-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KRW542vemNxNS0a6yttVVrbEXJQVzyStlXSYm67bLJ0hVi+liKYB0SHDSWukG+pn EJVOxK6XYCSmVJh7gumjXw== 0000950112-96-003333.txt : 19960919 0000950112-96-003333.hdr.sgml : 19960919 ACCESSION NUMBER: 0000950112-96-003333 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960918 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALTER INDUSTRIES INC /NEW/ CENTRAL INDEX KEY: 0000837173 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 133429953 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-59013 FILM NUMBER: 96631622 BUSINESS ADDRESS: STREET 1: 1500 N DALE MABRY HGWY CITY: TAMPA STATE: FL ZIP: 33607 BUSINESS PHONE: 8138714811 MAIL ADDRESS: STREET 1: 1500 NORTH MABRY HGWY STREET 2: 1500 NORTH MABRY HGWY CITY: TAMPA STATE: FL ZIP: 33607 FORMER COMPANY: FORMER CONFORMED NAME: HILLSBOROUGH HOLDINGS CORP DATE OF NAME CHANGE: 19910814 POS AM 1 WALTER INDUSTRIES, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1996 REGISTRATION NO. 33-59013 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- POST-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- WALTER INDUSTRIES, INC. (Exact name of registrant as specified in charter) DELAWARE 6711 13-3429953 (State or other jurisdiction of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code Number) Identification Number)
------------------- 1500 NORTH DALE MABRY HIGHWAY TAMPA, FL 33607 (813) 871-4811 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------- WILLIAM H. WELDON EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER WALTER INDUSTRIES, INC. 1500 NORTH DALE MABRY HIGHWAY TAMPA, FL 33607 (813) 871-4523 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- COPY OF ALL COMMUNICATIONS, INCLUDING SERVICE OF PROCESS, TO: PETER J. GORDON, ESQ. SIMPSON THACHER & BARTLETT 425 LEXINGTON AVENUE NEW YORK, NY 10017-3909 ------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. X If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ___________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ___________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 31,885,363 SHARES WALTER INDUSTRIES, INC. COMMON STOCK This Prospectus relates to the offering from time to time of up to 31,885,363 shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), that were issued by Walter Industries, Inc. (the "Company" or "Walter Industries"), a Delaware corporation formerly named Hillsborough Holdings Corporation, to certain former creditors and stockholders of the Company and its subsidiaries pursuant to the Company's Amended Joint Plan of Reorganization dated as of December 9, 1994, as modified on March 1, 1995 (as so modified, the "Plan of Reorganization"), under Section 1123(a) of the United States Bankruptcy Code (the "Bankruptcy Code"). The Plan of Reorganization became effective on March 17, 1995 (the "Effective Date of the Plan of Reorganization"). Pursuant to the Plan of Reorganization, 50,494,313 shares of Common Stock, including the Shares, were issued at that time. The Shares may be sold to the public from time to time by certain holders thereof (the "Selling Security Holders") in the amount and in the manner described herein or as may be set forth in a Prospectus Supplement accompanying this Prospectus. The Company will receive no proceeds from the sale of any of the Shares by any of the Selling Security Holders. See "Plan of Distribution." ------------------- SEE "CERTAIN RISK FACTORS" FOR INFORMATION CONCERNING CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN ANY OF THE SHARES. The Company's Common Stock is listed on the Nasdaq National Market under the symbol "WLTR". On September 16, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $ 13 3/8 per share. See "Price Range of Common Stock and Dividend Policy." ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------- The date of this Prospectus is September 17, 1996 The Selling Security Holders directly, through agents designated from time to time, or through dealers or underwriters also to be designated, may sell the Shares from time to time on terms to be determined at the time of sale. To the extent required, the specific Shares to be sold, the names of the Selling Security Holders, the respective purchase prices and public offering prices, historical trading information for the Common Stock, the names of any such agent, dealer or underwriter, and any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying Prospectus Supplement. See "Plan of Distribution." If the Company is advised that an underwriter has been engaged with respect to the sale of any Shares offered hereby, or in the event of any other material change in the plan of distribution, the Company will cause an appropriate amendment to the Registration Statement of which this Prospectus forms a part to be filed with the Securities and Exchange Commission (the "Commission") reflecting such engagement or other change. See "Additional Information." Each of the Selling Security Holders reserves the sole right to accept and, together with its agents from time to time, to reject in whole or in part any proposed purchase of Shares to be made directly or through agents. The Company will not receive any proceeds from this offering, but agreed to pay substantially all of the expenses of this offering other than applicable transfer taxes and commissions and discounts payable to dealers, agents or underwriters. The Selling Security Holders and any broker-dealers, agents or underwriters that participate with the Selling Security Holders in the distribution of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and any commissions received by them and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. See "Description of Capital Stock--Common Stock Registration Rights Agreements" and "Plan of Distribution" for a description of certain indemnification arrangements. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Commission. Reports and other information concerning the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511 and at Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants such as the Company that file electronically with the Commission. Such reports and other information also can be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (which term shall encompass any amendments and exhibits thereto) under the Securities Act with respect to the Shares offered hereby. This Prospectus, which forms a part of such Registration Statement, does not contain all the information set forth in such Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to such Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. Any interested parties may inspect such Registration Statement, without charge, at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and may obtain copies of all or any part of it from the Commission upon payment of the fees prescribed by the Commission. Such Registration Statement also can be inspected at the offices of National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Neither the delivery of this Prospectus or any Prospectus Supplement nor any sales made hereunder or thereunder shall under any circumstances create any implication that the information contained herein or therein is correct as of any time subsequent to the date hereof or thereof or that there has been no change in the affairs of the Company since the date hereof or thereof. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and consolidated financial statements (the "Consolidated Financial Statements") and notes thereto appearing elsewhere in this Prospectus. The Company operates, and during all periods for which financial information appears herein operated, on a fiscal year ending May 31. THE COMPANY The Company, through its direct and indirect subsidiaries, currently offers a diversified line of products and services for homebuilding, water and waste water transmission, residential and non-residential construction, and industrial markets. The Homebuilding and Related Financing Group sells, constructs on the customer's site, and finances standardized partially finished homes. Sales are made in approximately 24 states, primarily in the southern part of the United States. Substantially all of the sales are made on credit provided by the Group. A credit purchaser must provide his own land and give a first mortgage or deed of trust to secure payment of the purchase price of the home. The Water and Waste Water Transmission Products Group is one of the largest domestic manufacturers of ductile iron pressure pipe and fittings. The Group also manufactures valves and hydrants, fittings and castings. The Natural Resources Group engages in coal mining and a related degasification program. The Group owns four coal mines in Alabama and has the capacity to produce a total of 9.7 million tons of coal annually. The Group produced 7.9 million tons of coal in fiscal 1996. A substantial portion of this output is under long-term contracts and the balance will be used internally to produce furnace and foundry coke or sold to other customers on a short-term contract or spot market basis. The Company does not consider itself to be a significant factor in the domestic or international coal markets. The Industrial and Other Products Group produces furnace and foundry grades of coke, specialty chemicals, slag wool products, aluminum sheet, aluminum foil, window and door screens, window balances, fireplace inserts, fireplaces and accessories, municipal and original equipment manufacturer castings, patterns and tooling and resin-coated sand. See "The Company" and "Business and Properties." RECENT HISTORY The Company was organized in August 1987 by a group of investors led by Kohlberg Kravis Roberts & Co., L.P. ("KKR") for the purpose of acquiring Jim Walter Corporation, a Florida corporation ("Original Jim Walter"), pursuant to a leveraged buyout (the "LBO"). Following its organization, the Company organized and acquired all of the outstanding shares of capital stock of a group of direct and indirect wholly owned subsidiaries, including Hillsborough Acquisition Corporation ("HAC"). On September 18, 1987, HAC acquired approximately 95% of the outstanding shares of common stock of Original Jim Walter pursuant to a cash tender offer (the "Tender Offer"). On January 7, 1988, (i) Original Jim Walter merged (the "Merger") into HAC (which changed its name to Jim Walter Corporation), (ii) HAC distributed substantially all of its assets (principally excluding the stock of The Celotex Corporation ("Celotex") and several other subsidiaries of Original Jim Walter) to a parent corporation of HAC (which was merged into the Company on April 1, 1991) in redemption of all of the shares of capital stock of HAC owned by such parent corporation, (iii) HAC merged into its other stockholder, another indirect wholly owned subsidiary of the Company, and (iv) the surviving 3 corporation of such merger changed its name to Jim Walter Corporation (and is hereinafter referred to as "J-II" or "Jim Walter Corporation"). Following the Merger and prior to the commencement of the Chapter 11 Cases (as defined below), the Company undertook a program of corporate reorganizations and asset dispositions, which were contemplated by all of the debt agreements entered into in connection with the Tender Offer and the Merger. Pursuant to this program the Company restructured and/or disposed of certain of the businesses of Original Jim Walter, including the disposition in April, 1988 of all of the stock of the parent corporation of J-II. Also during this time, the Company and certain of its subsidiaries and certain of their former and current directors and officers, stockholders and other persons and entities which were parties to or beneficiaries of indemnification agreements and other indemnification obligations of the Company and its subsidiaries (the "Indemnitees") were named as co-defendants in lawsuits (the "Veil Piercing Litigation") brought by or on behalf of thousands of persons ("Asbestos Claimants") claiming asbestos-related damages against Celotex alleging, among other things, that (i) Original Jim Walter, its successors and other entities, including the Company and certain of its subsidiaries, were liable for all damages, including asbestos-related damages, caused by products manufactured, sold and distributed by a predecessor of Celotex, by reason of claims sounding in piercing the corporate veil, alter ego and related theories ("Veil Piercing Claims"), and (ii) the aforementioned distribution by HAC of substantially all of its assets pursuant to the LBO constituted a fraudulent conveyance. See "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements." On December 27, 1989, the Company and 31 of its subsidiaries each filed a voluntary petition for reorganization under Chapter 11 ("Chapter 11") of the Bankruptcy Code with the Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"); one additional subsidiary also filed a voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court on December 3, 1990 (all such voluntary petitions for reorganization, collectively, the "Chapter 11 Cases"). Two other subsidiaries, Cardem Insurance Co., Ltd. (Bermuda) ("Cardem Insurance") and Jefferson Warrior Railroad Company, Inc. ("J.W. Railroad"), did not file petitions for reorganization under Chapter 11. The filing of the voluntary petitions resulted from a sequence of events stemming primarily from an inability of the Company's interest reset advisors to reset interest rates on approximately $624 million of outstanding indebtedness, which indebtedness by its terms required that the interest rates thereon be reset to the rate per annum such indebtedness should bear in order to have a bid value of 101% of the principal amount thereof as of December 2, 1989. The reset advisors' inability to reset the interest rates was primarily attributable to two factors: (i) uncertainties arising from the then-pending Veil Piercing Litigation, including the possibility either that such litigation would lead to the prohibition of further asset sales and debt repayment or that substantial new asbestos-related claims might become assertible against the Company, which uncertainties materially hindered the ability of the Company and its subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii) general turmoil in the high yield bond markets at such time, both of which depressed the bid value of such indebtedness. In January 1990, the Company and each of its subsidiaries which were party to the Chapter 11 Cases filed a declaratory judgment action (the "Adversary Proceeding") in the Bankruptcy Court against all known Asbestos Claimants who had filed Veil Piercing Claims, Celotex and Jim Walter Corporation seeking a declaration, among other things, that (i) the corporate veil between Celotex and Original Jim Walter could not be pierced, (ii) the Company could not be held liable for the asbestos-related liabilities of either Celotex or Jim Walter Corporation on any grounds and (iii) the LBO could not be deemed a fraudulent conveyance. In October 1990, Celotex and one of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 with the Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Celotex Bankruptcy Court"). 4 In January 1994, the indenture trustees for certain pre-LBO debentures of Original Jim Walter assumed by the Company brought an action (the "Fraudulent Conveyance Lawsuit") for the benefit of the Company's estate and its creditors, which alleged that the issuance of debt in connection with the LBO constituted a fraudulent conveyance under New York and Florida law. The plaintiffs sought to avoid the obligations incurred by the Company and its subsidiaries in the LBO. On the Effective Date of the Plan of Reorganization the Company and its subsidiaries emerged from bankruptcy pursuant to the Plan of Reorganization. At that time, pursuant to the Plan of Reorganization 50,494,313 shares of Common Stock were issued to certain former creditors and stockholders of the Company and its subsidiaries and $490,000,000 aggregate principal amount of the Company's 12.19% Series B Senior Notes Due 2000 (the "Senior Notes") were issued to certain former creditors of the Company and its subsidiaries. (The Senior Notes were redeemed in full in January 1996; see "Management's Discussion and Analysis of Results of Operations and Financial Condition--Results of Operations--Years Ended May 31, 1996 and Pro Forma 1995.") Also pursuant to the Plan of Reorganization (i) the Veil Piercing Claims, the Veil Piercing Litigation and the Adversary Proceeding, among other things, were settled after a ruling by the Bankruptcy Court (which was affirmed on appeal by the United States District Court for the Middle District of Florida) finding in favor of the Company on every claim asserted in the Adversary Proceeding and (ii) the Fraudulent Conveyance Lawsuit was settled. This settlement of the Veil Piercing Litigation (the "Veil Piercing Settlement") was entered into among the Company, certain of its creditors, Celotex, Jim Walter Corporation and representatives of the Asbestos Claimants and provided for the dismissal of all the Veil Piercing Claims and the release of the Company, KKR, any and all of their present and former parents, subsidiaries, stockholders, partners, officers, directors and employees and certain other parties (collectively the "Released Parties") from all liabilities relating to the LBO or associated with asbestos-related liabilities of Celotex or Jim Walter Corporation. The Veil Piercing Settlement is embodied in the Plan of Reorganization. The Veil Piercing Settlement, among other things, requires Celotex, and certain other parties to the Celotex bankruptcy proceedings, to propose and use their respective best efforts to obtain confirmation of a plan of reorganization for Celotex that includes an injunction pursuant to Section 524(g) of the Bankruptcy Code ("Section 524(g)") or other similar injunctive relief providing the same protection as a Section 524(g) injunction acceptable to each of the Released Parties. Such injunctive relief would provide the Company with additional assurance that Veil Piercing Claims cannot be asserted in the future against the Company. In conjunction with its Chapter 11 bankruptcy proceedings, through July 1996 Celotex filed various plans of reorganization and/or amendments and supplements thereto which failed to conform to the Veil Piercing Settlement with respect to providing for a Section 524(g) injunction and which thus violated the Veil Piercing Settlement. On March 8, 1996, the Company, along with certain other Released Parties, commenced an adversary proceeding (the "Second Adversary Proceeding") in the Bankruptcy Court against Celotex and Jim Walter Corporation seeking (1) a declaration that the then-most recently proposed Celotex reorganization plan (the "Former Celotex Plan") did not contain the Section 524(g) injunction agreed upon by Celotex and Jim Walter Corporation and thus violated the Veil Piercing Settlement and (2) a mandatory injunction compelling Celotex to amend the Former Celotex Plan to incorporate a provision for a Section 524(g) injunction or an injunction acceptable to the Released Parties that provided the Released Parties the same protection which would be afforded to them by Section 524(g). On May 28, 1996, the Bankruptcy Court entered an Order granting Plaintiffs' Motion for Summary Judgment in part and denying the Motions for Summary Judgment filed by Celotex and Jim Walter Corporation. The Bankruptcy Court's Order declared that: (i) the Veil Piercing Settlement was a valid agreement binding all signatories, including Celotex and Jim Walter Corporation; (ii) the Former Celotex Plan did not contain a Section 524(g) injunction; and (iii) Celotex had not proposed an injunction acceptable to the Released Parties that provided the Released Parties the same protection which would be afforded to them by Section 524(g), thus violating the Veil Piercing Settlement. On June 7, 1996, the Bankruptcy Court (1) made its Order granting Plaintiffs' Motion for 5 Summary Judgment in part a final order and (2) denied without prejudice Plaintiffs' Emergency Motion for Injunctive Relief, which sought an injunction mandating that Celotex and Jim Walter Corporation comply with the Veil Piercing Settlement. Celotex and Jim Walter Corporation each filed notices of appeal from, inter alia, the Bankruptcy Court's Order granting in part Plaintiffs' Motion for Summary Judgment. By order dated June 19, 1996, the Celotex Bankruptcy Court denied confirmation of the Former Celotex Plan and ordered that any new plans must be submitted by July 12, 1996. On July 12, 1996, competing plans were filed by Celotex, Jim Walter Corporation, the Asbestos Bodily Injury Claimants Committee and others (the "Bodily Injury Plan") and by the Asbestos Property Damage Claimants Committee (the "Property Damage Plan"). The Company filed objections to both plans, on the grounds that they did not comply fully with the Veil Piercing Settlement. On August 23, 1996, both the Bodily Injury Plan proponents and the Property Damage Plan proponents filed amended plans. The Property Damage Plan, as amended, provides for a Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to all claimants, but reserves the right to seek confirmation of the Bodily Injury Plan even if the asbestos property damage claimants class votes against that plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the property damage claimants class, that would appear to preclude a Section 524(g) injunction as to asbestos property damage claims. However, in such event the Bodily Injury Plan would still provide for an injunction against asbestos property damage claims to the extent such an injunction is allowed by Section 105 of the Bankruptcy Code. Both plans require the approval of creditors and confirmation by the Celotex Bankruptcy Court. A confirmation hearing concerning the Current Celotex Plan, as amended, and the Property Damage Plan, as amended, is currently scheduled to commence on October 7, 1996. See "Business and Properties-- Legal Proceedings--Asbestos Related Litigation Settlements." See "Certain Risk Factors" for information concerning certain risks associated with an investment in the Shares. 6 SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The following data, insofar as it relates to each of the fiscal years 1992 through 1996, has been derived from annual financial statements, including the consolidated balance sheets at May 31, 1996 and 1995 and the related consolidated statements of operations and retained earnings (deficit) and of cash flows for the three years ended May 31, 1996 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, the pro forma consolidated statement of operations of the Company (the "Pro Forma Consolidated Statement of Operations") and the notes thereto and the other information contained elsewhere in this Prospectus.
YEARS ENDED MAY 31, -------------------------------------------------------------- 1992 1993(2) 1994 1995 1996(3)(4) ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS: Sales and revenues..................... $1,366,581 $1,318,986 $1,328,524 $1,442,322 $1,485,635 Cost of sales (exclusive of depreciation)......................... 891,882 804,411 845,061 951,381 987,354 Depreciation, depletion and amortization.......................... 82,801 70,483 71,035 72,037 74,341 Interest and amortization of debt discount and expense (1)............. 177,060 171,581 155,470 304,548 208,690 Income tax expense(benefit)............ 12,463 24,328 28,917 (170,450) (55,155) Income(loss) before extraordinary item and cumulative effect of accounting change (2)(3)(4)..................... 22,342 46,594 7,175 (358,645) (79,292) Net income (loss)...................... 22,342 (58,014) 7,175 (358,645) (84,696) Net loss per share (4)(5).............. Loss before extraordinary item......... (7.10) (1.56) Extraordinary item..................... -- (.10) ---------- ---------- Net loss............................... (7.10) (1.66) ---------- ---------- ---------- ---------- Number of shares used in calculation of loss per share........................ 50,494,313 50,988,195 ADDITIONAL FINANCIAL DATA: Gross capital expenditures............. $ 68,349 $ 71,708 $ 69,831 $ 91,317 $ 83,523 Net property, plant and equipment...... 664,622 663,040 657,863 662,792 541,536 Total assets........................... 3,171,266 3,223,234 3,140,892 3,245,153 3,091,377 Long-term senior debt.................. 948,782 1,046,971 871,970 2,220,370 2,211,296 Liabilities subject to Chapter 11 proceedings........................... 1,845,328 1,725,631 1,727,684 -- -- Stockholders' equity (deficit)......... (230,119) (287,737) (282,353) 360,774 276,694 Employees at end of year............... 7,645 7,545 7,676 7,888 7,755
- ------------ (1) Interest on unsecured obligations not accrued since December 27, 1989 amounted to $163.7 million in each of the years ended May 31, 1992 through 1994. The Company recorded additional interest and amortization of debt discount and expense of $141.4 million related to the consummation of the Plan of Reorganization in fiscal 1995. (2) The Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions ("FASB 106") and Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FASB 109") during fiscal year 1993. (3) The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FASB 121") during fiscal year 1996. (4) Extraordinary item consists of redemption premium and write off of unamortized debt expense of $8.3 million ($5.4 million after tax) related to early repayment of the Senior Notes and a $150 million bank credit facility during fiscal year 1996. See Note 8 of Notes to Financial Statements. (5) Per share information for fiscal years 1992 through 1994 is not relevant given the significant change in the Company's capital structure following consummation of the Plan of Reorganization. See Note 10 of Notes to Financial Statements. 7 PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS The following unaudited pro forma consolidated summary of operations was prepared to illustrate the estimated effects of the Plan of Reorganization and related financings and the application of the proceeds thereof as if they had occurred for summary of operations purposes as of June 1, 1994. THE PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS DOES NOT PURPORT TO BE INDICATIVE OF THE RESULTS OF OPERATIONS THAT WOULD ACTUALLY HAVE BEEN REPORTED HAD SUCH TRANSACTIONS IN FACT BEEN CONSUMMATED ON SUCH DATE OR OF THE RESULTS OF OPERATIONS THAT MAY BE REPORTED BY THE COMPANY IN THE FUTURE. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. All of the information presented below should be read in conjunction with the Consolidated Financial Statements and the notes thereto, the Pro Forma Consolidated Statement of Operations and the notes thereto and the other information contained elsewhere in this Prospectus.
YEAR ENDED MAY 31, 1995 ------------------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNT) Summary of Operations: Sales and revenues.......................................................... $1,434,694 Cost of sales (exclusive of depreciation)................................... 951,381 Depreciation, depletion and amortization.................................... 72,037 Interest and amortization of debt expense................................... 223,184 Income tax expense.......................................................... 25,280 Net loss.................................................................... (38,277) Net loss per share(1)....................................................... (.75)
- ------------ (1) Net loss per share has been computed based on the weighted average number of shares of Common Stock issuable (50,988,626, which includes 494,313 additional shares of Common Stock issued on September 13, 1995 (180 days after the Effective Date of the Plan of Reorganization) pursuant to the Plan of Reorganization, but does not include 3,880,140 additional shares issued to an escrow account on such date pursuant to the Plan of Reorganization because such issuance is contingent on future events and would be anti-dilutive; see "Description of Capital Stock--Additional Stock Issuances"). 8 CERTAIN RISK FACTORS Set forth below are certain significant risks involved in investing in the Shares offered by this Prospectus. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business and Properties" for a description of other factors affecting the Company's businesses generally. LEVERAGE At May 31, 1996, the Company had total consolidated debt of approximately $2,211,296,000 and a ratio of total consolidated debt to stockholders' equity of approximately 8.0 to 1.0. The ability of the Company to meet its debt service obligations will be dependent upon the future performance of the Company, which, in turn, will be subject to general economic conditions and to financial, competitive, business and other factors, including factors beyond the Company's control. The level of the Company's indebtedness could restrict its flexibility in responding to changing business and economic conditions. The Company believes that the Mid-State Trust V Variable Funding Loan Agreement, the $500 million credit facility described under "Business and Properties--Mid-State Homes", will provide Mid-State Homes, Inc. ("Mid-State Homes") with the funds needed to purchase the instalment notes and mortgages generated by Jim Walter Homes, Inc. ("Jim Walter Homes"). See "Business and Properties--Mid-State Homes." The Company also believes that under present operating conditions sufficient operating cash flow will be generated to make all required interest and principal payments and planned capital expenditures and meet substantially all operating needs and that amounts available under the Credit Facilities (as defined in "Description of Certain Indebtedness--Credit Facilities") will be sufficient to meet peak operating needs. The degree to which the Company is leveraged and the terms governing the Company's debt instruments, including restrictive covenants and events of default, could have important consequences to holders of the Shares, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to service its indebtedness; (iii) terms of the Company's debt instruments will restrict the Company's ability to pay dividends and will impose other operating and financial restrictions; (iv) the Company may be more leveraged than other providers of similar products and services, which may place the Company at a competitive disadvantage; and (v) the Company's significant degree of leverage could make it more vulnerable to changes in general economic conditions. Unexpected declines in the Company's future business, increases in interest rates or the inability to borrow additional funds for its operations if and when required could impair the Company's ability to meet its debt service obligations and, therefore, have a material adverse effect on the Company's business and future prospects. No assurance can be given that additional debt or equity funds will be available when needed or, if available, on terms which are favorable to the Company. Moreover, the terms of the Company's indebtedness contain change in control provisions which may have the effect of discouraging a potential takeover of the Company. See "Capitalization," "Pro Forma Consolidated Statement of Operations," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Results of Operations and Financial Condition--Financial Condition" and "--Liquidity and Capital Resources" and "Description of Certain Indebtedness--Credit Facilities." Borrowings under the Company's Credit Facilities bear interest at rates that fluctuate. As of May 31, 1996, borrowings under this facility totaled $416,000,000. In addition, there were $23,042,000 face amount of letters of credit outstanding thereunder. See "Description of Certain Indebtedness-- Credit Facilities." 9 ACCOUNTING PRESENTATION The Company emerged from bankruptcy on March 17, 1995. Accordingly, the Company's Consolidated Balance Sheets at and after May 31, 1995 and its Consolidated Statements of Operations and Retained Earnings (Deficit) for May 31, 1995 and periods thereafter will not be comparable to the Consolidated Financial Statements for prior periods included elsewhere herein. Furthermore, the Company's Consolidated Statement of Operations and Retained Earnings (Deficit) for May 31, 1995 are not comparable to the Company's consolidated statements of operations and retained earnings (deficit) for the year ended May 31, 1996 and for periods thereafter. Among other things, the Consolidated Statement of Operations and Retained Earnings (Deficit) for the year ended May 31, 1995 includes numerous adjustments required by the Plan of Reorganization, including adjustments to interest expense, payment of substantial professional expenses related to the bankruptcy and payment of $390 million pursuant to the Veil Piercing Settlement described herein. See "Business and Properties-- Legal Proceedings--Asbestos-Related Litigation Settlements." Similarly, the Company's Consolidated Balance Sheet as of May 31, 1995 reflects consummation of the Plan of Reorganization, and therefore is not comparable to the Company's Consolidated Balance Sheets for dates prior thereto. DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company has never paid cash dividends on its common stock and has no present intention of paying any cash dividends on the Common Stock. In addition, the covenants in certain debt instruments to which the Company is a party restrict the ability of the Company to pay cash dividends. Under the Credit Facilities, commencing on June 1, 1996, in any period of twelve consecutive months (on a non-cumulative basis, with the effect that amounts not paid in any twelve month period may not be carried over for payment in a subsequent period) the Company may pay cash dividends in an amount not to exceed: $5,500,000 provided the Consolidated Leverage Ratio (as defined in the Credit Facilities) during the four most recently completed fiscal quarters is greater than 2.50 to 1; $11,000,000 provided such Consolidated Leverage Ratio is less than or equal to 2.50 to 1; and $11,000,000 plus, to the extent positive, Cumulative Excess Cash Flow (as defined in the Credit Facilities) provided such Consolidated Leverage Ratio is less than or equal to 2.0 to 1, in each case also provided that no default under the Credit Facilities has occurred or would result from the payment of such dividends. See "Dividend Policy" and "Description of Certain Indebtedness--Credit Facilities." HOLDING COMPANY STRUCTURE The Company has no business operations other than (i) holding the capital stock of its operating subsidiaries and intermediate holding companies, (ii) holding cash, cash equivalents and marketable securities and (iii) advancing funds to, and receiving funds from, its subsidiaries. In repaying its indebtedness the Company relies primarily on cash flows from its subsidiaries, including debt service and dividends. The ability of the Company's subsidiaries to make payments with respect to advances from the Company will be affected by the obligations of such subsidiaries to their creditors. The ability of such subsidiaries to pay dividends will be subject to applicable law. The Credit Facilities are secured by pledges of the capital stock and intercompany notes of each of the direct and indirect subsidiaries of the Company other than Mid-State Holdings Corporation and its subsidiaries (collectively, "Mid-State Holdings") and Cardem Insurance. RESTRICTIVE COVENANTS The Credit Facilities and the Mid-State Trust V Variable Funding Loan Agreement contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, make capital expenditures, pay dividends, create liens on assets, enter into leases, investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict 10 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 interest coverage, fixed charge coverage and maximum leverage ratios, some of which become more restrictive over time. A substantial portion of the Company's indebtedness is secured by the capital stock and intercompany notes of certain subsidiaries of the Company. The Company currently is in compliance with the covenants and restrictions contained in its existing debt instruments. However, its ability to continue to so comply may be affected by events beyond its control. The breach of any of these covenants or restrictions could result in a default under those debt instruments, which would permit the lenders or other creditors thereunder to declare all amounts borrowed thereunder to be due and payable together with accrued and unpaid interest, would result in the termination of the commitments of the lenders under the Credit Facilities to make further loans and issue letters of credit and could permit such lenders and other creditors to proceed against the collateral securing the obligations owing to them. Any such default could have a significant adverse effect on the market value and the marketability of the Shares. See "Description of Certain Indebtedness--Credit Facilities." RISKS OF BUSINESS DOWNTURN Certain of the Company's businesses are affected by general economic or other factors outside their control. The sales of United States Pipe and Foundry Company, Inc. ("U.S. Pipe") are dependent to some extent upon the rate of residential and non-residential building construction and other forms of construction activity, and are thus subject to certain economic factors such as general economic conditions, the underlying need for construction projects, interest rates and governmental incentives provided to building projects. The cyclical nature of U.S. Pipe's business is offset to some extent by U.S. Pipe's sales to the replacement market. The replacement market generally fluctuates less than the rate of new construction and therefore tends to have a stabilizing influence during a period of depressed construction activity. Jim Walter Homes is also sensitive to certain general economic and other factors. Its business has tended to be countercyclical to national home construction activity. In times of high interest rates or lack of availability of mortgage funds, and thus limited new home construction, Jim Walter Homes' volume of home sales tends to increase due to the terms of the financing it offers. However, in times of low interest rates and increased availability of mortgage funds, Jim Walter Homes' volume of home sales tends to decrease. Also, in times of low interest rates and high availability of mortgage funds, additional competition is able to enter the market. A significant portion of the sales of Jim Walter Resources, Inc. ("Jim Walter Resources") are made pursuant to long-term contracts, which tend to stabilize the results of its operations. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business and Properties." ASBESTOS-RELATED LITIGATION SETTLEMENTS As discussed more fully under "Recent History" and "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements," the Company and the Indemnitees were defendants in the Veil Piercing Litigation and are beneficiaries of the Veil Piercing Settlement. In order for a holder of a Veil Piercing Claim or any claim related to the LBO which is held by any person who has asserted or may in the future assert Veil Piercing Claims (such claims and Veil Piercing Claims, whether asserted in the past or in the future, collectively, the "Settlement Claims") to assert that Settlement Claim against the Company or any of the Indemnitees, such holder would have to attack the Plan of Reorganization, the approval of the Class (as defined under "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements"), the approval of the Veil Piercing Settlement and all of the actions taken under the Veil Piercing Settlement. Because there were no objections to the Plan of Reorganization or the Veil Piercing Settlement (apart from an objection of the United States Environmental Protection Agency (the "EPA") concerning the scope of certain 11 releases affecting government environmental claims, which appeal has been dismissed; see "Business and Properties--Legal Proceedings--Plan of Reorganization"), such an attack would have to be based upon an alleged failure to provide due process under the United States Constitution. The Company believes, and the Bankruptcy Court has found, that due process requirements have been met. Should such an attack be sustained, however, the Company, the Indemnitees and the other Released Parties could be exposed to additional liabilities in the future of an indeterminate, but possibly substantial, amount. Future holders of Settlement Claims may also attack the injunctions discussed under "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements" on the grounds that the Bankruptcy Court did not have jurisdiction over their future claims. The Company believes that the Bankruptcy Court and the Celotex Bankruptcy Court have jurisdiction to issue "channeling" injunctions barring such future claims, if any. In addition, the provisions of Section 524(g) explicitly authorize an injunction barring claims by future claimants asserting asbestos-related diseases. Accordingly, if the Celotex Bankruptcy Court confirms a plan of reorganization containing such an injunction, as contemplated by the Veil Piercing Settlement, and such plan of reorganization is consummated, Section 524(g) would be an additional basis for preventing future Settlement Claims from being asserted against the Company, the Indemnitees and the other Released Parties. However, there can be no assurance that such a plan of reorganization will be confirmed and consummated. Indeed, through July 1996 Celotex and other parties to the Celotex bankruptcy proceedings filed various plans of reorganization and/or amendments and supplements thereto, and on August 5, 1996, the Company and others filed objections to both the Bodily Injury Plan and the Property Damage Plan, on the grounds that they did not comply fully with the Veil Piercing Settlement. On August 23, 1996, both the Bodily Injury Plan proponents and the Property Damage Plan proponents filed amended plans. The Property Damage Plan, as amended, provides for a Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to all claimants, but reserves the right to seek confirmation of the Bodily Injury Plan even if the asbestos property damage claimants class votes against that plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the property damage claimants class, that would appear to preclude a Section 524(g) injunction as to asbestos property damage claims. However, in such event the Bodily Injury Plan would still provide for an injunction against asbestos property damage claims to the extent such an injunction is allowed by Section 105 of the Bankruptcy Code. See "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements". In addition, a future holder of a Settlement Claim may try to attack Section 524(g) as unconstitutional or try to preclude its application to the Company's case. Should that happen, the Company, the Indemnitees and the other Released Parties could be exposed to additional liabilities in the future of an indeterminate, but possibly substantial, amount. It is also possible that some constituencies might seek to have the terms of the Veil Piercing Settlement altered. In the National Gypsum reorganization, the trust established to settle asbestos claims has sought an order requiring the reorganized debtor in that case to make additional payments to the trust. The Company believes that should not happen in its case because the settlement amount is being paid into a separate trust with allocation of such funds to be decided in the Celotex bankruptcy proceeding pursuant to final court orders in both cases. Any such request would have to be made to the Bankruptcy Court, which has previously approved the settlement payment as fair, and/or the Celotex Bankruptcy Court, which also has previously approved the settlement payment as fair. However, should such a request be made and granted, the Company, the Indemnitees and the other Released Parties could be exposed to additional liabilities in the future of an indeterminate, but possible substantial, amount. EFFECT OF FUTURE SALES OF COMMON STOCK No prediction can be made as to the effect, if any, that future sales of Shares, or the availability of Common Stock for future sale, will have on the market price of the Common Stock prevailing from time 12 to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Pursuant to the Plan of Reorganization, an aggregate of 50,494,313 shares of Common Stock were issued on the Effective Date of the Plan of Reorganization. On September 13, 1995 (180 days after the Effective Date of the Plan of Reorganization), 494,313 additional shares of Common Stock were issued to certain current and former stockholders of the Company and 3,880,140 additional shares were issued to an escrow account and may be distributed to such stockholders to the extent that certain contingencies regarding Federal Income Tax Claims (as defined in "Description of Capital Stock--Additional Stock Issuance") of the Company are resolved satisfactorily. See "Security Ownership of Management and Principal Stockholders" and "Description of Capital Stock--Additional Stock Issuances." Pursuant to Section 1145 of the Bankruptcy Code, all of the issued and outstanding shares of Common Stock are freely tradeable without registration under the Securities Act, except for shares issued to an "underwriter" (as defined in Section 1145(b) of the Bankruptcy Code) or subsequently acquired by an "affiliate" of the Company. Except in limited circumstances, none of the holders of such shares has agreed to restrict or otherwise limit in any way such holder's ability to dispose of such shares of Common Stock. See "Description of Capital Stock--Common Stock Registration Rights Agreements." No assurance can be given that sales of substantial amounts of Common Stock will not occur in the foreseeable future or as to the effect that any such sales, or the perception that such sales may occur, will have on the market or the market price of the Common Stock. See "Market for the Common Stock." TAX CONSIDERATIONS 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 (the "IRS") in the aggregate amount of $110,560,883 with respect to fiscal years ended August 31, 1980 and August 31, 1983 through August 31, 1987, $31,468,189 with respect to fiscal years ended May 31, 1988 (nine months) and May 31, 1989 and $44,837,693 with respect to fiscal years ended May 31, 1990 and May 31, 1991. Objections to the proofs of claim have been filed by the Company and the various issues are being litigated in the Bankruptcy Court. The Company believes that such proofs of claim are substantially without merit and intends to vigorously defend such claims against the Company, but there can be no assurance as to the ultimate outcome. Set forth under "Certain Federal Income Tax Consequences" is a description of certain United States federal income tax consequences to prospective purchasers expected to result from the purchase, ownership and sale or other disposition of the Shares under currently applicable law. DISPUTED CLAIMS RESERVES The total face amount of prepetition claims against the Company and certain of its subsidiaries which are still being disputed by the Company, including the Federal Income Tax Claims, is substantial. If the Company or any of its subsidiaries is unable to pay any claims which ultimately are allowed against it by the Bankruptcy Court, under the Plan of Reorganization the holders of such allowed claims would have recourse to the Company or any such subsidiary as applicable. Management does not expect that any allowed claims will have a material adverse effect on the Company's financial position. CERTAIN CORPORATE GOVERNANCE MATTERS; ANTITAKEOVER LEGISLATION The Restated Certificate of Incorporation of the Company (the "Charter") and the Plan of Reorganization provide that until March 17, 1998 the Board of Directors of the Company shall have nine members, two of whom must be Independent Directors (as defined under "Management--Board of Directors"), three of whom must be G. Robert Durham, James W. Walter and Kenneth J. Matlock, or their successors selected by the remaining directors from the senior officers of the Company (William H. Weldon and Kenneth E. Hyatt are now serving as successors to G. Robert Durham and 13 Kenneth J. Matlock, respectively; Mr. Welden has announced his intention to retire on September 30, 1996 and will be succeeded as a director by Richard E. Almy), two of whom must be designated by KKR, an affiliate of certain principal stockholders of the Company, and two of whom must be designated by Lehman Brothers Inc. ("Lehman"), whose affiliate Lehman Brothers Holdings, Inc. ("Lehman Holdings") is another principal stockholder of the Company (except that (i) in certain circumstances KKR will have the right to compel the resignation of one of Lehman's designees and designate the successor, (ii) in certain circumstances Lehman will have the right to compel the resignation of one of KKR's designees and designate the successor and (iii) Lehman's or KKR's designees must resign if Lehman or KKR, as the case may be, cease to beneficially own a specified equity interest in the Company). See "Management--Board of Directors" and "Security Ownership of Management and Principal Stockholders." As a result of the foregoing provision, stockholders of the Company other than Lehman and KKR will not have the ability to elect any of the Company's directors prior to March 17, 1998. In addition, the Charter and the Company's By-laws provide that until March 17, 1998 each committee of the Board of Directors (other than the Tax Oversight Committee) must include a number of directors designated by KKR and Lehman, respectively, so that each of KKR and Lehman has representation on the committee proportionate to its representation on the Board of Directors. The Charter provides that the foregoing provision and certain other provisions of the By-laws cannot be amended by the Board of Directors prior to March 17, 1998 unless 67% of the whole Board of Directors votes in favor of the amendment. See "Management--Committees of the Board of Directors." The foregoing provisions would, among other things, impede the ability of a third party to acquire control of the Company by seeking election of its nominees to the Board of Directors. In addition, Section 203 ("Section 203") of the Delaware General Corporation Law (the "DGCL") provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date on which such stockholder becomes an "interested stockholder" unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an "interested stockholder," (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (iii) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the "interested stockholder." Except as otherwise specified in Section 203, an "interested stockholder" is defined to include (x) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date and (y) the affiliates and associates of any such person. For purposes of Section 203, the Board of Directors has approved the transaction (the consummation of the Plan of Reorganization) which resulted in Lehman and the Celotex Settlement Fund Recipient becoming "interested stockholders" and, accordingly, the Company believes that neither of them will be subject to the restrictions of Section 203 unless it ceases to be the owner of 15% or more of the outstanding voting stock of the Company and seeks to reattain such level of ownership. The Board of Directors also approved the purchase of Common Stock by Channel One Associates, L.P., a limited partnership the general partner of which is KKR Associates, L.P. ("Channel One"), and its affiliates and associates of 15% or more of the outstanding voting stock of the Company through open market purchases or otherwise. Accordingly, the Company believes that none of Channel One and its affiliates and associates (including the KKR Investors referred to in "Security Ownership of Management and Principal Stockholders") will be subject to the restrictions of Section 203. In connection with 14 the above-described approval of the Board of Directors, Channel One and the KKR Investors agreed with the Company that they will not, and will not permit any of their affiliates to, vote any shares of Common Stock of the Company or otherwise take any other action to modify the composition of the Board of Directors of the Company prior to April 6, 1998 other than as expressly provided for in the Company's Charter and the Plan of Reorganization and that during such period they will not participate in the solicitation of proxies to vote, or seek to advise or influence any person with respect to, voting securities of the Company to modify the composition of the Board of Directors, or propose, assist in or encourage any person in connection with any of the foregoing. See "Description of Capital Stock-- Antitakeover Legislation." Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Charter does not exclude the Company from the restrictions imposed under Section 203. The provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the stockholder becoming an interested stockholder. Such provisions also may have the effect of preventing changes in the management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests. 15 THE COMPANY The Company, through its direct and indirect subsidiaries currently offers a diversified line of products and services for homebuilding, water and waste water transmission, residential and non-residential construction, and industrial markets. A brief description of the Company's four major operating groups follows. The Homebuilding and Related Financing Group sells, constructs on the customer's site, and finances standardized partially finished homes. Sales are made in approximately 24 states, primarily in the southern part of the United States. Substantially all of the sales are made on credit provided by the Group. A credit purchaser must provide his own land and give a first mortgage or deed of trust to secure payment of the purchase price of the home. The Water and Waste Water Transmission Products Group is one of the largest domestic manufacturers of ductile iron pressure pipe and fittings. The Group also manufactures valves and hydrants, fittings and castings. The Natural Resources Group engages in coal mining and a related degasification program. The Group owns four coal mines in Alabama and has the capacity to produce a total of 9.7 million tons of coal annually. The Group produced 7.9 million tons of coal in fiscal 1996. A substantial portion of this output is under long-term contracts and the balance will be used internally to produce furnace and foundry coke or sold to other customers on a short-term contract or spot market basis. The Company does not consider itself to be a significant factor in the domestic or international coal markets. The Industrial and Other Products Group produces furnace and foundry grades of coke, specialty chemicals, slag wool products, aluminum sheet, aluminum foil, window and door screens, window balances, fireplace inserts, fireplaces and accessories, municipal and original equipment manufacturer castings, patterns and tooling and resin-coated sand. See "Business and Properties." The Company's executive offices are located at 1500 North Dale Mabry Highway, Tampa, Florida 33607. The Company's telephone number is (813) 871-4811. RECENT HISTORY The Company was organized in August 1987 by a group of investors led by KKR for the purpose of acquiring Original Jim Walter pursuant to the LBO. Following its organization, the Company organized and acquired all of the outstanding shares of capital stock of a group of direct and indirect wholly owned subsidiaries, including HAC. On September 18, 1987, HAC acquired approximately 95% of the outstanding shares of common stock of Original Jim Walter pursuant to the Tender Offer. On January 7, 1988, (i) Original Jim Walter merged into HAC (which changed its name to Jim Walter Corporation), (ii) HAC distributed substantially all of its assets (principally excluding the stock of Celotex and several other subsidiaries of Original Jim Walter) to a parent corporation of HAC (which was merged into the Company on April 1, 1991) in redemption of all of the shares of capital stock of HAC owned by such parent corporation, (iii) HAC merged into its other stockholder, another indirect wholly owned subsidiary of the Company, and (iv) the surviving corporation of such merger changed its name to Jim Walter Corporation. Following the Merger and prior to the commencement of the Chapter 11 Cases, the Company undertook a program of corporate reorganizations and asset dispositions, which were contemplated by all of the debt agreements entered into in connection with the Tender Offer and the Merger. Pursuant to this program the Company restructured and/or disposed of certain of the businesses of Original Jim Walter, including the disposition in April, 1988 of all of the stock of the parent corporation of J-II. Also during this time, the Company and certain of its subsidiaries and the Indemnitees were named as co-defendants in the Veil Piercing Litigation brought by or on behalf of the Asbestos Claimants claiming asbestos-related damages against Celotex alleging, among other things, that (i) Original Jim 16 Walter, its successors and other entities, including the Company and certain of its subsidiaries, were liable for all damages, including asbestos-related damages, caused by products manufactured, sold and distributed by a predecessor of Celotex, by reason of the Veil Piercing Claims, and (ii) the aforementioned distribution by HAC of substantially all of its assets pursuant to the LBO constituted a fraudulent conveyance. See "Business and Properties--Legal Proceedings--Asbestos-Related Litigation Settlements." On December 27, 1989, the Company and 31 of its subsidiaries each filed a voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court; one additional subsidiary also filed a voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court on December 3, 1990. Two other subsidiaries, Cardem Insurance and J.W. Railroad, did not file petitions for reorganization under Chapter 11. The filing of the voluntary petitions resulted from a sequence of events stemming primarily from an inability of the Company's interest reset advisors to reset interest rates on approximately $624 million of outstanding indebtedness, which indebtedness by its terms required that the interest rates thereon be reset to the rate per annum such indebtedness should bear in order to have a bid value of 101% of the principal amount thereof as of December 2, 1989. The reset advisors' inability to reset the interest rates was primarily attributable to two factors: (i) uncertainties arising from the then-pending Veil Piercing Litigation, including the possibility either that such litigation would lead to the prohibition of further asset sales and debt repayment or that substantial new asbestos-related claims might become assertible against the Company, which uncertainties materially hindered the ability of the Company and its subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii) general turmoil in the high yield bond markets at such time, both of which depressed the bid value of such indebtedness. In January 1990, the Company and each of its subsidiaries which were party to the Chapter 11 Cases filed the Adversary Proceeding in the Bankruptcy Court against all known Asbestos Claimants who had filed Veil Piercing Claims, Celotex and Jim Walter Corporation seeking a declaration, among other things, that (i) the corporate veil between Celotex and Original Jim Walter could not be pierced, (ii) the Company could not be held liable for the asbestos-related liabilities of either Celotex or Jim Walter Corporation on any grounds and (iii) the LBO could not be deemed a fraudulent conveyance. In October 1990, Celotex and one of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 with the Celotex Bankruptcy Court. In January 1994, the indenture trustees for certain pre-LBO debentures of Original Jim Walter assumed by the Company brought the Fraudulent Conveyance Lawsuit for the benefit of the Company's estate and its creditors, which alleged that the issuance of debt in connection with the LBO constituted a fraudulent conveyance under New York and Florida law. The plaintiffs sought to avoid the obligations incurred by the Company and its subsidiaries in the LBO. On the Effective Date of the Plan of Reorganization, the Company and its subsidiaries emerged from bankruptcy pursuant to the Plan of Reorganization. At that time, pursuant to the Plan of Reorganization, 50,494,313 shares of Common Stock were issued to certain former creditors and stockholders of the Company and its subsidiaries and $490,000,000 aggregate principal amount of Senior Notes were issued to certain former creditors of the Company and its subsidiaries. (The Senior Notes were redeemed in full in January 1996; see "Management's Discussion and Analysis of Results of Operations and Financial Condition--Results of Operations--Years Ended May 31, 1996 and Pro Forma 1995.") Also pursuant to the Plan of Reorganization (i) the Veil Piercing Claims, the Veil Piercing Litigation and the Adversary Proceeding, among other things, were settled after a ruling by the Bankruptcy Court (which was affirmed on appeal by the United States District Court for the Middle District of Florida) finding in favor of the Company on every claim asserted in the Adversary Proceeding and (ii) the Fraudulent Conveyance Lawsuit was settled. The Veil Piercing Settlement was entered into among the Company, certain of its creditors, Celotex, Jim Walter Corporation and representatives of the Asbestos Claimants and provided for the dismissal of all the Veil Piercing Claims 17 and the release of the Released Parties from all liabilities relating to the LBO or associated with asbestos-related liabilities of Celotex or Jim Walter Corporation. The Veil Piercing Settlement is embodied in the Plan of Reorganization. The Veil Piercing Settlement, among other things, requires Celotex, and certain other parties to the Celotex bankruptcy proceeding, to propose and use their respective best efforts to obtain confirmation of a plan of reorganization for Celotex that includes an injunction pursuant to Section 524(g) or other similar injunctive relief providing the same protection as a Section 524(g) injunction acceptable to each of the Released Parties under to the Veil Piercing Settlement. Such injunctive relief would provide the Company with additional assurance that Veil Piercing Claims cannot be asserted in the future against the Company. In conjunction with its Chapter 11 bankruptcy proceedings, through July 1996 Celotex filed various plans of reorganization and/or amendments and supplements thereto which failed to conform to the Veil Piercing Settlement with respect to providing for a Section 524(g) injunction and which thus violated the Veil Piercing Settlement. On March 8, 1996, the Company, along with certain other Released Parties, commenced the Second Adversary Proceeding in the Bankruptcy Court against Celotex and Jim Walter Corporation seeking (1) a declaration that the Former Celotex Plan did not contain the Section 524(g) injunction agreed upon by Celotex and Jim Walter Corporation and thus violated the Veil Piercing Settlement and (2) a mandatory injunction compelling Celotex to amend the Former Celotex Plan to incorporate a provision for a Section 524(g) injunction or an injunction acceptable to the Released Parties that provided the Released Parties the same protection which would be afforded to them by Section 524(g). On May 28, 1996, the Bankruptcy Court entered an Order granting Plaintiff's Motion for Summary Judgment in part and denying the Motions for Summary Judgment filed by Celotex and Jim Walter Corporation. The Bankruptcy Court's Order declared that: (i) the Veil Piercing Settlement was a valid agreement binding all signatories, including Celotex and Jim Walter Corporation; (ii) the Former Celotex Plan did not contain a Section 524(g) injunction; and (iii) Celotex had not proposed an injunction acceptable to the Released Parties that provided the Released Parties the same protection which would be afforded to them by Section 524(g), thus violating the Veil Piercing Settlement. On June 7, 1996, the Bankruptcy Court (1) made its Order granting Plaintiffs' Motion for Summary Judgment in part a final order and (2) denied without prejudice Plaintiffs' Emergency Motion for Injunctive Relief, which sought an injunction mandating that Celotex and Jim Walter Corporation comply with the Veil Piercing Settlement. Celotex and Jim Walter Corporation each filed notices of appeal from, inter alia, the Bankruptcy Court's Order granting in part Plaintiffs' Motion for Summary Judgment. By order dated June 19, 1996, the Celotex Bankruptcy Court denied confirmation of the Former Celotex Plan and ordered that any new plans must be submitted by July 12, 1996. On July 12, 1996, the Bodily Injury Plan was filed by Celotex, Jim Walter Corporation, the Asbestos Bodily Injury Claimants Committee and others and the competing Property Damage Plan was filed by the Asbestos Property Damage Claimants Committee. The Company filed objections to both plans, on the grounds that they did not comply fully with the Veil Piercing Settlement. On August 23, 1996, both the Bodily Injury Plan proponents and the Property Damage Plan proponents filed amended plans. The Property Damage Plan, as amended, provides for a Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to all claimants, but reserves the right to seek confirmation of the Bodily Injury Plan even if the asbestos property damage claimants class votes against that plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the property damage claimants class, that would appear to preclude a Section 524(g) injunction as to asbestos property damage claims. However, in such event the Bodily Injury Plan would still provide for an injunction against asbestos property damage claims to the extent such an injunction is allowed by Section 105 of the Bankruptcy Code. Both plans require the approval of creditors and confirmation by the Celotex Bankruptcy Court. A confirmation hearing concerning the Bodily Injury Plan, as amended, and the Property Damage Plan, as amended, is currently scheduled to commence on October 7, 1996. See "Business and Properties-- Legal Proceedings--Asbestos Related Litigation Settlements." 18 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock has been listed on the Nasdaq National Market under the symbol "WLTR" since October 11, 1995. The table below sets forth, for the periods indicated, the range of high and low sales prices of the Common Stock since such date.
HIGH LOW ----------- ------------ Fiscal Year 1996 Second Quarter (beginning October 11, 1995) $ 14 3/4 $ 12 3/8 Third Quarter 13 3/4 12 Fourth Quarter 14 1/2 12 5/8 Fiscal Year 1997 First Quarter 14 1/2 11 7/8 Second Quarter 13 5/8 13 1/8 (through September 16, 1996)
For a recent sale price of the Common Stock, see the cover page of this Prospectus. As of September 3, 1996, there were approximately 133 holders of record of Common Stock. The Company has never paid cash dividends on its common stock and has no present intention of paying any cash dividends on the Common Stock. The declaration and payment of future dividends to holders of Common Stock will be at the discretion of the Company's Board of Directors and will depend upon many factors, including the Company's financial condition, earnings, capital requirements of its operating subsidiaries, legal requirements and such other factors as the Board of Directors deems relevant. Under the DGCL, the Company may only declare and pay dividends out of surplus (as defined in the DGCL), or, if there is no surplus and subject to certain conditions, net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Under the Credit Facilities, commencing on June 1, 1996, in any period of twelve consecutive months (on a non-cumulative basis, with the effect that amounts not paid in any twelve month period may not be carried over for payment in a subsequent period) the Company may pay cash dividends in an amount not to exceed: $5,500,000 provided the Consolidated Leverage Ratio (as defined in the Credit Facilities) during the four most recently completed fiscal quarters is greater that 2.50 to 1; $11,000,000 provided such Consolidated Leverage Ratio is less than or equal to 2.50 to 1; and $11,000,000 plus, to the extent positive, Cumulative Excess Cash Flow (as defined in the Credit Facilities) provided such Consolidated Leverage Ratio is less than or equal to 2.0 to 1, in each case also provided that no default under the Credit Facilities has occurred or would result from the payment of such dividends. See "Description of Certain Indebtedness--Credit Facilities." 19 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company and its subsidiaries as of May 31, 1996. This table should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto.
MAY 31, 1996 ---------------------- (DOLLARS IN THOUSANDS) LONG-TERM SENIOR DEBT: Walter Industries Revolving Credit Facility(1).......................................... $ 235,000 Term Loan A........................................................... 121,250 Term Loan B........................................................... 59,750 Other................................................................. 3,350 ----------- 419,350 ----------- Mid-State Trusts Trust II Mortgage-Backed Notes........................................ 497,000 Trust III Asset Backed Notes.......................................... 147,669 Trust IV Asset Backed Notes........................................... 902,277 Trust V Variable Funding Loan(2)...................................... 245,000 ----------- 1,791,946 ----------- $2,211,296 ----------- ----------- STOCKHOLDERS' EQUITY: Common Stock (par value $.01 per share, 200,000,000 shares authorized, 54,868,335 shares issued and outstanding)............................. $ 549 Capital in Excess of Par Value.......................................... 1,159,332 Retained Earnings (Deficit)............................................. (877,861) Excess of Additional Pension Liability over Unrecognized Prior Years Service Cost.......................................................... (5,326) ----------- $ 276,694 ----------- -----------
- ------------ (1) The Revolving Credit Facility is available for working capital needs with a sub-facility for trade and standby letters of credit in an amount not in excess of $40 million at any time outstanding and a sub-facility for swingline advances in an amount not in excess of $15 million. See "Description of Certain Indebtedness--Credit Facilities." (2) The Mid-State Trust V Variable Funding Loan is available to provide temporary financing to Mid-State Homes for its current purchases of instalment notes and mortgages from Jim Walter Homes. The agreement provides for a three-year $500 million credit facility secured by the instalment notes and mortgages Mid-State Trust V purchases from Mid-State Homes. See "Business and Properties--Mid-State Homes." 20 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following unaudited pro forma consolidated statement of operations was prepared to illustrate the estimated effects of the Plan of Reorganization and related financings and the application of the proceeds thereof as if they had occurred as of June 1, 1994. THE FOLLOWING UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DOES NOT PURPORT TO BE INDICATIVE OF THE RESULTS OF OPERATIONS THAT WOULD ACTUALLY HAVE BEEN REPORTED HAD SUCH TRANSACTIONS IN FACT BEEN CONSUMMATED ON SUCH DATE OR OF THE RESULTS OF OPERATIONS THAT MAY BE REPORTED BY THE COMPANY IN THE FUTURE. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. 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 Prospectus. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED MAY 31, 1995 ---------------------------------------- AS REPORTED ADJUSTMENTS PRO FORMA ----------- ----------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Sales and revenues: Net sales......................................... $ 1,181,635 $1,181,635 Time charges...................................... 222,221 222,221 Miscellaneous..................................... 30,838 30,838 Interest income from Chapter 11 proceedings....... 7,628 $ (7,628)(1) -- ----------- ----------- ---------- 1,442,322 (7,628) 1,434,694 ----------- ----------- ---------- Costs and expenses: Cost of sales..................................... 951,381 951,381 Depreciation, depletion and amortization.......... 72,037 72,037 Selling, general and administrative............... 130,616 130,616 Postretirement health benefits.................... 25,961 25,961 Provision for possible losses..................... 4,485 4,485 Chapter 11 costs.................................. 442,362 (442,362)(2) -- Interest and amortization of debt discount and expense.......................................... 304,548 (81,364)(3) 223,184 Amortization of excess of purchase price over net assets acquired.................................. 40,027 40,027 ----------- ----------- ---------- 1,971,417 (523,726) 1,447,691 ----------- ----------- ---------- (529,095) 516,098 (12,997) Income tax benefit (expense)........................ 170,450 (195,730)(4) (25,280) ----------- ----------- ---------- Net income (loss)................................... $ (358,645) $ 320,368 $ (38,277) ----------- ----------- ---------- ----------- ----------- ---------- Net loss per share.................................. $ (0.75)(5) ---------- ---------- Weighted average shares outstanding(5).............. 50,988,626
(Footnotes on following page) 21 (Footnotes for preceding page) - ------------ Changes from historical financial statements in the pro forma consolidated statement of operations consist of the following adjustments (all amounts in thousands): (1) Interest income from Chapter 11 proceedings of $7,628, which would not have been realized assuming the Plan of Reorganization became effective June 1, 1994, has been eliminated. (2) Chapter 11 costs of $442,362, which would not have been incurred assuming the Plan of Reorganization became effective June 1, 1994, have been eliminated. (3) Interest and amortization of debt discount and expense has been reduced by $81,364 to give retroactive effect as if all indebtedness to be repaid pursuant to the Plan of Reorganization was so done as of June 1, 1994 and the $490 million of Senior Notes had been outstanding for the full year ended May 31, 1995. Borrowings under the Mid-State Trust IV Asset Backed Notes were assumed to increase during the period June 1, 1994 through November 30, 1994 proportionately with the comparable period increase in the outstanding economic balance of the instalment notes sold by Mid-State Homes to Mid-State Trust IV on March 16, 1995. Borrowings under the Mid-State Trust V Variable Funding Loan Agreement were based on 78% of Jim Walter Homes' credit sales during the six-month period commencing on December 1, 1994 and ending on May 31, 1995. This time period is subsequent to the Mid-State Trust IV cut-off date for purchases of instalment notes from Mid-State Homes. See "Business and Properties--Mid-State Homes." No working capital borrowings were assumed under the Revolving Credit Facility. Pro forma interest expense, however, includes letter of credit fees and unused working capital commitment fees. (4) The income tax benefit has been adjusted at the applicable statutory rates to give effect to the pro forma adjustments described above. (5) Net loss per share has been computed based on the weighted average number of shares of Common Stock issuable (50,988,626, which includes 494,313 additional shares of Common Stock issued on September 13, 1995 (180 days after the Effective Date of the Plan of Reorganization) pursuant to the Plan of Reorganization, but does not include 3,880,140 additional shares issued to an escrow account on such date pursuant to the Plan of Reorganization because such issuance is contingent on future events and would be anti-dilutive; see "Description of Capital Stock--Additional Stock Issuances"). 22 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following data, insofar as it relates to each of the fiscal years 1992 through 1996, has been derived from annual financial statements, including the consolidated balance sheets at May 31, 1996 and 1995 and the related consolidated statements of operations and retained earnings (deficit) and of cash flows for the three years ended May 31, 1996 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, the Pro Forma Consolidated Statement of Operations and the notes thereto and the other information contained elsewhere in this Prospectus.
YEARS ENDED MAY 31, -------------------------------------------------------------- 1992 1993(2) 1994 1995 1996(3)(4) ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Summary of Operations: Sales and revenues................. $1,366,581 $1,318,986 $1,328,524 $1,442,322 $1,485,635 Cost of sales (exclusive of depreciation)..................... 891,882 804,411 845,061 951,381 987,354 Depreciation, depletion and amortization...................... 82,801 70,483 71,035 72,037 74,341 Interest and amortization of debt discount and expense (1).......... 177,060 171,581 155,470 304,548 208,690 Income tax expense(benefit)........ 12,463 24,328 28,917 (170,450) (55,155) Income(loss) before extraordinary item and cumulative effect of accounting change (2)(3)(4)...... 22,342 46,594 7,175 (358,645) (79,292) Net income (loss).................. 22,342 (58,014) 7,175 (358,645) (84,696) Net loss per share (4)(5).......... Loss before extraordinary item... (7.10) (1.56) Extraordinary item............... -- (.10) ---------- ---------- Net loss....................... (7.10) (1.66) ---------- ---------- ---------- ---------- Number of shares used in calculation of loss per share.... 50,494,313 50,988,195 Additional Financial Data: Gross capital expenditures......... $ 68,349 $ 71,708 $ 69,831 $ 91,317 $ 83,523 Net property, plant and equipment.......................... 664,622 663,040 657,863 662,792 541,536 Total assets....................... 3,171,266 3,223,234 3,140,892 3,245,153 3,091,377 Long-term senior debt.............. 948,782 1,046,971 871,970 2,220,370 2,211,296 Liabilities subject to Chapter 11 proceedings....................... 1,845,328 1,725,631 1,727,684 -- -- Stockholders' equity (deficit)..... (230,119) (287,737) (282,353) 360,774 276,694 Employees at end of year........... 7,645 7,545 7,676 7,888 7,755
- ------------ (1) Interest on unsecured obligations not accrued since December 27, 1989 amounted to $163.7 million in each of the years ended May 31, 1992 through 1994. The Company recorded additional interest and amortization of debt discount and expense of $141.4 million related to the consummation of the Plan of Reorganization in fiscal 1995. (2) The Company adopted FASB 106 and FASB 109 during fiscal year 1993. (3) The Company adopted FASB 121 during fiscal year 1996. (4) Extraordinary item consists of redemption premium and write off of unamortized debt expense of $8.3 million ($5.4 million after tax) related to early repayment of the Senior Notes and a $150 million bank credit facility during fiscal year 1996. See Note 8 of Notes to Financial Statements. (5) Per share information for fiscal years 1992 through 1994 is not relevant given the significant change in the Company's capital structure following consummation of the Plan of Reorganization. See Note 10 of Notes to Financial Statements. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INTRODUCTION The Company emerged from bankruptcy on March 17, 1995 pursuant to the Plan of Reorganization. Accordingly, the Company's Consolidated Statement of Operations and Retained Earnings (Deficit) for the year ended May 31, 1996 are not comparable to the Consolidated Statement of Operations and Retained Earnings (Deficit) for prior periods. This discussion should be read in conjunction with the consolidated financial statements and notes thereto of Walter Industries, Inc. and subsidiaries, particularly Note 1 of Notes to Financial Statements which presents an unaudited pro forma consolidated statement of operations for the year ended May 31, 1995 to illustrate the estimated effects of the Plan of Reorganization and related financings as if they had occurred as of June 1, 1994, and Note 15 of Notes to Financial Statements which presents sales and operating income by operating group. RESULTS OF OPERATIONS Years Ended May 31, 1996 and Pro Forma 1995. Net sales and revenues for the year ended May 31, 1996 were $50.9 million, or 3.6%, ahead of the prior year with a 3.0% increase in pricing and/or product mix and a .6% increase in volume. The increase in net sales and revenues was the result of improved sales and revenues in all operating groups. Homebuilding and Related Financing Group sales and revenues were $6.0 million, or 1.5%, ahead of the prior year. This performance reflects a 5.2% increase in the average net selling price per home sold, from $40,200 in 1995 to $42,300 in 1996, partially offset by an 8.9% decrease in the number of homes sold, from 4,126 units in 1995 to 3,760 units in 1996. The higher average net selling price reflects a greater percentage of "90% complete" homes sold in the current year and a price increase instituted February 1, 1995 to compensate for higher building material costs. The decrease in unit sales resulted from extremely competitive conditions in virtually every Jim Walter Homes sales region. The relatively low mortgage interest rate environment and higher availability of mortgage financing for home buyers in recent years adversely affected Jim Walter Homes' sales volumes. In an effort to generate additional unit sales, Jim Walter Homes in December 1995 reduced its financing rate to 8.5% from 10% for its "90% complete" homes on a trial basis and, in March 1996, began formally advertising the lower rate. Jim Walter Homes' backlog at May 31, 1996 was 1,957 units (all of which are expected to be completed prior to the end of fiscal 1997) compared to 1,529 units at May 31, 1995, a 28% increase. Time charge income (revenues received from Mid-State Homes' instalment note portfolio) increased from $222.2 million in 1995 to $231.1 million in 1996. The increase is attributable to increased payoffs received in advance of maturity and to an increase in the average balance per account in the portfolio, partially offset by a reduction in the total number of accounts. Operating income of $63.3 million (net of interest expense) was $18.5 million greater than the prior year. This performance was due to the higher time charge income, improved homebuilding gross profit margins resulting from the higher average net selling price per home sold and lower lumber costs and lower interest expense in 1996 ($128.2 million) as compared to that incurred in 1995 ($131.6 million), partially offset by the lower number of homes sold. Water and Waste Water Transmission Products Group sales and revenues were $9.2 million, or 2.2%, ahead of the prior year. The increase was the result of higher sales prices, partially offset by reduced volumes for ductile iron pressure pipe, fittings and castings. Sales volumes were negatively impacted by severe winter weather conditions and delays in federal funding for planned water and sewer pipeline projects. The order backlog at May 31, 1996 was 121,734 tons, which represents approximately three months' shipments, compared with 121,548 tons at May 31, 1995. Operating income of $14.0 million was $2.3 million below the prior year. The lower performance resulted from the lower sales 24 volumes, higher raw material costs, especially for scrap iron and alloys which are major raw material components, partially offset by the higher sales prices. Natural Resources Group sales and revenues exceeded the prior year by $31.9 million, or 9.6%. The increase resulted from greater sales volumes for coal and methane gas, a higher average selling price for coal, higher outside gas and timber royalty income and a $3.7 million gain (in 1996) from the sale of gas royalty interests in certain mineral properties. Gains from sales of certain excess real estate were $6.1 million in each year. A total of 7.61 million tons of coal was sold in 1996 versus 7.20 million tons in 1995, a 5.7% increase. The increase in tonnage sold was the result of greater shipments to certain export customers, partially offset by lower shipments to Alabama Power Company ("Alabama Power") and Japanese steel mills. The average price per ton of coal sold increased $1.51 from $41.34 in 1995 to $42.85 in 1996 due to higher prices realized in the worldwide metallurgical market and to Alabama Power. Blue Creek Mine No. 5 ("Mine No. 5") was shut down from November 17, 1993 through December 16, 1993 and from early April 1994 until May 16, 1994 as a result of a fire due to spontaneous combustion heatings. Representatives of Jim Walter Resources, the Mine Safety and Health Administration ("MSHA"), Alabama State Mine Inspectors and the United Mineworkers of America ("UMWA") agreed that the longwall coal panel being mined in Mine No. 5 at the time the fire recurred in April 1994 would be abandoned and sealed off. Development mining for the two remaining longwall coal panels in this section of the mine resumed on May 16, 1994 and mining on the first longwall panel resumed on January 17, 1995. Production was adversely impacted until such date. As a result of the fire, the Company and Jim Walter Resources claimed compensable losses in the amount of $25 million under their business interruption insurance coverage. When the insurers refused to pay their pro rata part of the claim, the Company commenced litigation seeking to enforce such insurance. The insurers issued policies insuring various percentages of the risk. The Company has entered into settlements with several insurers who, in the aggregate, have paid approximately $11.7 million, reducing the contract claims in the lawsuit to $12.7 million. The Company and Jim Walter Resources continue to pursue the litigation against the remaining carriers, and a trial is tentatively scheduled for October 21, 1996. See "Business and Properties--Legal Proceedings--Jim Walter Resources" and Note 12 of Notes to Financial Statements. In late November 1995, Mine No. 5 experienced another fire due to the unexpected recurrence of spontaneous combustion heatings and the mine was shut down. Efforts to contain and extinguish the fire were successful; however, conditions dictated the mine be shut down for several weeks. The affected coal panels on the western side of the mine have been sealed off and development work is under way on the eastern side of Mine No. 5. Longwall production on the east side is expected to commence in the fourth quarter of fiscal 1997. See "Business and Properties--Jim Walter Resources--Mining Division." Jim Walter Resources' three other operating mines remain in full production. The Group incurred an operating loss of $106.5 million in 1996 as compared to operating income of $21.4 million in 1995. The lower performance reflects a $120.4 million write-down of fixed assets to estimated fair market values at two coal mines reflecting the Company's adoption of FASB 121 (see Note 5 of Notes to Financial Statements) and firefighting and idle plant costs of $16 million, principally associated with the fire at Mine No. 5, partially offset by the increased sales volumes of coal and methane gas, the higher average sales price for coal, higher gas and timber royalty income, the $3.7 million gain (in 1996) from the sale of certain gas royalty interests and slightly lower costs per ton of coal produced ($36.12 in 1996 versus $37.13 in 1995). Industrial and Other Products Group sales and revenues were $2.6 million, or .9%, greater than the prior year. Increased selling prices for furnace and foundry coke, aluminum foil products, window components and metal building and foundry products combined with greater sales volumes of furnace and foundry coke, resin-coated sand and patterns and tooling were partially offset by lower aluminum sheet products selling prices and volumes and reduced sales volumes of window components and metal building and foundry products. The Group's operating loss in 1996 was $9.5 million as compared to operating income of $9.3 million in 1995. This performance reflects a $22.9 million FASB 121 write-off of excess of purchase price over net assets acquired (goodwill) (see Note 5 of Notes to Financial 25 Statements) and the window components business experiencing lower sales volume, higher raw material costs and reduced efficiencies due to prolonged start-up problems associated with the consolidation and relocation of JW Window Components, Inc.'s ("JW Window Components") Hialeah, Florida and Columbus, Ohio operations to Elizabethton, Tennessee. These decreases were partially offset by increased margins realized on aluminum sheet and foil products, furnace coke and resin-coated sand. Cost of sales, exclusive of depreciation, of $987.4 million was 80.9% of net sales in 1996 versus $951.4 million and 80.5% in 1995. The cost of sales increase was primarily the result of lower gross profit margins for pipe products, window components, patterns and tooling and metal building and foundry products combined with the firefighting and idle plant costs principally associated with the fire at Mine No. 5. These increases were partially offset by improved profit margins on home sales, aluminum foil and sheet products, furnace coke and resin-coated sand. Selling, general and administrative expenses (exclusive of postretirement health benefits) of $135.8 million were 9.1% of net sales and revenues in 1996 versus $130.6 million and 9.1% in 1995. Interest and amortization of debt expense was $208.7 million in 1996 versus $223.2 million, on a pro forma basis in 1995, reflecting lower outstanding debt balances and reduced interest rates resulting from the financing completed on January 22, 1996. The average rate of interest in 1996 was 9.10% as compared to 9.79% on a pro forma basis, in 1995. The prime interest rate ranged from 8.25% to 9.0% in 1996 compared to a range of 7.25% to 9.0% in 1995. The Company's effective tax rate in 1996 and on a pro forma basis in 1995 differed from the statutory tax rate due to amortization of goodwill and the FASB 121 write-off of goodwill of $22.9 million (in 1996) which are not deductible for tax purposes. In addition, in the fiscal 1996 fourth quarter, the Company recorded approximately $27 million of non-recurring tax benefits resulting from utilization of a capital loss carry forward, the Company's election to carry forward its net operating loss (thereby avoiding the effect of a rate difference and loss of certain tax credits), and other miscellaneous tax adjustments. See Note 9 of Notes to Financial Statements for further discussion of income taxes. On January 22, 1996, the Company completed a $550 million financing with a syndicate of banks led by NationsBank National Association (South). The financing consisted of a $365 million revolving credit facility, a six-year $125 million term loan and a $60 million seven-year term loan. Proceeds from the financing together with $75 million drawn under the Mid-State Trust V Variable Funding Loan Agreement were used to redeem in full the Senior Notes at a redemption price of 101% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption and to replace an existing $150 million bank credit facility, both incurred as a result of the Company's emergence from bankruptcy in March 1995. The Company recorded an extraordinary loss of $8.3 million ($5.4 million net of income tax benefit) consisting of a redemption premium and write-off of unamortized debt expense related to the early repayment of the Senior Notes and the $150 million bank credit facility. See Note 8 of Notes to Financial Statements. The net loss for the year ended May 31, 1996 was $84.7 million compared to a net loss of $38.3 million, on a pro forma basis, in 1995 reflecting all of the previously mentioned factors as well as the impact of higher postretirement health benefits in 1996. Years ended May 31, 1995 and 1994. Net sales and revenues for the year ended May 31, 1995 were $113.8 million, or 8.6%, greater than the prior year, with a 7.0% increase in volume and a 1.6% increase in pricing and/or product mix. The increase in net sales and revenues was the result of improved sales and revenues in all operating groups except Homebuilding and Related Financing. Industrial and Other Products Group sales and revenues were $59.6 million, or 26.5%, greater than the prior year. Increased sales volumes of aluminum foil and sheet products, foundry coke, chemicals, patterns and tooling, resin-coated sand, window components and metal building and foundry products, 26 combined with higher selling prices for aluminum foil and sheet products, furnace coke, window components and metal building and foundry products and a $3.6 million gain from the sale of JW Window Components' Hialeah, Florida facility were partially offset by reduced sales volumes of furnace coke and slag wool. The Group's operating income of $9.3 million was $2.0 million lower than the prior year. The decrease was the result of higher manufacturing costs in the window components business due to increased raw material costs, especially aluminum, a major raw material component, startup costs associated with the consolidation and relocation during 1995 of JW Window Components' Hialeah, Florida and Columbus, Ohio, operations to Elizabethton, Tennessee and reduced operating efficiencies, including start-up problems associated with the relocation of Vestal Manufacturing Company's ("Vestal Manufacturing") steel fabrication operation in May 1994. These decreases were partially offset by increased income for aluminum foil and sheet, foundry coke, chemicals, patterns and tooling and resin-coated sand due to the sales increases, improved gross profit margins for furnace coke and the gain from the Hialeah facility sale. Water and Waste Water Transmission Products Group sales and revenues were $55.0 million, or 15.4%, ahead of the prior year. The increase was the result of higher sales volumes and prices for ductile iron pressure pipe, valves, hydrants and castings. The order backlog for pressure pipe, at May 31, 1995, was 121,548 tons, compared to 111,907 tons at May 31, 1994. Operating income of $16.2 million exceeded the prior year by $2.8 million. The improved performance resulted from the increased sales prices and volumes, partially offset by higher raw material costs, especially scrap, a major raw material component. Natural Resources Group sales and revenues were $12.8 million, or 4.0%, greater than the prior year. The increase resulted from greater sales volumes for coal and a $6.1 million gain from the sale of excess real estate, partially offset by lower sales prices for coal and methane gas and lower outside coal and gas royalty income. A total of 7.20 million tons of coal was sold in 1995 versus 6.56 million tons in 1994, a 9.8% increase. The increase in tonnage sold was the result of increased shipments to Alabama Power and certain export customers, partially offset by lower shipments to Japanese steel mills. Increased shipments to Alabama Power were the result of a new agreement signed May 10, 1994 (the "New Alabama Power Contract") for the sale and purchase of coal, replacing the 1979 contract and the 1988 amendment thereto. Under the New Alabama Power Contract, Alabama Power will purchase 4.0 million tons of coal per year from Jim Walter Resources during the period July 1, 1994 through August 31, 1999. The New Alabama Power Contract has a fixed price subject to an escalation based on the Consumer Price Index or another appropriate published index and adjustments for government impositions and quality. The New Alabama Power Contract includes favorable modifications of specification, shipping deviations and changes in transportation arrangements. The average price per ton of coal sold decreased $2.79 from $44.13 in 1994 to $41.34 in 1995 due to lower prices realized on shipments to Alabama Power, the Japanese steel mills and certain export customers. Mine No. 5 was shut down from November 17, 1993 through December 16, 1993 and from early April 1994 until May 16, 1994 as a result of a fire due to spontaneous combustion heatings. Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and the UMWA agreed that the longwall coal panel being mined in Mine No. 5, at the time the fire recurred in April 1994, would be abandoned and sealed off. Development mining for the two remaining longwall coal panels in this section of the mine resumed on May 16, 1994 and mining on the first longwall panel resumed on January 17, 1995. Production was adversely impacted until such date. As a result of the fire, the Company and Jim Walter Resources claimed compensable losses in the amount of $25 million under their business interruption insurance coverage. When the insurers refused to pay their pro rata part of the claim, the Company commenced litigation seeking to enforce such insurance. See "Business and Properties--Legal Proceedings--Jim Walter Resources" and Note 12 of Notes to Financial Statements. Operating income of $21.4 million exceeded the prior year by $21.2 million. The improved performance principally resulted from the increased sales volumes of coal, lower costs per ton of coal produced ($37.13 in 1995 versus 27 $38.29 in 1994) and the gain on the sale of certain excess real estate, partially offset by decreases in selling prices for coal and methane gas and lower outside coal and gas royalty income. Homebuilding and Related Financing Group sales and revenues were $17.4 million, or 4.1%, below the prior year. This performance reflects a 4.7% decrease in the number of homes sold, from 4,331 units in 1994 to 4,126 units in 1995, partially offset by an increase in the average selling price per home sold, from $38,300 in 1994 to $40,200 in 1995. The decrease in unit sales was due to strong competition in virtually every Jim Walter Homes sales region. The higher average selling price in 1995 principally reflects a smaller percentage of the lower priced Affordable line homes sold. Jim Walter Homes' backlog at May 31, 1995 was 1,529 units compared to 2,065 units at May 31, 1994. Time charge income (revenues received from Mid-State Homes' instalment note portfolio) decreased from $238.1 million in 1994 to $222.2 million in 1995. The decrease in time charge income is attributable to a reduction in the total number of accounts and lower payoffs received in advance of maturity, partially offset by an increase in the average balance per account in the portfolio. The Group's operating income of $44.8 million (net of interest expense) was $16.9 million below the prior year. This decrease resulted from the lower number of homes sold, reduced homebuilding gross profit margins resulting from discounts related to sales promotions on certain models, the decrease in time charge income and higher interest expense in 1995 ($131.6 million) as compared to that incurred in 1994 ($128.8 million), partially offset by the increase in the average selling price per home sold. Cost of sales, exclusive of depreciation, of $951.4 million was 80.5% of net sales versus $845.1 million and 79.1% in 1994. The cost of sales percentage increase was primarily the result of lower gross profit margins on homes sales, pipe products, window components and metal building and foundry products. Selling, general and administrative expenses (exclusive of postretirement health benefits) of $130.6 million were 9.1% of net sales and revenues in 1995 versus $127.9 million and 9.6% in 1994. Chapter 11 costs of $442.4 million in 1995 include $390 million in settlement of all asbestos-related veil piercing claims and related legal fees and $52.4 million for professional fees, settlement of various disputed claims and other bankruptcy expenses. Interest and amortization of debt discount and expense increased $149.1 million principally due to $141.4 million of additional interest and amortization of debt expense related to consummation of the Plan of Reorganization. The average rate of interest in 1995 was 10.19% (such rate calculated excluding $141.4 million additional interest and amortization of debt discount and expense related to the consummation of the Plan of Reorganization) versus 9.58% in 1994. The prime interest rate ranged from 7.25% to 9.0% in 1995 compared to a range of 6.0% to 7.25% in 1994. During the pendency of the Chapter 11 Cases, the Company did not accrue interest on its pre-filing date unsecured debt obligations. Amortization of excess of purchase price over net assets acquired (goodwill) decreased $8.5 million primarily due to lower payoffs received in advance of maturity on the instalment note portfolio. The income tax benefit for 1995 was $170.5 million, which included recognition of tax benefits resulting from $583.8 million of additional expenses related to consummation of the Plan of Reorganization previously mentioned, compared to income tax expense of $28.9 million in 1994. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law, raising the federal corporate income tax rate to 35% from 34% retroactive to January 1, 1993. The effect of the rate change resulted in a $2.8 million charge to deferred tax expense in 1994. The net loss for 1995 and the net income for 1994 reflect all of the previously mentioned factors as well as the impact of slightly higher postretirement health benefits, partially offset by the greater interest income from Chapter 11 proceedings. 28 Years ended May 31, 1994 and 1993. Net sales and revenues for the year ended May 31, 1994 were $9.5 million, or .7%, greater than the prior year. The improved performance was the result of increased pricing and/or product mix as sales volumes were level with the prior year. The increase in net sales and revenues was the result of improved sales and revenues in all operating groups except the Natural Resources Group. Homebuilding and Related Financing Group sales and revenues were $5.2 million, or 1.2%, greater than the prior year. This performance reflects a 3.5% increase in the average selling price per home sold, from $37,000 in 1993 to $38,300 in 1994, which was more than offset by a 9.5% decrease in the number of homes sold, from 4,784 units in 1993 to 4,331 units in 1994. The higher average selling price in 1994 reflects a price increase instituted on April 1, 1993 to compensate for higher lumber costs and a greater percentage of "90% complete" homes sold in 1994 versus the prior year. The decrease in unit sales resulted from strong competition in virtually every Jim Walter Homes sales region. Jim Walter Homes' backlog at May 31, 1994 was 2,065 units compared to 1,831 units at May 31, 1993. Time charge income (revenues received from Mid-State Homes' instalment note portfolio) increased from $218.7 million in 1993 to $238.1 million in 1994. The increase in time charge income is attributable to increased payoffs received in advance of maturity and to an increase in the average balance per account in the portfolio. The Group's operating income of $61.8 million (net of interest expense) exceeded the prior year by $4.0 million. This improvement resulted from the increase in the average selling price per home sold, the higher time charge income and lower interest expense in 1994 ($128.8 million) compared to that incurred in 1993 ($137.9 million), partially offset by the lower number of homes sold, reduced homebuilding gross profit margins and higher selling, general and administrative expenses. The lower gross profit margins were the result of higher average lumber prices, the effect of discounts relating to sales promotions on certain models instituted during the period February 1994 through May 1994 and the decision in October 1992 to reduce gross profit margins on five smaller basic shelter homes to generate additional sales. Industrial and Other Products Group sales and revenues were $12.1 million, or 5.7%, ahead of the prior year. Increased sales volumes of aluminum foil, foundry coke, window components, metal building and foundry products, resin-coated sand and chemicals, combined with higher selling prices for furnace coke and window components, were partially offset by lower sales volumes of slag wool and patterns and tooling and lower selling prices for aluminum foil and sheet products. The Group's operating income of $11.2 million was $2.6 million greater than the prior year. The improved performance resulted from the sales increases and higher gross profit margins for furnace coke and slag wool, partially offset by reduced margins for chemicals, foundry coke, window components, metal building and foundry products, resin-coated sand and patterns and tooling. Water and Waste Water Transmission Products Group sales and revenues were $26.0 million, or 7.8%, ahead of the prior year. The increase was the result of higher selling prices and volumes for ductile iron pressure pipe and valves and hydrants, greater castings sales volume and increased selling prices for fittings, partially offset by lower fittings volume. The order backlog of pressure pipe at May 31, 1994 was 111,907 tons compared to 121,173 tons at May 31, 1993. Operating income of $13.4 million exceeded the prior year period by $9.7 million. The improved performance resulted from the increased sales prices and volumes, partially offset by higher raw material costs, especially scrap (a major raw material component) and lower gross profit margins for castings. Natural Resources Group sales and revenues were $31.6 million, or 9.0%, below the prior year. The decrease resulted from lower sales volumes and prices for coal and reduced methane gas selling prices, partially offset by increased methane gas sales volume and an increase in outside gas and timber royalty income. A total of 6.56 million tons of coal was sold in 1994 versus 7.18 million tons in 1993, an 8.6% decrease. The decrease in tonnage sold was the result of lower shipments to Alabama Power and Japanese steel mills. Reduced shipments to Alabama Power were the result of an agreement reached with Alabama Power to ship reduced tonnage for the contract year ending June 30, 1994. The average 29 price per ton of coal decreased 1.6%, from $44.84 in 1993 to $44.13 in 1994, due to lower prices realized on shipments to Japanese steel mills and other export customers. As previously mentioned, Mine No. 5 was shut down from November 17, 1993 through December 16, 1993 and from early April 1994 until May 16, 1994 as a result of a fire due to spontaneous combustion heatings. Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and the UMWA agreed that the longwall coal panel being mined at the time the fire recurred would be abandoned and sealed off. Development mining for the two remaining longwall coal panels in this section of the mine resumed on May 16, 1994 and mining on the first longwall panel resumed on January 17, 1995. Production was adversely impacted until January 17, 1995. As a result of the fire, the Company and Jim Walter Resources claimed compensable losses in the amount of $25 million under their business interruption insurance coverage. When the insurers refused to pay their pro rata part of the claim, the Company commenced litigation seeking to enforce such insurance. See "Business and Properties--Legal Proceedings--Jim Walter Resources" and Note 12 of the Notes to Financial Statements. The Group's operating income of $152,000 was $52.0 million below the prior year. The lower performance reflects the decrease in sales volumes and prices for coal, lower methane gas selling prices, reduced coal mining productivity as a result of various geological problems in all mines during portions of the year which resulted in higher costs per ton of coal produced ($38.29 in 1994 versus $33.45 in 1993) and idle plant costs of $5.7 million associated with the Mine No. 5 shut downs, all of which more than offset the effect of increased methane gas sales volume and greater outside gas and timber royalty income. Cost of sales in fiscal 1994, exclusive of depreciation, of $845.1 million was 79.1% of net sales versus $804.4 million and 75.0% in fiscal 1993. The cost of sales percentage increase was primarily the result of lower gross profit margins on home sales, coal, chemicals, foundry coke, castings, resin-coated sand, patterns and tooling, window components and metal building and foundry products, partially offset by improved margins on furnace coke, slag wool and pipe products. Selling, general and administrative expenses (exclusive of postretirement health benefits) of $127.9 million were 9.6% of net sales and revenues in 1994 versus $124.6 million and 9.4% in 1993. The Company adopted FASB No. 106 in 1993. Upon adoption the Company elected to record the transition obligation of $166.4 million pre-tax ($104.6 million after tax) as a one time charge against earnings rather than amortize it over a longer period. The annual accrual for postretirement health benefit costs in 1994 was $25.6 million versus $23.5 million in 1993. Interest and amortization of debt discount and expense decreased $16.1 million. The decrease was principally the result of reductions in the outstanding debt balances on the Mid-State Trust II Mortgage-Backed Notes and Mid-State Trust III Asset Backed Notes (see "Business and Properties-- Mid-State Homes" and Note 8 of Notes to Financial Statements) and lower amortization of debt discount and expense, partially offset by higher interest rates. The average interest rate in 1994 was 9.58% versus 9.44% in 1993. The prime interest rate ranged from 6.0% to 7.25% in 1994 compared to a range of 6.0% to 6.5% in 1993. Interest in the amount of $724.3 million ($163.7 million in each of the years 1994 and 1993) on unsecured obligations was not accrued in the Consolidated Financial Statements since the date of the filing of petitions for reorganization. This amount was based on the balances of the unsecured debt obligations and their interest rates as of December 27, 1989 and did not consider fluctuations in the level of short-term debt and interest rates and the issuance of commercial paper that would have occurred to meet the working capital requirements of the Homebuilding and Related Financing Group. Amortization of excess of purchase price over net assets acquired (goodwill) increased $9.1 million. The increase primarily resulted from adjustments to amortization of the goodwill due to greater payoffs received in advance of maturity on the instalment note portfolio. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law raising the federal corporate income tax rate to 35% from 34% retroactive to January 1, 1993. The effect of the 30 rate change resulted in a $2.8 million charge to deferred tax expense. The rate change effect, combined with reduced percentage depletion and increased amortization of goodwill (both permanent book/tax differences), resulted in an effective tax rate of 80.1% in 1994 versus an effective tax rate of 34.3% in 1993. The net income for fiscal 1994 and the net loss for fiscal 1993 reflects all of the previously mentioned factors, as well as the $4.5 million increase in Chapter 11 costs, partially offset by slightly higher interest income from Chapter 11 proceedings. The increase in Chapter 11 costs was due to the Veil Piercing Litigation (see Note 12 of Notes to Financial Statements) and the filing of two amended plans of reorganization. FINANCIAL CONDITION On December 27, 1989, the Company and 31 of its subsidiaries each filed a voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court. On December 3, 1990, one additional small subsidiary also filed a voluntary petition for reorganization under Chapter 11 with the Bankruptcy Court. Two other small subsidiaries did not file petitions for reorganization under Chapter 11. The filing of the voluntary petitions resulted from a sequence of events stemming primarily from an inability of the Company's interest reset advisors to reset interest rates on approximately $624 million of outstanding indebtedness, which indebtedness by its terms required that the interest rates thereon be reset to the rate per annum such indebtedness should bear in order to have a bid value of 101% of the principal amount thereof as of December 2, 1989. The reset advisors' inability to reset the interest rates was primarily attributable to two factors: (i) uncertainties arising from the then-pending asbestos-related veil piercing litigation, including the possibility either that such litigation would lead to the prohibition of further asset sales and debt repayment or that substantial new asbestos-related claims might become assertible against the Company, which uncertainties materially hindered the ability of the Company and its subsidiaries to pursue a refinancing or sell assets to reduce debt, and (ii) general turmoil in the high yield bond markets at such time, both of which depressed the bid value of such notes. On March 17, 1995, the Company and its subsidiaries emerged from bankruptcy. Pursuant to the Plan of Reorganization, the Company has repaid substantially all of its unsecured claims and senior and subordinated indebtedness subject to the Chapter 11 reorganization proceedings. A substantial controversy exists with regard to federal income taxes allegedly owed by the Company. Proofs of claim have been filed by the IRS in the amounts of $110,560,883 with respect to fiscal years ended August 31, 1980 and August 31, 1983 through August 31, 1987, $31,468,189 with respect to fiscal years ended May 31, 1988 (nine months) and May 31, 1989 and $44,837,693 with respect to fiscal years ended May 31, 1990 and May 31, 1991. Objections to the proofs of claim have been filed by the Company and the various issues are being litigated in the Bankruptcy Court. The Company believes that such proofs of claim are substantially without merit and intends to vigorously defend such claims against the Company but there can be no assurance as to the ultimate outcome. Since May 31, 1995, total debt has decreased $9.1 million resulting from redemption of the Senior Notes ($490.0 million), early repayments on the Credit Facilities debt ($30.0 million), quarterly principal payments on the Credit Facilities ($4.0 million), Mid-State Trust II Mortgage-Backed Notes ($87.0 million), Mid-State Trust III Asset Backed Notes ($25.9 million) and Mid-State Trust IV Asset Backed Notes ($51.6 million) and scheduled retirements of other long-term debt ($.6 million), partially offset by the issuance of long-term debt from the Credit Facilities financing ($450.0 million) and the Mid-State Trust V Variable Funding Loan Agreement ($230.0 million). The Credit Facilities contain a $365 million revolving credit facility which includes a sub-facility for trade and other standby letters of credit in an amount up to $40 million at any time outstanding and a sub-facility for swingline advances in an amount not in excess of $15 million at any time outstanding. At May 31, 1996, $23.0 million of letters of credit were outstanding under this facility. 31 The Credit Facilities and the Mid-State Trust V Variable Funding Loan Agreement contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, pay dividends, create liens on assets, enter into leases, make investments or acquisitions, engage in mergers or consolidations or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including change of control and asset sale transactions). In addition, under the Credit Facilities, the Company is required to maintain specified financial ratios and comply with certain financial tests, including interest coverage, fixed charge coverage ratios and maximum leverage ratios, some of which become more restrictive over time. The Company was in full compliance with these covenants at May 31, 1996 and believes it will meet these financial tests over the remaining terms of these debt agreements. LIQUIDITY AND CAPITAL RESOURCES At May 31, 1996, cash and short term investments, net of bank overdrafts, were approximately $53.7 million. Operating cash flows for the year ended May 31, 1996, together with proceeds from the Credit Facilities financing, issuance of long-term debt under the Mid-State Trust V Variable Funding Loan Agreement and the use of available cash balances, were primarily used for working capital requirements, payment of liabilities resulting from the Chapter 11 reorganization and previously accrued in fiscal year ended May 31, 1995, retirement of long-term senior debt, interest payments and capital expenditures. Working capital is required to fund adequate levels of inventories and accounts receivable. Commitments for capital expenditures at May 31, 1996 are not material; however, it is estimated that gross capital expenditures for the Company and its subsidiaries for the year ending May 31, 1997 will approximate $100 million. Because the Company's operating cash flow is significantly influenced by the general economy and, in particular, the level of construction, prior years' results should not necessarily be used to predict the Company's liquidity, capital expenditures, investment in instalment notes receivable or results of operations. The Company believes that the Mid-State Trust V Variable Funding Loan Agreement will provide Mid-State Homes with the funds needed to purchase the instalment notes and mortgages generated by Jim Walter Homes. It is contemplated that one or more permanent financings similar to the Mid-State Trust II, III and IV financings will be required over the next several years to repay borrowings under the Mid-State Trust V Variable Funding Loan Agreement. The Company believes that under present operating conditions sufficient operating cash flow will be generated to make all required interest and principal payments and planned capital expenditures and meet substantially all operating needs and that amounts available under the Credit Facilities will be sufficient to meet peak operating needs. 32 BUSINESS AND PROPERTIES GENERAL The Company, through its direct and indirect subsidiaries, currently offers a diversified line of products and services for homebuilding, water and waste water transmission, residential and non-residential construction and industrial markets. The operations of the Company are carried out by its operating subsidiaries, the business and properties of which are described below. For financial information relating to the industry segments of the Company and its subsidiaries, see Note 15 of Notes to Financial Statements. JIM WALTER HOMES Jim Walter Homes, headquartered in the Walter Industries building in Tampa, Florida, is in the business of marketing and supervising the construction of standardized, partially finished and shell, detached, single family residential homes, primarily in the southern region of the United States where the weather permits year-round construction. Jim Walter Homes has concentrated on the low to moderately priced segment of the housing market. Over 320,000 homes have been completed by Jim Walter Homes and its predecessor since 1946. Jim Walter Homes' products consist of more than 30 models of conventionally built homes, built of wood on concrete foundations or wood pilings, and ranging in size from approximately 640 to 2,214 square feet. Each home is completely finished on the outside and is unfinished on the inside except for rough floors, ceiling joists, partition studding and closet framing. The buyer may elect to purchase optional interior components, including installation thereof, such as plumbing and electrical materials, heating and air conditioning, wallboard, interior doors, interior trim and floor finishing. A buyer selecting all options receives a home considered to be "90% complete", excluding only floor covering, inside paint and utility hookups. Shell homes are those which are completely finished on the outside with the inside containing only rough floors, partition studding and closet framing, but not interior wallboard, floor finishing, plumbing, electrical wiring and fixtures, doors and cabinetry. The remaining units are sold at varying "in-between" stages of interior finishing. Jim Walter Homes builds all of its homes "on site" and only against firm orders. The following chart shows the unit sales volume of Jim Walter Homes and the percent of homes sold in the three stages of completion for fiscal years ended May 31, 1996, 1995 and 1994.
PERCENT OF UNIT SALES ----------------------------------------- FISCAL YEAR ENDED MAY 31, UNITS SOLD SHELL VARIOUS STAGES 90% COMPLETE - ------------------------- ---------- ----- -------------- ------------ 1996..................... 3,760 18% 4% 78% 1995..................... 4,126 25 9 66 1994..................... 4,331 23 10 67
During the fiscal years 1996, 1995 and 1994 the average net sales price of a home was $42,300, $40,200 and $38,300, respectively. Jim Walter Homes' backlog as of May 31, 1996 was 1,957 units compared to 1,529 units at May 31, 1995. The average time to construct a home ranges from four to twelve weeks. Jim Walter Homes currently operates 109 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). Of such branch offices, approximately 82% are owned, with the balance on leased land. Substantially all of these branch offices serve as "display parks" which are designed to allow customers to view actual models completed to the various stages of interior finishing available. Jim Walter Homes does not own or acquire land for purposes of its operations and is not a real estate developer. Accordingly, these operations are not subject to significant concentrations of credit risks. The actual 33 construction of all homes sold by Jim Walter Homes is done by local building contractors with their own crews, pursuant to subcontracts executed in connection with each home, and inspected by Jim Walter Homes' supervisory personnel. Jim Walter Homes maintains warehouses near each of its district offices from which a portion of the necessary building materials may be obtained; the balance of building materials is purchased locally. Approximately 96% of the homes Jim Walter Homes sells are purchased with financing it provides. In order to qualify for a credit sale, the purchaser of a home must own his property free and clear of all encumbrances. In addition to owning the land, the purchaser must perform certain steps to complete the home and obtain a certificate of occupancy. Depending on the degree of completion of the home purchased, these steps can cost a significant amount of money. The credit terms offered by Jim Walter Homes have a maximum 30-year term, are usually for 100% of the purchase price of the home and currently carry either an 8.5% or 10% "annual percentage rate", without points or closing costs. In an effort to generate additional sales, Jim Walter Homes in December 1995 reduced its financing rate from 10% to 8.5% for its "90% complete" homes on a trial basis and in March 1996 began formally advertising the lower rate. The 10% "annual percentage rate" had been in effect since 1979. To qualify for financing, a potential purchaser must also provide information concerning his or her monthly income and employment history as well as a legal description of and evidence that the customer owns the land on which the home is to be built. A customer's income and employment usually are verified through telephone conversations with such customer's employer and by examining his or her pay stubs, W2 forms or, if the customer is self-employed, income tax returns. An applicant must have a minimum of one year's continuous employment or, if he or she has changed jobs, the new job must be in the same field of work. Only a small percentage of secondary income (second job or part-time work) 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. 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 sales 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. Jim Walter Homes does not use a point or grade credit scoring system. Particular attention is paid to the credit information for the most recent three to five years. Attention is also given to the customer's total indebtedness and total other monthly payments on a judgmental basis by the credit department. The customer's credit standing is considered favorable if the employment history, income and credit report meet the aforementioned criteria. The contract for sale is subject to (i) executing a promissory note which is secured by a first lien on the land and the home to be built, (ii) executing a mortgage, deed of trust or other security instrument, (iii) receiving a satisfactory title report, (iv) inspecting the land to determine that it is suitable for building and (v) obtaining required permits. Although the mortgages, deeds of trust and similar security instruments constitute a first lien on the land and the home to be built, such security instruments are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration 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 division employees' experience and knowledge, be at least equal to 10% of the amount of the sales price to be financed. Before occupying a new home, the customer must complete the utility hook-ups and any of the other components not purchased from Jim Walter Homes, arrange for the 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 could range from $2,000-$3,000 to 34 $30,000-$40,000. Upon construction of a new home to the agreed-upon percentage of completion, Jim Walter Homes sells the building and instalment sales contract, the note and the related mortgage, deed of trust or other security instrument to Mid-State Homes, an indirect, wholly owned subsidiary of the Company, in the ordinary course of business pursuant to an Agreement of Purchase and Sale of Instalment Obligations and Servicing of Delinquent Accounts. Pursuant to this agreement, Jim Walter Homes provides field servicing on all delinquent accounts, including collection of delinquent accounts, recommendations of foreclosure, foreclosure and resale of foreclosed properties. The favorable financing offered by Jim Walter Homes normally has tended to increase unit volume in times of high interest rates and limited availability of mortgage financing funds. As a result, Jim Walter Homes' volume of home sales has tended to be counter-cyclical to national home construction activity. Also, in times of low interest rates and high availability of mortgage funds, additional competition is able to enter the market. 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 home builders ranging from regional and national firms to small local companies. Jim Walter Homes also competes with manufactured housing. For the calendar year 1995, Jim Walter Homes was the eighth largest builder of detached single-family homes in the United States after having been the sixth largest builder in 1994, the fifth largest builder in 1993, and the fourth largest builder in 1992 and 1991. However, because there are so many firms engaged in the single-family homebuilding industry, Jim Walter Homes accounted for less than 1% of all new detached for sale homes built in 1995. In the three years ended May 31, 1996, 1995 and 1994, Jim Walter Homes' net sales and revenues amounted to $159.2 million, $165.8 million and $166.0 million, respectively. MID-STATE HOMES Mid-State Homes, headquartered in the Walter Industries building in Tampa, Florida, was established in 1958 to purchase mortgage instalment notes from Jim Walter Homes on homes constructed and sold by Jim Walter Homes and to service such mortgage instalment notes. Mid-State Trust II, Mid-State Trust III, Mid-State Trust IV and Mid-State Trust V are business trusts organized by Mid-State Homes, which owns all of the beneficial interest in Mid-State Trust III, Mid-State Trust IV and Mid-State Trust V. Mid-State Trust IV owns all of the beneficial interest in Mid-State Trust II. In April 1988, Mid-State Homes sold to Mid-State Trust II instalment notes and mortgages which it had acquired from Jim Walter Homes through February 29, 1988 with a gross amount of approximately $3,376,000,000 and an aggregate outstanding economic balance of approximately $1,750,000,000 pursuant to a purchase and sales agreement, in exchange for a purchase price of $1,326,665,600, representing the net cash proceeds from the public offering of $1,450,000,000 aggregate face amount of mortgage-backed notes ("Mid-State Trust II Mortgage-Backed Notes") of Mid-State Trust II after paying the expenses associated with the sale of such Mid-State Trust II Mortgage-Backed Notes. The outstanding balance at May 31, 1996 of such Mid-State Trust II Mortgage-Backed Notes was $497,000,000. At May 31, 1996, such Mid-State Trust II instalment notes and mortgages had a gross book value of $1,166,386,000 and an economic balance of approximately $723,481,000. Under the Mid-State Trust II indenture for the Mid-State Trust II Mortgage-Backed Notes, if certain criteria as to performance of the pledged instalment notes are met, Mid-State Trust II is allowed to make quarterly distributions of cash to Mid-State Trust IV, its sole beneficial owner, to the extent that cash collections on such instalment notes exceed Mid-State Trust II's cash expenditures for its operating expenses, interest expense and mandatory debt payments on its mortgage-backed notes. In addition to the performance-based distributions, the indenture permits distribution of additional excess funds, if any, provided such distributions are consented to by Financial Security Assurance Inc., a monoline property and casualty insurance company and the guarantor of the Mid-State Trust II 35 Mortgage-Backed Notes. The guarantor has not approved any additional distributions since the January 1, 1995 distribution and such excess funds remain on deposit with Mid-State Trust II. On July 1, 1992, pursuant to approval by the Bankruptcy Court, mortgage instalment notes having a gross amount of $638,078,000 and an economic balance of $296,160,000 were sold by Mid-State Homes to Mid-State Trust III in exchange for the net proceeds from the public issuance by Mid-State Trust III of $249,864,000 of asset backed notes ("Mid-State Trust III Asset Backed Notes"). Net proceeds were used to repay in full all outstanding indebtedness due under a revolving credit facility, with the excess cash used to fund the ongoing operations of the Company and its subsidiaries. The outstanding balance at May 31, 1996 of such Mid-State Trust III Asset Backed Notes was $147,669,000. At May 31,1996, such Mid-State Trust III instalment notes and mortgages had a gross book value of $416,780,000 and an economic balance of $217,247,000. On March 16, 1995, pursuant to approval by the Bankruptcy Court, mortgage instalment notes having a gross amount of $2,020,258,000 and an economic balance of $826,671,000 were sold by Mid-State Homes to Mid-State Trust IV. In addition, on such date, Mid-State Homes sold its beneficial interest in Mid-State Trust II to Mid-State Trust IV. Mid-State Trust II had a total collateral value of $910,468,000 with $605,750,000 of Mid-State Trust II Mortgage-Backed Notes outstanding. These sales were in exchange for the net proceeds from the public issuance by Mid-State Trust IV of $959,450,000 of asset backed notes ("Mid-State Trust IV Asset Backed Notes"). The outstanding balance at May 31, 1996 of such Mid-State Trust IV Asset Backed Notes was $902,277,000. At May 31, 1996, such Mid-State Trust IV instalment notes and mortgages had a gross book value of $1,786,406,000 and an economic balance of $759,234,000. The instalment notes sold by Mid-State Homes to Mid-State Trusts II, III and IV are serviced by Mid-State Homes pursuant to servicing agreements entered into with each trust. Mid-State Homes, in connection with such servicing agreements, has entered into sub-servicing agreements with Jim Walter Homes to provide field servicing such as collections, repossessions and resale. The assets of Mid-State Trusts II, III and IV are not available to satisfy claims of general creditors of Mid-State Homes or the Company and its other subsidiaries. The liabilities of Mid-State Trusts II, III and IV for their publicly issued debt are to be satisfied solely from proceeds of the underlying instalment notes and are nonrecourse to Mid-State Homes and the Company and its other subsidiaries. On February 27, 1995, Mid-State Homes established Mid-State Trust V, a business trust in which Mid-State Homes owns all the beneficial interest, to provide temporary financing to Mid-State Homes for its current purchases of instalment notes and mortgages from Jim Walter Homes. On March 3, 1995, Mid-State Trust V entered into a Variable Funding Loan Agreement (the "Mid-State Trust V Variable Funding Loan Agreement") with Enterprise Funding Corporation, an affiliate of NationsBank N.A., as lender, and NationsBank N.A. (Carolinas), as Administrative Agent. The agreement provides for a three-year $500,000,000 credit facility (the "Mid-State Trust V Variable Funding Loan") secured by the instalment notes and mortgages Mid-State Trust V purchases from Mid-State Homes. It is contemplated that the facility will be an evergreen three-year facility with periodic paydowns from the proceeds of permanent financings similar to those done by Mid-State Trusts II, III and IV. The facility currently matures on March 3, 1999. The outstanding Mid-State Trust V Variable Funding Loan balance at May 31, 1996 was $245,000,000. At May 31, 1996, such Mid-State Trust V instalment notes and mortgages had a gross book value of $835,454,000 and an economic balance of $315,422,000. The revenues of Mid-State Trusts II, III, IV and V are required by generally accepted accounting principles to be consolidated as part of Mid-State Homes' revenues for financial statement purposes. In the three years ended May 31, 1996, 1995 and 1994, Mid-State Homes' revenues amounted to $248.8 million, $237.1 million and $255.3 million, respectively, including revenues of Mid-State Trust II of $135.2 million, $141.5 million and $164.5 million, respectively, and revenues of Mid-State Trust III of $24.9 million, $24.1 million and $27.5 million, respectively. For the two years ended May 31, 1996 and 36 1995, revenues of Mid-State Trust IV were $71.1 million and $27.5 million, respectively and revenues of Mid-State Trust V were $13.5 million and $0.5 million, respectively. JIM WALTER RESOURCES The operations of Jim Walter Resources are conducted through its Mining Division, which mines and sells coal from four deep shaft mines in Alabama, and its De-Gas Division, which extracts and sells methane gas from the coal seams owned or leased by Jim Walter Resources. MINING DIVISION The Mining Division, headquartered in Brookwood, Alabama, has approximately 9.7 million tons of rated annual coal production capacity from four deep shaft mines. These mines extract coal from Alabama's Blue Creek seam, which contains high quality metallurgical coal. This coal can be used as coking coal as well as steam coal because it meets current environmental compliance specifications. The Blue Creek coal has a low/medium volatility, high BTU and low sulfur content. The mines are located in west central Alabama between the cities of Birmingham and Tuscaloosa. The majority of coal is mined using longwall technology, complemented by the more standard continuous mining method. Since the late 1970's, by replacing the traditional methods of underground mining with the longwall technique, the Mining Division has achieved greater production efficiency, improved safety, generated superior coal recovery results and lowered production costs. There are approximately 70 longwall mining systems in use in the United States, of which the Mining Division currently operates six. The Mining Division's normal operating plan is a longwall/continuous miner ratio of about 75%/25%, which is the long-term sustainable ratio. Recoverable reserves, as of May 31, 1996, were estimated to be approximately 242 million tons, of which 217 million tons relate to the four Blue Creek Mines. A summary of reserves is as follows: ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF MAY 31, 1996 (IN THOUSANDS OF TONS)
TYPE(4) --------- STEAM(S) RESERVES(2) CLASSIFICATIONS(3) OR JWR'S INTEREST QUALITY(6) PRODUCTION(7) MINING ----------------------------- ------------------- METALLUR- ------------------ ------------------- ------------ PROPERTY TOTAL ASSIGNED UNASSIGNED MEASURED INDICATED GICAL(M) OWNED LEASED(5) ASH SULF. BTU/LB 1994 1995 - -------------- ------- -------- ---------- -------- --------- --------- ------- --------- ---- ----- ------ ----- ----- No. 3 Mine.... 60,075 60,075 -- 43,554 16,521 S/M 1,445 58,630 8.2 0.56 14,469 1,347 1,730 No. 4 Mine.... 71,262 71,262 -- 45,536 25,726 S/M 5,892 65,370 9.4 0.69 14,240 2,257 2,448 No. 5 Mine.... 26,758 26,758 -- 21,888 4,870 S/M 24,548 2,210 8.8 0.66 14,334 1,074 948 No. 7 Mine.... 59,174 59,174 -- 45,209 13,965 S/M 15,228 43,946 8.0 0.65 14,499 1,849 2,501 ------- -------- ----- -------- --------- ------- --------- ----- ----- 217,269 217,269 -- 156,187 61,082 47,113 170,156 6,527 7,627 Bessie (8).... 24,919 -- 24,919 14,880 10,039 S/M 658 24,261 11.0 1.30 13,655 -- -- ------- -------- ----- -------- --------- ------- --------- ----- ----- TOTAL......... 242,188 217,269 24,919 171,067 71,121 47,771 194,417 6,527 7,627 ------- -------- ----- -------- --------- ------- --------- ----- ----- ------- -------- ----- -------- --------- ------- --------- ----- ----- MINING PROPERTY 1996 - -------------- ----- No. 3 Mine.... 2,084 No. 4 Mine.... 2,542 No. 5 Mine.... 893 No. 7 Mine.... 2,347 ----- 7,866 Bessie (8).... -- ----- TOTAL......... 7,866 ----- -----
- ------------ (1) "Recoverable" reserves are defined as tons of mineable coal in the Blue Creek and Mary Lee seams which can be extracted and marketed after deduction for coal to be left in pillars, etc. and adjusted for reasonable preparation and handling losses. (2) "Assigned" reserves represent coal which has been committed by Jim Walter Resources to its operating mines and plant facilities. "Unassigned" reserves represent coal which is not committed to an operating mine and would require additional expenditures to recover. The division of reserves into these two categories is based upon current mining plans, projections and techniques. (3) The recoverable reserves (demonstrated resources) are the sum of "Measured" and "Indicated" resources. Measured coal extends 1/4 mile from any point of observation or measurement. Indicated coal is projected to extend from 1/4 mile to 3/4 mile from any point of observation or measurement. Inferred coal extends from 3/4 mile to 3 miles from any point of observation or measurement. Inferred reserves are not included in recoverable reserves. (4) All of the coal in the Blue Creek and Mary Lee seams is suitable for metallurgical purposes although, for marketing reasons, some is sold as compliance steam coal. (5) The leases are either renewable until the reserves are mined to exhaustion or are of sufficient duration to permit mining of all of the reserves before the expiration of the term. (Footnotes continued on following page) 37 (Footnotes continued from preceding page) (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 1996, 1995 and 1994 is for the fiscal years ended May 31. (8) The Bessie Mine was closed 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. The facilities of the Mining Division are summarized as follows:
FACILITY LOCATION SQ. FOOTAGE - --------------------------------------------------- -------------- -------------- Administrative headquarters........................ Brookwood, AL 41,500 Central shop, supply center and training center.... Brookwood, AL 128,400
CURRENT OPERATING MINES LOCATION RATED CAPACITY - --------------------------------------------------- -------------- -------------- Blue Creek No. 3................................... Adger, AL 2,600,000 tons Blue Creek No. 4................................... Brookwood, AL 2,700,000 tons Blue Creek No. 5................................... Brookwood, AL 1,800,000 tons Blue Creek No. 7................................... Brookwood, AL 2,600,000 tons
Of the Mining Division's approximately 9.7 million tons of current rated annual production capacity, 4.88 to 5.10 million tons are sold under long-term contracts, leaving 4.60 to 4.82 million tons to be sold under short-term contracts or on the spot market. Jim Walter Resources' supply contract with Alabama Power that had been in effect since January 1, 1979, as amended, was superseded by the New Alabama Power Contract. Under the New Alabama Power Contract, Alabama Power will purchase 4.0 million tons of coal per year from Jim Walter Resources during the period from July 1, 1994 through August 31, 1999. The New 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 New Alabama Power Contract includes favorable modifications of specification, shipping deviations and changes in transportation arrangements. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Results of Operations." Jim Walter Resources and Carcoke, S.A. are parties to a long-term contract which expires on December 31, 1997. The contract provides for the sale of approximately 880,000 tons annually, with an option on approximately 220,000 additional tons annually. The pricing mechanism is market driven and reflects changes in prices of three specific coals or coal indices. Mine No. 5 was shut down for a substantial portion of the period from July 9, 1990 through September 16, 1990 as a result of safety concerns arising from spontaneous combustion heatings which were a result of pyritic sulfur concentrations occurring in the coal seam in the southern part of the mine being exposed to the air by the mining process. The exposure of the sulfur deposits and its reaction with oxygen contained in the ventilation air currents caused the heatings to occur. Throughout this period, Jim Walter Resources was engaged in discussions with MSHA regarding a new ventilating arrangement designed to reduce the contact between oxygen and sulfur for the longwall faces at Mine No. 5. Idle plant expenses associated with the shutdown were $6.5 million. Although MSHA approved the resumption of operations at the mine on September 14, 1990, providing for a modified conventional ventilation system, productivity was poor and costs were therefore high. In February 1991, the mine's one longwall unit was moved from the southern part of the mine to a longwall coal panel in the northern area and productivity improved. The southwestern area of the mine was subsequently abandoned and sealed off as efforts to design a ventilation arrangement acceptable to MSHA which properly controlled 38 the spontaneous combustion heating and provided acceptable productivity and costs of operation were not successful. Mine No. 5 also was shut down from November 17, 1993 through December 16, 1993 and from early April 1994 until May 16, 1994 as a result of a fire due to spontaneous combustion heatings caused by pyritic sulfur concentrations occurring in the mine's coal seam being exposed to the air by the mining process. Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and the UMWA agreed that the longwall coal panel being mined in Mine No. 5 at the time the fire recurred in April 1994 would be abandoned and sealed off. Development mining for the two remaining longwall coal panels in this section of the mine resumed on May 16, 1994 and mining on the first longwall panel resumed on January 17, 1995. Production was adversely impacted until such date. As a result of the fire, the Company and Jim Walter Resources claimed compensable losses in the amount of $25 million under their business interruption insurance coverage. When the insurers refused to pay their pro rata part of the claim, the Company commenced litigation seeking to enforce such insurance. The insurers issued policies insuring various percentages of the risk. The Company has entered into settlements with several insurers who, in the aggregate, have paid approximately $11.7 million, reducing the contract claims in the lawsuit to $12.7 million. The Company and Jim Walter Resources continue to pursue the litigation against the remaining carriers and a trial is tentatively scheduled for October 21, 1996. See "Business and Properties--Legal Proceedings--Jim Walter Resources" and Note 12 of Notes to Financial Statements. In late November 1995, Mine No. 5 experienced another fire due to the unexpected recurrence of spontaneous combustion heatings caused by pyritic sulfur concentrations occurring in the mine's coal seam being exposed to the air by the mining process and the mine was shut down. Efforts to contain and extinguish the fire were successful; however, conditions dictated the mine be shut down for several weeks. Firefighting and idle plant costs of approximately $16 million associated with the November 1995 fire were not insured since spontaneous combustion heatings caused by pyritic sulfur concentrations in Jim Walter Resources' Mines No. 4 and No. 5 are now excluded from the Company's and Jim Walter Resources' insurance policies. The affected coal panels on the western side of the mine have been sealed off and development work is underway on the eastern side of Mine No. 5. Longwall production on the east side is expected to commence in the fourth quarter of fiscal 1997. While in development, the mine's costs are being capitalized. Total development costs in the year ended May 31, 1996 were $15,169,000. Jim Walter Resources' three other operating mines remain in full production. In the three years ended May 31, 1996, 1995 and 1994, the Mining Division's net sales and revenues were $325.8 million, $299.4 million and $290.3 million, respectively, including $4.8 million, $5.4 million and $5.7 million, respectively, to Sloss Industries Corporation ("Sloss Industries"), a wholly owned subsidiary of the Company. De-Gas Division The De-Gas Division, through a joint venture headquartered in Brookwood, Alabama, extracts and sells methane gas from the coal seams owned or leased by Jim Walter Resources. The original motivation for the joint venture was to increase safety in Jim Walter Resources' Blue Creek mines by reducing the level of methane gas through wells drilled in conjunction with the mining operations. As of May 1996, there were 340 wells producing approximately 40 million cubic feet of gas per day. As many as 100 additional wells are planned for development over the next 12-18 months. The degasification operation, as had originally been expected, has improved mining operations and safety by reducing methane gas levels in the mines, as well as being a profitable operation. The gas is transported through a 12-mile pipeline (owned and operated by Black Warrior Transmission Corp., a corporation the stock of which is owned on a 50-50 basis by Jim Walter Resources and Sonat Exploration Company, an affiliate of Southern Natural Gas Company ("SNG")), directly to SNG's pipeline. 39 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 such 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 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. Beginning in January 1994 and ending in December 2001, SNG will pay Jim Walter Resources a reservation fee of $675,000 per month if certain minimum quantities of gas are delivered. Black Warrior Methane Corp., a corporation the stock of which is owned on a 50-50 basis by Jim Walter Resources and Sonat Exploration Company, manages the operational activities of the joint venture. In the three years ended May 31, 1996, 1995 and 1994, the De-Gas Division's net sales and revenues amounted to $23.0 million, $20.8 million and $23.0 million, respectively. U.S. PIPE U.S. Pipe, headquartered in Birmingham, Alabama, conducts its business through its Pressure Pipe Division and Castings Division. The Pressure Pipe Division manufactures and sells a broad line of ductile iron pressure pipe, pipe fittings and valves and hydrants. It is one of the nations'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, 1996, 1995 and 1994, U.S. Pipe's net sales and revenues amounted to $421.4 million, $412.2 million and $357.2 million, respectively. Pressure Pipe Division The Pressure Pipe Division manufactures and sells a complete line of ductile iron pipe ranging from 4" to 64" in diameter as well as most equivalent metric sizes. In addition, this division produces and sells a full line of fittings, valves and hydrants of various configurations to meet various municipal specifications. Approximately 70%-75% of the ductile iron pressure pipe produced by this division is used in the transmission and distribution of potable water and the remaining 25%-30% is used in the transmission of waste water and industrial applications. The majority of ductile iron pressure pipe and related fittings, valves and hydrants are for new distribution systems. However, the market for rehabilitation, upgrading and replacement of pipe systems has grown significantly in recent years (currently accounting for approximately 30% of ductile iron pressure pipe sales) as municipalities have initiated programs to rehabilitate aging water and waste water transmission systems. Fittings, valves and hydrants produced by this division account for approximately 20% of sales. Ductile iron pressure pipe is manufactured by the deLavaud centrifugal casting process and is typically classified into three size categories: 1) Small pipe, ranging from 4" to 12" in diameter (approximately 55% of the division's pipe production), is used primarily for potable water distribution systems and small water system grids; 2) Medium pipe, ranging from 14" to 24" in diameter (approximately 26% of the division's pipe production), is used primarily in reinforcing distribution systems, including looping grids and supply lines; and 3) Large pipe, 30" to 64" in diameter, which accounts for the remaining 19% of pipe production, is used for major water and waste water transmission and collection systems. 40 The ductile iron pressure pipe industry is highly competitive, with a small number of manufacturers of ductile iron pressure pipe, fittings, valves and hydrants as well as a larger number of manufacturers which produce pipe from substitute materials, such as PVC, concrete, fiberglass, reinforced plastic and steel. U.S. Pipe is one of the nation's largest producers of ductile iron pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin Ductile Iron Pipe Company and American Cast Iron Pipe Company. The division competes with such manufacturers of ductile iron pressure pipe on the basis of price, customer service and product quality. U.S. Pipe is also a manufacturer of 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. Additional competition for ductile iron pressure pipe comes from pipe composed of other materials. 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. Products of the Pressure Pipe Division are sold primarily to contractors, water works distributors, municipalities and private utilities. 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 1996. U.S. Pipe has 36 sales offices in leased space in the United States. It employs a salaried sales force of approximately 70 persons. The order backlog of pressure pipe at May 31, 1996 was 121,734 tons, which represents approximately three months' shipments, compared to 121,548 tons at May 31, 1995. The Pressure Pipe Division manufactures ductile iron pressure pipe at four owned plants located in (i) Bessemer, Alabama (581,000 square feet on 169 acres of land); (ii) North Birmingham, Alabama (358,000 square feet on 61 acres of land); (iii) Union City, California (121,000 square feet on 70 acres of land); and (iv) Burlington, New Jersey (329,000 square feet on 109 acres of land). Such plants have annual rated capacities, on a one shift per day basis, of 180,000 tons, 160,000 tons, 85,000 tons and 132,000 tons, respectively, of ductile iron pressure pipe. In addition, the division manufactures fittings, valves and hydrants at its owned plant in Chattanooga, Tennessee (648,000 square feet on 80 acres of land). The general offices located in Birmingham, Alabama contain 122,000 square feet of office space on 6 acres of owned land. While the pipe business is generally sensitive to recessions because of its partial dependence on the level of new construction activity, certain aspects of Pressure Pipe's operations have in the past helped to reduce the impact on such division of the effects of a downturn in new construction. First, Pressure Pipe's products have experienced a strong level of demand in the replacement market. The Company believes that the growth of the replacement market will continue as a result of major expenditures by governmental entities in an effort to rebuild the nation's infrastructure, such as the replacement and upgrading of water and waste water transmission systems. In addition, legislation such as the Clean Water Act and the Safe Drinking Water Act may force utilities and cities to upgrade and/or replace their pipe systems. Second, Pressure Pipe's facilities are located in regions of the country which 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. 41 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, 1996, approximately 45% of the Castings Division's sales were sales of castings to the Pressure Pipe Division, with the balance of sales to various capital goods industries. Manufacturing operations are located in Anniston, Alabama (240,000 square feet on 21 acres of owned land). SLOSS INDUSTRIES Sloss Industries is a diversified manufacturing operation, headquartered in Birmingham, Alabama, which has four major product lines: (1) foundry coke; (2) furnace coke; (3) slag wool; and (4) specialty chemicals. Foundry coke is marketed to cast iron pipe plants and foundries producing castings, such as for the automotive and agricultural equipment industries. It is shipped primarily into four geographic markets: the East Coast; the Southeast; Mexico and the West Coast. Competition comes primarily from three merchant suppliers: ABC Coke, Koppers Company, Inc. and Empire Coke Company. In the year ended May 31, 1996, approximately 60% of the foundry coke produced by Sloss Industries was sold to U.S. Pipe. Furnace coke is sold primarily to basic steel producers. Furnace coke sales have been consistent over the past years, as a result of a contract with National Steel Corporation taking nearly all of Sloss' production capacity. Sloss Industries has only an estimated 1% of the market for furnace coke. Competition comes primarily from Koppers Company, Inc. in the southern United States and from Citizens Gas & Coke Utility and steel producers with excess coking capacity in the Midwest. Slag wool is utilized principally by acoustical ceiling manufacturers and is also used in fireproofing cements. A related product, processed mineral fiber, is used in friction materials and phenolic molding compounds. The continued success of the slag wool business depends upon Sloss Industries' ability to produce ceiling tile fiber of consistent high quality and react to customer demands for specific "customized" fiber composition. Of the total slag wool sales in the year ended May 31, 1996, approximately 66% was sold to Armstrong World Industries and 26% to Celotex. Chemical products are manufactured in plants located in Birmingham and Ariton, Alabama. The Birmingham product line is composed primarily of aromatic sulfonic acids and sulfonyl chlorides used in the pharmaceutical, plasticizer, foundry and coatings industries, but also includes a custom manufactured specialty monomer for the plastics industry. The Ariton facility produces custom manufactured specialty products for the rubber and plastics industries. Sloss Industries' manufacturing facilities located in Birmingham, Alabama include 120 coke ovens with an annual rated capacity of 450,000 tons and related buildings of 148,400 square feet, a slag wool plant with an annual rated capacity of 121,000 tons in a building of 63,000 square feet and a synthetic chemicals plant in a building of 63,300 square feet, all on 521 acres of owned land. Sloss Industries also operates a specialty chemical facility in Ariton, Alabama in a building of 6,880 square feet, on 53 acres of owned land. In the three years ended May 31, 1996, 1995 and 1994, Sloss Industries' net sales and revenues amounted to $91.1 million, $88.0 million and $81.7 million, respectively, including $12.0 million, $11.1 million and $9.4 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. Its second leading 42 product is cable wrap used in the manufacture of communications cable. 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 used primarily for general building applications such as siding, gutters, downspouts, trailer siding, mobile home siding and skirting, residential siding and window components. In fiscal 1996, JW Aluminum sold 122.7 million pounds of aluminum products, 29% of which were sheet products and 71% were foil products. JW Aluminum has focused on directing its product mix away from building products which are price sensitive, low value added products, towards higher value added products such as fin stock, where product quality and service are relied upon more than price. JW Aluminum operates a single manufacturing facility in Mt. Holly, South Carolina. Such facility, which incorporates the plant warehouse and administrative functions, is in a building of 319,000 square feet on 25 acres of owned land. JW Aluminum's current rated capacity is 125 million pounds per year, based on the present product mix. A $7.5 million expansion program currently underway will increase capacity to 150 million pounds per year in late fiscal 1997. In the three years ended May 31, 1996, 1995 and 1994, JW Aluminum's net sales and revenues amounted to $141.1 million, $134.2 million and $87.3 million, respectively, including $3.4 million, $6.1 million and $2.1 million, respectively, to JW Window Components. JW WINDOW COMPONENTS JW Window Components produces a variety of screens and screen components and a full line of window components, such as extruded aluminum components, weatherstripping, sash balances and spiral balances. JW Window Components is recognized as an industry leader in the production of block and tackle sash balances. It also has the broadest product line of any supplier to the window and patio door industry. The Company estimates that approximately 60% of total sales are directed to the new construction market, approximately 30% to the renovation market and approximately 10% to the commercial sector. JW Window Components' products are sold through a network of independent sales agents, who cover the continental United States, the Caribbean and Central American countries. JW Window Components operates three plants located in Elizabethton, Tennessee (190,000 square feet on 25 acres of owned land); Sioux Falls, South Dakota (50,000 square feet on 3 acres of owned land); and Merrill, Wisconsin (54,000 square feet of leased space). The administrative offices are located in Elizabethton, Tennessee. In the three years ended May 31, 1996, 1995 and 1994, net sales and revenues for JW Window Components amounted to $37.0 million, $45.8 million and $38.7 million, respectively. SOUTHERN PRECISION Southern Precision Corporation ("Southern Precision") is the largest producer of pattern tooling and resin coated sand in the Southeast. Southern Precision's Irondale, Alabama manufacturing facility incorporates the plant, warehouse and administrative functions (85,000 square feet of buildings located on 6 acres of owned land). The facility and equipment enable the company to service the larger and more sophisticated tooling and machining programs. Products and services provided at this location include: 1) wood and metal pattern tooling; 2) numerical controlled machining for industries such as satellite and aircraft communications, aerospace and glass machines; 3) plastic injection, compression and rubber molds; 4) aluminum castings; and 5) general machining of fabrications, castings and plates. 43 Southern Precision's Birmingham, Alabama manufacturing facility (27,500 square feet on 5 acres of owned land) produces a coated sand for production of shell cores for the foundry industry. To increase operating efficiency, the company closed its Irondale, Alabama coating facility in August 1995 and combined it with the Birmingham facility. The Birmingham facility is newer, provides adequate land for expansion and is located on a major rail line, which eliminates trucking expense while providing for bulk shipment by rail. In the three years ended May 31, 1996, 1995 and 1994, Southern Precision's net sales and revenues amounted to $15.0 million, $14.4 million and $11.0 million, respectively, including $1.2 million, $2.4 million and $2.2 million, respectively, to U.S. Pipe. VESTAL MANUFACTURING Vestal Manufacturing produces a diversified line of metal and foundry products for residential, commercial and industrial use. Vestal Manufacturing manufactures a line of energy saving fireplaces, fireplace inserts, accessories and woodburning stoves, as well as lightweight castings for municipal markets and metal building products. Vestal Manufacturing's products are sold through a network of independent sales agents to hardware and building materials distributors, home centers and mass merchandisers throughout the United States and Canada. Vestal Manufacturing's performance to a large extent is tied to residential construction. Foreign competition has also been a factor in recent years. Vestal Manufacturing, located in Sweetwater, Tennessee, operates a foundry with 103,000 square feet, a steel fabrication plant with 109,000 square feet and an administrative office containing 7,000 square feet, all on 46 acres of owned land. In the three years ending May 31, 1996, 1995 and 1994, Vestal Manufacturing's net sales and revenues amounted to $17.3 million, $19.4 million and $17.4 million, respectively. UNITED LAND United Land Corporation ("United Land") owns approximately 43,000 acres of land, 137,000 acres of mineral rights and 1,300 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 expects from time to time to sell excess real estate from the holdings of United Land not utilized by any of the other subsidiaries of the Company. In the three years ended May 31, 1996, 1995 and 1994, United Land's net sales and revenues amounted to $14.6 million, including a gain of $6.1 million on sales of certain excess real estate, $15.8 million, including a gain of $6.1 million on the sale of certain excess real estate, and $9.2 million, respectively. WALTER LAND Walter Land Company ("Walter Land") is a land sales operation with an inventory at May 31, 1996 of approximately 7,400 acres, primarily on the south side of Houma, Louisiana. The bulk of the commercial development in Houma is tied directly to service and support for offshore oil and gas drilling, which has been in a long term recession. Land sales have been few and small in recent years. Presently, the majority of Walter Land's income is derived from rental income. The management and sale of the Louisiana properties are handled by local personnel on a contract basis. In the three years 44 ended May 31, 1996, 1995 and 1994, Walter Land's net sales and revenues amounted to $277,000, $196,000 and $247,000, respectively. CARDEM INSURANCE Cardem Insurance is a Hamilton, Bermuda based offshore reinsurance company. The predominant part of its business is reinsuring 75% of the risk on fire and extended coverage insurance policies issued by Westchester Insurance Company, an unrelated insurance company. Such insurance policies are with individual owners of homes constructed by Jim Walter Homes. In the years ended May 31, 1996, 1995 and 1994, Cardem Insurance's net sales and revenues amounted to $13.1 million, $11.8 million and $12.0 million, respectively. SEASONALITY Certain of the businesses of the Company (primarily U.S. Pipe, Jim Walter Homes, JW Window Components and Vestal Manufacturing) are subject to seasonal variations to varying degrees. However, the businesses of the Company are significantly influenced by the general economy. TRADE NAMES, TRADEMARKS AND PATENTS The names of each of the Company's subsidiaries are well established in the respective markets served by them. Management believes that the reputation of such trade names is of some importance. The Company's subsidiaries have numerous patents and trademarks. Management does not believe, however, that any one such patent or trademark is of material importance. RESEARCH AND DEVELOPMENT Research activities conducted by each business are directed toward new products, process and building systems development, improvement of existing products, development of new uses for existing products and cost reduction efforts. Total research and development expenditures in each of the last three fiscal years were less than 1% of consolidated net sales and revenues. RAW MATERIALS Substantially all of the raw materials needed for the operations of the Company and its subsidiaries are either produced by the Company and its subsidiaries or are purchased from domestic sources. All materials used by the various businesses of the Company are available in the quantities necessary to support their respective operations. ENVIRONMENTAL The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenditures for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the fiscal year ended May 31, 1996 were approximately $5.1 million. Because environmental laws and regulations on the federal, state and local levels continue to evolve, and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily identified, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations, and the Company can give no assurance that such expenditures will not, in the future, be material. Capital expenditures for environmental requirements are anticipated in the next five years to average approximately $6.0 million per year. 45 U.S. Pipe is implementing an Administrative Consent Order ("ACO") for its Burlington, New Jersey plant that was required under the New Jersey Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act) in connection with the completion of the LBO. The ACO required soil and ground water cleanup. U.S. Pipe has completed, pending final approval, the soil cleanup required by the ACO. U.S. Pipe also has completed, pending final approval, ground water treatment as ordered in the ACO. Ground water monitoring as required by the ACO continues. It is not known how long ground water monitoring will be required. Management does not believe the 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. Various subsidiaries of the Company have been identified as potentially responsible parties by the EPA under CERCLA with respect to cleanup of hazardous substances at several sites to which their wastes allegedly have been transported. The subsidiaries are in the process of preliminary investigation of their relationship to these sites, if any, to determine the nature of their potential liability and amount of remedial costs to clean up such sites. Although no assurances can be given that the Company 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 its subsidiaries 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 the subsidiaries' involvement, if any, to be minor in relation to that of other named potentially responsible parties, a significant number of which are substantial companies. EMPLOYEES As of May 31, 1996, the Company and its subsidiaries employed 7,755 people, of whom 4,817 were hourly workers and 2,938 were salaried employees. Approximately 4,300 employees were represented by unions under collective bargaining agreements, of which approximately 1,750 were covered by one contract with the UMWA, which currently expires on August 1, 1998. The Company considers its relations with its employees to be satisfactory. The Company and its subsidiaries have various pension and profit sharing plans covering substantially all employees. In addition to the Company's own pension plans, contributions are made to certain multi-employer plans. The funding of retirement and employee benefit plans is in accordance with the requirements of 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. PROPERTIES The headquarters building of the Company is a modern twin tower building of masonry and steel construction containing approximately 200,000 square feet of office space, located on a plot of land in excess of 13 acres in Tampa, Florida. 46 LEGAL PROCEEDINGS Plan of Reorganization. The Plan of Reorganization was confirmed by the Bankruptcy Court on March 2, 1995. A limited appeal from the order confirming the Plan of Reorganization was filed by the United States on behalf of the EPA. Notwithstanding the filing of such appeal, the Plan of Reorganization became effective on March 17, 1995. The Company and the EPA have resolved all issues on appeal. On July 11, 1995 the Bankruptcy Court entered its Order Granting Motion to Approve Agreement of the United States and the Debtor Regarding Releases and Injunctions Under Amended Joint Plan of Reorganization Dated as of December 9, 1994. An order dismissing the appeal was entered on August 1, 1995. Despite the confirmation and effectiveness of the Plan of Reorganization, the Bankruptcy Court continues to have jurisdiction to, among other things, resolve disputed prepetition claims against the Company, resolve matters related to the assumption, assumption and assignment, or rejection of executory contracts pursuant to the Plan of Reorganization, and to resolve other matters that may arise in connection with or relate to the Plan of Reorganization. (For example, see Note 12 ("Litigation Related to Chapter 11 Distributions to Certain Holders of Subordinated Notes and/or Debentures and Chapter 11 Adversary Proceeding Filed by Certain Holders of Series B & C Senior Notes") of Notes to Financial Statements). Except as described in "Certain Risk Factors--Tax Considerations" and "--Disputed Claims Reserves," provision was made under the Plan of Reorganization in respect of all prepetition liabilities of the Company. Asbestos-Related Litigation Settlements. As discussed more fully under "Recent History", prior to filing the Chapter 11 Cases, the Company and the Indemnitees were subject to significant and mounting Veil Piercing Litigation arising from the LBO and the activities of Celotex, a former subsidiary of the Company. Celotex filed for protection under Chapter 11 on October 12, 1990 as a result, in part, of increasingly burdensome asbestos litigation. In the Veil Piercing Litigation, the Asbestos Claimants sought (i) to pierce the corporate veil that existed between Celotex and Original Jim Walter prior to the LBO and (ii) to unwind the LBO. According to the Asbestos Claimants, if Original Jim Walter were to be deemed responsible for Celotex's alleged multi-billion dollar asbestos liabilities, the debt issued in connection with the LBO would have rendered the Company insolvent, making the LBO a fraudulent conveyance. The Asbestos Claimants asserted at various times that the amount of Celotex's asbestos liabilities could reach $10 billion. Any finding that the Company could be liable for all or any part of these liabilities would have threatened the Company's existence. After the filing of the Chapter 11 Cases, the Company commenced the Adversary Proceeding. After a full trial (the "Veil Piercing Trial"), the Bankruptcy Court on April 18, 1994 found in favor of the Company on every claim asserted in the Adversary Proceeding. The United States District Court for the Middle District of Florida affirmed the Bankruptcy Court's decision on appeal on October 13, 1995. The decision of the District Court was appealed to the United States Court of Appeals for the Eleventh Circuit. On or about April 28, 1995, a stipulation of dismissal of that appeal was filed pursuant to the terms of the Veil Piercing Settlement described below. On April 28, 1994, the Company commenced an action (the "Celotex Action") in the Celotex bankruptcy proceeding seeking a ruling that, as a subsidiary of Jim Walter Corporation, Celotex alone had standing to assert the Veil Piercing Claims and that all creditors of Celotex were bound by the decisions in the Adversary Proceeding. If granted, the relief sought in the Celotex Action would have barred any future Veil Piercing Claims from being brought against the Company or any other entity. Counsel for the Asbestos Claimants had indicated that they would assert that only the named defendants in the Adversary Proceeding could be bound by the decisions in that action, leaving thousands of unnamed and future claimants free to relitigate the same issues raised therein. The Celotex Action was dismissed without prejudice on October 13, 1994 for lack of a case and controversy and for failure to join an indispensable party. Counsel for the Asbestos Claimants asserted that they would vigorously oppose any attempt by the Company to obtain an adjudication in any forum to the 47 effect that the Asbestos Claimants or any other individual claimants lack standing to raise Veil Piercing Claims. Prior to the Veil Piercing Trial, a number of the Company's creditors reached a settlement agreement with the Asbestos Claimants and Celotex to resolve the Veil Piercing Claims, the Veil Piercing Litigation and the Adversary Proceeding (the "Initial Settlement"). The Company did not join in the Initial Settlement and filed objections in the Chapter 11 Cases thereto. On October 17, 1994, a hearing was commenced in the Chapter 11 Cases on the fairness of the Initial Settlement and certain other issues relating to the payment of post-petition interest to unsecured creditors of the Company and challenges to the voting process. Before the completion of that hearing, all parties conducted intensive settlement negotiations. As a result of those negotiations, the Company, the Asbestos Claimants, certain creditors of the Company, KKR, Jim Walter Corporation, Celotex and others agreed upon the terms of a global settlement, ultimately resulting in the execution of the Veil Piercing Settlement, the terms of which are embodied in and made effective by the Plan of Reorganization. Under the Veil Piercing Settlement, all pending and future Settlement Claims are settled, satisfied, released, barred and discharged and all persons that have asserted or may in the future assert Settlement Claims are permanently enjoined from, among other things, (i) commencing, conducting or continuing in any manner, directly or indirectly, any proceeding of any kind in respect of Settlement Claims against, among others, any of the Released Parties, (ii) enforcing, levying, attaching, collecting or otherwise recovering by any manner, directly or indirectly, any judgment, award, decree or order against any of the Released Parties in respect of Settlement Claims and (iii) creating, perfecting or otherwise enforcing in any manner, directly or indirectly, any encumbrance of any kind against any of the Released Parties in respect of Settlement Claims. The Veil Piercing Settlement was intended to resolve finally all Settlement Claims. The Veil Piercing Settlement was signed by, among others, Celotex, Jim Walter Corporation and counsel for the Asbestos Claimants, thus binding them to the terms thereof. To implement the Veil Piercing Settlement, all present and future holders of Settlement Claims other than Celotex, including Asbestos Claimants, were certified by the Bankruptcy Court as a class (for settlement purposes only) under applicable bankruptcy rules and the Federal Rules of Civil Procedure (the "Class"). A representative of the Class was appointed by the Bankruptcy Court (the "Class Representative"). All potential members of the Class who could be identified received actual notice of the terms of the Veil Piercing Settlement and the Plan of Reorganization in addition to wide publication notice. The forms of notice were approved by the Bankruptcy Court. The Class Representative and Celotex each filed proofs of claim in the Chapter 11 Cases for the Settlement Claims. The Company filed objections to those proofs of claim and the Bankruptcy Court allowed the Settlement Claims pursuant to the Veil Piercing Settlement in the aggregate amount of $375 million. The Plan of Reorganization established a class of all present and future holders of Settlement Claims ("Class U-7"). A bar date for the filing of Class U-7 claims was set and notice thereof was approved by the Bankruptcy Court and given by the Company to all known Veil Piercing Claimants and by publication. For voting purposes, every member of Class U-7 was temporarily allowed a $1 claim. Every Class U-7 claimant was given an opportunity to vote on the Plan of Reorganization. Class U-7 approved the Plan of Reorganization by a vote of 73,861 in favor to 16 opposed. No member of Class U-7 filed an objection to the Plan of Reorganization or to the Veil Piercing Settlement embodied therein. The Plan of Reorganization provides that acceptance of the Plan of Reorganization by Class U-7 binds any and all present or future holders of Settlement Claims to the terms of the Plan of Reorganization and thus bars them from bringing any Settlement Claims against the Company, the Indemnitees or any of the other Released Parties. Under the terms of the Veil Piercing Settlement, the stated amount of the settlement ($375 million) (the "Celotex Settlement Fund") was paid under the 48 Plan of Reorganization in the form of Common Stock, cash and Senior Notes to the Celotex Settlement Fund Recipient, which will hold the proceeds for the exclusive benefit of the Veil Piercing Claimants (as defined in the Veil Piercing Settlement). Under the Plan of Reorganization, all Settlement Claims must be channeled to the Celotex Settlement Fund Recipient to be administered under the jurisdiction of the Celotex Bankruptcy Court. On March 2, 1995, the Bankruptcy Court entered a confirmation order which, among other things, (i) provided for the satisfaction, discharge and release of the Settlement Claims, (ii) included an injunction permanently channeling all Settlement Claims to the Celotex Settlement Fund Recipient, (iii) found the Veil Piercing Settlement to be fair and reasonable and (iv) provided that the Class hall be deemed to have provided releases of all Released Parties under the Veil Piercing Settlement. By orders dated February 13 and 25, 1995, the Celotex Bankruptcy Court approved the Veil Piercing Settlement and directed Celotex to render performance in accordance with its terms. In addition, the Celotex Bankruptcy Court appointed a legal representative to protect the interests of unknown asbestos bodily injury claimants. After review of the Veil Piercing Settlement, that legal representative informed the Celotex Bankruptcy Court that the Veil Piercing Settlement should be approved as being in the best interests of such claimants. On March 17, 1995, the Celotex Bankruptcy Court issued an order authorizing the Celotex Settlement Fund Recipient to receive the Celotex Settlement Fund for the exclusive benefit of the Veil Piercing Claimants (as defined in the Veil Piercing Settlement). The Celotex Bankruptcy Court also ordered that "all claims of the type settled by the Veil Piercing Settlement . . . shall attach solely to the [Celotex] Settlement Fund and all persons and entities are enjoined from commencing or continuing any suit, arbitration or other proceeding of any type against any and all of the Released Parties . . . arising out of any such claims." The Celotex Bankruptcy Court also enjoined anyone from taking any action against the Celotex Settlement Fund without the prior approval of the Celotex Bankruptcy Court. Under the terms of the Veil Piercing Settlement, all parties thereto have agreed to use their best efforts to obtain a confirmation of a plan of reorganization in the Celotex bankruptcy proceeding that includes a provision for an injunction pursuant to Section 524(g) or other similar injunctive relief providing the same protection as a Section 524(g) injunction acceptable to each of the Released Parties. Section 524(g) is part of the 1994 amendments to the Bankruptcy Code. It provides for permanent supplemental injunctions, such as the ones contemplated in the Veil Piercing Settlement, to protect third parties who are not debtors in bankruptcy. Thus, a supplemental injunction under Section 524(g) would operate to bar future Settlement Claims against the Company, the Indemnitees and the other Released Parties. There had been some disputes about the statutory authorization of such injunctions under case law before the enactment of Section 524(g). Under Section 524(g), the Celotex Bankruptcy Court may (i) bind all present and future holders of Settlement Claims to the terms of the Veil Piercing Settlement and (ii) enjoin such holders from bringing Settlement Claims against any Released Party in the future. The Plan of Reorganization does not provide for a Section 524(g) injunction. However, as discussed above, under the terms of the Veil Piercing Settlement the parties to the Celotex bankruptcy proceeding are required to use their best efforts to obtain the confirmation of a plan of reorganization that contains such a provision or other similar injunctive relief providing the same protection as a Section 524(g) injunction acceptable to each of the Released Parties. Although there is no assurance that it will be confirmed and consummated, if a Celotex plan of reorganization is confirmed and consummated and it contains a Section 524(g) injunction, it would provide additional protection for the Released Parties, including the Company. In conjunction with its Chapter 11 bankruptcy proceedings, through July 1996 Celotex filed various plans of reorganization and/or amendments and supplements thereto which failed to conform to the Veil Piercing Settlement with respect to providing for a Section 524(g) injunction and which thus violated the Veil Piercing Settlement. On March 8, 1996, the Company, along with certain other Released Parties commenced the Second Adversary Proceeding in 49 the Bankruptcy Court against Celotex and Jim Walter Corporation seeking (1) a declaration that the Former Celotex Plan did not contain the Section 524(g) injunction agreed upon by Celotex and Jim Walter Corporation and thus violated the Veil Piercing Settlement and (2) a mandatory injunction compelling Celotex to amend the Former Celotex Plan to incorporate a provision for a Section 524(g) injunction or an injunction acceptable to the Released Parties that provided the Released Parties the same protection which would be afforded to them by Section 524(g). On May 28, 1996, the Bankruptcy Court entered an Order granting Plaintiff's Motion for Summary Judgment in part and denying the Motions for Summary Judgment filed by Celotex and Jim Walter Corporation. The Bankruptcy Court's Order declared that: (i) the Veil Piercing Settlement was a valid agreement binding all signatories, including Celotex and Jim Walter Corporation; (ii) the Former Celotex Plan did not contain a Section 524(g) injunction; and (iii) Celotex had not proposed an injunction acceptable to the Released Parties that provided the Released Parties the same protection which would be afforded to them by Section 524(g), thus violating the Veil Piercing Settlement. On June 7, 1996, the Bankruptcy Court (1) made its Order granting Plaintiffs' Motion for Summary Judgment in part a final order and (2) denied without prejudice Plaintiffs' Emergency Motion for Injunctive Relief, which sought an injunction mandating that Celotex and Jim Walter Corporation comply with the Veil Piercing Settlement. Celotex and Jim Walter Corporation each filed notices of appeal from, inter alia, the Bankruptcy Court's Order granting in part Plaintiffs' Motion for Summary Judgment. By order dated June 19, 1996, the Celotex Bankruptcy Court denied confirmation of the Former Celotex Plan and ordered that any new plans must be submitted by July 12, 1996. On July 12, 1996, the Bodily Injury Plan was filed by Celotex, Jim Walter Corporation, the Asbestos Bodily Injury Claimants Committee and others and the competing Property Damage Plan was filed by the Asbestos Property Damage Claimants Committee. The Company filed objections to both plans, on the grounds that they did not comply fully with the Veil Piercing Settlement. On August 23, 1996, both the Bodily Injury Plan proponents and the Property Damage Plan proponents filed amended plans. The Property Damage Plan, as amended, provides for a Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to all claimants, but reserves the right to seek confirmation of the Bodily Injury Plan even if the asbestos property damage claimants class votes against that plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the property damage claimants class, that would appear to preclude a Section 524(g) injunction as to asbestos property damage claims. However, in such event the Bodily Injury Plan would still provide for an injunction against asbestos property damage claims to the extent such an injunction is allowed by Section 105 of the Bankruptcy Code. Both plans require the approval of creditors and confirmation by the Celotex Bankruptcy Court. A confirmation hearing concerning the Bodily Injury Plan, as amended, and the Property Damage Plan, as amended, is currently scheduled to commence on October 7, 1996. Jim Walter Homes/Mid-State Homes. Jim Walter Homes and Mid-State Homes, together with Mid-State Trust II and certain other parties, were involved in litigation, primarily in the Bankruptcy Court, with approximately 750 owners of 446 houses constructed by Jim Walter Homes in south Texas. The homeowners sought damages based upon alleged construction defects, common law fraud, and violations of the Texas Deceptive Trade Practices Act, the Texas Consumer Credit Code, federal and state debt collections statutes and the Racketeering Influence Corruptions and Practices Act. The litigation was settled pursuant to a settlement agreement (the "Texas Settlement Agreement") which was approved by the Bankruptcy Court on July 13, 1995. The settlement figure was approximately $3.6 million in account balance reductions (of which approximately $1.25 million represents a principal reduction), plus an approximate aggregate payment of $27,500 in cash to certain homeowner claimants and $2.9 million as attorney's fees (of which $900,000 was deferred and is payable over the next five years). The Texas Settlement Agreement has a provision for the attorney for the homeowner claimants to indemnify and hold harmless the defendants from any and all claims, demands, causes of actions, lawsuits and settlements by the homeowners. Further, it provides for the Bankruptcy Court to retain jurisdiction over any claims which are not resolved by the Texas Settlement Agreement. Cases involving approximately 22 non-settling homeowner claimants will be resolved on an individual basis before the 50 Bankruptcy Court and, although there can be no assurance as to the ultimate outcome, the Company has filed motions it believes to be dispositive of the remaining issues. In May 1995 Jim Walter Homes and Mid-State Homes settled a class action by purchasers of houses constructed by Jim Walter Homes in South Carolina since December 27, 1989 in which the plaintiffs contended that Jim Walter Homes violated certain provisions of the South Carolina Consumer Protection Code (the "South Carolina Statute") relating to a borrower's right to choose the borrower's attorney in certain transactions. Jim Walter Homes and Mid-State Homes had filed an action in the Bankruptcy Court for a declaratory judgment with respect to their liability, if any, to purchasers of houses built by Jim Walter Homes in South Carolina from July 1, 1982 (the date on which the South Carolina Statute become effective) to December 27, 1989. The settlement required a cash payment of approximately $3 million, which after application of these settlement proceeds to pay existing arrearages on the homeowners' mortgages resulted in a net cash outlay of approximately $1,050,000. In addition, legal fees of approximately $360,000 were paid. On November 22, 1995, the Bankruptcy Court approved the settlement and distribution pursuant to the settlement has been completed. Jim Walter Resources. On May 31, 1995 the Company and Jim Walter Resources commenced a lawsuit in the Circuit Court for Tuscaloosa County, Alabama against a group of insurance companies with which the Company has business interruption insurance seeking damages in the amount of $25 million for loss from interruption of Jim Walter Resources' business resulting from a fire in November 1993 in Jim Walter Resources' Mine No. 5. See "Business and Properties--Jim Walter Resources" and Note 12 ("Suit by the Company and Jim Walter Resources, Inc. for Business Interruption Losses") of Notes to Financial Statements. The insurers issued policies insuring various percentages of the risk. The complaint filed by the Company and Jim Walter Resources seeks payment of the amounts claimed to be due under the insurance policies in question and a declaratory judgment that the policies in question are not void or voidable due to any alleged failure to disclose or lack of fortuity. Certain of the insurers have counterclaimed for rescission on the basis of nondisclosure and lack of fortuity. The Company and Jim Walter Resources are also seeking a declaratory judgment stating that each of the insurers is liable for its pro rata share of the business interruption loss. In addition, the Company and Jim Walter Resources have asserted a claim for bad faith refusal to pay against certain insurers. The Company has entered into settlements with several insurers who, in the aggregate, have paid approximately $11.7 million reducing the contract claims in the lawsuit to approximately $12.7 million. The Company and Jim Walter Resources continue to pursue the litigation against the remaining insurers and a trial is tentatively scheduled for October 21, 1996. Although there can be no assurance as to the ultimate outcome, the Company and Jim Walter Resources believe their claim is meritorious. See Note 12 ("Suit by the Company and Jim Walter Resources, Inc. for Business Interruption Losses") of Notes to Financial Statements. U.S. Pipe--Environmental Penalty. U.S. Pipe entered into an Administrative Consent Order in July 1995 with the New Jersey Department of Environmental Protection pursuant to which it agreed, among other things, to pay a civil penalty of $187,000, which has been paid in full, to resolve alleged violations of its storm water permit regarding its plant in Burlington, New Jersey. The Company is currently conducting a study as required by the Administrative Consent Order to determine what further actions are necessary to comply with such order. The Company does not expect the civil penalty or any other aspect of the order to have a materially adverse effect on its consolidated financial position. See "Business and Properties--Environmental". Other. The Company and its subsidiaries are involved in various other proceedings 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 because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. Management does not expect that any of such other proceedings will have a material adverse effect on the Company's consolidated financial position. 51 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is a list showing the names, ages (as of September 1, 1996) and positions of all directors of the Company, and, where applicable, the executive office or offices held by each director with the Company.
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------ James W. Walter........................... 73 Chairman Emeritus and Director. Kenneth E. Hyatt.......................... 56 Director; Chairman, President and Chief Executive Officer. William H. Weldon(1)...................... 64 Director; Executive Vice President and Chief Financial Officer. Howard L. Clark, Jr....................... 52 Director. James B. Farley........................... 65 Director. Eliot M. Fried............................ 63 Director. Perry Golkin.............................. 43 Director. James L. Johnson.......................... 69 Director. Michael T. Tokarz......................... 46 Director.
- ------------ (1) Mr. Weldon has announced his intention to retire on September 30, 1996. Effective October 1, 1996 Richard E. Almy will succeed him as a director of the Company and Dean M. Fjelstul will succeed him as the Chief Financial Officer of the Company. James W. Walter has been a director of the Company since 1988. Mr. Walter retired as Chairman of the Company effective October 6, 1995 and thereafter became the Chairman Emeritus. Mr. Walter founded Walter Construction Co., a predecessor of Original Jim Walter, in 1948 and Original Jim Walter (incorporated in 1955). He was President and Chief Executive Officer of Original Jim Walter from 1955 to 1963, Chairman and Chief Executive Officer from 1963 to 1983 and Chairman until 1988. He is a director of Anchor Glass Container Corporation and Contel Cellular, Inc. 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, he also served as Chief Operating Officer of the Company. He was elected a director on September 12, 1995. Mr Hyatt served as President and Chief Executive Officer and a director of Celotex from 1990 until shortly prior to his election, effective September 1, 1995, as President and Chief Operating Officer of the Company. Mr Hyatt held various management and executive positions with various subsidiaries of Original Jim Walter from 1966 until 1984, at which time he was named Vice President and Group Executive of Original Jim Walter. Following Original Jim Walter's leveraged buyout in 1988 by KKR, Mr. Hyatt joined with an investor group in the acquisition of Celotex and certain related entities. In October 1990 Celotex and one of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 in the Celotex Bankruptcy Court as a result of massive litigation involving asbestos-related liabilities. The Celotex Settlement Fund Recipient is a principal stockholder of the Company. See "Security Ownership of Management and Principal Stockholders--Ownership of Principal Stockholders". William H. Weldon was elected a director of the Company on June 1, 1996. Since December 1, 1995 he has been Executive Vice President and Chief Financial Officer of the Company. Mr. Weldon had been Senior Vice President-Finance and Chief Accounting Officer of the Company since November 1991. He previously served as Vice President, Controller and Chief Accounting Officer of the Company from 1988 to 1991. Previously he served as Vice President and Controller (1977-1988), Controller (1972-1977) and Assistant Controller (1970-1972) of Original Jim Walter. Howard L. Clark, Jr. has been the Vice Chairman of Lehman, an investment-banking firm, since February 1993; prior thereto he served as Chairman and Chief Executive Officer of Shearson Lehman 52 Brothers, Inc. Prior thereto he was an Executive Vice President and the Chief Financial Officer of American Express Company, a financial services firm. He also is a director of Lehman, Plasti-Line, Inc., The Maytag Corporation, and Fund American Enterprises Holdings, Inc. Mr. Clark has been a director of the Company since March 17, 1995. James B. Farley is the retired Chairman of the Board, and a current Trustee, of Mutual of New York, a life insurance company. He served as Chairman and Chief Executive Officer of Mutual of New York from 1989 to 1994. He also is a director of Ashland Oil, Inc. and Harrah's Entertainment Company. Mr. Farley has been a director of the Company since March 17, 1995. Eliot M. Fried has been a Managing Director of Lehman or Shearson Lehman Brothers, Inc. since 1991 and is Co-chairman of Lehman's Firm Wide Investment Committee. He served as a Senior Vice President of a predecessor firm of Lehman, from 1982 to 1991. He also is a director of Bridgeport Machines, Inc., Energy Ventures, Inc., Sun Distributors L.P. and Vernitron Corporation. Mr. Fried has been a director of the Company since March 17, 1995. Perry Golkin is a member of KKR & Co. L.L.C. which is the general partner of KKR. He is also a general partner of KKR Associates, L.P. Prior to 1995, he was executive of KKR. He is also a director of K-III Communications Corporation and American Re Corporation. Mr. Golkin was a director of the Company from 1987 to March 2, 1995. Mr. Golkin has been a director of the Company since November 14, 1995. James L. Johnson is Chairman Emeritus of GTE Corporation, a telephone company and cellular service provider. From April 1988 to May 1992 he was Chairman and Chief Executive Officer of GTE. He also is a director of Contel Cellular, Inc., CellStar Corporation, The FINOVA Group Inc., Harte-Hanks Communications Inc. and Valero Energy Corp. and a Trustee of Mutual of New York. Mr. Johnson has been a director of the Company since March 17, 1995. Michael T. Tokarz is a member of KKR & Co. L.L.C. which is the general partner of KKR. He is also a general partner of KKR Associates, L.P. Prior to 1993 he was an executive of KKR. He also is a director of Safeway, Inc. K-III Communications Corporation, Flagstar Companies, Inc., Flagstar Corporation, Neway Anchorlok International, Inc., KSL Recreation Corporation, IDEX Corporation and United Fixtures Company. Mr. Tokarz has been a director of the Company since 1987. Except as described under "Board of Directors" below, directors of the Company are elected by the stockholders of the Company. Each director holds office until his successor is elected and qualified. The Company is not aware of any family relationships among any of the foregoing directors. 53 Set forth below is a list showing the names, ages (as of September 1, 1996) and positions of the executive officers of the Company who are not directors of the Company.
NAME AGE OFFICES - ------------------------------------------ --- ------------------------------------------ Richard E. Almy........................... 54 Executive Vice President and Chief Operating Officer of the Company(1) William Carr.............................. 66 President and Chief Operating Officer of Jim Walter Resources Dean M. Fjelstul.......................... 54 Senior Vice President--Finance of the Company(2) Frank A. Hult............................. 45 Vice President, Controller and Chief Accounting Officer of the Company Donald M. Kurucz.......................... 57 Vice President and Treasurer of the Company Robert W. Michael......................... 54 Senior Vice President and Group Executive of the Company; President and Chief Operating Officer of Jim Walter Homes Edward A. Porter.......................... 49 Vice President General Counsel and Secretary of the Company William N. Temple......................... 63 Senior Vice President and Group Executive of the Company; President and Chief Operating Officer of U.S. Pipe David L. Townsend......................... 42 Vice President Administration of the Company
- ------------------- (1) Mr. Almy will succeed Mr. Weldon as a director of the Company effective October 1, 1996. (2) Mr. Fjelstul will succeed Mr. Weldon as the Chief Financial Officer of the Company effective October 1, 1996. Richard E. Almy has been Executive Vice President and Chief Operating Officer of the Company since June 1996. Previously, he was President of JW Aluminum (1991-1996) and JW Window Components (1995-1996). William Carr has been President and Chief Operating Officer of Jim Walter Resources since 1991; prior thereto he was a Senior Executive Vice President and Chief Operating Officer of Jim Walter Resources and President of its Mining Division since 1976. He was a Vice President of Original Jim Walter from 1976 to 1988. Dean M. Fjelstul has been Senior Vice President--Finance of the Company since June 1996. Previously, he was employed by Alliant Techsystems as Vice President and Chief Financial Officer (1990-1996). Prior thereto he served in various financial management capacities with Honeywell, Inc. during a 22-year tenure with that company. Frank A. Hult has been a Vice President and the Chief Accounting Officer of the Company since 1995. Previously, he was a Vice President (since 1994), the Controller (since 1991), Assistant Controller and Chief Accountant (1989-1991) and Manager of Budgets (1988-1989) of the Company. Prior thereto he was Manager of Budgets (1984-1988) and Financial Analyst (1978-1981) of Original Jim Walter and Manager-Operations Administration (1981-1984), Plant Controller (1975-1978) and Cost Accountant (1974-1975) for Celotex. Donald M. Kurucz has been a Vice President and the Treasurer of the Company since 1991; he was Treasurer of the Company from 1988-1991. Previously he served as Treasurer (1977-1988) and Assistant Treasurer (1975-1977) of Original Jim Walter. Robert W. Michael has been a 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 a 54 Vice President of Original Jim Walter from 1984-1988. 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 Homes (1964-1966). 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 in various legal positions (1980-1988). William N. Temple has been a Senior Vice President and Group Executive of the Company since 1991 and President and Chief Operating Officer of U.S. Pipe since 1993; he was a Vice President of the Company from 1988 to 1991 and, from 1974, was a Vice President of Original Jim Walter. Previously he served as President of the former Fasteners and Special Products Division of U.S. Pipe and Vice President of U.S. Pipe (1972-1974), President of the former Southeastern Bolt and Screw division of U.S. Pipe (1971-1974) and Controller of U.S. Pipe (1965-1971). David L. Townsend has been a Vice President of the Company since 1988. Previously he served as a Vice President (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. 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. BOARD OF DIRECTORS The Plan of Reorganization and the Charter provide that, upon emerging from Chapter 11 on the Effective Date of the Plan of Reorganization, the Board of Directors of the Company shall consist of nine members until March 17, 1998, the third anniversary of the Effective Date of the Plan of Reorganization (the "Initial Three Year Term"), of which: (i) three directors initially were James W. Walter, G. Robert Durham and Kenneth J. Matlock, their successors to be selected by the remaining directors from the senior officers of the Company (William H. Weldon and Kenneth E. Hyatt are now serving as successors to G. Robert Durham and Kenneth J. Matlock, respectively; Mr. Weldon has announced his intention to retire on September 30, 1996 and will be succeeded as a director by Richard E. Almy); (ii) two directors (currently Michael T. Tokarz and Perry Golkin) are to be designated by KKR; (iii) two directors (currently, Howard L. Clark, Jr. and Eliot M. Fried) are to be designated by Lehman; and (iv) two directors (currently James B. Farley and James L. Johnson) are to be Independent Directors (as defined in the following paragraph). Independent Directors are defined as persons who (i) are not (a) officers, affiliates, employees, Interested Stockholders, consultants or partners of any Significant Stockholder or any affiliate of any Significant Stockholder or of any entity that was dependent upon any Significant Stockholder or any affiliate of any Significant Stockholder for more than 5% of its revenues or earnings in its most recent fiscal year, (b) officers, employees, consultants or partners of the Company or any of its affiliates, or officers, employees, Interested Stockholders, consultants or partners of any entity that was dependent upon the Company or any of its affiliates for more than 5% of its revenues or earnings in its most recent fiscal year or (c) any relative or spouse of any of the foregoing persons or a relative of a spouse of any of the foregoing persons and (ii) are selected by management of the Company from a list of qualified candidates provided by an independent search firm selected by management and Lehman. For these purposes "Interested Stockholder" means, with respect to any person, any other person that together with its affiliates and associates "beneficially owns" (as defined in Rule 13d-3 under the Exchange Act) 5% or more of the equity securities of such person, and "Significant Stockholder" means an Interested Stockholder of the Company. 55 If, at any time during the Initial Three Year Term, Lehman and its affiliates fail to have beneficial ownership of 8% or more of the outstanding Common Stock (without giving effect to shares of Common Stock held in escrow pursuant to the Plan of Reorganization--see Footnote (3) to "Security Ownership of Management and Principal Stockholders--Ownership of Principal Stockholders" herein) (the "Outstanding Common Stock") and KKR and its affiliates have, at such time, beneficial ownership of 8% or more of the Outstanding Common Stock, then KKR shall have the right to compel one director selected by Lehman (from among those designated by Lehman) to resign as a director and to appoint a successor. If, at any time during the Initial Three Year Term, KKR and its affiliates fail to have beneficial ownership of 8% or more of the Outstanding Common Stock and Lehman and its affiliates have, at such time, beneficial ownership of 8% or more of the Outstanding Common Stock, then Lehman shall have the right to compel one director selected by KKR (from among those designated by KKR) to resign as a director and to appoint a successor. If, at any time during the Initial Three Year Term, either Lehman and its affiliates or KKR and its affiliates fail to have beneficial ownership of 5% or more of the Outstanding Common Stock, then the directors appointed by Lehman or by KKR, respectively, shall resign and the remaining directors of the Company shall appoint their successor(s) for the remainder of the Initial Three Year Term; provided, however, that KKR shall be entitled to designate one director during the Initial Three Year Term if, and so long as, the number of shares of Common Stock beneficially owned by KKR and its affiliates, together with shares of Common Stock held in escrow pursuant to the Plan of Reorganization that would be distributed to KKR or its affiliates upon release from escrow, shall together equal 5% or more of the then outstanding Common Stock of the Company, including, for purposes of this calculation only, any shares held in escrow pursuant to the Plan of Reorganization. After the Initial Three Year Term, the Charter currently provides that all the directors of the Company shall be elected by the stockholders of the Company annually for a term of one year each. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Company has established an Audit Committee, a Compensation Committee, a Finance Committee, a Nominating Committee, an Environmental, Health and Safety Committee and one special committee, the Tax Oversight Committee. The Board of Directors may, from time to time, establish certain other committees to facilitate the management of the Company. The Audit Committee is responsible for meeting with representatives of the Company's independent certified public accountants and financial management to review accounting, internal control, auditing and financial reporting matters, and is also responsible, among other things, for maintaining liaison with and exercising such supervision of the actions of said public accountants in whatever manner and to whatever extent shall be deemed, at its discretion, necessary, proper and in the best interest of the Company and its stockholders. The Audit Committee consists of four directors who are not and never have been employees of the Company (Eliot M. Fried, Chairman, James B. Farley, Perry Golkin and James L. Johnson). The Compensation Committee is responsible for reviewing and approving officer and executive salaries of the Company and its subsidiaries in amounts over $100,000 annually and for reviewing and recommending for approval by the Board of Directors executive and key employee compensation plans, including incentive compensation, stock incentives and other benefits. The Compensation Committee consists of four directors who are not and never have been employees of the Company (James L. Johnson, Chairman, Howard L. Clark, Jr., James B. Farley and Michael T. Tokarz). The Finance Committee is responsible for recommendations to the Board of Directors concerning public and private financings, dividends, discretionary contributions by the Company under the Company's and its subsidiaries' employee benefit plans and other financial matters, approval of the designation of the investment fund managers for the Company's and its subsidiaries' employee benefit plans, and approval of investment of the Company's funds, by establishment of policies for investment 56 of funds by the Company's officers. The Finance Committee consists of four directors (James B. Farley, Chairman, Howard L. Clark, Jr., Michael T. Tokarz and James W. Walter). The Nominating Committee is responsible for establishing the criteria for and the qualifications of persons suitable for nomination as directors, including nominees recommended by stockholders, and reporting its recommendations to the Board of Directors. During the Initial Three Year Term, selection of directors is subject to restrictions discussed in "Board of Directors" above. The Nominating Committee consists of four directors (Howard L. Clark, Jr., Chairman, Perry Golkin, James L. Johnson and James W. Walter). The Environmental, Health and Safety Committee is responsible for receiving environmental, health and safety reports from the Company's and its subsidiaries' environmental counsel and engineers and health and safety personnel; examining and reporting on the Company's and its subsidiaries' compliance with environmental, reclamation, health and safety requirements and the policies pertaining thereto; reporting the same to the Board of Directors; approving the proposed scope of internal and independent environmental and health and safety audits; and periodically evaluating and recommending to the Board of Directors changes in the Company's and its subsidiaries' environmental, health and safety policies. The Environmental, Health and Safety Committee consists of four directors (Michael T. Tokarz, Chairman, James B. Farley, Eliot M. Fried and James L. Johnson). The Tax Oversight Committee is a special purpose temporary committee and is responsible for (i) approving all settlements and agreements by the Company or any of its subsidiaries regarding all Federal Income Tax Claims that are entitled to priority under the Bankruptcy Code and (ii) determining final resolution of certain contingencies regarding Federal Income Tax Claims, both as more fully described in the Plan of Reorganization. The members of the Tax Oversight Committee shall consist at all times of two Independent Directors and a director (or other person) designated by Lehman (Howard L. Clark, Jr., Chairman, James B. Farley and James L. Johnson). Pursuant to the Charter and By-laws, at all times during the Initial Three Year Term each committee of the Board of Directors (other than the Tax Oversight Committee, which shall be constituted as described above) shall include such number of directors (but in any event at least one director) designated by each of KKR and Lehman so that each of KKR and Lehman has representation on each such committee proportionate to the representation it has on the Board of Directors. The Charter provides that the foregoing provision of the By-laws and certain other provisions of the By-laws cannot be amended by the Board of Directors during the Initial Three Year Term unless 67% of the whole Board of Directors votes in favor of the amendment. Thereafter, the affirmative vote of a majority of directors will be required to amend those provisions. DIRECTORS' COMPENSATION Non-employee directors of the Company (Messrs. Clark, Farley, Fried, Golkin, Johnson, Tokarz and Walter (since the date of his retirement as an employee of the Company)) are paid retainer fees of $25,000 per year; committee chairmen receive an additional retainer fee of $5,000 per year. Each non-employee director also receives a fee of $1,500 for each Board of Directors or committee meeting attended and is reimbursed for travel and lodging expenses. The Company and its subsidiaries do not pay fees to directors who are employees of any of the Company and its subsidiaries. On April 11, 1995, the Board of Directors approved and adopted the Walter Industries, Inc. Directors' Deferred Fee Plan under which non-employee directors may elect to defer all or a portion of their director's fees. The deferred fees, at each electing director's option, are credited to either an income account or a stock equivalent account or divided between the two accounts. The income account is credited quarterly with interest at the prime rate and the stock equivalent account is credited with an amount equal to the number of equivalent shares of Common Stock which could have been purchased with the cash dividend, if any, which would have been payable had the participant been the actual 57 owner of the number of shares of Common Stock credited to his account. Payments begin, at the participant's election, upon the later of the termination of his services as a director or the date of retirement from his principal occupation or employment in such number of annual installments as shall be determined by the Company. Payments from the income account are in cash and payments from the stock equivalent account are in cash at the Common Stock's then current market value, or, at the Company's option, in shares of Common Stock. Mr. Farley has elected to have all of his director's fees credited to a stock equivalent account. Mr. Walter, Chairman Emeritus, entered into a consulting agreement upon his retirement from employment with the Company on October 6, 1995 (see "Certain Relationships and Certain Related Transactions"). During the fiscal year ended May 31, 1996, he received $87,580 pursuant to this agreement. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid to or accrued for the account of (i) the Chief Executive Officer of the Company and (ii) each of the next four most highly compensated executive officers of the Company whose cash compensation exceeded $100,000 during the fiscal year ended May 31, 1996, and (iii) one additional individual for whom disclosure would have been provided pursuant to clause (ii) above but for the fact that such individual was not serving as an executive officer of the Company at the end of the last fiscal year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ SECURITIES YEAR ANNUAL COMPENSATION UNDERLYING ALL OTHER ENDED -------------------------- OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION MAY 31 SALARY ($) BONUS ($)(1) (#)(2) ($)(3) - --------------------------------------- ------ ---------- ------------ ------------ ------------ G. Robert Durham....................... 1996 531,648 450,000 200,000 * Chairman of the Board 1995 466,764 1,225,000 0 67,598 and Chief Executive Officer 1994 460,214 400,000 0 69,275 (retired May 31, 1996) Kenneth E. Hyatt (4)................... 1996 340,245 300,000 150,000 * President and Chief Operating Officer 1995 (4) (4) (4) (4) 1994 (4) (4) (4) (4) William H. Weldon...................... 1996 211,548 210,000 75,000 * Executive Vice President and Chief 1995 183,618 565,000 0 26,320 Financial Officer 1994 173,688 160,000 0 25,798 William N. Temple...................... 1996 213,854 106,000 50,000 * Senior Vice President and Group 1995 205,202 287,000 0 128,596 Executive; President of U.S. Pipe 1994 180,608 120,000 0 18,665 William Carr........................... 1996 263,857 30,000 50,000 * President and Chief Operating Officer 1995 247,077 215,000 0 56,491 of Jim Walter Resources 1994 236,164 25,000 0 0 James W. Walter........................ 1996 158,677 250,000 200,000 * Chairman (retired October 6, 1995) 1995 370,366 1,225,000 0 52,576 1994 369,603 400,000 0 53,880
- ------------ * Not currently available. See footnote (3) (Footnotes continued on following page) 58 (Footnotes continued from preceding page) (1) For fiscal 1995, the amounts shown in this column include bonuses paid to the named executive officers pursuant to the Plan of Reorganization in addition to incentive bonus compensation. At the time of filing by the Company and virtually all of its subsidiaries under Chapter 11 of the Bankruptcy Code, accounting professionals for the official committees in the Chapter 11 cases recommended that the Company adopt a retention bonus arrangement, a common method of assuring retention of key personnel during bankruptcy proceedings. The Company decided not to adopt such a retention bonus plan, but determined instead to pay bonuses informally upon completion of the reorganization to key personnel who continued their employment with the Company and its subsidiaries during the pendency of the Chapter 11 cases (which were initiated on December 27, 1989 and concluded on March 17, 1995) despite the unavailability of long-term incentive compensation plans and the limitations on salaries and incentive compensation imposed by the Bankruptcy Court during such time. The Company's proposal to make such informal payments was incorporated in the Plan of Reorganization and approved by the Bankruptcy Court. Such bonuses were paid upon the Effective Date of the Plan of Reorganization in the amounts of $800,000; $800,000; $400,000; $175,000 and $175,000 to Messrs. Durham, Walter, Weldon, Temple and Carr, respectively. (2) Options were awarded pursuant to the 1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (3) The amounts shown in this column for fiscal 1994 and fiscal 1995 for Messrs. Durham, Walter and Weldon represent the Company's contributions for each of their accounts in the Walter Industries, Inc. Profit Sharing Plan (the "Profit Sharing Plan") and accruals for the related Supplemental Profit Sharing Plan (the "Supplemental Profit Sharing Plan") which provides benefits which would have been provided under the tax-qualified Profit Sharing Plan but for restrictions on such benefits imposed by the Internal Revenue Code of 1986, as amended (the "IRC"). The Profit Sharing Plan and the Supplemental Profit Sharing Plan amounts are for the plan years ended August 31, 1994 and 1995. Amounts for the plan year ended August 31, 1996 are not currently available, but are anticipated not to be materially different from amounts for the plan year ended August 31, 1995, except for Mr. Walter who retired during the fiscal year ended May 31, 1996, whose contribution under the Profit Sharing Plan is estimated to be $18,500 and Mr. Hyatt whose contributions under the Profit Sharing Plan and Supplemental Profit Sharing Plan are estimated to be $51,000. The amounts shown in this column for fiscal 1994 and 1995 for Messrs. Carr and Temple represent accruals for the Supplemental Pension Plan which provides benefits which would have been provided under a tax-qualified pension plan but for restrictions on such benefits imposed by the IRC. Amounts for the 1996 plan year are not currently available but are anticipated not to be materially different from the amounts for fiscal 1995. (4) Mr. Hyatt became an executive officer of the Company on September 1, 1995. He has been Chairman of the Board and Chief Executive Officer of the Company since June 1, 1996 and has been President since September 1, 1995. Between September 1, 1995 and June 1, 1996, he also served as Chief Operating Officer. In its fiscal year ended May 31, 1996, the Company was not subject to Section 162(m) of the IRC, which limits the deduction for compensation of certain officers to one million dollars annually unless certain stated performance goals are met. 59 OPTIONS GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION INDIVIDUAL GRANTS TERM -------------------------------------------------- ------------------------ % OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO EXERCISE UNDERLYING EMPLOYEES OR BASE OPTIONS IN FISCAL PRICE EXPIRATION NAME GRANTED(#)(1) 1996 ($/SH) DATE (2) 5% ($) (3) 10% ($) (3) - -------------------------------- ------------- ---------- -------- ---------- ---------- ----------- G. Robert Durham................ 200,000 13.3% $14.125 05/31/01 $ 780,495 $ 1,724,690 Kenneth E. Hyatt................ 150,000 10.0% 14.0625 09/01/05 1,162,958 2,412,258 William H. Weldon............... 75,000 5.0% 14.125 07/12/05 584,063 1,688,371 William N. Temple............... 50,000 3.3% 14.125 07/12/05 389,375 959,050 William Carr.................... 50,000 3.3% 14.125 07/12/05 389,375 959,050 James W. Walter................. 200,000 13.3% 14.125 10/06/00 608,805 1,311,082
- ------------ (1) All options included in this table will become exercisable in three equal installments commencing on the first anniversary of the date of grant and continuing on each of the two anniversaries thereafter. The right to exercise all of the options is contingent on the optionee's refraining from conduct which the Compensation Committee determines is contrary to the best interests of the Company (including but not limited to competition with the Company) and, except in the case of Messrs. Walter, Durham, and Weldon (see footnote (2) below), upon the optionee's remaining in the employ of the Company or a subsidiary of the Company until the date on which the installment becomes exercisable. (2) The right to exercise all of the options expires on the tenth anniversary of the date on which they were granted or, if earlier, three months after termination of employment (one year in the event of death or disability). However, in recognition of Messrs. Walter, Durham, and Weldon having continued in the Company's employ until its emergence from Chapter 11 and to reward them for their past, present and future services, exercisability of their options will not be contingent upon continued employment by the Company or a subsidiary (see footnote (1) above) and such options will not expire as a result of termination of employment until five years after such termination or, if later, one year after death. Since Messrs. Durham and Walter retired on May 31, 1996 and October 6, 1995, respectively, their options are scheduled to expire five years from their respective dates of retirement. (3) The amounts of hypothetical potential appreciation shown in these columns reflect required calculations at annual appreciation rates of 5% and 10% set by the Commission and, therefore, are not intended to represent either historical appreciation or anticipated future appreciation in the price of Common Stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ACQUIRED ON OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) EXERCISE VALUE ------------------------------ ------------------------- NAME (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ----------------------- ----------- ------------ ------------------------------ ------------------------- G. Robert Durham....... 0 0 0/200,000 0/0 Kenneth E. Hyatt....... 0 0 0/150,000 0/0 William H. Weldon...... 0 0 0/75,000 0/0 William N. Temple...... 0 0 0/50,000 0/0 William Carr........... 0 0 0/50,000 0/0 James W. Walter........ 0 0 0/200,000 0/0
60 PENSION PLANS The table below sets forth the aggregate estimated annual retirement benefits payable under the Pension Plan for Salaried Employees of Subsidiaries, Divisions and/or Affiliates of Walter Industries (the "Pension Plan") and under the Company's unfunded, non-qualified, Supplemental Pension Plan (the "Supplemental Pension Plan" and together with the Pension Plan, the "Pension Plans") for employees retiring at normal retirement age (65) on June 1, 1996 and is based on social security covered compensation in effect on June 1, 1996: PENSION PLAN TABLE
YEARS OF SERVICE --------------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------------------------------ ------- ------- ------- ------- ------- 150,000............................. 31,119 41,492 51,866 62,239 72,612 175,000............................. 36,651 48,867 61,084 73,301 85,518 200,000............................. 42,182 56,242 70,303 84,364 98,424 225,000............................. 47,713 63,617 79,522 95,426 111,330 250,000............................. 53,244 70,992 88,741 106,489 124,237 300,000............................. 64,307 85,742 107,178 128,614 150,049 350,000............................. 75,369 100,492 125,616 150,739 175,862 400,000............................. 86,432 115,242 144,053 172,864 201,674 450,000............................. 97,494 129,992 162,491 194,989 227,487 500,000............................. 108,557 144,742 180,928 217,114 253,299 550,000............................. 119,619 159,492 199,366 239,239 279,112 600,000............................. 130,682 174,242 217,803 261,364 304,924
Benefit payments under the Pension Plans are based on final average annual compensation (including overtime pay, incentive compensation and certain other forms of compensation reportable as wages taxable for Federal income tax purposes) for the five consecutive years within the final ten years of employment prior to normal retirement age (65) which produce the highest average. This is equivalent to the sum of the amounts included under the Salary and Bonus column headings in the Summary Compensation Table above. Benefit amounts are shown on a straight-line annuity basis, payable annually upon retirement at age 65. No offsets are made for the value of any social security benefits earned. The Company makes accruals for the Supplemental Pension Plan only for such employees as to which the pension benefits under the Pension Plan have been limited by the IRC. In the case of the Supplemental Pension Plan, the applicable company may, in its sole discretion, elect to furnish any and all benefits due by purchasing annuities, or by other means at its disposal, including payment of the present value of such benefits. Only employees of the Company's subsidiaries (except Jim Walter Homes, Mid-State Homes, Best Insurors, Inc., Best Insurors of Mississippi, Inc., Jim Walter Insurance Services, Inc., Dixie Building Supplies, Inc. ("Dixie Building Supplies") and Coast to Coast Advertising, Inc.) participate in the Pension Plans. Of the named executive officers, only Messrs. Carr and Temple are participants in the Pension Plans with twenty and ten years of credited service, respectively; Messrs. Durham, Hyatt, Walter and Weldon are not participants in the Pension Plans. Profit Sharing Plans. Under the Profit Sharing Plan and the Supplemental Profit Sharing Plan, amounts contributed by the Company for the benefit of the participants become payable upon termination of employment. In the case of the Supplemental Profit Sharing Plan, accrued amounts are payable, at the discretion of the Company, in either a lump sum or in sixty (60) equal monthly installments. While the Profit Sharing Plan provides retirement benefits for all salaried employees of the Company and certain of its subsidiaries not covered by the Pension Plans, the Company makes 61 contributions to the Supplemental Profit Sharing Plan only for such employees as to which the full contribution under the Profit Sharing Plan has been limited by the IRC. For the Supplemental Profit Sharing Plan year to end August 31, 1996, only three employees, Messrs. Durham, Hyatt and Weldon, qualified for participation in the Supplemental Profit Sharing Plan. Amounts for the plan year ended August 31, 1996 are not currently available. COMPENSATION COMMITTEE INTERLOCKS OR INSIDER PARTICIPATION IN COMPENSATION DECISIONS During the fiscal year ended May 31, 1996, three employee directors (James W. Walter (retired October 6, 1995), G. Robert Durham, and Kenneth E. Hyatt) participated in deliberations of the Company's Board of Directors concerning executive compensation. However, no employee director voted on executive compensation matters in which they were directly involved; instead they abstained on such occasions. CERTAIN RELATED TRANSACTIONS In July 1986, Waltsons, Inc., a family owned corporation in which James W. Walter, Chairman Emeritus and a Director of the Company, has a twenty percent (20%) interest, acquired a fifty percent (50%) interest in the operations of Booker & Company, Inc. ("Booker"), a wholesale distributor of building supplies and material headquartered in Tampa, Florida. For over 30 years, Booker has been a supplier of various building supplies and materials to Dixie Building Supplies. During the fiscal year ended May 31, 1996, Booker's sales of building supplies and materials to such subsidiary totaled $5,679,000. The Company believes that the terms of the transactions between the Company and Booker are at least as favorable to the Company as those that could be obtained from unaffiliated third parties. The Company entered into a consulting agreement with Mr. Walter effective upon his retirement on October 6, 1995. The term of the agreement is for a period of three years, commencing October 6, 1995, during which time Mr. Walter will render to the Company such services of an advisory or consulting nature as the Company may reasonably require. Mr. Walter will be paid an annual consulting fee of $150,000. The agreement also contains a restrictive covenant prohibiting, during the term of the agreement and for a period of three years after its termination, Mr. Walter's employment by any person, firm or corporation which is engaged in business in competition with the Company or its subsidiaries, or his engaging in such business for his own account. 62 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS The following tables furnish information, as of August 5, 1996, as to: (i) shares of Common Stock beneficially owned by each director and each executive officer (including one retired executive officer) of the Company named in the Summary Compensation Table herein; (ii) shares of Common Stock beneficially owned by all current directors and executive officers of the Company as a group; and (iii) shares of Common Stock known by the Company to be beneficially owned by any person owning beneficially more than five percent (5%) of the outstanding shares of Common Stock, together with such person's address. (Except as indicated below, to the knowledge of the Company each person indicated in the following tables has sole voting and investment power as to the shares shown.) OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
NUMBER OF SHARES PERCENT OF COMMON NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED STOCK OUTSTANDING - -------------------------------------------------------- ------------------- ----------------- James W. Walter,........................................ 132,710(1)(2) * Chairman Emeritus and Director Kenneth E. Hyatt,....................................... 73,280(1)(3) * Chairman, Chief Executive Officer and President Howard L. Clark, Jr..................................... (4) (4) Director James B. Farley......................................... 10,000 * Director Eliot M. Fried.......................................... (4) (4) Director James L. Johnson........................................ 10,000 * Director Perry Golkin............................................ 14,268,589(5) 26.0(5) Director Michael T. Tokarz....................................... 14,268,589(5) 26.0(5) Director G. Robert Durham........................................ 76,666(6) * (Director and Chief Executive Officer-retired May 31, 1996) William H. Weldon....................................... 31,950(1)(7) * Director, Executive Vice President and Chief Financial Officer William N. Temple,...................................... 20,140(1)(8) * Senior Vice President and Group Executive; President of U.S. Pipe William Carr............................................ 38,355(1)(9) * President and Chief Operating Officer of Jim Walter Resources, Inc. All current directors and executive officers as a group (19 individuals)........................................ 14,680,910(1)(10) 26.8(1)(10)
- ------------ * Less than 1% of outstanding Common Stock (1) Includes 6,234, 23,689, 2,493, 1,246, 4,363 and 3,601,378 shares of Common Stock issued to an escrow account for the benefit of Messrs. Hyatt, Walter, Weldon, Temple and Carr, and to all current directors and executive officers as a group (including 3,553,380 shares for the benefit of the KKR Investors (as defined below)), respectively, on September 13, 1995 pursuant to the Plan of Reorganization. To the extent that certain contingencies regarding Federal Income Tax Claims of the Company are resolved satisfactorily, such escrowed shares will be distributed to such (Footnotes continued on following page) 63 (Footnotes continued from preceding page) persons under the Plan of Reorganization. To the extent such matters are not settled satisfactorily, the escrowed shares will be returned to the Company and canceled. Until such matters are finally determined, such persons will have the power to exercise voting rights with respect to such respective escrowed shares of Common Stock. See "Description of Capital Stock--Additional Stock Issuances". For so long as such persons have the power to exercise voting rights with respect to all such escrowed shares, or if all such escrowed shares were distributed to such persons, such persons will beneficially own such 6,234, 23,689, 2,493, 1,246, 4,363 and 3,601,378 shares of Common Stock, respectively. (2) Includes options to purchase 66,666 shares, which became exercisable as of July 12, 1996. (3) Includes options to purchase 50,000 shares which will become exercisable as of September 1, 1996. Also includes 200 shares held by Mr. Hyatt's children, of which Mr. Hyatt disclaims beneficial ownership. (4) Messrs. Clark and Fried are Vice Chairman and Managing Director, respectively, of Lehman. See "Ownership of Principal Stockholders" below for information concerning ownership of shares by Lehman's affiliate, Lehman Holdings. (5) Messrs. Tokarz and Golkin are general partners of KKR Associates, L.P., which is the sole general partner of each of JWC Associates, L.P., JWC Associates II, L.P. and KKR Partners II, L.P. (the "KKR Investors") and Channel One Associates, L.P. ("Channel One"), and thus Messrs. Tokarz and Golkin may be deemed to be beneficial owners of the shares owned by the KKR Investors and Channel One (see "Ownership of Principal Stockholders" below). Messrs. Tokarz and Golkin disclaim beneficial ownership of such shares. The number of shares of Common Stock includes 3,553,380 shares of Common Stock issued to an escrow account on September 13, 1995 for the benefit of the KKR Investors pursuant to the Plan of Reorganization. See Footnote (3) under "Ownership of Principal Stockholders" below. For so long as the KKR Investors have the power to exercise voting rights with respect to all such escrowed shares, or if all such escrowed shares were distributed to the KKR Investors, Messrs. Tokarz and Golkin may be deemed to be beneficial owners of such 3,553,380 escrowed shares of Common Stock. (6) Includes options to purchase 66,666 shares which became exercisable as of July 12, 1996. (7) Includes options to purchase 25,000 shares which became exercisable as of July 12, 1996. (8) Includes options to purchase 16,666 shares which became exercisable as of July 12, 1996. (9) Includes options to purchase 16,666 shares which became exercisable as of July 12, 1996. (10) Includes 14,268,589 shares of Common Stock beneficially owned by the KKR Investors and Channel One, which may be deemed to be beneficially owned by Messrs. Tokarz and Golkin. See Footnote (5) above. Does not include shares of Common Stock owned by Lehman Holdings. See Footnote (4) above. Includes 22,023 shares beneficially owned by Sam J. Salario, who retired as President of Mid-State Homes and a Vice President of Jim Walter Homes on August 31, 1996. 64 OWNERSHIP OF PRINCIPAL STOCKHOLDERS
NAME AND COMPLETE MAILING ADDRESS NUMBER OF SHARES PERCENT OF CLASS - -------------------------------------------------------------- ---------------- ---------------- The Celotex Settlement Fund Recipient......................... 10,941,326(1) 19.9(1) 1 Metro Center 4010 Boy Scout Boulevard Tampa, Florida 33607 Lehman Brothers Holdings, Inc................................. 7,869,525(2) 14.3(4) 3 World Financial Center New York, NY 10285 The KKR Investors............................................. 14,268,589(3) 26.0 (JWC Associates, L.P., JWC Associates II, L.P. and KKR Partners II, L.P. and Channel One Associates, L.P.) c/o Kohlberg Kravis Roberts & Co., L.P. 9 West 57th Street New York, NY 10009
- ------------ (1) Celotex, on behalf of the Celotex Settlement Fund Recipient, has agreed with the Company and Lehman to vote and execute written consents with respect to the shares of Common Stock held by it in proportion to the votes cast or consents executed and delivered by all other holders of Common Stock on each matter voted on by stockholders. Identical restrictions on the voting of the Celotex Settlement Fund Recipient's Common Stock are contained in the Charter and in the Plan of Reorganization. See "Description of Capital Stock--Stockholder's Agreement" and "--Tag-Along and Voting Rights Agreement". (2) Lehman transferred the shares of Common Stock which it received pursuant to the Plan of Reorganization to its affiliate, Lehman Holdings. (3) The shares of Common Stock beneficially owned by the KKR Investors are as follows: 9,610,144 shares are beneficially owned by JWC Associates, L.P.; 63,680 shares are beneficially owned by JWC Associates II, L.P.; and 232,965 shares are beneficially owned by KKR Partners II, L.P., including 3,446,979, 22,841 and 83,560 shares, respectively, issued to an escrow account on September 13, 1995 pursuant to the Plan of Reorganization. To the extent that certain contingencies regarding Federal Income Tax Claims of the Company are resolved satisfactorily, up to 3,553,380 of the escrowed shares will be distributed to the KKR Investors under the Plan of Reorganization. To the extent such matters are not settled satisfactorily, the escrowed shares will be returned to the Company and canceled. Until such matters are fully determined, the KKR Investors will have the power to exercise voting rights with respect to such shares of Common Stock. See "Description of Capital Stock--Additional Stock Issuances". For so long as the KKR Investors have the power to exercise voting rights with respect to all such escrowed shares, or if all such escrowed shares were distributed to the KKR Investors, the KKR Investors will beneficially own such 3,553,380 shares of Common Stock. The Company has been advised that as of August 5, 1996 Channel One beneficially owned 4,361,800 shares. KKR Associates, L.P. is the sole general partner of each of the KKR Investors and Channel One. The general partners of KKR Associates, L.P. are Henry R. Kravis, George R. Roberts, Robert I. MacDonnell, Michael W. Michelson, Saul A. Fox, Paul E. Raether, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Scott M. Stuart, Clifton S. Robbins and Edward A. Gilhuly. (4) As a result of errors by the balloting agent in recording elections to receive cash and Senior Notes in lieu of a portion of the Common Stock to be received under the Plan of Reorganization by holders of subordinated debt of the Company outstanding prior to the Effective Date of the Plan of Reorganization, the number of shares of Common Stock to be received by Lehman and other holders of such subordinated debt was determined from a ruling by the Bankruptcy Court as to which elections were proper. Appeals have been filed to the Bankruptcy Court's decision, which appeals, if successful, could cause additional shares of Common Stock to be delivered to Lehman (in lieu of a portion of the cash and Senior Notes previously delivered to Lehman) pursuant to the Plan of Reorganization. When such appeals have been finally adjudicated, such number of shares will be finally determinable. See Note 12 ("Litigation Related to Chapter 11 Distributions to Certain Holders of Subordinated Notes and/or Debentures") of Notes to Financial Statements.
65 DESCRIPTION OF CERTAIN INDEBTEDNESS CREDIT FACILITIES On January 22, 1996, the Company and certain of its subsidiaries completed a $550 million financing with a syndicate of banks led by NationsBank National Association (South). The financing consisted of a $365 million revolving credit facility ("Revolving Credit Facility"), a $125 million six-year term loan ("Term Loan A") and a $60 million seven-year term loan ("Term Loan B")(collectively, the "Credit Facilities"). Proceeds from the financing, together with $75 million drawn under the Mid-State Trust V Variable Funding Loan Agreement were used to redeem in full $490 million aggregate amount of the Senior Notes at a redemption price of 101% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption and to replace an existing $150 million bank credit facility, both issued in connection with the Company's emergence from bankruptcy in March 1995. The Credit Facilities are secured by a pledge of intercompany notes and stock of certain subsidiaries of the Company. Net cash proceeds from certain asset sales must be applied to permanently reduce the Credit Facilities and beginning with fiscal year ending May 31, 1997, 50% of the excess cash flow (as defined in the Credit Facilities) must be used to permanently reduce Term Loan A and Term Loan B. Term Loan A amortizes over a six year period. Scheduled principal payments to be made in each of the five years from May 31, 1996 are $15,000,000, $16,250,000, $21,250,000, $25,000,000 and $25,000,000, respectively. Term Loan B carries minimal amortization over six years with sizeable principal payments in the seventh year. Scheduled principal payments in each of the five years from May 31, 1996 are $1,000,000. The Credit Facilities contain a number of covenants, including restrictions on liens, indebtedness, leases, mergers, sales or disposition of assets, investments, dividends, repurchases of shares of capital stock, prepayment of indebtedness and capital expenditures, as well as financial covenants with respect to leverage ratios, interest coverage and fixed charge coverage ratios. Mid-State Holdings and Cardem Insurance are not parties to or governed by this facility. The borrowers are required to maintain a leverage ratio (the ratio of indebtedness of the borrowers to EBITDA of the borrowers) not more than a ratio of 3.75 to 1 for measurement periods in the year ended May 31, 1996, 3.00 to 1 for each measurement period in the year ending May 31, 1997 and 2.50 to 1 thereafter. The borrowers' interest coverage ratio (the ratio of EBITDA to interest expense) for all measurement periods is required to be at least 2.50 to 1. 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 1.0 to 1 in each of the measurement periods in the year ended May 31, 1996, a ratio ranging from 1.0 to 1 to 1.15 to 1 for measurement periods in the year ending May 31,1997 and 1.25 to 1 thereafter. DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The Company's authorized capital stock consists of 200,000,000 shares of Common Stock, par value $.01 per share. At September 3, 1996 there were 54,868,335 shares of Common Stock issued and outstanding. See "Additional Stock Issuances" below. Harris Trust and Savings Bank is the transfer agent and registrar for the Common Stock. COMMON STOCK The holders of the Common Stock are entitled to one vote for each share held of record on all matters as to which stockholders are entitled to vote. There are no cumulative voting rights in the election of directors. The quorum required at any stockholders' meeting for consideration of any matter is a majority of the issued and outstanding shares of Common Stock, represented in person or by proxy. 66 Holders of the Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available for dividends. See "Certain Risk Factors--Dividend Policy; Restrictions on Payment of Dividends" and "Dividend Policy". In the event of any liquidation, dissolution or winding up of the Company, the holders of the Common Stock are entitled to receive pro rata any assets distributable to stockholders in respect of shares held by them, after payment of all obligations of the Company. The outstanding shares of the Common Stock (including the Shares offered hereby) are duly authorized, validly issued, fully paid and nonassessable. ADDITIONAL STOCK ISSUANCES Pursuant to the Plan of Reorganization, the Company was or may be required to issue additional Common Stock to the holders of common stock of the Company immediately prior to the Effective Date of the Plan of Reorganization ("Original Stockholders") on the dates and in the amounts described below, in each case on a pro rata basis. Solely for the purpose of calculating the number of shares to be issued in these issuances, such additional Common Stock will be valued at a price per share of $22.86 (the "Common Stock Value Per Share"). Original Stockholders have received and will be entitled receive shares of Common Stock as follows: (a) On the date on which a final, non-appealable order is entered resolving the total amount of claims of the IRS against the Company or any of its subsidiaries (other than Cardem Insurance and J.W. Railroad) arising prior to the Effective Date of the Plan of Reorganization and entitled to priority under Section 507(a)(7) of the Bankruptcy Code ("Federal Income Tax Claims"), the Original Stockholders will receive Common Stock with an aggregate Common Stock Value Per Share equal to the amount by which the total amount of the Federal Income Tax Claims are reduced to below $27 million (the "Federal Income Tax Claims Differential"). Such Common Stock shall be, first, issued by the Company directly to the Original Stockholders up to a number of shares having an aggregate Common Stock Value Per Share equal to the excess, if any, of (A) $88.7 million over (B) the aggregate Common Stock Value Per Share of all shares of Common Stock theretofore issued into escrow as described in the next paragraph, and second, be satisfied by the release from such escrow of any remaining shares of Common Stock issuable to Original Stockholders pursuant to such provisions. (b) The Plan of Reorganization provides that if, on or prior to August 24, 1995 (the 160th day following the Effective Date of the Plan of Reorganization), (i) one or more Veil Piercing Settlement Tax Savings Events (as defined below) shall not have occurred in respect of (and the Tax Oversight Committee shall not have determined) the maximum Veil Piercing Settlement Tax Savings Amount (as defined below) that could result from a good faith claim by the Company's consolidated tax group of both (a) a refund with respect to tax years prior to the tax year in which the Effective Date of the Plan of Reorganization occurs, and (b) a deduction with respect to the tax year in which the Effective Date of the Plan of Reorganization occurs (collectively, the "Initial Claim"), or (ii) the Company shall not have issued and delivered into escrow with an escrow agent selected by the Company, Lehman and AIF II, L.P., certain of its affiliates and certain accounts controlled or managed by such affiliates (AIF II, L.P., such affiliates and accounts, collectively, "Apollo") certificates representing shares of Common Stock having an aggregate Common Stock Value Per Share equal to the full amount of such maximum Veil Piercing Settlement Tax Savings Amount, then not later than September 13, 1995 (the 180th day after the Effective Date of the Plan of Reorganization) the Company shall issue and deliver into escrow certificates representing Common Stock having an aggregate Common Stock Value Per Share equal to the sum of (i) that part of the Veil Piercing Settlement Tax Savings Amount arising from the Initial Claim in respect of which shares of Common Stock had not theretofore been issued into escrow, as such Veil Piercing Settlement Tax Savings Amount (whether or not a Veil Piercing Settlement Tax Savings 67 Event shall previously have occurred) shall be estimated in good faith by the Chief Financial Officer of the Company and set forth in a certificate delivered to the Tax Oversight Committee (and such amount shall be the Veil Piercing Settlement Tax Savings Amount for purposes of provisions described in this sentence) and (ii) an additional amount equal to the lesser of (A) $13 million and (B) an amount that would cause the total number of shares of Common Stock to be issued into escrow to have an aggregate Common Stock Value Per Share equal to $88.7 million. A "Veil Piercing Settlement Tax Savings Event" is any filing by the Company's consolidated tax group or any member thereof of a tax return for a tax year ending on or after May 31, 1995 or a claim for refund or deduction for a tax year ending prior to May 31, 1995 on which a Veil Piercing Settlement Tax Savings Amount is claimed. A "Veil Piercing Settlement Tax Savings Amount" is the difference between (a) the aggregate amount of federal, state and local tax payable by members of the Company's consolidated group as reported on such members' relevant tax returns and (b) the aggregate amount of federal, state and local income tax that would have been reported on such returns if the distribution under the Veil Piercing Settlement Agreement had not been made, as determined by the Tax Oversight Committee. The Company believes that it may properly deduct in full the payment made under the Plan of Reorganization to Celotex, in its capacity as the Celotex Settlement Fund Recipient, but there can be no assurance that the IRS will not challenge the deduction and if it does so whether such challenge will succeed. On August 23, 1995, the Chief Financial Officer of the Company delivered the aforementioned certificate to the Tax Oversight Committee, and on September 13, 1995 the Company delivered 3,880,140 shares of Common Stock into escrow. The Original Stockholders, on a pro rata basis, are entitled to exercise all voting rights of, and receive all dividends and other distributions on, Common Stock held in escrow. The amount of such dividends and other distributions must be returned to the Company if such shares are subsequently cancelled prior to release from escrow. Such shares will be released from escrow as soon as practicable after the Tax Oversight Committee determines that the applicable Veil Piercing Settlement Tax Savings Amount is no longer subject to adjustment because (i) the statutory period during which assessments (or denial of a refund claim) can be made with respect to such Veil Piercing Settlement Tax Savings Amount has passed, (ii) the Company and the IRS or other relevant taxing authority have entered into a closing or similar agreement governing the years or issues in question with respect to such Veil Piercing Settlement Tax Savings Amount, or (iii) a court decision determining the income tax liability (or the right to such refund) with respect to such Veil Piercing Settlement Tax Savings Amount has been rendered and the time period for the filing of an appeal has passed. Notwithstanding and in addition to the foregoing, the Plan of Reorganization provides that $11.3 million of Common Stock (using the Common Stock Value Per Share) be issued directly to the Original Stockholders on a pro rata basis at the same time as shares of Common Stock are first issued into escrow; accordingly, on September 13, 1995, the Company issued 494,313 shares of Common Stock to the Original Stockholders on a pro rata basis. The Plan of Reorganization limits the number of shares issuable under the provisions described in (a) and (b) above to that number of shares of Common Stock that, when added to the shares issued to the Original Stockholders on the Effective Date of the Plan of Reorganization, has an aggregate Common Stock Value Per Share of $250 million. The Plan of Reorganization contains an arbitration provision for the final determination of any dispute that may arise between KKR (the principal Original Stockholder) and the Tax Oversight Committee with respect to any determination made by the Tax Oversight Committee regarding the provisions of the Plan of Reorganization described in (b) above. The Plan of Reorganization also provides that, for purposes of the Federal Income Tax Claims Differential, the amount of Federal Income Tax Claims shall not be reduced by any Veil Piercing Settlement Tax Savings Amount and that any terms of any settlement or agreement regarding Federal 68 Income Tax Claims shall not be agreed to by the Company or any subsidiary thereof without the prior consent of the Tax Oversight Committee. The Company is authorized to issue additional shares of capital stock from time to time. There are no specific restrictions upon such issuances, except that the Charter prohibits the issuance of non-voting equity securities if, and only to the extent that and so long as, Section 1123 of the Bankruptcy Code is applicable and would prohibit such issuance. The Company's stockholders will not have preemptive rights to purchase additional shares of capital stock of the Company upon any issuance of such shares authorized by the Board. STOCKHOLDER'S AGREEMENT Pursuant to the Stockholder's Agreement dated as of the Effective Date of the Plan of Reorganization (the "Stockholder's Agreement") between the Company and the Celotex Settlement Fund Recipient, the Celotex Settlement Fund Recipient has agreed, in any vote or action by written consent by holders of Common Stock on any matter submitted to a vote of holders of Common Stock, to vote, and execute written consents with respect to, the shares of Common Stock held by it for and/or against such matter in proportion to the votes cast or consents executed and delivered by all other holders of Common Stock. Identical restrictions on the voting of the Celotex Settlement Fund Recipient's Common Stock are contained in the Charter and in the Plan of Reorganization. Pursuant to the Stockholder's Agreement, the Celotex Settlement Fund Recipient further agreed not to, and to cause its affiliates not to, offer, sell, assign, give, pledge, encumber or otherwise dispose of any shares of its Common Stock or any interest therein or right thereto to any person that is a successor to or creditor of the Celotex Settlement Fund Recipient or a creditor of Celotex (any such creditor, a "Celotex Settlement Fund Beneficiary"), in such person's capacity as such, unless such person executes and delivers an instrument, in form and substance reasonably satisfactory to the Company, pursuant to which it agrees to be bound by the Stockholder's Agreement to the same extent as the Celotex Settlement Fund Recipient. TAG-ALONG AND VOTING RIGHTS AGREEMENT Pursuant to the Tag-Along and Voting Rights Agreement dated as of the Effective Date of the Plan of Reorganization (the "Tag-Along and Voting Rights Agreement") among Celotex, on behalf of the Celotex Settlement Fund Recipient, Apollo and Lehman (collectively, the "Tag-Along Stockholders") each Tag-Along Stockholder agreed that if it proposes to dispose of any Common Stock held by it on the Effective Date of the Plan of Reorganization to any third party (other than transactions described below), the other Tag-Along Stockholders will have the right to include the shares of Common Stock held by them on the Effective Date of the Plan of Reorganization in such disposition transaction on the same terms and conditions, provided, however, that if the initiating Tag-Along Stockholder is Lehman or Apollo, then Lehman or Apollo, respectively, will not be entitled to participate in such disposition transaction. If the Tag-Along Stockholders collectively desire to sell more shares of Common Stock than the proposed purchaser desires to purchase, each Tag-Along Stockholder shall sell a pro rata number of its shares. The foregoing does not apply to any transaction effected on a national securities exchange, on the National Association of Securities Dealers Automated Quotation System or through a registered-broker dealer or made pursuant to a public offering under an effective registration statement under the Securities Act. The foregoing also does not apply to any disposition by a Tag-Along Stockholder to an affiliate or by the Celotex Settlement Fund Recipient to a successor or a Celotex Settlement Fund Beneficiary. The parties have agreed that any of their transferees which is an affiliate or, in the case of the Celotex Settlement Fund Recipient, a successor or a Celotex Settlement Fund Beneficiary must, prior to such transfer, agree in writing to be bound by the Tag-Along and Voting Rights Agreement as if it had been an original party thereto. The Celotex Settlement Fund Recipient also has agreed to, and to cause each of its affiliates to, vote and execute written consents with respect to their shares of Common Stock in proportion to the 69 votes cast or consents executed and delivered by all other holders of Common Stock, in any vote or action by written consent by holders of Common Stock. COMMON STOCK REGISTRATION RIGHTS AGREEMENTS The Company has entered into a Registration Rights Agreement, dated as of the Effective Date of the Plan of Reorganization (the "Common Stock Registration Rights Agreement"), with certain holders ("Common Stock Holders") of Common Stock pursuant to which the Company agreed to file the Registration Statement of which this Prospectus forms a part (the "Initial Common Stock Shelf Registration") and use its reasonable best efforts to keep such Common Stock Shelf Registration continuously effective for up to one year. After such period of effectiveness, one or more Common Stock Holders may request to have all or part of their Common Stock as to which registration pursuant to the Securities Act is required for public sale ("Registrable Common Stock") registered under the Securities Act, and all other Common Stock Holders have the right to participate in any such registration; provided that (i) the Company is not required to effect more than two such registrations, (ii) no such registration may be requested within 180 days of the effectiveness of any such earlier registration or a registration as to which Common Stock Holders have "piggyback" registration rights (as discussed below), (iii) the Company is not required to effect any such registration unless at least 5% of the shares of Registrable Common Stock outstanding at the time of such request is to be included in such registration and (iv) if the intended method of distribution is an underwritten public offering, the Company may require the underwriting to be conducted on a "firm commitment" basis. Any such requested registration may be effected pursuant to a shelf registration statement under Rule 415 of the Securities Act (a "Shelf Registration"); any such registration (other than a Shelf Registration, which must be kept effective by the Company for up to one year, if made pursuant to the first demand under the provisions described in this paragraph or nine months otherwise) need not be kept effective by the Company for more than 90 days. If the intended method of distribution is an underwritten public offering, the underwriters must be nationally recognized, selected by Common Stock Holders owning at least a majority of the shares of Registrable Common Stock being registered (the "Majority Selling Common Stock Holders") and reasonably acceptable to the Company. In addition, if the managing underwriter advises the Company in writing that, in its opinion, the number of shares requested to be registered exceeds the number that can be sold within a price range specified by the Majority Common Stock Selling Holders, the shares requested to be included by Common Stock Holders shall be included in the registration on a pro rata basis in preference to any other shares which the Company or any person wishes to include in such registration. The KKR Investors and Lehman Holdings, as Common Stock Holders which own more than 5% of the shares of Registerable Common Stock outstanding, have exercised the demand registration right described above and have agreed with the Company that such demand shall be satisfied by the Company causing the Initial Common Stock Shelf Registration to remain effective beyond the first anniversary of the effective date of the Initial Common Stock Shelf Registration for an additional year. If the Company at any time following the termination of the Initial Common Stock Shelf Registration proposes to register any of its securities under the Securities Act (other than any registration of any securities on Form S-4 or Form S-8), the Common Stock Holders have the right, pursuant to a written request submitted within 20 days (10 days in certain circumstances) of receipt of notice thereof from the Company, to participate in such registration. Upon a request of Common Stock Holders owning at least a majority of the shares of Registrable Common Stock requested to be included in a demand or "piggyback" registration made at any time on or after March 17, 1996, the Company has agreed to use its best efforts to (i) cause the Common Stock covered by such registration to be listed on a national securities exchange or to be quoted through NASDAQ or (ii) provide for at least two market makers for the Common Stock. 70 All expenses of the Company in connection with the performance of its obligations under the Common Stock Registration Rights Agreement and the reasonable fees, disbursements and other charges of one firm of counsel (per registration) selected by the Majority Selling Common Stock Holders (but excluding underwriting discounts and commissions and transfer taxes) shall be borne by the Company, except where some or all of the Common Stock Holders withdraw or terminate their requests prior to the registration statement becoming effective, in which case such Common Stock Holders shall be required to bear some or all of such expenses, provided that if the Company elects not to proceed with a registration as to which Common Stock Holders have "piggyback" registration rights as described above or elects not to proceed with any registration as described in the second succeeding paragraph, the Company must bear all reasonable out-of-pocket costs (other than counsel fees, disbursements and other charges not specifically referred to above) incurred by a Common Stock Holder in connection with such terminated registration. In addition, pursuant to the Common Stock Registration Rights Agreement, the Company has agreed to indemnify each offeror of Registrable Common Stock covered by a registration statement filed pursuant to the Common Stock Registration Rights Agreement, each other person who participates as an underwriter in such offering, each other person who controls such offerors or underwriters and their respective directors, officers, partners, agents and affiliates against certain liabilities, including liabilities under the Securities Act. The Company is not obligated to file any registration statement under the Common Stock Registration Rights Agreement or any amendment or supplement thereto (other than the Registration Statement of which this Prospectus forms a part and amendments and supplements thereto) and may suspend any seller's rights to make sales pursuant to any effective registration statement (provided that the right to effect sales pursuant to the Registration Statement of which this Prospectus forms a part may not be suspended prior to the ninetieth day following the date hereof) at any time when the Company, in the good faith judgment of its Board of Directors, reasonably believes that the filing thereof at the time requested, or the offering of securities thereto, would adversely affect a pending or proposed public offering of the Company's securities, a material financing, or a material acquisition, merger, recapitalization, consolidation, reorganization or similar transaction, or negotiations, discussions or pending proposals with respect thereto. Such a deferral of the filing of a registration statement or an amendment or supplement thereto or suspension of a seller's right to effect sales may continue for no more than 10 days after the abandonment or consummation of any of the foregoing proposals or transactions or 60 days after the date of the Board's determination referred to in the preceding sentence. In the event of such a suspension, the applicable registration period will be extended by the number of days of the suspension. Lock-Up Agreements Pursuant to the Common Stock Registration Rights Agreement, each Common Stock Holder has agreed, if required by the managing underwriter of any underwritten offering and except as required otherwise under applicable law, not to sell any equity securities of the Company during the 10 days preceding or 120 days following the effective date of an underwritten registration under the Common Stock Registration Rights Agreement. The Company has agreed not to (and to cause certain other holders of equity securities acquired after the Effective Date of the Plan of Reorganization to agree not to) effect any public offering and sale of Common Stock pursuant to an effective registration statement during such period of time. Channel One Registration Rights Agreement The Company has entered into a Registration Rights Agreement dated as of September 12, 1995 (the "Channel One Registration Rights Agreement") with Channel One pursuant to which the Company has agreed to include in the Initial Common Stock Shelf Registration all shares of Common Stock owned by Channel One. The Company has also agreed to include all shares of Common Stock owned by Channel One in each registration statement filed by the Company subsequent to the filing of the Initial Common Stock Shelf Registration which includes shares of Registrable Common Stock to 71 the extent that the Company may do so without breaching any of its obligations under the Common Stock Registration Rights Agreement and otherwise on the terms and subject to the conditions of the Common Stock Registration Rights Agreement that are applicable to the holders of the shares of Registrable Common Stock included in such registration statement. The Channel One Registration Rights Agreement provides that certain provisions of the Common Stock Registration Rights Agreement are binding upon and applicable to the parties thereto, including those provisions described above relating to expenses, indemnification, postponements and suspensions. ANTITAKEOVER LEGISLATION Section 203 of the DGCL provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date on which such stockholder becomes an "interested stockholder" unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an "interested stockholder," (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (iii) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the "interested stockholder." Except as otherwise specified in Section 203, an "interested stockholder" is defined to include (x) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date and (y) the affiliates and associates of any such person. For purposes of Section 203, the Board has approved the transaction (the consummation of the Plan of Reorganization) which resulted in Lehman and the Celotex Settlement Fund Recipient becoming "interested stockholders" and, accordingly, the Company believes that neither of them will be subject to the restrictions of Section 203 unless it ceases to be the owner of 15% or more of the outstanding voting stock of the Company and seeks to reattain such level of ownership. The Board of Directors also approved the purchase of Common Stock by Channel One and its affiliates and associates of 15% or more of the outstanding voting stock of the Company through open market purchases or otherwise. Accordingly, the Company believes that none of Channel One and its affiliates and associates (including the KKR Investors) will be subject to the restrictions of Section 203. In connection with the above-described approval of the Board of Directors, Channel One and the KKR Investors agreed with the Company that they will not, and will not permit any of their affiliates to, vote any shares of Common Stock of the Company or otherwise take any other action to modify the composition of the Board of Directors of the Company prior to April 6, 1998 other than as expressly provided for in the Company's Charter and the Plan of Reorganization and that during such period they will not participate in the solicitation of proxies to vote, or seek to advise or influence any person with respect to, voting securities of the Company to modify the composition of the Board of Directors, or propose, assist in or encourage any person in connection with any of the foregoing. Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. The Charter does not exclude the Company from the restrictions imposed under Section 203. The provisions of Section 203 may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the stockholder becoming an interested stockholder. Such provisions also may have the effect of preventing changes in the management of the Company. It is possible that such provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests. 72 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following summary describes certain United States federal income tax and estate tax consequences of the ownership of Shares by Non-United States Holders (as defined below) as of the date hereof. This discussion does not address all aspects of United States federal income taxation and does not deal with foreign, state and local consequences that may be relevant to such Non-United States Holders in light of their personal circumstances. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in federal income tax consequences different from those discussed below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. As used herein, a "Non-United States Holder" of Shares means a holder who is not (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof or (iii) an estate or trust the income of which is subject to United States federal income taxation regardless of its source. PAYMENT OF DIVIDENDS If the Company pays dividends on its Shares, such dividends paid to a Non-United States Holder of Shares will be subject to withholding of United States federal income tax rate at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business of the Non-United States Holder within the United States. Dividends that are effectively connected with the conduct of a trade or business within the United States are subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current United States Treasury regulations, dividends paid to an address outside the United States are presumed to be paid to a resident of such country (unless the payor has knowledge to the contrary) for purposes of the withholding discussed above, and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under proposed Treasury regulations not currently in effect, however, a Non-United States Holder of Shares who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification and other requirements. Certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exception. A Non-United States Holder of Shares eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. SALE OR EXCHANGE A Non-United States Holder will generally not be subject to United States federal income tax with respect to gain recognized on a sale, exchange or other disposition of Shares unless (i) the gain is effectively connected with the conduct of a trade or business of the Non-United States Holder in the United States, (ii) in the case of a Non-United States Holder who is an individual and holds the Shares as capital assets, such holder is present in the United States for 183 days or more in the taxable year of sale, exchange or other disposition and certain other conditions are met, or (iii) the Company is or has been a "U.S. real property holding corporation" for United States federal income tax purposes. The 73 Company is not and does not anticipate becoming a "U.S. real property holding corporation" for United States federal income tax purposes. An individual Non-United States Holder described in clause (i) above will be taxed on the net gain derived from the sale under regular graduated United States federal income tax rates. An individual Non-United States Holder described in clause (ii) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States capital losses (notwithstanding the fact that the individual is not considered a resident of the United States). If a Non-United States Holder that is a foreign corporation falls under clause (i) above, it will be taxed on its gain under regular graduated United States federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits within the meaning of the Code for the taxable year, as adjusted for certain items, unless it qualifies for a lower rate under an applicable income tax treaty. FEDERAL ESTATE TAX Common Stock held by an individual Non-United States Holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. BACKUP WITHHOLDING AND INFORMATION REPORTING The Company must report annually to the IRS and to each Non-United States Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-United States Holder resides under the provisions of an applicable income tax treaty. Under current law, backup withholding (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) generally will not apply to dividends paid to a Non-United States Holder at an address outside the United States (unless the payer has knowledge that the payee is a U.S. person). Under proposed United States Treasury regulations not currently in effect, however, a Non-United States Holder will be subject to back-up withholding unless applicable certification requirements are met. The payment of the proceeds of the sale, exchange or other disposition of Shares to or through the United States office of a broker is subject to both backup withholding and information reporting unless the owner certifies under penalties of perjury that it is a Non-United States Holder or otherwise establishes an exemption. In general, backup withholding and information reporting will not apply if a foreign office of a broker pays the proceeds of the sale of Shares to the owner thereof. If, however, such broker is, for United States federal income tax purposes, a U.S. person, a controlled foreign corporation or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, such payments will be subject to information reporting, but not backup withholding, unless (1) such broker has documentary evidence in its records that the beneficial owner is not a U.S. person and certain other conditions are met or (2) the beneficial owner otherwise establishes an exemption. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished to the IRS. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF ANY INVESTMENT IN THE SHARES, INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS. 74 SELLING SECURITY HOLDERS The following table sets forth information with respect to the Shares offered hereby beneficially owned by each of the Selling Security Holders as of September 3, 1996. The Shares offered hereby may be offered in whole or in part from time to time by or on behalf of the Selling Security Holders named below.
NUMBER OF SHARES OF COMMON STOCK OWNED PERCENTAGE OF SELLING SECURITY HOLDER AND REGISTERED HEREUNDER OUTSTANDING COMMON STOCK* - ----------------------------------------------- ------------------------ ------------------------- Lehman Brothers Holdings, Inc.................. 7,862,639 14.3% JWC Associates L.P............................. 6,163,165 11.2% JWC Associates II, L.P......................... 40,839 ** KKR Partners II, L.P........................... 149,405 ** Channel One Associates, L.P.................... 4,361,800 7.9% William Carr................................... 14,126 ** Donald M. Kurucz............................... 2,674 ** Kenneth J. Matlock............................. 5,573 ** Robert W. Michael.............................. 7,801 ** William N. Temple.............................. 2,228 ** David L. Townsend.............................. 1,783 ** James W. Walter................................ 42,355 ** William H. Weldon.............................. 4,457 ** The Celotex Corporation, in its capacity as the Celotex Settlement Fund Recipient............. 10,941,326 19.9% AIF II, L.P.(1)................................ 1,152,681 2.1% Lion Advisors, L.P.(1)......................... 1,132,511 2.1% ----------- --- Total.......................................... 31,885,363 58.1% ----------- --- ----------- ---
- ------------ * All percentages in the table are based on 54,868,335 shares of Common Stock being issued and outstanding. See "Security Ownership of Management and Principal Stockholders." ** Owns less than 1% of outstanding Common Stock. (1) Lion Advisors, L.P. (a) holds the 1,132,511 Shares set forth next to its name on behalf of an investment account under management over which Lion Advisors, L.P. holds investment, voting and dispositive power and (b) is an affiliate of AIF II, L.P. Neither AIF II, L.P. nor Lion Advisors, L.P. is an affiliate of the Company. 75 PLAN OF DISTRIBUTION The Company will receive no proceeds from this offering. The Shares may be sold from time to time to purchasers directly by any of the Selling Security Holders. Alternatively, any of the Selling Security Holders may from time to time offer the Shares through underwriters, dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Security Holders and/or the purchasers of Shares for whom they may act as agent. The Selling Security Holders and any underwriters, dealers or agents that participate in the distribution of Shares may be deemed to be underwriters, and any profit on the sale of Shares by them and any discounts, commissions or concessions received by any such underwriters, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. If the Company is advised that an underwriter has been engaged with respect to the sale of any Shares offered hereby, or in the event of any other material change in the plan of distribution, the Company will cause appropriate amendments to the Registration Statement of which this Prospectus forms a part to be filed with the Commission reflecting such engagement or other change. See "Additional Information." At the time a particular offer of Shares is made, to the extent required, a Prospectus Supplement will be provided by the Company and distributed by the relevant Selling Security Holder which will set forth the aggregate amount and type of Shares being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, any discounts, commissions and other items constituting compensation from the Selling Security Holders and any discounts, commissions or concessions allowed or reallowed or paid to dealers. The Shares may be sold from time to time in one or more transactions at a fixed offering price, which may be changed, or at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the Selling Security Holders or by agreement between the Selling Security Holders and underwriters or dealers. To the extent not prohibited by applicable securities laws, Selling Security Holders may sell the Shares other than pursuant to the Registration Statement of which this Prospectus forms a part. The Common Stock is listed on the Nasdaq National Market under the symbol "WLTR". Under applicable rules and regulations under the Exchange Act any person engaged in a distribution of the Shares may not simultaneously engage in market-making activities with respect to such Shares for a period of nine business days prior to the commencement of such distribution and ending upon the completion of such distribution. In addition to and without limiting the foregoing, each Selling Security Holder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation rules 10b-6 and 10b-7, which provisions may limit the timing of purchases and sales of any of the Shares by the Selling Security Holders. All of the foregoing may affect the marketability of the Shares and the ability of any person or entity to engage in market-making activities with respect to the Shares. Under guidelines adopted by the National Association of Securities Dealers, Inc. (the "NASD"), the maximum commission that any NASD member firm can receive in connection with a distribution of the Shares, without further clearance from the NASD, is 8%. Pursuant to the Common Stock Registration Rights Agreement, the Company is obligated to pay substantially all of the expenses incident to the registration, offering and sale of the Shares to the public other than commissions and discounts of underwriters, dealers or agents, and the Selling Security Holders, and any underwriter they may utilize, and their respective controlling persons are entitled to be indemnified by the Company against certain liabilities, including liabilities under the Securities Act. See "Description of Capital Stock--Common Stock Registration Rights Agreements". 76 LEGAL MATTERS The validity of the Shares offered hereby has been passed upon for the Company by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. EXPERTS The consolidated financial statements as of May 31, 1996 and 1995 and for each of the three years in the period ended May 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent certified public accountants, given on the authority of said firm as experts in auditing and accounting. 77 INDEX TO FINANCIAL STATEMENTS
PAGES ------------- Walter Industries, Inc. and Subsidiaries Report of Independent Certified Public Accountants........................ F-2 Consolidated Balance Sheet--May 31, 1996 and 1995......................... F-3 Consolidated Statement of Operations and Retained Earnings (Deficit) for the Three Years Ended May 31, 1996...................................... F-4 Consolidated Statement of Cash Flows for the Three Years Ended May 31, 1996.................................................................... F-5 Notes To Financial Statements............................................. F-6 to F-27
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Walter Industries, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and retained earnings (deficit) and of cash flows present fairly, in all material respects, the financial position of Walter Industries, Inc. and its subsidiaries at May 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1996 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. Price Waterhouse LLP Tampa, Florida July 12, 1996, except as to Note 16, which is as of August 28, 1996 F-2 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
MAY 31, -------------------------- 1996 1995 ----------- ----------- (IN THOUSANDS) ASSETS Cash (includes short-term investments of $64,338,000 and $84,872,000) (Notes 3 and 14).................................... $ 81,881 $ 128,007 Short-term investments, restricted (Notes 3 and 14)............... 175,432 128,002 Instalment notes receivable (Notes 4, 8 and 14)................... 4,208,252 4,256,866 Less--Provision for possible losses............................. ( 26,138) ( 26,556) Unearned time charges........................................... ( 2,851,961) ( 2,869,282) ----------- ----------- Net......................................................... 1,330,153 1,361,028 Trade receivables................................................. 178,847 160,584 Less--Provision for possible losses............................. ( 8,180) ( 7,998) ----------- ----------- Net......................................................... 170,667 152,586 Federal income tax receivable (Note 9)............................ -- 99,875 Other notes and accounts receivable............................... 21,055 30,236 Inventories, at lower of cost (first in, first out or average) or market Finished goods.................................................. 124,456 111,792 Goods in process................................................ 32,798 29,593 Raw materials and supplies...................................... 51,674 53,453 Houses held for resale.......................................... 2,517 1,599 ----------- ----------- Total inventories........................................... 211,445 196,437 Prepaid expenses.................................................. 11,937 12,694 Property, plant and equipment, at cost (Notes 5 and 6)............ 888,991 1,186,407 Less--Accumulated depreciation, depletion and amortization...... ( 347,455) ( 523,615) ----------- ----------- Net......................................................... 541,536 662,792 Investments....................................................... 6,646 6,191 Deferred income taxes (Note 9).................................... 155,171 16,544 Unamortized debt expense (Note 8)................................. 29,548 34,167 Other assets...................................................... 44,971 43,698 Excess of purchase price over net assets acquired (Notes 1, 5 and 7)............................................................... 310,935 372,896 ----------- ----------- $ 3,091,377 $ 3,245,153 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Bank overdrafts (Note 3).......................................... $ 28,194 $ 33,746 Accounts payable.................................................. 74,330 108,137 Accrued expenses.................................................. 120,477 150,907 Income taxes payable (Note 9)..................................... 56,238 53,261 Long-term senior debt (Notes 4, 8 and 14)......................... 2,211,296 2,220,370 Accrued interest (Note 8)......................................... 28,819 37,854 Accumulated postretirement health benefits obligation (Note 13)... 247,827 228,411 Other long-term liabilities....................................... 47,502 51,693 Stockholders' equity (Notes 1, 10 and 11): Common stock, $.01 par value per share: Authorized--200,000,000 shares Issued--54,868,335 shares and 50,494,313 shares............... 549 505 Capital in excess of par value.................................. 1,159,332 1,159,384 Retained earnings (deficit), per accompanying statement......... ( 877,861) ( 793,165) Excess of additional pension liability over unrecognized prior years service cost............................................ ( 5,326) ( 5,950) ----------- ----------- Total stockholders' equity.................................. 276,694 360,774 ----------- ----------- $ 3,091,377 $ 3,245,153 ----------- ----------- ----------- -----------
F-3 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED MAY 31, -------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Sales and revenues: Net sales............................................ $1,220,397 $1,181,635 $1,068,387 Time charges (Note 4)................................ 231,104 222,221 238,097 Miscellaneous........................................ 34,134 30,838 17,383 Interest income from Chapter 11 proceedings (Note 1).................................................. -- 7,628 4,657 ---------- ---------- ---------- 1,485,635 1,442,322 1,328,524 ---------- ---------- ---------- Cost and expenses: Cost of sales........................................ 987,354 951,381 845,061 Depreciation, depletion and amortization (Note 6).... 74,341 72,037 71,035 Selling, general and administrative.................. 135,840 130,616 127,901 Postretirement health benefits (Note 13)............. 27,129 25,961 25,585 Provision for possible losses........................ 4,367 4,485 4,611 Chapter 11 costs (Note 1)............................ -- 442,362 14,254 Interest and amortization of debt discount and expense(Notes 6 and 8)............................. 208,690 304,548 155,470 Amortization of excess of purchase price over net assets acquired (Note 7)........................... 39,096 40,027 48,515 Long-lived asset impairment (Note 5)................. 143,265 -- -- ---------- ---------- ---------- 1,620,082 1,971,417 1,292,432 ---------- ---------- ---------- ( 134,447) ( 529,095) 36,092 Income tax benefit (expense) (Note 9): Current.............................................. ( 621) 80,754 ( 41,598) Deferred............................................. 55,776) 89,696 12,681 ---------- ---------- ---------- Income (loss) before extraordinary item................ ( 79,292) ( 358,645) 7,175 Extraordinary item--loss on debt repayment (net of income tax benefit of $2,910,000) (Note 8)............. ( 5,404) -- -- ---------- ---------- ---------- Net income (loss)...................................... ( 84,696) ( 358,645) 7,175 Retained earnings (deficit) at beginning of year....... ( 793,165) ( 434,520) ( 441,695) ---------- ---------- ---------- Retained earnings (deficit) at end of year............. ($ 877,861) ($ 793,165) ($ 434,520) ---------- ---------- ---------- ---------- ---------- ---------- Net loss per share (Note 10): Loss before extraordinary item....................... ($ 1.56) ($ 7.10) Extraordinary item................................... ( .10) -- ---------- ---------- Net loss............................................. ($ 1.66) ($ 7.10) ---------- ---------- ---------- ----------
F-4 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, ------------------------------- 1996 1995 1994 -------- --------- -------- (IN THOUSANDS) OPERATIONS Income (loss) before extraordinary item....................... $(79,292) $(358,645) $ 7,175 Charges to income not affecting cash: Settlement of Chapter 11 claims with debt and new Common Stock..................................................... -- 444,752 -- Depreciation, depletion and amortization.................... 74,341 72,037 71,035 Provision for deferred income taxes......................... ( 55,776) ( 89,696) ( 12,681) Accumulated postretirement health benefits obligation (Note 13)........................................................ 19,416 18,449 20,057 Provision for other long-term liabilities................... ( 4,034) 294 280 Amortization of excess of purchase price over net assets acquired (Note 7)......................................... 39,096 40,027 48,515 Amortization of debt discount and expense................... 7,250 11,783 17,597 Long-lived asset impairment (Note 5)........................ 143,265 -- -- -------- --------- -------- 144,266 139,001 151,978 Decrease (increase) in: Short-term investments, restricted (Note 3)................. ( 47,430) ( 20,450) ( 1,932) Instalment notes receivable, net (a)........................ 30,875 ( 1,849) 27,680 Trade and other receivables, net............................ ( 8,900) ( 44,009) 12,747 Federal income tax receivable (Note 9)...................... 99,875 ( 99,875) -- Inventories................................................. ( 15,008) ( 23,858) ( 5,940) Prepaid expenses............................................ 757 ( 1,359) ( 3,433) Deferred income taxes (Note 9).............................. ( 79,941) -- -- Increase (decrease) in: Bank overdrafts (Note 3).................................... ( 5,552) 3,867 11,958 Accounts payable............................................ ( 7,361) 28,925 6,772 Accrued expenses............................................ 7,054 28,242 6,427 Income taxes payable (Note 9)............................... 2,977 ( 15,348) 2,408 Accrued interest............................................ ( 9,033) 24,156 47,833 Liabilities subject to Chapter 11 proceedings (Note 1)...... -- -- 1,286 -------- --------- -------- Cash flows from operations.................................. 112,579 17,443 257,784 -------- --------- -------- FINANCING ACTIVITIES Issuance of long-term senior debt (Note 8).................... 680,000 974,450 2,000 Additions to unamortized debt expense......................... ( 6,045) ( 17,153) -- Extraordinary item--loss on debt repayment.................... ( 5,404) -- -- Charge to income not affecting cash: Write off of unamortized debt expense....................... 3,414 -- -- Provision for deferred income tax........................... ( 2,910) -- -- Retirement of long-term senior debt (Note 8).................. (689,074) ( 120,250) (178,865) Payment of liabilities subject to Chapter 11 proceedings...... ( 63,932) ( 604,044)(b) -- Payment of accrued postpetition interest on Chapter 11 secured debt obligations............................................ -- ( 244,334) -- Fractional share payments..................................... ( 8) -- -- -------- --------- -------- Cash flows used in financing activities..................... ( 83,959) ( 11,331) (176,865) -------- --------- -------- INVESTING ACTIVITIES Additions to property, plant and equipment, net of normal retirements................................................. ( 73,485) ( 76,966) ( 65,858) (Increase) in investments and other assets.................... ( 1,261) ( 4,442) ( 2,128) -------- --------- -------- Cash flows used in investing activities..................... ( 74,746) ( 81,408) ( 67,986) -------- --------- -------- Net increase (decrease) in cash and cash equivalents.......... ( 46,126) ( 75,296) 12,933 Cash and cash equivalents at beginning of year................ 128,007 203,303 190,370 -------- --------- -------- Cash and cash equivalents at end of year (Note 3)............. $ 81,881 $ 128,007 $203,303 -------- --------- -------- -------- --------- --------
- ------------ (a) Consists of sales and resales, net of repossessions and provision for possible losses, of $148,749,000, $155,236,000 and $153,776,000 and cash collections on account and payouts in advance of maturity of $179,624,000, $153,387,000 and $181,456,000, for the years ended May 31, 1996, 1995 and 1994, respectively. (b) In addition, $490 million of Series B Senior Notes and 44,050,974 shares of new Common Stock were issued to satisfy a portion of the allowed claims of holders of secured and subordinated debt, settle a portion of the asbestos-related veil-piercing claims and 6,443,339 shares of new Common Stock were issued to the former shareholders in cancellation of their original holdings.
F-5 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1--RECENT HISTORY 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 relate to the Consensual Plan. The following unaudited pro forma consolidated statement of operations for fiscal 1995 was prepared to illustrate the estimated effects of the Consensual Plan and related financings as if they had occurred as of June 1, 1994. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED MAY 31, 1995 ---------------------------------------------- AS REPORTED ADJUSTMENTS PRO FORMA ----------- ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE AMOUNT) Sales and revenues: Net sales...................................... $ 1,181,635 $ 1,181,635 Time charges................................... 222,221 222,221 Miscellaneous.................................. 30,838 30,838 Interest income from Chapter 11 proceedings.... 7,628 $ (7,628)(1) -- ----------- ----------- ----------- 1,442,322 (7,628) 1,434,694 ----------- ----------- ----------- Cost and expenses: Cost of sales.................................. 951,381 951,381 Depreciation, depletion and amortization....... 72,037 72,037 Selling, general and administrative............ 130,616 130,616 Postretirement health benefits................. 25,961 25,961 Provision for possible losses.................. 4,485 4,485 Chapter 11 costs............................... 442,362 (442,362)(2) -- Interest and amortization of debt discount and expense...................................... 304,548 ( 81,364)(3) 223,184 Amortization of excess of purchase price over net assets acquired.......................... 40,027 40,027 ----------- ----------- ----------- 1,971,417 ( 523,726) 1,447,691 ----------- ----------- ----------- ( 529,095) 516,098 ( 12,997) Income tax benefit (expense)..................... 170,450 ( 195,730)(4) ( 25,280) ----------- ----------- ----------- Net income (loss)................................ ($ 358,645) $ 320,368 ($ 38,277) ----------- ----------- ----------- ----------- ----------- ----------- Net loss per share............................... ($ .75)(5) ----------- ----------- Weighted average shares outstanding.............. 50,988,626
(Footnotes on following page) F-6 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 1--RECENT HISTORY--(CONTINUED) (Footnotes for preceding page) - ------------ Changes from the historical financial statement in the pro forma consolidated statement of operations consist of the following adjustments (all amounts in thousands): (1) Interest income from Chapter 11 proceedings of $7,628, which would not have been realized assuming the Consensual Plan became effective June 1, 1994, has been eliminated. (2) Chapter 11 costs of $442,362, which would not have been incurred assuming the Consensual Plan became effective June 1, 1994, have been eliminated. (3) Interest and amortization of debt discount and expense has been reduced $81,364 to give retroactive effect as if all indebtedness to be repaid pursuant to the Consensual Plan was so done as of June 1, 1994 and the $490 million of Series B Senior Notes had been outstanding for the full year ended May 31, 1995. Borrowings under the Trust IV Asset Backed Notes were assumed to increase during the period June 1, 1994 through November 30, 1994 proportionately with the comparable period increase in the outstanding economic balance of the instalment notes sold by Mid-State to Trust IV on March 16, 1995. Borrowings under the Trust V Variable Funding Loan Agreement were based on 78% of Jim Walter Homes' credit sales during the six-month period December 1, 1994 through May 31, 1995. This time period is subsequent to the Trust IV cut-off date for purchases of instalment notes from Mid-State. No working capital borrowings were assumed under the Bank Credit Facility. Pro forma interest expense, however, includes letter of credit fees and unused working capital commitment fees. (4) The provision for income taxes has been adjusted at the applicable statutory rates to give effect to the pro forma adjustments described above. (5) Net loss per share has been computed based on the weighted average number of common shares outstanding (including 494,313 additional (shares) of Common Stock issued six months after the Effective Date of the Consensual Plan, but not including 3,880,140 additional shares which have been issued to an escrow account because such issuance is contingent upon future events and would be anti-dilutive). NOTE 2--PRINCIPLES OF CONSOLIDATION The Company through its direct and indirect subsidiaries currently offers a diversified line of products and services for homebuilding, water and waste water transmission, coal mining and related degasification, residential and non-residential construction, and industrial markets. The consolidated financial statements include the accounts of the Company and all of its subsidiaries. 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. NOTE 3--CASH AND RESTRICTED SHORT-TERM INVESTMENTS Cash includes short-term investments with original maturities of less than one year. These investments are readily convertible to cash 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 bank overdrafts. F-7 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--CASH AND RESTRICTED SHORT-TERM INVESTMENTS--(CONTINUED) Restricted short-term investments include (i) temporary investment of reserve funds and collections on instalment notes receivable owned by Mid-State Trusts II, III, IV and V ($110,436,000) 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 ($43,161,000) and (iii) miscellaneous other segregated accounts restricted to specific uses ($21,835,000). NOTE 4--INSTALMENT NOTES RECEIVABLE The instalment notes receivable arise from sales of partially finished homes to customers for time payments primarily over periods of twelve to thirty years and are secured by first mortgages or similar security instruments. Revenue and income from the sale of homes is included in income upon completion of construction and legal transfer to the customer. The buyer's ownership of the land and the improvements necessary to complete the home constitute a significant equity investment which the Company has access to should the buyer default on payment of the instalment note obligation. Of the gross amount of $4,208,252,000 an amount of $3,914,150,000 is due after one year. Instalment payments estimated to be receivable within each of the five years from May 31, 1996 are $294,102,000, $288,698,000, $283,371,000, $275,512,000 and $266,809,000, respectively, and $2,799,760,000 after five years. Of the gross amount of instalment notes receivable of $4,208,252,000, 19%, 11% and 11% are secured by homes located in the states of Texas, Florida and Mississippi, respectively. Time charges are included in equal parts in each monthly payment and are taken into income as collected. This method approximates the interest method since a much larger provision for loan losses and other expenses would be required if time charge income were accelerated. The aggregate amount of instalment notes receivable having at least one payment ninety or more days delinquent was 3.14% and 3.17% of total instalment notes receivable at May 31, 1996 and 1995, respectively. Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from Jim Walter Homes, Inc. ("Jim Walter Homes") on homes constructed and sold by Jim Walter Homes and services such instalment mortgage notes. Mid-State Trust II ("Trust II"), Mid-State Trust III ("Trust III") and Mid-State Trust IV ("Trust IV") are business trusts organized by Mid-State, which owns all of the beneficial interest in Trust III and Trust IV. Trust IV owns all of the beneficial interest in Trust II. The Trusts were organized for the purpose of purchasing instalment notes receivable from Mid-State with the net proceeds from the issuance of the Trust II Mortgage-Backed Notes, the Trust III Asset Backed Notes and the Trust IV Asset Backed Notes. The assets of Trust II, Trust III and Trust IV, including the instalment notes receivable, are not available to satisfy claims of general creditors of the Company and its subsidiaries. The liabilities of Trusts II, III and IV for their publicly issued debt are to be satisfied solely from the proceeds of the underlying instalment notes and are non-recourse to the Company and its subsidiaries. Of the gross amount of instalment notes receivable at May 31, 1996 of $4,208,252,000 with an economic balance of $2,016,665,000, receivables owned by Trust II had a gross book value of $1,166,386,000 and an economic balance of $723,481,000, receivables owned by Trust III had a gross book value of $416,780,000 and an economic balance of $217,247,000 and receivables owned by Trust IV had a gross book value of $1,786,406,000 and an economic balance of $759,234,000. Mid-State Trust V ("Trust V"), a business trust in which Mid-State holds all the beneficial interest, was organized to hold instalment notes receivable as collateral for borrowings to provide temporary financing to Mid-State for its current purchases of instalment notes and mortgages from Jim Walter F-8 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--INSTALMENT NOTES RECEIVABLE--(CONTINUED) Homes. At May 31, 1996, receivables owned by Trust V had a gross book value of $835,454,000 and an economic balance of $315,422,000. NOTE 5--LONG-LIVED ASSET IMPAIRMENT The Financial Accounting Standards Board issued in March 1995 Statement of Financial Accounting Standards No. 121--"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FASB 121") which becomes effective for fiscal years beginning after December 15, 1995 (fiscal year 1997 for the Company). The Company elected to adopt FASB 121 during the third quarter of fiscal 1996 as a result of significant adverse changes in the results of operations during fiscal 1996 principally in the Natural Resources business segment as a result of a fire due to the unexpected recurrence of spontaneous combustion heatings at Jim Walter Resources' Mine No. 5 at the end of the fiscal second quarter and various geological problems at the three other coal mines during portions of the year that led to the conclusion that there was an impairment of fixed assets within the Natural Resources segment. FASB 121 established standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company is required to review long-lived assets and certain intangibles, to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In performing such a review for recoverability, the Company is required to compare the expected future cash flows to the carrying value of long-lived assets and identifiable intangibles. If the sum of the expected future undiscounted cash flows is less than the carrying amount of such assets and intangibles, the assets are impaired and the assets must be written down to their estimated fair market value. After performing a review for asset impairment at each of the Company's business segments and applying the principles of measurement contained in FASB 121, the Company recorded a charge against earnings of $143,265,000 before tax ($101,125,000 after tax). The charge includes a $120,400,000 pre-tax ($78,260,000 after tax) write down of fixed assets at two coal mines in the Natural Resources segment to their estimated fair market values. Fair market values were based principally on expected future discounted cash flows. In addition, a $22,865,000 write off of excess of purchase price over net assets acquired was recorded in the Industrial and Other Products segment, substantially all of which was at JW Window Components, Inc. Adoption of this standard had no impact on cash flow. F-9 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows (see Notes 1 and 5): MAY 31, ---------------------- 1996 1995 -------- ---------- (IN THOUSANDS) Land and minerals................................... $150,708 $ 196,798 Land improvements................................... 18,143 20,140 Buildings and leasehold improvements................ 98,452 110,758 Mine development costs.............................. 47,930 125,903 Machinery and equipment............................. 548,562 703,138 Construction in progress............................ 25,196 29,670 -------- ---------- Total........................................... $888,991 $1,186,407 -------- ---------- -------- ---------- 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. Depletion of minerals is provided based on estimated recoverable quantities. The Company has capitalized interest on qualifying properties in accordance with Statement of Financial Accounting Standards No. 34. Interest capitalized for the years ended May 31, 1996, 1995 and 1994 was immaterial. Interest paid in cash for the years ended May 31, 1996, 1995 and 1994 was $220,959,000, $437,357,000 and $91,293,000, respectively. NOTE 7--EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED The excess of purchase price over net assets acquired in connection with the acquisition of Original Jim Walter is being amortized over periods ranging up to twenty 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 based upon estimated future undiscounted cash flows from operations of the related business unit (see Note 5). At May 31, 1996, the accumulated amortization of goodwill was approximately $443.3 million. At May 31, 1996, the net unamortized balance of goodwill is not considered to be impaired. F-10 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--DEBT Long-term debt, in accordance with its contractual terms, consisted of the following at each year end: MAY 31, ------------------------ 1996 1995 ---------- ---------- (IN THOUSANDS) Senior debt: Walter Industries, Inc. Revolving Credit Facility................. $ 235,000 $ -- Bank Credit Facility...................... -- -- Term Loan A............................... 121,250 -- Term Loan B............................... 59,750 -- Series B Senior Notes Due 2000............ -- 490,000 Other..................................... 3,350 4,000 ---------- ---------- 419,350 494,000 ---------- ---------- Mid-State Trusts Trust II Mortgage-Backed Notes............ 497,000 584,000 Trust III Asset Backed Notes.............. 147,669 173,527 Trust IV Asset Backed Notes............... 902,277 953,843 Trust V Variable Funding Loan............. 245,000 15,000 ---------- ---------- 1,791,946 1,726,370 ---------- ---------- Total................................. $2,211,296 $2,220,370 ---------- ---------- ---------- ---------- On January 22, 1996, the Company completed a $550 million financing with a syndicate of banks led by NationsBank National Association (South). The financing consisted of a $365 million revolving credit facility ("Revolving Credit Facility"), a $125 million six-year term loan ("Term Loan A") and a $60 million seven-year term loan ("Term Loan B") (collectively the "Credit Facilities"). Proceeds from the financing, together with $75 million drawn under the Trust V Variable Funding Loan Agreement were used to redeem in full $490 million aggregate amount of Series B Senior Notes Due 2000 (the "Senior Notes") at a redemption price of 101% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption and to replace the existing $150 million bank credit facility, both issued in connection with the Company's emergence from bankruptcy in March 1995. The Company recorded an extraordinary loss of $8,314,000 ($5,404,000 net of income tax benefit) consisting of a redemption premium and the write off of unamortized debt expense related to the early repayment of the Senior Notes and the $150 million bank credit facility. The Credit Facilities are secured by a pledge of intercompany notes and stock of certain subsidiaries of the Company. Net cash proceeds from certain asset sales must be applied to permanently reduce the Credit Facilities and beginning with fiscal year ending May 31, 1997, 50% of the excess cash flow (as defined in the Credit Facilities) must be used to permanently reduce Term Loan A and Term Loan B. The Revolving Credit Facility is a six year non-amortizing facility which includes a sub-facility for trade and other standby letters of credit in an amount up to $40 million at any time outstanding and a sub-facility for swingline advances in an amount not in excess of $15 million at any time outstanding. 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 1/2%, or (ii) a LIBOR rate plus an Applicable Margin of 3/4% to 1 3/4% (based F-11 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--DEBT--(CONTINUED) upon a leverage ratio pricing grid). At May 31, 1996, the weighted average interest rate was 6.74%. A commitment fee ranging from 1/4% to 1/2% 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 3/8%. At May 31, 1996, there were no swingline borrowings outstanding under this facility; however, letters of credit in the aggregate face amount of $23,042,000 have been issued thereunder. Term Loan A 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 1/2%, or (ii) a LIBOR rate plus 3/4% to 1 3/4% (based upon a leverage ratio pricing grid). Scheduled principal payments to be made in each of the five years from May 31, 1996 are $15,000,000, $16,250,000, $21,250,000, $25,000,000 and $25,000,000, respectively. At May 31, 1996, the weighted average interest rate was 6.64% Term Loan B interest is at LIBOR plus 2% to 2 1/4% (based upon a leverage ratio pricing grid). At May 31, 1996, the interest rate was 7.39%. Scheduled principal payments in each of the five years from May 31, 1996 are $1,000,000. The Trust II Mortgage-Backed Notes (see Note 4) were issued in five classes in varying principal amounts. Three of the classes have been fully repaid. The two remaining classes A3 and A4 bear interest at the rates of 9.35% and 9.625%, respectively. Interest on each class of notes is payable quarterly on each 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 A3 and Class A4 Notes in order of maturity. Maturities of the balance of these Mortgage-Backed Notes range from April 1, 1998 for the Class A3 Notes to April 1, 2003 for the Class A4 Notes. The Class A3 and Class A4 Notes are subject to special principal payments and the Class A4 Notes may be subject to optional redemption under specified circumstances. The scheduled principal amount of notes maturing in each of the five years from May 31, 1996 is $87,000,000, $87,000,000, $64,600,000, $64,600,000 and $64,600,000, respectively. The Trust III Asset Backed Notes (see Note 4) bear interest at 7.625%, constitute a single class and have a final maturity date of April 1, 2022. Payments are made quarterly on January 1, April 1, July 1 and October 1, based on collections on the underlying collateral less amounts paid for interest on the notes and Trust III expenses. The Trust IV Asset Backed Notes (see Note 4) 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 million Variable Funding Loan Agreement with Enterprise Funding Corporation, an affiliate of NationsBank National Association, as lender, and NationsBank National Association (Carolinas), as Administrative Agent. It is contemplated that this facility will be an evergreen three-year facility with periodic paydowns from the proceeds of permanent financings similar to those done by Trusts II, III and IV. The facility currently matures on March 3, 1999. Accordingly, the $245 million of borrowings outstanding at May 31, 1996 has been classified as long-term debt. Interest is based on the cost of A-1 and P-1 rated commercial paper plus 3/4%. Commitment fees on the unused facility are .55%. F-12 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--DEBT--(CONTINUED) The Company uses interest rate swaps that are relatively straightforward and involve little complexity as hedge instruments to manage interest rate risks. At the present time 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 rates and proceeds in refinancing from short-term to long-term certain indebtedness secured by the fixed rate instalment notes receivable generated by its homebuilding business. At May 31, 1996, Trust V had in place a swap agreement with a notional amount of $216 million under which it pays a fixed interest rate of 5.25% and receives interest based on commercial paper rates. This swap is in effect until June 30, 1997, accretes monthly and is designed to offset the interest rate risk of the Trust V Variable Funding Loan Agreement. Also at May 31, 1996, Trust V had in place forward swaps totaling $100 million notional amount which will start June 30, 1997 and run for 10 years at a blended monthly fixed rate of 7.25%. At that time Trust V would begin to receive interest based on prevailing commercial paper rate levels. It is the Company's intent to terminate those forward swaps when a long-term fixed rate financing is put in place for a portion of the instalment notes receivable portfolio. The gain or loss at termination will be deferred and amortized over the life of the new financing. The Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, pay dividends, create liens on assets, enter into leases, make investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including change of control and asset sale transactions). In addition, under the Credit Facilities, the Company is required to maintain specified financial ratios and comply with certain financial tests, including interest coverage, fixed charge coverage ratios and maximum leverage ratios, some of which become more restrictive over time. The Company was in full compliance with these covenants at May 31, 1996. The Trust V Variable Funding Loan Agreement's covenants, among other things, restricts the ability of Trust V to dispose of assets, create liens and engage in mergers or consolidations. The Company was in full compliance with these covenants at May 31, 1996. NOTE 9--INCOME TAXES Income tax expense (benefit) is made up of the following components:
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 ------------------ ------------------- ------------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED ------- -------- -------- -------- -------- -------- (IN THOUSANDS) United States.............................. ($ 799 ($ 54,846) ($ 80,445) ($ 88,815) $ 38,712 ($ 11,716) State and local............................ 1,420 ( 930) ( 309) ( 881) 2,886 ( 965) ------- -------- -------- -------- -------- -------- Total................................... $ 621 ($55,776) ($ 80,754) ($ 89,696) $ 41,598 ($ 12,681) ------- -------- -------- -------- -------- -------- ------- -------- -------- -------- -------- --------
In fiscal 1996 the Company received a refund of federal income tax of $22.2 million paid in 1995 as estimated payments while in fiscal 1995 and 1994 the Company paid federal income tax of approximately $30.6 million and $37.1 million. State income taxes refunded in fiscal 1996 were approximately $0.1 million while state income taxes paid in 1995 and 1994 were approximately $4.0 million and $2.1 million, respectively. F-13 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--INCOME TAXES--(CONTINUED) The Company complies with Statement of Financial Accounting Standards No. 109 ("FASB 109"), "Accounting for Income Taxes". FASB 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 which have been recognized in the Company's financial statements or tax returns. FASB 109 generally considers all expected future events other than changes in tax law or rates. The income tax expense (benefit) before extraordinary item at the Company's effective tax rate differed from the statutory rate as follows:
FOR THE YEARS ENDED MAY 31, --------------------------- 1996 1995 1994 ----- ----- ----- Statutory tax rate................................................ (35.0)% (35.0)% 35.0% Effect of: Adjustment to deferred taxes.................................. -- -- 5.3 State and local income tax.................................... .2 ( .2) 3.3 Percentage depletion.......................................... ( 2.6) ( .5) ( 1.7) Enacted tax rate change....................................... -- -- 9.4 Nonconventional source fuel credit............................ -- -- (10.8) Amortization of excess of purchase price over net assets acquired and FASB 121 charge................................ 16.2 2.7 47.1 Benefit of capital loss carryforward.......................... ( 5.9) ( 1.5) ( 8.5) Adjustment of prior years net operating loss carryforward..... ( 5.0) -- -- Effect of rate difference and avoidance of loss of credits on net operating loss due to carryforward election............. ( 9.1) 2.3 -- Other, net.................................................... .2 -- 1.0 ----- ----- ----- Effective tax rate................................................ (41.0)% (32.2)% 80.1% ----- ----- ----- ----- ----- -----
The tax benefit related to the extraordinary item approximates the statutory rate and is deferred federal income tax. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law raising the federal corporate income tax rate to 35% from 34%, retroactive to January 1, 1993. FASB 109 requires that deferred tax liabilities and assets be adjusted in the period of enactment for the effect of an enacted change in the tax laws or rates. The effect of the change was $2,833,000 and such amount is F-14 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--INCOME TAXES--(CONTINUED) included in the provision for deferred income taxes for the year ended May 31, 1994. Deferred tax liabilities (assets) are comprised of the following:
MAY 31, ------------------------ 1996 1995 --------- -------- (IN THOUSANDS) Instalment sales method for instalment notes receivable in prior years............................................................ $ 34,691 $ 43,312 Depreciation...................................................... 78,462 116,625 Difference in basis of assets under purchase accounting........... 20,424 23,894 Capital loss carryforward......................................... -- ( 7,977) Net operating loss carryforward................................... ( 155,283) ( 31,488) Accrued expenses.................................................. ( 39,034) ( 81,855) Postretirement benefits other than pensions....................... ( 94,431) ( 87,032) Valuation allowance............................................... -- 7,977 --------- -------- Total deferred tax (asset) liability.......................... ($155,171) ($ 16,544) --------- -------- --------- --------
The Revenue Act of 1987 eliminated the instalment sales method of tax reporting for instalment sales after December 31, 1987. As a result of the loss incurred in the 1995 fiscal year, the Company recorded a federal income tax receivable of approximately $99.9 million. During fiscal 1996 the Company elected to carry the 1995 loss forward rather than back to prior years. Accordingly, $77.7 million has been reclassified from federal income tax receivable to a deferred tax asset. The election to carryforward the net operating loss generated a tax benefit of approximately $19 million in the fourth quarter due to the effect of the rate difference, avoidance of loss of credits and other miscellaneous tax adjustments. The Company's net operating loss carryforward at May 31, 1996 approximates $443.6 million of which $372.3 million will expire in fiscal 2010 and $71.3 million will expire in fiscal 2011. Also during the fourth quarter of fiscal 1996 the Company utilized its capital loss carryforward of approximately $22.8 million. Under the Internal Revenue Code, if certain substantial changes in the Company's ownership occur, there are annual limitations on the amount of loss and credit carryforwards. The reorganization under the Consensual Plan created an ownership change in fiscal 1995; therefore, $296 million of the net operating loss carryforward is subject to the annual limitation which will be eliminated by fiscal 1998. However, the Company believes that the annual limitation will not affect the realization of the net operating loss carryforward. The Company allocates federal income tax expense (benefit) to its subsidiaries based on their separate taxable income (loss). A substantial controversy exists with regard to federal income taxes allegedly owed by the Company. Proofs of claim have been filed by the Internal Revenue Service in the amounts of $110,560,883 with respect to fiscal years ended August 31, 1980 and August 31, 1983 through August 31, 1987, $31,468,189 with respect to fiscal years ended May 31, 1988 (nine months) and May 31, 1989 and $44,837,693 with respect to fiscal years ended May 31, 1990 and May 31, 1991. Objections to the proofs of claim have been filed by the Company and the various issues are being litigated in the Bankruptcy Court. Although the range for such claims is zero to $186 million, the Company believes that such proofs of claim are substantially without merit and intends to defend such claims against the Company vigorously. F-15 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--STOCKHOLDERS' EQUITY The Company is authorized to issue 200,000,000 shares of common stock, $.01 par value. As of May 31, 1996, 54,868,335 shares of common stock are outstanding. Pursuant to the Consensual Plan, 494,313 shares were issued on September 13, 1995 to all former stockholders as of the Effective Date of the Consensual Plan. Also on September 13, 1995, pursuant to the Consensual Plan, 3,880,140 shares of common stock were issued to an escrow account. To the extent that certain federal income tax matters of the Company are resolved satisfactorily, up to a maximum 3,880,140 of the escrowed shares will be distributed to all former stockholders of the Company as of the Effective Date. To the extent such matters are not resolved satisfactorily, the escrowed shares will be returned to the Company and canceled. Net loss per share has been computed by dividing net loss by the weighted average number of common shares issued of 50,988,195, which includes 494,313 additional shares issued on September 13, 1995 pursuant to the Consensual Plan, but does not include 3,880,140 additional shares issued to an escrow account on September 13, 1995 because such issuance is contingent on future events and would be anti-dilutive in the current year. In management's opinion, per share information for fiscal year 1994 is not relevant given the significant change in the Company's capital structure which occurred as a result of the Company's reorganization pursuant to the Consensual Plan (see Note 1). NOTE 11--STOCK OPTIONS Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved by stockholders in October 1995, an aggregate of 3,000,000 shares of the Company's common stock have been reserved for the grant and issuance of incentive and non-qualified stock options, stock appreciation rights ("SAR's") and stock awards. The maximum number of such shares with respect to which stock options or SAR's may be granted to any employee during which the plan is in effect is 500,000 shares and the aggregate number of such shares that may be used in settlement of stock awards is 1,000,000 shares. An option becomes exercisable at such times and in such installments as set by the Compensation Committee of the Board 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. Information on stock options is summarized as follows: 1996 -------------------------- AVERAGE PRICE SHARES PER SHARE --------- ------------- Outstanding at beginning of year................... -- $-- Granted............................................ 1,500,000 14.120 Exercised.......................................... -- -- Canceled........................................... ( 13,000) 14.125 --------- --------- Outstanding at end of year......................... 1,487,000 14.120 --------- --------- Exercisable at end of year......................... -- -- --------- --------- F-16 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--LITIGATION AND OTHER MATTERS Veil-Piercing Suits Beginning in early 1989, the Company and certain of its officers, directors and shareholders were named as co-defendants in a number of lawsuits brought by persons ("Asbestos Claimants") claiming that the Company should be held liable for all asbestos-related liabilities of The Celotex Corporation ("Celotex") and its parent, Jim Walter Corporation ("JWC"). The stock of a predecessor of JWC ("Original Jim Walter") was acquired by a company known as Hillsborough Acquisition Corporation ("HAC"), a former subsidiary of the Company, pursuant to a 1988 leveraged buyout (the "LBO"). Asserting a variety of theories of derivative liability, including piercing the corporate veil, the suits alleged, among other things, that Original Jim Walter was liable for all asbestos-related liabilities of Celotex and that the distribution by HAC of substantially all of its assets to the Company pursuant to the LBO was therefore a fraudulent conveyance (the "Veil-Piercing Suits"). On December 27, 1989, the Company and certain of its subsidiaries filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"), which stayed all Veil-Piercing Suits pursuant to the automatic stay. In January 1990, the Company filed a declaratory judgment action ("Adversary Proceeding") against all Asbestos Claimants who had filed Veil-Piercing Suits seeking a ruling that the Company could not be held liable for any asbestos-related liabilities of Celotex or JWC on any grounds, asserting that the corporate veil separating Original Jim Walter and Celotex was intact, and asserting that the LBO could not be deemed a fraudulent conveyance. In April 1994, the Bankruptcy Court ruled in favor of the Company on all of the claims asserted in the Adversary Proceeding. The ruling was affirmed by the United States District Court for the Middle District of Florida (the "District Court") on October 13, 1994. Thereafter, a settlement (the "Veil-Piercing Settlement") was entered into among the Company, certain of its creditors, Celotex, JWC and representatives of the Asbestos Claimants pursuant to which all the Veil-Piercing Suits would be dismissed and the Company and its officers, directors and relevant stockholders would be released from all liabilities relating to the LBO or associated with asbestos-related liabilities of Celotex or JWC. The Veil-Piercing Settlement is embodied in the Amended Joint Plan of Reorganization Dated as of December 9, 1994 as modified on March 1, 1995 (as so modified the "Consensual Plan") that was confirmed by the Bankruptcy Court pursuant to an order signed on March 2, 1995. The Consensual Plan binds all known and unknown claimants and enjoins such persons or entities from bringing any suits against the Company in the future for asbestos or LBO related claims. Dismissal of the Veil-Piercing Suits is in process and all of these suits will be dismissed in the near future pursuant to the terms of the Veil-Piercing Settlement and the Consensual Plan. On March 8, 1996, the Company, together with various other parties, filed an adversary proceeding with the Bankruptcy Court, naming Celotex and JWC as defendants. In this proceeding the Company and the other named plaintiffs allege that Celotex and JWC breached the Veil-Piercing Settlement by failing to propose and use their best efforts to obtain confirmation of a Chapter 11 plan for Celotex (which is presently in bankruptcy) that included an injunction issued pursuant to Section 524(g) of the Bankruptcy Code or other similar injunctive relief acceptable to each of the parties to the Veil-Piercing Settlement. Although all Veil-Piercing claims by Asbestos Claimants were resolved as part of the Consensual Plan, the Company believes that Section 524(g) would afford additional statutory protection to the Company against the possibility of such claims in the future. The Company believed that the plan of reorganization proposed by Celotex in its Chapter 11 proceeding failed to conform with the F-17 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED) terms of the Veil-Piercing Settlement; that the plan proposed by Celotex did not meet the requirements of Section 524(g); and that Celotex and JWC failed to propose and use their best efforts to obtain confirmation of a plan of reorganization in the Celotex bankruptcy that included a provision for an injunction as required by the Veil-Piercing Settlement. The defendants contend that the proposed Celotex plan met the requirements of the Veil-Piercing Settlement. This proceeding requested the Bankruptcy Court to (i) declare the rights and obligations of the various parties to the Veil-Piercing Settlement and (ii) issue an order requiring specific performance by each of the named defendants of their obligations under the Veil-Piercing Settlement. The Company, Celotex and JWC each filed motions in the Bankruptcy Court seeking an order granting summary judgment in favor of the respective party. On May 28, 1996, the Bankruptcy Court issued an order granting in part the Company's motion for summary judgment and denying the motions for summary judgment filed by Celotex and JWC. The Bankruptcy Court found that the plan of reorganization filed by Celotex in its Chapter 11 proceeding did not comply with the terms of the Veil-Piercing Settlement. The Bankruptcy Court, however, declined to issue a mandatory injunction compelling compliance, but rather left to the parties the opportunity to fashion an alternative remedy. The parties were unable to agree on an alternative remedy and on June 7, 1996, the Company requested that the Bankruptcy Court grant injunctive relief compelling Celotex and JWC to perform their respective obligations under the Veil-Piercing Settlement. In light of confirmation hearings scheduled to begin June 10, 1996 in the Celotex bankruptcy, the Bankruptcy Court denied the relief requested without prejudice to request such relief in the future. The Bankruptcy Court's May 28, 1996 order has been appealed by Celotex and JWC. On June 12, 1996, the court in the Celotex bankruptcy (the "Celotex Bankruptcy Court"), in response to an announcement by certain parties, including Celotex, of an agreement to an alternative plan of reorganization, denied confirmation of the Celotex plan of reorganization. On July 12, 1996, certain parties to the Celotex reorganization, together with Celotex filed with the Celotex Bankruptcy Court a proposed plan of reorganization. That plan contains a provision for an injunction pursuant to Section 524(g). The proposed plan is subject to approval of Celotex' creditors and confirmation by the Celotex Bankruptcy Court. SOUTH CAROLINA LITIGATION In February 1995, Jim Walter Homes and Mid-State filed an adversary action for declaratory judgment in the Bankruptcy Court against all South Carolina homeowners who purchased their homes between July 1, 1982 and December 27, 1989. The complaint in the adversary action sought a declaration that Jim Walter Homes and Mid-State did not violate a South Carolina statute that provided homeowners a preferential choice of attorneys to represent them in the closing of the purchase of their homes. The adversary action was settled for $3 million which, after application of settlement proceeds to pay arrearages on the homeowners' mortgages, resulted in a net cash outlay of approximately $1,050,000, and legal fees of $360,000. On November 22, 1995, the Bankruptcy Court approved the settlement and distribution pursuant to the settlement has been completed. Texas Litigation In May 1991, Jim Walter Homes and Mid-State, together with Trust II and certain other parties, were involved in various lawsuits, primarily in the Bankruptcy Court, with approximately 750 owners of F-18 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED) 446 houses constructed by Jim Walter Homes in south Texas. The homeowners sought damages based upon alleged construction defects, common law fraud, and violations of various Texas and federal statutes. The litigation was settled pursuant to a settlement agreement approved by the Bankruptcy Court on July 13, 1995. The settlement figure was approximately $3,600,000 in account balance reductions (of which approximately $1,250,000 represents a principal reduction), plus an approximate aggregate of $27,500 cash to certain homeowner claimants and $2,900,000 as attorney's fees (of which $900,000 was deferred and is payable over five years). Cases involving approximately 22 non-settling homeowner accounts will be resolved on an individual basis before the Bankruptcy Court and the Company has filed motions believed by the Company to be dispositive of these remaining issues. Suit by the Company and Jim Walter Resources, Inc. for Business Interruption Losses On May 31, 1995, the Company and Jim Walter Resources, Inc. ("JWR") filed a lawsuit in the Circuit Court for Tuscaloosa County, Alabama (Civil Action No. CV-95-625) against certain insurers. The lawsuit arises out of a spontaneous combustion fire that began in JWR's underground coal mine No. 5 on November 17, 1993. Efforts to control the fire caused a blockage in the tunnels, corridors, and passageways necessary to conduct mining, so mining operations temporarily ceased. After JWR believed that the fire had been extinguished or brought under control, JWR resumed its mining operations. JWR subsequently detected that the intensity of the fire increased substantially, making it necessary to seal off portions of the mine and to lose permanently certain corridors and passageways necessary to the continued mining of the longwall panel then being mined. JWR's longwall mining was interrupted until another longwall panel could be prepared. In addition to the mining of coal, JWR produces natural gas from wells drilled into the mine, and production of the gas from the area of the lost longwall panel was also lost. As a result of the fire, the Company and JWR claimed compensable losses in the amount of $25 million under their business interruption insurance coverage. When the insurers refused to pay their pro rata part of the claim, the lawsuit described above was commenced. The complaint filed by the Company and JWR seeks payment of the amounts claimed to be due under the insurance policies in question and a declaratory judgment that the policies in question are not void or voidable due to any alleged failure to disclose or a lack of fortuity. Certain of the insurers have counterclaimed for rescission on the basis of nondisclosure and lack of fortuity. The Company and JWR also seek a declaratory judgment stating that each of the insurers is liable for its pro rata share of the business interruption loss. In addition, the Company and JWR have asserted a claim for bad faith refusal to pay against certain insurers. The insurers issued policies insuring various percentages of the risk. The Company has entered into settlements with several insurers, who, in the aggregate have paid approximately $11.7 million to date, reducing the contract claims in the lawsuit to approximately $12.7 million. The Company and JWR continue to pursue the litigation against the remaining carriers and a trial is tentatively scheduled for October 21, 1996. F-19 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED) Litigation Related to Chapter 11 Distributions to Certain Holders of Subordinated Notes and/or Debentures 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 shares of Common Stock of the Company. Such elections (the "Subordinated Note Claim Election") were to be made on the ballots used for voting on the Creditors' Plan. A balloting agent was retained to receive and separately tabulate ballots cast on the Creditors' Plan and the Debtors' Fifth Amended Joint Plan of Reorganization (the "Company's Plan"). Voting on the Company's Plan and the Creditors' Plan took place during the period August 12, 1994 through September 23, 1994. Subsequent to September 23, 1994, the balloting agent filed with the Bankruptcy Court two (2) separate voting certifications. The voting certification with respect to the Creditors' Plan not only set forth the voting results but also listed the names of subordinated bondholders who made the Subordinated Note Claim Election. The Consensual Plan confirmed by the Bankruptcy Court, which technically constituted a modification of the Creditors' Plan, (a) kept in place the Subordinated Note Claim Election provision and prior elections, (b) contained as Exhibit 8 a schedule prepared by the balloting agent which set forth the names of the subordinated bondholders who made the Subordinated Note Claim Election (the "Exhibit 8 Schedule"), and (c) contained a new election (the "Class U-4 Exchange Election") which provided that those subordinated bondholders who made the Subordinated Note Claim Election were eligible to make the Class U-4 Exchange Election whereby they could essentially "exchange" shares of Common Stock for new senior notes which Lehman Brothers, Inc. was otherwise entitled to receive. In February 1995, the balloting agent filed a voting certification with the Bankruptcy Court which listed those subordinated bondholders who made the Class U-4 Exchange Election (the "Exchange Election Schedule"). In preparing to make distributions to subordinated bondholders, it came to the attention of the Company that the Exhibit 8 Schedule and the Exchange Election Schedule were inaccurate. As a result, the Company reviewed all ballots that the balloting agent claimed to be in its possession and determined that discrepancies existed between the Exhibit 8 Schedule and Exchange Election Schedule and certain of the ballots cast by subordinated bondholders. On or about April 5, 1995, the Company filed a motion with the Bankruptcy Court seeking to amend the Exhibit 8 Schedule and the Exchange Election Schedule. On April 28, 1995, an order was entered reflecting the Bankruptcy Court's decision to permit the amendment of the Exhibit 8 Schedule and the Exchange Election Schedule to correct errors on the information contained therein and not to permit such Schedules to be amended to include any additional bondholders(the "April 28 Order"). Four bondholders each filed a motion with the Bankruptcy Court seeking a stay of the April 28 Order pending appeal to the United States District Court. On May 10, 1995, the Bankruptcy Court denied each of the stay motions. Two of such bondholders then each filed emergency motions for a stay pending appeal with the District Court. On May 11, 1995, the District Court issued an order denying the emergency motions. F-20 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--LITIGATION AND OTHER MATTERS--(CONTINUED) On May 14, 1995, one of such bondholders filed a petition for a writ of mandamus with the Eleventh Circuit Court of Appeals which was denied on May 15, 1995. Appeals from the April 28 Order were filed with the District Court by six bondholders. (Two of the appeals have been dismissed). The appeals raise similar issues and ultimately seek the same relief-- reversal of the April 28 Order as it applies to appellants and the modification of the consideration that appellants are to be provided under the Consensual Plan, so that a portion of their distribution would be comprised of Qualified Securities, instead of Common Stock of the Company. The Company filed a brief in support of the April 28 Order and also filed a motion to dismiss the remaining four appeals of the appellants as moot and to dismiss two of those appeals for failure to file timely briefs. Subsequently, one of the remaining four appeals has been voluntarily dismissed. At this time the Company is unable to predict whether or not the three pending appeals will be dismissed, or the ultimate outcome of such appeals. Chapter 11 Adversary Proceeding Filed by Certain Holders of Series B & C Senior Notes On June 15, 1995, certain holders of Series B & C Notes (the "Noteholders") commenced an adversary proceeding in the Bankruptcy Court against the Company, as Disbursing Agent, and its subsidiaries seeking payment of interest for the period from the Effective Date (March 17, 1995) until the date distribution was received by such Noteholders. The Bankruptcy Court entered an order on January 17, 1996 denying the Noteholders' claim for interest, which order was not appealed. INCOME TAX LITIGATION A substantial controversy exists with regard to federal income taxes allegedly owed by the Company. See Note 9-- Income Taxes for a more complete explanation. MISCELLANEOUS LITIGATION The Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. Most of these cases are in a preliminary stage and the Company is unable to predict a range of possible loss, if any. The Company provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on the Company's future results of operations cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, the Company believes that the final outcome of such other litigation will not have a materially adverse effect on the Company's consolidated financial condition. NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS The Company has various pension and profit sharing plans covering substantially all employees. In addition to its own pension plans, the Company contributes to certain multi-employer plans. Total pension expense for the years ended May 31, 1996, 1995 and 1994, was $11.8 million, $8.2 million and $9.7 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 F-21 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS--(CONTINUED) Funding Standards" of the Employee Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits based on years of service and compensation or at stated amounts for each year of service. The net pension costs for Company administered plans are as follows:
FOR THE YEARS ENDED MAY 31, ----------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Service cost-benefits earned during the period.................. $ 6,072 $ 5,817 $ 5,334 Interest cost on projected benefit obligation................... 16,972 16,174 16,333 Actual loss (return) on assets.................................. (35,347) 4,304 (19,352) Net amortization and deferral................................... 20,236 (21,377) 3,145 ------- ------- ------- Net pension costs........................................... $ 7,933 $ 4,918 $ 5,460 ------- ------- ------- ------- ------- -------
The following table sets forth the funded status of Company administered plans:
MAY 31, 1996 MAY 31, 1995 ----------------------------- ----------------------------- PLANS IN WHICH PLANS IN WHICH ----------------------------- ----------------------------- ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS ------------- ------------- ------------- ------------- (IN THOUSANDS) Actuarial present value of accumulated benefit obligations: Vested benefits............................... $ 149,542 $ 50,941 $ 134,589 $ 47,474 Non-vested benefits........................... 6,815 1,585 5,849 1,207 ------------- ------------- ------------- ------------- $ 156,357 $ 52,526 $ 140,438 $ 48,681 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Plan assets at fair value, primarily stocks and bonds.......................................... $ 189,728 $ 34,609 $ 169,635 $ 31,023 Projected benefit obligations................... 188,422 54,008 169,984 49,681 ------------- ------------- ------------- ------------- Plan assets in excess of (less than) projected benefit obligations........................... 1,306 (19,399) ( 349) (18,658) Unamortized portion of transition (asset) obligation at June 1, 1986.................... (9,185) 4,021 (10,507) 4,785 Unrecognized net loss from actual experience different from that assumed.................... 13,191 6,124 20,545 6,610 Prior service cost not recognized............... 618 3,595 696 2,269 Contribution to plans after measurement date.... -- 1,042 -- 667 ------------- ------------- ------------- ------------- Prepaid (accrued) pension cost.................. 5,930 ( 4,617) 10,385 (4,327) Additional liability............................ -- (12,507) -- (2,664) ------------- ------------- ------------- ------------- Prepaid pension cost (pension liability) recognized in the balance sheet............... $ 5,930 $ (17,124) $ 10,385 $ (16,991) ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
The projected benefit obligations were determined using an assumed discount rate of 7 1/2% in fiscal 1996 and 8% in 1995 and, where applicable, an assumed increase in future compensation levels of 4 1/2% in fiscal 1996 and 5% in 1995. The assumed long-term rate of return on plan assets was 8% in fiscal 1996 and 1995. F-22 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS--(CONTINUED) Under the labor contract with the United Mine Workers of America, Jim Walter Resources 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 $41.5 million at May 31, 1996. However, although the net liability can be estimated, its components, the relative position of each employer with respect to actuarial present value of accumulated benefits and net assets available for benefits, are not available to the Company. The Company provides certain postretirement benefits other than pensions, primarily healthcare, to eligible retirees. The Company's postretirement benefit plans are not funded. Postretirement benefit costs were $27.1 million in 1996, $26.0 million in 1995 and $25.6 million in 1994. Amounts paid for postretirement benefits were $7.7 million in 1996, $7.5 million in 1995 and $5.5 million in 1994. The net periodic postretirement benefit cost includes the following components:
FOR THE YEARS ENDED MAY 31, ------------------------------ 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) Service cost.................................................. $ 8,668 $ 8,491 $ 9,302 Interest cost................................................. 18,701 17,470 16,283 Net amortization and deferral................................. ( 240) -- -- -------- ------- ------- Net periodic postretirement benefit cost.................. $ 27,129 $25,961 $25,585 -------- ------- ------- -------- ------- -------
The accumulated postretirement benefits obligation at May 31, 1996 and 1995 are as follows:
MAY 31, ---------------------- 1996 1995 --------- --------- (IN THOUSANDS) Retirees............................................................. $ 93,380 $ 92,550 Fully eligible, active participants.................................. 32,896 30,129 Other active participants............................................ 132,026 111,084 --------- --------- Accumulated postretirement benefit obligation........................ 258,302 233,763 Unrecognized net loss................................................ ( 10,475) ( 5,352) --------- --------- Postretirement benefit liability recognized in the balance sheet..... $ 247,827 $ 228,411 --------- --------- --------- ---------
The principal assumptions used to measure the accumulated postretirement benefit obligation include a discount rate of 7 1/2% in fiscal 1996 and 8% in 1995 and a health care cost trend rate of 9 1/2% declining to 5 1/4% over a nine year period and remaining level thereafter in fiscal 1996 and a health care cost trend rate of 10% declining to 5 1/2% over a ten year period in fiscal 1995. A one percent increase in trend rates would increase the accumulated postretirement benefit obligation by 18% and increase net periodic postretirement benefit cost for 1996 by 20%. Certain subsidiaries of the Company maintain profit sharing plans. The total cost of these plans for the years ended May 31, 1996, 1995 and 1994 was $2.9 million, $3.0 million and $3.1 million, respectively. F-23 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FASB 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 allowed under FASB 107. The derived fair value estimates resulting from the judgments and valuation techniques applied cannot be substantiated by comparison to independent materials or to disclosures by other companies with similar financial instruments. Furthermore, FASB 107 fair value disclosures do not purport to be the amount which could be attained in immediate settlement of the financial instrument. Fair value estimates are not necessarily more relevant than historical cost values and have limited usefulness in evaluating long-term assets and liabilities held in the ordinary course of business. Accordingly, management believes that the disclosures required by FASB 107 have limited relevance to the Company and its operations. The following methods and assumptions were used to estimate fair value disclosures: Cash (including short-term investments) and short-term investments, restricted--The carrying amounts reported in the balance sheet approximates fair value. Instalment notes receivable--The estimated fair value of instalment notes receivable at May 31, 1996 was in the range of $2.0 billion to $2.1 billion. The estimated fair value is based upon valuations prepared by an investment banking firm as of May 31, 1996. 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 debt at May 31, 1996 was $2.268 billion based on current yields for comparable debt issues or prices for actual transactions. NOTE 15--SEGMENT INFORMATION Information relating to the Company's business segments is set forth on pages F-25 through F-27. Prior years Contributions to Operating Income has been restated to reflect amortization of excess purchase price over net assets acquired by operating segment, which amortization was previously included in unallocated corporate interest and other expense. F-24 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--SEGMENT INFORMATION--(CONTINUED)
FOR THE YEARS ENDED MAY 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS) Sales and Revenues: Homebuilding and related financing...................... $ 413,111 $ 407,119 $ 424,530 Water and waste water transmission products............. 421,436 412,237 357,189 Natural resources(b).................................... 364,113 332,251 319,410 Industrial and other products........................... 286,783 284,230 224,673 Corporate............................................... 192 6,485 2,722 ----------- ----------- ----------- Consolidated sales and revenues(a)(c)............... $ 1,485,635 $ 1,442,322 $ 1,328,524 ----------- ----------- ----------- ----------- ----------- ----------- Contributions to Operating Income(d)(e): Homebuilding and related financing...................... $ 63,317 $ 44,822 $ 61,763 Water and waste water transmission products............. 13,966 16,240 13,426 Natural resources (f)................................... ( 106,509) 21,400 152 Industrial and other products (f)....................... ( 9,509) 9,275 11,227 ----------- ----------- ----------- ( 38,735) 91,737 86,568 Less--Unallocated corporate interest and other expense (g).................................................... ( 95,712) ( 620,832) ( 50,476) Income taxes............................................ 55,155 170,450 ( 28,917) ----------- ----------- ----------- Income (loss) before extraordinary item............. ($ 79,292 ($ 358,645 $ 7,175 ----------- ----------- ----------- ----------- ----------- ----------- Depreciation, Depletion and Amortization: Homebuilding and related financing...................... $ 3,279 $ 3,336 $ 3,093 Water and waste water transmission products............. 18,636 16,520 16,063 Natural resources....................................... 38,652 41,434 40,326 Industrial and other products........................... 11,890 9,073 9,821 Corporate............................................... 1,884 1,674 1,732 ----------- ----------- ----------- Total............................................... $ 74,341 $ 72,037 $ 71,035 ----------- ----------- ----------- ----------- ----------- ----------- Gross Capital Expenditures: Homebuilding and related financing...................... $ 3,735 $ 4,192 $ 3,210 Water and waste water transmission products............. 12,888 15,538 14,426 Natural resources....................................... 53,576 46,214 40,224 Industrial and other products........................... 12,792 24,692 10,054 Corporate............................................... 532 681 1,917 ----------- ----------- ----------- Total............................................... $ 83,523 $ 91,317 $ 69,831 ----------- ----------- ----------- ----------- ----------- ----------- Identifiable Assets: Homebuilding and related financing...................... $ 1,802,950 $ 1,789,582 $ 1,832,919 Water and waste water transmission products............. 480,209 480,617 490,004 Natural resources....................................... 381,582 465,680 450,468 Industrial and other products........................... 177,668 213,836 173,618 Corporate (h)........................................... 248,968 295,438 193,883 ----------- ----------- ----------- Total............................................... $ 3,091,377 $ 3,245,153 $ 3,140,892 ----------- ----------- ----------- ----------- ----------- -----------
F-25 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--SEGMENT INFORMATION--(CONTINUED) - ------------ (a) Inter-segment sales (made primarily at prevailing market prices) are deducted from sales of the selling segment and are insignificant in amount with the exception of the sales of the Industrial and Other Products Group to the Water and Waste Water Transmission Products Group of $13,292,000, $13,373,000 and $11,480,000 and sales of the Natural Resources Group to the Industrial and Other Products Group of $4,774,000, $5,397,000 and $5,650,000 in 1996, 1995 and 1994, respectively. (b) Includes sales of coal of $325,495,000, $297,650,000 and $289,279,000 in 1996, 1995 and 1994, respectively. Jim Walter Resources' coal supply contract with Alabama Power Company that had been in effect since January 1, 1979, as amended, was superseded by a new contract executed May 10, 1994. The new contract is effective from July 1, 1994 through August 31, 1999 with Jim Walter Resources' option to extend such contract through August 31, 2004, subject to mutual agreement on the market pricing mechanism and other terms and conditions of such extension. Sales to Alabama Power Company in the years ended May 31, 1996, 1995 and 1994 were 13%, 13% and 11% of consolidated net sales and revenues, respectively. (c) Export sales, primarily coal, were $171,446,000, $129,071,000 and $155,966,000 in 1996, 1995 and 1994, respectively. Export sales to any single geographic area do not exceed 10% of consolidated net sales and revenues. (d) Operating income amounts are after deducting amortization of excess of purchase price over net assets acquired (goodwill) of $39,096,000 in 1996, $40,027,000 in 1995 and $48,515,000 in 1994. A breakdown by segment is as follows:
FOR THE YEARS ENDED MAY 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Homebuilding and related financing...................... $ 31,246 $ 31,703 $ 40,191 Water and waste water transmission products............. 12,247 12,214 12,215 Natural resources....................................... ( 1,331) ( 1,328) ( 1,327) Industrial and other products........................... 2,135 2,627 2,624 Corporate............................................... ( 5,201) ( 5,189) ( 5,188) -------- -------- -------- $ 39,096 $ 40,027 $ 48,515 -------- -------- -------- -------- -------- --------
(e) Includes postretirement health benefits of $27,129,000, $25,961,000 and $25,585,000 in 1996, 1995 and 1994. A breakdown by segment is as follows:
FOR THE YEARS ENDED MAY 31, ----------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Homebuilding and related financing......................... $ 1,636 $ 2,295 $ 2,170 Water and waste water transmission products................ 3,729 4,362 4,391 Natural resources.......................................... 16,640 15,004 14,681 Industrial and other products.............................. 4,581 3,610 3,662 Corporate.................................................. 543 690 681 ------- ------- ------- $27,129 $25,961 $25,585 ------- ------- ------- ------- ------- -------
(f) Includes FASB 121 write down of fixed assets of $120,400,000 at two coal mines in the Natural Resources Group and write off of goodwill of $22,865,000 in the Industrial and Other Products Group.
F-26 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--SEGMENT INFORMATION--(CONTINUED) (g) Excludes interest expense incurred by the Homebuilding and Related Financing Group of $128,215,000, $131,560,000 and $128,828,000 in 1996, 1995 and 1994, respectively. The balance of unallocated expenses consisting primarily of unallocated interest, corporate expenses and Chapter 11 costs (in 1995 and 1994) are attributable to all groups and cannot be reasonably allocated to specific groups. (h) Primarily cash and corporate headquarters buildings and equipment.
NOTE 16--SUBSEQUENT EVENT On July 12, 1996, competing plans were filed by Celotex, Jim Walter Corporation, the Asbestos Bodily Injury Claimants Committee and others (the "Bodily Injury Plan") and by the Asbestos Property Damage Claimants Committee (the "Property Damage Plan"). The Company filed objections to both plans, on the grounds that they did not comply fully with the Veil-Piercing Settlement. On August 23, 1996, both the Bodily Injury Plan proponents and the Property Damage Plan proponents filed amended plans. The Property Damage Plan, as amended, provides for a Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to all claimants, but reserves the right to seek confirmation of the Bodily Injury Plan even if the asbestos property damage claimants class votes against that plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the property damage claimants class, that would appear to preclude a Section 524(g) injunction as to asbestos property damage claims. However, in such event the Bodily Injury Plan would still provide for an injunction against asbestos property damage claims to the extent such an injunction is allowed by Section 105 of the Bankruptcy Code. Both plans require the approval of creditors and confirmation by the Celotex Bankruptcy Court. A confirmation hearing concerning the Bodily Injury Plan, as amended, and the Property Damage Plan, as amended, is currently scheduled to commence on October 7, 1996. F-27 - ------------------------------------------- ---------------------------------- =========================================== ================================== NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT, AND INFORMATION OR AND REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE 31,885,363 SHARES AN OFFER TO SELL, OR A SOLICITATION OF AN WALTER INDUSTRIES, INC. OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT BE MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS COMMON STOCK SUPPLEMENT NOR ANY SALES MADE HEREUNDER OR THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF. ------------------- TABLE OF CONTENTS PAGE ---- Available Information................ 2 Additional Information............... 2 Prospectus Summary................... 3 Certain Risk Factors................. 9 The Company.......................... 16 Recent History....................... 16 Price Range of Common Stock and Dividend Policy.................... 19 ---------------- Capitalization..................... 20 PROSPECTUS Pro Forma Consolidated Statement of ---------------- Operations......................... 21 Selected Historical Consolidated Financial Data..................... 23 Management's Discussion and Analysis of Results of Operations and Financial Condition.................. 24 Business and Properties.............. 33 Management........................... 52 Security Ownership of Management and Principal Stockholders............. 63 Description of Certain Indebtedness......................... 66 SEPTEMBER 17, 1996 Description of Capital Stock......... 66 Certain Federal Income Tax Consequences........................ 73 Selling Security Holders............. 75 Plan of Distribution................. 76 Legal Matters........................ 77 Experts.............................. 77 Index to Financial Statements........ F-1 - ------------------------------------------- ---------------------------------- =========================================== ================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Registration fee............................................................ $ 139,072.62 Blue Sky fees and expenses.................................................. 1,500.00 Printing and engraving expenses............................................. 75,000.00 Legal fees and expenses..................................................... 330,000.00 Accounting fees and expenses................................................ 70,000.00 Miscellaneous............................................................... 2,000.00 ------------ Total................................................................... $ 617,572.62 ------------ ------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL empowers a Delaware corporation to indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such officer or director acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests, and, for criminal proceedings, had no reasonable cause to believe his conduct was illegal. A Delaware corporation may indemnify officers and directors against expenses (including attorneys' fees) in connection with the defense or settlement of an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually and reasonably incurred. Article IV of the By-laws of the Company provides for indemnification of its officers and directors to the fullest extent permitted by Section 145 of the DGCL. Section 102(b)(7) of the DGCL provides that a Delaware corporation may eliminate or limit the personal liability of a director to a Delaware corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL relating to the unlawful payment of a dividend or an unlawful stock purchase or redemption or (iv) for any transaction from which the director derived an improper personal benefit. Article 6 of the Restated Certificate of Incorporation of the Company provides for the elimination of personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except as otherwise provided by the DGCL. The Company has entered into a Directors and Officers Indemnification Agreement which provides that directors and officers shall be indemnified to the fullest extent permitted by applicable law and obligates the Company to indemnify the directors and officers of the Company (a) if any director or officer is or may become a party to any proceeding against all expenses reasonably incurred by such II-1 director or officer in connection with the defense or settlement of such proceeding, but only if such director or officer acted in good faith and in a manner which such director or officer reasonably believed to be in or not opposed to the best interests of the Company, and in the case of a criminal action or proceeding, in addition, only if such director or officer had no reasonable cause to believe that his or her conduct was unlawful, (b) if a director or officer is or may become a party to any proceeding by or in the name of the Company to procure a judgement in its favor against all expenses reasonably incurred by such director or officer in connection with the defense or settlement of such proceeding, but only if such director or officer acted in good faith and in a manner which such director or officer reasonably believed to be in or not opposed to the best interests of the Company, except no indemnification for expenses need be made in respect of any claim in which such director or officer shall have been adjudged liable to the Company unless a court in which the proceeding is brought determines otherwise and (c) if a director or officer has been successful on the merits or otherwise in defense of any proceeding or claim. The Common Stock Registration Rights Agreement and the Channel One Registration Rights Agreement each requires the Company, on the one hand, and the Holders referred to therein, on the other hand, under certain circumstances, to indemnify each other and, in the case of the Company's indemnification obligations, each other person who participates as an underwriter in an offering thereunder, and each other person who controls such parties and/or underwriters and their respective directors, officers, partners, agents and affiliates against certain liabilities, including liabilities under the Securities Act, incurred in connection with each registration of securities pursuant to such registration rights agreement. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described hereunder or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment to the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person, in connection with the Shares being registered hereby, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Pursuant to the Plan of Reorganization, 50,494,313 shares of Common Stock were issued to certain former creditors and stockholders of the Company and its subsidiaries and $490,000,000 principal amount of Senior Notes were issued to certain former creditors of the Company and its subsidiaries on the Effective Date of the Plan of Reorganization. On September 13, 1995 (180 days after the Effective Date of the Plan of Reorganization), 494,313 additional shares of Common Stock were issued to certain current and former stockholders of the Company and 3,880,140 additional shares were issued to an escrow account and may be distributed to such stockholders to the extent that certain contingencies regarding Federal Income Tax Claims of the Company are resolved satisfactorily. See "Security Ownership of Management and Principal Stockholders" and "Description of Capital Stock--Additional Stock Issuances." All such securities were or will be issued in satisfaction of various prepetition claims allowed by the Bankruptcy Court. In reliance on the exemption provided by Section 1145 of the Bankruptcy Code, none of such securities were or will be registered under the Securities Act in connection with their issuance pursuant to the Plan of Reorganization. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
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)(iii)** --Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, as modified 3(a)** --Restated Certificate of Incorporation of the Company 3(b)** --By-Laws of the Company 4(a)(i)** --Restated Certificate of Incorporation of the Company (see Exhibit 3(a)) 4(a)(ii)** --By-Laws of the Company (see Exhibit 3(b)) 4(b)** --Specimen Stock Certificate 4(c)(i) --12.19% Series B Senior Note Indenture (3) 4(c)(ii) --Form of Company Pledge Agreement (included as Exhibit B to Exhibit 4(c)(i)) (3) 4(c)(iii) --Form of Subsidiary Pledge Agreement (included as Exhibit C to Exhibit 4(c)(i)) (3) 4(c)(iv) --Form of 12.19% Series B Senior Note Certificate (included as Exhibit A to Exhibit 4(c)(i)) (3) 5** --Opinion of Simpson Thacher & Bartlett regarding legality of the securities being registered 10(a)** --Stockholder's Agreement 10(b)(i)** --Form of Common Stock Registration Rights Agreement 10(b)(ii) --Form of Senior Note Registration Rights Agreement (3) 10(b)(iii)** --Channel One Registration Rights Agreement 10(c)** --Durham Employment Agreement 10(d) --Second Amended and Restated Veil Piercing Settlement Agreement (included as Exhibit 3A to Exhibit 2(a)(i)) (1) 10(e) --12.19% Series B Senior Note Indenture (see Exhibit 4(c)(i)) (3) 10(f) --Bank Revolving Credit Facility (terminated) (5) 10(g)** --Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnitees parties thereto 10(h)** --New Alabama Power Contract (4) 10(i)** --Escrow Agreement, dated as of September 12, 1995, between the Company and Harris Trust and Savings Bank, as Escrow Agent 10(j)** --Walter Industries, Inc. Directors' Deferred Fee Plan 10(k) --1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6) 10(l)** --Agreement, dated as of August 30, 1995, between the Company and James W. Walter 10(m) --Bank Credit Agreement (7) 11** --Statement re computation of per share earnings 21** --Subsidiaries of the Company 23(a)** --Consent of Price Waterhouse LLP 23(b)** --Consent of Simpson Thacher & Bartlett (included in their opinion filed as Exhibit 5 hereto) 24*** --Powers of Attorney 27** --Financial Data Schedule
- ------------ ** Previously filed *** A Power of Attorney for Perry Golkin is filed herewith. Powers of Attorney for the other signatories hereto were previously filed in connection with this Registration Statement. II-3 (1) This Exhibit is incorporated by reference to the Application for Qualification of Indenture on 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 on Form S-1 (File No. 33-59021) filed by the Company with the Commission on May 2, 1995. (4) Portions of this document have been omitted pursuant to a request for confidential treatment. (5) This Exhibit is incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 33-59021) 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 (File No. 333-02095) filed by the Company with the Commission on April 1, 1996. (7) This Exhibit is incorporated by reference to the Current Report on Form 8-K filed by the Company with the Commission on February 16, 1996.
(b) Financial Statement Schedules
SCHEDULE NO. - -------- III Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement Amendment to be signed on its behalf by the undersigned, hereunto duly authorized in the City of Tampa, State of Florida on the 17th day of September, 1996. WALTER INDUSTRIES, INC. By /s/ WILLIAM H. WELDON ................................... William H. Weldon Executive Vice President, Chief Financial Officer and Director Pursuant to the requirements of the Securities Act of 1933, this Registration Statement Amendment has been signed by the following persons in the capacities indicated on September 17, 1996.
SIGNATURE TITLE - -------------------------------------- --------------------------------------------------- * Chairman Emeritus and Director ...................................... James W. Walter * Chairman of the Board, President, Chief Executive ...................................... Officer and Director (Principal Executive Kenneth E. Hyatt Officer) /s/ WILLIAM H. WELDON Executive Vice President, Chief Financial Officer ...................................... and Director (Principal Financial Officer) William H. Weldon * Vice President, Controller and Chief Accounting ...................................... Officer (Principal Accounting Officer) Frank A. Hult * Director ...................................... Howard L. Clark, Jr. * Director ...................................... James B. Farley * Director ...................................... Eliot M. Fried * Director ...................................... Perry Golkin * Director ...................................... James L. Johnson * Director ...................................... Michael T. Tokarz *By: /s/ WILLIAM H. WELDON .................................. William H. Weldon Attorney-in-fact
II-5 INDEX TO FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES PAGE - --------------------------------------------------------------------------------------- ---- III Valuation and Qualifying Accounts.............................................. S-2
All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. S-1 SCHEDULE III WALTER INDUSTRIES, INC, AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1996
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COST AND DEDUCTIONS AT END DESCRIPTION OF YEAR EXPENSES FROM RESERVES RECLASSIFICATIONS OF YEAR - --------------------------------- ---------- ---------- ------------- ----------------- ------- (IN THOUSANDS) Reserves (provision for possible losses) deducted from instalment notes receivable.... $ 26,556 $ 743 $ 1,161(1) -- $26,138 ---------- ---------- ------------- ------- ------- ---------- ---------- ------------- ------- ------- Reserve (provision for possible losses) deducted from trade receivables.................... $ 7,998 $ 3,624 $ 3,442(1) -- $ 8,180 ---------- ---------- ------------- ------- ------- ---------- ---------- ------------- ------- ------- Accrued workmen's compensation (2)............... $ 4,500 $ (257) $ 75(3) $ 4,500 $ 8,668 ---------- ---------- ------------- ------- ------- ---------- ---------- ------------- ------- ------- Black Lung reserves (2).......... $ 21,867 $ (3,000) $ 142(3) $(4,500) $14,225 ---------- ---------- ------------- ------- ------- ---------- ---------- ------------- ------- -------
- ------------ (1) Notes and accounts written off as uncollectible. (2) Included in other long-term liabilities. (3) Losses sustained. S-2 SCHEDULE III WALTER INDUSTRIES, INC, AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1995
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COST AND DEDUCTIONS AT END DESCRIPTION OF YEAR EXPENSES FROM RESERVES RECLASSIFICATIONS OF YEAR - --------------------------------- ---------- ---------- ------------- ----------------- ------- (IN THOUSANDS) Reserves (provision for possible losses) deducted from instalment notes receivable.... $ 26,301 $1,155 $ 900(1) -- $26,556 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- ------- Reserve (provision for possible losses) deducted from trade receivables.................... $ 7,392 $3,330 $ 2,724(1) -- $ 7,998 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- ------- Accrued workmen's compensation (2)............... $ 3,737 $ 763 $-- -- $ 4,500 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- ------- Black Lung reserves (2).......... $ 21,997 $-- $ 130(3) -- $21,867 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- -------
- ------------ (1) Notes and accounts written off as uncollectible. (2) Included in other long-term liabilities. (3) Losses sustained. S-3 SCHEDULE III WALTER INDUSTRIES, INC, AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1994
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COST AND DEDUCTIONS AT END DESCRIPTION OF YEAR EXPENSES FROM RESERVES RECLASSIFICATIONS OF YEAR - -------------------------------- ---------- ---------- ------------- ----------------- ------- (IN THOUSANDS) Reserves (provision for possible losses) deducted from instalment notes receivable... $ 26,579 $ 905 $ 1,183(1) -- $26,301 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- ------- Reserve (provision for possible losses) deducted from trade receivables................... $ 7,324 $ 3,706 $ 3,638(1) -- $ 7,392 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- ------- Accrued workmen's compensation (3).............. $ 2,887 $ 824 $( 26)(2) -- $ 3,737 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- ------- Black Lung reserves (3)......... $ 22,190 $ -- $ 193(4) -- $21,997 ---------- ---------- ------------- --- ------- ---------- ---------- ------------- --- -------
- ------------ (1) Notes and accounts written off as uncollectible. (2) Expenditures or losses sustained and liabilities reclassified from accounts payable. (3) Included in other long-term liabilities. (4) Losses sustained. S-4 EXHIBIT INDEX
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)(iii)** --Findings of Fact, Conclusions of Law and Order Confirming Amended Joint Plan of Reorganization of Walter Industries, Inc. and certain of its subsidiaries, as modified 3(a)** --Restated Certificate of Incorporation of the Company 3(b)** --By-Laws of the Company 4(a)(i)** --Restated Certificate of Incorporation of the Company (see Exhibit 3(a)) 4(a)(ii)** --By-Laws of the Company (see Exhibit 3(b)) 4(b)** --Specimen Stock Certificate 4(c)(i) --12.19% Series B Senior Note Indenture (3) 4(c)(ii) --Form of Company Pledge Agreement (included as Exhibit B to Exhibit 4(c)(i)) (3) 4(c)(iii) --Form of Subsidiary Pledge Agreement (included as Exhibit C to Exhibit 4(c)(i)) (3) 4(c)(iv) --Form of 12.19% Series B Senior Note Certificate (included as Exhibit A to Exhibit 4(c)(i)) (3) 5** --Opinion of Simpson Thacher & Bartlett regarding legality of the securities being registered 10(a)** --Stockholder's Agreement 10(b)(i)** --Form of Common Stock Registration Rights Agreement 10(b)(ii) --Form of Senior Note Registration Rights Agreement (3) 10(b)(iii)** --Channel One Registration Rights Agreement 10(c)** --Durham Employment Agreement 10(d) --Second Amended and Restated Veil Piercing Settlement Agreement (included as Exhibit 3A to Exhibit 2(a)(i)) (1) 10(e) --12.19% Series B Senior Note Indenture (see Exhibit 4(c)(i)) (3) 10(f) --Bank Revolving Credit Facility (terminated) (5) 10(g)** --Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnitees parties thereto 10(h)** --New Alabama Power Contract (4) 10(i)** --Escrow Agreement, dated as of September 12, 1995, between the Company and Harris Trust and Savings Bank, as Escrow Agent 10(j)** --Walter Industries, Inc. Directors' Deferred Fee Plan 10(k) --1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6) 10(l)** --Agreement, dated as of August 30, 1995, between the Company and James W. Walter 10(m) --Bank Credit Agreement (7) 11** --Statement re computation of per share earnings 21** --Subsidiaries of the Company 23(a)** --Consent of Price Waterhouse LLP 23(b)** --Consent of Simpson Thacher & Bartlett (included in their opinion filed as Exhibit 5 hereto) 24*** --Powers of Attorney 27** --Financial Data Schedule
- ------------ ** Previously filed *** A Power of Attorney for Perry Golkin is filed herewith. Powers of Attorney for the other signatories hereto were previously filed in connection with this Registration Statement. E-1 (1) This Exhibit is incorporated by reference to the Application for Qualification of Indenture on 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 on Form S-1 (File No. 33-59021) filed by the Company with the Commission on May 2, 1995. (4) Portions of this document have been omitted pursuant to a request for confidential treatment. (5) This Exhibit is incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 33-59021) 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 (File No. 333-02095) filed by the Company with the Commission on April 1, 1996. (7) This Exhibit is incorporated by reference to the Current Report on Form 8-K filed by the Company with the Commission on February 16, 1996.
E-2 EX-24 2 Exhibit 24 POWER OF ATTORNEY ----------------- The undersigned Director of Walter Industries, Inc. a Delaware corporation which proposes to file with the Securities and Exchange Commission, Washington, D.C. under the provisions of the Securities Act of 1933, as amended, a Post-Effective Amendment to Registration Statement on Form S-1 No. 33-59013 with respect to Common Stock to be sold by certain holders thereof, hereby constitutes and appoints Dean M. Fjelstul, Donald M. Kurucz and William H. Weldon, and each of them as his attorney, with full power of substitution and resubstitution, for and in his name, place and stead, to sign and file the proposed Registration Statement and any and all amendments and exhibits thereto, and any and all applications and other documents to be filed with the Securities and Exchange Commission pertaining to such securities or such registration, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his hand at New York, New York this 30th day of August, 1996. /s/ Perry Golkin - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----