-----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, CbslqudxzqZEcNdJEYo1Tmy4GnljmpB+VQ6txvv6qz/KUZSTBJvvg4F3pEYo7aWx 2opVoGa5QS2igd2P1r0pog== 0001047469-97-003060.txt : 19971110 0001047469-97-003060.hdr.sgml : 19971110 ACCESSION NUMBER: 0001047469-97-003060 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19971107 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: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-20537 FILM NUMBER: 97709768 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 10-K405/A 1 10-K405/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K/A AMENDMENT NO. 1 --X-- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended May 31, 1997 OR -- -- Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 000-20537 WALTER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3429953 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1500 NORTH DALE MABRY HIGHWAY 33607 TAMPA, FLORIDA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (813) 871-4811 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes --X-- No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --X-- The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on July 25, 1997 as reported by NASDAQ National Market System, was approximately $359.7 million. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 and 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes --X-- No -- --. Number of shares of common stock outstanding as of July 25, 1997: 55,053,722 DOCUMENTS INCORPORATED BY REFERENCE Applicable portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders of the Company to be held September 16, 1997 are incorporated by reference in Part III of this Form 10-K. PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES (a) Introduction Walter Industries, Inc. (the "Company", or "Walter Industries") was organized in August 1987 by a group of investors led by Kohlberg Kravis Roberts & Co., LP ("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 corporation of such merger changed its name to Jim Walter Corporation (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. 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 United States 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 hereinafter referred to as the "Chapter 11 Cases"). Two other subsidiaries, Cardem Insurance Co., Ltd. ("Cardem Insurance") and Jefferson Warrior Railroad Company, Inc. 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, 2 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"). 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 March 17, 1995 (the "Effective Date"), the Company and its subsidiaries emerged from bankruptcy 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"). At that time, pursuant to the Consensual Plan 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. 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 Senior Notes) in lieu of Common Stock of the Company. The Plan of Reorganization confirmed by the Bankruptcy Court which technically constituted a modification of the Creditors Plan kept in place the bondholders election. Certain subordinated bondholders, however, were unable to provide documentation evidencing their right to receive Qualified Securities within the two year time frame prescribed by the Plan of Reorganization. As a result, approximately 212,000 additional shares of Common Stock were issued in lieu of Qualified Securities in fiscal 1997. Also pursuant to the Consensual Plan (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 Consensual Plan. The Veil Piercing Settlement, among other things, required 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 3 reorganization for Celotex that included 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 provides the Company with additional assurance that Veil Piercing Claims cannot be asserted in the future against the Company. On October 7, 1996, Celotex and various other parties in the Celotex bankruptcy announced to the Celotex Bankruptcy Court that an agreement had been reached between Asbestos Bodily Injury Claimants Committee and others (the "Bodily Injury Plan") and the Asbestos Property Damage Claimants Committee (the "Property Damage Plan") pursuant to which the Bodily Injury Plan proponents agreed to file with the Celotex Bankruptcy Court a Modified Joint Plan of Reorganization (the "Modified Plan") which would provide, among other things, for revised treatment of asbestos property damage claims. In accordance with the agreement the Modified Plan was filed with the Celotex Bankruptcy Court on October 8, 1996 and superseded and replaced the Bodily Injury Plan and the Property Damage Plan. The Modified Plan provides for a Section 524(g) injunction as to all asbestos claimants. The Modified Plan was approved by a vote of the Celotex creditors, and on December 6, 1996 the Celotex Bankruptcy court entered an order confirming the Modified Plan. The Modified Plan became effective as of May 30, 1997. See Note 12 to Consolidated Financial Statements--Litigation--Veil Piercing Suits on pages F-19 and F-20 included herein. (b) Industry Segments The Company's industry segment information for the last three fiscal years is included in Note 15 to Consolidated Financial Statements, on pages F-26 through F-28 included herein. (c) Narrative Description of 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, coal mining and related degasification, 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. JIM WALTER HOMES Jim Walter Homes, Inc. ("Jim Walter Homes") headquartered in the Walter Industries building in Tampa, Florida, markets and supervises the construction of detached, single-family residential homes, primarily in the Southern United States where the weather permits year-round construction and provides mortgage financing on such homes. Jim Walter Homes has concentrated on the low to moderately priced segment of the housing market. Over 325,000 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 2,200 square feet. Each home is completely finished on the outside and is unfinished on the inside except for rough floors, ceiling joists, partition studding and closet framing. The buyer may elect to purchase optional interior components, including installation thereof, such as plumbing and electrical materials, heating and air conditioning, wallboard, interior doors, interior trim and floor finishing. A buyer selecting all options receives a home considered to be "90% complete", excluding landscaping and utility connections. Shell homes are those which are completely finished on the outside with the inside containing only rough floors, ceiling joists, partition studding and closet framing, but not interior wallboard, floor finishing, plumbing, electrical wiring and fixtures, doors and cabinetry. The remaining units are sold at varying "in-between" 4 stages of interior finishing. Jim Walter Homes builds all of its homes "on site" and only after a building contract has been entered into and Jim Walter Homes is satisfied that the customer has clear title to the land and the site is suitable for building. The following chart shows the unit sales volume of Jim Walter Homes and the percent of homes sold in the three stages of completion for fiscal years ended May 31, 1997, 1996 and 1995.
PERCENT OF UNIT SALES ------------------------------------------------------------------ FISCAL YEAR ENDED MAY 31, UNITS BUILT SHELL VARIOUS STAGES 90% COMPLETE - --------------------------------------------------------------- ------------- ----- ------------------- ----------------- 1997......................................................... 3,900 10% 1% 89% 1996......................................................... 3,760 18 4 78 1995......................................................... 4,126 25 9 66
During the fiscal years 1997, 1996 and 1995 the average net sales price of a home was $47,500, $42,300 and $40,200 respectively. Jim Walter Homes backlog as of May 31, 1997 was 1,972 units compared to 1,957 units at May 31, 1996. The average time to construct a home ranges from four to twelve weeks. At fiscal 1997 year end, Jim Walter Homes operated 110 branch offices located in 19 states (Alabama, Arizona, Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia). In addition, Jim Walter Homes serves five adjoining states (Delaware, Illinois, Kansas, Maryland and Pennsylvania). Accordingly, these operations are not subject to significant concentrations of credit risks. Of such branch offices, approximately 79% are owned, with the balance on leased land. Substantially all of these branch offices serve as "display parks" which are designed to allow customers to view actual models completed to the various stages of interior finishing available. Jim Walter Homes does not own or acquire land for purposes of its operations and is not a land developer. The actual construction of all homes sold by Jim Walter Homes is done by local building contractors with their own crews, pursuant to subcontracts executed in connection with each home, and inspected by Jim Walter Homes' supervisory personnel. Jim Walter Homes maintains 32 regional warehouses near each of its district offices from which a portion of the necessary building materials may be obtained; the balance of building materials is purchased locally. Approximately 96% of the homes Jim Walter Homes sells are purchased with financing it arranges. Jim Walter Homes offers qualified customers a fixed interest rate mortgage without requiring a down payment and does not charge add-ons such as closing costs, points, credit service fees or private mortgage insurance. Jim Walter Homes offers credit terms for up to a maximum of 30 years, usually for 100% of the purchase price of the home and currently carry an 8.5% "annual percentage rate". In December 1995, Jim Walter Homes reduced its financing rate from 10% to 8.5% for its "90% complete" homes on a trial basis and in March 1996 began formally advertising the lower rate. Jim Walter Homes extended the 8.5% financing rate to the remainder of its product line ("shell" and homes sold at various "in between" stages of interior finishing) in the fourth quarter of fiscal 1997. The 10% "annual percentage rate" had been in effect since 1979. To qualify for financing, a potential customer must provide information concerning his or her monthly income and employment history as well as a legal description of and evidence that the customer owns the land on which the home is to be built. A customer's income and employment usually are verified through telephone conversations with the customer's employer and by examining his or her pay stubs, W2 forms or, if the customer is self-employed, income tax returns. An applicant must have a minimum of one year's continuous employment or, if there has been a change in employment, the new job must be in the same field of work. Only a small percentage of secondary income (second jobs or part-time 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. Jim Walter Homes does not use a point or grade 5 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. If a favorable report is obtained and the required monthly payment does not exceed 25% of the customer's monthly gross income, the application usually is approved and a building or instalment sale contract is executed, a title report is ordered and frequently a survey of the property is made. Surveys are performed by independent registered surveyors when, in the opinion of Jim Walter Homes, additional information beyond examination of the title record is needed. Such additional information is primarily concerned with verification of legal description, ownership of land and existence of any encroachments. Jim Walter Homes does not obtain appraisals or title insurance. Although consideration is given to the ratio of the amount financed to the estimated value of the home and the land securing such amount, there is no explicit appraisal-based loan-to-value test. However, there is a requirement that the value of the lot on which the home is to be built, as estimated solely on the basis of Jim Walter Homes' mortgage servicing division employees' experience and knowledge, be at least equal to 10% of the cash selling price of the home. The building and instalment sale contract is subject to (i) except in the State of Texas, 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, mechanic's lien contract or other security instrument, (iii) receiving a satisfactory title report, (iv) inspecting the land to determine that it is suitable for building and (v) obtaining required permits. Although the mortgages, deeds of trust and similar security instruments constitute a first lien on the land and the home to be built, such security instruments are not insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs or otherwise insured or guaranteed. Prior to occupancy of the new home, the buyer must complete the utility hook-ups and any of the other components not purchased from Jim Walter Homes, arrange for the final building inspection and, if required, obtain a certificate of occupancy. The costs to complete a new home depends on the stage of completion of the home purchased and whether public water and sewer systems are available or wells and septic tanks must be installed. Such costs could range from $2,000-$3,000 to $30,000-$40,000. Upon completion of construction of a new home to the agreed-upon percentage of completion, Jim Walter Homes sells the building and instalment sale contract, the note and the related mortgage, deed of trust or other security instrument to Mid-State Homes, Inc. ("Mid-State Homes"), an indirect, wholly owned subsidiary of the Company, 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 payments, including collection of delinquent payments, 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 1996, Jim Walter Homes was the eleventh largest builder of detached single-family homes in the United States after having been the eighth largest builder in 1995, the sixth largest builder in 1994, the fifth largest builder in 1993 and the fourth largest builder in 1992. 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 1996. 6 In the three years ended May 31, 1997, 1996 and 1995, Jim Walter Homes' net sales and revenues amounted to $185.7 million, $159.2 million and $165.8 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 ("Trust II"), Mid-State Trust III ("Trust III"), Mid-State Trust IV ("Trust IV"), Mid-State Trust V ("Trust V") and Mid-State Trust VI ("Trust VI") are Delaware business trusts organized by Mid-State Homes, which owns all of the beneficial interest in Trust III, Trust IV, Trust V and Trust VI. Trust IV owns all of the beneficial interest in Trust II. In April 1988, Mid-State Homes sold to Trust II instalment notes and mortgages which it had acquired from Jim Walter Homes through February 29, 1988 having a gross amount of approximately $3.376 billion and an aggregate outstanding economic balance of approximately $1.750 billion pursuant to a purchase and sales agreement, in exchange for a purchase price of $1.327 billion, representing the net cash proceeds from the public offering of $1.450 billion aggregate face amount of mortgage-backed notes ("Trust II Mortgage-Backed Notes") of Trust II after paying the expenses associated with the sale of such Trust II Mortgage-Backed Notes. The outstanding balance of such Trust II Mortgage-Backed Notes at May 31, 1997 was $410.0 million At May 31, 1997, such Trust II instalment notes and mortgages had a gross book value of $966.1 million and an economic balance of $609.2 million. Under the Trust II indenture for the Trust II Mortgage-Backed Notes, if certain criteria as to performance of the pledged instalment notes are met, Trust II is allowed to make quarterly distributions of cash to Trust IV, its sole beneficial owner, to the extent that cash collections on such instalment notes exceed Trust II's cash expenditures for its operating expenses, interest expense and mandatory debt payments on its mortgage-backed notes. In addition to the performance-based distributions, the indenture permits distribution of additional excess funds, if any, provided such distributions are consented to by Financial Security Assurance Inc., a monoline property and casualty insurance company and the guarantor of the Trust II Mortgage-Backed Notes. The guarantor has not approved any additional distributions since the January 1, 1995 distribution and such excess funds ($79.7 million at May 31, 1997) remain on deposit with Trust II. On July 1, 1992, mortgage instalment notes having a gross amount of $638.1 million and an economic balance of $296.2 million were sold by Mid-State Homes to Trust III in exchange for the net proceeds from the public issuance by Trust III of $249.9 million of asset backed notes ("Trust III Asset Backed Notes"). Net proceeds were used to repay in full all outstanding indebtedness due under a revolving credit facility, with the excess cash used to fund the ongoing operations of the Company and its subsidiaries. The outstanding balance at May 31, 1997 of such Trust III Asset Backed Notes was $116.9 million. At May 31,1997, such Trust III instalment notes and mortgages had a gross book value of $364.9 million and an economic balance of $195.5 million. On March 16, 1995, mortgage instalment notes having a gross amount of $2.020 billion and an economic balance of $826.7 million were sold by Mid-State Homes to Trust IV. In addition, on such date, Mid-State Homes sold its beneficial interest in Trust II to Trust IV. Trust II had a total collateral value of $910.5 million with $605.7 million of Trust II Mortgage-Backed Notes outstanding. These sales were in exchange for the net proceeds from the public issuance by Trust IV of $959.4 million of asset backed notes ("Trust IV Asset Backed Notes"). The outstanding balance at May 31, 1997 of such Trust IV Asset Backed Notes was $841.2 million. At May 31, 1997, such Trust IV instalment notes and mortgages had a gross book value of $1.613 billion and an economic balance of $704.5 million. On February 27, 1995, Mid-State Homes established Trust V, a business trust in which Mid-State Homes owns all of the beneficial interest, to provide temporary financing to Mid-State Homes for its 7 current purchases of instalment notes and mortgages from Jim Walter Homes. On March 3, 1995, Trust V entered into the Mid-State Trust V Variable Funding Loan Agreement (the "Trust Variable Funding Loan Agreement") with Enterprise Funding Corporation, an affiliate of NationsBank NA, as lender, and NationsBank NA (Carolinas), as Administrative Agent. The agreement provides for a three-year, $500.0 million credit facility (subsequently reduced to $400.0 million on July 31, 1997) (the "Trust V Variable Funding Loan") secured by the instalment notes and mortgages 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 Trusts II, III, IV and VI. The facility currently matures on March 3, 2000. The outstanding Trust V Variable Funding Loan balance at May 31, 1997 was $384.0 million. At May 31, 1997, the Trust V instalment notes and mortgages had a gross book value of $1.310 billion and an economic balance of $509.1 million. On June 11, 1997, Mid-State Homes purchased mortgage instalment notes from Trust V having a gross amount of $1.196 billion and an economic balance of $462.3 million. Mid-State Homes subsequently sold such mortgage instalment notes to Trust VI, a business trust organized by Mid-State Homes which owns all of the beneficial interest in Trust VI. These sales were in exchange for the net proceeds from the public issuance of $439.2 million of asset backed notes ("Trust VI Asset Backed Notes"). The Trust VI Asset Backed Notes were issued in four classes, bear interest at rates ranging from 7.34% to 7.79%, and have a final maturity of July 1, 2035. Payments will be made quarterly on January 1, April 1, July 1, and October 1 based on collections on the underlying collateral, less amounts paid for interest on the notes and Trust VI expenses. Net proceeds from the public offering were used primarily to pay down Trust V indebtedness of $384.0 million. The instalment notes sold by Mid-State Homes to Trusts II, III, IV, V and VI are serviced by Mid-State Homes pursuant to servicing agreements entered into with each trust. Mid-State Homes, in connection with such servicing agreements, has entered into sub-servicing agreements with Jim Walter Homes to provide field servicing such as collections, repossessions and resales. The assets of Mid-State Trusts II, III, IV, and VI are not available to satisfy claims of general creditors of Mid-State Homes or the Company and its other subsidiaries. The liabilities of Mid-State Trusts II, III, IV and VI for their publicly issued debt are to be satisfied solely from proceeds of the underlying instalment notes and are non-recourse to Mid-State Homes and the Company and its other subsidiaries. The revenues of Mid-State Trusts II, III, IV, V and VI are required by generally accepted accounting principles to be consolidated as part of Mid-State Homes' revenues for financial statement purposes. In the three years ended May 31, 1997, 1996 and 1995 Mid-State Homes' revenues amounted to $249.4 million, $248.8 million and $237.1 million, respectively. JIM WALTER RESOURCES The operations of Jim Walter Resources, Inc. ("Jim Walter Resources") are conducted through its Mining Division, which mines and sells coal from four deep shaft mines in Alabama, and its De-Gas Division, which extracts and sells methane gas from the coal seams owned or leased by Jim Walter Resources. 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. Blue Creek coal offers high coking strength with low coking pressure, low sulfur and low-to-medium ash content with high BTU values. The mines are located in west central Alabama between the cities of Birmingham and Tuscaloosa. 8 The majority of coal is mined using longwall extraction technology, complemented by the more standard continuous mining method. By replacing more traditional methods of underground mining with longwall technology, the Mining Division has achieved greater production efficiency, improved safety, generated superior coal recovery results and lowered production costs. There are approximately 70 longwall mining systems in use in the United States, of which the Mining Division currently operates seven. The Mining Division's normal operating plan is a longwall/continuous miner ratio of about 75%/25%, which is the sustainable long-term ratio. Recoverable reserves were estimated to be approximately 233 million tons as of May 31, 1997, of which 208 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, 1997 (IN THOUSANDS OF TONS)
TYPE (4) --------- JIM WALTER STEAM (S) RESOURCES' RESERVES(2) CLASSIFICATIONS(3) OR INTEREST ------------------------------ -------------------- METALLUR- ----------------- MINING PROPERTY TOTAL ASSIGNED UNASSIGNED MEASURED INDICATED GICAL(M) OWNED LEASED(5) - ------------------------- ------- -------- ---------- -------- --------- --------- ------ --------- No. 3 Mine............... 57,877 57,877 -- 42,192 15,685 S/M 1,440 56,437 No. 4 Mine............... 69,133 69,133 -- 46,945 22,188 S/M 5,696 63,437 No. 5 Mine............... 24,056 24,056 -- 20,111 3,945 S/M 22,081 1,975 No. 7 Mine............... 56,661 56,661 -- 44,337 12,324 S/M 19,257 37,404 ------- -------- ---------- -------- --------- ------ --------- 207,727 207,727 -- 153,585 54,142 48,474 159,253 Bessie (8)............... 24,919 -- 24,919 14,880 10,039 -- 658 24,261 ------- -------- ---------- -------- --------- ------ --------- TOTAL.................... 232,646 207,727 24,919 168,465 64,181 49,132 183,514 ------- -------- ---------- -------- --------- ------ --------- ------- -------- ---------- -------- --------- ------ --------- QUALITY(6) PRODUCTION(7) -------------------- ------------------- MINING PROPERTY ASH SULF. BTU/LB 1997 1996 1995 - ------------------------- ---- ----- ------ ----- ----- ----- No. 3 Mine............... 8.2 0.56 14,469 2,198 2,084 1,730 No. 4 Mine............... 9.4 0.69 14,240 2,129 2,542 2,448 No. 5 Mine............... 8.8 0.66 14,334 801 893 948 No. 7 Mine............... 8.0 0.65 14,499 2,513 2,347 2,501 ----- ----- ----- 7,641 7,866 7,627 Bessie (8)............... 11.0 1.30 13,655 -- -- -- ----- ----- ----- TOTAL.................... 7,641 7,866 7,627 ----- ----- ----- ----- ----- -----
- ------------------------ (1) "Recoverable" reserves are defined as tons of mineable coal in the Blue Creek and Mary Lee seams which can be extracted and marketed after deduction for coal to be left in pillars, etc. and adjusted for reasonable preparation and handling losses. (2) "Assigned" reserves represent coal which has been committed by Jim Walter Resources to its operating mines and plant facilities. "Unassigned" reserves represent coal which is not committed to an operating mine and would require additional expenditures to recover. The division of reserves into these two categories is based upon current mining plans, projections and techniques. (3) The recoverable reserves (demonstrated resources) are the sum of "Measured" and "Indicated" resources. Measured coal extends 1/4 mile from any point of observation or measurement. Indicated coal is projected to extend from 1/4 mile to 3/4 mile from any point of observation or measurement. Inferred coal extends from 3/4 mile to 3 miles from any point of observation or measurement. Inferred reserves are not included in recoverable reserves. (4) All of the coal in the Blue Creek and Mary Lee seams is suitable for metallurgical purposes although, for marketing reasons, some is sold as compliance steam coal. (5) The leases are either renewable until the reserves are mined to exhaustion or are of sufficient duration to permit mining of all of the reserves before the expiration of the term. (6) Values shown are weighted averages of all reserves and are calculated on a dry basis. Bessie Mine reserves are equivalent to preparation at a 1.60 specific gravity, whereas the others are at a 1.40 specific gravity. (7) Production for 1997, 1996 and 1995 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. 9 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 Company ("Alabama Power") that had been in effect since January 1, 1979, as amended, was superseded by a new agreement executed on May 10, 1994 (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 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. Jim Walter Resources and Cockerill Sambre are parties to a long-term contract which expires on December 31, 2000. The contract provides for the sale of approximately 880,000 tons annually, with an option on approximately 220,000 additional tons annually. The pricing mechanism is market driven and reflects changes in prices of three specific coals or coal indices. Blue Creek Mine No. 5 ("Mine No. 5") was shut down from November 17, 1993 through December 16, 1993 and from early April 1994 until May 16, 1994 as a result of a fire due to spontaneous combustion heatings caused by pyritic sulfur concentrations occurring in the mine's coal seam being exposed to air by the mining process. Representatives of Jim Walter Resources, the Mine Safety and Health Administration ('MSHA"), Alabama State Mine Inspectors and the United Mine Workers 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 $12.4 million, reducing the contract claims in the lawsuit to $12.6 million. The Company and Jim Walter Resources continue to pursue the litigation against the remaining carriers and a trial is tentatively scheduled for October 1997. In late November 1995, Mine No. 5 experienced another fire due to the unexpected recurrence of spontaneous combustion heatings and the mine was shut down. Efforts to contain and extinguish the fire were successful; however, conditions dictated the mine be shut down for several weeks. The affected coal panels on the western side of the mine were then permanently sealed off in an effort to prevent further combustion fires in this mine. Mining operations were redeployed approximately five miles to the eastern 10 side of the mine where more favorable geological conditions exist. Firefighting and idle plant costs of approximately $16 million associated with the November 1995 fire were not insured since spontaneous combustion heatings caused by pyritic sulfur concentrations in Jim Walter Resources' Mine No. 4 and No. 5 are now excluded from the Company's and Jim Walter Resources' insurance policies. The affected coal panels on the western side of the mine were sealed off and from December 1995 through March 1997 development work was accelerated on the eastern side of Mine No. 5. The mine returned to production status in the fourth quarter of fiscal 1997. Longwall production resumed in the eastern part of the mine in June 1997. While in development, the mine's costs ($40.7 million) were capitalized. Jim Walter Resources three other mines remained in full production. In the three years ended May 31, 1997, 1996 and 1995, the Mining Division's net sales and revenues were $310.7 million, $325.8 million and $299.4 million, respectively, including $4.2 million, $4.8 million and $5.4 million, respectively, to Sloss Industries Corporation ("Sloss Industries"), a wholly owned subsidiary of the Company. DE-GAS DIVISION The De-Gas Division, through a joint venture headquartered in Brookwood, Alabama, extracts and sells methane gas from the coal seams owned or leased by Jim Walter Resources. The original motivation for the joint venture was to increase safety in Jim Walter Resources' Blue Creek mines by reducing methane gas concentrations with wells drilled in conjunction with the mining operations. There were 390 wells producing approximately 45 million cubic feet of gas per day, as of May 1997. As many as 63 additional wells are planned for development in fiscal 1998. 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. The De-Gas Division began operations in 1981 with the formation of an equal joint venture with Kaneb Services, Inc. ("Kaneb") to capture and market methane gas from the Blue Creek seam. SNG is the joint venture's exclusive customer for all output of methane gas, all of which was originally at a price tied to the price of fuel oil in New York. Kaneb subsequently sold its 50% interest in the degasification operation to an indirect wholly owned subsidiary of Sonat, Inc. In connection with this sale, additional areas were added to the gas sales contract. This gas was priced at a market price nominated by SNG which was not to be lower than the published price for spot purchases for SNG-South Louisiana for the applicable month. Effective January 1, 1994, the gas sales contract was amended. The price to be paid for gas delivered to SNG is now equal to the average of two published spot prices provided, however, that the price will not be less than $2.00 per MMBTU (approximately $1.96 per MCF) on a weighted annual basis, calculated cumulatively each month. The contract also calls for SNG to pay Jim Walter Resources a reservation fee of $675,000 per month through December 31, 2001, provided certain minimum quantities of gas are delivered. Black Warrior Methane Corp., a corporation the stock of which is owned 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, 1997, 1996 and 1995, the De-Gas Division's net sales and revenues amounted to $28.8 million, $23.0 million and $20.8 million, respectively. U.S. PIPE United States Pipe and Foundry Company, Inc. ("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, valves and 11 hydrants. It is one of the nation's largest producers of ductile iron pressure pipe. The Castings Division produces and sells a wide variety of gray and ductile iron castings. In the three years ended May 31, 1997, 1996 and 1995, U. S. Pipe's net sales and revenues amounted to $420.7 million, $421.4 million and $412.2 million, respectively. PRESSURE PIPE DIVISION The Pressure Pipe Division manufactures and markets a complete line of ductile iron pipe ranging from 4" to 64" in diameter as well as equivalent metric sizes, at lengths up to 20 feet. In addition, this division produces and sells a full line of fittings, valves and hydrants of various configurations to meet municipal specifications. Approximately 70%--75% of the ductile iron pressure pipe produced by this division is used in the transmission and distribution of potable water and the remaining 25%--30% is used in the transmission of waste water and industrial applications. The majority of ductile iron pressure pipe and related fittings, valves and hydrants are for new distribution systems. The market for rehabilitation, upgrading and replacement of pipe systems accounts for approximately 30% of ductile iron pressure pipe sales. Fittings, valves and hydrants produced by this division account for approximately 20% of sales. Ductile iron pressure pipe is manufactured by the deLavaud centrifugal casting process and is typically classified into three size categories: 1) Small pipe, ranging from 4" to 12" in diameter (approximately 59% of the division's pipe production), used primarily for potable water distribution systems and small water system grids; 2) Medium pipe, ranging from 14" to 24" in diameter (approximately 25% of the division's pipe production), used primarily in reinforcing distribution systems, including looping grids and supply lines; and 3) Large pipe, 30" to 64" in diameter (which accounts for the remaining 16% of pipe production), used for major water and waste water transmission and collection systems. The ductile iron pressure pipe industry is highly competitive, with a small number of manufacturers of ductile iron pressure pipe, fittings, valves and hydrants. U.S. Pipe is one of the nation's largest producers of ductile iron pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin Ductile Iron Pipe Company and American Cast Iron Pipe Company. The division competes with such other manufacturers of ductile iron pressure pipe on the basis of price, customer service and product quality. Additional competition for ductile iron pressure pipe comes from pipe composed of other materials, such as PVC, concrete, fiberglass, reinforced plastic and steel. Although ductile iron pressure pipe is typically more expensive than competing forms of pipe, customers choose ductile iron for its quality, longevity, strength, ease of installation and lack of maintenance problems. U.S. Pipe 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. Products of the Pressure Pipe Division are sold primarily to contractors, water works distributors, municipalities, private utilities and other governmental agencies. Most ductile iron pressure pipe orders result from contracts which are bid by contractors or directly issued by municipalities or private utilities. An increasing portion of ductile iron pressure pipe sales are made through independent water works distributors. The division maintains numerous supply depots in leased space throughout the country which are used as a source of pipe for start-up projects to support ongoing projects and to aid in completing projects. The Pressure Pipe Division's sales are primarily domestic, with foreign sales accounting for approximately 5% of dollar sales in 1997. U.S. Pipe has 36 regional sales offices in leased office space in the United States. The order backlog of pressure pipe at May 31, 1997 was 108,341 tons, which represents approximately three months shipments, compared to 121,734 tons at May 31, 1996. 12 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). These plants have annual rated capacities to produce 180,000 tons, 160,000 tons, 85,000 tons and 132,000 tons, respectively, of ductile iron pressure pipe based on one shift per day. In addition, the division manufactures fittings, valves and hydrants at its owned plant in Chattanooga, Tennessee (648,000 square feet on 91 acres of land). The general offices located in Birmingham, Alabama contain 122,000 square feet of office space on 6 acres of owned land. While the pipe business is generally sensitive to recessions because of its partial dependence on the level of new construction activity, certain aspects of Pressure Pipe's operations have in the past helped to reduce the impact of a downturn in new construction. First, Pressure Pipe's products have experienced a strong level of demand in the replacement market. The Company believes that growth of the replacement market will accelerate as a result of 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, SAFE DRINKING WATER ACT ("SDWA") amendments signed into law in 1996 mandate that communities nationwide upgrade their water transmission systems over the next 20 years in order to comply with new federal water quality standards. Second, Pressure Pipe's facilities are located in regions of the country that have exhibited consistent economic strength. The Burlington, New Jersey plant is adjacent to the northeastern market with its significant replacement potential and the division's operations in the South are located in areas of steady economic growth. The West Coast, served by the Union City, California plant, has a critical shortage of water for many of the large metropolitan areas which will require major transmission pipelines in the future. Because freight costs for pipe are high, locations close to important markets lower transportation costs, thereby making the Pressure Pipe Division's products more competitive. CASTINGS DIVISION The Castings Division produces a wide variety of gray and ductile iron castings for a diversified customer base, including special hardness castings for the pollution control industry. In the year ended May 31, 1997, approximately 55% of the Division's castings sales were directed to the Pressure Pipe Division, with the balance of sales to various capital goods industries. Manufacturing operations are located in Anniston, Alabama (240,000 square feet on 21 acres of owned land). 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, 1997, approximately 61% 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 at capacity over the past years to satisfy a long-term contract with National Steel Corporation. Sloss Industries has only an estimated 1% share of the furnace coke market. Competition comes primarily from Koppers Company, Inc. in the southern United States, Citizens Gas & Coke Utility and steel producers with excess coking capacity in the Midwest. 13 Slag wool is an insulating fiber utilized principally as a raw material by acoustical ceiling manufacturers. It is also used in manufactured-home insulation, plastics molding and asphalt paving systems where it is used as a bonding agent. A related product, processed mineral fiber, is used in friction materials and thermoplastic molding compounds, adhesives, paints and sealants. 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, 1997, approximately 72% was sold to Armstrong World Industries and 20% 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, as well as a custom manufactured specialty monomer for the plastics industry. The Ariton facility produces custom manufactured specialty products for the rubber and plastics industries. Sloss Industries' manufacturing facilities are located in Birmingham, Alabama and include: 120 coke ovens with an annual rated capacity of 410,000 tons and related buildings of 148,400 square feet, a slag wool plant with an annual rated capacity of 102,000 tons in a building of 63,000 square feet and a synthetic chemicals plant in a building of 63,300 square feet, all on 521 acres of owned land. 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, 1997, 1996 and 1995, Sloss Industries' net sales and revenues amounted to $91.1 million, $91.1 million and $88.0 million, respectively, including $11.2 million, $12.0 million and $11.1 million, respectively to U. S. Pipe. JW ALUMINUM JW Aluminum Company ("JW Aluminum"), headquartered in Mt. Holly, South Carolina, is a leading producer of custom-coated fin stock used in heating and air conditioning applications and telecommunications cable wrap. JW Aluminum's other foil and sheet products are used in a variety of applications such as lithoplate for newspapers and as a facer on foam insulation products. Aluminum sheet products are primarily used for general building applications such as siding, gutters, downspouts, roofing, mobile home siding and skirting, residential siding and window components. JW Aluminum sold 135.6 million pounds of aluminum products in fiscal 1997; 73% of which were foil products and 27% were sheet products. JW Aluminum has focused on directing its product mix towards higher value added products such as fin stock, where quality and service are relied upon more than price-driven commodity products. JW Aluminum operates a single manufacturing 300,000 square foot facility in Mt. Holly, South Carolina on 30 acres of owned land. JW Aluminum's current rated capacity is 150 million pounds per year based on its present product mix. A two-year, $31.0 million expansion project is currently underway which will add 65,000 square feet of production space and increase JW Aluminum's capacity 60% to approximately 240 million pounds per year at completion. In the three years ended May 31, 1997, 1996 and 1995, JW Aluminum's net sales and revenues totaled $150.4 million, $141.1 million and $134.2 million, respectively, including $2.8 million, $3.4 million and $6.1 million, respectively, to JW Window Components, Inc. ("JW Window Components"), a wholly owned subsidiary of the Company. 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 14 balances. The Company estimates that 60% of total sales are directed to the new construction market, 30% to the renovation market and 10% to the commercial sector. JW Window's products are sold through a network of independent sales agents, covering the continental United States, the Caribbean and Central America. JW Window's 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 located in Elizabethton, Tennessee contain 8,500 square feet of leased office space. In the three years ended May 31, 1997, 1996 and 1995, (JW Window Components' net sales and revenues were $38.9 million, $37.0 million and $45.8 million, respectively. SOUTHERN PRECISION Southern Precision Corporation ("Southern Precision") is the largest producer of specialized industrial tooling products and resin coated sand in the Southeast. Southern Precision's Irondale, Alabama manufacturing facility incorporates the plant, warehouse and administrative functions in 78,000 square feet of building space located on 6 acres of owned land. Products and services provided at this location include: wood and metal pattern tooling; computerized numerically controlled machining for industries such as satellite and aircraft communications, aerospace and glass machines; plastic injection, compression and rubber molds; aluminum castings; and general machining of fabrications, castings and plates. Southern Precision's 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. In the three years ended May 31, 1997, 1996 and 1995, Southern Precision's net sales and revenues amounted to $15.6 million, $15.0 million and $14.4 million, respectively, including $1.2 million, $1.2 million and $2.4 million, respectively to U.S. Pipe. VESTAL MANUFACTURING Vestal Manufacturing Company ("Vestal") produces a diversified line of metal and foundry products for residential, commercial and industrial use. Vestal manufactures a line of energy saving fireplaces, fireplace inserts, accessories and wood-burning stoves, as well as lightweight castings for municipal markets and metal building products. Its products are sold through a network of independent sales agents to hardware and building material distributors, home centers and mass merchandisers throughout the United States and Canada. Vestal's performance to a large extent is tied to residential construction. Foreign competition has also been a factor in recent years. Vestal, located in Sweetwater, Tennessee, operates a foundry with 103,000 square feet of building, a steel fabrication plant with 109,000 square feet and an administrative office containing 7,000 square feet, all on 46 acres of owned land. In the three years ended May 31, 1997, 1996 and 1995, Vestal's net sales and revenues totaled $18.0 million, $17.3 million and $19.4 million, respectively. UNITED LAND United Land Corporation ("United Land") owns approximately 40,000 acres of land, 141,000 acres of mineral rights and 1,300 acres of surface rights, principally in Alabama. 15 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, 1997, 1996 and 1995, United Land's net sales and revenues amounted to $8.6 million, $14.6 million, and $15.8 million, respectively, including gains on sales of certain excess real estate of $2.5 million, $6.1 million and $6.1 million, respectively. WALTER LAND Walter Land Company ("Walter Land") is a land sales business with an inventory at May 31, 1997 of approximately 6,800 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. Walter Land's income is principally derived from land sales and rental income. The management and sale of the Louisiana properties are handled by local personnel on a contract basis. In the three years ended May 31, 1997, 1996 and 1995, Walter Land's net sales and revenues amounted to $1.1 million, including gains of $.8 million on land sales, $277,000 and $196,000, respectively. CARDEM INSURANCE Cardem Insurance is a Hamilton, Bermuda based offshore reinsurance company. The predominant portion of its business is reinsuring 75% of the risk on fire and extended coverage insurance policies issued by Westchester Insurance Company, an unrelated insurance company. Such insurance policies are with individual owners of homes constructed by Jim Walter Homes. In the years ended May 31, 1997, 1996 and 1995, Cardem Insurance's net sales and revenues amounted to $12.3 million, $13.1 million and $11.8 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 and in particular, the level of construction. TRADE NAMES, TRADEMARKS AND PATENTS The names of each of the Company's subsidiaries are well established in the respective markets served by them. Management believes that the reputation of such trade names is of some importance. The Company's subsidiaries have numerous patents and trademarks. Management does not believe, however, that any one such patent or trademark is of material importance to the Company's business as a whole. RESEARCH AND DEVELOPMENT Research activities conducted by each business are directed toward new products, process and building systems development, improvement of existing products, development of new uses for existing products and cost reduction efforts. Total research and development expenditures in each of the last three fiscal years were less than 1% of consolidated net sales and revenues. RAW MATERIALS Substantially all of the raw materials needed for the operations of the Company and its subsidiaries are either produced by the Company and its subsidiaries or purchased from domestic sources. All materials used by the various businesses of the Company are available in quantities required to support their respective operations. 16 ENVIRONMENTAL The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenditures for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the fiscal year ended May 31, 1997 and May 31, 1996 were approximately $6.8 million and $5.1 million, respectively. Because environmental laws and regulations on the federal, state and local levels continue to evolve, and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations. Consequently, the Company can give no assurance that such expenditures will not be material in the future. Capital expenditures for environmental requirements are anticipated to average approximately $6.0 million per year in the next five years. U.S. Pipe has implemented an Administrative Consent Order ("ACO") for its Burlington, New Jersey plant that was required under the New Jersey Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act) in connection with the completion of the LBO. The ACO required soil and ground water cleanup. U.S. Pipe has completed, pending final approval, the soil cleanup required by the ACO. U.S. Pipe also has completed, pending final approval, ground water treatment as ordered in the ACO. Ground water monitoring as required by the ACO continues. It is not known how long ground water monitoring will be required. Management does not believe any further cleanup costs will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries. The Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), generally imposes liability, which may be joint and several and is without regard to fault or the legality of waste generation or disposal, on certain classes of persons, including owners and operators of sites at which hazardous substances are released into the environment (or pose a threat of such release), persons that disposed or arranged for the disposal of hazardous substances at such sites, and persons who owned or operated such sites at the time of such disposal. CERCLA authorizes the EPA, the states and, in some circumstances, private entities to take actions in response to public health or environmental threats and to seek to recover the costs they incur from the same classes of persons. Certain governmental authorities can also seek recovery for damages to natural resources. Currently, U.S. Pipe has been identified as a potentially responsible party ("PRP") by the EPA under CERCLA with respect to cleanup of hazardous substances at two sites to which its wastes allegedly were transported. U.S. Pipe is one of many PRP's at such sites and is in the process of preliminary investigation of its relationship to these sites, if any, to determine the nature of its potential liability and amount of remedial costs to clean up such sites. Although no assurances can be given that U.S. Pipe will not be required in the future to make material expenditures relating to these sites, management does not believe at this time that the cleanup costs it will be called on to bear, if any, associated with these sites will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries. Management believes the extent of U.S. Pipe's involvement, if any, to be minor in relation to that of other named PRP's, a significant number of which are substantial companies. EMPLOYEES As of May 31, 1997, the Company and its subsidiaries employed 7,584 people, of whom 4,784 were hourly workers and 2,800 were salaried employees. Approximately 4,200 employees were represented by unions under collective bargaining agreements, of which approximately 1,730 were covered by one contract with the UMWA, which expires on August 1, 1998. The Company considers its relations with its employees to be satisfactory. 17 The Company and its subsidiaries have various pension and profit sharing plans covering substantially all employees. In addition to the Company's own pension plans, contributions are made to certain multi-employer plans. The funding of retirement and employee benefit plans is in accordance with the requirements of such plans and, where applicable, in sufficient amounts to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits based on years of service and compensation or at stated amounts for each year of service. The Company and its subsidiaries also provide certain postretirement benefits other than pensions and profit sharing, primarily healthcare, to eligible retirees. PROPERTIES The Company's headquarters building contains approximately 200,000 square feet of office space, located on approximately 13 acres in Tampa, Florida. ITEM 3. LEGAL PROCEEDINGS See Items 1 and 2 - Business and Properties - Introduction on pages 2 through 4 and Jim Walter Resources - Mining Division on pages 10 and 11 and Note 12 of the Notes to Consolidated Financial Statements on pages F-19 through F-22 included herein. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is a list showing the names, ages (as of August 1, 1997) and positions of the executive officers of the Company.
NAME AGE OFFICE - ----------------------------------- --- ----------------------------------------------------------------------- Kenneth E. Hyatt................... 56 Chairman, President and Chief Executive Officer Richard E. Almy.................... 55 Director, Executive Vice President and Chief Operating Officer Dean M. Fjelstul................... 55 Senior Vice President and Chief Financial Officer Robert W. Michael.................. 55 Senior Vice President and Group Executive William N. Temple (1).............. 64 Senior Vice President and Group Executive Frank A. Hult...................... 46 Vice President, Controller and Chief Accounting Officer Donald M. Kurucz(2)................ 58 Vice President and Treasurer Edward A. Porter................... 50 Vice President--General Counsel and Secretary David L. Townsend.................. 43 Vice President--Administration George R. Richmond................. 47 President and Chief Operating Officer of Jim Walter Resources
- ------------------------ (1) Mr. Temple has announced his intention to retire in January 1998. On July 30, 1997, the Company announced that Ralph E. Fifield, former President of United States Steel/Kobe Steel Company and a 28-year industrial manufacturing veteran, would succeed Mr. Temple as President and Chief Operating Officer of United States Pipe and Foundry Company effective August 1, 1997 with Mr. Temple assuming the position of Chairman pending his retirement. Mr. Fifield, 51, gained extensive manufacturing and operations management experience during a 28-year career with United States Steel, which he joined in 1969 at the Company's Gary, Indiana plant. Following a progressive series of plant engineering positions at the Gary facility, he was named Plant Manager of U.S. Steel's South Works plant in Chicago in 1984. He later served as General Manager of the company's Fairless, Pennsylvania plant from 1988 to 1990 and Fairfield, Alabama plant from 1990 to 1991. In 1991 he was promoted to 18 Corporate Vice President--Operations, overseeing six manufacturing facilities. In 1994, Mr. Fifield was named President of Lorain, Ohio based USS/KOBE Steel company, a joint venture with annual revenues of approximately $770 million. (2) Mr. Kurucz died on October 10, 1997. As of the date of this filing no one had been appointed to serve as Treasurer of the Company. Kenneth E. Hyatt has been Chairman of the Board and Chief Executive Officer of the Company since June 1, 1996 and has been President of the Company since September 1, 1995. Between September 1, 1995 and June 1, 1996, Mr. Hyatt also served as Chief Operating Officer of the Company. Mr. Hyatt was elected a director on September 12, 1995. Mr. Hyatt served as President and Chief 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. In 1986, he was elected Executive Vice President and Chief Operating Officer 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 of the Bankruptcy Code in the Bankruptcy Court as a result of massive litigation involving asbestos-related liabilities. The Celotex Plan of Reorganization was confirmed in December 1996 and became effective May 1997. The Celotex Trust is a principal stockholder of the Company. Richard E. Almy has been Executive Vice President and Chief Operating Officer of the Company since June 1996. Previously, Mr. Almy was President and Chief Operating Officer at JW Aluminum (1991-1996) and JW Window Components (1995-1996). Dean M. Fjelstul has been Senior Vice President and Chief Financial Officer of the Company since October 1996. Between June 1, 1996 and October 1, 1996, Mr. Fjelstul served as Senior Vice President - Finance of the Company. Previously, he was employed by Alliant Techsystems as Vice President and Chief Financial Officer (1990-1996). Prior thereto he served in various financial management capacities with Honeywell, Inc. during a 22 year tenure with that company. Robert W. Michael has been 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 Vice President of Original Jim Walter from 1984 to 1988. Prior thereto, he was Vice President-Sales (1975-1984), a Regional Manager (1973-1975), an Assistant Regional Manager (1970-1973), a Main Branch Manager (1967-1970) and a Sub-Branch Manager (1966-1967) with Jim Walter Homes and held various managerial positions with Mid-State Homes (1964-1966). 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). Frank A. Hult has been a Vice President, Controller and the Chief Accounting Officer of the Company since 1995. Previously, he was a Vice President (since 1994), the Controller (since 1991), Assistant Controller and Chief Accountant (1989-1991) and Manager of Budgets (1988-1989) of the Company. Prior thereto he was Manager of Budgets (1984-1988) and Financial Analyst (1978-1981) of Original Jim Walter and Manager-Operations Administration (1981-1984), Plant Controller and Cost Accountant (1974-1975) for Celotex. 19 Until his death, as noted above, Donald M. Kurucz had 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. Edward A. Porter has been Vice President, General Counsel and Secretary of the Company since January 1996. Previously, he was employed by National Gypsum Company as Senior Vice President-Administration, General Counsel and Secretary (1993-1995); Vice President--Administration, General Counsel and Secretary (1988-1993) and held various legal positions (1980-1988). David L. Townsend has been a Vice President of the Company since 1988. Previously he served as a Vice President-Human Resources and Public Relations (1994-1996) and Vice President-Public Relations (1988-1994) of the Company. Prior thereto he served as a Vice President-Public Relations (since 1983), Director of Public Relations (1982-1983) and Manager of Public Relations (1980-1982) of Original Jim Walter and in various staff positions (1978-1980) with Original Jim Walter. George R. Richmond has been President and Chief Operating Officer of Jim Walter Resources since June 1, 1997, succeeding William Carr as President and Chief Operating Officer upon Mr. Carr's retirement on May 31, 1997. Previously he served as Senior Vice President of Operations (since 1993) and Vice President of Operations (1992). Prior thereto he was Deputy Mine Manager and No. 3 Mine Manager, Longwall Manager, Master Mechanic and Longwall Mechanical Engineer. 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. 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock (the "Common Stock") has been listed on the Nasdaq National Market under the trading symbol "WLTR" since October 11, 1995. The table below sets forth, for the quarterly periods indicated, the range of high and low sales prices of the Company's Common Stock since such date.
1997 1996(1) -------------------- ------------ HIGH LOW HIGH LOW --------- --------- ----- --- 1st Quarter................................................. $ 14 1/4 $ 11 7/8 2nd Quarter................................................. 14 1/4 12 5/8 14 3/4 12 3/8 3rd Quarter................................................. 15 1/4 12 5/8 13 3/4 12 4th Quarter................................................. 15 3/8 13 1/4 14 1/2 12 5/8
- ------------------------ (1) Beginning October 11, 1995 The Registrant has never paid cash dividends on Common Stock and has no present intention of paying any cash dividends on the Common Stock. Covenants contained in certain of the debt instruments referred to in Note 8 of Notes to Consolidated Financial Statements on pages F-11 through F-13 restrict the ability of the Company to pay cash dividends. As of July 25, 1997, there were 123 shareholders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The following data, insofar as it relates to each of the fiscal years 1993 through 1997, has been derived from annual financial statements, including the consolidated balance sheets at May 31, 1997 and 1996 and the related consolidated statements of operations and cash flows for the three years ended May 31, 1997 and the notes thereto appearing elsewhere herein. All of the information presented below should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto, and the other information contained elsewhere in this report. 21
YEARS ENDED MAY 31, ----------------------------------------------------------------------- 1997 1996 (3) 1995 1994 1993 (2) ------------- ------------- ------------- ------------ ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA AND AMOUNTS REFERENCED IN FOOTNOTES) Summary of Operations: Sales and revenues............................. $ 1,507,061 $ 1,485,635 $ 1,442,322 $ 1,328,524 $ 1,318,986 Cost of sales (exclusive of depreciation)...... 980,235 987,354 951,381 845,061 804,411 Depreciation, depletion and amortization....... 71,814 74,341 72,037 71,035 70,483 Interest and amortization of debt discount and expense (1).................................. 179,291 208,690 304,548 155,470 171,581 Income tax expense (benefit)................... 32,981 (55,155) (170,450) 28,917 24,328 Income (loss) before extraordinary item and cumulative effect of accounting change (2)(3)(4).................................... 37,117 (79,292) (358,645) 7,175 46,594 Net income (loss).............................. 37,117 (84,696) (358,645) 7,175 (58,014) Net income (loss) per share (4) & (5) Income (loss) before extraordinary item........ .67 (1.56) (7.10) Extraordinary item............................. -- (.10) -- ------------- ------------- ------------- Net income (loss).............................. .67 (1.66) (7.10) ------------- ------------- ------------- ------------- ------------- ------------- Number of shares used in calculation of income (loss) per share............................. 55,039,347 50,988,195 50,494,313 ------------- ------------- ------------- ------------- ------------- ------------- Additional Financial Data: Gross capital expenditures..................... $ 101,755 $ 83,523 $ 91,317 $ 69,831 $ 71,708 Net property, plant and equipment.............. 568,176 541,536 662,792 657,863 663,040 Total assets................................... 3,027,385 3,091,377 3,245,153 3,140,892 3,223,234 Long-term senior debt.......................... 2,065,575 2,211,296 2,220,370 871,970 1,046,971 Liabilities subject to Chapter 11 proceedings.................................. -- -- -- 1,727,684 1,725,631 Stockholders' equity (deficit)................. 319,412 276,694 360,774 (282,353) (287,737) Employees at end of year....................... 7,584 7,755 7,888 7,676 7,545
- ------------------------ (1) Interest on unsecured obligations not accrued since December 27, 1989 amounted to $163.7 million in each of the years ended May 31, 1993 and 1994. The Company recorded additional interest and amortization of debt discount and expense of $141.4 million related to the consummation of the Consensual Plan in fiscal 1995. (2) The Company adopted Statement of Financial Accounting Standards No. 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 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 to "Notes to Consolidated Financial Statements"). (5) Per share information for fiscal years 1993 and 1994 is not relevant given the significant change in the Company's capital structure following consummation of the Consensual Plan. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company emerged from bankruptcy on March 17, 1995 pursuant to the Consensual Plan. Accordingly, the Company's Consolidated Statement of Operations and Retained Earnings (Deficit) for the years ended May 31, 1997 and 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 Consolidated Financial Statements" on pages F-6 and F-7, which presents an unaudited pro forma consolidated statement of operations for the year ended May 31, 1995 to illustrate the estimated effects of the Consensual Plan and related financings as if they had occurred as of June 1, 1994, and Note 15 of "Notes to Consolidated Financial Statements" on pages F-26 through F-28, which presents sales and operating income by operating group. RESULTS OF OPERATIONS YEARS ENDED MAY 31, 1997 AND 1996 Net sales and revenues for the year ended May 31, 1997 were $21.4 million, or 1.4%, above the prior year with a 2.8% increase in pricing and/or product mix partially offset by a 1.4% decrease in volume. The decrease in volume was principally the result of lower coal shipments, reflecting reduced production levels. In addition, continued delays in federal spending for planned water and sewer pipeline projects resulted in lower ductile iron pressure pipe shipments. The increase in pricing primarily resulted from higher average net selling prices for homes, ductile iron pressure pipe and coal. Homebuilding and Financing Group sales and revenues were $27.7 million, or 6.7%, greater than the prior year. This performance reflects a 12.3% increase in the average net selling price per home sold, from $42,300 in 1996 to $47,500 in 1997, combined with a 3.7% increase in the number of homes sold, from 3,760 units in 1996 to 3,900 units in 1997. The higher average net selling price reflects a greater percentage of "90% complete" homes sold in the current year and price increases instituted to compensate for higher building material and labor costs. The increase in unit sales reflects the decision by Jim Walter Homes in December 1995 to reduce its financing rate from 10% to 8.5% for its "90% complete" homes on a trial basis to generate additional unit sales. In March 1996, the lower rate was formally advertised. Jim Walter Homes extended the 8.5% financing rate to the remainder of its product line ("shell" and homes sold at various "in-between" stages of interior finish) in the fourth quarter of 1997. Jim Walter Homes' backlog at May 31, 1997 was 1,972 units (all of which are expected to be completed prior to the end of fiscal 1998) compared to 1,957 units at May 31, 1996. Time charge income (revenues received from Mid-State Homes' instalment note portfolio) increased slightly from $231.1 million in 1996 to $231.4 million in 1997. This increase is attributable to increased payoffs received in advance of maturity and to an increase in the average balance per account in the portfolio, partially offset by a reduction in the total number of accounts. Operating income of $81.7 million (net of interest expense) was $18.3 million greater than the prior year. This performance resulted from increases in the average net selling price and number of homes sold, lower interest expense in 1997 ($119.0 million) as compared to 1996 ($128.2 million), lower goodwill amortization in 1997 ($28.5 million) versus 1996 ($31.2 million), and slightly higher time charge income and homebuilding gross profit margins, partially offset by higher selling, general and administrative expenses principally resulting from changes to the base salary and commission structure at Jim Walter Homes. Industrial Products Group sales and revenues were $12.6 million, or 4.4%, greater than the prior year. Increased sales volumes of aluminum foil and sheet products, slag wool, furnace coke, window components and metal building products, combined with improved sales prices for furnace and foundry coke, window components and metal building and foundry products, were partially offset by lower sales volumes of foundry coke and lower sales prices for aluminum foil and sheet products. The group's operating income in 1997 was $21.4 million, compared to an operating loss of $10.4 million in 1996. The improved performance 23 was the result of the overall sales increases and higher gross profit margins realized on furnace and foundry coke, slag wool, aluminum foil and sheet products, window components and metal building and foundry products. Results for 1996 were adversely impacted by a $22.9 million write-off of goodwill, reflecting the Company's adoption of FASB 121 (see Note 5 of "Notes to Consolidated Financial Statements"). Water Transmission Products Group sales and revenues declined slightly in 1997. The group's performance reflected lower sales volumes, but higher selling prices for ductile iron pressure pipe and fittings and higher selling prices and sales volumes for valves and hydrants. The order backlog at May 31, 1997 was 108,341 tons, which represents approximately three months shipments, compared with 121,734 tons at May 31, 1996. Operating income of $14.0 million was $3.5 million above the prior year. This increase was principally due to improved operating efficiencies and lower raw material costs, especially for scrap iron, the principal raw material used in the manufacture of ductile iron pressure pipe. Natural Resources Group sales and revenues were $17.9 million, or 4.9%, below the prior year. The decrease resulted from lower coal shipments due to reduced production levels, a $3.7 million gain (in 1996) from the sale of gas royalty interests in certain mineral properties, lower gains realized from the sale of excess real estate in 1997 ($2.5 million) versus 1996 ($6.1 million) and lower coal and timber royalty income, partially offset by higher average selling prices for coal and methane gas and greater methane gas volume. A total of 6.95 million tons of coal was sold in 1997 versus 7.61 million tons in 1996, an 8.7% decrease reflecting lower shipments to certain export customers, partially offset by increased tonnage sold to Alabama Power Company ("Alabama Power"). The average price per ton of coal sold increased $1.64 from $42.85 in 1996 to $44.49 in 1997 as a result of higher prices realized in the worldwide metallurgical market and a greater percentage of tonnage sold to Alabama Power at above-market contract prices. Methane gas sales volumes were 7.6 billion cubic feet in 1997 versus 6.8 billion cubic feet in 1996. The average selling price per thousand cubic feet, which included a monthly reservation fee of $675,000, was $3.75 in 1997 versus $3.32 in 1996. The group's operating income in 1997 was $27.6 million compared to an operating loss of $105.9 million in 1996. Coal production costs of $36.73 per ton in 1997 were slightly higher than 1996 costs of $36.12 per ton. Operating income of $27.6 million in 1997 includes settlement of a legal claim related to a theft of coal inventory from the Port of Mobile, Alabama, partially offset by a charge relating to a reduction in Jim Walter Resources' salaried workforce under a voluntary early retirement program. The operating loss of $105.9 million in 1996 included a $120.4 million FASB 121 write-down of fixed assets to estimated fair market values at two coal mines (see Note 5 of "Notes to Consolidated Financial Statements") and firefighting and idle plant costs of $16 million, principally associated with a fire at Blue Creek Mine No. 5 ("Mine No. 5") in November 1995. From December 1995 through March 1997, Mine No. 5 accelerated development of its eastern reserves. While in development, the mine's costs ($40.7 million) were capitalized. As a result of a previous fire that began in Mine No. 5 on November 17, 1993, the Company and Jim Walter Resources claimed compensable losses in the amount of $25 million under their business interruption coverage. When the insurers refused to pay their pro rata portion of the claim, the Company and Jim Walter Resources commenced litigation seeking to enforce such insurance. The Company has entered into settlement with several insurers who, in the aggregate, have paid approximately $12.4 million to date, reducing the contract claims to approximately $12.6 million. The Company and Jim Walter Resources continue to pursue litigation against the remaining carriers, and a trial is tentatively scheduled for October 1997 (see Note 12 of "Notes to Consolidated Financial Statements"). Cost of sales, exclusive of depreciation, of $980.2 million was 78.4% of net sales in 1997 versus $987.4 million and 80.9% in 1996. Cost of sales in 1996 was adversely impacted by firefighting and idle plant costs associated with the Mine No. 5 fire. In addition, 1997 costs were favorably affected by decreases in the cost of scrap iron, the major raw material used in the manufacture of ductile iron pressure pipe. 24 Selling, general and administrative expenses of $144.7 million were 9.6% of net sales and revenues in 1997 versus $135.8 million and 9.1% in 1996. The increases principally reflect higher expenses at Jim Walter Homes and Jim Walter Resources as previously discussed. Interest and amortization of debt expense was $179.3 million in 1997 versus $208.7 million in 1996, reflecting lower outstanding debt balances and reduced interest rates resulting from a debt refinancing completed on January 22, 1996. The average rate of interest in 1997 was 8.1% compared to 9.1% in 1996. The prime interest rate ranged from 8.25% to 8.5% in 1997 compared to a range of 8.25% to 9.0% in 1996. The Company's effective tax rate in 1997 and 1996 differed from the statutory tax rate due to amortization of goodwill and the FASB 121 write-off of goodwill of $22.9 million (in 1996), which are not deductible for tax purposes, and percentage depletion. Also, 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 its 1995 net operating loss forward rather than back to prior years (thereby avoiding the effect of a rate difference and loss of certain tax credits), and other miscellaneous tax adjustments (see Note 9 of "Notes to Consolidated Financial Statements" for further discussion of income taxes). Net income for the year ended May 31, 1997 was $37.1 million compared to a net loss of $84.7 million in 1996, reflecting all of the previously mentioned factors as well as the impact of lower postretirement health benefits in 1997. The loss in fiscal 1996 includes an extraordinary loss of $8.3 million ($5.4 million net of income tax benefit) consisting of a redemption premium and write-off of deferred financing costs resulting from the debt refinancing completed in January 1996. 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 0.6% increase in volume. This increase was the result of improved sales and revenues in all operating groups. Homebuilding and Financing Group sales and revenues were $5.9 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 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 from 10% to 8.5% for its "90% complete" homes on a trial basis and, in March 1996, began formally advertising the lower rate. Jim Walter Homes' backlog at May 31, 1996 was 1,957 units 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 due to increased payoffs received in advance of maturity and an increase in the average balance per account, partially offset by a reduction in the total number of accounts. Operating income of $63.4 million (net of interest expense) was $18.4 million greater than the prior year. This performance reflected higher time charge income and improved homebuilding gross profit margins (resulting from a 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 Transmission Products Group sales and revenues were $8.5 million, or 2.1%, 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 25 conditions and delays in federal funding for planned water and sewer pipeline projects. The order backlog at May 31, 1996 was 121,734 tons compared with 121,548 tons at May 31, 1995. Operating income of $10.5 million was $2.4 million below the prior year. The lower performance resulted from the lower sales volumes and higher raw material costs, especially for scrap iron and alloys which are major raw material components, partially offset by higher sales prices. Natural Resources Group sales and revenues exceeded the prior year by $30.8 million, or 9.3%. 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 resulting from greater shipments to certain export customers, partially offset by lower shipments to 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. 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 portion 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, paid approximately $11.7 million through May 31, 1996, reducing the contract claims in the lawsuit to $12.7 million. The Company and Jim Walter Resources continue to pursue litigation against the remaining carriers, and a trial is tentatively scheduled for October 1997 (see Note 12 of "Notes to Consolidated Financial Statements"). In 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 that the mine be shut down for several weeks. The affected coal panels on the western side of the mine were then sealed off and development work on the eastern side of the Mine was ongoing from December 1995 through May 1996. Such development work was completed in March 1997. Jim Walter Resources' three other mines remained in full production during 1996 and 1995. The group incurred an operating loss of $105.9 million in 1996 as compared to operating income of $22.3 million in 1995. The lower performance reflects a $120.4 million FASB 121 write-down of fixed assets to estimated fair market values at two coal mines (see Note 5 of "Notes to Consolidated Financial Statements") and firefighting and idle plant costs of $16 million, principally associated with the fire at Mine No. 5. These factors were partially offset by increased sales volumes of coal and methane gas, a 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 Products Group sales and revenues were $6.0 million, or 2.1%, 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 $10.4 million compared to operating income of $6.6 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 Consolidated Financial Statements") lower window components sales volume, higher raw material costs and reduced efficiencies due to prolonged 26 start-up problems associated with the consolidation and relocation of 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, tooling and metal building and foundry products, combined with 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 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 debt refinancing completed on January 22, 1996. The average rate of interest in 1996 was 9.1% as compared to 9.8%, 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 Consolidated 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 (the "Revolving Credit Facility"), a six-year $125 million 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 the $490 million aggregate amount of 12.19% 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 an existing $150 million bank credit facility, both of which were 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 Consolidated 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 Financing. Industrial Products Group sales and revenues were $56.7 million, or 25.2%, greater than the prior year. Increased sales volumes of aluminum foil and sheet products, foundry coke, chemicals, patterns and 27 tooling, resin-coated sand, window components and metal building and foundry products, 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 $6.6 million was $3.3 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, start-up 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's 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 Transmission Products Group sales and revenues were $55.2 million, or 15.5%, 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 $13.0 million exceeded the prior year by $3.0 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 $14.1 million, or 4.4%, 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 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 Note 12 of Notes to Consolidated Financial Statements.) Operating income of $22.3 million exceeded the prior year by $21.4 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 $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. 28 Homebuilding and Financing Group sales and revenues were $16.9 million, or 4.0%, 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 $45.0 million (net of interest expense) was $16.6 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 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 Consensual Plan. 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 Consensual Plan) 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 Consensual Plan 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. FINANCIAL CONDITION On March 17, 1995, the Company and its subsidiaries emerged from bankruptcy pursuant to the Consensual Plan. Despite the confirmation and effectiveness of the Consensual Plan, the Bankruptcy 29 Court continues to have jurisdiction over the resolution of disputed prepetition claims against the Company and other matters that may arise in connection with or related to the Consensual Plan. 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 for taxes, interest and penalties in the 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. These proofs of claim represent total adjustments to taxable income of approximately $360 million for all tax periods at issue. Objections to the proofs of claim have been filed by the Company and the various issues are being litigated in the Bankruptcy Court. Included in the proofs of claim is an adjustment to taxable income disallowing a deduction of approximately $51 million for hedging losses incurred during fiscal 1988. This issue was conceded by the Internal Revenue Service pursuant to a joint stipulation of parties approved by the Bankruptcy Court by an order dated January 3, 1997. The Company believes that the balance of 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, 1996, total debt has decreased $145.7 million resulting from early repayments, net of borrowings, on the Revolving Credit Facility ($89.0 million), quarterly principal payments on Term Loan A and Term Loan B ($16.0 million), scheduled payments of Mid-State Trust II Mortgage-Backed Notes ($87.0 million), scheduled payments of Mid-State Trust III Asset Backed Notes ($30.7 million), scheduled payments of Mid-State Trust IV Asset Backed Notes ($61.1 million) and scheduled retirements of other long-term debt ($0.9 million), partially offset by borrowings under the Mid-State Trust V Variable Funding Loan Agreement ($139.0 million). The Credit Facilities contain a $365 million revolving credit facility which includes a sub-facility for trade and other standby letters of credit up to $75 million at any time outstanding and a sub-facility for swingline advances not to exceed/limited to $15 million at any time outstanding. At May 31, 1997, $40.0 million of letters of credit were outstanding under this facility. 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 restricts 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 ratios, fixed charge coverage ratios and maximum leverage ratios, some of which become more restrictive over time. The Company was in compliance with these covenants at May 31, 1997 and believes it will meet these financial tests over the remaining terms of these debt agreements. The Trust V Variable Funding Loan Agreement's covenants, among other things, restrict the ability of Trust V to dispose of assets, create liens and engage in mergers or consolidations. The Company was in compliance with these covenants at May 31, 1997. LIQUIDITY AND CAPITAL RESOURCES At May 31, 1997, cash and cash equivalents net of bank overdrafts, were approximately $10.3 million. Operating cash flows for the year ended May 31, 1997, together with issuance of long-term debt under the Revolving Credit Facility and the Mid-State Trust V Variable Funding Loan Agreement, were primarily used for working capital requirements, retirement of long-term senior debt, interest payments and capital expenditures. 30 Working capital is required to fund adequate levels of inventories and accounts receivable. Commitments for capital expenditures at May 31, 1997 are not material; however, it is estimated that gross capital expenditures for the Company and its subsidiaries for the year ending May 31, 1998 will approximate $105 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. On June 11, 1997, Mid-State purchased from Mid-State Trust V mortgage instalment notes having a gross amount of $1.196 billion and an economic balance of $462.3 million and subsequently sold such mortgage instalment notes to Mid-State Trust VI ("Trust VI"), a business trust organized by Mid-State which owns all of the beneficial interest in Trust VI. These sales were in exchange for the net proceeds from the public issuance by Trust VI of $439.2 million of Trust VI Asset Backed Notes. The notes were issued in four classes, bear interest at rates ranging from 7.34% to 7.79% and have a final maturity of July 1, 2035. Payments will be made quarterly on January 1, April 1, July 1, and October 1 based on collections on the underlying collateral less amounts paid for interest on the notes and Trust VI expenses. Net proceeds from the public offering were used primarily to pay down the Mid-State Trust V Variable Funding Loan Agreement indebtedness of $384.0 million. It is anticipated that one or more permanent financings similar to Mid-State Trust VI 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, planned capital expenditures and meet substantially all operating needs. It is further expected that amounts available under the Credit Facilities will be sufficient to meet peak operating needs of the Company. PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Form 10-K contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that is based on the beliefs of the management of the Company, as well as assumptions made by and information currently available to the management of the Company. When used in this Form 10-K, the words "estimate," "project," "believe," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements on page F-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to pages 5 through 7 of the Proxy Statement (the "Proxy Statement") included in the Schedule 14A filed by the Company with the Securities and Exchange Commission (the "Commission") on August 12, 1997 under the Securities Exchange Act of 1934, as amended. Certain information with respect to executive officers is included in Part I, Item 4A. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to pages 13 through 21 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to pages 10 through 12 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to page 9 of the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules--See Index to Financial Statements on page F-1. (b) Reports on Form 8-K-- Report on Form 8-K filed with the Commission on July 2, 1997. Report on Form 8-K filed with the Commission on October 30, 1997. (c) Exhibits--See Index to Exhibits on page E-1 and E-2. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WALTER INDUSTRIES, INC. November 6, 1997 /s/ DEAN M. FJELSTUL ------------------------------------------------ Dean M. Fjelstul, Senior Vice President and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. November 6, 1997 /s/ KENNETH E. HYATT* ------------------------------------------------ Kenneth E. Hyatt, Chairman, Director and Principal Executive Officer November 6, 1997 /s/ RICHARD E. ALMY* ------------------------------------------------ Richard E. Almy, Executive Vice President, Director and Principal Operating Officer November 6, 1997 /s/ HOWARD L. CLARK, JR.* ------------------------------------------------ Howard L. Clark, Jr., Director November 6, 1997 /s/ JAMES B. FARLEY* ------------------------------------------------ James B. Farley, Director November 6, 1997 /s/ ELIOT M. FRIED* ------------------------------------------------ Eliot M. Fried, Director November 6, 1997 /s/ PERRY GOLKIN* ------------------------------------------------ Perry Golkin, Director November 6, 1997 /s/ JAMES L. JOHNSON* ------------------------------------------------ James L. Johnson, Director November 6, 1997 /s/ MICHAEL T. TOKARZ* ------------------------------------------------ Michael T. Tokarz, Director
33 November 6, 1997 /s/ JAMES W. WALTER* ------------------------------------------------ James W. Walter, Director November 6, 1997 /s/ DEAN M. FJELSTUL ------------------------------------------------ Dean M. Fjelstul, Senior Vice President and Principal Financial Officer November 6, 1997 /s/ FRANK A. HULT ------------------------------------------------ Frank A. Hult, Vice President, Controller and Principal Accounting Officer
/s/ FRANK A. HULT ------------------------------ Frank A. Hult *By: Attorney-in-fact 34 INDEX TO FINANCIAL STATEMENTS
PAGES -------------- Walter Industries, Inc. and Subsidiaries Report of Independent Certified Public Accountants.............................................. F-2 Consolidated Balance Sheet--May 31, 1997 and 1996............................................... F-3 Consolidated Statement of Operations for the Three Years Ended May 31, 1997.................................................................................. F-4 Consolidated Statement of Cash Flows for the Three Years Ended May 31, 1997.................................................................................. F-5 Notes To Consolidated Financial Statements...................................................... F-6 to F-28 Financial Statement Schedules for the three years ended May 31, 1997: Report of Independent Certified Public Accountants On Financial Statement Schedules........................................................................... F-29 Schedule III--Valuation and Qualifying Accounts................................................. F-30 to F-32
All other schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto. 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 of cash flows present fairly, in all material respects, the financial position of Walter Industries, Inc. and its subsidiaries at May 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/ PRICE WATERHOUSE LLP Price Waterhouse LLP Tampa, Florida July 10, 1997 F-2 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
MAY 31, --------------------------- 1997 1996 ------------ ------------- (IN THOUSANDS) ASSETS Cash and cash equivalents (Notes 3 and 14)........................................... $ 35,782 $ 32,543 Short-term investments, restricted (Notes 3 and 14).................................. 195,371 175,432 Marketable securities (Notes 3 and 14)............................................... 41,222 49,338 Instalment notes receivable (Notes 4, 8 and 14)...................................... 4,256,845 4,208,252 Less--Provision for possible losses................................................ (26,394) (26,138) Unearned time charges........................................................ (2,896,517) (2,851,961) ------------ ------------- Net........................................................................ 1,333,934 1,330,153 Trade receivables.................................................................... 170,236 178,847 Less--Provision for possible losses................................................ (8,225) (8,180) ------------ ------------- Net........................................................................ 162,011 170,667 Other notes and accounts receivable.................................................. 20,880 21,055 Inventories, at lower of cost (first in, first out or average) or market Finished goods..................................................................... 117,949 124,456 Goods in process................................................................... 32,291 32,798 Raw materials and supplies......................................................... 52,066 51,674 Houses held for resale............................................................. 3,068 2,517 ------------ ------------- Total inventories.......................................................... 205,374 211,445 Prepaid expenses..................................................................... 11,862 11,937 Property, plant and equipment, at cost (Notes 5 and 6)............................... 978,006 888,991 Less--Accumulated depreciation, depletion and amortization......................... (409,830) (347,455) ------------ ------------- Net........................................................................ 568,176 541,536 Investments.......................................................................... 5,112 6,646 Deferred income taxes (Note 9)....................................................... 109,023 155,171 Unamortized debt expense (Note 8).................................................... 22,793 29,548 Other assets (Note 13)............................................................... 41,671 44,971 Excess of purchase price over net assets acquired (Notes 1, 5 and 7)................. 274,174 310,935 ------------ ------------- $ 3,027,385 $ 3,091,377 ------------ ------------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Bank overdrafts (Note 3)............................................................. $ 25,523 $ 28,194 Accounts payable..................................................................... 86,418 74,330 Accrued expenses..................................................................... 131,768 120,477 Income taxes payable (Note 9)........................................................ 58,884 56,238 Long-term senior debt (Notes 4, 8 and 14): Mortgage-backed/asset backed notes................................................. 1,752,125 1,791,946 Other senior debt.................................................................. 313,450 419,350 Accrued interest..................................................................... 23,220 28,819 Accumulated postretirement health benefits obligation (Note 13)...................... 268,959 247,827 Other long-term liabilities (Note 13)................................................ 47,626 47,502 Stockholders' equity (Notes 1, 10 and 11): Common stock, $.01 par value per share: Authorized--200,000,000 shares Issued--55,063,412 shares and 54,868,335 shares.................................. 551 549 Capital in excess of par value..................................................... 1,164,261 1,159,332 Retained earnings (deficit)........................................................ (840,744) (877,861) Excess of additional pension liability over unrecognized prior years service cost......................................................... (4,656) (5,326) ------------ ------------- Total stockholders' equity................................................. 319,412 276,694 ------------ ------------- $ 3,027,385 $ 3,091,377 ------------ ------------- ------------ -------------
F-3 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MAY 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Sales and revenues: Net sales............................................................. $ 1,251,022 $ 1,220,397 $ 1,181,635 Time charges (Note 4)................................................. 231,388 231,104 222,221 Miscellaneous......................................................... 24,651 34,134 30,838 Interest income from Chapter 11 proceedings (Note 1).................. -- -- 7,628 ------------ ------------ ------------ 1,507,061 1,485,635 1,442,322 ------------ ------------ ------------ Cost and expenses: Cost of sales......................................................... 980,235 987,354 951,381 Depreciation, depletion and amortization (Note 6)..................... 71,814 74,341 72,037 Selling, general and administrative................................... 144,703 135,840 130,616 Postretirement health benefits (Note 13).............................. 22,710 27,129 25,961 Provision for possible losses......................................... 3,340 4,367 4,485 Chapter 11 costs (Note 1)............................................. -- -- 442,362 Interest and amortization of debt discount and expense (Notes 1 and 8).................................................................. 179,291 208,690 304,548 Amortization of excess of purchase price over net assets acquired (Note 7)............................................................ 34,870 39,096 40,027 Long-lived asset impairment (Note 5).................................. -- 143,265 -- ------------ ------------ ------------ 1,436,963 1,620,082 1,971,417 ------------ ------------ ------------ 70,098 (134,447) (529,095) Income tax benefit (expense) (Note 9): Current............................................................... (8,244) (621) 80,754 Deferred.............................................................. (24,737) 55,776 89,696 ------------ ------------ ------------ Income (loss) before extraordinary item................................. 37,117 (79,292) (358,645) Extraordinary item--loss on debt repayment (net of income tax benefit of $2,910) (Note 8)...................................................... -- (5,404) -- ------------ ------------ ------------ Net income (loss)....................................................... $ 37,117 $ (84,696) $ (358,645) ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) per share (Note 10): Income (loss) before extraordinary item............................... $ .67 $ (1.56) $ (7.10) Extraordinary item.................................................... -- (.10) -- ------------ ------------ ------------ Net income (loss)................................................... $ .67 $ (1.66) $ (7.10) ------------ ------------ ------------ ------------ ------------ ------------
F-4 WALTER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) OPERATIONS Income (loss) before extraordinary item........................................ $ 37,117 $ (79,292) $(358,645) Charges to income not affecting cash: Settlement of Chapter 11 claims with debt and new common stock............... -- -- 444,752 Depreciation, depletion and amortization..................................... 71,814 74,341 72,037 Provision for deferred income taxes.......................................... 24,737 (55,776) (89,696) Accumulated postretirement health benefits obligation (Note 13).............. 21,132 19,416 18,449 Provision for other long-term liabilities.................................... 1,336 (4,034) 294 Amortization of excess of purchase price over net assets acquired (Note 7)... 34,870 39,096 40,027 Amortization of debt discount and expense.................................... 6,914 7,250 11,783 Long-lived asset impairment (Note 5)......................................... -- 143,265 -- --------- --------- --------- 197,920 144,266 139,001 Decrease (increase) in: Short-term investments, restricted (Notes 3 and 14).......................... (19,939) (47,430) (20,450) Marketable securities (Notes 3 and 14)....................................... 8,116 20,534 92,168 Instalment notes receivable, net (a)......................................... (3,781) 30,875 (1,849) Trade and other receivables, net............................................. 8,831 (8,900) (44,009) Federal income tax receivable................................................ -- 99,875 (99,875) Inventories.................................................................. 6,071 (15,008) (23,858) Prepaid expenses............................................................. 75 757 (1,359) Deferred income taxes (Note 9)............................................... 21,411 (79,941) -- Increase (decrease) in: Bank overdrafts (Note 3)..................................................... (2,671) (5,552) 3,867 Accounts payable............................................................. 14,850 (7,361) 28,925 Accrued expenses............................................................. 11,937 7,054 28,242 Income taxes payable (Note 9)................................................ 2,646 2,977 (15,348) Accrued interest............................................................. (5,599) (9,033) 24,156 --------- --------- --------- Cash flows from operations................................................. 239,867 133,113 109,611 --------- --------- --------- FINANCING ACTIVITIES Issuance of long-term senior debt (Notes 4, 8 and 14).......................... 159,000 680,000 974,450 Additions to unamortized debt expense.......................................... (159) (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 (Notes 4, 8 and 14)........................ (304,721) (689,074) (120,250) Disposition of liabilities subject to Chapter 11 proceedings................... 3,427 (63,932) (604,044)(b) Payment of accrued postpetition interest on Chapter 11 secured debt obligations.................................................................. -- -- (244,334) Fractional share payments...................................................... (13) (8) -- --------- --------- --------- Cash flows used in financing activities...................................... (142,466) (83,959) (11,331) --------- --------- --------- INVESTING ACTIVITIES Additions to property, plant and equipment, net of normal retirements.......... (98,454) (73,485) (76,966) Decrease (increase) in investments and other assets............................ 4,292 (1,261) (4,442) --------- --------- --------- Cash flows used in investing activities...................................... (94,162) (74,746) (81,408) --------- --------- --------- Net increase (decrease) in cash and cash equivalents........................... 3,239 (25,592) 16,872 Cash and cash equivalents at beginning of year (Notes 3 and 14)................ 32,543 58,135 41,263 --------- --------- --------- Cash and cash equivalents at end of year (Notes 3 and 14)...................... $ 35,782 $ 32,543 $ 58,135 --------- --------- --------- --------- --------- ---------
- ------------------------ (a) Consists of sales and resales, net of repossessions and provision for possible losses, of $173,418,000, $148,749,000 and $155,236,000 and cash collections on account and payouts in advance of maturity of $169,637,000, $179,624,000 and $153,387,000, for the years ended May 31, 1997, 1996 and 1995, 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 CONSOLIDATED 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 NEXT PAGE) F-6 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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: (1) Interest income from Chapter 11 proceedings of $7,628,000, which would not have been realized assuming the Consensual Plan became effective June 1, 1994, has been eliminated. (2) Chapter 11 costs of $442,362,000, 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 $81,364,000 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 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. In addition, certain reclassifications have been made in the accompanying consolidated financial statements in order to conform with the fiscal 1997 presentation. NOTE 3--CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES Cash and cash equivalents include short-term deposits and highly liquid investments which have original maturities of three months or less and are stated at cost which approximates market. The Company's cash management system provides for the reimbursement of all major bank disbursement F-7 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED) accounts on a daily basis. Checks issued but not yet presented to the banks for payment are classified as bank overdrafts. 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 ($101,467,000) 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 ($79,706,000) and (iii) miscellaneous other segregated accounts restricted to specific uses ($14,198,000). Investments with original maturities greater than three months are classified as marketable securities. In accordance with Statement of Financial Accounting Standards No. 115-- "Accounting for Certain Investments in Debt and Equity Securities," the Company's marketable securities are classified as available for sale and are carried at estimated fair values. 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. The credit terms offered by Jim Walter Homes, Inc. ("Jim Walter Homes") are usually for 100% of the purchase price of the home and the instalment notes receivable currently carry either an 8.5% or 10% annual percentage rate, without points or closing costs. 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 to which the Company has access should the buyer default on payment of the instalment note obligation. Of the gross amount of $4,256,845,000 an amount of $3,967,340,000 is due after one year. Instalment payments estimated to be receivable within each of the five years from May 31, 1997 are $289,505,000, $284,802,000, $277,990,000, $270,327,000 and $262,932,000, respectively, and $2,871,289,000 after five years. Of the gross amount of instalment notes receivable of $4,256,845,000, 19%, 12% and 11% are secured by homes located in the states of Texas, Mississippi and Florida, 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 90 or more days delinquent was 2.78% and 3.14% of total instalment notes receivable at May 31, 1997 and 1996, respectively. Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from 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 F-8 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--INSTALMENT NOTES RECEIVABLE (CONTINUED) to the Company and its subsidiaries. The gross amount of instalment notes receivable at May 31, 1997 was $4,256,845,000 and had an economic balance of $2,019,581,000. The economic balance of an account is the present value of the future scheduled monthly payments due on the account. Such present value is calculated by discounting the remaining future scheduled monthly payments on an account by the effective financing rate. The effective financing rate is determined by calculating the discount rate which, when applied in a present value calculation, results in the present value of all originally scheduled monthly payments on such account being equal to the original amount financed. In effect, the economic balance of an account is the amount of principal that can be amortized by the instalment payments due over the remaining term of the account at the effective financing rate. Instalment notes receivable owned by Trust II had a gross book value of $966,072,000 and an economic balance of $609,227,000; receivables owned by Trust III had a gross book value of $364,872,000 and an economic balance of $195,535,000; and receivables owned by Trust IV had a gross book value of $1,612,880,000 and an economic balance of $704,532,000. 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 Homes. At May 31, 1997, receivables owned by Trust V had a gross book value of $1,310,206,000 and an economic balance of $509,059,000 (see Note 8). Instalment notes receivable not pledged to the trusts had a gross book value of $2,815,000 and an economic balance of $1,228,000. NOTE 5--LONG-LIVED ASSET IMPAIRMENT In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 C "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " ("FASB 121") which became 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. A fire which resulted from the unexpected recurrence of spontaneous combustion heatings at Jim Walter Resources' Mine No. 5 at the end of the fiscal second quarter, as well as various geological problems at the three other coal mines during portions of the year, led to the conclusion that there was an impairment of fixed assets within the Natural Resources segment. After performing a review for asset impairment at each of the Company's business segments and applying the principles of measurement contained in FASB 121, the Company recorded a charge against earnings in 1996 of $143,265,000 before tax ($101,125,000 after tax). The charge included 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 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 CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows (see Note 5):
MAY 31, ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS) Land and minerals..................................................... $ 150,667 $ 150,708 Land improvements..................................................... 20,476 18,143 Buildings and leasehold improvements.................................. 106,004 98,452 Mine development costs................................................ 80,363 47,930 Machinery and equipment............................................... 597,357 548,562 Construction in progress.............................................. 23,139 25,196 ---------- ---------- Total............................................................... $ 978,006 $ 888,991 ---------- ---------- ---------- ----------
The Company provides depreciation for financial reporting purposes principally on the straight line method over the useful lives of the assets. Assets (primarily mine development costs) extending for the full life of a coal mine are depreciated on the unit of production basis. For federal income tax purposes, accelerated methods are used for substantially all eligible properties. The depreciable property categories and the principal rates for depreciation used are as follows: Land improvements....................................... 3.5% to 10% Buildings............................................... 2% to 20% Leasehold improvements.................................. Over term of leases Mine development costs.................................. Over life of mines Machinery and equipment................................. 3.5% to 33.3%
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, 1997, 1996 and 1995 was immaterial. Rental expense for all operating leases was $12.0 million, $11.0 million and $10.0 million for the fiscal years ended May 31, 1997, 1996 and 1995, respectively. Future minimum payments under noncancelable operating leases at May 31, 1997 are: 1998, $11.3 million; 1999, $7.8 million; 2000, $6.7 million; 2001, $6.6 million; and 2002, $5.4 million. 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, 1997, the accumulated amortization of goodwill was approximately $478.1 million. At May 31, 1997, the net unamortized balance of goodwill is not considered to be impaired. F-10 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--DEBT Long-term debt, in accordance with its contractual terms, consisted of the following at each year end:
MAY 31, -------------------------- 1997 1996 ------------ ------------ (IN THOUSANDS) Senior debt: Walter Industries, Inc. Revolving Credit Facility......................................................... $ 146,000 $ 235,000 Term Loan A....................................................................... 106,250 121,250 Term Loan B....................................................................... 58,750 59,750 Other............................................................................. 2,450 3,350 ------------ ------------ 313,450 419,350 ------------ ------------ Mid-State Trusts Trust II Mortgage-Backed Notes.................................................... 410,000 497,000 Trust III Asset Backed Notes...................................................... 116,934 147,669 Trust IV Asset Backed Notes....................................................... 841,191 902,277 Trust V Variable Funding Loan..................................................... 384,000 245,000 ------------ ------------ 1,752,125 1,791,946 ------------ ------------ Total........................................................................... $ 2,065,575 $ 2,211,296 ------------ ------------ ------------ ------------
Interest paid in cash for the years ended May 31, 1997, 1996 and 1995 was $179,749,000, $220,959,000 and $437,357,000, respectively. 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 $75 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 .50%, or (ii) a LIBOR rate plus an Applicable Margin of .75% to 1.75% (based upon a leverage F-11 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--DEBT (CONTINUED) ratio pricing grid). At May 31, 1997, the weighted average interest rate was 7.73%. A commitment fee ranging from .25% to .50% 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 .375%. At May 31, 1997, there were no swingline borrowings outstanding under this facility; however, letters of credit in the aggregate face amount of $39,967,000 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 .50%, or (ii) a LIBOR rate plus .75% to 1.75% (based upon a leverage ratio pricing grid). Scheduled principal payments to be made in each of the five years from May 31, 1997 are $16,250,000, $21,250,000, $25,000,000, $25,000,000 and $18,750,000, respectively. At May 31, 1997, the weighted average interest rate was 6.87% Term Loan B interest is at LIBOR plus 2% to 2.25% (based upon a leverage ratio pricing grid). At May 31, 1997, the interest rate was 7.88%. Scheduled principal payments in each of the five years from May 31, 1997 are $1,000,000, $1,000,000, $1,000,000, $1,000,000 and $11,750,000, respectively. 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, 1997 is $87,000,000, $64,600,000, $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, 2000. Accordingly, the $384 million of borrowings outstanding at May 31, 1997 has been classified as long-term debt. Interest is based on the cost of A-1 and P-1 rated commercial paper plus .50%. The commitment fee on the unused portion of the facility is .20%. On June 11, 1997, Mid-State purchased from Mid-State Trust V mortgage instalment notes having a gross amount of $1,196,479,000 and an economic balance of $462,287,000 and subsequently sold such F-12 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--DEBT (CONTINUED) mortgage instalment notes to Mid-State Trust VI ("Trust VI"), a business trust organized by Mid-State which owns all of the beneficial interest in Trust VI. These sales were in exchange for the net proceeds from the public issuance by Trust VI of $439,150,000 of Trust VI Asset Backed Notes. The notes were issued in four classes, bear interest at rates ranging from 7.34% to 7.79% and have a final maturity of July 1, 2035. Payments will be made quarterly on January 1, April 1, July 1 and October 1 based on collections on the underlying collateral, less amounts paid for interest on the notes and Trust VI expenses. Net proceeds from the public offering were used primarily to pay down the Trust V indebtedness of $384,000,000. The Company has traditionally used interest rate swaps as hedge instruments to manage interest rate risks. The Company has two types of interest rate risks: (i) current risk on interest rates related to debt which has floating rates and (ii) risk of interest 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, 1997, Trust V had in place a swap agreement with a notional amount of $360 million under which it pays a fixed interest rate of 5.25% and receives interest based on commercial paper rates. This swap was in effect until June 30, 1997, it accreted monthly and was designed to offset the interest rate risk of the Trust V Variable Funding Loan Agreement. Also at May 31, 1997, Trust V had in place forward swaps totaling $150 million notional amount which were to start June 30, 1997 and run for 10 years at a blended monthly fixed rate of 7.25%. At that time, Trust V was to receive interest based on prevailing commercial paper rate levels. On May 15, 1997, in order to offset refinancing risk, Trust V entered into a rate swap agreement with a notional amount of $250 million under which Trust V was to pay a fixed rate of 6.62%. This transaction had a termination date of June 13, 1997. With the creation of Trust VI on June 11, 1997, all swap agreements were terminated. Since interest rates have declined over the past year, Trust VI coupon levels were below those originally expected. This lower level of interest cost served to mitigate the losses incurred ($8.6 million) on the swap agreements at termination. These losses will be deferred and amortized over the life of Trust VI. The Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, pay dividends, create liens on assets, enter into 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 compliance with these covenants at May 31, 1997. 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 compliance with these covenants at May 31, 1997. F-13 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--INCOME TAXES Income tax expense (benefit) is made up of the following components:
MAY 31, 1997 MAY 31, 1996 MAY 31, 1995 ---------------------- ----------------------- ---------------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED ----------- --------- ----------- ---------- ---------- ---------- (IN THOUSANDS) United States................... $ 4,745 $ 25,697 $ (799) $ (54,846) $ (80,445) $ (88,815) State and local................. 3,499 (960) 1,420 (930) (309) (881) ----------- --------- ----------- ---------- ---------- ---------- Total......................... $ 8,244 $ 24,737 $ 621 $ (55,776) $ (80,754) $ (89,696) ----------- --------- ----------- ---------- ---------- ---------- ----------- --------- ----------- ---------- ---------- ----------
In fiscal 1997 and 1995, the Company paid federal income tax of approximately $3.0 million and $30.6 million, respectively. In fiscal 1997, the Company received a refund of federal income tax of $21.4 million due to a net operating loss carryback. In fiscal 1996, the Company received a refund of federal income tax of $22.2 million paid in a previous year as estimated payments. State income taxes paid in 1997 and 1995 were approximately $2.6 million and $4.0 million respectively, while state income taxes refunded in fiscal 1996 were approximately $100,000. The Company complies with Statement of Financial Accounting Standards No. 109--"Accounting for Income Taxes" ("FASB 109"). 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, ------------------------------- 1997 1996 1995 --------- --------- --------- Statutory tax rate................................................. 35.0% (35.0)% (35.0)% Effect of: State and local income tax....................................... 2.3 .2 (.2) Percentage depletion............................................. (8.8) (2.6) (.5) Amortization of excess of purchase price over net assets acquired and FASB 121 charge............................................ 17.5 16.2 2.7 Benefit of capital loss carryforward............................. -- (5.9) (1.5) 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.................... .5 (9.1) 2.3 Other, net....................................................... .5 .2 -- --- --------- --------- Effective tax rate................................................. 47.0% (41.0)% (32.2)% --- --------- --------- --- --------- ---------
In fiscal 1996, the tax benefit related to the extraordinary item approximated the statutory rate and is deferred federal income tax. F-14 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--INCOME TAXES (CONTINUED) Deferred tax liabilities (assets) are comprised of the following:
MAY 31, ------------------------ 1997 1996 ----------- ----------- (IN THOUSANDS) Instalment sales method for instalment notes receivable in prior years............................................................. $ 27,504 $ 34,691 Depreciation........................................................ 84,721 78,462 Difference in basis of assets under purchase accounting............. 18,536 20,424 Net operating loss carryforward..................................... (91,230) (155,283) Accrued expenses.................................................... (46,101) (39,034) Postretirement benefits other than pensions......................... (102,453) (94,431) ----------- ----------- Total deferred tax (asset) liability.............................. $ (109,023) $ (155,171) ----------- ----------- ----------- -----------
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 1996 fiscal year, the Company recorded a deferred tax asset of $25.0 million. During fiscal 1997, the Company elected to carry the 1996 loss back to prior years rather than forward, resulting in a refund of federal income taxes of $21.4 million, which was accordingly charged against the deferred tax asset. The election to carry back the net operating loss generated a tax charge of approximately $400,000 in the fourth quarter of fiscal 1997 due to the effect of the rate difference and other miscellaneous tax adjustments. During fiscal 1996, the Company elected to carry a 1995 loss forward rather than back to prior years, which generated a tax benefit of approximately $19 million in the fourth quarter of fiscal 1996 due to the effect of the rate difference, avoidance of loss of credits and other miscellaneous tax adjustments. Also during the fourth quarter of fiscal 1996, the Company utilized its capital loss carryforward of approximately $22.8 million. The Company's net operating loss carryforward at May 31, 1997 approximates $242.1 million, which will expire in fiscal 2010. The Company's minimum tax credit carryforward at May 31, 1997 approximates $6.5 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, $164.6 million of the remaining net operating loss carryforward is subject to the annual limitation. However, the Company believes that the annual limitation will not affect the realization of the net operating loss carryforward, which is expected to be fully utilized by fiscal 1999. 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 for taxes, interest and penalties 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. These proofs of F-15 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--INCOME TAXES (CONTINUED) claim represent total adjustments to taxable income of approximately $360 million for all tax periods at issue. Objections to the proofs of claim have been filed by the Company, and the various issues are being litigated in the Bankruptcy Court. Included in the proofs of claim is an adjustment to taxable income disallowing a deduction of approximately $51 million for hedging losses incurred during fiscal year 1988. This issue was conceded by the Internal Revenue Service pursuant to a joint stipulation of parties approved by the Bankruptcy Court by an order dated January 3, 1997. The Company believes that the balance of such proofs of claim are substantially without merit and intends to defend vigorously such claims; however, there can be no assurance as to the ultimate outcome. NOTE 10--STOCKHOLDERS' EQUITY The Company is authorized to issue 200,000,000 shares of common stock, $.01 par value. As of May 31, 1997, 55,063,412 shares of common stock were outstanding. On June 24, 1997, the Company repurchased 1,387,092 shares of outstanding common stock and such shares are being held as treasury stock. Pursuant to the Consensual Plan, 494,313 shares were issued on September 13, 1995 to all former stockholders as of the Effective Date of the Consensual Plan. Also on September 13, 1995, pursuant to the Consensual Plan, 3,880,140 shares of common stock were issued to an escrow account. To the extent that certain federal income tax matters of the Company are resolved satisfactorily, up to a maximum 3,880,140 of the escrowed shares will be distributed to former stockholders of the Company as of the Effective Date. To the extent such matters are not resolved satisfactorily, the escrowed shares will be returned to the Company and canceled. Pursuant to the Consensual Plan, a total of 54,868,766 shares of common stock were to be issued to creditors and former stockholders of the Company. The plan of reorganization originally proposed by certain creditors and committees (the "Creditors Plan") provided that subordinated bondholders could elect to receive "Qualified Securities" (cash and/or new senior notes) in lieu of common stock of the Company. The Consensual Plan confirmed by the Bankruptcy Court, which technically constituted a modification of the Creditors Plan kept in place the bondholders election. Certain subordinated bondholders, however, were unable to provide documentation evidencing their right to receive Qualified Securities within the two year time frame prescribed by the Consensual Plan. As a result, approximately 212,000 additional shares of common stock were issued in lieu of Qualified Securities in 1997. In addition, certain former stockholders did not tender their shares, which resulted in approximately 17,000 shares not being issued. Primary net income per share in 1997 was computed by dividing net income by the monthly weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents include the number of shares issuable on the exercise of dilutive employee stock options less the number of shares of common stock which could have been purchased with the proceeds from the exercise of such options. These purchases were assumed to have been made at the average market price of the common stock during the year. Primary net loss per share in 1996 does not include 3,880,140 additional shares issued to an escrow account on September 13, 1995 pursuant to the Consensual Plan because such issuance would be anti-dilutive. Fully diluted net income (loss) per share is not materially different from primary net income (loss) per share. F-16 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED) Changes in stockholders' equity for the two years ended May 31, 1997 are summarized as follows:
EXCESS OF COMMON STOCK ADDITIONAL ---------------------- CAPITAL IN RETAINED PENSION SHARES PAR VALUE EXCESS EARNINGS LIABILITY --------- ----------- ------------ ----------- ----------- (IN THOUSANDS) Balance at May 31, 1995.............................. 50,494 $ 505 $ 1,159,384 $ (793,165) $ (5,950) Stock issued......................................... 4,374 44 (44) Fractional share payments............................ (8) Net loss............................................. (84,696) Reverse excess of additional pension liability....... 624 --------- ----- ------------ ----------- ----------- Balance at May 31, 1996.............................. 54,868 549 1,159,332 (877,861) (5,326) Stock issued, net.................................... 195 2 4,942 Fractional share payments............................ (13) Net income........................................... 37,117 Reverse excess of additional pension liability....... 670 --------- ----- ------------ ----------- ----------- Balance at May 31, 1997.............................. 55,063 $ 551 $ 1,164,261 $ (840,744) $ (4,656) --------- ----- ------------ ----------- ----------- --------- ----- ------------ ----------- -----------
In management's opinion, information for fiscal 1995 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). In February 1997, Statement of Financial Accounting Standards No. 128--"Earnings per Share" ("FASB 128"), was issued. FASB 128 will be effective for both interim and annual periods ending after December 15, 1997 and will require a restatement of previously reported earnings per share. Under FASB 128, "basic" earnings per share will replace the reporting of "primary" earnings per share. Basic earnings per share is calculated by dividing the income available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. "Fully diluted" earnings per share will be replaced by "diluted" earnings per share under FASB 128. The calculation of diluted earnings per share is similar to that of fully diluted earnings per share under existing accounting pronouncements. Basic earnings per share and diluted earnings per share are not expected to be significantly different from primary net income per share and fully diluted net income per share as calculated by the Company for the years ended May 31, 1997 or 1996. 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 ("SARs") and stock awards. The maximum number of such shares with respect to which stock options or SARs may be granted to any employee during 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 F-17 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--STOCK OPTIONS (CONTINUED) 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:
1997 1996 --------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ---------- --------- ---------- ----------- Outstanding at beginning of year.............. 1,487,000 $ 14.120 -- $ -- Granted....................................... 1,219,000 12.313 1,500,000 14.120 Exercised..................................... -- -- -- -- Canceled...................................... (36,001) 13.571 (13,000) 14.125 ---------- ---------- Outstanding at end of year.................... 2,669,999 13.301 1,487,000 14.120 ---------- ---------- ---------- ---------- Exercisable at end of year.................... 487,333 14.118 -- ---------- ---------- ---------- ----------
OPTIONS OPTIONS OUTSTANDING EXERCISABLE ----------------------------------------- ------------------ NUMBER WEIGHTED AVERAGE NUMBER OUTSTANDING AT REMAINING CONTRACTUAL EXERCISABLE AT EXERCISE PRICES MAY 31, 1997 LIFE (YEARS) MAY 31, 1997 - --------------- -------------- ------------------------- ------------------ 12.313 1,208,000 9.2 -- 14.063 153,000 8.2 51,000 14.125 1,308,999 8.2 436,333 -------------- ------- 2,669,999 8.7 487,333 -------------- ------- -------------- -------
Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates as prescribed by Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("FASB 123"), the Company's net income and net income per share on a pro forma basis would have been (in thousands, except per share data):
1997 --------- Pro forma net income............................................................... $ 35,314 --------- --------- Pro forma net income per share..................................................... $ .64 --------- ---------
The preceding pro forma results were calculated with the use of the Black Scholes option-pricing model. The following assumptions were used for the year ended May 31, 1997: (1) risk free interest rate of 7.36%; (2) dividend yield of 0.0%; (3) expected life of 5.0 years; and (4) volatility of 29.3%. The Walter Industries, Inc. Employee Stock Purchase Plan was adopted in January 1996. All full-time employees of the Company who have attained the age of majority in the state in which they reside are eligible to participate. The Company contributes a sum equal to 15% of each participant's actual payroll deduction as authorized, and remits such funds to a designated brokerage firm who purchases in the open market, as agent for the Company, as many shares of common stock as such funds will permit for the accounts of the participants. The amount of stock purchased depends upon the market prices of the common stock at the time the purchases are made. The total number of shares which may be purchased F-18 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--STOCK OPTIONS (CONTINUED) under the plan is 500,000. Total shares purchased under the plan in 1997 were approximately 200,000, and the Company's contribution was approximately $400,000. NOTE 12--LITIGATION 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 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") in October 1994. Thereafter, a settlement (the "Veil-Piercing Settlement") was entered into among the Company, certain of its creditors, Celotex, JWC and representatives of the Asbestos Claimants pursuant to which all the Veil-Piercing Suits would be dismissed and the Company and its officers, directors and relevant stockholders would be released from all liabilities relating to the LBO or associated with asbestos-related liabilities of Celotex or JWC. The Veil-Piercing Settlement is embodied in the Amended Joint Plan of Reorganization Dated as of December 9, 1994 as modified on March 1, 1995 (as so modified the "Consensual Plan") 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. In March 1996, the Company, together with various other parties, filed an adversary proceeding with the Bankruptcy Court, naming Celotex and JWC as defendants. In this proceeding the Company and the other named plaintiffs 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 that included an injunction issued pursuant to Section 524(g) of the Bankruptcy Code or other similar injunctive relief F-19 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--LITIGATION (CONTINUED) 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) affords additional statutory protection to the Company against the possibility of such claims in the future. On May 28, 1996, the Bankruptcy Court issued an order granting in part the Company's motion for summary judgment and denying the motions for summary judgment filed by Celotex and JWC. The Bankruptcy Court found, among other things, that the plan of reorganization filed by Celotex in its Chapter 11 proceeding did not comply with the terms of the Veil-Piercing Settlement. The Bankruptcy Court's May 28, 1996 Order was appealed by Celotex and JWC. In October 1996, Celotex and various other parties in the Celotex bankruptcy announced to the Court in the Celotex Bankruptcy (the "Celotex Bankruptcy Court") that an agreement had been reached between Celotex and each of its creditor groups pursuant to a Modified Joint Plan of Reorganization (the "Celotex Modified Plan") which, among other things, superseded and replaced all prior plans. The Celotex Modified Plan contains a provision for a Section 524(g) injunction as to all asbestos claimants. The Celotex Modified Plan was approved by a vote of the Celotex creditors and in December 1996 the Celotex Bankruptcy Court entered an Order confirming the Celotex Modified Plan. The Celotex Modified Plan became effective as of May 30, 1997. As a result of the Celotex Modified Plan containing a provision for a Section 524(g) injunction and such Plan having become effective, the Company believes that the appeal of Celotex and JWC of the Bankruptcy Court's May 28, 1996 Order is now moot and that the only issue which remains in that adversary proceeding is whether the Company and other plaintiffs are entitled to collect attorneys' fees and expenses from Celotex and JWC with respect to the prosecution of the adversary proceeding. 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 had 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 F-20 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--LITIGATION (CONTINUED) 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 $12.4 million to date, reducing the contract claims in the lawsuit to approximately $12.6 million. The Company and JWR continue to pursue the litigation against the remaining carriers, and a trial is tentatively scheduled for October 1997. 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 certificates. In preparing to make distributions to subordinated bondholders, it came to the attention of the Company that certain schedules associated with the certifications 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 schedules and certain of the ballots cast by subordinated bondholders. The Company filed a motion with the Bankruptcy Court seeking to amend the schedules. In April 1995, an order was entered reflecting the Bankruptcy Court's decision to permit the amendment of the schedules in certain respects but not others (the "April Order"). Appeals from the April Order were filed with the District Court by various bondholders. In November 1996, the District Court entered an order granting the Company's motion to dismiss and dismissing as moot all appeals in this matter. No appeal of the District Court's Order was taken and that Order is now final. 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 F-21 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--LITIGATION (CONTINUED) 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, 1997, 1996 and 1995, was $7.6 million, $11.8 million and $8.2 million, respectively. The funding of retirement and employee benefit plans is in accordance with the requirements of the plans and, where applicable, in sufficient amounts to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits based on years of service and compensation or at stated amounts for each year of service. F-22 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED) The net pension costs for Company administered plans are as follows:
FOR THE YEARS ENDED MAY 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (IN THOUSANDS) Service cost-benefits earned during the period............ $ 6,644 $ 6,072 $ 5,817 Interest cost on projected benefit obligation............. 17,589 16,972 16,174 Actual loss (return) on assets............................ (28,532) (35,347) 4,304 Net amortization and deferral............................. 8,680 20,236 (21,377) ---------- ---------- ---------- Net pension costs....................................... $ 4,381 $ 7,933 $ 4,918 ---------- ---------- ---------- ---------- ---------- ----------
The following table sets forth the funded status of Company administered plans:
MAY 31, 1997 MAY 31, 1996 -------------------------- -------------------------- PLANS IN WHICH PLANS IN WHICH -------------------------- -------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ------------ ------------ ------------ ------------ (IN THOUSANDS) Actuarial present value of accumulated benefit obligations: Vested benefits............................................. $ 166,103 $ 46,853 $ 149,542 $ 50,941 Non-vested benefits......................................... 7,444 1,525 6,815 1,585 ------------ ------------ ------------ ------------ $ 173,547 $ 48,378 $ 156,357 $ 52,526 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Plan assets at fair value, primarily stocks and bonds......... $ 213,726 $ 33,341 $ 189,728 $ 34,609 Projected benefit obligations................................. 207,610 48,430 188,422 54,008 ------------ ------------ ------------ ------------ Plan assets in excess of (less than) projected benefit obligations................................................. 6,116 (15,089) 1,306 (19,399) Unamortized portion of transition (asset) obligation at June 1, 1986..................................................... (7,524) 2,918 (9,185) 4,021 Unrecognized net loss from actual experience different from that assumed................................................ 6,743 4,758 13,191 6,124 Prior service cost not recognized............................. 633 3,695 618 3,595 Contribution to plans after measurement date.................. 103 1,126 -- 1,042 ------------ ------------ ------------ ------------ Prepaid (accrued) pension cost................................ 6,071 (2,592) 5,930 (4,617) Additional liability.......................................... -- (11,294) -- (12,507) ------------ ------------ ------------ ------------ Prepaid pension cost (pension liability) recognized in the balance sheet............................................... $ 6,071 $ (13,886) $ 5,930 $ (17,124) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The projected benefit obligations were determined using an assumed discount rate of 7.50% in fiscal 1997 and 1996 and, where applicable, an assumed increase in future compensation levels of 4.50% in fiscal 1997 and 1996. The assumed long-term rate of return on plan assets was 9% and 8% in fiscal 1997 and 1996, respectively. F-23 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 $34.7 million at May 31, 1997. 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 $22.7 million in 1997, $27.1 million in 1996 and $26.0 million in 1995. Amounts paid for postretirement benefits were $7.3 million in 1997, $7.7 million in 1996 and $7.5 million in 1995. The net periodic postretirement benefit cost includes the following components:
FOR THE YEARS ENDED MAY 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Service cost................................................. $ 7,642 $ 8,668 $ 8,491 Interest cost................................................ 14,990 18,701 17,470 Net amortization and deferral................................ 78 (240) -- --------- --------- --------- Net periodic postretirement benefit cost................... $ 22,710 $ 27,129 $ 25,961 --------- --------- --------- --------- --------- ---------
The accumulated postretirement benefits obligation at May 31, 1997 and 1996 are as follows:
MAY 31, ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS) Retirees.............................................................. $ 81,731 $ 93,380 Fully eligible, active participants................................... 37,189 32,896 Other active participants............................................. 106,493 132,026 ---------- ---------- Accumulated postretirement benefit obligation......................... 225,413 258,302 Unrecognized net gain (loss).......................................... 43,546 (10,475) ---------- ---------- Postretirement benefit liability recognized in the balance sheet...... $ 268,959 $ 247,827 ---------- ---------- ---------- ----------
The principal assumptions used to measure the accumulated postretirement benefit obligation include a discount rate of 7.50% in fiscal 1997 and 1996 and a health care cost trend rate of 8.50% declining to 5.25% over a eight year period and remaining level thereafter in fiscal 1997 and a health care cost trend rate of 9.50% declining to 5.25% over a nine year period in fiscal 1996. A one percent increase in trend rates would increase the accumulated postretirement benefit obligation by 18% and increase net periodic postretirement benefit cost for 1997 by 21%. Certain subsidiaries of the Company maintain profit sharing plans. The total cost of these plans for the years ended May 31, 1997, 1996 and 1995 was $3.4 million, $2.9 million and $3.0 million, respectively. F-24 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED) In February 1997, a reduction in the salaried workforce at Jim Walter Resources was completed under a voluntary early retirement program. The total cost of this program was $6.2 million. 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 and cash equivalents, restricted short term investments and marketable securities--The carrying amounts reported in the balance sheet approximate fair value. Instalment notes receivable--The estimated fair value of instalment notes receivable at May 31, 1997 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, 1997. The value of mortgage-backed instruments such as instalment notes receivable are very sensitive to changes in interest rates. Debt--The estimated fair value of long term debt at May 31, 1997 was $2.142 billion based on current yields for comparable debt issues or prices for actual transactions. F-25 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--SEGMENT INFORMATION Information relating to the Company's business segments is set forth below.
FOR THE YEARS ENDED MAY 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (IN THOUSANDS) Sales and Revenues: Homebuilding and financing............................................ $ 440,749 $ 413,078 $ 407,172 Water transmission products........................................... 419,813 419,984 411,442 Natural resources (a)................................................. 345,011 362,948 332,151 Industrial products................................................... 299,851 287,230 281,280 Corporate............................................................. 1,637 2,395 10,277 ------------ ------------ ------------ Consolidated sales and revenues (b)(c).............................. $ 1,507,061 $ 1,485,635 $ 1,442,322 ------------ ------------ ------------ ------------ ------------ ------------ Contributions to Operating Income (d)(e): Homebuilding and financing (f)........................................ $ 81,731 $ 63,390 $ 44,954 Water transmission products........................................... 13,986 10,517 12,965 Natural resources (g)................................................. 27,595 (105,929) 22,314 Industrial products (g)............................................... 21,433 (10,406) 6,570 ------------ ------------ ------------ 144,745 (42,428) 86,803 Less-Unallocated corporate interest and other expense (h)............... (74,647) (92,019) (615,898) Income tax benefit (expense).......................................... (32,981) 55,155 170,450 ------------ ------------ ------------ Income (loss) before extraordinary item............................. $ 37,117 $ (79,292) $ (358,645) ------------ ------------ ------------ ------------ ------------ ------------ Depreciation, Depletion and Amortization: Homebuilding and financing............................................ $ 3,311 $ 3,279 $ 3,336 Water transmission products........................................... 17,010 18,636 16,520 Natural resources..................................................... 38,107 38,652 41,434 Industrial products................................................... 11,696 11,890 9,073 Corporate............................................................. 1,690 1,884 1,674 ------------ ------------ ------------ Total............................................................... $ 71,814 $ 74,341 $ 72,037 ------------ ------------ ------------ ------------ ------------ ------------ Gross Capital Expenditures: Homebuilding and financing............................................ $ 5,617 $ 3,735 $ 4,192 Water transmission products........................................... 14,479 12,888 15,538 Natural resources..................................................... 54,999 53,576 46,214 Industrial products................................................... 25,968 12,792 24,692 Corporate............................................................. 692 532 681 ------------ ------------ ------------ Total............................................................... $ 101,755 $ 83,523 $ 91,317 ------------ ------------ ------------ ------------ ------------ ------------ Identifiable Assets: Homebuilding and financing............................................ $ 1,796,949 $ 1,802,950 $ 1,789,582 Water transmission products........................................... 452,963 480,209 480,617 Natural resources..................................................... 387,167 381,582 465,680 Industrial products................................................... 192,688 177,668 213,836 Corporate (i)......................................................... 197,618 248,968 295,438 ------------ ------------ ------------ Total............................................................... $ 3,027,385 $ 3,091,377 $ 3,245,153 ------------ ------------ ------------ ------------ ------------ ------------
F-26 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--SEGMENT INFORMATION (CONTINUED) - ------------------------ (a) Includes sales of coal of $309,308,000, $325,495,000 and $297,650,000 in 1997, 1996 and 1995, 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. Sales to Alabama Power Company in each of the years ended May 31, 1997, 1996 and 1995 were 13% of consolidated net sales and revenues. (b) Inter-segment sales (made primarily at prevailing market prices) are deducted from sales of the selling segment and are insignificant in amount with the exception of the sales of the Industrial Products Group to the Water Transmission Products Group of $12,440,000, $13,292,000 and $13,373,000 and sales of the Natural Resources Group to the Industrial Products Group of $4,172,000, $4,774,000 and $5,397,000 in 1997, 1996 and 1995, respectively. (c) Export sales, primarily coal, were $134,733,000, $171,446,000 and $129,071,000 in 1997, 1996 and 1995, 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 $34,870,000 in 1997, $39,096,000 in 1996 and $40,027,000 in 1995. A breakdown by segment is as follows:
FOR THE YEARS ENDED MAY 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Homebuilding and financing................................... $ 28,538 $ 31,246 $ 31,703 Water transmission products.................................. 12,212 12,247 12,214 Natural resources............................................ (1,327) (1,331) (1,328) Industrial products.......................................... 638 2,135 2,627 Corporate.................................................... (5,191) (5,201) (5,189) --------- --------- --------- $ 34,870 $ 39,096 $ 40,027 --------- --------- --------- --------- --------- ---------
(e) Includes postretirement health benefits of $22,710,000, $27,129,000 and $25,961,000 in 1997, 1996 and 1995. A breakdown by segment is as follows:
FOR THE YEARS ENDED MAY 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Homebuilding and financing................................... $ 1,888 $ 1,636 $ 2,295 Water transmission products.................................. 3,857 3,729 4,362 Natural resources............................................ 11,873 16,640 15,004 Industrial products.......................................... 4,519 4,581 3,610 Corporate.................................................... 573 543 690 --------- --------- --------- $ 22,710 $ 27,129 $ 25,961 --------- --------- --------- --------- --------- ---------
(f) In July 1986, Waltsons, Inc., a corporation in which James W. Walter, Chairman Emeritus and a Director of the Company, has a twenty percent (20%) interest, acquired a fifty percent (50%) interest F-27 WALTER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15--SEGMENT INFORMATION (CONTINUED) in the operations of Booker & Company, Inc. ("Booker"), a wholesale distributor of building supplies and materials. In December 1996, Waltsons, Inc. sold all of its interest in the operations of Booker. Booker has been a supplier of various building supplies and materials to Dixie Building Supplies, Inc., a wholly owned subsidiary of the Company. Booker's sales of building supplies and materials to such subsidiary totaled $6,091,000, $5,679,000 and $5,434,000 in 1997, 1996 and 1995, respectively. 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. (g) 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 Products Group in 1996. (h) Excludes interest expense incurred by the Homebuilding and Financing Group of $118,959,000, $128,215,000 and $131,560,000 in 1997, 1996 and 1995, respectively. Such amounts are net of intercompany interest income of $33,135,000 and $28,127,000 in 1997 and 1996, and includes intercompany interest expense of $35,128,000 in 1995. The balance of unallocated expenses consisting primarily of unallocated interest, corporate expenses and Chapter 11 costs (in 1995) are attributable to all groups and cannot be reasonably allocated to specific groups. (i) Primarily cash and cash equivalents and corporate headquarters buildings and equipment. NOTE 16--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the fiscal years ended May 31, 1997 and 1996.
MAY 31, FEB 28, NOV 30, AUG 31, 1997 ($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1997 1997 1996 1996 - ----------------------------------------------------------------- ---------- ---------- ---------- ---------- Net sales and revenues........................................... $ 399,087 $ 340,415 $ 397,896 $ 369,663 Gross profit..................................................... 79,893 51,662 67,963 71,269 Income (loss) before extraordinary item.......................... 21,620 (2,248) 7,525 10,220 Per share........................................................ .39 (.04) .13 .19 Net income (loss)................................................ 21,620 (2,248) 7,525 10,220 Per share........................................................ $ .39 $ (.04) $ .13 $ .19
MAY 31, FEB 29, NOV 30, AUG 31, 1996 ($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1996 1995 1995 - ----------------------------------------------------------------- ---------- ---------- ---------- ---------- Net sales and revenues........................................... $ 389,209 $ 329,142 $ 378,136 $ 380,148 Gross profit..................................................... 72,453 33,583 60,733 66,274 Income (loss) before extraordinary item.......................... 39,720 (118,159) (1,094) 241 Per share........................................................ .72 (2.32) (.02) -- Net income (loss)................................................ 39,720 (123,563) (1,094) 241 Per share........................................................ $ .72 $ (2.42) $ (.02) $ --
The results of operations for the quarter ended February 29, 1996 included a $143.3 million pre-tax charge ($101.1 million after tax) for impairment of certain long-lived assets (see Note 5) and an extraordinary pre-tax loss of $8.3 million ($5.4 million after tax) due to the early repayment of debt (see Note 8). F-28 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Stockholders Walter Industries, Inc. Our audits of the consolidated financial statements referred to in our report dated July 10, 1997, appearing in the Form 10-K/A Amendment No. 1 also included an audit of the Financial Statement Schedules listed in Item 14(l) of this form. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICE WATERHOUSE LLP Price Waterhouse LLP Tampa, Florida July 10, 1997 F-29 SCHEDULE III WALTER INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1997
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COST AND FROM RECLASSI- AT END DESCRIPTION OF YEAR EXPENSES RESERVES FICATIONS OF YEAR - ----------------------------------------------------- ----------- ----------- ------------ ------------- --------- (IN THOUSANDS) Reserves (provision for possible losses) deducted from installment notes receivable.................. $ 26,138 $ 2,861 $ 2,605(1) -- $ 26,394 -- -- ----------- ----------- ------------ --------- ----------- ----------- ------------ --------- Reserve (provision for possible losses) deducted from trade receivables.................................. $ 8,180 $ 479 $ 434(1) -- $ 8,225 -- -- ----------- ----------- ------------ --------- ----------- ----------- ------------ --------- Accrued workmen's compensation (2)................... $ 8,668 $ 1,116 $ 21(3) -- $ 9,763 -- -- ----------- ----------- ------------ --------- ----------- ----------- ------------ --------- Black Lung reserves (2).............................. $ 14,225 $ -- $ 283(3) -- $ 13,942 -- -- ----------- ----------- ------------ --------- ----------- ----------- ------------ ---------
- ------------------------ (1) Notes and accounts written off as uncollectible. (2) Included in other long-term liabilities. (3) Losses sustained. F-30 SCHEDULE III WALTER INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1996
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COST AND FROM RECLASSI- AT END DESCRIPTION OF YEAR EXPENSES RESERVES FICATIONS OF YEAR - ----------------------------------------------------- ----------- ----------- ------------ --------- --------- (IN THOUSANDS) Reserves (provision for possible losses) deducted from instalment notes receivable................... $ 26,556 $ 3,805 $ 4,223(1) -- $ 26,138 ----------- ----------- ------------ --------- --------- ----------- ----------- ------------ --------- --------- Reserve (provision for possible losses) deducted from trade receivables.................................. $ 7,998 $ 562 $ 380(1) -- $ 8,180 ----------- ----------- ------------ --------- --------- ----------- ----------- ------------ --------- --------- Accrued workmen's compensation (2)................... $ 4,500 $ (257) $ 75(3) $ 4,500 $ 8,668 ----------- ----------- ------------ --------- --------- ----------- ----------- ------------ --------- --------- Black Lung 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. F-31 SCHEDULE III WALTER INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1995
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COST AND FROM RECLASSI- AT END DESCRIPTION OF YEAR EXPENSES RESERVES FICATIONS OF YEAR - ----------------------------------------------------- ----------- ----------- ------------ ----------- --------- (IN THOUSANDS) Reserves (provision for possible losses) deducted from instalment notes receivable................... $ 26,301 $ 3,473 $ 3,218 (1) -- $ 26,556 ----------- ----------- ------------ --- --------- ----------- ----------- ------------ --- --------- Reserve (provision for possible losses) deducted from trade receivables.................................. $ 7,392 $ 1,012 $ 406 (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. F-32 EXHIBIT INDEX AMENDMENT NO. 1 ON FORM 10-K/A TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1997
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) 3(a) --Restated Certificate of Incorporation of the Company (3) 3(b) --By-Laws of the Company (3) 10(a) --Stockholder's Agreement (3) 10(b) --Form of Common Stock Registration Rights Agreement (3) 10(c) --Channel One Registration Rights Agreement (7) 10(d) --Second Amended and Restated Veil Piercing Settlement Agreement (included as Exhibit 3A to Exhibit 2(a)(i) (1) 10(e) --Bank Credit Agreement (8) 10(f) --Director and Officer Indemnification Agreement, dated as of March 3, 1995, among the Company and the Indemnities parties thereto (5) 10(g) --New Alabama Power Contract (4)(5) 10(h) --Escrow Agreement, dated as of September 12, 1995, between the Company and Harris Trust and Savings Bank, as Escrow Agent (7) 10(i) --Walter Industries, Inc. Directors' Deferred Fee Plan (7) 10(j) --1995 Long-Term Incentive Stock Plan of Walter Industries, Inc. (6) 10(k) --Agreement, dated as of August 30, 1995, between the Company and James W. Walter (7) 10(l) --Stock Purchase Agreement dated as of September 19, 1997 by and among the Stockholders of Applied Industrial Materials Corporation, Certain Stockholders of AIMCOR Enterprises International, Inc. AIMCOR (Germany) Limited Partnership, and AIMCOR (Luxemborg) Limited Partnership, as first parties, and Walter Industries, Inc. as second party. (9)
E-1
EXHIBIT NUMBER DESCRIPTION - ------------------- ------------------------------------------------------------------------------------------ 10(m) --$800 Million Credit Agreement by and among Walter Industries, Inc. as Borrower, NationsBank, National Association, as Administrative Agent, Documentation Agent and Syndication Agent and the Lenders Party hereto from time to time. (9) 10(n) --Variable Funding Loan Agreement, dated as of March 3, 1995, among Mid-State Trust V. Enterprise Funding Corporation and NationsBank N.A. and amendments thereto 11 --Statement re computation of per share earnings(10) 21 --Subsidiaries of the Company 23 --Consent of Price Waterhouse LLP 24 --Power of Attorney(10) 27 --Financial Data Schedule(10)
- ------------------------ (1) This Exhibit is incorporated by reference to the Application for Qualification of Indendture of Form T-3 filed by the Company with the Commission on February 6, 1995. (2) This Exhibit is incorporated by reference to Amendment No. 2 to the Application for Qualification of Indenture on Form T-3 filed by the Company with the Commission on March 7, 1995. (3) This Exhibit is incorporated by reference to the Registration Statement of Form S-1 (File No. 33-59013) filed by the Company with the Commission on May 2, 1995. (4) Portions of this document have been omitted pursuant to an approved request for confidential treatment dated October 11, 1995. (5) This Exhibit is incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 33-59013) filed by the Company with the Commission on May 2, 1995. (6) This Exhibit is incorporated by reference to the Registration Statement on Form S-8 filed by the Company with the Commission on April 1, 1996. (7) This Exhibit is incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 33-59013) filed by the Company with the Commission on May 2, 1995. (8) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on February 16, 1996. (9) This Exhibit is incorporated by reference to Form 8-K filed by the Company with the Commission on October 30, 1997. (10) This Exhibit is incorporated by reference to the Form 10-K filed by the Company on August 26, 1997. E-2 EX-10.(N) 2 EXHIBIT 10(N) VARIABLE FUND LOAN AGREE DTD 3/3/95 Exhibit 10(n) VARIABLE FUNDING LOAN AGREEMENT dated as of March 3, 1995 among ENTERPRISE FUNDING CORPORATION, the Lender, and MID-STATE TRUST V, the Borrower, and FIRST UNION NATIONAL BANK OF FLORIDA, the Custodian/Collateral Agent, and NATIONSBANK, N.A. (CAROLINAS) the Administrative Agent TABLE OF CONTENTS Page ARTICLE I GENERAL............................... 2 SECTION 1.1. Certain Defined Terms.......................................... 2 SECTION 1.2. Other Terms.................................................... 2 SECTION 1.3. Computation of Time Periods.................................... 2 ARTICLE II AMOUNT AND TERMS OF COMMITMENT................... 2 SECTION 2.1. Revolving Credit Facility...................................... 2 SECTION 2.2. Variable Funding Note.......................................... 2 SECTION 2.3. Availability of Borrowings..................................... 3 SECTION 2.4. Selection of Tranche Periods and Tranche Rates................. 3 SECTION 2.5. Interest and Fees.............................................. 4 SECTION 2.6. Mandatory and Optional Prepayments............................ 4 SECTION 2.7. Proceeds and Payments.......................................... 6 SECTION 2.8. Pledged Accounts............................................... 6 SECTION 2.9. Payments and Computations, Etc................................. 7 SECTION 2.10. Reports....................................................... 8 ARTICLE III REPRESENTATIONS AND WARRANTIES.................... 8 SECTION 3.1. Representations and Warranties of the Borrower................. 8 (a) Existence and Standing.................................... 8 (b) Authorization and Contravention........................... 8 (c) Binding Effect............................................ 8 (d) Perfection................................................ 8 (e) Good Title................................................ 9 (f) Accuracy of Information................................... 9 (g) Tax Status................................................ 9 (h) Use of Proceeds........................................... 9 (i) Place of Business......................................... 9 (j) Nature of Accounts........................................ 9 (k) No Event of Default....................................... 9 (l) Not an Investment Company................................. 9 (m) ERISA..................................................... 9 (n) Beneficial Ownership...................................... 10 (o) Debt for Tax.............................................. 10 (p) Unacceptable Investment................................... 10 (q) Action, Error, Omission, Etc.............................. 10 (r) No Litigation............................................. 10 (s) Default and Delinquency Ratios............................ 10 (t) Monthly Payments.......................................... 10 SECTION 3.2. Reaffirmation of Representations\ and Warranties by the Borrower............................... 11 -i- ARTICLE IV CONDITIONS PRECEDENT........................ 11 SECTION 4.1. Conditions to Effectiveness.................................... 11 SECTION 4.2. Conditions to Each Loan........................................ 13 ARTICLE V COVENANTS.............................. 15 SECTION 5.1. Affirmative Covenants of Borrower.............................. 15 (a) Comfort Letter............................................ 15 (b) Other Information......................................... 15 (c) Compliance Certificate.................................... 15 (d) Notice of Event of Default or Potential Event of Default................................ 16 (e) Conduct of Business....................................... 16 (f) Compliance with Laws...................................... 16 (g) Furnishing of Information and Inspection of Records..................................... 16 (h) Payment of Obligations.................................... 16 (i) Further Assurances........................................ 16 (j) Access.................................................... 17 (k) Costs and Expenses........................................ 17 (l) Amendments; Miscellaneous................................. 17 SECTION 5.2. Negative Covenants of Borrower.................................. 17 (a) No Extension or Amendment of Accounts..................... 17 (b) No Sale................................................... 18 (c) No Insurance.............................................. 18 (d) Other Business............................................ 18 (e) Dissolution............................................... 18 (f) Liens..................................................... 18 (g) No Amendment.............................................. 18 (h) No Mergers, Etc........................................... 18 (i) Change of Name, Etc....................................... 18 (j) Borrowing Base Deficiency................................. 19 (k) Pledged Accounts.......................................... 19 (l) Successor Service......................................... 19 ARTICLE VI EVENTS OF DEFAULT......................... 19 SECTION 6.1. Events of Default.............................................. 19 SECTION 6.2. Remedies....................................................... 21 -ii- ARTICLE VII INDEMNIFICATION; EXPENSES; RELATED MATTERS............. 21 SECTION 7.1. Indemnities by the Borrower.................................... 21 SECTION 7.2. Indemnity for Taxes, Reserves, and Expenses.................... 22 SECTION 7.3. Other Costs; Expenses and Related Matters...................... 24 ARTICLE VIII MISCELLANEOUS........................... 25 SECTION 8.1. Term of Agreement.............................................. 25 SECTION 8.2. Waivers; Amendments............................................ 25 SECTION 8.3. Notices........................................................ 25 SECTION 8.4. Governing Law; Submission to Jurisdiction; Integration.................................................... 27 SECTION 8.5. Severability; Counterparts..................................... 28 SECTION 8.6. Successors and Assigns......................................... 28 SECTION 8.7. Waiver of Confidentiality...................................... 28 SECTION 8.8. Confidentiality Agreement...................................... 28 SECTION 8.9. Liability of Owner Trustee..................................... 29 SECTION 8.10. No Bankruptcy Petition Against the Lender...................... 29 SECTION 8.11. No Recourse Against Stockholders, Officers, or Directors......................................... 29 Form of Variable Funding Note.............................................. A-1 Form of Borrowing Request.................................................. B-1 Form of Borrower's Counsel Opinion......................................... C-1 -iii- VARIABLE FUNDING LOAN AGREEMENT VARIABLE FUNDING LOAN AGREEMENT (this "Loan Agreement"), dated as of March 3, 1995, by and among ENTERPRISE FUNDING CORPORATION, a Delaware corporation (the "Lender"), MID-STATE TRUST V, a Delaware business trust, as borrower (the "Borrower"), FIRST UNION NATIONAL BANK OF FLORIDA, a national banking association, as custodian and collateral agent (the "Collateral Agent"), and NATIONSBANK, N.A. (CAROLINAS), a national banking association, as administrative agent (the "Administrative Agent"). PRELIMINARY STATEMENTS WHEREAS, the Borrower has been established pursuant to the Trust Agreement dated as of the date hereof; WHEREAS, on the Closing Date, and from time to time pursuant to the Depositor Account Transfer Agreement dated as of the date hereof (the "DAT Agreement"), Jim Walter Homes, Inc. (the "Originator") has agreed to convey certain Accounts to Mid-State Homes, Inc. (the "Depositor"), and the Depositor, pursuant to the Borrower Account Transfer Agreement dated as of the date hereof (the "BAT Agreement"), has agreed to convey certain Accounts to the Borrower; WHEREAS, pursuant to the Custodian/Collateral Agent Agreement dated as of the date hereof (the "CCA Agreement"), and as collateral security for its obligations under this Loan Agreement, the Borrower has agreed to assign all Accounts purchased by it, all of its rights under the DAT Agreement, the BAT Agreement, the Contribution Agreement, the Master Servicing Agreement and the Subservicing Agreement, and all of its right, title, interest in and to certain bank accounts and certain other collateral, and to deliver any notes evidencing indebtedness and certain other documents related to the Accounts, to the Collateral Agent for the benefit of the Lender, and to take such other steps as set forth in the CCA Agreement to create and perfect a first lien in all such rights in favor of the Collateral Agent, for the benefit of the Lender; WHEREAS, the Borrower has requested that the Lender make Loans to the Borrower, from time to time, which will be secured by the Collateral described above and evidenced by a Variable Funding Note, the proceeds of which will be used to purchase the Accounts; WHEREAS, the Lender will finance the Loans through the periodic issuance of Transaction Commercial Paper and Related Liquidity Draws; and WHEREAS, subject to the terms and conditions set forth herein, the Lender is willing to make the Loans to the Borrower. NOW, THEREFORE, in consideration of the mutual benefits to be derived and the representations and warranties, conditions and promises herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I GENERAL SECTION 1.1. Certain Defined Terms. Capitalized terms used in this Loan Agreement shall have the meanings given such terms in Annex A hereto, unless otherwise defined herein. SECTION 1.2. Other Terms. All accounting terms not specifically defined herein or in Annex A hereto shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC of the State of New York, and not specifically defined herein or in Annex A, are used herein as defined in such Article 9. SECTION 1.3. Computation of Time Periods. Unless otherwise stated in this Loan Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." ARTICLE II AMOUNT AND TERMS OF COMMITMENT SECTION 2.1. Revolving Credit Facility. Subject to the terms and conditions hereof, the Lender agrees to make loans ("Loans") to the Borrower from time to time as permitted by this Loan Agreement during the Facility Term in an aggregate amount outstanding at any time not to exceed the Maximum Net Investment; provided, however, that in no event shall the Lender make any Loan if, after giving effect to such Loan, either (a) the Net Investment would exceed the Maximum Net Investment or (b) a Borrowing Base Deficiency would exist. SECTION 2.2. Variable Funding Note. The Loans shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A (the "VFN"), payable to the order of the Lender. The Lender shall record the date and amount of each Loan made and the date and amount of each payment of principal thereof, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The VFN shall (a) be dated the Closing Date, (b) be stated to mature on the Scheduled Termination Date, and (c) provide for the payment of principal, interest and fees in accordance with Section 2.5 and Section 2.6 hereof. -2- SECTION 2.3. Availability of Borrowings. During the Facility Term, the Borrower may request Loans on any Business Day by delivering to the Administrative Agent irrevocable notice of each borrowing via facsimile in the form of Exhibit B hereto (a "Borrowing Request") on the related Determination Date with respect to Loans to be made on a Remittance Date and at least two Business Days prior to the proposed Borrowing Date with respect to Loans to be made on any other Borrowing Date. The Borrowing Request shall specify (a) the proposed Borrowing Date for such Loan; (b) the amount of the Loan requested, which shall be at least $5,000,000 and integral multiples of $1,000,000 in excess thereof, and (c) the desired Tranche Period related thereto pursuant to Section 2.4. Each Borrowing Request shall be irrevocable and binding on the Borrower and the Borrower shall indemnify the Lender and the Administrative Agent against any loss or expense incurred by the Lender or the Administrative Agent, either directly or through the Liquidity Provider Agreement, as a result of any failure by the Borrower to complete such borrowing, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by the Lender, either directly or pursuant to the Liquidity Provider Agreement, by reason of the liquidation or reemployment of funds acquired by the Lender or the Liquidity Provider (including, without limitation, funds obtained by issuing commercial paper or promissory notes or obtaining deposits as loans from third parties) for the Lender to fund such borrowing. SECTION 2.4. Selection of Tranche Periods and Tranche Rates. (a) At all times hereafter, but prior to the occurrence of a Termination Event, the Borrower shall, subject to the Lender's approval and the limitations described below, request Tranche Periods and allocate a portion of the Net Investment to each selected Tranche Period, so that the aggregate amounts allocated to outstanding Tranche Periods at all times shall equal the Net Investment. The Borrower shall give the Administrative Agent irrevocable notice by telephone of the new requested Tranche Period(s) at least two Business Days prior to the expiration of any then existing Tranche Period; provided, however, that the Lender may select, in its sole discretion, any such new or other Tranche Period if (i) the Borrower fails to provide such notice on a timely basis or (ii) the Lender determines, in its sole discretion, that the Tranche Period requested by the Borrower is unavailable or for any reason commercially undesirable. The Lender confirms that it is its intention to allocate all or substantially all of the Net Investment to one or more CP Tranche Periods; provided, that the Lender may determine, from time to time, in its sole discretion, that funding such Net Investment by means of one or more CP Tranche Periods is not desirable for any reason. If the Liquidity Provider acquires an interest with respect to the Accounts pursuant to the terms of the Liquidity Provider Agreement, the Liquidity Provider may exercise the right of selection granted to the Lender hereby. The Tranche Rate applicable to any such interest may be the BR Rate, the -3- CD Rate, or the Eurodollar Rate, as determined by the Liquidity Provider. In the case of any Tranche Period outstanding upon the occurrence of a Termination Event, such Tranche Period shall end on the date of such occurrence. (b) At all times on and after the occurrence of a Termination Event, the Lender or the Liquidity Provider, as applicable, shall select all Tranche Periods and Tranche Rates applicable thereto. SECTION 2.5. Interest and Fees. The Borrower shall pay to the Lender, pursuant to the terms of the CCA Agreement, as interest on the outstanding Loans, the following amounts on the following dates: (a) on each day (i) that a Tranche matures or (ii) interest is due and owing on any Related Credit Support Disbursements, an amount equal to the Discount due on such maturing Tranche (together with an amount equal to any Discount due on maturing Transaction Commercial Paper to the extent the amount of Transaction Commercial Paper issued in order to fund such Loan exceeds the amount of such Loan) and on such Credit Support Related Disbursement; (b) on each day that Transaction Commercial Paper is issued, the Dealer Fee with respect to such Transaction Commercial Paper; (c) on each Remittance Date: (i) the Program Costs (exclusive of any Dealer Fees paid pursuant to paragraph (b) of this Section 2.5) due and payable on such date; (ii) Defaulted Interest; and (iii) an amount equal to the amount owing to any Indemnified Party pursuant to Article VII hereof and certain other expenses imposed on the Lender with respect to funding the Net Investment or its other obligations hereunder for the related Collection Period, if any. SECTION 2.6. Mandatory and Optional Prepayments. Unless a Termination Event has occurred: (a) On each Remittance Date following the Facility Termination Date, the Borrower shall, or shall cause the Collateral Agent to, deposit in the Principal Payment Account the lesser of (i) the Net Investment as of the last day of the related Collection Period and (ii) the amount of Collections available therefor after application pursuant to clauses (i) through (iii) of Section 4.1(d) of the CCA Agreement. -4- (b) On the Remittance Date with respect to which a Borrowing Base Deficiency existed on the related Determination Date and continues to exist on such Remittance Date, and on the second Business Day following the occurrence of a Borrowing Base Deficiency at any other time, if such Borrowing Base Deficiency still exists on such second Business Day, the Borrower shall, or shall cause the Collateral Agent to, deposit into the Principal Payment Account, an amount at least equal to such Borrowing Base Deficiency. (c) On each day that principal is due with respect to a Related Liquidity Draw or a Related Credit Support Disbursement pursuant to the Credit Support Agreement, the Borrower shall, or shall cause the Collateral Agent to, deposit in the Principal Payment Account an amount equal to such principal. (d) On or prior to the initial Scheduled Termination Date the Borrower shall, or shall cause the Collateral Agent to, deposit in the Principal Payment Account an amount not less than the lesser of (i) the Net Investment (or such other amount as agreed to by the Lender on the Business Day prior to such deposit) and (ii) the greater of (A) fifty percent of the highest outstanding Net Investment during the period from the Closing Date to the most recent origination date of the Accounts to be released from the Lien of this Loan Agreement in connection with such Take-Out (a "Take-Out Cut-Off Date") and (B) $100,000,000 (such deposit, a "Take-Out"). After a Take-Out occurs, if the Facility Term is extended pursuant to Section 8.1 hereof, the Borrower shall, or shall cause the Collateral Agent to, deposit in the Principal Payment Account within 36 months of the prior Take-Out not less than the lesser of (x) the Net Investment (or such other amount as agreed to by the Lender on the Business Day prior to such deposit) and (y) the greater of (1) fifty percent of the highest outstanding Net Investment during the period from the prior Take-Out to the related Take-Out Cut-Off Date and (2) $100,000,000. (e) Following the occurrence of the Facility Termination Date, on each Remittance Date on which the amount on deposit in the Reserve Account (after giving effect to all deposits to such account to be made on such date) exceeds the Specified Reserve Account Requirement for such date, the Borrower shall, or shall cause the Collateral Agent to, deposit in the Principal Payment Account the amount of such excess. (f) The Borrower shall have the right on any Remittance Date, upon written notice to the Administrative Agent not later than the related Determination Date, to deposit into the Principal Payment Account prepayments of principal on the VFN. (g) The Lender agrees that amounts deposited in the Principal Payment Account pursuant to the provisions of this -5- Loan Agreement or the CCA Agreement shall be applied to repay maturing Tranches or related Credit Support Disbursements on each day a Tranche or Related Credit Support Disbursement matures. The Net Investment shall be reduced by any amounts withdrawn and paid to or at the direction of the Lender from the Principal Payment Account. (h) The entire principal balance of the VFN shall be due and payable on the Scheduled Termination Date together with all accrued and unpaid Discount thereon. SECTION 2.7. Proceeds and Payments. The proceeds of the Loans shall be used by the Borrower solely to purchase Accounts and to pay other amounts expressly permitted under the terms and conditions of the Operative Documents. Unless otherwise specified herein, any payments to be made to the Lender hereunder shall be paid or deposited in its account with Bankers Trust Company, Corporate Agency Group, ABA No. 021 001 033, Account No. 01419647, Reference EFC FFC to XX447 General Collateral, Attn: J. R. Angelo, or such other account as may be designated in writing by the Lender to the Borrower. SECTION 2.8. Pledged Accounts. (a) The Borrower shall establish, on or prior to the Closing Date, an Eligible Bank Account No. __________) at the Collateral Agent in the name of the Collateral Agent (the "Collection Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Lender. (b) The Borrower shall establish, on or prior to the Closing Date, an Eligible Bank Account (No. _____________) at the Collateral Agent in the name of the Collateral Agent (the "Reserve Account") bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Lender. (c) The Borrower shall establish, on or prior to the Closing Day, an Eligible Bank Account (No.______________) at the Collateral Agent in the name of the Collateral Agent (the "Holding Account") bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Lender. (d) The Borrower shall establish, on or prior to the Closing Date, an Eligible Bank Account (ABA No. 053000196; Account No. 001366855) at the Administrative Agent in the name of the Lender (the "Principal Payment Account") bearing a designation clearly indicating that the funds deposited therein are for the benefit of the Lender. Funds on deposit in the Principal Payment Account (other than investment earnings) shall be invested in Eligible Investments at the written direction of the Borrower; provided that such -6- investments will mature so that sufficient funds will be available uninvested for application by the Lender pursuant to paragraph (g) of Section 2.6 hereof. Investment earnings on amounts on deposit in the Principal Payment Account shall be paid by the Lender to the Borrower as soon as practicable following receipt thereof by the Lender. The Borrower will deposit into the Principal Payment Account losses on investments in the Principal Payment Account. (e) If at any time the Collection Account, the Reserve Account or the Holding Account shall no longer be an Eligible Bank Account, then the Borrower shall, within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which the Lender shall consent), cause such account to be moved such that such account will be an Eligible Bank Account. The Borrower shall immediately notify the Administrative Agent of the new location and account number of such account. SECTION 2.9. Payments and Computations, Etc. (a) On the Business Day preceding a Borrowing Date, the Borrower shall request from the Lender, and the Lender shall provide to Borrower, the Market Discount Rate applicable to such Borrowing Date. On each Determination Date on which a Borrowing Request is made and within one Business Day of a written request from the Lender, the Borrower shall calculate the AEB, AMV and the Borrowing Base, using in the case of the AMV, the Market Discount Rate supplied by the Lender. The Lender and the Administrative Agent shall not be bound by, any calculation of the AEB, the AMV or the Borrowing Base by the Borrower. (b) All amounts to be paid or deposited by the Borrower hereunder shall be paid or deposited in accordance with the terms hereof no later than 11:00 a.m. (New York City time) on the day when due in immediately available funds. If such amounts are payable to the Lender they shall be paid or deposited in accordance with Section 2.6 hereof, until otherwise notified by the Lender. The Borrower shall, to the extent permitted by law, pay to the Lender upon demand, interest on all amounts not paid to the Lender or deposited when required hereunder at a rate equal to the Base Rate. All computations of discount, interest, and all per annum fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. Any computations by the Lender of a Borrowing Base Deficiency or amounts payable by the Borrower hereunder to the Lender, the Liquidity Provider or the Credit Support Provider shall be binding absent manifest error. -7- SECTION 2.10. Reports. On each Determination Date, the Borrower shall cause the Master Servicer to provide to the Lender (a) the Master Servicing Certificate for the related Collection Period, (b) a Schedule of Accounts with respect to all Accounts owned by the Borrower and (c) such other information as the Lender may reasonably request. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties of the Borrower. The Borrower represents and warrants to the Lender that: (a) Existence and Standing. The Borrower (i) is a business trust duly organized, validly existing, and in good standing under the laws of the State of Delaware, (ii) has all power and all material governmental licenses, authorizations, consents, and approvals required to carry on its business in each jurisdiction in which its business is now conducted, and (iii) is duly qualified to do business and is in good standing under the laws of each jurisdiction where the conduct of its business requires such qualification. (b) Authorization and Contravention. The execution, delivery, and performance by the Borrower of this Loan Agreement, the VFN, and the other Operative Document to which the Borrower is a party are within the Borrower's powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any Governmental Authority, and do not contravene, or constitute a default under, any provision of applicable law or regulation or any other Operative Document to which the Borrower is a party, or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower, or result in the creation or imposition of any lien on assets of the Borrower. (c) Binding Effect. This Loan Agreement and the VFN constitute the legal, valid, and binding obligations of the Borrower, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium, or other similar laws affecting the rights of creditors. (d) Perfection. At all times, the Borrower shall be the owner of all of the Collateral, free and clear of all liens, encumbrances, security interests, preferences, or other security arrangement of any kind or nature whatsoever (other than those permitted by the Operative Documents), and all mortgages, financing statements, and other documents required to be recorded or filed in order to perfect and protect the Collateral against all creditors of and purchasers from the Borrower will have been duly filed in each filing office necessary for such purpose and all filing fees and taxes, if -8- any, payable in connection with such filings shall have been paid in full. (e) Good Title. At all times, the Lender shall have a valid and perfected first-priority security interest in the Collateral free and clear of any Adverse Claim. (f) Accuracy of Information. All information heretofore furnished by the Borrower or any Affiliate of the Borrower (including, without limitation, any information delivered pursuant to Sections 2.10 and 5.1 hereof) to the Lender or the Administrative Agent for purposes of or in connection with this Loan Agreement or any transactions contemplated hereby is, and all such information hereafter furnished by the Borrower to the Lender or the Administrative Agent will be, true and accurate in every material respect on the date such information is stated or certified. (g) Tax Status. The Borrower has filed all tax returns (federal, state, and local) required to be filed and has paid or made adequate provision for the payment of all taxes, assessments, and other governmental charges. (h) Use of Proceeds. The proceeds of the Loans will be used solely to purchase Accounts and to pay other amounts expressly permitted under the terms and conditions of the Operative Documents. (i) Place of Business. The chief place of business of the Borrower is located at the address of the Borrower indicated in Section 8.3 hereof and all of the Borrower's Records are kept at the offices of the Collateral Agent. (j) Nature of Accounts. Each Account to be purchased with the proceeds of a Loan is an Eligible Account and an "eligible asset" as defined in Rule 3a-7 under the Investment Company Act of 1940, as amended. (k) No Event of Default. No event has occurred and is continuing and no condition exists which constitutes an Event of Default or, to the knowledge of the Borrower, a Potential Event of Default. (l) Not an Investment Company. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such Act. (m) ERISA. The Borrower is in compliance in all material respects with ERISA and no lien in favor of the Pension Benefit Guaranty Corporation on any of the Accounts exists. -9- (n) Beneficial Ownership. The Depositor holds a 100% beneficial ownership in the Borrower. (o) Debt for Tax. The Borrower will treat the Loans as indebtedness for federal income tax purposes. (p) Unacceptable Investment. The Borrower has no knowledge of any material circumstance or condition with respect to the Accounts, the Obligors, or the credit standing of the Obligors that could reasonably be expected to cause an Account to be an unacceptable investment or adversely affect the value of any Account. (q) Action, Error, Omission, Etc.. To the knowledge of the Borrower, no material action, error, omission, misrepresentation, negligence, fraud, or similar occurrence with respect to an Account has taken place on the part of any person, including, without limitation, any Obligor, the Depositor, the Originator, any appraiser, any builder, or developer, or any other party involved in the origination of the Accounts or in the application of insurance in relation to such Accounts. (r) No Litigation. There are no actions, suits, or proceedings pending, or to the knowledge of the Borrower, threatened against or affecting the Borrower or any Affiliate of the Borrower or their respective properties, in or before any court, arbitrator, or other body which question the validity of this Loan Agreement or the transactions contemplated herein, or which could be reasonably expected to have a materially adverse effect on the financial condition of the Borrower or its ability to perform its obligations under this Loan Agreement (other than an appeal of the Consensual Plan after entry of the Confirmation Order so long as such Confirmation Order remains unstayed). (s) Default and Delinquency Ratios. The Default Ratio and the Delinquency Ratio with respect to the Accounts owned by the Borrower have not exceeded 3.1% and 1.4% respectively, for the 12-month period prior to December 31, 1994 and 3.8% and 1.8% respectively, for the period from January 1, 1995 to the Closing Date. (t) Monthly Payments. All Monthly Payments (net of the Servicing Fee) on the Accounts to be purchased with the proceeds of a Loan due after the applicable Cut-Off Date and received more than three Business Days prior to the Borrowing Date, plus the proceeds of each Full Prepayment of any such Account (including any related payment of interest) received by the Master Servicer after the Cut-Off Date but more than three Business Days prior to the Borrowing Date, will have been for deposited in the Holding Account in accordance with Section 2.7 of the Master Servicing Agreement. -10- Any document, instrument, certificate or notice delivered to the Lender or the Administrative Agent under this Loan Agreement shall be deemed a representation and warranty by the Borrower. SECTION 3.2. Reaffirmation of Representations and Warranties by the Borrower. On each day that a Loan is made hereunder, the Borrower, by accepting the proceeds of such Loan, shall be deemed to have certified that all representations and warranties described in Section 3.1 are true and correct on and as of such day as though made on and as of such day. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.1. Conditions to Effectiveness. On or prior to the Closing Date, the Lender shall have received the following documents, instruments, and fees, all of which shall be in a form and substance acceptable to the Lender, or the following actions shall have occurred: (a) the Lender shall have received a certified copy of the Trust Agreement duly executed by the Owner Trustee and the Depositor; (b) the Lender shall have received a Good Standing Certificate for the Borrower issued by the Secretary of State of Delaware and certificates of qualification in all foreign jurisdictions where such qualification is material to the transactions contemplated by this Loan Agreement; (c) the Lender shall have received copies of all Operative Documents, together with all of the documents required to be delivered to the Lender thereunder; (d) the Lender shall have received (i) an Opinion of Counsel of Shackleford, Farrior, Stallings, & Evans, P.A., special counsel to the Borrower, covering the matters set forth in Exhibit C hereto and (ii) such Opinions of Counsel as the Lender may reasonably request satisfactory to the Lender regarding issues of state law relating to the effectiveness of the Account Documents to vest in the Collateral Agent a first priority lien in the Mortgaged Properties; (e) the Lender shall have received the VFN, duly executed by the Borrower, and all other Operative Documents, duly executed by the parties thereto; (f) the Borrower shall have paid to the Lender the Arrangement Fee and the Commitment Fee and any Dealer Fee to be paid on the Closing Date; -11- (g) an order shall have been entered by the United States Bankruptcy Court confirming the Consensual Plan of Reorganization of Walter Industries, Inc. and its subsidiaries (the "Consensual Plan"), which order shall not have been stayed, and the Consensual Plan shall have become effective; provided, however, notwithstanding any other provision of this Loan Agreement, the filing or existence of an appeal of an order confirming the Consensual Plan, which shall not be the subject of a stay, and shall not be a basis, either directly or indirectly, for the failure or refusal of the Lender on or after the effective date of the Consensual Plan to make Loans under this Loan Agreement; (h) a final, nonappealable order shall have been entered by the United States Bankruptcy Court (A) authorizing and approving the Operative Documents and the transactions contemplated thereby in all respects and (B) containing specific findings that (x) the transfers of Accounts contemplated by the DAT Agreement and the BAT Agreement are true arms-length sales for fair consideration under the applicable state law, (y) upon purchase of the Accounts by the Depositor and the Borrower, the Accounts become the sole property of the Depositor and the Borrower, as applicable, and (z) neither the Depositor nor the Originator retains any ownership rights in the Accounts pursuant to Section 541 of the Bankruptcy Code or otherwise; (i) the Lender shall have received an Opinion of Counsel (i) covering the items set forth in clauses (x) (solely with respect to the BAT Agreement), (y) and (z) of paragraph (h) (B) of this Section 4.1 and (ii) to the effect that, in the event of the insolvency of the Originator or the Depositor, the Borrower would not be substantively consolidated with either such Person for purposes of the Bankruptcy Code; (j) the Borrower shall have established the Pledged Accounts; (k) the Lender shall have received lien searches in the State of Florida with respect to the Originator and the Depositor, and in the State of Delaware with respect to the Borrower, in form and substance satisfactory to the Lender. Any termination statements or releases requested by the Lender to be filed with respect to the Accounts shall have been filed; (l) the Default Ratio and the Delinquency Ratio with respect to all Accounts originated by the Originator shall not have exceeded 3.1% and 1.4%, respectively, for the 12-month period prior to December 31, 1994 and 3.8% and 1.8%, respectively, for the period from January 1, 1995 to the Closing Date; -12- (m) the Lender shall have received (i) a listing or magnetic tape of the portfolio of outstanding unpledged retail installment sales contracts of the Depositor as of January 31, 1995 showing with respect to each such contract (A) the economic balance and (B) the pay-off balance of each such contract, and (ii) the Originator's and/or the Depositor's magnetic tape format and specifications, and the Lender shall be satisfied with the results thereof; and (n) the Lender and the Administrative Agent shall have received such other documents instruments, certificates and opinions as the Lender or the Administrative Agent shall reasonably request. SECTION 4.2. Conditions to Each Loan. The obligation of the Lender to make the initial Loan hereunder and any subsequent Loan is subject to the satisfaction of the following conditions, each of which may be waived by the Lender: (a) the Lender shall have received an Officers' Certificate from the Borrower stating that: (i) no Event of Default or Potential Event of Default shall have occurred and the Loan to be made on such date will not result in any breach of any of the terms, conditions or provisions of, or constitute a default under any of the Operative Documents to which the Borrower is a party, or any indenture, mortgage, deed of trust or other agreement or instrument to which the Borrower is a party or by which it is bound, or any order of any Governmental Authority entered in any proceeding to which the Borrower is a party or by which it may be bound or to which it may be subject, and all conditions precedent provided in this Loan Agreement relating to the Loan to be made on such date have been complied with; (ii) the Borrower is the owner of and has good title to each Account, has not assigned any interest or participation in any such Account (or, if any such interest or participation has been assigned, it has been released) and has the right to Grant each such Account to the Collateral Agent, and no other Person has any lien on, security interest in or other rights to any such Account; (iii) the Borrower has Granted to the Collateral Agent all of its right, title, and interest in and to each Account Granted to the Collateral Agent by it to secure the VFN; (iv) the information set forth in the Schedule of Accounts delivered to the Collateral Agent is correct; and -13- (v) no material adverse change shall have occurred in the affairs of the Borrower or the Master Servicer or the value of the Accounts since December 20, 1994, with respect to the initial Loan, and the preceding Borrowing Date, with respect to each Loan thereafter; (b) all of the Account Documents relating to the Accounts to be purchased on such date have been delivered to the Collateral Agent within the time periods specified in Section 3.1 of the CCA Agreement, except that (i) in lieu of delivering the Account Documents for any Account which has been the subject of a Full Prepayment received by the Master Servicer after the Cut-Off Date but no later than three Business Days prior to the Borrowing Date, the Borrower may deliver, or cause to be delivered, as indicated in the Officers' Certificate from the Master Servicer delivered pursuant to paragraph (a) of this Section 4.2, the cash proceeds of such Full Prepayment and (ii) in lieu of delivering the Account Documents for any Account with respect to which foreclosure proceedings have been commenced and such Account Documents are required in connection with the prosecution of such proceedings, the Borrower may deliver a trust receipt pursuant to Section 3.2 of the CCA Agreement; (c) the Borrower shall have delivered a Borrowing Request to the Lender pursuant to Section 2.3 hereof; (d) the Lender and the Collateral Agent shall have received the Schedule of Accounts relating to the Accounts to be purchased with the proceeds of such Loan; (e) the Lender shall have received acknowledgment copies of proper financing statements, duly filed under the Uniform Commercial Code of all jurisdictions that the Lender may deem necessary or desirable in order to perfect the ownership interest of the Borrower created by the BAT Agreement and the security interests created by the CCA Agreement and all other filings, notifications, consents and recordings necessary to consummate the transactions contemplated hereunder and under the other Operative Documents shall be accomplished and the Lender shall have received evidence of such filings, notifications, consents and recordings satisfactory in form and substance to the Lender; (f) the Lender shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by it and the validity and enforceability against it of the Operative Documents to approvals shall be in full force and effect; (g) no more than 7% of the Accounts then owned by the Borrower may be in arrears for 60 days or more as of the last day of any month preceding the Borrowing Date; -14- (h) the Depositor shall have continued to purchase or otherwise acquire all of the Accounts originated by the Originator on an ongoing basis; (i) after giving effect to any new Loan, no Borrowing Base Deficiency shall exist; (j) the Facility Termination Date shall not have occurred; (k) the order entered by the United States Bankruptcy Court confirming the Consensual Plan shall not have been stayed; and (l) no Servicer Default or default under any Subservicing Agreement shall have occurred and be continuing, and no condition that with the giving of notice or the passage of time world constitute a Servicer Default or a default under any Subservicing Agreement shall have occurred and be continuing. ARTICLE V COVENANTS SECTION 5.1. Affirmative Covenants of Borrower. At all times from the date hereof to the date on which all amounts due and owing to the Lender hereunder have been paid in full and this Loan Agreement has terminated unless the Lender shall otherwise consent in writing: (a) Comfort Letter. The Borrower shall deliver to the Lender within 60 days of its reasonable request a Comfort Letter with respect to all Accounts owned by the Borrower. (b) Other Information. The Borrower shall deliver to the Lender (i) a copy of all financial documents and reports provided to the Borrower by the Depositor, the Originator or any other Person in any capacity pursuant to the Operative Documents, and (ii) such other information (including non-financial information) as the Lender may from time to time reasonably request. (c) Compliance Certificate. The Borrower shall deliver to the Lender within 90 days after the close of its fiscal year, a compliance certificate signed by an authorized signatory of the Borrower stating that no Event of Default or Potential Event of Default exists, or if any Event of Default or Potential Event of Default exists, stating the nature and status thereof. -15- (d) Notice of Event of Default or Potential Event of Default. As soon as possible and in any event within two days after the occurrence of an Event of Default or a Potential Event of Default, the Borrower shall provide to the Lender a statement setting forth details of such Event of Default or Potential Event of Default and the action which the Borrower proposes to take with respect thereto. The Borrower shall notify the Administrative Agent of the occurrence of any event of default or event, which, due to the giving of notice or lapse of time, or both, could become an event of default by itself, the Depositor or the Originator in any capacity under any of the Operative Documents of which it becomes aware. (e) Conduct of Business. The Borrower will carry on and conduct its business in substantially the same manner as it is presently conducted and do all things necessary to remain duly organized, validly existing, and in good standing as a business trust in the State of Delaware and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. (f) Compliance with Laws. The Borrower will comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees, or awards to which it may be subject. (g) Furnishing of Information and Inspection of Records. The Borrower will furnish to the Lender from time to time such information with respect to the Accounts as the Lender may reasonably request, including, without limitation, a schedule identifying the Obligor and the Outstanding Balance for each Account. (h) Payment of Obligations. The Borrower shall pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature. (i) Further Assurances. The Borrower shall do such further acts and things and execute and deliver to the Lender such assignments, agreements, powers and instruments as are required by the Lender to carry into effect the purposes of this Agreement and the other Operative Documents or to better assure and confirm unto the Lender its rights, powers and remedies hereunder and under the other Operative Documents, including, without limitation, to obtain such consents and give such notices, and to file and record all such documents and instruments, and renew each such consent, notice, filing and recordation, at such time or times, in such manner and at such places, as may be necessary or desirable to preserve and protect the position of the Lender hereunder and under the other Operative Documents. This covenant shall survive the termination of this Loan Agreement. - 16 - (j) Access. The Borrower shall allow, and cause the Depositor to allow, the Lender and its representatives full and complete access during normal business hours and upon reasonable notice to the books, records, documents, and facilities of the Borrower and the Depositor, and will on the same conditions make the officers, employees, attorneys, agents, independent accountants, and actuaries of the Borrower and the Depositor available to discuss such aspects of the business, financial condition, or prospects of the Borrower and the Depositor as may be reasonably necessary. (k) Costs and Expenses. The Borrower shall pay all costs, fees, intangible, documentary and recording taxes in connection with the execution and delivery of this Loan Agreement and the other Operative Documents. (l) Amendments; Miscellaneous. (i) The Borrower shall furnish to the Collateral Agent and the Lender copies of the form of each proposed amendment to the Trust Agreement, the Master Servicing Agreement or the Subservicing Agreement at least 60 days prior to the proposed date of adoption of any such proposed amendment. (ii) The Borrower will at all times hold itself out to the public under the Borrower's own name and as a separate and distinct entity from Walter Industries, Inc. and any of its Affiliates. (iii) The Borrower will at all times be responsible for the payment of all its obligations and indebtedness, will at all times maintain a business office, records, books of account, and funds separate from the Depositor and will observe all customary formalities of independent existence. (iv) To the extent such compliance involves questions of law, the Borrower shall be deemed in compliance with the requirements of any provision of this paragraph (l) if it is acting in accordance with an opinion of counsel as to such requirements. SECTION 5.2. Negative Covenants of Borrower. During the term of this Loan Agreement, unless the Lender shall otherwise consent in writing: (a) No Extension or Amendment of Accounts. Except as permitted by Section 2.1(j) of the Master Servicing Agreement or Section 3.4 of the CCA Agreement, the Borrower will not extend, amend, or otherwise modify the terms of any Account, or amend, modify, or waive any term or condition of any Account Document related thereto. - 17 - (b) No Sale. The Borrower shall not sell, transfer, exchange or otherwise dispose of any portion of the Collateral except as expressly permitted by the Operative Documents. (c) No Insurance. The Borrower shall not obtain or carry insurance relating to the Accounts separate from that required by the Master Servicing Agreement, unless the Lender shall have the same rights with respect thereto as it has with respect to the insurance required by the Master Servicing Agreement. (d) Other Business. The Borrower shall not engage in any business or activity other than in connection with, or relating to, the issuance of the VFN or the preservation of the Collateral and the release of assets therefrom pursuant to this Loan Agreement, and the other Operative Documents to which the Borrower is a party. (e) Dissolution. The Borrower shall not dissolve or liquidate in whole or in part. (f) Liens. The Borrower shall not (i) permit the validity or effectiveness of this Loan Agreement or the CCA Agreement to be impaired, or permit the lien of the CCA Agreement to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations under this Loan Agreement or, (ii) except as may be expressly permitted by the Operative Documents, permit any lien, charge, security interest, mortgage or other encumbrance (other than the lien of the CCA Agreement) to be created on or extend to or otherwise arise upon or burden the Collateral or any part thereof or any interest therein or the proceeds thereof, or (iii) except as permitted by the Operative Documents, permit the lien of the CCA Agreement not to constitute a valid and perfected first priority security interest in the Collateral. (g) No Amendment. The Borrower shall not amend the Trust Agreement. (h) No Mergers, Etc. The Borrower will not consolidate or merge with or into any other Person. (i) Change of Name, Etc. The Borrower will not change its name, identity, or structure or its chief executive office, unless at least 10 days prior to the effective date of any such change the Borrower delivers to the Collateral Agent UCC financing statements, executed by the Borrower, necessary to reflect such change and to continue the perfection of the Lender's ownership interests or security interests in the Accounts. (j) Borrowing Base Deficiency. The Borrower shall not on any day, permit a Borrowing Base Deficiency to exist. - 18 - (k) Pledged Accounts. The Borrower shall not move any Pledged Account from the institution at which they are maintained on the Closing Date, except as permitted in accordance with Section 2.8. (l) Successor Servicer. The Borrower shall not permit any change of master servicer, except in accordance with the Master Servicing Agreement. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) Any representation, warranty, certification, or statement made by the Borrower in this Loan Agreement or in any other document delivered pursuant hereto or other Operative Document, or by the Depositor or the Originator in any of the Operative Documents, shall prove to have been incorrect in any material respect when made or deemed made; (b) Failure of the Borrower, to pay or deposit any amounts when required hereunder; (c) Failure of the Borrower, the Depositor, the Originator, or any of their respective Affiliates to pay when due any amounts due hereunder or the default by the Borrower, in the performance of any term, provision, or condition contained in any agreement under which any Indebtedness greater than $5,000,000 was created or is governed, regardless of whether such event is an "event of default" or "default" under any such agreement; or any Indebtedness greater than $5,000,000 shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the date of maturity thereof; (d) The default by the Borrower in the performance of any covenant or undertaking (i) to be performed or observed under Sections 5.1(d), 5.2(b), (d), (e), (f), (g), or (h) or (ii) to be performed or observed under any other provision hereof (other than described in paragraph (b) of this Section 6.1) and such default in the case of this clause (ii) shall continue for five days; (e) Any representation or warranty made or deemed made by the Borrower, the Originator or the Depositor, in any capacity, which is contained in any Operative Document or in any agreement, written report or written information furnished at any time under or required by the Operative Documents shall prove to have been false or incorrect in any material respect on or as of the date made or deemed made; - 19 - (f) Any Event of Bankruptcy shall occur with respect to the Borrower, the Depositor, the Originator, or any of their Affiliates; (g) The Collateral Agent, for the benefit of the Lender, shall, for any reason, fail to have a valid and perfected first-priority security interest in the Collateral; (h) The Depositor or the Originator shall enter into any transaction or merger whereby it is not the surviving entity; (i) There shall have occurred any material adverse change in the operations of the Borrower, the Depositor, the Master Servicer or the Originator since the Closing Date which would have or reasonably could be expected to have a material adverse effect on the Lender or any other event shall have occurred which materially affects the Borrower's ability to perform under this Loan Agreement or the collectibility of the Accounts; (j) An event of default under the Master Servicing Agreement or the Subservicing Agreement shall have occurred; (k) The Depositor shall fail to maintain its 100% beneficial ownership interest in the Borrower; (l) The Collections Coverage Ratio averaged for any three consecutive Collection Periods is (i) until a Take-Out has occurred, less than 125% for the first four Collection Periods after the Closing Date, 150% for any of the next eight Collection Periods, and 175% thereafter, (ii) following the occurrence of a Take-Out that is between 50% and 75% of the highest outstanding Net Investment for the period from the Closing Date to the Take-Out Cut-Off Date, in the case of the first Take-Out, or for the period between Take-Out Cut-Off Dates for subsequent Take-Outs, less than 150% for the four Collection Periods following such Take-Out and 175% for each Collection Period thereafter and (iii) following the occurrence of a Take-Out that is greater than 75% of the highest outstanding Net Investment for the period from the Closing Date to the Take-Out Cut-Off Date, in the case of the first Take-Out, or for the period between Take-Out Cut-Off Dates for subsequent Take-Outs, less than 125% for the three Collection Periods following such Take-Out, 150% for the next six Collection Periods, and 175% thereafter; (m) The amount on deposit in the Reserve Account fails to reach the Specified Reserve Account Requirement on or prior to the 15th Remittance Date or on or prior to the sixth Remittance Date following a Reserve Account Event; (n) The Delinquency Ratio with respect to the Accounts owned by the Borrower averaged for any three consecutive Collection Periods exceeds 3.5%; - 20 - (o) The Default Ratio with respect to the Accounts owned by the Borrower averaged for any three consecutive Collection Periods exceeds 6%; or (p) The Borrower fails to perform a Take-Out as set forth in Section 2.6 hereof. SECTION 6.2. Remedies. If a Termination Event shall have occurred, the Facility Term shall terminate. Upon the occurrence of a Termination Event, the Lender shall be entitled to exercise any rights it may have pursuant to the Operative Documents, including, without limitation, the CCA Agreement. The Lender may declare all amounts outstanding with respect to the VFN to be immediately due and payable, by a notice in writing to the Borrower, and upon any such declaration, together with accrued and unpaid interest thereon to the date of such acceleration and any other amounts due and payable to the Lender hereunder, shall become immediately due and payable. ARTICLE VII INDEMNIFICATION; EXPENSES; RELATED MATTERS SECTION 7.1 Indemnities by the Borrower. Without limiting any other rights which the Lender may have hereunder or under applicable law, the Borrower hereby agrees to indemnify the Lender, the Liquidity Provider and the Credit Support Provider and any of their permitted assigns and their respective officers, directors, and employees (collectively, "Indemnified Parties") from and against any and all damages, losses, claims, liabilities, costs, and expenses, including reasonable attorneys' fees (which such attorneys may be employees of the Liquidity Provider, the Credit Support Provider, or the Lender) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Loan Agreement or the transactions contemplated hereby excluding, however, (i) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of an Indemnified Party or (ii) recourse (except as otherwise specifically provided in this Loan Agreement) for uncollectible Accounts. Without limiting the generality of the foregoing, the Borrower shall indemnify each Indemnified Party for Indemnified Amounts relating to or resulting from: (a) reliance on any representation or warranty made by the Borrower under or in connection with this Loan Agreement or any other information or report delivered by the Borrower pursuant hereto, which shall have been false or incorrect in any material respect when made or deemed made; (b) the failure by the Borrower to comply with any applicable law, rule, or regulation with respect to any - 21 - Account, or the nonconformity of any Account with any such applicable law, rule, or regulation; (c) the failure to vest and maintain vested in the Lender a first-priority perfected security interest in the Collateral, free and clear of any Adverse Claim; (d) the failure to file or record, or any delay in filing or recording, mortgages, financing statements, continuation statements, or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any of the Collateral; or (e) any dispute, claim, offset, or defense (other than discharge in bankruptcy) of an Obligor to the payment of any Account (including, without limitation, a defense based on such Account not being legal, valid, and binding obligation of such Obligor enforceable against it in accordance with its terms); provided, however, that if the Lender enters into agreements for the purchase of interests in receivables from or the making of loans to one or more Other Transferors, the Lender shall allocate such Indemnified Amounts which are in connection with the Liquidity Provider Agreement, the Credit Support Agreement or the credit support furnished by the Credit Support Provider to the Borrower and each Other Transferor; and provided, further, that if such Indemnified Amounts are attributable to the Borrower and not attributable to any Other Transferor, the Borrower shall be solely liable for such Indemnified Amounts or if such Indemnified Amounts are attributable to Other Transferors and not attributable to the Borrower, such Other Transferors shall be solely liable for such Indemnified Amounts. SECTION 7.2. Indemnity for Taxes, Reserves, and Expenses. (a) If after the date hereof, the adoption of any Law or bank regulatory guideline or any amendment or change in the interpretation of any existing or future Law or bank regulatory guideline by any Governmental Authority charged with the administration, interpretation, or application thereof, or the compliance with any directive of any Governmental Authority (in the case of any bank regulatory guideline, whether or not having the force of Law): (i) shall subject any Indemnified Party to any tax, duty, or other charge with respect to this Loan Agreement, the VFN, the Accounts, or payments of amounts due hereunder, or shall change the basis of taxation of payments to any Indemnified Party of amounts payable in respect of this Loan Agreement, the VFN, the Accounts, or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or - 22 - the credit support furnished by the Credit Support Provider or otherwise in respect of this Loan Agreement, the VFN or the Accounts (except for changes in the rate of general corporate, franchise, net income, or other income tax imposed on such Indemnified Party by the jurisdiction in which such Indemnified Party's principal executive office is located); (ii) shall impose, modify, or deem applicable any reserve, special deposit, or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against assets of, deposits with or for the account of, or credit extended by, any Indemnified Party or shall impose on any Indemnified Party or on the United States market for certificates of deposit or the London interbank market any other condition affecting this Loan Agreement, the VFN, the Accounts, or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or the credit support provided by the Credit Support Provider or otherwise in respect of this Loan Agreement, the VFN, or the Accounts; or (iii) imposes upon any Indemnified Party any other expense (including, without limitation, reasonable attorneys' fees and expenses, and expenses of litigation or preparation therefor in contesting any of the foregoing) with respect to this Loan Agreement, the VFN, the Accounts, or payments of amounts due hereunder or its obligation to advance funds under the Liquidity Provider Agreement or the credit support furnished by the Credit Support Provider or otherwise in respect of this Loan Agreement, the VFN, or the Accounts, and the result of any of the foregoing is to increase the cost to such Indemnified Party with respect to this Loan Agreement, the VFN, the Accounts, the obligations hereunder, the funding of any Loans hereunder, the Liquidity Provider Agreement, or the Credit Support Agreement, by an amount deemed by such Indemnified Party to be material, then, within 10 days after demand by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate such Indemnified Party for such increased cost or reduction. (b) If any Indemnified Party shall have determined that after the date hereof, the adoption of any applicable Law or bank regulatory guideline regarding capital adequacy, or any change therein, or any change in the interpretation thereof by any Governmental Authority, or any directive regarding capital adequacy (in the case of any bank regulatory guideline, whether or not having the force of law) of any such Governmental Authority, has or would have the effect of reducing the rate of return on capital of such Indemnified Party (or its parent) as a consequence of such Indemnified Party's obligations hereunder or with respect hereto to a level below that which such Indemnified - 23 - Party (or its parent) could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Indemnified Party to be material, then from time to time, within 10 days after demand by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate such Indemnified Party (or its parent) for such reduction. (c) The Lender will promptly notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle an Indemnified Party to compensation pursuant to this Section 7.2. A notice by the Lender claiming compensation under this Section 7.2 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Lender may use any reasonable averaging and attributing methods. (d) Anything in this Section 7.2 to the contrary notwithstanding, if the Lender enters into agreements for the acquisition of interests in receivables from one or more Other Transferors, the Lender shall allocate the liability for any amounts under this Section 7.2 ("Section 7.2 Costs") to the Borrower and each Other Transferor; provided, however, that if such Section 7.2 Costs are attributable to the Borrower and not attributable to any Other Transferor, the Borrower shall be solely liable for such Section 7.2 Costs or if such Section 7.2 Costs are attributable to Other Transferors and not attributable to the Borrower, such Other Transferors shall be solely liable for such Section 7.2 Costs. SECTION 7.3. Other Costs; Expenses and Related Matters. (a) The Borrower agrees, upon receipt of a written invoice, to pay or cause to be paid, and to save the Lender and the Administrative Agent harmless against liability for the payment of, all reasonable out-of-pocket expenses (including, without limitation, attorneys', accountants' and other third parties' fees and expenses, any filing fees and expenses incurred by officers or employees of the Lender) incurred by or on behalf of the Lender and the Administrative Agent (i) in connection with the negotiation, execution, delivery, and preparation of this Loan Agreement, the other Operative Documents, and any documents or instruments delivered pursuant hereto and the transactions contemplated hereby (including, without limitation, the perfection or protection of the Collateral) and (ii) from time to time (A) relating to any amendments, waivers, or consents under this Loan Agreement, (B) arising in connection with the Lender's or its agent's enforcement or preservation of rights (including, without limitation, the perfection and protection - 24 - of the Collateral under this Loan Agreement), or (C) arising in connection with any audit, dispute, disagreement, litigation, or preparation for litigation involving this Loan Agreement and the other Operative Documents (all of such amounts, collectively, "Transaction Costs"). (b) The Borrower shall pay the Lender on demand any Early Collection Fee due on account of the reduction of the Net Investment on a day prior to a Remittance Date. ARTICLE VIII MISCELLANEOUS SECTION 8.1 Term of Agreement. This Loan Agreement shall terminate following the Facility Termination Date when the Net Investment has been reduced to zero, all accrued Discount has been paid in full, and all other amounts due under this Loan Agreement have been paid in full; provided, however, that (i) the rights and remedies of the Lender with respect to any representation and warranty made or deemed to be made by Borrower pursuant to this Loan Agreement, (ii) the indemnification and payment provisions of Article VII, and (iii) the agreement set forth in Section 8.9 thereof, shall be continuing and shall survive any termination of this Loan Agreement. SECTION 8.2 Waivers; Amendments. No failure or delay on the part of the Lender in exercising any power, right, or remedy under this Loan Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right, or remedy preclude any other further exercise thereof or the exercise of any other power, right, or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. Any provision of this Loan Agreement may be amended if, but only if, such amendment is in writing and is signed by the Borrower and the Lender. SECTION 8.3 Notices. Except as provided below, all communications and notices provided for hereunder shall be in writing (including bank wire, telecopy, or electronic facsimile transmission or similar writing) and shall be given to the other party at its address or telecopy number set forth below or at such other address or telecopy number as such party may hereafter specify for the purposes of notice to such party. Each such notice or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and confirmation is received, (b) if given by mail three Business Days following such posting, or (c) if given by any other means, when received at the address specified in this Section 8.3. However, anything in this Section 8.3 to the contrary notwithstanding, the Borrower hereby authorizes the Lender to effect Loans and Tranche Period selections based on telephonic notices made by any Person which the Lender in good faith believes - 25 - to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation of each telephonic notice signed by an authorized officer of the Borrower. However, the absence of such confirmation shall not affect the validity of such notice. If the written confirmation differs in any material respect from the action taken by the Lender, the records of the Lender and the Administrative Agent shall govern absent manifest error. If to the Lender: Enterprise Funding Corporation c/o Merrill Lynch Money Markets Inc. World Financial Center -- South Tower 225 Liberty Street New York, New York 10080 Attention: Gary Carlin Telephone: (212) 236-7200 Telecopy: (212) 236-7584 (with a copy to the Administrative Agent) If to the Borrower: Mid-State Trust V c/o Wilmington Trust Company 1100 North Market Street Wilmington, Delaware 19890 Attention: Bruce L. Bisson Telephone: (302) 651-1000 Telecopy: (302) 651-8882 with a copy to: Mid-State Homes, Inc. 1500 North Dale Mabry Highway Tampa, Florida 33607 Attention: William H. Weldon Telephone: (813) 871-4523 Telecopy: (813) 871-4430 If to the Collateral Agent: First Union National Bank of Florida, N.A. First Union Financial Center 200 South Biscayne Boulevard Miami, FL 33131 Attention: Corporate Trust Department Telephone: (305) 789-4686 Telecopy: (305) 789-4678 - 26 - If to the Administrative Agent: NationsBank, N.A. (Carolinas) NationsBank Corporate Center 7th Floor Charlotte, North Carolina 28255 Attention: Michelle M. Heath Investment Banking Telephone: (704) 386-7922 Telecopy: (704) 388-9169 SECTION 8.4. Governing Law; Submission to Jurisdiction; Integration. (a) THIS LOAN AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN THE CITY OF NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. The Borrower hereby irrevocably waives, to the fullest extent it may effectively do so, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Nothing in this Section 8.4 shall affect the right of the Lender to bring any action or proceeding against the Borrower or its property in the courts of other jurisdictions. (b) This Loan Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire Agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. (c) Notwithstanding paragraph (a) of this Section 8.4, if anything in such paragraph is deemed to conflict with the retention of jurisdiction by the Court (as defined in the Consensual Plan) set forth in the Consensual Plan, the Consensual Plan shall govern. SECTION 8.5. Severability; Counterparts. This Loan Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Any provisions of this Loan Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions - 27 - hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 8.6. Successors and Assigns. (a) This Loan Agreement shall be binding on the parties hereto and their respective successors and assigns; provided, however, that the Borrower may not assign any of its rights or delegate any of its duties hereunder without the prior written consent of the Lender. No provision of this Loan Agreement shall in any manner restrict the ability of the Lender to assign, participate, grant security interests in, or otherwise transfer any portion of the Collateral. (b) The Borrower hereby agrees and consents to the assignment by the Lender from time to time of all or any part of its rights under, interest in, and title to this Loan Agreement and its interest in the Collateral to any Liquidity Provider. In addition, the Borrower hereby agrees and consents to the complete assignment by the Lender of all of its rights under, interest in, and title to this Loan Agreement and its interest in the Collateral to the Collateral Agent. SECTION 8.7. Waiver of Confidentiality. The Borrower hereby consents to the disclosure of any nonpublic information with respect to it received by the Lender or the Administrative Agent to any of the Lender, any nationally recognized rating agency rating the Lender's commercial paper, the Administrative Agent, the Liquidity Provider, the Dealers, or the Credit Support Provider in relation to this Loan Agreement. SECTION 8.8. Confidentiality Agreement. The Borrower hereby agrees that it will not disclose the contents of this Loan Agreement or any other proprietary or confidential information of the Lender, the Collateral Agent, the Administrative Agent, the Liquidity Provider or the Credit Support Provider to any other Person except (a) its auditors and attorneys, employees or financial advisors (other than any commercial bank), and any nationally recognized rating agency, provided such auditors, attorneys, employees, financial advisors, or rating agencies are informed of the highly confidential nature of such information or (b) as otherwise required by applicable law or order of a court of competent jurisdiction. SECTION 8.9. Liability of Owner Trustee. It is expressly understood and agreed by the parties hereto that (a) this Loan Agreement is executed and delivered by Wilmington Trust Company, not individually or personally but solely as Owner Trustee under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it as the Owner Trustee, (b) each of the representations, undertakings and agreements herein made on the part of the Borrower is made and intended not as personal - 28 - representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose for binding only the Borrower, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the other parties hereto and by any Person claiming by, through or under such parties and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Borrower or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Borrower under this Loan Agreement. SECTION 8.10. No Bankruptcy Petition Against the Lender. The Borrower hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Commercial Paper or other indebtedness of the Lender, it will not institute against, or join any other Person in instituting against, the Lender any bankruptcy, reorganization, arrangement, insolvency, or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. SECTION 8.11. No Recourse Against Stockholders, Officers, or Directors. No recourse under any obligation, covenant, or agreement of the Lender contained in this Loan Agreement shall be had against Merrill Lynch Money Markets Inc. (or any affiliate thereof), or any stockholder, officer, or director of the Lender, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and understood that this Loan Agreement is solely a corporate obligation of the Lender, and that no personal liability whatever shall attach to or be incurred by Merrill Lynch Money Markets Inc. (or any affiliate thereof), or the stockholders, officers, or directors of the lender, as such, or any of them, under or by reason of any of the obligations, covenants, or agreements of the Lender contained in this Loan Agreement, or implied therefrom, and that any and all personal liability for breaches by the Lender of any of such obligations, covenants or agreements, either at common law or at equity, or by statute or constitution, of Merrill Lynch Money Markets Inc. (or any affiliate thereof) and every such stockholder, officer, or director is hereby expressly waived as a condition of and consideration for the execution of this Loan Agreement. - 29 - IN WITNESS WHEREOF, the parties hereto have executed and delivered this Variable Funding Loan Agreement as of the date first written above. ENTERPRISE FUNDING CORPORATION, as Lender By: /s/ Thomas S. Dunstan ------------------------------------------------ Name: Thomas S. Dunstan Title: MID-STATE TRUST V, as Borrower By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: /s/ Emmett R. Harmon ------------------------------------------------ Name: Emmett R. Harmon Title: Vice President FIRST UNION NATIONAL BANK OF FLORIDA, as Custodian/Collateral Agent By: /s/ Lisa Derryberry ------------------------------------------------ Name: Lisa Derryberry Title: Vice President NATIONSBANK, N.A. (CAROLINAS) as Administrative Agent By: /s/ Michelle M. Heath ------------------------------------------------ Name: Michelle M. Heath Title: Vice President - 30 - EXHIBIT A [Form of Variable Funding Note] VARIABLE FUNDING NOTE New York, New York [Closing Date] FOR VALUE RECEIVED, the undersigned, MID-STATE TRUST V, a Delaware business trust (the "Borrower"), promises to pay to the order of ENTERPRISE FUNDING CORPORATION (the "Lender"), on the date specified in Section 2.3 of the Loan Agreement (as hereinafter defined), at the office of the Lender, c/o NationsBank, N.A. (Carolinas), as Administrative Agent, NationsBank Corporate Center, 7th Floor, Charlotte, North Carolina, 28255, in lawful money of the United States of America and in immediately available funds, the principal amount of FIVE HUNDRED MILLION DOLLARS ($500,000,000), or, if less, the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to the Loan Agreement, and to pay interest at such office, in like money, from the date hereof on the unpaid principal amount of such Loans from time to time outstanding at the rates and on the dates specified in Sections 2.5 and 2.6 of the Loan Agreement. The Lender is authorized to record, on the schedules annexed hereto and made a part hereof or on other appropriate records of the Lender, the date and the amount of each Loan made by the Lender, each continuation thereof, the Tranche Period for such Loan and the date and amount of each payment or prepayment of principal thereof. Any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure of the Lender to make any such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under the Loan Agreement in respect of the Loans. This Variable Funding Note is the Variable Funding Note referred to in the Variable Funding Loan Agreement dated as of March __, 1995 (as amended, supplemented, or otherwise modified and in effect from time to time, the "Loan Agreement") among the Lender, the Borrower, First Union National Bank of Florida, as Collateral Agent, and NationsBank, N.A. (Carolinas), as Administrative Agent, and is entitled to the benefits thereof. Capitalized terms used herein without definition have the meanings assigned to them in the Loan Agreement. This Variable Funding Note is subject to optional and mandatory prepayment as provided in the Loan Agreement. Upon the occurrence of a Termination Event, the Lender shall have all of the remedies specified in the Loan Agreement. The Lender hereby waives presentment, demand, protest, and all notices of any kind. THIS VARIABLE FUNDING NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. MID-STATE TRUST V By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: _________________________ Title: Schedule 1 to VARIABLE FUNDING NOTE Principal Discount Prepayment of on of Date Loans Loans Loans Notation By ---- --------- -------- ---------- ----------- EXHIBIT B [Form of Borrowing Request] BORROWING REQUEST MID-STATE TRUST V (the "Borrower"), pursuant to Section 2.3 of the Variable Funding Loan Agreement dated as of March __, 1995 (as amended, modified, or supplemented from time to time, the "Loan Agreement"), hereby requests that Enterprise Funding Corporation make a Loan to it pursuant to the following instructions: Borrowing Date: ____________ Loan amount: _____________ Tranche Period(s): ____________ Account to be credited: ____________ [bank name] ABA No. ____________ Account No. ____________ Reference No. ____________ Please credit the above-mentioned account by 10:00 a.m. (New York City time) on the Borrowing Date. Capitalized terms used herein have the meaning assigned to them in the Loan Agreement. AEB: $______________ AMV: $______________ Borrowing Base: $______________ The Borrower hereby certifies as of the date hereof that the Conditions Precedent to each Loan set forth in Section 4.2 of the Loan Agreement have been satisfied, and that all of the representations and warranties made in Section 3.1 of the Loan Agreement are true and correct on and as of the Borrowing Date for such Loan, both before and after giving effect to such Loan. MID-STATE TRUST V ________________________________ By: Title: Dated: ___________ __, 199_ EXHIBIT C [Form of Borrower's Counsel Opinion] [Letterhead of Counsel for the Borrower] March __, 1995 Enterprise Funding Corporation c/o Merrill Lynch Money Markets Inc. Merrill Lynch World Headquarters World Financial Center--South Tower 25 Liberty Street--8th Floor New York, New York 10080 NationsBank, N.A. (Carolinas) as Liquidity Provider and Collateral Agent 100 North Tryon Street Charlotte, North Carolina 28255 Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 4.1 of the Variable Funding Loan Agreement dated as of March __, 1995 (the "Loan Agreement") among Mid-State Trust V (the "Borrower") and Enterprise Funding Corporation (the "Lender"). Terms defined in the Loan Agreement and not otherwise defined herein are used in this opinion with the meanings so defined. We have acted as counsel to the Borrower in connection with the preparation of the Loan Agreement and the transactions and other documents contemplated thereby. We have examined, on the date hereof, the Loan Agreement and all Exhibits thereto, the Variable Funding Note, the other Operative Documents to which the Borrower is a party, certificates of public officials, copies of each of the above having been delivered to you. We have also examined the closing documents delivered pursuant to the Loan Agreement and copies of all such documents and records and have made such investigations of law, as we have deemed necessary and relevant as a basis for our opinion. With respect to the accuracy of material factual matters which were not independently established, we have relied on certificates and statements of officers of the Borrower. On the basis of the foregoing, we are of the opinion that: 1. The Borrower is a Delaware business trust duly formed, validly existing and in good standing under the laws of the State of Delaware, Del. Code Ann. tit. 12 Section 3801, et seq. (1994), has the power and authority to own its properties and to carry on Enterprise Funding Corporation NationsBank, N.A. (Carolinas) March __, 1995 Page 2 its business as now being conducted, and had at all relevant times, and now has, all necessary power, authority, and legal right to acquire and own the Trust Assets, and is duly qualified and in good standing as a foreign business trust and is authorized to do business in each jurisdiction in which the affect upon the business properties of the Borrower or its ability to perform its obligations under the Loan Agreement. 2. The Borrower has the power and has taken all necessary action to execute, deliver, and perform the Loan Agreement, the Variable Funding Note, and all other Operative Documents to which the trust is a party, each in accordance with its respective terms, and to consummate the transactions contemplated thereby. The Loan Agreement, the Variable Funding Note, and all other Operative Documents to which the Borrower is a party have been duly executed and delivered by the Borrower and when duly executed and delivered will constitute the legal, valid, and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. 3. The execution, delivery, and performance in accordance with their terms by the Borrower of the Loan Agreement, the Variable Funding Note, and all other Operative Documents to which the Borrower is a party and the consummation of the transactions contemplated thereby, do not and will not (a) require (i) any governmental approval or (ii) any consent or approval of any other party which has not been obtained, (b) violate or conflict with, result in a breach of, or constitute a default under (i) the Trust Agreement, (ii) to the best of our knowledge after due inquiry, any other agreement to which the Borrower is a party or by which the Borrower or any of its properties may be bound, or (iii) any applicable law, or any order, rule, or regulation applicable to the Borrower of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Borrower or any of its proper ties, or (c) result or require in the creation or imposition of any Lien upon any of the assets, property or revenue of the Borrower other than as contemplated by the Operative Documents. 4. To the best of our knowledge, after due inquiry, there are not, in any court or before any arbitrator of any kind or before or by any governmental or non-governmental body, any actions, suits, proceedings, or investigations, pending or Enterprise Funding Corporation NationsBank, N.A. (Carolinas) March __, 1995 Page 3 threatened, (a) against the Borrower or the business or any property of the Borrower except actions, suits, or proceedings that, if adversely determined, would not, singly or in the aggre gate, have a materially adverse affect on the Borrower, or on the ability of the Borrower to perform its respective obligations under the Loan Agreement, the Variable Funding Note, and all other Operative Documents to which the Borrower is a party or (b) relating to the Loan Agreement, the Variable Funding Note, and all other Operative Documents to which the Borrower is a party. 5. Upon the delivery of the Account Documents relating to the Accounts to the Collateral Agent and the execution and delivery of the CCA Agreement, the Lender will have a first priority perfected security interest in the Collateral. The foregoing opinions and conclusions were given only in respect of the laws of New York and, to the extent specifically referred to herein, the Federal laws of the United States of America. This opinion has been delivered at your request for the purposes contemplated by the Loan Agreement. Without our prior written consent, this opinion is not to be utilized or quoted for any other purpose and no one other than you is entitled to rely thereon. Very truly yours, AMENDMENT NO. 1 TO LOAN AGREEMENT AMENDMENT NO. 1 TO LOAN AGREEMENT (this "Amendment"), dated as of August 2, 1995, by and among MID-STATE TRUST V, as Borrower (the "Borrower"), ENTERPRISE FUNDING CORPORATION, as Lender (the "Lender"), FIRST UNION NATIONAL BANK OF FLORIDA, as Custodian/Collateral Agent (the "Collateral Agent"), and NATIONSBANK, N.A. (CAROLINAS), as Administrative Agent (the "Administrative Agent"). Capitalized terms used and not defined in this Amendment shall have the meanings ascribed to such terms in the Variable Funding Loan Agreement, dated as of March 3, 1995 (the "Loan Agreement"), among the parties hereto. PRELIMINARY STATEMENTS WHEREAS, the parties hereto are parties to the Loan Agreement; WHEREAS, the parties hereto wish to amend certain terms of the Loan Agreement as hereinafter provided; NOW, THEREFORE, in consideration of the mutual covenants contained herein and in the Loan Agreement and other good and valuable consideration, the receipt and adequacy of which is hereby expressly acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments. The Loan Agreement is hereby amended as follows: (a) Section 2.5 is hereby amended by: (i) deleting paragraph (a) of such Section and replacing it with the following: "(a) on each day (i) that a Tranche matures or (ii) interest is due and owing on any Related Credit Support Disbursements or Related Liquidity Draws, an amount equal to the Discount due on such maturing Tranche (together with an amount equal to any Discount due on maturing Transaction Commercial Paper to the extent the amount of Transaction Commercial Paper issued in order to fund such Loan exceeds the amount of such Loan) and the interest due on such Related Credit Support Disbursement or Related Liquidity Draw."; (ii) deleting clause (iii) of paragraph (c) of such Section in its entirety and replacing it with the following: "(iii) to the extent not paid by the Borrower under Article VII hereof, an amount equal to the amount owing to any Indemnified Party pursuant to such Article VII"; and (iv) inserting the following at the end of such Section: "Notwithstanding anything to the contrary, the amount due and payable from the Borrower to the Lender pursuant to clause (i) of paragraph (c) of this Section 2.5 shall be discharged on each Remittance Date to the extent and in the amount of any Surety Bond Premium paid by the Collateral Agent to the Surety Provider on such date. As used in this Agreement, the terms "Surety Bond Premium" and "Surety Provider" shall have the meanings ascribed to such terms in the Amended and Restated CCA Agreement dated as of August 2, 1995 (the "Amended and Restated CCA Agreement") among the Lender, the Borrower, the Collateral Agent, NationsBank, N.A. (Carolinas) ("NationsBank") and Capital Markets Assurance Corporation." (b) Section 2.6 is hereby amended by: (i) inserting the following at the end of paragraph (a) thereof: "(net of all accrued and unpaid Discount on all Tranches and interest on any Related Credit Support Disbursements and Related Liquidity Draws through such Remittance Date.)" (ii) inserting the following at the end of paragraph (e) thereof; and -2- "less any amount due to the Surety Provider pursuant to Section 4.2(c) of the Amended and Restated CCA Agreement." (iii) inserting the phrase ", Related Liquidity Draw" immediately following the word "Tranches" and immediately following the word "Tranche" in the first sentence of paragraph (g) thereof. (c) Section 2.8 is hereby amended by: (i) inserting the phrase "in the name of the Collateral Agent" following the phrase "Eligible Investments" in paragraph (d) of such Section; and (ii) deleting paragraph (e) of such Section in its entirety and replacing it with the following: "If at any time the Collection Account, the Reserve Account, the Principal Payment Account or the Holding Account shall no longer be an Eligible Bank Account, then the Borrower shall, within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which the Lender shall consent), cause such account and the funds on deposit therein to be moved so that such account shall be an Eligible Bank Account. The Borrower shall immediately notify the Administrative Agent and the Rating Agencies of the new location and account number of such account. For purposes of this Agreement, the term "Eligible Bank Account" shall mean, if such bank account does not meet the requirements of paragraphs (a) and (b) of such definition, a bank account otherwise acceptable to the Lender, the Surety Provider and the Rating Agencies." (d) Section 2.9 is hereby amended by deleting the first sentence thereof and replacing it with the following sentence: "On the Business Day preceding a Determination Date relating to a Borrowing Date, the Borrower shall request from the Lender, and the Lender shall provide to the Borrower, the Market Discount Rate applicable to the related Borrowing Date." -3- (e) Section 7.1 is hereby amended by: (i) adding the following at the end of clause (ii) of such Section 7.1 "or (iii) any obligations of the Lender or of NationsBank owing to the Surety Provider under the Insurance and Reimbursement Agreement, dated as of August 2, 1995, among the Lender, the Borrower, NationsBank, the Surety Provider and the Collateral Agent."; and (ii) deleting the proviso to such Section in its entirety. SECTION 2. Effectiveness; Binding Effect. This Amendment shall be effective as of the date hereof. This Amendment shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. SECTION 3. Severability of Provisions. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 4. Captions. The captions in this Amendment are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 5. Loan Agreement to Remain in Full Force and Effect. Except as amended hereby, the Loan Agreement shall remain in full force and effect and is hereby ratified, adopted and confirmed in all respects. All references in the Loan Agreement to "herein," or words of like import, and all references to the Loan Agreement in any agreement or document shall hereafter be deemed to refer to the Loan Agreement as amended hereby. SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. -4- SECTION 7. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MID-STATE TRUST V By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: /s/ Emmett R. Harmon ------------------------------- Name: Emmett R. Harmon Title: Vice President ENTERPRISE FUNDING CORPORATION By: /s/ Thomas S. Dunstan ------------------------------- Name: Thomas S. Dunstan Title: Vice President FIRST UNION NATIONAL BANK OF FLORIDA, as Collateral Agent By: /s/ Lisa Derryberry ------------------------------- Name: Lisa Derryberry Title: Vice President NATIONSBANK, N.A. (CAROLINAS), as Administrative Agent By: /s/ Michelle M. Heath ------------------------------- Name: Michelle M. Heath Title: Vice President -5- AMENDMENT NO. 2 TO LOAN AGREEMENT AMENDMENT NO. 2 TO LOAN AGREEMENT (this "Amendment"), dated as of March 29, 1996, by and among MID-STATE TRUST V, as Borrower (the "Borrower"), ENTERPRISE FUNDING CORPORATION, as Lender (the "Lender"), FIRST UNION NATIONAL BANK OF FLORIDA, as Custodian/Collateral Agent (the "Collateral Agent"), and NATIONSBANK, N.A., as Administrative Agent (the "Administrative Agent"). Capitalized terms used and not defined in this Amendment shall have the meanings ascribed to such terms in the Variable Funding Loan Agreement, dated as of March 3, 1995, among the parties hereto, as amended from time to time (as so amended, the "Loan Agreement"). PRELIMINARY STATEMENTS WHEREAS, the parties hereto are parties to the Loan Agreement; WHEREAS, the parties hereto wish to amend certain terms of the Loan Agreement as hereinafter provided; NOW, THEREFORE, in consideration of the mutual covenants contained herein and in the Loan Agreement and other good and valuable consideration, the receipt and adequacy of which is hereby expressly acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments. The Loan Agreement is hereby amended as follows: (a) Section 2.6 is hereby amended by inserting the following at the end of the parenthetical at the end of paragraph (a) thereof: "and net of any amounts paid to the provider of any Qualified Hedge Agreement as permitted by the CCA Agreement". (b) Section 5.1 is hereby amended by adding the following clause at the end of such Section: "(m) The Borrower shall maintain in full force and effect a Qualified Hedge Agreement with respect to all Accounts owned by the Borrower the Account Notes of which bear interest at a rate of less than 10% per annum." (c) Section 6.1 is hereby amended by: (i) Deleting the period at the end of paragraph (p) thereof and replacing it with "; and"; and (ii) Inserting the following after paragraph (p) thereof: "(q) at any time at which the Borrower is required to have a Qualified Hedge Agreement in place pursuant to Section 5.1(m) hereof, the earliest to occur of (i) a default by the Borrower in its obligations under any Qualified Hedge Agreement obtained by it; (ii) a default by the provider of any Qualified Hedge Agreement in its payment obligations to the Borrower under such Qualified Hedge Agreement which default is not cured within ten (10) Business Days; (iii) a default by the provider of any Qualified Hedge Agreement in any other obligations under such Qualified Hedge Agreement which default is not cured within thirty (30) Business Days or (iv) any Qualified Hedge Agreement obtained by the Borrower ceases to be a Qualified Hedge Agreement (other than as a result of a default described in the preceding clause (ii)) and is not replaced with a new Qualified Hedge Agreement within thirty (30) Business Days of the date of such occurrence." (d) Annex A is hereby amended by: (i) Adding the following phrase at the end of each of the definitions of "CCA Agreement", "Trust Agreement", "Loan Agreement" and "Master Servicing Agreement": "as such agreement may be amended from time to time". (ii) Adding the following definition after the definition of "Account Note": ""Account Note Interest Rate" means, with respect to a Qualified Hedge Agreement, the interest rate set forth in the Account Notes for the Accounts to - 2 - which such Qualified Hedge Agreement relates." (iii) Deleting clause (j) of the definition of "Eligible Account" therein in its entirety and replacing it with the following: "for which the Account Note evidences an account bearing a fixed rate of interest and fully amortizing level monthly payments due on the 5th or the 15th day of each month; such Account Note bears an interest rate of not less than 10% per annum; and such Account Note has an original term to maturity not in excess of (i) 25 years with respect to Accounts on which the sales price to the customer is less than $50,000 and (ii) 30 years with respect to Accounts on which the sales price to the customer is equal to or greater than $50,000." "Notwithstanding the foregoing, an Account which otherwise meets the criteria specified for an "Eligible Account" except that the related Account Note provides for an interest rate of less than 10% per annum shall be considered an "Eligible Account", provided that the Borrower has obtained, prior to the date any such Account is to be considered an Eligible Account, and maintains at all times while the related Account Notes are outstanding, a Qualified Hedge Agreement with respect to such Accounts." (iv) Adding the following definition after the definition of "Independent": ""Insurance Agreement" means the Insurance and Reimbursement Agreement, dated as of August 2, 1995, among the Borrower, the Lender, the Collateral Agent, the Surety Provider and NationsBank, N.A., as such agreement may be amended from time to time." (v) Adding the following at the end of the definition of "Operative Documents": - 3 - "and any Qualified Hedge Agreement obtained by the Borrower." (vi) Adding the following definitions after the definition of "Program Fee": ""Qualified Hedge Agreement" means one or more interest rate swaps, caps or collars, or any combination of such arrangements which, taken as a whole: (a) is pledged to the Collateral Agent as collateral for the Senior Secured Obligations and provides that all payments to be made thereunder will be made to the Collection Account for the benefit of the Collateral Agent; (b) provides for a notional amount at least equal to the Qualified Hedge Notional Amount for the Accounts to which such arrangement relates but which is not greater than the aggregate Economic Balance of all Eligible Accounts of the Borrower; (c) provides that all payments to be made thereunder will be made on a Remittance Date; (d) which, (i) in the case of an interest rate cap, provides for a strike price at least 1.00% below the Account Note Interest Rate for the related Accounts and (ii) in the case of an interest rate swap agreement, provides that the Borrower shall pay a fixed rate of interest not greater than a rate 1.00% below the Account Note Interest Rate for the related Accounts and the counterparty shall pay into the Collection Account for the benefit of the Collateral Agent by direct wire transfer interest calculated at a floating rate at least equal to the daily unweighted average of the USD-CP-H.15 (as defined in the 1991 ISDA Definitions); (e) the counterparty of which is a Qualified Hedge Agreement Provider; - 4 - (f) is entered into pursuant to an ISDA Master Agreement and Schedule substantially in the form attached hereto as Exhibit I; (g) the confirmation with respect to which does not amend or alter the terms of the agreement and schedule referred to in the preceding clause (f)(other than deminimus non-material changes); (h) will provide that the payments referred to in clause (d) of this definition will continue from the date of such Qualified Hedge Agreement through the 8-year and three-month period following the Scheduled Termination Date in effect as of the effective date of such Qualified Hedge Agreement; and (i) is otherwise satisfactory in form and substance to each of the Lender and the Surety Provider as evidenced by their execution and delivery of a certificate in the form attached hereto as Exhibit II. "Qualified Hedge Agreement Notional Amount" means, with respect to any group of Accounts the Account Notes of which provide for interest at a rate of less than 10% per annum, an amount at least equal to the aggregate Economic Balance of such Accounts. "Qualified Hedge Agreement Provider" means any Person (a) in the case of NationsBank, N.A., the long-term debt rating of which is at least "A" from each of S&P and Moody's, and (b) in the case of any other Person, the long-term debt obligations of which are rated in one of the two highest long-term debt rating categories of each of S&P and Moody's." - 5 - (vii) Adding the following definition after the definition of "Successor Servicer": ""Surety Provider" means Capital Markets Assurance Corporation, a New York stock insurance company."; (viii) Adding Exhibit I hereto as Exhibit I to Annex I; and (ix) Adding Exhibit II hereto as Exhibit II to Annex I. SECTION 2. Effectiveness; Binding Effect. This Amendment shall be effective as of the date hereof. This Amendment shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. SECTION 3. Severability of Provisions. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 4. Captions. The captions in this Amendment are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 5. Loan Agreement to Remain in Full Force and Effect. Except as amended hereby, the Loan Agreement shall remain in full force and effect and is hereby ratified, adopted and confirmed in all respects. All references in the Loan Agreement to "herein," or words of like import, and all references to the Loan Agreement in any agreement or document shall hereafter be deemed to refer to the Loan Agreement as amended hereby. SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. - 6 - SECTION 7. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MID-STATE TRUST V By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: /s/ Bruce Bisson ------------------------------- Name: Bruce Bisson Title: Vice President ENTERPRISE FUNDING CORPORATION By: /s/ John R. Bulger ------------------------------- Name: John R. Bulger Title: Vice President FIRST UNION NATIONAL BANK OF FLORIDA, as Collateral Agent By: /s/ Lisa Derryberry ------------------------------- Name: Lisa Derryberry Title: Vice President NATIONSBANK, N.A., as Administrative Agent By: /s/ Michelle M. Heath ------------------------------- Name: Michelle M. Heath Title: Vice President - 7 - Capital Markets Assurance Corporation hereby consents to this Amendment No. 2 to Loan Agreement by the execution hereof. CAPITAL MARKETS ASSURANCE CORPORATION By: /s/ Steven Czark ------------------------------- Name: Steven Czark Title: - 8 - EXHIBIT II EXHIBIT II TO ANNEX I CERTIFICATE Reference is made to the Loan Agreement, dated as of March 2, 1995, among Mid-State Trust V, as Borrower, Enterprise Funding Corporation, as Lender (the "Lender"), First Union National Bank of Florida, as collateral agent, and NationsBank, N.A., as administrative agent, as such agreement may be amended from time to time (the "Loan Agreement"). Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Loan Agreement. This certificate is hereby delivered for the purposes of clause (i) of the definition of Qualified Hedge Agreement contained in the Loan Agreement. The undersigned hereby certify that as of the date hereof, [the Interest Rate Agreement, the Schedule thereto and the Confirmations] executed copies of which are attached hereto as Exhibit A constitute a "Qualified Hedge Agreement" with respect to Accounts, the related Account Notes which provide for interest at a rate of less than 10% per annum but are intended to qualify as Eligible Accounts as specified in paragraph (j) of the definition of Eligible Accounts. The attached Qualified Hedge Agreement shall continue to be satisfactory to the undersigned only until the occurrence of any of the events set forth in Section 6.1(q) of the Loan Agreement which are not cured within the time frame specified therein and only for so long as the Qualified Hedge Agreement meets the criteria set forth in clauses (a) through (h) of the definition of "Qualified Hedge Agreement" in Annex A to the Loan Agreement. IN WITNESS WHEREOF, we have hereunto set our hands. March ,1996 ENTERPRISE FUNDING CORPORATION By____________________________ Name: Title: CAPITAL MARKETS ASSURANCE CORPORATION By____________________________ Name: Title: - B - ii - AMENDMENT NO. 3 TO LOAN AGREEMENT AND AMENDMENTS TO BORROWER ACCOUNT TRANSFER AGREEMENT AND FEE LETTER AMENDMENT NO. 3 TO LOAN AGREEMENT and AMENDMENTS TO BORROWER ACCOUNT TRANSFER AGREEMENT and FEE LETTER (this "Amendment"), dated as of July 31, 1997, by and among MID-STATE TRUST V, as Borrower (the "Borrower"), ENTERPRISE FUNDING CORPORATION, as Lender (the "Lender"), FIRST UNION NATIONAL BANK, formerly known as First Union National Bank of North Carolina and successor by merger to First Union National Bank of Florida, as Custodian/Collateral Agent (the "Collateral Agent"), NATIONSBANK, N.A., as Administrative Agent (the "Administrative Agent"), MID-STATE HOMES, INC. ("Mid-State") and JIM WALTER HOMES, INC. ("JWH"). Capitalized terms used and not defined in this Amendment shall have the meanings ascribed to such terms in the Variable Funding Loan Agreement, dated as of March 3, 1995, among the parties hereto, as amended from time to time (as so amended, the "Loan Agreement"). PRELIMINARY STATEMENTS WHEREAS, the parties hereto are parties to the Loan Agreement, certain of the parties hereto executed the Fee Letter, and Mid-State and the Borrower are parties to the BAT Agreement; WHEREAS, Mid-State, JWH and such Eligible Originators as may become party thereto, from time to time, are parties to the Amended and Restated DAT Agreement, dated as of the date hereof; WHEREAS, the parties hereto wish to amend certain terms of the Loan Agreement, the BAT Agreement and the Fee Letter as hereinafter provided; NOW, THEREFORE, in consideration of the mutual covenants contained herein and in the Loan Agreement, the BAT Agreement and the Fee Letter and other good and valuable consideration, the receipt and adequacy of which is hereby expressly acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendments to Loan Agreement. The Loan Agreement is hereby amended as follows: (a) Section 2.6 is hereby amended by: (i) deleting the following at the end of the parenthetical at the end of paragraph (a) thereof: "and net of any amounts paid to the provider of any Qualified Hedge Agreement as permitted by the CCA Agreement"; and -1- (ii) replacing (A) "8.1" in the thirteenth line thereof with "2.11" and (B) "36" in the fifteenth line of paragraph (d) thereof with "24". (b) Adding the following as a new Section 2.11 thereto: "SECTION 2.11 Renewal of Revolving Credit Facility. In the event that the Borrower desires to extend the Scheduled Termination Date, it shall, at least 60 days but not more than 120 days prior to the then current Scheduled Termination Date, send a notice (an 'Extension Request') to the Lender, requesting whether or not the Lender elects, in its sole discretion, to extend the Scheduled Termination Date for an additional 364 days following the then effective Scheduled Termination Date. The Lender shall, within 30 days after receipt of the Extension Request, notify the Borrower, the Collateral Agent, the Administrative Agent and the Surety Provider of its decision regarding such extension. If the Lender agrees to so extend, then the Scheduled Termination Date shall be extended to the date which is 364 days after the then effective Scheduled Termination Date; if the Lender does not agree to so extend, then the Scheduled Termination Date shall remain as the then effective Scheduled Termination Date." (c) Section 3.1(q) is hereby amended by adding the phrase "or Eligible Originator" after the word "Originator" in the sixth line thereof. (d) Section 4.1(i) is hereby amended by adding the phrase ", any Eligible Originator" after the word "Originator" in the fifth line thereof. (e) Section 4.1(k) is hereby amended by adding the phrase ", the State of its incorporation with respect to any Eligible Originator" after the phrase "Depositor," in the third line thereof. (f) Section 4.1(m) is hereby amended by adding the phrase ", any Eligible Originator's" after the word "Originator's" in the sixth line thereof. (g) Section 4.2(h) is hereby amended by adding the following phrase after "Originator" in the third line thereof: "(or originated by an Eligible Originator and sold to the Depositor)". (h) Section 5.1(b) is hereby amended by adding the phrase ", any Eligible Originator" after the word "Originator" in the third line thereof. (i) Section 5.1(d) is hereby amended by adding the phrase ", any Eligible Originator" after the word "Depositor" in the tenth line thereof. (j) Section 5.1 is hereby amended by deleting clause (m) at the end of such Section. -2- (k) Section 5.2 is hereby amended by adding the following clause (m) at the end thereof: "(m) Approval of Administrative Agent and Surety Provider. The Borrower shall not make any request for a Loan hereinunder unless all criteria set forth in the definition of "Eligible Originator" have been satisfied." (l) Section 6.1 is hereby amended by: (i) adding the phrase ", any Eligible Originator," before "the Originator" in clauses (c), (e) and (f) thereof and after "Depositor" in clauses (a), (h) and (i) thereof; (ii) placing a period at the end of paragraph (p) thereof; and (iii) deleting paragraph (q) thereof. (m) Amending Annex A thereto by: (i) making the following changes to the definition of "Account Documents": (A) adding the following phrase after "Originator" in clause (iv) thereof: "or an Eligible Originator"; (B) adding the following phrase before "Originator" in clause (vi)(1) thereof: "Eligible Originator or to the"; and (C) adding the phrase "an Eligible Originator," after "Depositor" in clause (viii) thereof; (ii) deleting the definition of "Account Note Interest Rate"; (iii) replacing "80%" and "70%" in the definition of "AEB" with "85%" and "75%", respectively; (iv) adding the following phrase after "Originator" in the fourth line of the definition of "Agreement for Deed": "(or an Eligible Originator)"; (v) adding the phrase "and any Eligible Originator" after the word "Originator" in the third line of the definition of "Assignments"; (vi) adding the following phrase before the period in the definition of "BAT Agreement" ", as amended from time to time"; (vii) adding the phrase "and any Eligible Originator" after the word "Originator" in the second line of the definition of "Buy-Back Obligation"; -3- (viii) adding the following phrase before the period in the definition of "DAT Agreement" ", as amended from time to time"; (ix) deleting the second paragraph of clause (j) of the definition of "Eligible Account" and changing "10%" in the seventh line of the first paragraph thereof to "8.5%"; (x) adding the phrase "or any Eligible Originator" after the word "Originator" in the third line of clause (o) of the definition of "Eligible Account" (xi) deleting "and" after the semicolon in clause (x) of the definition of "Eligible Account," replacing the period at the end of clause (y) of such definition with ";" and adding the following new clause (z) to such definition: "(z) which has been generated by the Originator, or by an Eligible Originator; and"; (xii) adding the following new clause (aa) to the definition of "Eligible Account": "(aa) with respect to any Account originated by an Eligible Originator, the amount thereof, together with the amount of all other outstanding Accounts of such Eligible Originator purchased under the DAT Agreement, would not represent greater than 3% of the Borrowing Base, and (ii) with respect to any Account originated by an Eligible Originator, the amount thereof, together with the amount of all outstanding Accounts purchased from all Eligible Originators under the DAT Agreement, would not represent greater than 10% of the Borrowing Base."; (xiii) by adding the following new definition thereto after the definition of "Eligible Investments": 'Eligible Originator' means a corporation (i) engaged in the residential building business, all of the outstanding capital stock of which is owned by either the Originator or Walter Industries, Inc., (ii) which has been approved in writing by the Administrative Agent and the Surety Provider in their sole discretion, (iii) which has delivered opinions of its counsel, in form satisfactory to the Administrative Agent and Surety Provider, with respect to (A) the enforceability of the Amended and Restated DAT Agreement against such Eligible Originator; and (B) the creation and perfection of a security interest by such Eligible Originator in the Accounts and Account Documents created under the DAT Agreement in favor of the Depositor; which such opinion shall be delivered when such Eligible Originator becomes a party thereto, except that in the case of Neatherlin Homes, Inc., such opinion shall be delivered no later than 15 days after the effectiveness of the Amended and Restated DAT Agreement (the "Opinion Date"); and (iv) as to which UCC-1 financing statements have been filed against such Eligible Originator -4- covering the property conveyed to Mid-State under the Amended and Restated DAT Agreement."; (xiv) adding the following phrase after the definition of "Fee Letter": "as such agreement may be amended from time to time."; (xv) changing "$500,000,000" in the definition of "Maximum Net Investment" to "$400,000,000"; (xvi) deleting the phrase "and any Qualified Hedge Agreement obtained by the Borrower" at the end of the definition of "Operative Documents"; (xvii) deleting the following definitions: "Qualified Hedge Agreement", "Qualified Hedge Agreement Notional Amount" and "Qualified Hedge Agreement Provider"; (xviii) adding the phrase "or Eligible Originator" after the word "Originator" in the third line of the definition of "Repurchase Price"; (xix) adding "or Eligible Originator" after "Originator" in the definition of "Resale Account"; and (xx) deleting the definition of "Scheduled Termination Date" and replacing it in its entirety by the following: "'Scheduled Termination Date' means June __, 1998, or such later date as is agreed to by the Lender in its sole discretion, pursuant to Section 2.11 of the Loan Agreement." SECTION 2. Amendment to BAT Agreement. (a) Section 1 of the BAT Agreement shall be amended by adding the phrase "or Eligible Originator" after the word "Originator" in the eighth line thereof. (b) Section 3(a)(ii) of the BAT Agreement is hereby amended by adding the phrase "or Eligible Originator" after the word "Originator" in the first line thereof. (c) Section 3(c)(xi) is hereby amended by adding the phrase "or Eligible Originator" after the word "Originator" in the sixth line thereof. (d) Section 3(c)(xv) is hereby amended by adding the phrase "or Eligible Originator" after the word "Originator" in the third line thereof. (e) Section 3(c)(xviii) is hereby amended by adding the phrase "or Eligible Originator" after the word "Originator" in the first line thereof. (f) Section 3(c)(xix) is hereby amended by adding the phrase "or Eligible Originator" after the word "Originator" in the third line thereof. -5- SECTION 3. Amendment to Fee Letter. Schedule A to the Fee Letter shall be amended by replacing (a) ".20%" in Facility Fee with ".15%" and (b) ".50%" in "Program Fee" with ".30%". SECTION 4. Conditions to Effectiveness. This Amendment shall be effective on and as of the date on which all parties hereto have executed this Amendment and delivered their signature pages hereto to the Lender and the Lender shall have received the following, each of which shall be in form and substance satisfactory to the Lender: (a) An amendment to the Insurance Agreement and the surrender by the Collateral Agent of the Surety Bond issued by the Surety Provider to the Collateral Agent on March 29, 1996, and cancellation thereof, and issuance of a new Surety Bond in the forms attached hereto as Exhibits A and B, respectively, duly executed by the parties thereto; (b) An opinion of counsel to the Surety Provider regarding the enforceability of the amendments described in (a) above against the Surety Provider; (c) The Trust shall have executed and delivered to the Lender a new Variable Funding Note in the form of Exhibit C attached hereto; (d) The ISDA Master Agreement, dated as of March 29, 1996, between the Trust and NationsBank, N.A., and the schedule attached thereto, shall have been terminated and all payments due and owing thereunder by the parties thereto shall have been paid in full; (e) The Amended and Restated DAT Agreement shall have been duly executed by the parties thereto. SECTION 5. Conditions Subsequent to Effectiveness. Mid-State hereby agrees to deliver an opinion of its counsel, in form satisfactory to the Administrative Agent and the Surety Provider, with respect to the creation and perfection of the security interest created under the BAT Agreement by Mid-State in the Accounts and Account Documents in favor of the Borrower, which such opinion shall be delivered by the Opinion Date. SECTION 6. Severability of Provisions. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 7. Captions. The captions in this Amendment are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 8. Agreements to Remain in Full Force and Effect. Except as amended hereby, the Loan Agreement, the Depositor Account Transfer Agreement and the Fee Letter shall remain in full force and effect and are hereby ratified, adopted and confirmed in all respects. All references in the Loan Agreement and the Fee Letter to "herein," or words of like import, and all -6- references to the Loan Agreement and the Fee Letter in any agreement or document shall hereafter be deemed to refer to the Loan Agreement and Fee Letter, respectively, as amended hereby. SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 10. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same amendment. The parties hereto do not intend that the Collateral Agent shall become, and the Collateral gent shall not become, a party to the BAT Agreement or the Fee Letter as a result of its execution and delivery of one (1) or more counterparts of this Amendment. -7- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MID-STATE TRUST V By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: /s/ Bruce L. Bisson ----------------------------- Name: Bruce L. Bisson Title: Vice President ENTERPRISE FUNDING CORPORATION By: /s/ Stewart L. Cutler ----------------------------- Name: Stewart L. Cutler Title: Vice President FIRST UNION NATIONAL BANK, as Collateral Agent By: /s/ Lisa Derryberry ----------------------------- Name: Lisa Derryberry Title: Vice President NATIONSBANK, N.A., as Administrative Agent By: /s/ Stan Meihaus ----------------------------- Name: Stan Meihaus Title: Vice President -8- MID-STATE HOMES, INC. By: /s/ Donald M. Kurucz ----------------------------- Name: Donald M. Kurucz Title: Vice President JIM WALTER HOMES, INC. By: /s/ Joseph H. Kelly, Jr. ----------------------------- Name: Joseph H. Kelly, Jr. Title: Vice President Capital Markets Assurance Corporation hereby consents to the foregoing amendment by the execution hereof: CAPITAL MARKETS ASSURANCE CORPORATION By: /s/ Rajat Basu ----------------------------- Name: Rajat Basu Title: Managing Director Date: -9- EX-21 3 EXHIBIT 21 EXHIBIT 21 LIST OF THE SUBSIDIARIES OF THE COMPANY (JURISDICTION OF INCORPORATION AS NOTED IN PARENTHESIS) The direct and indirect subsidiaries of Walter Industries, Inc. are: 1. JW Aluminum Company (DE) 2. Homes Holdings Corporation (DE) a. Jim Walter Homes, Inc. (FL) (a subsidiary of Homes Holdings Corporation) i. Jim Walter Homes of Louisiana, Inc. (LA) (a subsidiary of Jim Walter Homes, Inc.) ii. Walter Home Improvement, Inc. (FL) (a subsidiary of Jim Walter Homes, Inc.) iii. Neatherlin Homes, Inc. (TX) (a subsidiary of Jim Walter Homes, Inc.) iv. Jim Walter Homes of Georgia, Inc. (DE) (a subsidiary of Jim Walter Homes, Inc.) 3. JW Window Components, Inc. (DE) a. Jim Walter Window Components, Inc. (WI) (a subsidiary of JW Window Components, Inc.) 4. Vestal Manufacturing Company (DE) 5. Sloss Industries Corporation (DE) 6. Southern Precision Corporation (DE) 7. Mid-State Holdings Corporation (DE) a. Mid-State Homes, Inc. (FL) (a subsidiary of Mid-State Holdings Corporation) i. Mid-State Trust III (a business trust owned by Mid-State Homes, Inc.) ii. Mid-State Trust IV (a business trust owned by Mid-State Homes, Inc.) A. Mid-State Trust II (a business trust owned by Mid-State Trust IV) iii. Mid-State Trust V (a business trust owned by Mid-State Homes, Inc.) iv. Mid-State Trust VI (a business trust owned by Mid-State Homes, Inc.) 8. United States Pipe and Foundry Company, Inc. (AL) 9. Railroad Holdings Corporation (DE) a. Jefferson Warrior Railroad Company, Inc. (AL) (a subsidiary of Railroad Holdings Corporation) 10. Computer Holdings Corporation (DE) a. Jim Walter Computer Services, Inc. (DE) ( a subsidiary of Computer Holdings Corporation) 11. Land Holdings Corporation (DE) a. Walter Land Company (DE) (a subsidiary of Land Holdings Corporation) 12. J.W.I. Holdings Corporation (DE) a. J.W. Walter, Inc. (DE) (a subsidiary of J.W.I. Holdings Corporation) 13. Hamer Holdings Corporation (DE) a. Hamer Properties, Inc. (WV) (a subsidiary of Hamer Holdings Corporation) 14. Best Insurors, Inc. (FL) a. Best Insurors of Mississippi, Inc. (MS) (a subsidiary of Best Insurors, Inc.) b.Jim Walter Insurance Services, Inc. (FL) (a subsidiary of Best Insurors, Inc.) 15. Cardem Insurance Co., Ltd. (Bermuda) 16. Coast to Coast Advertising, Inc. (FL) 17. United Land Corporation (DE) 18. Dixie Building Supplies, Inc. (FL) 19. Jim Walter Resources, Inc. (AL) a. Black Warrior Transmission Corp. (50% owned by Jim Walter Resources, Inc.) b. Black Warrior Methane Corp. (50% owned by Jim Walter Resources, Inc.) 20. Walter International Sales, Inc. (Barbados, W.I.) The names of particular subsidiaries may have been omitted if the unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of August 27, 1997. EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 of Walter Industries, Inc. and its subsidiaries of our report dated July 10, 1997, appearing on page F-2 of Walter Industries, Inc.'s Form 10-K/A Amendment No. 1 for the year ended May 31, 1997. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page F-29 of such Annual Report on Form 10-K/A Amendment No 1. /s/ Price Waterhouse LLP Price Waterhouse LLP Tampa, Florida November 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----