, Indiana 45,965
Operations (manufacturing plant).................. Bridgeport, Alabama 176,900
Sales Office...................................... Pittsburgh,
Pennsylvania 7,870
Sales Office...................................... Birmingham, Alabama 640
OTHER
Other consists of the remaining operating businesses of the Company. In the
three years ended May 31, 1999, 1998 and 1997, net sales and revenues totaled
$348.4 million, $336.6 million and $323.7 million, respectively, including $15.7
million, $16.2 million and $14.7 million, respectively, to U. S. Pipe.
JW Aluminum
JW Aluminum Company ("JW Aluminum"), headquartered in Mt. Holly, South
Carolina, is a leading producer of fin stock, used in heating and air
conditioning applications, and telecommunications cable wrap. JW Aluminum's
other foil and sheet products are used in a variety of applications such as
lithoplate for newspapers and as a facer on foam insulation products. Aluminum
sheet products are primarily used for general building applications such as
siding, gutters, downspouts, roofing, mobile home siding and skirting,
residential siding and window components.
JW Aluminum sold approximately 179 million pounds of aluminum products in
fiscal 1999; 68% were foil products and 32% were sheet products. JW Aluminum
directs its product mix towards higher value-added products such as
custom-coated fin stock and lithographic sheet, where quality and service are
relied upon more than price-driven commodity products.
JW Aluminum operates a single manufacturing 400,000 square foot facility in
Mt. Holly, South Carolina on 38 acres of owned land and with a current rated
capacity of 220 million pounds per year based on its present product mix. These
amounts include fiscal 1999 additions of 50,000 square feet of production space,
1 acre of owned land and 40 million pounds of capacity as a result of a $31
million expansion project. The addition of a wide-width slitter in fiscal 2000
will complete it's expansion program, and production capacity will reach 240
million pounds.
Sloss Industries
Sloss Industries Corporation ("Sloss") is a diversified manufacturing
operation, headquartered in Birmingham, Alabama, which has four major product
lines: foundry coke, furnace coke, slag fiber and specialty chemicals.
Foundry coke is marketed to cast iron pipe plants and foundries producing
castings, such as for the automotive and agricultural equipment industries. It
is shipped primarily into four geographic markets: the East Coast; the
Southeast; and West Coast of the United States, and Mexico. Competition comes
primarily from two merchant suppliers: ABC Coke and Empire Coke Company. In the
year ended May 31, 1999, approximately 59% of the foundry coke produced by Sloss
was sold to U. S. Pipe.
11
Furnace coke is sold primarily to the domestic steel industry for producing
steel in blast furnaces. Furnace coke sales have been at capacity over the past
years to satisfy a long-term contract with National Steel Corporation. Sloss has
only an estimated 1% share of the furnace coke market. Competition comes
primarily from Koppers Company, Inc., Citizens Gas & Coke Utility and steel
producers with excess coking capacity.
Slag fiber is an insulating fiber utilized principally as a raw material by
acoustical ceiling manufacturers. It is also used in manufactured-home
insulation, plastics molding and asphalt paving systems where it is used as a
bonding agent. A related product, processed mineral fiber, is used in friction
materials and thermoplastic molding compounds, adhesives, paints and sealants.
Slag fiber products are manufactured in plants located in Birmingham, Alabama
and Alexandria, Indiana. Of the total slag fiber sales in the year ended May 31,
1999, approximately 64% was sold to Armstrong World Industries and 17% to
Celotex Corporation.
Specialty chemical products are manufactured at plants located in Birmingham
and Ariton, Alabama. The Birmingham product line is composed primarily of
aromatic sulfonic acids and sulfonyl chlorides used in the pharmaceutical,
plasticizer, foundry and coatings industries, as well as a custom manufactured
specialty monomer for the plastics industry. The Ariton facility produces custom
manufactured specialty products for the rubber and plastics industries.
Properties
The manufacturing facilities of Sloss are as follows:
LAND SQUARE
FACILITY ACREAGE FOOTAGE
- -------------------------------------------------------------------------- ----------- ---------
Birmingham, AL
Furnace & foundry coke battery (120 ovens).............................. 511 148,400
Slag fiber plant........................................................ 5 63,000
Synthetic chemicals plant............................................... 5 63,300
Alexandria, IN slag fiber plant........................................... 33 111,900
Ariton, AL specialty chemicals plant...................................... 53 6,880
Southern Precision
Southern Precision Corporation ("Southern Precision") is one of the largest
producers of specialized industrial tooling products and resin-coated sand in
the Southeast.
Properties
The administrative headquarters and manufacturing facilities of Southern
Precision are summarized as follows:
BUILDING
PRINCIPAL LAND SQUARE
FACILITY PRODUCTS ACREAGE FOOTAGE
- ---------------------------------- ------------------------------------- ------------- -----------
Irondale, AL...................... 6 78,000
Administrative headquarters
Manufacturing facility.......... Wood and metal tooling;
Numerically controlled machining
Birmingham, AL.................... Resin-coated sand 5 27,500
Trussville, AL.................... Aluminum & steel fabrication 1 7,100
12
United Land
United Land Corporation ("United Land") owns approximately 39,000 acres of
land, 178,000 acres of mineral rights and 1,500 acres of surface rights,
principally in Alabama.
United Land receives royalties resulting from leases to strip coal miners,
gas producers and timber companies. When market conditions are favorable,
management from time to time sells excess real estate from the holdings of
United Land not utilized by any of the other subsidiaries of the Company.
Vestal Manufacturing
Vestal Manufacturing Company ("Vestal") produces a diversified line of metal
and foundry products for residential, commercial and industrial use. Vestal
manufactures a line of energy saving fireplaces, fireplace inserts, accessories
and wood-burning stoves, as well as lightweight castings for municipal markets
and metal building products, including meter boxes and covers, valve boxes and
covers and manhole covers. Its products are sold through a network of
independent sales agents to hardware and building material distributors, home
centers and mass merchandisers throughout the United States and Canada.
Vestal's performance to a large extent is tied to residential construction.
Foreign competition has also been a factor in recent years.
Properties
The administrative headquarters and manufacturing facilities of Vestal are
summarized as follows:
BUILDING
LAND SQUARE
LOCATION ACREAGE FOOTAGE
- -------------------------------------------------------------------------- ------------- ---------
Sweetwater, TN............................................................ 46
Administrative headquarters............................................. 7,000
Foundry................................................................. 103,000
Steel fabrication plant................................................. 109,000
DISCONTINUED OPERATION
Jim Walter Resources
The operations of Jim Walter Resources, Inc. ("Jim Walter Resources") are
conducted through its Mining Division, which mines and sells coal from three
deep shaft mines in Alabama, and its De-Gas Division, which extracts and sells
methane gas from the coal seams owned or leased by Jim Walter Resources. In the
three years ended May 31, 1999, 1998 and 1997 Jim Walter Resources net sales and
revenues totaled $301.4 million, $360.4 million and $339.5 million,
respectively, including $5.1 million, $5.8 million and $4.2 million,
respectively, to Sloss.
In February 1999 (the "measurement date"), the Company announced its intent
to dispose of Jim Walter Resources. As a result, the operations of Jim Walter
Resources have been classified as a discontinued operation. In February 1999, a
decision was also made to shut down Blue Creek Mine No. 3 ("No. 3 Mine"). The
estimated costs to shut down this mine approximated $53 million. In addition,
Jim Walter Resources realized a $25 million pre-tax gain from a reduction in its
postretirement benefit obligation. Both of the above items were recorded in the
fiscal 1999 third quarter, net of taxes, within the results of discontinued
operation prior to the measurement date.
MINING DIVISION
The Mining Division, headquartered in Brookwood, Alabama, has approximately
8.6 million tons of rated annual coal production capacity from three deep shaft
mines. These mines extract coal from Alabama's Blue Creek seam, which contains
high-quality metallurgical coal. This coal can be used as coking coal as well as
steam coal because it meets current environmental compliance specifications.
Blue Creek coal offers high coking strength with low coking pressure, low sulfur
and low-to-medium ash content
13
with high BTU values and can be sold either as metallurgical coal, used to
produce coke, or as compliance steam coal, used by electric utilities. The
current market price of metallurgical coal generally exceeds the market price of
compliance steam coal. The mines are located in west central Alabama between the
cities of Birmingham and Tuscaloosa.
The majority of coal is mined using longwall extraction technology,
complemented by the more standard continuous mining method. By replacing more
traditional methods of underground mining with longwall technology, the Mining
Division has achieved greater production efficiency, improved safety, superior
coal recovery and lower production costs. The Mining Division currently operates
five longwall mining systems for primary production and 12 continuous miner
sections for the development of mains and longwall panel entries. The Mining
Division's normal operating plan is a longwall/continuous miner ratio of
approximately 75% / 25%.
Recoverable reserves were estimated to be approximately 222 million tons as
of May 31, 1999, of which 197 million tons relate to the three Blue Creek Mines.
A summary of reserves is as follows:
ESTIMATED RECOVERABLE (1) COAL RESERVES AS OF MAY 31, 1999
(IN THOUSANDS OF TONS)
TYPE (4)
-------------
STEAM (S) JIM WALTER
RESERVES (2) CLASSIFICATIONS (3) OR RESOURCES' INTEREST
--------------------------------- ------------------------ METALLUR- ----------------------
MINING PROPERTY TOTAL ASSIGNED UNASSIGNED MEASURED INDICATED GICAL (M) OWNED LEASED (5)
- -------------------- --------- --------- ----------- ----------- ----------- ------------- --------- -----------
No. 3 Mine (9)...... -- -- -- -- -- -- --
No. 4 Mine.......... 67,965 67,965 -- 57,124 10,841 S/M 6,966 60,999
No. 5 Mine.......... 20,452 20,452 -- 20,308 144 S/M 18,688 1,764
No. 7 Mine (9)...... 108,362 108,362 -- 85,554 22,808 S/M 12,591 95,771
--------- --------- ----------- ----------- ----------- --------- -----------
196,779 196,779 -- 162,986 33,793 38,245 158,534
Bessie (10)......... 24,919 -- 24,919 14,880 10,039 -- 658 24,261
--------- --------- ----------- ----------- ----------- --------- -----------
TOTAL............... 221,698 196,779 24,919 177,866 43,832 38,903 182,795
--------- --------- ----------- ----------- ----------- --------- -----------
--------- --------- ----------- ----------- ----------- --------- -----------
QUALITY (6)
------------------------------------- PRODUCTION (7)
BTU/LB -------------------------------
MINING PROPERTY VOLATILITY SULF. MAF(8) 1999 1998 1997
- -------------------- ----------- ----- ----------- --------- --------- ---------
No. 3 Mine (9)...... -- -- -- 864 1,974 2,198
No. 4 Mine.......... 24-30% .75 15,625 1,878 2,194 2,129
No. 5 Mine.......... 22-23% .76 15,625 1,662 1,495 801
No. 7 Mine (9)...... 19-23% .66 15,625 2,357 2,449 2,513
Bessie (10)......... -- -- --
--------- --------- ---------
TOTAL............... 6,761 8,112 7,641
--------- --------- ---------
--------- --------- ---------
- ------------------------------
(1) "Recoverable" reserves are defined as tons of mineable coal in the Blue
Creek and Mary Lee seams which can be extracted and marketed after deduction
for coal to be left in pillars, etc. and adjusted for reasonable preparation
and handling losses.
(2) "Assigned" reserves represent coal which has been committed by Jim Walter
Resources to its operating mines and plant facilities. "Unassigned" reserves
represent coal which is not committed to an operating mine and would require
additional expenditures to recover. The division of reserves into these two
categories is based upon current mining plans, projections and techniques.
(3) The recoverable reserves (demonstrated resources) are the sum of "Measured"
and "Indicated" resources. Measured coal extends 1/4 mile from any point of
observation or measurement. Indicated coal is projected to extend from 1/4
mile to 3/4 mile from any point of observation or measurement. Inferred coal
extends from 3/4 mile to 3 miles from any point of observation or
measurement. Inferred reserves are not included in recoverable reserves.
(4) All of the coal in the Blue Creek and Mary Lee seams is suitable for
metallurgical purposes although, for marketing reasons, some is sold as
compliance steam coal.
(5) A majority of the leases are either renewable until the reserves are mined
to exhaustion or are of sufficient duration to permit mining of all of the
reserves before the expiration of the term.
(6) Values shown are weighted averages of all reserves and are calculated on a
dry basis. Bessie Mine reserves are equivalent to preparation at a 1.60
specific gravity, whereas the others are at a 1.40 specific gravity.
(7) Production for 1999, 1998 and 1997 is for the fiscal years ended May 31.
(8) Moisture and ash free ("MAF")
(9) In February 1999 a decision was made to shut down No. 3 Mine. All of No. 3
Mine reserves were re-assigned to No. 7 Mine.
(10) Bessie Mine suspended operations in August 1988.
Environmental expenditures imposed by laws relating to deep shaft mining
have been insignificant to date and no substantial expenditures are expected in
the future. The Mining Division does not engage in any surface (strip) mining.
14
The Mining Division's coal is sold to a diversified base of domestic and
foreign customers. In the United States, Alabama Power Company ("Alabama Power")
remains one of the division's major customers. The division's coal also reaches
customers in numerous markets throughout Europe, Latin America and Asia.
Jim Walter Resources' supply contract with Alabama Power, which had been in
effect since January 1, 1979, as amended, was superseded by an agreement
executed on May 10, 1994 (the "Current Alabama Power Contract"). Under the
Current Alabama Power Contract, Alabama Power purchases 4.0 million tons of
compliance steam coal per year from Jim Walter Resources through December 31,
1999 at prices which are significantly above market prices for metallurgical
coal as well as compliance steam coal. In January 1998, Jim Walter Resources
entered into a contract amendment with Alabama Power to extend the contract
period from August 31, 1999 to December 31, 1999. Total tonnage to be shipped
under the contract was not amended. The Current Alabama Power Contract has a
fixed price subject to an escalation based on the Consumer Price Index and
adjustments for governmental impositions and quality. The Current Alabama Power
Contract includes favorable modifications of specification, shipping deviations
and changes in transportation arrangements. Also, in January 1998, Jim Walter
Resources entered into a new agreement to supply coal from January 1, 2000 to
December 31, 2005. The new contract stipulates lower volumes (1.5 million tons
per year) at selling prices higher than current spot market levels.
Jim Walter Resources and Cockerill Sambre S.A. ("Cockerill"), a Belgian
steel producer, are parties to a long-term contract that automatically renews on
December 31, 2000. The contract provides for the sale of approximately 800,000
metric tons annually, with an option on approximately 200,000 additional metric
tons annually. The pricing mechanism is market driven and reflects changes in
prices of three specific coals or coal indices. In August 1999, Jim Walter
Resources filed with the International Court of Arbitration of the International
Chamber of Commerce, a Request for Arbitration concerning the contract. The
Request for Arbitration alleges that Cockerill has breached the contract by
failing to purchase required minimum quantities of coal during calendar years
1998 and 1999 and that Cockerill has failed to provide Jim Walter Resources with
adequate assurances that Cockerill will perform under the contract during
calendar year 2000. Jim Walter Resources seeks to have the matter submitted to
binding arbitration under the terms of the contract and is requesting damages in
an amount to be determined by the arbitrator.
DE-GAS DIVISION
The De-Gas Division, through a joint venture headquartered in Brookwood,
Alabama, extracts and sells methane gas from the coal seams owned or leased by
Jim Walter Resources.
The original motivation for the joint venture was to increase safety in Jim
Walter Resources' Blue Creek mines by reducing methane gas concentrations with
wells drilled in conjunction with the mining operations. There were 288 wells
producing approximately 55 million cubic feet of gas per day as of May 1999. As
many as 58 additional wells are planned for development in fiscal 2000. The
degasification operation, as originally expected, has improved mining operations
and safety by reducing methane gas levels in the mines, as well as being a
profitable operation.
The gas is transported directly to SNG's pipeline through a 12-mile pipeline
which is owned and operated by Black Warrior Transmission Corp., a corporation
the stock of which is owned 50% by Jim Walter Resources and 50% by Sonat
Exploration Company, an affiliate of Southern Natural Gas Company (SNG).
The De-Gas Division began operations in 1981 with the formation of an equal
joint venture with Kaneb Services, Inc. ("Kaneb") to capture and market methane
gas from the Blue Creek seam. SNG is the joint venture's exclusive customer for
all output of methane gas, all of which was originally at a price tied to the
price of fuel oil in New York. Kaneb subsequently sold its 50% interest in the
degasification operation to an indirect wholly owned subsidiary of Sonat, Inc.
In connection with this sale, additional areas were added to the gas sales
contract. This gas was priced at a market price nominated by SNG which was not
to
15
be lower than the published price for spot purchases for SNG-South Louisiana for
the applicable month. Effective January 1, 1994, the gas sales contract was
amended. The price to be paid for gas delivered to SNG is now equal to the
average of two published spot prices provided, however, that the price will not
be less than $2.00 per MMBTU (approximately $1.96 per MCF) on a weighted annual
basis, calculated cumulatively each month. The contract also calls for SNG to
pay Jim Walter Resources a reservation fee of $675,000 per month through
December 31, 2001, provided certain minimum quantities of gas are delivered.
Black Warrior Methane Corp., a corporation the stock of which is owned 50% by
Jim Walter Resources and 50% by Sonat Exploration Company, manages the
operational activities of the joint venture.
PROPERTIES
The facilities of the Mining Division are summarized as follows:
FACILITY LOCATION SQ. FOOTAGE
- ------------------------------------------------------------- ------------------ -----------
Administrative headquarters.................................. Brookwood, AL 42,400
Central shop, supply center and training center.............. Brookwood, AL 127,300
CURRENT
OPERATING MINES LOCATION RATED CAPACITY
- -------------------------------------------------------- ------------------ ----------------
Blue Creek No. 4........................................ Brookwood, AL 3,200,000 tons
Blue Creek No. 5........................................ Brookwood, AL 2,300,000 tons
Blue Creek No. 7........................................ Brookwood, AL 3,100,000 tons
CORPORATE
Properties
The Company's headquarters building contains approximately 200,000 square
feet of office space located on approximately 13 acres in Tampa, Florida.
Seasonality
Certain of the businesses of the Company (primarily U.S. Pipe, Jim Walter
Homes and AIMCOR) are subject to seasonal variations to varying degrees.
However, the businesses of the Company are significantly influenced by the
general economy and, in particular, the levels of construction activity.
Trade Names, Trademarks and Patents
The names of each of the Company's subsidiaries are well established in the
respective markets served by them. Management believes that customer recognition
of such trade names is of some importance. The Company's subsidiaries have
numerous patents and trademarks. Management does not believe, however, that any
one such patent or trademark is material to the Company's business as a whole.
Research and Development
Research activities conducted by each business are directed toward new
products, process and building systems development, improvement of existing
products, development of new uses for existing products and cost reduction
efforts. Total research and development expenditures for all of the businesses
in each of the last three fiscal years were less than 1% of the Company's
consolidated net sales and revenues.
Raw Materials
Substantially all of the raw materials needed for the operations of the
Company and its subsidiaries are either produced by the Company and its
subsidiaries or purchased from domestic sources. All materials used by the
various businesses of the Company are available in quantities required to
support their respective operations.
16
Environmental
The Company and its subsidiaries are subject to a wide variety of laws and
regulations concerning the protection of the environment, both with respect to
the construction and operation of many of its plants, mines and other
facilities, and with respect to remediating environmental conditions that may
exist at its own and other properties. The Company believes that it and its
subsidiaries are in substantial compliance with federal, state and local
environmental laws and regulations. Expenditures for compliance of ongoing
operations and for remediation of environmental conditions arising from past
operations in the fiscal years ended May 31, 1999 and 1998 were approximately
$6.1 million in each year. These amounts include $1.9 million and $2.0 million,
respectively, related to the discontinued operations of Jim Walter Resources.
Because environmental laws and regulations continue to evolve, and because
conditions giving rise to obligations and liabilities under environmental laws
are in some circumstances not readily identifiable, it is difficult to forecast
the amount of such future environmental expenditures or the effects of changing
standards on future business operations. Consequently, the Company can give no
assurance that such expenditures will not be material in the future. Capital
expenditures for environmental requirements are anticipated to average
approximately $4.5 million per year in the next five years.
U.S. Pipe has implemented an Administrative Consent Order ("ACO") for its
Burlington, New Jersey plant that was required under the New Jersey
Environmental Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act) in connection with the completion of the acquisition of Original
Jim Walter. The ACO required soil and ground water cleanup. U.S. Pipe has
completed, pending final approval, the soil cleanup required by the ACO. U.S.
Pipe also has completed, pending final approval, ground water treatment as
ordered in the ACO. Ground water monitoring as required by the ACO continues. It
is not known how long ground water monitoring will be required. Management does
not believe any further cleanup costs will have a material adverse effect on the
financial condition or results of operations of the Company and its
subsidiaries.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), generally imposes liability, which may be joint and several and
is without regard to fault or the legality of waste generation or disposal, on
certain classes of persons, including owners and operators of sites at which
hazardous substances are released into the environment (or pose a threat of such
release), persons that disposed or arranged for the disposal of hazardous
substances at such sites, and persons who owned or operated such sites at the
time of such disposal. CERCLA authorizes the EPA, the states and, in some
circumstances, private entities to take actions in response to public health or
environmental threats and to seek to recover the costs they incur from the same
classes of persons. Certain governmental authorities can also seek recovery for
damages to natural resources. Currently, U.S. Pipe has been identified as a
potentially responsible party ("PRP") by the EPA under CERCLA with respect to
cleanup of hazardous substances at two sites to which its wastes allegedly were
transported. U.S. Pipe is one of many PRP's at such sites and is in the process
of preliminary investigation of its relationship to these sites, if any, to
determine the nature of its potential liability and amount of remedial costs to
clean up such sites. Although no assurances can be given that U.S. Pipe will not
be required in the future to make material expenditures relating to these sites,
management does not believe at this time that the cleanup costs it will be
called on to bear, if any, associated with these sites will have a material
adverse effect on the financial condition or results of operations of the
Company and its subsidiaries. Management believes the extent of U.S. Pipe's
involvement, if any, to be minor in relation to that of other named PRP's, a
significant number of which are substantial companies.
Employees
As of May 31, 1999, the Company and its subsidiaries employed 7,683 people,
of whom 4,308 were hourly workers and 3,375 were salaried employees.
Approximately 3,713 employees were represented by unions under collective
bargaining agreements, of which approximately 1,317 were covered by one contract
with the United Mine Workers of America, which expires on December 31, 2002. The
Company considers
17
its relations with its employees to be satisfactory. These totals include 1,317
hourly workers and 402 salaried workers employed by the discontinued operations
of Jim Walter Resources.
The Company and its subsidiaries have various pension and profit sharing
plans covering substantially all employees. In addition to the Company's own
pension plans, contributions are made to certain multi-employer plans. The
funding of retirement and employee benefit plans is in accordance with the
requirements of such plans and, where applicable, in sufficient amounts to
satisfy the "Minimum Funding Standards" of the Employee Retirement Income
Security Act of 1974 ("ERISA"). The plans provide benefits based on years of
service and compensation or at stated amounts for each year of service. The
Company and its subsidiaries also provide certain postretirement benefits other
than pensions and profit sharing, primarily healthcare, to eligible retirees.
ITEM 3. LEGAL PROCEEDINGS
See Items 1 and 2--Business and Properties--General on page 2 and Notes 7
and 13 of the Notes to Consolidated Financial Statements on pages F-13, F-14 and
F-22 included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is a list showing the names, ages (as of August 1, 1999) and
positions of the executive officers of the Company.
NAME AGE OFFICE
- ------------------------------------ --- ----------------------------------------------------------------------
Kenneth E. Hyatt.................... 58 Chairman, President and Chief Executive Officer
Richard E. Almy..................... 57 Director, Executive Vice President and Chief Operating Officer
Arthur W. Huge...................... 54 Executive Vice President and Chief Financial Officer
Robert W. Michael................... 57 Senior Vice President and Group Executive
Frank A. Hult....................... 48 Vice President, Controller and Chief Accounting Officer
Edward A. Porter.................... 52 Vice President-General Counsel and Secretary
David L. Townsend................... 45 Vice President-Administration
Joseph J. Troy...................... 35 Vice President and Treasurer
Ralph E. Fifield.................... 53 President and Chief Operating Officer of U.S. Pipe
George R. Richmond.................. 49 President and Chief Operating Officer of Jim Walter Resources
Peter Scott-Hansen.................. 57 President and Chief Operating Officer of AIMCOR
Kenneth E. Hyatt has been Chairman of the Board and Chief Executive Officer
of the Company since June 1, 1996 and has been President of the Company since
September 1, 1995. Between September 1, 1995 and June 1, 1996, Mr. Hyatt also
served as Chief Operating Officer of the Company. Mr. Hyatt was elected a
director on September 12, 1995. Mr. Hyatt served as President and Chief
Operating Officer and a director of The Celotex Corporation from 1990 until
shortly prior to his election, effective September 1, 1995, as President and
Chief Operating Officer of the Company.
Richard E. Almy has been Executive Vice President and Chief Operating
Officer of the Company since June 1996. Previously, Mr. Almy was President and
Chief Operating Officer of JW Aluminum (1991-1996).
Arthur W. Huge has been Executive Vice President and Chief Financial Officer
since June 21, 1999. Previously Mr. Huge was Executive Vice President and Chief
Financial Officer of LTV Corporation since February 1998. Mr. Huge was Senior
Vice President and Chief Financial Officer (1993-1998) and also
18
served as Vice President and Chief Financial Officer of LTV Steel Corporation,
having joined that company in 1987 as Vice President-Finance. Prior to joining
LTV Steel, Mr. Huge served in a progression of operating and financial
management positions at Bethlehem Steel Corporation.
Robert W. Michael has been Senior Vice President and Group Executive of the
Company since 1991 and President and Chief Operating Officer of Jim Walter Homes
since 1984. He also served as Vice President of Original Jim Walter from 1984 to
1988. Prior thereto, he was Vice President--Sales (1975-1984), a Regional
Manager (1973-1975), an Assistant Regional Manager (1970-1973), a Main Branch
Manager (1967-1970) and a Sub-Branch Manager (1966-1967) with Jim Walter Homes
and held various managerial positions with Mid-State (1964-1966).
Frank A. Hult has been Vice President, Controller and the Chief Accounting
Officer of the Company since 1995. Previously, he was a Vice President (since
1994), the Controller (since 1991), Assistant Controller and Chief Accountant
(1989-1991) and Manager of Budgets (1988-1989) of the Company. Prior thereto, he
served in various financial positions with Original Jim Walter and The Celotex
Corporation (1974 -1988).
Edward A. Porter has been Vice President--General Counsel and Secretary of
the Company since January 1996. Previously, he was employed by National Gypsum
Company as Senior Vice President-- Administration, General Counsel and Secretary
(1993-1995); Vice President--Administration, General Counsel and Secretary
(1988-1993); and held various legal positions (1980-1988).
David L. Townsend has been Vice President--Administration of the Company
since 1996. Previously, he served as Vice President--Human Resources and Public
Relations (1994-1996) and Vice President-- Public Relations (1988-1994) of the
Company. Prior thereto, he served as Vice President--Public Relations (since
1983), Director of Public Relations (1982-1983) and Manager of Public Relations
(1980-1982) of Original Jim Walter and in various staff positions (1978-1980)
with Original Jim Walter.
Joseph J. Troy has been Vice President and Treasurer of the Company since
March 1998. Previously, he was employed by NationsBank as Senior Vice
President--Corporate Finance (1993-1998) and prior thereto he served in various
banking positions from 1985-1993.
Ralph E. Fifield has been President and Chief Operating Officer of U.S. Pipe
since August 1, 1997. Previously, Mr. Fifield served as President of United
States Steel/Kobe Steel Company since 1994, a joint venture with annual revenues
of approximately $770 million. Prior thereto, he was Corporate Vice
President--Operations of United States Steel Corporation (1991-1994), General
Manager of its Fairfield, Alabama (1990-1991) and Fairless, Pennsylvania Plants
(1988-1990), and Plant Manager of its South Works plant in Chicago (1984-1988),
and he served in a series of plant engineering positions at its Gary, Indiana
plant (1969-1984).
George R. Richmond has been President and Chief Operating Officer of Jim
Walter Resources since June 1, 1997. Previously he served as Senior Vice
President of Operations (since 1993) and Vice President of Operations (1992).
Prior thereto he was Deputy Mine Manager and No. 3 Mine Manager, Longwall
Manager, Master Mechanic and Longwall Mechanical Engineer.
Peter Scott--Hansen has been President and Chief Executive Officer of AIMCOR
since it was acquired by Walter Industries in October 1997. Previously, he was
President of the Carbon Products division of AIMCOR since 1986. Prior thereto,
he was President of the Carbon Products Group of International Minerals and
Chemical Corporation (IMC"), a predecessor of AIMCOR, (1980-1986) and held
various positions in international marketing, transportation and operations with
IMC (1968-1980).
Executive Officers serve at the pleasure of the Board of Directors. The
Company is not aware of any family relationships among any of the foregoing
executive officers.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") has been listed on the New
York Stock Exchange under the trading symbol "WLT" since December 18, 1997.
Previously, the Common Stock had been listed on the Nasdaq National Market
("WLTR") since October 11, 1995. The table below sets forth, for the quarterly
periods indicated, the range of high and low sales prices of the Common Stock
since such date.
1999 1998
-------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- -------
1st Quarter............................. $19 3/16 $14 1/8 $18 13/16 $14
2nd Quarter............................. 14 15/16 10 13/16 21 9/16 18 1/2
3rd Quarter............................. 16 1/8 12 1/4 22 5/8 17 1/2
4th Quarter............................. 13 9/16 10 3/8 22 3/8 18 1/16
The Registrant has never paid cash dividends on Common Stock and has no
present intention to do so. Covenants contained in certain of the debt
instruments referred to in Note 8 of Notes to Consolidated Financial Statements
on pages F-14 through F-17 restrict the amount the Company could pay in cash
dividends.
In September 1998, the Company's Board of Directors authorized an increase,
from two to four million, in the number of shares of the Company's Common Stock
which may be purchased under the share repurchase program authorized in July
1998. As of August 16, 1999, the Company had repurchased approximately 3,873,000
shares at a cost of approximately $53.8 million.
As of August 16, 1999, there were 5,462 shareholders of record of the
Company's Common Stock.
20
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to each of the fiscal years 1995
through 1999, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the three years ended May 31, 1999 and the notes thereto appearing
elsewhere herein. All of the information presented below should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto, and the other information contained elsewhere in this report.
YEARS ENDED MAY 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales and revenues....................... $1,617,835 $1,483,051 $1,171,183 $1,137,597 $1,126,100
Income (loss) from continuing
operations............................. 53,515 29,073 16,504 (6,629) (319,989)
Net income (loss)........................ 35,598 56,241 37,117 (84,696) (358,645)
Basic income (loss) per share:
Income (loss) from continuing
operations........................... 1.04 .54 .30 (.13) (6.34)
Net income (loss)...................... .69 1.04 .68 (1.66) (7.10)
Number of shares used in calculation of
basic income (loss) per share.......... 51,628 54,383 54,922 50,989 50,494
Diluted income (loss) per share
Income (loss) from continuing
operations........................... 1.04 .53 .30 (.13) (6.34)
Net income (loss)...................... .69 1.03 .67 (1.66) (7.10)
Number of shares used in calculation of
diluted income (loss) per share........ 51,745 54,383 55,064 50,989 50,494
Gross capital expenditures from
continuing operations.................. 56,154 66,895 46,791 30,036 45,843
Net property, plant and equipment from
continuing operations.................. 398,591 396,340 297,645 289,986 306,349
Total assets............................. 3,362,026 3,562,670 3,027,385 3,091,377 3,245,153
Long-term senior debt.................... 2,311,151 2,475,617 2,065,575 2,211,296 2,220,370
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion should be read in conjunction with the consolidated
financial statements and notes thereto of Walter Industries, Inc. and
subsidiaries, particularly Note 15 of "Notes to Consolidated Financial
Statements" which presents sales and revenues and operating income by operating
segment.
RESULTS OF OPERATIONS
YEARS ENDED MAY 31, 1999 AND 1998
Net sales and revenues for the year ended May 31, 1999 increased $134.8
million, or 9.1%, over the prior year. The increase was attributable to improved
performances from all operating segments, particularly the Energy Services Group
reflecting a full year contribution from AIMCOR versus eight months last year,
slightly offset by the disposition of JW Window Components, Inc. ("JWWC") during
fiscal 1999. See Note 2 of "Notes to Consolidated Financial Statements"
regarding the acquisition of AIMCOR and disposition of JWWC.
Cost of sales, exclusive of depreciation, of $1,073.2 million was 79.5% of
net sales versus $980.6 million and 80.7% in 1998. The percentage improvement
principally reflected higher gross profit margins on pipe products, aluminum
foil and sheet products, foundry coke and chemicals.
21
Selling, general and administrative expenses of $168.7 million were 10.4% of
net sales and revenues versus $156.4 million and 10.5% last year.
Interest and amortization of debt expense was $185.0 million versus $193.6
million in 1998 as a result of lower interest rates and lower average
outstanding debt balances. The average rate of interest in 1999 was 7.6% as
compared to 8.0% in 1998. The average prime rate of interest was 8.0% and 8.5%
in 1999 and 1998, respectively.
The Company's effective tax rate from continuing operations in 1999 and 1998
differed from the statutory tax rate primarily due to amortization of goodwill
(excluding amounts related to the AIMCOR acquisition), which is not deductible
for tax purposes. Additionally, in 1999, the Company's effective tax rate
differed from the statutory rate as a result of a $9.8 million non-recurring tax
benefit recognized on the sale of JWWC. See Note 7 of "Notes to Consolidated
Financial Statements" for further discussion of income taxes.
The discontinued operation reflects a loss, net of tax, of $17.9 million in
fiscal 1999 compared to after tax income of $29.8 million in fiscal 1998. This
loss reflects the costs associated with the shut down of Mine No. 3 of $53
million, partially offset by a $25 million gain resulting from a reduction in
other postretirement benefits. See Note 3 of "Notes to Consolidated Financial
Statements".
Net income in 1999 was $35.6 million, including an after-tax loss of $17.9
million from the discontinued operations of Jim Walter Resources and an
after-tax gain of $4.9 million from the sale of JWWC. This compared to net
income of $56.2 million in 1998 which included an after-tax gain of $29.8
million from the discontinued operations of JWR and a $2.7 million extraordinary
loss from the write-off of unamortized debt expense related to the early
repayment of a $550.0 million credit facility in conjunction with the Company's
acquisition of AIMCOR (see Note 8 of "Notes to Consolidated Financial
Statements"). The Company's diluted earnings per share in 1999 were $.69
compared to $1.03 in 1998. Income from continuing operations in 1999 was $53.5
million ($1.04 per diluted share) compared to $29.1 million ($.53 per diluted
share) in 1998 and reflects all of the factors discussed in the following
segment analysis.
Segment Analysis
Homebuilding and Financing sales and revenues increased $11.8 million, or
2.6%, over the prior year. The increase reflects a higher average net selling
price, from $48,700 in 1998 to $52,000 in 1999, an increase in the number of
units sold, from 3,702 units in 1998 to 3,737 units in 1999, and greater time
charge income (revenues received from Mid-State's instalment note portfolio),
from $242.9 million in 1998 to $246.4 million in 1999. The higher average
selling price primarily resulted from price increases instituted to compensate
for higher building material and labor costs, coupled with consumer preference
for new and more upscale models and amenities being offered by Jim Walter Homes.
The order backlog at May 31, 1999 was 2,683 units (all of which are expected to
be completed by the end of fiscal 2000) compared to 1,883 units at May 31, 1998.
The increase in time charge income resulted from increased payoffs received in
advance of maturity and to an increase in the average balance per account in the
portfolio, partially offset by a reduction in the total number of accounts.
Operating income of $113.5 million (net of interest expense) was $14.0 million
greater than the prior year, reflecting the increases in the average net selling
price and number of homes sold, higher time charge income, lower interest
expense in 1999 ($98.9 million) compared to the prior year ($116.0 million) and
lower goodwill amortization in 1999 ($23.3 million) compared to 1998 ($23.9
million).
Water Transmission Products sales and revenues increased $34.3 million, or
8.1%, over the prior year. The increase was the result of increased shipments of
ductile iron pressure pipe, fittings, valves and hydrants and slightly higher
average selling prices for ductile iron pressure pipe. Total shipments of
615,800 tons were 7.2% greater than the prior year. The order backlog of ductile
iron pressure pipe at May 31, 1999 was 119,900 tons, representing approximately
three months shipments, compared with 121,709 tons at May 31, 1998. Operating
income of $33.0 million was $16.8 million greater than the prior year period.
This performance was the result of improved gross profit margins realized due to
lower raw material costs
22
(primarily scrap iron) and improved operating efficiencies combined with the
previously mentioned increase in sales and revenues.
Energy Services sales and revenues increased $75.3 million, or 26.3%, over
the prior year's eight month contribution (see Note 2 of "Notes to Consolidated
Financial Statements"). Operating income of $24.9 million exceeded the prior
year by $3.9 million. Sales and earnings in the current year, however, were
adversely impacted by a decline in U.S. and European steel production which
affected pricing and demand for petroleum coke and specialty metal products, as
well as from higher bulk handling costs at the Texas Gulf Coast terminals and
services operations principally caused by equipment problems following intense
tropical storm activity in that region during the fiscal second quarter.
The Other segment's sales and revenues increased $12.3 million, or 3.8%,
over the prior year. This increase was primarily due to improved shipments of
aluminum foil and sheet products, foundry coke and chemicals, coupled with
improved selling prices for foundry coke and slag fiber, partially offset by
lower selling prices for aluminum foil and sheet products. Operating income of
$26.2 million was $1.2 million greater than the prior year. The segment's
performance reflects the sales increases and higher gross profit margins
realized on aluminum foil and sheet products, foundry coke and chemicals,
partially offset by the pre-tax loss on the sale of JWWC (see Note 2 of "Notes
to Consolidated Financial Statements").
YEARS ENDED MAY 31, 1998 AND 1997
Net sales and revenues for the year ended May 31, 1998 increased $311.9
million over the prior year, a 26.6% increase of which 24.4% was attributable to
the acquisition of AIMCOR. The balance of the increase was the result of
improved performances from all other operating segments.
Cost of sales, exclusive of depreciation, of $980.6 million was 80.7% of net
sales in 1998 versus $725.9 million and 79.1% in 1997. The percentage increase
reflected lower gross profit margins realized on pipe products, aluminum
products, furnace and foundry coke, slag fiber, chemicals and window components,
partially offset by improved margins on home sales.
Selling, general and administrative expenses of $156.4 million were 10.5% of
net sales and revenues in 1998 versus $132.4 million and 11.3% in 1997. The
dollar increase was primarily attributable to the acquisition of AIMCOR.
Interest and amortization of debt expense was $193.6 million in 1998 versus
$179.2 million in 1997, reflecting higher outstanding debt balances, primarily
resulting from the AIMCOR acquisition. The average rate of interest in 1998 was
8.0%, compared to 8.1% in 1997. The prime rate of interest was 8.5% in 1998
compared to a range of 8.25% to 8.5% in 1997.
The Company's effective tax rate in 1998 and 1997 differed from the
statutory tax rate primarily due to amortization of goodwill (excluding amounts
related to the AIMCOR acquisition), which is not deductible for tax purposes.
See Note 7 of "Notes to Consolidated Financial Statements" for further
discussion of income taxes.
After tax income from the discontinued operation increased from $20.6
million in 1997 to $29.8 in 1998 reflecting higher coal shipments and methane
gas sales volumes combined with increased coal productivity which contributed to
lower production costs, partially offset by the reduced coal and methane gas
selling prices. Fiscal 1998 results also included a $8.0 million credit from
settlement of insurance claims whereas fiscal 1997 results included a $10.0
million settlement of a legal claim related to a theft of coal inventory at the
Port of Mobile, Alabama, partially offset by a $6.2 million charge relating to a
reduction in Jim Walter Resources' salaried workforce under a voluntary early
retirement program.
Net income for the year ended May 31, 1998 was $56.2 million, including
after-tax income of $29.8 million from the discontinued operations of Jim Walter
Resources and a $2.7 million extraordinary loss from the write-off of
unamortized debt expense related to the early repayment of a $550.0 million
credit facility in conjunction with the Company's acquisition of AIMCOR (see
Note 8 of "Notes to
23
Consolidated Financial Statements"). The Company's diluted earnings per share
were $1.03 compared to $.67 in 1997. Income from continuing operations in 1998
was $29.1 million ($.53 per diluted share) compared to $16.5 million ($.30 per
diluted share) and reflects all of the factors discussed in the following
segment analysis as well as the income contribution from the Energy Services,
and lower postretirement benefits and provision for possible losses in 1998.
Segment Analysis
Homebuilding and Financing sales and revenues increased $8.7 million, or
2.0%, over the prior year. The increase reflects greater time charge income,
from $231.4 million in 1997 to $242.9 million in 1998 and an increase in the
average net selling price, from $47,500 in 1997 to $48,700 in 1998, partially
offset by a decrease in the number of units sold, from 3,900 units in 1997 to
3,702 units in 1998. The increase in time charge income was attributable to
increased payoffs received in advance of maturity and to an increase in the
average balance per account in the portfolio, partially offset by a reduction in
the total number of accounts. The higher average selling price was primarily
attributable to price increases instituted during the year to compensate for
higher building materials and labor costs. The decrease in unit sales resulted
from intense competition from local and regional homebuilders as well as labor
shortages due to high demand for subcontractors and construction crews. Jim
Walter Homes and its affiliated companies had 1,883 units in backlog at May 31,
1998 compared to 1,972 units at May 31, 1997. Operating income of $99.4 million
(net of interest expense) was $14.7 million greater than the prior year,
reflecting the higher time charge income, the increase in the average net
selling price per home sold, an improved homebuilding gross profit margin, lower
interest expense in 1998 ($116.0 million) as compared to the prior year ($119.0
million), and lower goodwill amortization in 1998 ($23.9 million) versus 1997
($25.5 million), partially offset by the decrease in the number of homes sold.
Water Transmission Products sales and revenues increased $6.6 million over
the prior year, representing a 1.6% increase. The increase reflected greater
shipments of ductile iron pressure pipe, valves and hydrants, partially offset
by lower selling prices across most product lines, combined with lower sales
volumes of fittings. Total shipments of 574,500 tons were 5.0% higher than the
prior year, while average selling prices were 3.2% lower, reflecting intense
competitive conditions related to the slow pace of funding for domestic
infrastructure repair and replacement projects. The order backlog for ductile
iron pressure pipe at May 31, 1998 was 121,709 tons compared with 108,341 tons
at May 31, 1997. Operating income of $16.2 million was $.2 million below the
prior year. This performance was the result of the lower selling prices and
gross profit margins for ductile iron pressure pipe and fittings, partially
offset by the previously mentioned increase in sales volumes.
The Other segment's sales and revenues increased $11.4 million, or 3.7%,
over the prior year. The increase was principally the result of greater
shipments of aluminum foil and sheet products, foundry coke and slag fiber,
combined with higher selling prices for aluminum foil and sheet products and
furnace and foundry coke. These increases were partially offset by lower
shipments of chemicals and window components. Operating income of $25.0 million
was $1.3 million below the prior year, reflecting lower gross profit margins
realized on aluminum foil and sheet products, furnace and foundry coke, slag
fiber, chemicals and window components.
FINANCIAL CONDITION
In fiscal 1999, total debt decreased by $168.1 million. In June 1998, an
agreement was reached with Financial Security Assurance, Inc. to release
approximately $121.6 million of funds held by Trust II, which were subject to
retention at July 1, 1998. Such funds were utilized to pay down Trust IV
indebtedness.
On December 10, 1998, Mid-State purchased from Trust V instalment notes
having a gross value of $858.7 million and an economic balance of $335.3
million. Mid-State subsequently sold these notes to Trust VII, a business trust
organized by Mid-State. These sales were in exchange for the net proceeds from
the public issuance of $313.5 million of Asset Backed Notes by Trust VII. Net
proceeds from the public
24
offering were primarily used to repay related asset-backed borrowings of $284.0
million under the Trust V warehouse facility. See Note 8 of "Notes to
Consolidated Financial Statements."
On May 27, 1999, Mid-State renewed its 364 day, $90 million Loan and
Security Agreement with Kitty Hawk Funding Corporation. Proceeds from the
additional borrowings in 1999 ($9.0 million) were utilized to pay down the
Revolving Credit Facility. See Note 8 of "Notes to Consolidated Financial
Statements."
Borrowings under the Credit Facilities totaled $552.2 million at May 31,
1999. The Revolving Credit Facility includes a sub-facility for trade and other
standby letters of credit in an amount up to $75.0 million at any time
outstanding and a sub-facility for swingline advances in an amount not in excess
of $25.0 million at any time outstanding. At May 31, 1999, letters of credit in
the aggregate face amount of $24.5 million have been issued and swingline
advances were $2.2 million. See Note 8 of "Notes to Consolidated Financial
Statements."
The Credit Facilities contain a number of significant covenants including
maintaining specified financial ratios and complying with certain financial
tests, including a fixed charge coverage ratio and a maximum leverage ratio. The
borrowers fixed charge coverage ratio (the ratio of (a) EBITDA minus capital
expenditures to (b) the sum of all required principal payments on outstanding
indebtedness, interest expense and dividends paid) is required to be at least
1.25 to 1 at the end of each measurement period for the duration of the Credit
Facilities. The borrowers are required to maintain a leverage ratio (the ratio
of indebtedness to consolidated EBITDA (as defined in the Credit Facilities)) of
not more than 3.25 to 1 at the end of each measurement period for the duration
of the Credit Facilities. The Company was in compliance with these covenants at
May 31, 1999. See Note 8 of "Notes to Consolidated Financial Statements."
The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants at
May 31, 1999.
The Loan and Security Agreement contains a number of covenants that, among
other things, restrict the ability of Mid-State to dispose of assets, create
liens on assets, engage in mergers, incur any unsecured or recourse debt, or
make material changes to their credit and collection policy. In addition,
Mid-State is required to maintain specified net income and net worth levels. The
Company was in compliance with these covenants at May 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, net of book overdrafts, were approximately $7.2
million at May 31, 1999. Operating cash flows for the year ended May 31, 1999,
together with issuance of long-term debt under Trust VII and Trust V Variable
Funding Loan Agreement, borrowings under the Credit Facilities, the Loan and
Security Agreement and the use of available cash balances, were primarily used
for retirement of long-term senior debt, interest payments, capital expenditures
and to purchase approximately 3.6 million shares of common stock. In September
1998, the Company's Board of Directors authorized an increase, from two to four
million, in the number of shares of the Company's common stock which may be
repurchased under its July 1998 stock repurchase program.
Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at May 31, 1999 were
not significant; however, it is estimated that gross capital expenditures for
the Company's continuing operations for the fiscal year ending May 31, 2000 will
approximate $75 million.
Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, levels of domestic construction activity,
current results should not necessarily be used to predict the Company's
liquidity, capital expenditures, investment in instalment notes receivable or
results of operations. The Company believes that the Mid-State Trust V Variable
Funding Loan Agreement will provide Mid-State with the funds needed to purchase
the instalment notes and mortgages generated by Jim
25
Walter Homes and its affiliates. It is anticipated that one or more permanent
financings similar to the previous Mid-State asset-backed financings will be
required over the next several years to repay borrowings under the Trust V
Variable Funding Loan Agreement. The Company believes that, under present
operating conditions, sufficient cash flow will be generated to make all
required interest and principal payments on its indebtedness, to make all
planned capital expenditures and meet substantially all operating needs. It is
further expected that amounts under the Revolving Credit Facility will be
sufficient to meet peak operating needs of the Company and to repurchase up to
an additional 400,000 shares of the Company's common stock, the amount remaining
at May 31, 1999 under the current authorization.
MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into in
the normal course of business. The Company is subject to interest rate risk on
its existing Credit Facilities, Loan and Security Agreement, Trust V Variable
Funding Loan, and any future financing requirements.
The Company's primary market risk exposure relates to (i) the interest rate
risk on long-term and short-term borrowings, (ii) the impact of interest rate
movements on its ability to meet interest rate expense requirements and comply
with financial covenants, and (iii) the impact of interest rate movements on the
Company's ability to obtain adequate financing to fund future acquisitions. The
Company has historically managed interest rate risk through the periodic use of
interest rate hedging instruments. There were no such instruments outstanding at
May 31, 1999. While the Company can not predict its ability to refinance
existing debt or the impact interest rate movements will have on its existing
debt, management continues to evaluate its financial position on an ongoing
basis.
The Company is also subject to a limited amount of foreign currency risk,
but does not currently engage in any significant foreign currency hedging
transactions to manage exposure for transactions denominated in currencies other
than the U.S. dollar.
YEAR 2000
Introduction
The Company is currently working to resolve the potential impact of the Year
2000 ("Y2K") on the processing of date-sensitive information by the Company's
computerized information systems. The Y2K problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
which could result in miscalculations or system failures. The problems created
by using abbreviated dates appear in hardware (such as microchips), operating
systems and other software programs. The Company's Y2K compliance project is
intended to determine the readiness of the Company's business for the year 2000
and to address the issues, if any, which were identified. The Company defines
Y2K "compliance" to mean that the computer code will process all defined future
dates properly and give accurate results.
Description of Areas of Impact and Risk
The Company has identified three areas where the Y2K issue creates risk to
the Company: a) internal Information Technology ("IT") systems; b) non-IT
systems with embedded chip technology and c) system capabilities of third party
businesses with relationships with the Company, including product suppliers,
customers, service providers (such as telephone, power, logistics, financial
services) and other businesses whose failure to be Y2K compliant could have a
material adverse effect on the Company's business, financial condition or
results of operations.
26
Plan to Address Year 2000 Compliance
The Company has established a Corporate Steering Committee (the "Committee")
to coordinate solutions to Y2K issues for its information systems, non-IT
systems with embedded chips and third party business trading partners. The
Committee includes a representative from each subsidiary as well as a member of
the Company's Law Department, the Director of Information Technology and the
Chief Financial Officer. Each subsidiary also has a steering committee
consisting of a representative on the Committee and other members from all
functional areas of the respective subsidiary. The Committee has identified
systems and applications that require modification and has evaluated alternative
solutions. The Committee also developed a Y2K Standard that was issued to all
subsidiaries and must be followed for Y2K compliance. Status conferences are
held monthly and on-site progress reviews are held quarterly. The Company has
two data centers which have installed Y2K-compliant mainframe equipment,
operating systems and system software. Separate virtual machines within a
computer have been installed for the purpose of testing. During the first
calendar quarter of 1999, the Company conducted a detailed review of all Year
2000 remediation activities and associated required documentation to ensure that
the process was on schedule.
State of Readiness
IT Systems--The initial inventory and prioritization process for the
Company's IT systems was completed in 1998 with the current focus on remediation
and testing. Approximately 80% of all identified IT system business components
have been tested and are considered compliant as of May 31, 1999. Coding changes
for all legacy systems have been completed and the final testing phase is in
process. The Y2K test environment is fully functional. Compliance testing will
continue through 1999 and will be completed by November 1999. All financial
systems have been remediated, tested and were considered fully compliant as of
May 31, 1999. Personal computer and other hardware compliant upgrades are 90%
complete, with the remainder on order.
Non-IT systems--Non-IT systems consist of any device which is able to store
and report date-related information, such as access control systems, elevators,
conveyors, and other items containing a microprocessor or internal clock. The
plan utilized by the Company for analysis of the IT systems was also used for
non-IT systems. All identified non-IT systems have been tested and are
considered compliant as of May 31, 1999.
Material Third Parties--The Company has created an inventory of what it
believes to be all material third parties with whom the Company has a business
relationship. Y2K readiness surveys were sent to these third parties beginning
in January 1998. The Company has reviewed the responses to these surveys to
determine the Y2K readiness of these third parties. For those material third
party suppliers, service providers and customers who fail to respond to the
Company's survey, the Company is pursuing alternative means of obtaining Y2K
readiness information, such as review of publicly available information
published by such third parties. The Company plans to continue to review its
third party relationships throughout the Y2K compliance program to ensure all
material third party relationships are addressed.
Contingency Planning and Risks
Contingency plan guidelines have been developed by the Committee and
provided to each subsidiary. Contingency plans are currently being prepared at
all subsidiaries and are scheduled to be completed by October 1999. On-site
reviews of written contingency plans were conducted in the second calendar
quarter of 1999. While the Company believes that its approach to Y2K readiness
is sound, it is possible that some business components may not be identified in
the inventory, or that the scanning or testing process may not result in
analysis and remediation of all source code. The Company will assume a third
party is not Y2K ready if no Y2K verification is obtained and take action, as
appropriate. The Company's contingency plan will address alternative providers
and processes to deal with business interruptions that may be caused by the
internal system or by the failure of third party providers to be Y2K ready to
the extent possible. In the
27
unlikely event of a Y2K issue, the Company's contingency plan focus is on
employee safety, equipment safety and prompt business resumption.
The failure to correct a material Y2K issue could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failure could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
Cost of Project
The overall budget for the Company's Y2K compliance effort is approximately
$16.5 million. The project is 80% complete with the remaining 20% related to
contingency planning, final testing of remediated applications and post-Y2K
monitoring. Approximately $14.2 million or 86% of the project budget has been
spent as of May 31, 1999.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union commenced conversion from their existing sovereign currencies to a new,
single currency called the Euro. Fixed conversion rates between the existing
currencies, the legacy currencies, and the Euro will be established and the Euro
will become the common legal currency of the participating countries by January
1, 2000. The Euro is trading on currency exchanges and is available for non-cash
transactions. The participants are issuing sovereign debt exclusively in Euro
and are redenominating outstanding sovereign debt. Following this introduction
period, the participating members legacy currencies will remain legal tender as
denominations of Euro until January 1, 2002. At that time, countries will issue
new Euro-denominated bills for use in cash transactions. All legacy currency
will be withdrawn prior to July 1, 2002, completing the Euro conversion on this
date. As of January 1, 1999, the participating countries no `longer control
their own monetary policies by directing independent interest rates for the
legacy currencies; instead, the authority to direct monetary policy, including
money supply and official interest rates for the Euro, is being exercised by the
new European Central Bank.
The Company has established a plan to address issues raised by the Euro
conversion. These issues, which are applicable to the operations of AIMCOR
include but are not limited to: the competitive impact created by cross-border
price transparency; the need for the Company and its business partners to adapt
IT and non-IT systems to accommodate Euro-denominated transactions, and the need
to analyze the legal and contractual implications of the Company's contracts.
The Company currently anticipates that the required modifications to its
systems, equipment and processes will be made on a timely basis and does not
expect that the costs of such modifications will have a material effect on the
Company's financial position or results of operations. As part of Phase I, the
core IT system has been modified for Euro Currency compliance. The Company's
European locations are currently processing Euro-compliant transactions. Phase
II of the Euro Currency project focuses on the conversion effect to a Euro base
currency. Phase II is scheduled to be complete by July 1, 2002. The project
budget is approximately $183,000 of which approximately $143,000 has been spent.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 137--"Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FAS No. 133" ("FAS 137") was issued in June 1999. This statement was issued to
clarify implementation issues and allow a better understanding of the Financial
Accounting Standards Board's intent regarding certain fundamental issues that
pertain to the application of Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities". FAS 137
becomes effective for all fiscal quarters of fiscal years beginning after June
15, 2000 (fiscal 2001 for the Company). Historically, the Company's only
derivative instruments related to interest lock agreements (see Note 8 of "Notes
to Consolidated Financial Statements").
28
Management of the Company believes the statement will not materially affect its
performance or reporting.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-K contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that is based on the beliefs of the management of the
Company, as well as assumptions made by and information currently available to
the management of the Company. When used in this Form 10-K, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to publicly release any revisions to these forward looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
UNAUDITED INTERIM FINANCIAL INFORMATION:
(in thousands, except per share amounts)
QUARTER ENDED
----------------------------------------------
FISCAL YEAR 1999 AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
- ------------------------------------------------------ --------- ----------- ----------- ---------
Net sales and revenues................................ $ 408,552 $ 426,333 $ 352,577 $ 430,373
Gross profit.......................................... 65,270 69,262 58,709 83,652
Income from continuing operations..................... 10,800 19,842 6,906 15,967
Income(loss) from discontinued operation.............. (1,763) (107) (17,832) 1,785
Net income............................................ 9,037 19,735 (10,926) 17,752
Diluted earnings per share:
Income from continuing operations................... .20 .38 .14 .32
Income (loss) from discontinued operation........... (.03) -- (.35) .03
Net income (loss)................................... .17 .38 (.21) .35
QUARTER ENDED
----------------------------------------------
NOVEMBER FEBRUARY
FISCAL YEAR 1998 AUGUST 31 30* 28* MAY 31*
- ------------------------------------------------ --------- ----------- ----------- ---------
Net sales and revenues.......................... $ 299,886 $ 360,788 $ 376,959 $ 445,418
Gross Profit.................................... 47,232 56,848 58,914 71,951
Income from continuing operations............... 6,300 5,978 1,496 15,299
Income (loss) from discontinued operation....... 7,765 6,663 6,212 9,191
Extraordinary item, net of tax.................. -- (2,663) -- --
Net income...................................... 14,065 9,978 7,708 24,490
Diluted earnings per share:
Income from continuing operations............. .11 .11 .03 .28
Income (loss) from discontinued operation..... .15 .12 .11 .17
Extraordinary item............................ -- (.05) -- --
Net income.................................... .26 .18 .14 .45
- ------------------------
*Includes results from AIMCOR acquired with an effective date of September 30,
1997
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data consist of the financial
statements as indexed on page F-1 and unaudited interim financial information
presented in Part II, Item 7, "Management's Discussion and Analysis of Results
of Operations and Financial Condition".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Proxy Statement (the "Proxy Statement")
included in the Schedule 14A to be filed by the Company with the Securities and
Exchange Commission (the "Commission") on August 30, 1999 under the Securities
Exchange Act of 1934, as amended. Certain information with respect to executive
officers is included in Part I, Item 4.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules--See Index to Financial Statements on
page F-1.
(b) Reports of Form 8-K-- None
(c) Exhibits--See Index to Exhibits on page E-1 and E-2.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WALTER INDUSTRIES, INC.
August 27, 1999
/s/ ARTHUR W. HUGE
---------------------------------------------
Arthur W. Huge, Executive Vice President
and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
August 27, /s/ KENNETH E. HYATT *
1999 ----------------------------------------------
Kenneth E. Hyatt, Chairman,
Director and Principal Executive Officer
August 27, /s/ RICHARD E. ALMY *
1999 ----------------------------------------------
Richard E. Almy, Executive Vice President,
Director and Principal Operating Officer
August 27, /s/ HOWARD L. CLARK, JR. *
1999 ----------------------------------------------
Howard L. Clark, Jr., Director
August 27, /s/ PERRY GOLKIN *
1999 ----------------------------------------------
Perry Golkin, Director
August 27, /s/ JAMES L. JOHNSON *
1999 ----------------------------------------------
James L. Johnson, Director
August 27, /s/ MICHAEL T. TOKARZ *
1999 ----------------------------------------------
Michael T. Tokarz, Director
August 27, /s/ JAMES W. WALTER *
1999 ----------------------------------------------
James W. Walter, Director
31
August 27, /s/ DONALD N. BOYCE *
1999 ----------------------------------------------
Donald N. Boyce, Director
August 27, /s/ CHARLES E. LONG *
1999 ----------------------------------------------
Charles E. Long, Director
August 27, /s/ ARTHUR W. HUGE
1999 ----------------------------------------------
Arthur W. Huge, Executive Vice President
and Principal Financial Officer
August 27, /s/ FRANK A. HULT
1999 ----------------------------------------------
Frank A. Hult, Vice President, Controller
and Principal Accounting Officer
*By: /s/ FRANK A. HULT
-------------------------
Frank A. Hult
Attorney-in-fact
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Walter Industries, Inc. and Subsidiaries
Report of Independent Certified Public Accountants............ F-2
Consolidated Balance Sheets--May 31, 1999 and 1998............ F-3
Consolidated Statements of Operations for the Three Years
Ended May 31, 1999.......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for
the Three Years Ended May 31, 1999.......................... F-5
Consolidated Statements of Cash Flows for the Three Years
Ended May 31, 1999.......................................... F-6
Notes to Consolidated Financial Statements.................... F-7 to F-25
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Walter Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Walter
Industries, Inc. and its subsidiaries at May 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Tampa, Florida
July 14, 1999
F-2
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Cash and cash equivalents....................................................... $ 40,783 $ 54,647
Short-term investments, restricted.............................................. 145,658 244,173
Marketable securities........................................................... 4,803 39,064
Instalment notes receivable..................................................... 4,191,138 4,238,745
Less - Allowance for possible losses (25,813) (26,221)
Unearned time charges................................................... (2,874,556) (2,894,459)
---------- ----------
Net.................................................................... 1,290,769 1,318,065
Trade receivables............................................................... 196,734 192,235
Less - Allowance for possible losses.......................................... (3,337) (3,933)
---------- ----------
Net.................................................................... 193,397 188,302
Other receivables............................................................... 14,996 9,445
Inventories
Finished goods................................................................ 152,806 158,276
Goods in process.............................................................. 44,178 36,876
Raw materials and supplies.................................................... 44,612 45,539
Houses held for resale........................................................ 3,377 3,153
---------- ----------
Total inventories........................................................... 244,973 243,844
Prepaid expenses................................................................ 9,270 8,117
Property, plant and equipment, net.............................................. 398,591 396,340
Investments..................................................................... 6,389 5,053
Deferred income taxes........................................................... 36,857 59,581
Unamortized debt expense........................................................ 50,623 31,215
Other long-term assets.......................................................... 40,613 38,419
Goodwill, net................................................................... 518,575 543,896
Assets held for disposition..................................................... 365,729 382,509
---------- ----------
$3,362,026 $3,562,670
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdrafts................................................................. $ 33,579 $ 24,867
Accounts payable................................................................ 125,846 145,476
Accrued expenses................................................................ 135,959 126,022
Income taxes payable............................................................ 53,032 60,098
Short-term notes payable........................................................ 2,200 5,800
Long-term senior debt
Mortgage-backed/asset-backed notes............................................ 1,758,151 1,886,167
Other senior debt............................................................. 553,000 589,450
Accrued interest................................................................ 25,670 27,147
Accumulated postretirement benefits obligation.................................. 270,409 283,708
Other long-term liabilities..................................................... 61,261 54,848
Stockholders' equity
Common stock, $.01 par value per share:
Authorized--200,000,000 shares
Issued--55,304,184 shares and 55,283,686 shares............................. 553 553
Capital in excess of par value................................................ 1,169,377 1,169,052
Accumulated deficit........................................................... (748,905) (784,503)
Treasury stock--4,992,292 shares and 1,398,092 shares, at cost................ (72,078) (21,841)
Cumulative foreign currency translation adjustment............................ (341) (52)
Excess of additional pension liability over unrecognized prior years service
cost........................................................................ (5,621) (4,122)
Net unrealized depreciation in marketable securities.......................... (66) --
---------- ----------
Total stockholders' equity.................................................. 342,919 359,087
---------- ----------
$3,362,026 $3,562,670
---------- ----------
---------- ----------
See accompanying "Notes to Consolidated Financial Statements"
F-3
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Sales and revenues:
Net sales................................................. $1,350,089 $1,215,564 $ 917,445
Time charges.............................................. 246,440 242,858 231,388
Miscellaneous............................................. 21,306 24,629 22,350
--------- --------- ---------
1,617,835 1,483,051 1,171,183
--------- --------- ---------
Cost and expenses:
Cost of sales............................................. 1,073,196 980,619 725,898
Depreciation.............................................. 44,559 40,716 35,410
Selling, general and administrative....................... 168,711 156,441 132,380
Postretirement benefits................................... 7,753 6,645 10,868
Provision for possible losses............................. 1,745 676 3,340
Interest and amortization of debt expense................. 184,997 193,580 179,180
Amortization of goodwill.................................. 43,118 40,352 36,615
Loss on sale of subsidiary................................ 4,907 -- --
--------- --------- ---------
1,528,986 1,419,029 1,123,691
--------- --------- ---------
Income from continuing operations before income tax
expense................................................... 88,849 64,022 47,492
Income tax expense:
Current................................................... (14,053) (17) (3,106)
Deferred.................................................. (21,281) (34,932) (27,882)
--------- --------- ---------
Income from continuing operations........................... 53,515 29,073 16,504
Income (loss) from discontinued operation, net of tax....... (17,917) 29,831 20,613
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $1,434)..................... -- (2,663) --
--------- --------- ---------
Net income.................................................. $ 35,598 $ 56,241 $ 37,117
--------- --------- ---------
--------- --------- ---------
Basic income (loss) per share:
Income from continuing operations......................... $ 1.04 $ .54 $ .30
Income (loss) from discontinued operation................. (.35) .55 .38
Extraordinary item........................................ -- (.05) --
--------- --------- ---------
Net income.............................................. $ .69 $ 1.04 $ .68
--------- --------- ---------
--------- --------- ---------
Diluted income (loss) per share:
Income from continuing operations......................... $ 1.04 $ .53 $ .30
Income (loss) from discontinued operation................. (.35) .55 .37
Extraordinary item........................................ -- (.05) --
--------- --------- ---------
Net income.............................................. $ .69 $ 1.03 $ .67
--------- --------- ---------
--------- --------- ---------
See accompanying "Notes to Consolidated Financial Statements"
F-4
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
OTHER CAPITAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE COMMON IN TREASURY
TOTAL INCOME DEFICIT INCOME STOCK EXCESS STOCK
--------- --------------- ------------ --------------- ----------- --------- -----------
Balance at May 31, 1996........... $ 276,694 $ (877,861) $ (5,326) $ 549 $1,159,332 $ --
Comprehensive income
Net income...................... 37,117 $ 37,117 37,117
Other comprehensive income, net
of tax:
Excess of additional pension
liability................... 670 670 670
---------------
Comprehensive income.............. $ 37,787
---------------
---------------
Stock issued in lieu of qualified
securities...................... 5,375 2 5,373
Canceled shares................... (431) (431)
Fractional share payments......... (13) (13)
--------- ------------ ------- ----- --------- -----------
Balance at May 31, 1997........... 319,412 (840,744) (4,656) 551 1,164,261 --
Comprehensive income
Net income...................... 56,241 $ 56,241 56,241
Other comprehensive income, net
of tax:
Foreign currency translation
adjustment.................. (52) (52) (52)
Excess of additional pension
liability................... 534 534 534
---------------
Comprehensive income.............. $ 56,723
---------------
---------------
Stock issued from option
exercises....................... 4,793 2 4,791
Purchases of treasury stock....... (21,841) (21,841)
--------- ------------ ------- ----- --------- -----------
Balance at May 31, 1998........... 359,087 (784,503) (4,174) 553 1,169,052 (21,841)
Comprehensive income
Net income...................... 35,598 $ 35,598 35,598
Other comprehensive income, net of
tax:
Net unrealized depreciation in
marketable securities....... (66) (66) (66)
Foreign currency translation
adjustment.................. (289) (289) (289)
Excess of additional pension
liability................... (1,499) (1,499) (1,499)
---------------
Comprehensive income.............. $ 33,744
---------------
---------------
Stock issued from option
exercises....................... 325 325
Purchases of treasury stock....... (50,237) (50,237)
--------- ------------ ------- ----- --------- -----------
Balance at May 31, 1999........... $ 342,919 $ (748,905) $ (6,028) $ 553 $1,169,377 $ (72,078)
--------- ------------ ------- ----- --------- -----------
--------- ------------ ------- ----- --------- -----------
See accompanying "Notes to Consolidated Financial Statements"
F-5
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
--------------------------------
1999 1998 1997
--------- ---------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income....................................................................... $ 35,598 $ 56,241 $ 37,117
Charges to income from continuing operations not affecting cash:
Depreciation................................................................... 44,559 40,716 35,410
Provision for deferred income taxes............................................ 21,281 34,932 27,882
Accumulated postretirement benefits obligation................................. (13,299) 14,749 21,132
Provision for other long-term liabilities...................................... 4,489 694 1,336
Amortization of goodwill....................................................... 43,118 40,352 36,615
Amortization of debt expense................................................... 6,785 6,624 6,914
Loss on sale of subsidiary..................................................... 4,907 -- --
Extraordinary loss on early extinguishment of debt (net of income tax
benefit)...................................................................... -- 2,663 --
--------- ---------- ---------
147,438 196,971 166,406
Decrease (increase) in assets, net of effects from acquisitions and dispositions:
Short-term investments, restricted............................................. 98,515 (51,554) 23,116
Marketable securities.......................................................... 34,195 2,158 (20,939)
Instalment notes receivable, net (a)........................................... 27,296 15,869 (3,781)
Trade and other receivables, net............................................... (9,334) (12,025) 1,056
Inventories.................................................................... (7,037) 968 5,507
Prepaid expenses............................................................... (1,139) (322) 399
Deferred income taxes.......................................................... -- -- 21,411
Assets of discontinued operation............................................... 16,780 (10,608) (11,932)
Increase (decrease) in liabilities, net of effects from acquisitions and
dispositions:
Book overdrafts................................................................ 8,712 (656) (2,671)
Accounts payable............................................................... (22,372) 14,057 14,850
Accrued expenses............................................................... 6,407 (21,412) 11,937
Income taxes payable........................................................... (7,825) 1,258 2,646
Accrued interest............................................................... (1,477) 3,927 (5,599)
--------- ---------- ---------
Cash flows from operating activities......................................... 290,159 138,631 202,406
--------- ---------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements and effects from
acquisitions and dispositions................................................. (52,016) (65,060) (43,069)
Decrease (increase) in investments and other assets, net of effects from
acquisitions and dispositions................................................. (3,472) 2,169 1,360
Acquisitions, net of cash acquired............................................. (18,953) (386,319) --
Proceeds from sale of subsidiary............................................... 14,878 -- --
--------- ---------- ---------
Cash flows used in investing activities...................................... (59,563) (449,210) (41,709)
--------- ---------- ---------
FINANCING ACTIVITIES
Issuance of short-term notes payable and long-term
senior debt.................................................................. 658,859 1,550,500 159,000
Retirement of long-term senior debt............................................ (826,925) (1,185,198) (304,721)
Additions to unamortized debt expense.......................................... (26,193) (19,143) (159)
Purchases of treasury stock.................................................... (50,237) (21,841) --
Exercise of employee stock options............................................. 325 4,793 --
Disposition of liabilities subject to Chapter 11 proceedings................... -- -- 3,427
Fractional share payments...................................................... -- -- (13)
--------- ---------- ---------
Cash flows from (used in) financing activities............................... (244,171) 329,111 (142,466)
--------- ---------- ---------
EFFECT OF EXCHANGE RATE ON CASH.................................................... (289) 389 --
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents............................... (13,864) 18,921 18,231
Cash and cash equivalents at beginning of year..................................... 54,647 35,726 17,495
--------- ---------- ---------
Cash and cash equivalents at end of year........................................... $ 40,783 $ 54,647 $ 35,726
--------- ---------- ---------
--------- ---------- ---------
- ------------------------------
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $170,503 and $171,081 and $173,418 and cash collections
on account and payouts in advance of maturity of $197,799, $186,950 and
$169,637 for the years ended May 31, 1999, 1998 and 1997, respectively.
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................................. $ 181,073 $ 183,866 $ 179,749
Income taxes paid.............................................................. 10,211 7,331 5,598
Income tax refunds............................................................. -- -- 21,411
See accompanying "Notes to Consolidated Financial Statements"
F-6
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Walter Industries, Inc. (the "Company") was organized in 1987 for the
purpose of acquiring Jim Walter Corporation ("Original Jim Walter"). The
Company's financial statements reflect the allocation of the purchase price of
Original Jim Walter based upon the fair value of the assets acquired and the
liabilities assumed. On December 27, 1989, the Company and most of its
subsidiaries each filed a voluntary petition for reorganization under Chapter 11
of Title 11 of the United States Code in the United States Bankruptcy Court for
the Middle District of Florida, Tampa Division (the "Bankruptcy Court"). The
Company emerged from bankruptcy on March 17, 1995 (the "Effective Date")
pursuant to the Amended Joint Plan of Reorganization Dated as of December 9,
1994, as modified on March 1, 1995 (as so modified the "Consensual Plan").
Despite the confirmation and effectiveness of the Consensual Plan, the
Bankruptcy Court continues to have jurisdiction over, among other things, the
resolution of disputed prepetition claims against the Company and other matters
that may arise in connection with or related to the Consensual Plan.
PRINCIPLES OF CONSOLIDATION
The Company is a diversified holding company with three reportable segments:
Homebuilding and Financing, Water Transmission Products and Energy Services.
Through these operating segments and other operations, the Company offers a
diversified line of products and services primarily including home construction
and financing, ductile iron pressure pipe, alloys, metals, petroleum coke
distribution and refinery outsourcing services, aluminum foil and sheet
products, furnace and foundry coke, chemicals and slag fiber. The Company's coal
mining and methane gas subsidiary, Jim Walter Resources, Inc. ("JWR"), has been
classified as a discontinued operation (see Note 3 for further discussion). The
consolidated financial statements include the accounts of the Company and all of
its subsidiaries. Preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from those estimates. All significant
intercompany balances have been eliminated. In addition, certain
reclassifications of prior year amounts have been made in the accompanying
consolidated financial statements in order to conform with the fiscal 1999
presentation. Current and prior year financial statements have been revised to
reflect the reclassification of JWR financial information.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries included in Energy Services
are translated at current exchange rates, while revenues and expenses are
translated at average rates prevailing during the year. Translation adjustments
are reported as a component of stockholders' equity. Gains and losses on foreign
currency transactions are included in selling, general and administrative
expenses.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash and cash equivalents,
marketable securities, instalment notes receivable and trade receivables.
The Company maintains cash and cash equivalents and marketable securities in
high quality securities with various financial institutions. Concentrations of
credit risk with respect to instalment notes receivable and trade receivables
are limited due to the large number of customers and their dispersion across
many geographic areas. However, of the gross amount of instalment notes
receivable at May 31, 1999, 22%, 13%,
F-7
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
10% and 10% (20%, 12%, 10% and 10% in 1998) are secured by homes located in the
states of Texas, Mississippi, Florida and Alabama respectively. The Company
believes the potential for incurring material losses related to these credit
risks is remote.
REVENUE RECOGNITION
Revenue is recognized when products are shipped or services are provided to
customers for all segments except Homebuilding and Financing. Revenue from the
sale of a home is included in income upon completion of construction and legal
transfer to the customer. Time charges are included in equal parts in each
monthly payment and taken into income as collected. This method of time charge
income recognition approximates the effective interest method since a much
larger provision for losses would be required if time charge income were
accelerated.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include short-term deposits and highly liquid
investments which have original maturities of three months or less and are
stated at cost which approximates market. The Company's cash management system
provides for the reimbursement of all major bank disbursement accounts on a
daily basis. Checks issued but not yet presented to the banks for payment are
classified as book overdrafts.
Investments with original maturities greater than three months are
classified as marketable securities. In accordance with Statement of Financial
Accounting Standards No. 115--"Accounting for Certain Investments in Debt and
Equity Securities," the Company's marketable securities are classified as
available for sale and are carried at estimated fair values which approximate
cost at May 31, 1998. The unrealized depreciation is reflected in stockholders'
equity, net of tax, at May 31, 1999.
INVENTORIES
Inventories are valued at the lower of cost or market using either the
first-in, first-out ("FIFO") or average cost method of accounting.
GOODWILL
Goodwill acquired in connection with the acquisition of Original Jim Walter
is being amortized over periods ranging up to 20 years. Goodwill acquired in
connection with the acquisition of Applied Industrial Materials Corporation
("AIMCOR") is being amortized over 35 years. Goodwill acquired in connection
with all other acquisitions is being amortized over 15 years. The Company
evaluates, on a regular basis, whether events or circumstances have occurred
that indicate the carrying amount of goodwill may warrant revision or may not be
recoverable. The Company measures impairment of goodwill and other long-term
assets based upon estimated future undiscounted cash flows from operations of
the related business unit. At May 31, 1999 and 1998, the accumulated
amortization of goodwill was approximately $570.0 million and $524.6 million,
respectively. At May 31, 1999, the net unamortized balance of goodwill and other
long-term assets were not considered to be impaired.
F-8
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DEPRECIATION
The Company provides depreciation for financial reporting purposes
principally on the straight-line method over the useful lives of the assets.
Assets (primarily mine development costs) extending for the full life of a coal
mine are depreciated on the unit of production basis. For federal income tax
purposes, accelerated methods are used for substantially all eligible
properties. The depreciable property categories and the principal rates for
depreciation used are as follows:
Land improvements....................................... 3-30 years
Buildings............................................... 5-50 years
Leasehold improvements.................................. Over term of lease
Mine development costs.................................. Over life of mine
Machinery and equipment................................. 3-20 years
Depletion of minerals is provided based on estimated recoverable quantities.
CAPITALIZED INTEREST
The Company has capitalized interest on qualifying properties in accordance
with Statement of Financial Accounting Standards No. 34--"Capitalization of
Interest Cost". Interest capitalized for the years ended May 31, 1999, 1998 and
1997 was immaterial.
OPERATING LEASES
Rent expense was $19.9 million, $13.7 million and $12.0 million for the
years ended May 31, 1999, 1998 and 1997, respectively. Future minimum payments
under noncancelable operating leases at May 31, 1999 are: 2000, $18.4 million;
2001, $14.3 million; 2002, $12.1 million; 2003, $6.6 million; and 2004, $2.9
million.
ENVIRONMENTAL EXPENDITURES
The Company capitalizes environmental expenditures that increase the life or
efficiency of property or that reduce or prevent environmental contamination.
The Company accrues for environmental expenses resulting from existing
conditions that relate to past operations when the costs are probable and
reasonably estimable.
TAXES
The Company complies with Statement of Financial Accounting Standards No.
109--"Accounting for Income Taxes" ("FAS 109"). FAS 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. FAS 109
generally considers all expected future events other than changes in tax law or
rates.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the income available to
common stockholders by the weighted average number of common shares outstanding
for the period, without consideration of common
F-9
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
stock equivalents. Diluted earnings per share includes the number of shares
issuable on the exercise of dilutive employee stock options less the number of
shares of common stock that could have been purchased with the proceeds from the
exercise of such options.
COMPREHENSIVE INCOME
Effective for the fiscal year ended May 31, 1999, the Company adopted FAS
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in the Company's consolidated financial statements. Comprehensive income is
defined as the change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The Company's balance of other comprehensive income is comprised
exclusively of unrealized depreciation in marketable securities, changes in
cumulative foreign currency translation adjustment and excess of additional
pension liability. The deferred income taxes related to the cumulative foreign
currency translation adjustment for the years ended May 31, 1999, 1998 and 1997
was not significant.
NOTE 2--ACQUISITIONS AND DIVESTITURE
Effective September 23, 1998, Jim Walter Homes, Inc., the Company's
homebuilding subsidiary, acquired Texas-based homebuilder Dream Homes, Inc. On
February 26, 1999, Jim Walter Homes, Inc. acquired Crestline Homes, Inc., a
modular homebuilder, located in Laurinburg, North Carolina. These acquisitions
did not materially affect the operating results of the Company.
On October 1, 1998, the Company sold the assets of the window balance
operations of JW Window Components, Inc. ("JWWC"). On November 23, 1998, the
Company sold the outstanding capital stock of JWWC, which comprised the roll
form and screen products operations. These transactions completed the Company's
divestiture of JWWC. The Company recorded a pre-tax loss of $4.9 million and a
tax benefit of $9.8 million on the sale of JWWC. This divestiture did not
materially affect the operating results of the Company.
On October 15, 1997, the Company completed the acquisition of AIMCOR, which,
through its Carbon Group, is a leading international provider of products and
outsourcing services to the petroleum, steel, foundry and aluminum industries.
Through its Metals Group, AIMCOR is also a leading supplier of ferrosilicon in
the southeastern United States. The purchase price was approximately $400.0
million, including direct acquisition costs of $4.8 million, and is subject to
certain indemnity obligations of the parties as required by the Stock Purchase
Agreement. The acquisition was accounted for using the purchase method of
accounting and had an effective date of September 30, 1997.
The following unaudited results of operations reflect the effect on the
Company's operations as if the acquisition of AIMCOR had occurred as of June 1,
1997 (in thousands, except per share amounts).
YEAR ENDED
MAY 31, 1998
------------
Net sales and revenues.......................................................... $1,640,562
Income from continuing operations............................................... 34,059
Net income...................................................................... 61,227
Basic income per share.......................................................... 1.14
Diluted income per share........................................................ 1.13
F-10
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS AND DIVESTITURE (CONTINUED)
The unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of June 1, 1997, nor are they
necessarily indicative of future operating results.
NOTE 3--DISCONTINUED OPERATION
In February 1999 (the "measurement date"), a decision was made to dispose of
JWR, the Company's coal mining and methane gas subsidiary. The Company expects
to complete the disposition within calendar 1999. As a result, the operations of
JWR have been classified as a discontinued operation in the consolidated
financial statements. JWR comprised substantially all of the Company's
previously reported Natural Resources operating segment. In February 1999, a
decision was also made to shut down Blue Creek Mine No. 3 ("Mine No. 3"). The
estimated costs to shut down the mine approximated $53 million. In addition, the
Company realized a $25 million pre-tax gain from a reduction in JWR's
postretirement benefit obligation (see Note 9). Both of the above items were
recorded in the fiscal 1999 third quarter, net of taxes, within the results of
discontinued operation prior to the measurement date.
The following is a summary of the operating results of JWR (in thousands):
PRIOR TO MEASUREMENT DATE
-------------------------------------------------------------------
YEARS ENDED
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------
MAY 31, 1999 FEB. 28, 1999 MAY 31, 1998 MAY 31, 1997
------------------- ------------------ ------------ ------------
Sales and revenues.......................... $ 59,252 $ 237,056 $ 354,149 $ 335,878
Costs and expenses.......................... 58,775 274,763 320,465 313,272
------- -------- ------------ ------------
Income (loss) before tax.................... 477 (37,707) 33,684 22,606
Income tax benefit (expense)................ 1,308 18,005 (3,853) (1,993)
------- -------- ------------ ------------
Income (loss) from discontinued operation... $ 1,785 $ (19,702) $ 29,831 $ 20,613
------- -------- ------------ ------------
------- -------- ------------ ------------
The assets of JWR have been segregated on the balance sheet from their
historical classification to separately identify them as assets held for
disposition. Such amounts are summarized as follows (in thousands):
MAY 31, MAY 31,
1999 1998
---------- ----------
Cash and cash equivalents................................................................. $ 58 $ 62
Short-term investments, restricted........................................................ 3,491 3,290
Trade and other receivables, net.......................................................... 28,476 26,944
Inventories............................................................................... 61,434 55,210
Prepaid expenses.......................................................................... 10,056 4,039
Property, plant and equipment, net........................................................ 235,655 276,008
Deferred income taxes..................................................................... 33,093 24,828
Investments and other long-term assets.................................................... (6,534) (7,872)
---------- ----------
Total Assets Held for Disposition....................................................... $ 365,729 $ 382,509
---------- ----------
---------- ----------
F-11
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--DISCONTINUED OPERATION (CONTINUED)
The liabilities of JWR, aggregating approximately $247.6 million at May 31,
1999, have not been classified separately pending determination of the form and
structure of disposition. Management does not presently anticipate a loss on the
ultimate disposition.
NOTE 4--RESTRICTED SHORT-TERM INVESTMENTS
Restricted short-term investments at May 31, 1999 and 1998 include (i)
temporary investment of reserve funds and collections on instalment notes
receivable owned by Mid-State Trusts II, III, IV, V, VI and VII (the "Trusts")
($115.9 million and $125.3 million, respectively) which are available only to
pay expenses of the Trusts and principal and interest on indebtedness of the
Trusts, (ii) certain funds held by Trust II that are in excess of the amount
required to be paid for expenses, principal and interest on the Trust II
Mortgage-Backed Notes, but which are subject to retention ($17.1 million and
$106.9 million, respectively) and (iii) miscellaneous other segregated accounts
restricted to specific uses ($12.7 million and $12.0 million, respectively). In
June 1998, an agreement was reached with Financial Security Assurance Inc. to
release approximately $121.6 million of funds held by Trust II which were
subject to retention at July 1, 1998. Such funds were utilized to pay down Trust
IV indebtedness.
NOTE 5--INSTALMENT NOTES RECEIVABLE
Instalment notes receivable arise from sales of detached, single-family
homes to customers. These receivables require periodic payments, primarily over
periods of 12 to 30 years, and are secured by first mortgages or similar
security instruments. The credit terms offered by Jim Walter Homes, Inc. ("Jim
Walter Homes") and its affiliates are usually for 100% of the purchase price of
the home. The buyer's ownership of the land and improvements necessary to
complete the home constitute a significant equity investment to which the
Company has access should the buyer default on payment of the instalment note
obligation. The Company currently holds fixed-rate instalment loans at either an
8.5% or 10% annual percentage rate, without points or closing costs. The
aggregate amount of instalment notes receivable having at least one payment 90
or more days delinquent was 3.29% and 3.06% of total instalment notes receivable
at May 31, 1999 and 1998, respectively. The allowance for possible losses as a
percentage of net instalment notes receivable was approximately 2.0% in both
years which reflects management's assessment of the amount necessary to provide
against future loss in the portfolio.
Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from Jim
Walter Homes and its affiliates on homes constructed and sold by Jim Walter
Homes and its affiliates and services such instalment notes. Mid-State Trust II
("Trust II"), Mid-State Trust III ("Trust III"), Mid-State Trust IV ("Trust
IV"), Mid-State Trust VI ("Trust VI") and Mid-State Trust VII ("Trust VII") are
business trusts organized by Mid-State, which owns all of the beneficial
interest in Trust III, Trust IV, Trust VI, and Trust VII. Trust IV owns all of
the beneficial interest in Trust II. The Trusts were organized for the purpose
of purchasing instalment notes receivable from Mid-State with the net proceeds
from the issuance of mortgage-backed or asset-backed notes. The assets of Trust
II, Trust III, Trust IV, Trust VI and Trust VII, including the instalment notes
receivable, are not available to satisfy claims of general creditors of the
Company and its subsidiaries. The liabilities of Trusts II, III, IV, VI, and VII
for their publicly issued debt are to be satisfied solely from the proceeds of
the underlying instalment notes and are non-recourse to the Company and its
subsidiaries. Mid-State Trust V ("Trust V"), a business trust in which Mid-State
holds all the beneficial interest, was organized as a warehouse facility to hold
instalment notes receivable as collateral for borrowings to provide temporary
financing to Mid-State for its current purchases of instalment notes and
mortgages from Jim Walter Homes and its affiliates.
F-12
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INSTALMENT NOTES RECEIVABLE (CONTINUED)
The gross amount of instalment notes receivable and the economic balance by
trust are as follows (in thousands):
MAY 31, 1999 MAY 31, 1998
-------------------------------- --------------------------------
GROSS BALANCE ECONOMIC BALANCE GROSS BALANCE ECONOMIC BALANCE
------------- ----------------- ------------- -----------------
Trust II................. $ 617,265 $ 398,932 $ 784,641 $ 502,034
Trust III................ 257,751 145,573 310,526 171,071
Trust IV................. 1,219,063 561,602 1,416,842 635,678
Trust V.................. 332,938 126,188 673,043 261,986
Trust VI................. 925,677 379,118 1,050,695 419,430
Trust VII................ 817,339 323,210 -- --
Unpledged................ 21,105 8,113 2,998 1,329
------------- ----------------- ------------- -----------------
Total.................. $ 4,191,138 $ 1,942,736 $ 4,238,745 $ 1,991,528
------------- ----------------- ------------- -----------------
------------- ----------------- ------------- -----------------
The economic balance of an account is the present value of the future
scheduled monthly payments due on the account. Such present value is calculated
by discounting the remaining future scheduled monthly payments on an account
using the effective financing rate. The effective financing rate is determined
by calculating the discount rate which, when applied in a present value
calculation, results in the present value of all originally scheduled monthly
payments on such account being equal to the original amount financed. In effect,
the economic balance of an account is the amount of principal that can be
amortized by the instalment payments due over the remaining term of the account
at the effective financing rate.
At May 31, 1999, instalment payments estimated to be receivable within each
of the next five fiscal years and thereafter are as follows (in thousands):
2000............................................................ $ 267,928
2001............................................................ 262,448
2002............................................................ 256,949
2003............................................................ 249,205
2004............................................................ 240,030
Thereafter...................................................... 2,914,578
---------
$4,191,138
---------
---------
F-13
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
MAY 31,
------------------------
1999 1998
----------- -----------
Land and minerals................................................... $ 77,928 $ 77,551
Land improvements................................................... 20,403 20,113
Buildings and leasehold improvements................................ 130,217 124,556
Machinery and equipment............................................. 503,773 471,109
Construction in progress............................................ 19,808 29,576
----------- -----------
Gross............................................................. 752,129 722,905
Less: Accumulated depreciation.................................... (353,538) (326,565)
----------- -----------
Net............................................................... $ 398,591 $ 396,340
----------- -----------
----------- -----------
NOTE 7--INCOME TAXES
Income tax expense (benefit) from continuing operations consists of the
following components (in thousands):
FOR THE YEARS ENDED MAY 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ----------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
--------- --------- --------- --------- ----------- ---------
Federal................ $ 11,310 $ 21,290 $ (3,545) $ 34,883 $ 1,064 $ 28,250
State and local........ 1,637 (9) 1,639 49 2,042 (368)
Foreign................ 1,106 -- 1,923 -- -- --
--------- --------- --------- --------- ----------- ---------
Total................ $ 14,053 $ 21,281 $ 17 $ 34,932 $ 3,106 $ 27,882
--------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- ----------- ---------
The income tax expense (benefit) from continuing operations at the Company's
effective tax rate differed from the statutory rate as follows:
FOR THE YEARS ENDED
MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Statutory tax rate.................................... 35.0% 35.0% 35.0%
Effect of:
State and local income tax.......................... 1.2 1.7 2.3
Amortization of goodwill............................ 13.4 19.3 27.0
Foreign sales corporation benefit................... (.2) (.5) --
Capital loss on sale of subsidiary.................. (9.1) -- --
Other, net.......................................... (.5) (.9) .9
--- --- ---
Effective tax rate from continuing operations......... 39.8% 54.6% 65.2%
--- --- ---
--- --- ---
The discontinued operation is reported net of tax expense (benefit) of
$(19,313), $3,853 and $1,993 for 1999, 1998 and 1997, respectively. The
effective tax rate for the discontinued operation differs from the statutory
rate primarily as a result of utilizing percentage depletion for income tax
purposes. In fiscal 1998,
F-14
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
the income tax benefit related to the extraordinary item approximated the
statutory rate and is deferred federal income tax.
Deferred tax liabilities (assets) are comprised of the following (in
thousands):
MAY 31,
--------------------
1999 1998
--------- ---------
Bad debts............................................... $ (10,832) $ (10,712)
Instalment sales method for instalment notes receivable
in prior years........................................ 15,774 21,268
Depreciation and amortization........................... 37,739 30,569
Difference in basis of assets under purchase
accounting............................................ 14,922 17,253
Net operating loss/capital loss/credit carryforwards.... (26,661) (51,214)
Accrued expenses........................................ (22,495) (22,978)
Postretirement benefits other than pensions............. (49,155) (47,294)
Pensions................................................ 3,851 3,527
--------- ---------
Total deferred tax (asset)............................ $ (36,857) $ (59,581)
--------- ---------
--------- ---------
The Revenue Act of 1987 eliminated the instalment sales method of tax
reporting for instalment sales afte r December 31, 1987.
The change in the deferred tax accounts during fiscal 1999 includes a
purchase accounting adjustment of $1.6 million for the AIMCOR acquisition.
Deferred tax assets of $33,093 and $24,828 at May 31, 1999 and 1998,
respectively, are included in assets held for disposition (see Note 3). The
Company believes that it is more likely than not that the total deferred tax
asset will be realized through taxable earnings or alternative tax strategies;
therefore, a valuation allowance is not warranted.
The Company's net operating loss carryforward at May 31, 1999 approximates
$30.9 million, which will expire in fiscal 2010. The Company's minimum tax
credit carryforward at May 31, 1999 approximates $13.2 million. The Company's
foreign tax credit carryforward at May 31, 1999 approximates $.4 million which
will expire in fiscal 2003. The Company's capital loss carryforward at May 31,
1999 approximates $6.3 million which will expire in fiscal 2004. Under the
Internal Revenue Code, if certain substantial changes in the Company's ownership
occur, there are annual limitations on the amount of loss and credit
carryforwards.
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the Internal
Revenue Service ("IRS") for taxes, interest and penalties in the total amount of
$347.3 million with respect to fiscal years ended August 31, 1980 and August 31,
1983 through May 31, 1994. The claims for fiscal years ended May 31, 1993 and
May 31, 1994 do not reflect tentative net operating carryback allowances in the
amount of $21.4 million. These proofs of claim represent total adjustments to
taxable income of approximately $507.2 million for all tax periods at issue. The
Company has filed objections to the proofs of claim, and the various issues are
being litigated in the Bankruptcy Court. By joint stipulation between the IRS
and the Company, confirmed by Order of the Bankruptcy Court dated January 3,
1997, the IRS conceded an issue involving an adjustment to taxable income of
approximately $51.0 million for hedging losses incurred during fiscal year 1988.
Also by joint stipulation, confirmed by Order of the Bankruptcy Court dated
March 10, 1998, the IRS has conceded an issue involving adjustments to taxable
income of approximately $127.0 million for amortization deductions
F-15
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
related to certain debt issuance costs for tax years 1988 through 1991. The
Company believes that the balance of such proofs of claim are substantially
without merit and intends to defend vigorously such claims, but there can be no
assurance as to the ultimate outcome. The Company's U. S. federal income tax
returns for the fiscal years ended May 31, 1995 and 1996 are currently being
audited by the IRS.
NOTE 8--DEBT
Long-term debt, in accordance with its contractual terms, consisted of the
following at each year end (in thousands):
MAY 31,
--------------------
1999 1998
--------- ---------
Senior debt:
Walter Industries, Inc.
Revolving Credit Facility........................ $ 125,000 $ 135,000
Term Loan........................................ 425,000 450,000
Other............................................ 3,000 4,450
--------- ---------
553,000 589,450
--------- ---------
Mid-State Trusts
Loan & Security Agreement........................ 89,300 80,300
Trust II Mortgage-Backed Notes................... 258,400 323,000
Trust III Asset Backed Notes..................... 48,576 85,145
Trust IV Asset Backed Notes...................... 590,783 774,024
Trust V Variable Funding Loan.................... 105,000 218,000
Trust VI Asset Backed Notes...................... 359,342 405,698
Trust VII Asset Backed Notes..................... 306,750 --
--------- ---------
1,758,151 1,886,167
--------- ---------
Total.......................................... $2,311,151 $2,475,617
--------- ---------
--------- ---------
In conjunction with the closing of the AIMCOR acquisition on October 15,
1997, the Company completed an $800.0 million financing with Bank of America (as
successor to NationsBank, National Association) and other lenders. The financing
consisted of a $350.0 million revolving credit facility ("Revolving Credit
Facility") and a $450.0 million six-year term loan (the "Term Loan"),
(collectively, the "Credit Facilities"). Proceeds from the financing were used
to (a) finance the acquisition of AIMCOR, (b) pay transaction costs, (c) provide
ongoing working capital, and (d) repay outstanding indebtedness under a $550.0
million credit facility. The Company recorded an extraordinary loss of $4.1
million ($2.7 million net of income tax benefit) during fiscal 1998 consisting
of a write-off of unamortized debt expense related to the early repayment of the
$550.0 million credit facility.
The Credit Facilities are secured by guarantees and pledges of the capital
stock of all domestic subsidiaries of the Company other than Mid-State Holdings
Corporation and its sole subsidiary Mid-State. Net cash proceeds from (a) asset
sales where the aggregate consideration received (on a cumulative basis from
October 15, 1997) exceeds $20.0 million and the cumulative amount of such
proceeds from such sales since the most recent preceding prepayment equals or
exceeds $5.0 million, (b) each Permitted Receivables Securitization (as defined
in the Credit Facilities) or (c) the issuance of Consolidated Indebtedness (as
F-16
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED)
defined in the Credit Facilities) permitted thereunder must be applied to
permanently reduce the Credit Facilities. There have been no such reductions to
date. Interest, at the option of the Company, is at (i) the greater of (a) the
prime rate, or (b) the federal funds effective rate plus .50% or (ii) a LIBOR
rate plus an Applicable Margin (as defined in the Credit Facilities) of .50% to
1.25% (based upon a leverage ratio pricing grid). At May 31, 1999, the weighted
average interest rate was 6.02%.
The Revolving Credit Facility includes a sub-facility for trade and other
standby letters of credit in an amount up to $75.0 million at any time
outstanding and a sub-facility for swingline advances in an amount not in excess
of $25.0 million at any time outstanding. A commitment fee ranging from .175% to
.30% per annum (based upon a leverage ratio pricing grid) is payable on the
daily average unutilized commitment. The fee for outstanding letters of credit
is priced at the Applicable Margin less .125%. At May 31, 1999, letters of
credit in the aggregate face amount of $24.5 million have been issued and
swingline advances outstanding were $2.2 million. The Revolving Credit Facility
is due October 15, 2003.
Scheduled principal payments on the Term Loan in each of the five years from
May 31, 1999 are $50 million, $75 million, $75 million, $100 million, and $125
million, respectively.
On May 27, 1999, Mid-State renewed its 364-day, $90.0 million Loan and
Security Agreement with Kitty Hawk Funding Corporation, an affiliate of Bank of
America (as successor to NationsBank) as lender and as agent and bank investor.
Advances under the Loan and Security Agreement are secured by Mid-State's
beneficial interest in Trust III and evidenced by a variable funding note. The
proceeds from the borrowings outstanding at May 31, 1999 and 1998 were used to
pay down the Revolving Credit Facility. Future proceeds will be used for general
corporate purposes. The facility currently matures on May 25, 2000, but provides
for extensions of the maturity through May 31, 2002. Accordingly, the $89.3
million of borrowings outstanding at May 31, 1999 have been classified as
long-term debt. Principal payments are required on any day in which the
outstanding principal amount of all advances under the Loan and Security
Agreement exceed the borrowing base. Additionally, commencing on May 31, 2001,
Mid-State is required to prepay $1.5 million on May 31, August 31, November 30,
and February 28. The outstanding principal of all advances must be paid when the
facility is terminated. Interest must be paid on the last day of each tranche
period at either the commercial paper rate, the prime rate or the LIBOR rate
plus .47% as determined by Mid-State and approved by the lender. The advances
under the Loan and Security Agreement are to be satisfied solely from the assets
of Mid-State and are non-recourse to the Company and any of its other
subsidiaries.
The Trust II Mortgage-Backed Notes were issued in five classes in varying
principal amounts. Four of the classes have been fully repaid. The remaining
class, A4 ("Class A4 Notes"), bears interest at the rate of 9.625%. Interest on
the notes is payable quarterly on January 1, April 1, July 1 and October 1 (each
a "Payment Date"). On each Payment Date, regular scheduled principal payments
will be made on the Class A4 Notes until maturity on April 1, 2003. Class A4
Notes are subject to special principal payments and may be subject to optional
redemption under specified circumstances. The scheduled principal amount of
notes maturing in each of the four years from May 31, 1999 is $64.6 million.
The Trust III Asset Backed Notes bear interest at 7.625%, constitute a
single class and have a final maturity date of April 1, 2022. Payments are made
quarterly on January 1, April 1, July 1 and October 1 based on collections on
the underlying collateral less amounts paid for interest on the notes and Trust
III expenses.
F-17
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED)
The Trust IV Asset Backed Notes bear interest at 8.33%, constitute a single
class and have a final maturity of April 1, 2030. Payments are made quarterly on
January 1, April 1, July 1 and October 1 based on collections on the underlying
collateral and distributions from Trust II, less amounts paid for interest on
the notes and Trust IV expenses.
On March 3, 1995, Trust V entered into the three-year $500.0 million
Variable Funding Loan Agreement with Enterprise Funding Corporation, an
affiliate of Bank of America (as successor to NationsBank) as lender and as
Administrative Agent. The agreement was amended to reduce the facility to $400.0
million effective July 31, 1997. This facility is an evergreen facility
renewable on an annual basis. Periodic paydowns occur from the proceeds of
permanent financings. Accordingly, the $105.0 million of borrowings outstanding
at May 31, 1999 have been classified as long-term debt. The facility currently
matures on September 29, 1999. Interest is based on the cost of A-1 and P-1
rated commercial paper which was 4.9% at May 31, 1999 plus .35%. The facility
fee on the maximum net investment is .15%.
The Trust VI Asset Backed Notes were issued in four classes, bear interest
rates ranging from 7.34% to 7.79% and have a final maturity on July 1, 2035.
Payments are made quarterly on January 1, April 1, July 1, and October 1 based
on collections on the underlying collateral, less amounts paid for interest on
the notes and Trust VI expenses.
On December 10, 1998, Mid-State Homes purchased from Trust V instalment
notes having a gross value of $858.7 million and an economic balance of $335.3
million. Mid-State subsequently sold these notes to Trust VII, a business trust
organized by Mid-State. These sales were in exchange for the net proceeds from
the public issuance of $313.5 million of Asset Backed Notes by Trust VII ("Trust
VII Asset Backed Notes"). The notes were issued in a single class and bear
interest at 6.34% payable quarterly beginning March 15, 1999. The notes have a
final maturity of December 1, 2036. Payments are made quarterly on December 15,
March 15, June 15, and September 15 based on collections on the underlying
collateral, less amounts paid for interest on the notes and Trust VII expenses.
The $313.5 million in proceeds were primarily used to repay related asset-backed
borrowings of $284.0 million under the Trust V warehouse facility. Lehman
Brothers, Inc., an affiliate of Lehman Brothers Holdings, Inc., which owned 2.8
million shares of the Company's common stock at May 31, 1999, served as an
underwriter in connection with the public issuance of the Trust VII Asset Backed
Notes and received underwriting commissions and fees of $.8 million.
The Company periodically uses interest rate lock agreements as hedge
instruments to manage interest rate risks. The Company has two types of interest
rate risks: (i) current risk on interest rates related to debt which has
floating rates and (ii) risk of interest rate fluctuations from indebtedness
secured by fixed-rate instalment notes receivable generated by its homebuilding
business. During fiscal 1998, the Company entered into forward-interest rate
lock agreements in order to fix the interest rate on a portion of asset-backed
long-term debt which was anticipated to be issued in the second quarter of
fiscal 1999. The lock agreements had a total notional amount of $250.0 million
and had a weighted-average interest rate of 5.57%. Approximately $100.0 million
notional amount of interest rate lock agreements were held by Lehman Brothers,
Inc. These agreements were terminated on October 9, 1998. The losses incurred
($24.0 million) have been deferred and are being amortized to interest expense
over the life of Trust VII Asset Backed Notes. Additionally, the interest rate
lock agreements in effect during fiscal 1997 were terminated on June 11, 1997.
The losses incurred ($8.6 million) have been deferred and are being amortized to
interest expense over the life of Trust VI Asset Backed Notes. There were no
interest rate lock agreements at May 31, 1999.
F-18
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED)
The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities (including change of
control and asset sale transactions). In addition, under the Credit Facilities,
the Company is required to maintain specified financial ratios and comply with
certain financial tests, including a fixed charge coverage ratio and a maximum
leverage ratio. The Company was in compliance with these covenants at May 31,
1999.
The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants at
May 31, 1999.
The Loan and Security Agreement contains a number of covenants that, among
other things, restrict the ability of Mid-State to dispose of assets, create
liens on assets, engage in mergers, incur any unsecured or recourse debt, or
make material changes to their credit and collection policies. In addition,
Mid-State is required to maintain specified net income and net worth levels. The
Company was in compliance with these covenants at May 31, 1999.
NOTE 9--PENSION AND OTHER EMPLOYEE BENEFITS
The Company has various pension and profit sharing plans covering
substantially all employees. In addition to its own pension plans, the Company
contributes to certain multi-employer plans. Combined total pension expense for
the years ended May 31, 1999, 1998 and 1997, was $3.3 million, $7.5 million and
$7.6 million, respectively. The funding of retirement and employee benefit plans
is in accordance with the requirements of the plans and, where applicable, in
sufficient amounts to satisfy the "Minimum Funding Standards" of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits
based on years of service and compensation or at stated amounts for each year of
service.
The Company also provides certain postretirement benefits other than
pensions, primarily health care, to eligible retirees. The Company's
postretirement benefit plans are not funded. As discussed in Note 3, the Company
realized a $25.0 million pre-tax curtailment gain from a reduction in JWR's
F-19
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
postretirement benefit obligation resulting from a recent actuarial analysis of
medical claims experience and a reduction in the workforce, partially offset by
the decision to shut down Mine No. 3.
PENSION BENEFITS OTHER BENEFITS
---------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year.... $ 285,973 $ 256,040 $ 262,242 $ 225,413
Service cost............................... 7,072 6,290 7,629 8,128
Interest cost.............................. 19,372 18,651 16,714 16,005
Amendments................................. 2,375 362 (1,984) --
Actuarial loss............................. 1,271 18,822 19,476 19,585
Acquisitions............................... -- 2,270 -- --
Benefits paid.............................. (16,961) (16,462) (9,130) (6,889)
Other...................................... 600 -- (42,048) --
---------- ---------- ----------- -----------
Benefit obligation at end of year.......... $ 299,702 $ 285,973 $ 252,899 $ 262,242
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Change in plan assets
Fair value of plan assets at beginning of
year..................................... $ 283,396 $ 247,067 $ -- $ --
Actual return on plan assets............... 12,418 45,246 -- --
Employer contribution...................... 3,560 5,328 -- --
Acquisitions............................... -- 2,217 -- --
Benefits paid.............................. (16,961) (16,462) -- --
---------- ---------- ----------- -----------
Fair value of plan assets at end of year... $ 282,413 $ 283,396 $ -- $ --
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Funded status.............................. $ (17,289) $ (2,577) $ (252,899) $ (262,242)
Unrecognized net actuarial gain (loss)..... 19,591 6,351 (13,480) (19,199)
Unrecognized prior service cost............ 6,122 4,318 (4,030) (2,267)
Unamortized transition amount.............. (3,498) (4,062) -- --
Contribution after measurement date........ 718 1,057 -- --
---------- ---------- ----------- -----------
Prepaid (accrued) benefit cost............. $ 5,644 $ 5,087 $ (270,409) $ (283,708)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Amounts recognized in the balance sheet:
Prepaid benefit cost....................... $ 5,529 $ 5,648 $ -- $ --
Accrued benefit cost....................... (11,967) (10,554) (270,409) (283,708)
Intangible asset........................... 6,461 5,871 -- --
Accumulated other comprehensive income..... 5,621 4,122 -- --
---------- ---------- ----------- -----------
Net amount recognized...................... $ 5,644 $ 5,087 $ (270,409) $ (283,708)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
F-20
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
Certain pension plans have benefit obligations in excess of fair value of
plan assets. At May 31, 1999 and 1998, these plans had total obligations of
$54.3 and $53.0 million, respectively and had total assets of $41.3 and $41.4
million, respectively.
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average assumptions
Discount rate...................... 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets..... 9.00% 9.00% -- --
Rate of compensation increase...... 4.50% 4.50% -- --
For measurement purposes, an 8.50% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate was assumed
to decrease gradually to 5.25% for 2006 and remain at that level thereafter.
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Components of net periodic benefit
cost
Service cost....................... $ 7,572 $ 6,860 $ 7,629 $ 8,128
Interest cost...................... 19,372 18,651 16,714 16,005
Expected return on plan assets..... (24,912) (21,870) -- --
Amortization of prior service
cost............................. 572 538 (215) (222)
Recognized net actuarial loss...... (540) (520) (1,855) (2,203)
--------- --------- --------- ---------
Net periodic benefit cost.......... $ 2,064 $ 3,659 $ 22,273 $ 21,708
--------- --------- --------- ---------
--------- --------- --------- ---------
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
1-PERCENTAGE-
POINT 1-PERCENTAGE-
INCREASE POINT DECREASE
------------- --------------
Effect on total of service and interest cost components........ $ 4,032 $ (5,127)
Effect on postretirement benefit obligation.................... $ 42,825 $ (34,302)
The Company and certain of its subsidiaries maintain profit sharing plans.
The total cost of these plans for the years ended May 31, 1999, 1998 and 1997
was $3.6 million, $3.5 million and $3.4 million, respectively.
Under the labor contract with the United Mine Workers of America, JWR makes
payments into multi-employer pension plan trusts established for union
employees. Under ERISA, as amended by the Multiemployer Pension Plan Amendments
Act of 1980, an employer is liable for a proportionate part of the plans'
unfunded vested benefits liabilities. The Company estimates that its allocated
portion of the unfunded vested benefits liabilities of these plans amounted to
approximately $46.0 million and $42.5 million at May 31, 1999 and 1998,
respectively. However, although the net liability can be estimated, its
F-21
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
components, the relative position of each employer with respect to the actuarial
present value of accumulated benefits and net assets available for benefits, are
not available to the Company.
In February 1997, a reduction in the salaried workforce at JWR was completed
under a voluntary early retirement program. The total cost of this program was
$6.2 million.
NOTE 10--STOCKHOLDERS' EQUITY
The Company is authorized to issue 200,000,000 shares of common stock, $.01
par value. As of May 31, 1999 and 1998, 50,311,892 and 53,885,594 shares of
common stock were outstanding, respectively. In September 1998, the Company's
Board of Directors authorized an increase, from two to four million, in the
number of shares of the Company's common stock which may be purchased under the
share repurchase program authorized in July 1998. Information relating to the
Company's share repurchases is set forth in the following table (in thousands):
FOR THE YEARS ENDED
MAY 31,
--------------------
1999 1998
--------- ---------
Shares.................................................... 3,594 1,398
Amount.................................................... $ 50,237 $ 21,841
As of May 31, 1999, 4,992,292 shares of common stock are held as treasury
stock. On September 13, 1995, pursuant to the Consensual Plan, 3,880,140 shares
of common stock were issued to an escrow account. To the extent that certain
federal income tax matters of the Company are resolved satisfactorily, up to a
maximum 3,880,140 of the escrowed shares will be distributed to former
stockholders of the Company as of the Effective Date. To the extent such matters
are not resolved satisfactorily, the escrowed shares will be returned to the
Company and canceled.
Pursuant to the Consensual Plan, a total of 54,868,766 shares of common
stock were to be issued to creditors and former stockholders of the Company. The
plan of reorganization originally proposed by certain creditors and committees
(the "Creditors Plan") provided that subordinated bondholders could elect to
receive "Qualified Securities" (cash and/or new senior notes) in lieu of common
stock of the Company. The Consensual Plan confirmed by the Bankruptcy Court
(which technically constituted a modification of the Creditors Plan) kept in
place the bondholders election. Certain subordinated bondholders, however, were
unable to provide documentation evidencing their right to receive Qualified
Securities within the two-year time frame required by the Consensual Plan. As a
result, approximately 212,000 additional shares of common stock were issued in
lieu of Qualified Securities in fiscal 1997. In addition, certain former
stockholders did not tender their shares, which resulted in approximately 17,000
shares not being issued.
F-22
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE
A reconciliation of the basic and diluted per earnings share computations
for each of the three years in the period ended May 31, 1999 are as follows (in
thousands except per share data):
FOR THE YEARS ENDED MAY 31,
----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
--------- --------- --------- --------- --------- ---------
Income from continuing operations..... $ 53,515 $ 53,515 $ 29,073 $ 29,073 $ 16,504 $ 16,504
Income (loss) from discontinued
operation........................... (17,917) (17,917) 29,831 29,831 20,613 20,613
Extraordinary item.................... -- -- (2,663) (2,663) -- --
--------- --------- --------- --------- --------- ---------
Net income........................ $ 35,598 $ 35,598 $ 56,241 $ 56,241 $ 37,117 $ 37,117
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Shares of common stock outstanding:
Average number of common
shares(a)......................... 51,628 51,628 53,846 53,846 54,922 54,922
Effect of diluted securities:
Stock options (b)................... -- 117 -- 537 -- 142
--------- --------- --------- --------- --------- ---------
51,628 51,745 53,846 54,383 54,922 55,064
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Per share:
Income from continuing operations... $ 1.04 $ 1.04 $ .54 $ .53 $ .30 $ .30
Income (loss) from discontinued
operation......................... (.35) (.35) .55 .55 .38 .37
Extraordinary item.................. -- -- (.05) (.05) -- --
--------- --------- --------- --------- --------- ---------
Net income........................ $ .69 $ .69 $ 1.04 $ 1.03 $ .68 $ .67
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
- ------------------------
(a) Fiscal 1999, 1998 and 1997 shares include 3,880,140 additional shares issued
to an escrow account on September 13, 1995 pursuant to the Consensual Plan,
but do not include shares held in treasury.
(b) Represents the number of shares of common stock issuable on the exercise of
dilutive employee stock options less the number of shares of common stock
which could have been purchased with the proceeds from the exercise of such
options. These purchases were assumed to have been made at the higher of
either the market price of the common stock at the end of the period or the
average market price for the period.
NOTE 12--STOCK OPTIONS
Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved by
stockholders in October 1995 and amended in September 1997 and April 1999, an
aggregate of 6,000,000 shares (3,000,000, respectively at May 31, 1998 and 1997)
of the Company's common stock have been reserved for the grant and issuance of
incentive and non-qualified stock options, stock appreciation rights ("SARs")
and stock awards. The maximum number of such shares with respect to which stock
options or SARs may be granted to any employee while the Plan is in effect is
1,000,000 shares, and the aggregate number of such shares that may be used in
settlement of stock awards is 3,000,000 shares. An option becomes exercisable at
such times and in such installments as set by the Compensation Committee of the
Board (generally, vesting occurs over three years in equal annual increments),
but no option will be exercisable after the tenth anniversary of the date on
which it is granted. The option price per share may not be less than the fair
market value of a share on the date the option is granted.
F-23
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS (CONTINUED)
Information on stock options is summarized as follows:
MAY 31, 1999 MAY 31, 1998 MAY 31, 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of
year............................ 3,298,329 $ 14.551 2,669,999 $ 13.301 1,487,000 $ 14.120
Granted........................... 727,500 15.195 906,000 17.955 1,219,000 12.313
Exercised......................... (20,498) 12.902 (233,341) 13.686 -- --
Canceled.......................... (127,333) 16.198 (44,329) 13.353 (36,001) 13.571
--------- --------- ---------
Outstanding at end of year........ 3,877,998 14.626 3,298,329 14.551 2,669,999 13.301
--------- --------- ---------
--------- --------- ---------
Exercisable at end of year........ 2,076,174 13.693 1,143,036 13.570 487,333 14.118
--------- --------- ---------
--------- --------- ---------
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ------------------------
---------------------------------------------- NUMBER WEIGHTED
NUMBER WEIGHTED AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL AT EXERCISE
EXERCISE PRICES MAY 31, 1999 LIFE (YEARS) MAY 31, 1999 PRICE
- ---------------- ------------------- ------------------------- ------------- ---------
$10.547-12.656... 1,138,697 7.2 711,693 $ 12.313
12.657-14.766... 1,245,801 6.1 1,245,801 14.117
14.767-16.875... 591,000 9.4 10,000 14.875
16.876-18.984... 855,500 8.6 93,012 17.252
18.985-21.094... 47,000 8.8 15,668 20.815
---------- -------------
3,877,998 7.5 2,076,174
---------- -------------
---------- -------------
The Company applies APB Opinion No. 25 and related interpretations for
accounting for stock options. Accordingly, no compensation costs at the grant
dates are recorded. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates as prescribed by Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation", the Company's net income and net income per share on a pro forma
basis would have been (in thousands, except per share data):
1999 1998 1997
--------- --------- ---------
Pro forma net income......................................... $ 32,070 $ 53,836 $ 35,314
--------- --------- ---------
--------- --------- ---------
Pro forma basic income per share............................. $ .62 $ 1.00 $ .64
--------- --------- ---------
--------- --------- ---------
Pro forma diluted income per share........................... $ .62 $ .99 $ .64
--------- --------- ---------
--------- --------- ---------
The preceding pro forma results were calculated with the use of the Black
Scholes option-pricing model. The following assumptions were used for the year
ended May 31, 1999: (1) risk-free interest rate of 5.75%; (2) dividend yield of
0.0%; (3) expected life of 5.0 years; and (4) volatility of 34.66%. The
following assumptions were used for the year ended May 31, 1998: (1) risk-free
interest rate of 6.07%; (2) dividend yield of 0.0%; (3) expected life of 5.0
years; and (4) volatility of 31.10%.The following assumptions were
F-24
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS (CONTINUED)
used for the year ended May 31, 1997: (1) risk-free interest rate of 7.36%; (2)
dividend yield of 0.0%; (3) expected life of 5.0 years; and (4) volatility of
29.30%.
The Walter Industries, Inc. Employee Stock Purchase Plan was adopted in
January 1996 and amended in April 1999. All full-time employees of the Company
who have attained the age of majority in the state in which they reside are
eligible to participate. The Company contributes a sum equal to 15% of each
participant's actual payroll deduction as authorized, and remits such funds to a
designated brokerage firm which purchases in the open market, as agent for the
Company, as many shares of common stock as such funds will permit for the
accounts of the participants. The amount of stock purchased depends upon the
market prices of the common stock at the time the purchases are made. The total
number of shares that may be purchased under the plan is 1,000,000 (1,000,000 at
May 31, 1998). Total shares purchased under the plan in 1999, 1998 and 1997 were
approximately 225,000, 155,000 and 200,000, respectively, and the Company's
contribution was approximately $.4 million in all years.
NOTE 13--LITIGATION
INCOME TAX LITIGATION
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company (see "Note 7" for a more complete explanation).
MISCELLANEOUS LITIGATION
The Company and its subsidiaries are parties to a number of other lawsuits
arising in the ordinary course of their businesses. The Company provides for
costs relating to these matters when a loss is probable and the amount is
reasonably estimable. The effect of the outcome of these matters on the
Company's future results of operations cannot be predicted with certainty
because any such effect depends on future results of operations and the amount
and timing of the resolution of such matters. While the results of litigation
cannot be predicted with certainty, the Company believes that the final outcome
of such other litigation will not have a materially adverse effect on the
Company's consolidated financial condition.
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107--"Disclosures about Fair
Value of Financial Instruments" ("FAS 107") requires disclosure of estimated
fair values for all financial instruments for which it is practicable to
estimate fair value. Considerable judgment is necessary in developing estimates
of fair value and a variety of valuation techniques are permitted under FAS 107.
The derived fair value estimates resulting from the judgments and valuation
techniques applied cannot be substantiated by comparison to independent
materials or to disclosures by other companies with similar financial
instruments. Management believes that the disclosures required by FAS 107 have
limited relevance to the Company and its operations.
The following methods and assumptions were used to estimate fair value
disclosures:
CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS, MARKETABLE
SECURITIES, TRADE RECEIVABLES, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND
SHORT-TERM NOTES PAYABLE--The carrying amounts reported in the balance sheet
approximate fair value.
F-25
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INSTALMENT NOTES RECEIVABLE--The estimated fair value of instalment notes
receivable at May 31, 1999 and 1998 was in the range of $2,000.0 million to
$2,100.0 million and $2,100.0 million to $2,200.0 million, respectively. The
estimated fair value is based upon valuations prepared by an investment banking
firm as of May 31, 1999 and 1998. The value of mortgage-backed instruments such
as instalment notes receivable are very sensitive to changes in interest rates.
DEBT--The estimated fair value of long-term senior debt at May 31, 1999 and
1998 approximated $2,228.0 million and $2,560.0 million, respectively, based on
current yields for comparable debt issues or prices for actual transactions.
INTEREST RATE LOCK AGREEMENTS--The estimated fair value of the interest rate
lock agreements at May 31, 1998 would have resulted in a loss of $.9 million.
The fair value was based on quotes from brokers which represented the amounts
that the Company would pay if the agreements were terminated at May 31, 1998.
There were no interest rate lock agreements at May 31, 1999.
NOTE 15--SEGMENT INFORMATION
In June 1997, FAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998. The Company has adopted this statement for the year ended May
31, 1999.
The Company's reportable segments are strategic business units that offer
different products and services and have separate management teams. The business
units have been aggregated into three reportable segments since the long-term
financial performance of these reportable segments is affected by similar
economic conditions. The three reportable segments are: Homebuilding and
Financing, Water Transmission Products and Energy Services. The Company markets
and supervises the construction of detached, single-family residential homes,
primarily in the Southern United States, and provides mortgage financing on such
homes through the Homebuilding and Financing segment. Ductile iron pressure
pipe, fittings, valves and hydrants are manufactured and marketed through the
Water Transmission Products segment. The Energy Services segment markets and
distributes petroleum coke and a variety of ferroalloys as well as offering
value-added services (such as inventory management, warehousing, shipping and
removal of product from refineries) to its vendors and customers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating earnings of the respective business units.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables. The Other category consisting of the
remaining operating businesses of the Company includes specialty aluminum foil
and sheet products, furnace and foundry coke, slag fiber, specialty chemicals,
resin-coated sand, patterns and tooling, and land management businesses. The
Company's coal mining and methane gas subsidiary, JWR, has been classified as a
discontinued operation (see Note 3).
F-26
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION (CONTINUED)
FOR THE YEARS ENDED MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Sales and revenues:
Homebuilding and Financing................................. $ 461,315 $ 449,471 $ 440,749
Water Transmission Products................................ 460,738 426,389 419,813
Energy Services............................................ 361,250 285,950 --
Other...................................................... 332,664 320,409 308,984
Corporate.................................................. 1,868 832 1,637
--------- --------- ---------
Consolidated sales and revenues (a)(b)................... $1,617,835 $1,483,051 $1,171,183
--------- --------- ---------
--------- --------- ---------
Operating income (c)(d):
Homebuilding and Financing (e)............................. $ 113,451 $ 99,421 $ 84,721
Water Transmission Products................................ 33,039 16,192 16,342
Energy Services............................................ 24,891 20,947 --
Other...................................................... 26,197 25,006 26,311
--------- --------- ---------
197,578 161,566 127,374
Less--corporate interest and other expenses (e).............. (108,729) (97,544) (79,882)
--------- --------- ---------
Income from continuing operations before income tax
expense.................................................. 88,849 64,022 47,492
Income tax expense......................................... (35,334) (34,949) (30,988)
--------- --------- ---------
Income from continuing operations........................ $ 53,515 $ 29,073 $ 16,504
--------- --------- ---------
--------- --------- ---------
Depreciation:
Homebuilding and Financing................................. $ 3,950 $ 3,840 $ 3,311
Water Transmission Products................................ 17,335 16,880 17,010
Energy Services............................................ 6,268 3,701 --
Other...................................................... 15,642 14,738 13,398
Corporate.................................................. 1,364 1,557 1,691
--------- --------- ---------
Total.................................................... $ 44,559 $ 40,716 $ 35,410
--------- --------- ---------
--------- --------- ---------
Gross capital expenditures:
Homebuilding and Financing................................. $ 6,150 $ 4,908 $ 5,617
Water Transmission Products................................ 23,598 20,492 14,479
Energy Services............................................ 6,582 14,169 --
Other...................................................... 17,445 26,206 26,003
Corporate.................................................. 2,379 1,120 692
--------- --------- ---------
Total.................................................... $ 56,154 $ 66,895 $ 46,791
--------- --------- ---------
--------- --------- ---------
F-27
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION (CONTINUED)
FOR THE YEARS ENDED MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Identifiable assets:
Homebuilding and Financing................................. $1,730,922 $1,833,967 $1,796,949
Water Transmission Products................................ 449,972 439,514 452,963
Energy Services............................................ 494,014 503,508 --
Other...................................................... 246,061 250,037 229,431
Corporate.................................................. 75,328 153,135 176,358
--------- --------- ---------
Total.................................................... $2,996,297 $3,180,161 $2,655,701
--------- --------- ---------
--------- --------- ---------
- ------------------------
(a) Inter-segment sales (made primarily at prevailing market prices) are
deducted from sales of the selling segment and are insignificant in amount
with the exception of the sales of Other to Water Transmission Products of
$15.7 million, $16.2 million and $14.7 million in 1999, 1998 and 1997,
respectively.
(b) Export sales were $143.7 million, $110.5 million, and $23.3 million in 1999,
1998, and 1997, respectively. Export sales to any single geographic area do
not exceed 10% of consolidated sales and revenues.
(c) Operating income amounts are after deducting amortization of goodwill. A
breakdown by segment of goodwill amortization is as follows (in thousands):
FOR THE YEARS ENDED MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Homebuilding and Financing............................... $ 23,288 $ 23,942 $ 25,548
Water Transmission Products.............................. 9,858 9,859 9,856
Energy Services.......................................... 8,756 5,336 --
Other.................................................... 1,057 1,058 1,056
Corporate................................................ 159 157 155
--------- --------- ---------
$ 43,118 $ 40,352 $ 36,615
--------- --------- ---------
--------- --------- ---------
(d) Operating income amounts include postretirement benefits. A breakdown by
segment is as follows (in thousands):
FOR THE YEARS ENDED MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Homebuilding and Financing................................. $ 1,707 $ 1,271 $ 1,888
Water Transmission Products................................ 2,510 2,046 3,857
Energy Services............................................ -- -- --
Other...................................................... 3,219 3,086 4,550
Corporate.................................................. 317 242 573
--------- --------- ---------
$ 7,753 $ 6,645 $ 10,868
--------- --------- ---------
--------- --------- ---------
F-28
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION (CONTINUED)
(e) Interest expense incurred by the Homebuilding and Financing segment and
Corporate are as follows (in thousands):
FOR THE YEARS ENDED MAY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Homebuilding and Financing:
Gross interest...................................... $ 144,177 $ 154,644 $ 152,094
Less: Intercompany interest income.................. (45,321) (38,647) (33,135)
--------- --------- ---------
Net interest........................................ 98,856 115,997 118,959
Corporate:
Senior debt interest................................ 40,820 38,936 27,086
Intercompany interest............................... 45,321 38,647 33,135
--------- --------- ---------
$ 184,997 $ 193,580 $ 179,180
--------- --------- ---------
--------- --------- ---------
General corporate expense, senior debt interest expense and intercompany
interest expense are attributable to all segments, but cannot be reasonably
allocated to specific segments.
F-29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
Walter Industries, Inc.
Our audits of the consolidated financial statements of Walter Industries,
Inc. referred to in our report dated July 14, 1999, appearing on page F-2 of
this Form 10-K also included an audit of the financial statement schedules
listed in Item 14(a) of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Tampa, Florida
July 14, 1999
S-1
SCHEDULE II
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES FROM RESERVES OF YEAR
- --------------------------------------------------------------- ----------- ----------- ------------- ---------
(IN THOUSANDS)
For the Year Ended May 31, 1997
Reserve (provision for possible losses) deducted from
instalment notes receivable................................ $ 26,138 $ 2,896 $ (2,640)(1) $ 26,394
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
Reserve (provision for possible losses) deducted from trade
receivables................................................ $ 4,980(2) $ 444 $ (399)(1) $ 5,025(2)
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
For the Year Ended May 31, 1998
Reserve (provision for possible losses) deducted from
instalment notes receivable................................ $ 26,394 $ 1,341 $ (1,514)(1) $ 26,221
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
Reserve (provision for possible losses) deducted from trade
receivables................................................ $ 5,025(2) $ (665) $ (427)(1) $ 3,933(2)
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
For the Year Ended May 31, 1999
Reserve (provision for possible losses) deducted from
instalment notes receivable................................ $ 26,221 $ 929 $ (1,337)(1) $ 25,813
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
Reserve (provision for possible losses) deducted from trade
receivables................................................ $ 3,933(2) $ 816 $ (1,412)(1) $ 3,337(2)
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
- ------------------------
(1) Notes and accounts written off as uncollectible.
(2) Net of $3,200 related to discontinued operation.
S-2
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1999
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------
2(a (i) -- Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its
subsidiaries, dated as of December 9, 1994 (1)
2(a ii) -- Modification to the Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain
of its subsidiaries, as filed in the Bankruptcy court on March 1, 1995 (2)
2(a ii) -- Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan of Reorganization
of Walter Industries, Inc. and certain of its subsidiaries, as modified (3)
3(a) -- Restated Certificate of Incorporation of the Company (3)
3(b) -- By-Laws of the Company (3)
10(a) -- Stockholder's Agreement (3)
10(b) -- Form of Common Stock Registration Rights Agreement (3)
10(c) -- Channel One Registration Rights Agreement (7)
10(d) -- Second Amended and Restated Veil Piercing Settlement Agreement (included as Exhibit 3A to
Exhibit 2(a)(i) (1)
10(e) -- Bank Credit Agreement (8)
10(f) -- Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company
and the Indemnities parties thereto (5)
10(g) -- New Alabama Power Contract (4)(5)
10(h) -- Escrow Agreement, dated as of September 12, 1995, between the Company and Harris Trust and
Savings Bank, as Escrow Agent (7)
10(i) -- Walter Industries, Inc. Directors' Deferred Fee Plan (7)
10(j) -- 1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6)
10(k) -- Agreement, dated as of August 30, 1995, between the Company and James W. Walter (7)
10(l) -- Stock Purchase Agreement dated as of September 19, 1997 by and among the Stockholders of
Applied Industrial Materials corporation, Certain Stockholders of AIMCOR Enterprises
International, Inc. AIMCOR (Germany) Limited Partnership and AIMCOR (Luxembourg) Limited
Partnership, as first parties, and Walter Industries, Inc. as second party. (9)
10(m) -- $800 Million Credit Agreement by and among Walter Industries, Inc. as Borrower, NationsBank,
National Association, as Administrative Agent, Documentation Agent and Syndication Agent and
the Lenders Party hereto from time to time. (9)
10(n) -- Variable Funding Loan Agreement, dated as of March 3, 1995, among Mid-State Trust V Enterprise
Funding Corporation and NationsBank N.A. and amendments thereto. (10)
21 -- Subsidiaries of the Company
23 -- Consent of PricewaterhouseCoopers LLP
24 -- Powers of Attorney
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------
27 -- Financial Data Schedule
- ------------------------
(1) This Exhibit is incorporated by reference to the Application for
Qualification of Indenture of Form T-3 filed by the Company with the
Commission on February 6, 1995.
(2) This Exhibit is incorporated by reference to Amendment No. 2 to the
Application for Qualification of Indenture on Form T-3 filed by the Company
with the Commission on March 7, 1995.
(3) This Exhibit is incorporated by reference to the Registration Statement of
Form S-1 (File No. 33-59013) filed by the Company with the Commission on May
2, 1995.
(4) Portions of this document have been omitted pursuant to an approved request
for confidential treatment dated October 11, 1995.
(5) This Exhibit is incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 33-59013) filed by the Company
with the Commission on May 2, 1995.
(6) This Exhibit is incorporated by reference to the Registration Statement on
Form S-8 filed by the Company with the Commission on April 1, 1996.
(7) This Exhibit is incorporated by reference to Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 33-59013) filed by the Company
with the Commission on May 2, 1995.
(8) This Exhibit is incorporated by reference to Form 8-K filed by the Company
with the Commission on February 16, 1996.
(9) This Exhibit is incorporated by reference to Form 8-K filed by the Company
with the Commission on October 30, 1997.
(10) This Exhibit is incorporated by reference to Form 10-K/A filed by the
Company with the Commission on November 7, 1997.