10-Q 1 tmtx-10q.txt QUARTERLY REPORT FOR QUARTER ENDED NOVEMBER 30, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended November 30, 2002 Commission File No. 0-5940 TEMTEX INDUSTRIES, INC. ----------------------- (Exact name of Registrant as specified in its Charter) Delaware 75-1321869 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1190 W. Oleander Avenue, Perris, CA 92571 ---------------------------------------- ----------- (Address of principal executive offices) (Zip Code) 909/657-7311 -------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No ----- ----- The Registrant had 3,444,641 shares of common stock, par value $.20 per share, outstanding as of the close of the period covered by this report. PART I. FINANCIAL INFORMATION Item 1: Financial Statements TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations

Three Months Ended ~~Nine~~November ~~Months~~30 ~~Ended May 31, May 31, 2002 2001 2002 2001~~ ---------- ----------------- 2002 2001 ------------ ------------ ~~Net~~(Unaudited) ~~sales~~(in $thousands ~~5,729~~except $share ~~5,036~~and per share data) Net sales $ 166,~~838~~209 $ 145,~~603~~677 Cost of goods sold 5,~~644~~384 4,~~816~~987 ~~15,786 13,602~~ ---------- --~~--------~~ ---------- --~~--------~~ 85825 ~~220~~690 ~~1,052 1,001~~ Cost and expenses: Selling, general and administrative 1,419 1,~~912~~392 ~~4,230 4,798~~ Interest ~~131~~139 ~~138~~145 ~~402 351~~ Other expense 33138 2028 ~~74 5~~ ---------- --~~--------~~ ---------- --~~--------~~ 1,~~583~~696 ~~2,070 4,706 5,154 ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS BEFORE INCOME TAX BENEFIT (~~1,~~498)~~565 ~~(1,850) (3,654) (4,153) Federal income tax benefit 174~~ -- ~~174~~ -- ---------- ---------- --~~--------~~ ~~----------~~ NET LOSS $ (~~1,324~~871) $ (~~1,850~~875) ~~$ (3,480) $ (4,153)~~ ========== ==~~========~~ ========== ==~~========~~ Basic and diluted loss per common share: $ (0.3825) $ (0.5425) ~~$ (1.01) $ (1.21)~~ ========== ==~~========~~ ========== ==~~========~~ Basic and diluted weighted average common shares outstanding 3,444,641 3,444,641 ~~3,444,641 3,444,641~~ ========== ==~~========~~ ========== ==~~========~~

See notes to condensed consolidated financial statements -2- TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets

~~May~~November 3130, August 31, 2002 ~~2001~~2002 ------------ ------------ (Unaudited) (in thousands except share and per share data) ASSETS CURRENT ASSETS Cash and cash equivalents $ 67322 $ ~~169~~918 Accounts receivable, less allowance for doubtful accounts of $~~206~~277 at ~~May~~November 3130, 2002 and $~~274~~236 at August 31, ~~2001~~2002 2,~~643~~891 2,~~967~~386 Inventories, 3net 2,~~866~~009 62,~~881~~146 Prepaid expenses and other assets ~~368~~185 ~~159~~139 ------------ ------------ TOTAL CURRENT ASSETS 65,~~944~~407 105,~~176~~589 OTHER ASSETS 7590 5497 PROPERTY, PLANT AND EQUIPMENT Buildings and improvements 2,615 2,615 Machinery, equipment, furniture and fixtures 18,~~839~~871 18,~~701~~890 Leasehold improvements 1,~~311~~319 1,~~309~~318 ------------ ------------ 22,~~765~~805 22,~~625~~823 Less allowances for depreciation and amortization 1920,~~704~~003 19,~~013~~947 ------------ ------------ 3,061 3,612 ------------ ------------ $ 10,080 $ 13,842 ============ ============ May 31, August 31, 2002 2001 ------------ ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 1,983 $ 2,~~955~~802 ~~Accounts payable 3,161~~ 2,~~337~~876 ~~Accrued expenses 804 899 Income taxes payable 13 8 Current maturities of indebtedness to related parties 21 18 Current maturities of long~~-~~term obligations 46 44~~ ------------ ------------ TOTAL ~~CURRENT~~ASSETS LIABILITIES 6,028 6,261 INDEBTEDNESS TO RELATED PARTIES, less current maturities 1,532 1,547 LONG-TERM OBLIGATIONS, less current maturities 314 348 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock - $1 ~~par value; 1~~8,~~000,000~~299 ~~shares authorized, none issued -- -- Common stock -~~ $~~.20~~ ~~par value; 10~~8,~~000,000~~562 shares authorized, 5,286,125 shares issued 720 720 Additional capital 9,253 9,253 Retained deficit (7,328) (3,848) ------------ ------------ 2,645 6,125 Less: Treasury stock At cost -153,696 shares 439 439 At no cost - 1,687,788 shares -- -- ------------ ------------ 2,206 5,686 ------------ ------------ $ 10,080 $ 13,842 ============ ============

-3- TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets

~~Nine~~November ~~Months~~30, ~~Ended~~August ~~May~~ 31, 2002 2002 ------------~~-------------~~ ~~2002 2001~~ ---------- --~~--------~~ ~~OPERATING ACTIVITIES Net loss $~~ (~~3,480~~Unaudited) $ (~~4,153)~~in ~~Adjustments~~thousands toexcept ~~reconcile~~share ~~net~~and ~~loss~~per toshare ~~net~~data) ~~cash~~LIABILITIES ~~provided~~AND bySTOCKHOLDERS' ~~(used~~EQUITY in(DEFICIT) ~~operating~~CURRENT ~~activities:~~LIABILITIES ~~Depreciation~~Notes ~~and~~payable ~~amortization~~$ ~~699~~2,180 ~~852~~$ ~~Provision~~1,974 ~~for~~Accounts ~~doubtful~~payable ~~accounts~~2,882 712,296 91Accrued ~~Changes~~expenses in1,071 ~~operating assets and liabilities: Accounts receivable 253 306 Inventories 3~~1,~~015~~233 ~~(75)~~Income ~~Prepaid~~taxes ~~expenses~~payable ~~and~~20 ~~other~~20 ~~assets~~Current ~~(56)~~maturities ~~(77)~~of ~~Accounts~~indebtedness ~~payable~~to ~~and~~related ~~accrued~~parties ~~expenses~~22 ~~729~~20 ~~(134)~~Current ~~Income~~maturities ~~taxes~~of ~~payable/receivable~~long-term ~~(169)~~obligations ~~282~~39 49 ------------ ------------ ~~NET~~TOTAL ~~CASH~~CURRENT ~~PROVIDED~~LIABILITIES BY6,214 ~~(USED~~5,592 ~~IN)~~INDEBTEDNESS ~~OPERATING~~TO ~~ACTIVITIES~~RELATED 1PARTIES,~~062~~ (less current maturities 2,~~908)~~834 ~~INVESTING~~2,834 ~~ACTIVITIES~~LONG-TERM ~~Purchases~~OBLIGATIONS, ofless ~~property,~~current ~~plant~~maturities ~~and~~431 ~~equipment~~445 ~~(148)~~COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (~~283~~DEFICIT) ~~----------~~Preferred stock -~~---------~~ ~~NET~~$1 ~~CASH~~par ~~USED~~value; IN1,000,000 ~~INVESTING~~shares ~~ACTIVITIES~~authorized, ~~(148)~~none ~~(283)~~issued ~~FINANCING~~-- ~~ACTIVITIES~~-- ~~Net~~Common ~~proceeds~~stock ~~from~~- ~~notes~~$.20 ~~payable~~par ~~and~~value; ~~long-term~~10,000,000 ~~obligations~~shares ~~(972) 2~~authorized,~~465~~5,286,125 ~~Principal~~shares ~~payments~~issued on720 ~~long-term~~720 ~~obligations~~Additional ~~and~~capital ~~indebtedness~~9,301 to9,301 ~~related~~Accum ~~parties~~lated deficit (4410,762) (369,891) ------------ ------------ ~~NET~~(741) ~~CASH~~130 ~~(USED~~Less: ~~IN)~~Treasury ~~PROVIDED~~stock: BYAt ~~FINANCING~~cost ~~ACTIVITIES~~- (1153,~~016)~~696 2shares 439 439 At no cost - 1,~~429~~687,788 shares -- -- ------------ ------------ ~~DECREASE~~TOTAL INSTOCKHOLDERS' ~~CASH~~EQUITY ~~AND CASH EQUIVALENTS~~ (~~102~~DEFICIT) (~~762) Cash and cash equivalents at beginning of period 169~~ 1,~~021~~180) (309) ------------ ------------ ~~CASH~~TOTAL LIABILITIES AND ~~CASH~~STOCKHOLDERS' ~~EQUIVALENTS~~EQUITY AT(DEFICIT) ~~END~~$ OF8, ~~PERIOD~~299 $ 678,562 ~~$ 259~~ ============ ============

-4- TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows

See notes to condensed consolidated financial statements. -5- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements include the accounts of Temtex Industries, Inc. (the Company) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- month period ended November 30, 2002 are not necessarily indicative of the results that may be expected for the year ending August 31, 2003. The financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended August 31, 2002. Certain prior period amounts have been reclassified to conform with the current period's presentation. The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements for the year ended August 31, 2002 as filed in the Company's Annual Report on Form 10-K, the Company incurred significant losses from continuing operations during the previous two years ended August 31, 2002. In addition, considering borrowing limitations under the Company's existing credit agreement, the Company was only able to borrow an additional $222,000 under its credit agreement at November 30, 2002. These factors, among others, indicate that the Company may be unable to continue as a going concern. Management recognizes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow it to satisfy its obligations on a timely basis. The generation of sufficient cash flow is dependent on the Company's ability to reduce overhead costs and to continue to reduce inventories. Consequently, if the Company is not able to achieve its initiatives or if the Company is unable to obtain additional financing as needed, it is likely that the Company would be required to cease operations altogether. NOTE B--INCOME TAXES For the periods ended November 30, 2002 and 2001, no state and federal income tax benefit has been recorded as the Company has recorded a valuation allowance to fully reserve the net operating loss carryforwards since the realization of these assets is uncertain. The Company has federal net operating loss carryforwards of approximately $15,000,000, which begin to expire in the year 2021. -6- NOTE C--LOSS PER COMMON SHARE Basic loss per common share is based upon the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding during the period unless the effect of the common stock equivalents would be antidilutive. Common stock equivalents include options granted to key employees and outside directors as well as warrants issued in connection with the subordinated convertible notes. The number of common stock equivalents was based on the number of shares issuable on the exercise of options reduced by the number of shares that are assumed to have been purchased at the average price of the common stock during the period with the proceeds from the exercise of the options. All options and warrants outstanding were not included in the calculation of losses per share as they were not dilutive. NOTE D--INVENTORIES Inventories are summarized below (in thousands): November 30, 2002 August 31, 2002 ----------------- --------------- Finished goods $ 789 $ 740 Work in process 268 332 Raw materials and supplies 1,584 1,704 ------- ------- $ 2,641 $ 2,776 ------- ------- Excess and obsolete reserves (632) (630) ------- ------- Total Inventories, Net $ 2,009 $ 2,146 ======= ======= NOTE E--NOTES PAYABLE AND LONG-TERM DEBT In September 2000, the Company entered into a three-year credit agreement with Frost Capital Group whereby the Company may borrow a maximum of $4,000,000 under a revolving credit facility. The amount available under the facility is subject to limitations based on specified percentages of the Company's eligible outstanding receivables and inventories. The outstanding principal bears interest at an annual rate of 1.25% above the specified bank's prime commercial interest rate. Interest is payable monthly and is added to the outstanding loan balance. On July 19, 2002, the Company entered into an amendment to the revolving facility which, among other things, (1) permitted the issuance of $1.5 million long term obligations, (2) subordinated the bank's lien on the Company's inventory so as to permit the pledge of that inventory to the holder of the Secured Note, and (3) eliminated inventory as part of the borrowing base. The revolving credit facility does not require the maintenance of any financial ratios but does contain both affirmative and negative covenants. As of the date of this filing, the Company is in compliance with all of the loan covenants, with the exception of a provision requiring timely filing of an officer's certificate. Frost Capital Group has waived any defaults related to this issue. -7- The credit facility is secured by all assets of the Company and its subsidiary, Temco Fireplace Products. At November 30, 2002 there was approximately $2,180,000 outstanding under the credit facility, leaving $222,000 available. Effective July 19, 2002, a group of four private investors led by William Y. Tauscher, loaned the Company an aggregate $750,000 pursuant to Subordinated Convertible Notes due July 19, 2007. The Convertible Notes bear interest at the rate of 6% per annum (9% after a default) which is payable monthly commencing September 1, 2002. The outstanding principal under the Convertible Notes is due on July 19, 2007, or earlier upon an event of default. Further, to the extent the Company engages in certain transactions resulting in the sale of the business prior to the maturity date, the holders of the Convertible Notes maintain the right, at their election, to accelerate the payment of the debt to the effective date of such transaction. Commencing July 19, 2003, the Convertible Notes are convertible, at the option of the holders thereof, into shares of common stock at an initial conversion price of $0.60 per share. As a result, the Convertible Notes would collectively convert into 1,250,000 shares or, approximately 26.6% of the shares outstanding, assuming only the conversion of the Convertible Notes. The Convertible Notes are convertible prior to July 19, 2003 upon an event of default at the election of the holders. Lastly, to the extent the holders of the Convertible Notes do not voluntarily elect to receive the prepayment of the notes in connection with certain sale events, the Convertible Notes will automatically convert upon the occurrence of such event at the then existing conversion price. The Convertible Notes are unsecured obligations and are fully subordinated to the Company's indebtedness to Frost Capital Group under the revolving credit facility and to the Company's indebtedness to James Upfield as discussed below. In connection with the sale of the Convertible Notes, the Company issued to the purchasers of the Convertible Notes four common stock purchase warrants exercisable for an aggregate of 250,000 shares of common stock. The warrants may be exercised for a period of five years at a per share purchase price of $0.60. The warrants were allocated a value of $47,500 at issuance. Such amount reduced the face amount of the Subordinated Convertible Notes and will be accreted to interest expense over the life of the notes. Also on July 19, 2002, James E. Upfield loaned the Company $750,000 pursuant to a Secured Term Note due July 19, 2005. This Term Note bears interest at the rate of 6% per annum (9% after a default) which is payable monthly commencing September 1, 2002. The outstanding principal balance of the Term Note is due on July 19, 2005 or earlier upon an event of default. The Term Note issued to Mr. Upfield is secured by a first priority security interest in the Company's inventory and a second priority security interest in equipment (with the superior lien remaining pledged under the credit facility with Frost Capital Group). NOTE F--COMMITMENTS AND CONTINGENCIES Due to the complexity of the Company's operations, disagreements occasionally occur. In the opinion of management, the Company's ultimate loss from such disagreements and potential resulting legal action, if any, will not be significant. During 2002, the Company entered into an agreement with William Tauscher (now the Chairman of the Company) to provide consulting services. As a result of such agreement, the Company recorded $142,406 in expenses for the 2002 fiscal year, $78,228 of which remains outstanding and is included in accounts payable as of November 30, 2002. -8- NOTE G-- FOREIGN OPERATIONS At November 30, 2002, assets of approximately $719,000 were located at the Company's manufacturing facility in Mexico. -9- Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------- The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included as Part 1, Item 1 of this report. This document contains "forward-looking statements" made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of our management as well as assumptions made by, and information currently available, to our management. These statements include without limitation, the following: * statements regarding our anticipated future capital requirements and the sufficiency of the working capital currently available to us; * statements regarding our plans to expand our market share for our products and enhanced inventory turnover; * statements regarding our plan to achieve targeted inventory reductions; * statements regarding our consolidation strategy; * statements regarding the objectives of our management; and * other statements which speak to projections of future conditions or our anticipated performance, including statements which contain the words "anticipate," "believe," "expect" and words or phrases of similar import, as they relate to us or our management. You should be aware that these forward-looking statements are subject to certain risks, uncertainties and assumptions including, without limitation: * our ability to generate sufficient cash flow to allow us to continue as a going concern; * our ability to meet our near term cash requirements; * our ability to achieve certain efficiencies in our sales, purchasing and manufacturing processes; and * our ability to overcome numerous other significant risks and difficulties including, but not limited to, those factors set forth in subsequently filed reports with the U. S. Securities and Exchange Commission. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any written or oral forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. -10- We are a producer of metal fireplace products used in the residential and commercial building and the remodeling markets. We manufacture our fireplace products at our plants in Manchester, Tennessee; Perris, California; and through Temcomex Manufacturing Products (Mexico) and distribute them through Temco Fireplace Products, Inc., (both of which are our wholly owned subsidiaries). Our fireplace products are sold nationwide to a network of contractors, distributors and retailers. Net Sales --------- Net sales of fireplace products increased $532,000, approximately 9%, in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. The increase in sales was mainly due to an overall increase in quantity of fireplaces delivered for the period. Gross Profit ------------ Gross profit increased to $825,000 from $690,000 or approximately 19% in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. The increase in gross profit was the direct result of the increase in sales between the quarters, and partially due to slightly improved margin percentages. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses increased $27,000 or approximately 2% in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. This marginal increase is due, in part, to increased administrative costs associated with implementing our consolidation plan, partially offset by reductions in certain administrative and overhead costs. Interest Expense ---------------- Net interest expense decreased $6,000 between the comparative first quarters. This decrease is attributable, in part, to more favorable interest rates on recent company borrowings, although the amount of such borrowings has increased for the recent period. Other Expense ------------- Other expense in fiscal 2003 includes a restructuring charge of $130,000 representing the Company's estimate of the costs incurred at November 30, 2002 related to the manufacturing consolidation and centralization initiatives that are currently underway. Such costs include travel, physical moving of equipment and employee severeance and stay-pay agreements. Income Taxes ------------ The Company has not recorded a benefit for income taxes on its operating losses in either of the comparison quarters. The Company, before considering the valuation allowance, has net deferred tax assets resulting primarily from net operating losses. Therefore, the Company has chosen to establish a valuation allowance to reserve the entire amount until such time that reassessment indicates that it is more likely than not that the benefits will be realized primarily through future taxable income. -11- Liquidity and Capital Resources ------------------------------- Net cash used in operating activities was $682,000 for the first three months of 2003 compared to net cash provided of $506,000 for the first three months of 2002. The change in cash flow from operations between periods was primarily due to the reduced level of inventory reductions achieved in 2003. The Company planned a temporary inventory buildup during October and November 2003 to facilitate the move of certain manufacturing operations to Mexico. Capital expenditures for the first three months of 2003 were $96,000. The majority of expenditures were for tooling, replacement items and major repairs to manufacturing equipment. Revolving Credit Facility. In September 2000, we entered into a three-year credit agreement with Frost Capital Group whereby we may borrow a maximum of $4,000,000 under a revolving credit facility. The amount available under the facility is subject to limitations based on specified percentages of our eligible outstanding receivables and inventory. The outstanding principal bears interest at an annual rate of 1.25% above the specified bank's prime commercial interest rate. Interest is payable monthly and is added to the outstanding loan balance. On July 19, 2002, we entered into an amendment to the revolving facility which, among other things, (1) permitted the financing transaction involving James Upfield and the William Tauscher group, (2) subordinated the bank's lien on our inventory so as to permit the pledge of that inventory to Mr. Upfield to secure our obligations under a secured term note issued to Mr. Upfield on July 19, 2002, and (3) eliminated inventory as part of the borrowing base. The revolving credit facility does not require the maintenance of any financial ratios but does contain both affirmative and negative covenants. As of the date of this filing, we are in compliance with all of the loan covenants, with the exception of a provision regarding timely filing of an officer's certificate. Frost Capital Group has waived any defaults related to this issue. The credit facility is secured by all of our assets and our subsidiary, Temco Fireplace Products, Inc., subject to a prior lien of Mr. Upfield. At November 30, 2002 there was approximately $2,180,000 outstanding, leaving approximately $222,000 available under the credit facility. Going Concern Issues. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements for the year ended August 31, 2002 as filed in the Company's Annual Report on Form 10-K, we incurred significant losses from continuing operations during the previous two years ended August 31, 2002. In addition, considering borrowing limitations under our existing credit agreement, we continue to borrow near the maximum amount under our credit agreement and the lender has, consistent with its rights under the applicable loan documents, further decreased our available borrowing base. In an attempt to remedy the serious deficiencies inherent in our cash position, we consummated, effective July 19, 2002, a financing transaction involving James E. Upfield, our former Chairman of the Board and a holder of approximately 39% of our outstanding common stock, and a group of investors led by William Y. Tauscher, our current Chairman of the Board. The investment group led by Mr. Tauscher loaned us an aggregate $750,000 in exchange for subordinated convertible notes due July 19, 2007 and warrants for the purchase of 250,000 shares of our common stock. Contemporaneously with this transaction, Mr. Upfield loaned us an additional $750,000 in exchange for a secured term note due July 19, 2005. -12- Although these transactions provided us with $1,500,000 in additional working capital, our management recognizes that our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to allow us to satisfy our obligations on a timely basis. As of November 30, 2002, we had a working capital deficit in the amount of $807,000. Our cash and cash equivalents have significantly decreased over the first quarter of this current fiscal year by $596,000 to $322,000 at November 30, 2002. Unless we are successful in our attempts to improve our operating performance, such as our recent consolidation efforts to streamline operations, reduce costs and generate consistent profits, additional outside financing may be required. We anticipate that such additional financing will be difficult to obtain on acceptable terms, if at all. Consequently, if we fail to improve our operating performance or if we are unable to obtain additional financing as needed, it is likely that we would be required to cease operations altogether. Management Initiatives. The lack of adequate cash resources has become an increasingly difficult problem for our management. Specifically: * we are managing our cash on a day-to-day basis; * the inability to obtain raw materials and other materials from vendors and suppliers has, on occasion, resulted in significant plant slow-downs, thereby decreasing production and jeopardizing client relationships; and * Frost Capital Group, the lender on our revolving credit facility, has continued to reduce our eligible accounts receivable, thereby further restricting the amount of cash we can borrow to finance our operations. Generation of sufficient cash flow is dependent on our ability to reduce overhead costs, and to continue to reduce inventories. We are continuing to perform a detailed review of each sales territory to determine what actions should be taken to increase our market share in that region. We are also evaluating other methods of controlling inventory levels, including the possible purchase of computer software to more effectively control the purchasing and production processes. We expect to be able to achieve these initiatives without materially disrupting product shipments to current customers. In addition, our management has taken and is taking certain consolidation measures that are designed to streamline our operations, reduce costs, and improve our efficiencies. These consolidation measures have included the relocation of our corporate headquarters to Perris, California, and the relocation of a significant amount of equipment and manufacturing operations from our Manchester, Tennessee location to our Mexicali, Mexico manufacturing facility. No assurances can be given that these or other measures we may take will be sufficient to provide sufficient cash resource for our continued operations or to allow us to continue as a going concern. Item 3: Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------- We do not engage in market risk sensitive instruments and do not purchase hedging instruments or "other than trading" instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts. Our primary market risk exposure is that of interest rate risk on borrowings that we may have under some future credit facility. -13- Item 4: Controls and Procedures ------------------------------- Within the ninety days prior to the filing date of this Form 10- Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company (including our consolidated subsidiaries) required to be included in this Quarterly Report on Form 10-Q. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation. PART II. OTHER INFORMATION Item 1: Legal Proceedings. ------------------------- None Item 2: Changes in Securities and Use of Proceeds. ------------------------------------------------- None Item 3: Defaults Upon Senior Securities. --------------------------------------- None Item 4: Submission of Matters to a Vote of Security Holders. ----------------------------------------------------------- None Item 5: Other Information ------------------------- None Item 6. Exhibits and Reports on Form 8-K ------------------------------------------ (a). Exhibits -------- Exhibit No. Description --------- ----------- 99.1 Section 906 Certification. (b). Reports on Form 8-K ------------------- On October 11, 2002, we filed a Report on Form 8-K disclosing the relocation of our principal executive offices from Dallas, Texas to Perris, California. -14- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEMTEX INDUSTRIES, INC. DATE: January 14, 2003 BY:/s/RICHARD N. ANDERSON ----------------- ---------------------------- Richard N. Anderson President and Chief Executive Officer DATE: January 14, 2003 BY:/s/JOHN F. GURROLA ----------------- ---------------------------- John F. Gurrola Chief Financial Officer and Secretary -15- CERTIFICATIONS I, Richard Anderson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Temtex Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 14, 2003 /s/ RICHARD N. ANDERSON ------------------------------------- Richard N. Anderson President and Chief Executive Officer -16- CERTIFICATIONS I, John Gurrola, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Temtex Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 14, 2003 /s/ JOHN F. GURROLA ------------------------------------- John F. Gurrola Chief Financial Officer and Secretary -17-

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