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Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-21737
PROSPECTUS
OFFER FOR ANY AND ALL OUTSTANDING
SERIES A 11 1/8% SENIOR NOTES DUE 2001
IN EXCHANGE FOR
SERIES B 11 1/8% SENIOR NOTES DUE 2001
OF
WAXMAN USA INC.
THE EXCHANGE OFFER WILL EXPIRE AT
MIDNIGHT, NEW YORK CITY TIME, ON MARCH 31, 1997,
UNLESS EXTENDED.
Waxman USA Inc., a Delaware corporation (the "Company"), a direct
wholly-owned subsidiary of Waxman Industries, Inc. ("Waxman Industries")
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to issue an aggregate principal amount at
maturity of up to $4,830,000 of Series B 11 1/8% Senior Notes due 2001 (the
"New Notes") of the Company in exchange for a like principal amount of the
issued and outstanding Series A 11 1/8% Senior Notes due 2001 (the "Old Notes"
and, together with the New Notes, the "Notes") of the Company from the holders
(the "Holders") thereof.
The Old Notes were originally issued by the Company in private
placements primarily to certain institutional and accredited investors. The Old
Notes are eligible for trading in the Private Offering, Resales and Trading
through Automated Linkages ("Portal") market and are eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Act").
After the Exchange Offer, the Old Notes that remain outstanding will continue
to be subject to the restrictions on transfer contained in the legend thereon
and may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to the registration requirements of, the Act. The
Company does not have any publicly traded securities.
The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions and registration
rights relating to the Old Notes. The terms of the Notes are governed by the
Indenture, dated as of April 1, 1996, between the Company and the United
States Trust Company of New York , as Trustee (the "Trustee"), and all
amendments and supplements thereto (the "Indenture"). A portion of the capital
stock of a subsidiary of the Company has been pledged to the lenders under the
New Term Loan (as defined herein) (which had an outstanding principal balance
of $5.0 million as of September 30, 1996). The capital stock of the Company is
privately held by Waxman Industries and constitutes substantially all of
Waxman Industries' assets. The retained earnings of the Company on September
30, 1996 were approximately $9.2 million. The Company is dependent on
distributions from its operating subsidiaries in order to meet its
obligations, including its payment obligations with respect to the Notes. See
"Risk Factors -- Reliance on Operations of Subsidiaries; Structural
Subordination" and "-- Restrictions Imposed by Terms of Indebtedness."
The Notes are general unsecured obligations of the Company, ranking
senior in right of payment to any future indebtedness of the Company that is
subordinated in right of payment to the Notes and pari passu in right of
payment to and with all other existing or future indebtedness of the Company.
See "Description of the Notes."
The New Notes and the Old Notes remaining after the Exchange Offer
mature on September 1, 2001. Interest on the Notes will be payable
semi-annually on March 1 and September 1 of each year, commencing September 1,
1996. The Notes are redeemable, in whole or in part, at the option of the
Company at any time and from time to time at the redemption prices set forth
therein, plus accrued and unpaid interest, if any, to the date of redemption.
See "Description of Notes -- Redemption."
In the event of a Change of Control (as defined herein), the Company
will be obligated to make an offer to purchase all outstanding Notes at a
redemption price of 101% of the principal amount thereof, plus accrued and
unpaid interest, if any.
On April 3, 1996, the Company issued $43,026,000 principal amount of
Old Notes in exchange for a like aggregate principal amount of Waxman
Industries' then outstanding 13 3/4% Senior Subordinated Notes due June 1,
1999 (the "Senior Subordinated Notes") pursuant to a private exchange offer
(the "Initial Private Exchange Offer") which was a part of a series of
interrelated transactions (the "Reorganization"). In addition to the Initial
Private Exchange Offer, the components of the Reorganization included (i) the
solicitation of the consents of the holders of the Senior Subordinated Notes
to the adoption of certain amendments to the indenture governing the Senior
Subordinated Notes, (the "Senior Subordinated Consent Solicitation"), (ii) the
Barnett Public Offering (as defined herein), (iii) the
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establishment of a $30.0 million Restated Credit Agreement (as defined
herein), (iv) the defeasance of Waxman Industries' Senior Secured Notes (as
defined herein) and (v) the repayment of certain borrowings under the
Company's existing revolving and term loan credit facilities. See "Recent
Securities Offering and Related Matters -- The Reorganization." In December
1996, the Company consummated a registered exchange offer whereby the Company
offered to exchange $43,026,000 aggregate principal amount of New Notes in
exchange for a like principal amount of the Old Notes issued in the Initial
Private Exchange Offer (the "Registered Exchange Offer"). The Company
exchanged $43,025,000 aggregate principal amount of New Notes for a like
principal amount of Old Notes pursuant to the Registered Exchange Offer and
$1,000 principal amount of the Old Notes remained outstanding immediately
subsequent to the consummation of the Registered Exchange Offer. Such $1,000
principal amount of Old Notes is included in the Exchange Offer.
During January 1997, the Company issued an additional $4,829,000
principal amount of Old Notes in exchange for a like aggregate principal
amount of Senior Subordinated Notes pursuant to private exchange offers (the
"Private Exchange Offers").
The current offer and sale of the New Notes are being registered
under the Registration Statement of which this Prospectus forms a part in
order to satisfy certain obligations of the Company contained in the
Registration Rights Agreement, dated as of April 3, 1996, between the Company
and the Trustee, on behalf of the original purchasers of the Old Notes (the
"Registration Rights Agreement") and various Exchange Agreements between the
Company and holders of the Old Notes who are a party thereto (collectively,
the "Exchange Agreements"). Based on interpretations by the Staff of the
Securities and Exchange Commission (the "Commission") set forth in certain
"no-action" letters issued to third parties and unrelated to the Company and
the Exchange Offer, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by Holders thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the Act),
without compliance with the registration and prospectus delivery provisions of
the Act, provided that such New Notes are acquired in the ordinary course of
such Holders' business and such Holders have no intention, nor any arrangement
with any person, to participate in the distribution of such New Notes. A
broker-dealer holding Old Notes may participate in the Exchange Offer provided
that it acquired the Old Notes for its own account as a result of
market-making or other trading activities. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Act. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired by such broker-dealer as a result of
market-making or other trading activities. For a period of 180 days after the
Expiration Date (as defined herein), the Company will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will accept for exchange Old Notes validly tendered prior
to Midnight, New York City time, on March 31, 1997, unless extended by the
Company in its sole discretion (the "Expiration Date"). Tenders of Old Notes
may be withdrawn at any time prior to the Expiration Date. The Exchange Offer
is subject to certain customary conditions. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer."
The Company will not receive any proceeds from the Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will pay all the
expenses incident to the Exchange Offer. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange. In
the event the Company terminates the Exchange Offer and does not accept for
exchange any Old Notes, the Company will promptly return the Old Notes to the
Holders thereof. See "The Exchange Offer."
-----------------------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE NOTES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA. THE NOTES
ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
THIS DOCUMENT MAY NOT BE PASSED ON IN THE UNITED KINGDOM TO ANY
PERSON UNLESS THAT PERSON IS OF A KIND DESCRIBED IN ARTICLE 9(3) OF THE
FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER
1988 OR IS A PERSON TO WHOM THIS DOCUMENT MAY OTHERWISE LAWFULLY BE ISSUED OR
PASSED ON.
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NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER CHAPTER 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN
ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL
TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
-----------------------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 13, 1997.
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AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (together
with all amendments thereto referred to herein as the "Registration
Statement") under the Act, with the Commission covering the securities being
offered by this Prospectus. This Prospectus does not contain all the
information set forth or incorporated by reference in the Registration
Statement and the exhibits and schedules relating thereto, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered by this Prospectus, reference is made to the Registration
Statement and the exhibits and schedules thereto which are on file at the
offices of the Commission and may be obtained upon payment of the fee
prescribed by the Commission, or may be examined without charge at the offices
of the Commission. Statements contained in this Prospectus as to the contents
of any contract or other documents referred to are not necessarily complete,
and are qualified in all respects by such reference.
The Company is currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
addition, pursuant to the Indenture, the Company is required, whether or not
it is subject to the informational requirements of the Exchange Act, to file
periodic reports, proxy statements and other information with the Commission.
The Registration Statement, as well as such periodic reports, proxy statements
and other information, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; Suite 1400, Northwest Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission also maintains a Web site
(http://www.sec.gov.) that contains reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission.
ii
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TABLE OF CONTENTS
PROSPECTUS SUMMARY
The Company...................................................... v
Background of Exchange Offer;
Recent Securities Offering and Related Matters.............. vii
The Exchange Offer............................................... x
Consequences of Exchanging Old Notes Pursuant to the Exchange
Offer....................................................... xi
Summary Description of the New Notes............................. xi
Risk Factors..................................................... xii
RISK FACTORS
Consequences of Failure to Exchange.............................. 1
Leverage......................................................... 1
Deferred Coupon Notes Interest Payments.......................... 2
Terms of the New Credit Agreement................................ 2
Subordination to the ............................................ 2
Reliance on Operations of Subsidiaries; Structural Subordination 2
Restrictions Imposed by Terms of Indebtedness; Consequences
of Failure to Comply........................................... 3
Control by Principal Stockholders; Certain Anti-Takeover Effects. 3
Deficiency of Earnings to Fixed Charges.......................... 4
Foreign Sourcing................................................. 4
Reliance on Key Customers........................................ 4
Relationship with Waxman Industries.............................. 5
Lack of Public Market............................................ 5
SELECTED UNAUDITED PRO FORMA OPERATING DATA AND BALANCE SHEET.... 11
NOTES TO SELECTED UNAUDITED PROFORMA
OPERATING DATA AND BALANCE SHEET................................. 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.......................................................... 17
Results of Operations............................................ 19
Year Ended June 30, 1996 vs. Year Ended June 30, 1995............ 22
Year Ended June 30, 1995 vs. Year Ended June 30, 1994............ 23
BUSINESS
General.......................................................... 30
Consumer Products................................................ 30
Barnett.......................................................... 31
Marketing and Distribution....................................... 32
Products......................................................... 34
Other Operations................................................. 34
Purchasing....................................................... 35
Import Restrictions.............................................. 36
Competition...................................................... 36
Employees........................................................ 36
Trademarks....................................................... 37
Properties....................................................... 37
Legal Proceedings................................................ 38
Environmental Regulations........................................ 38
iii
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MANAGEMENT
Directors and Executive Officers.................................. 38
The Company....................................................... 40
EXECUTIVE COMPENSATION
Employment Agreements............................................. 42
Stock Option and SAR Grants....................................... 43
Stock Option and SAR Exercises.................................... 44
PRINCIPAL STOCKHOLDERS
Capital Stock of the Company...................................... 45
RECENT SECURITIES OFFERING AND RELATED MATTERS
THE EXCHANGE OFFER
Purpose of Exchange Offer......................................... 47
Terms of the Exchange Offer; Period for Tendering Old Notes....... 47
Procedures for Tendering Old Notes................................ 48
Acceptance of Old Notes for Exchange; Delivery of New Notes....... 49
Book-Entry Transfer............................................... 50
Guaranteed Delivery Procedures.................................... 50
Withdrawal Rights................................................. 50
Certain Conditions to the Exchange Offer.......................... 51
Exchange Agent.................................................... 52
Fees and Expenses................................................. 52
Transfer Taxes.................................................... 52
Consequences of Failure to Exchange............................... 53
DESCRIPTION OF THE NOTES
General........................................................... 53
Maturity, Interest and Principal.................................. 53
Redemption........................................................ 54
Change of Control................................................. 54
Provision of Financial Information................................ 54
Certain Covenants................................................. 55
Consolidation, Merger, Conveyance, Transfer or Lease.............. 59
Events of Default................................................. 59
Defeasance........................................................ 61
Satisfaction and Discharge........................................ 61
Amendments and Waivers............................................ 61
Regarding the Trustee............................................. 61
Certain Definitions............................................... 62
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The New Credit Agreement.......................................... 69
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Exchange of Notes................................................. 69
Backup Withholding and Information Reporting...................... 70
USE OF PROCEEDS................................................... 71
PLAN OF DISTRIBUTION.............................................. 71
LEGAL MATTERS..................................................... 72
EXPERTS........................................................... 72
iv
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to,
and should be read in conjunction with, the more detailed information and
financial statements appearing elsewhere in this Prospectus. References in
this Prospectus to a particular fiscal year refer to the 12-month period ended
on June 30 in that year. Unless the context otherwise indicates, all
references to "Waxman Industries" and the "Company" are to Waxman Industries,
Inc. and to Waxman USA Inc., its subsidiaries and to the business conducted
through Waxman USA's subsidiaries and their divisions, respectively.
THE COMPANY
The Company believes it is one of the leading suppliers of plumbing
products to the repair and remodeling market in the United States. The Company
distributes plumbing, hardware and electrical products to approximately 56,000
customers in the United States, including, plumbing and electrical repair and
remodeling contractors and independent retailers. The Company's consolidated
net sales were $235.1 million in fiscal 1996 and $65.9 million for the three
months ended September 30, 1996.
The Company conducts its business primarily through its wholly-owned
subsidiary Consumer Products and through Barnett, of which the Company owns
approximately 49.9% of the outstanding common stock, and, through the
ownership of certain convertible non-voting preferred stock, approximately a
54% economic interest. The Company also owns several smaller operations.
Consumer Products markets and distributes approximately 7,000 products to a
wide variety of retailers, primarily do-it-yourself ("D-I-Y") warehouse home
centers, home improvement centers, mass merchandisers, hardware stores and
lumberyards. Consumer Products' customers include large national retailers
such as Kmart, Builders Square and Wal-Mart. According to rankings of the
largest D-I-Y retailers published in National Home Center News, an industry
trade publication, Consumer Products' customers include 15 of the 25 largest
D-I-Y retailers in the United States. Consumer Products works closely with its
customers to develop comprehensive marketing and merchandising programs
designed to improve their profitability, efficiently manage shelf space,
reduce inventory levels and maximize floor stock turnover. For fiscal 1996 and
the three months ended September 30, 1996, Consumer Products' largest
customers, Kmart and its subsidiary Builders Square, accounted for
approximately 42.3% and 41.7%, respectively, of Consumer Products' total net
sales.
Consumer Products' marketing strategy includes offering mass
merchandisers and D-I-Y retailers a comprehensive merchandising program which
includes design, layout and setup of selling areas. Sales and service
personnel assist the retailer in determining the proper product mix in
addition to designing department layouts to effectively display products and
optimally utilize available floor and shelf space. Consumer Products supplies
point-of- purchase displays for both bulk and packaged products, including
color-coded product category signs and color- coordinated bin labels to help
identify products, and backup tags to signify products that require
reordering. Consumer Products also offers certain of its customers the option
of private label programs for their plumbing and floor care products. In-house
design, assembly and packaging capabilities enable Consumer Products to react
quickly and effectively to service its customers' changing needs. In addition,
Consumer Products' products are packaged and designed for ease of use, with
"how to" instructions included to simplify installation, even for the
uninitiated D-I-Y consumer. Consumer Products' net sales for fiscal 1996 and
the three months ended September 30, 1996 were $61.7 million and $16.1
million, respectively. In connection with a recent strategic reevaluation of
the Consumer Products' operations, Consumer Products decided to exit from the
distribution of electrical products to further focus its strategic direction.
The Company believes that the reorientation of Consumer Products' strategic
focus will initially result in a decrease in net sales but will strengthen and
improve the Consumer Products business in the long-term.
Barnett is a direct marketer and distributor of an extensive line of
plumbing, electrical and hardware products to over 46,000 active customers
throughout the United States. Barnett offers approximately 9,700 name brand
and private label products through its industry-recognized Barnett(R) catalogs
and telesales operations. Barnett markets its products through three distinct,
comprehensive catalogs that target professional contractors, independent
hardware stores and maintenance managers. Barnett's staff of over 100
knowledgeable telesales, customer service and technical support personnel work
together to serve customers by assisting in product selection and offering
technical advice. To provide rapid delivery and a strong local presence,
Barnett has established a network of 29 distribution centers strategically
v
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located in 29 major metropolitan areas throughout the United States. Through
these local distribution centers, approximately 70% of Barnett's orders are
shipped directly to the customer, in almost all cases, within the same day of
receipt of the order. The remaining 30% of the orders are picked up by the
customer at one of Barnett's local distribution centers. Barnett's strategy of
being a low-cost, competitively priced supplier is facilitated by its volume
of purchases and offshore sourcing of a significant portion of its private
label products. Products are purchased from over 400 domestic and foreign
suppliers.
Barnett believes that its distinctive business model has enabled it to
become a high-volume, cost-efficient direct marketer of competitively priced
plumbing, electrical and hardware products. Barnett's approximately 675-page
catalogs offer an extensive selection of products in an easy to use format
enabling customers to consolidate purchases with a single vendor. Barnett
provides an updated version of its catalogs to its customers on average four
times a year. To attract new customers and offer special promotions to
existing customers, Barnett supplements its catalogs with monthly promotional
flyers. Barnett's experienced and knowledgeable inbound telesales staff,
located at Barnett's centralized headquarters in Jacksonville, Florida, uses
Barnett's proprietary information systems to take customer orders as well as
offer technical advice. Barnett's highly trained outbound telesales staff
maintains frequent customer contact, makes telesales presentations and
encourages additional purchases. Targeted customer accounts are typically
assigned an outbound telesalesperson in order to enhance customer
relationships and improve customer satisfaction. Barnett's high in-stock
position and extensive network of local distribution centers enable it to
fulfill approximately 94% of the items included in each customer order and
provide rapid delivery. Barnett's net sales were $127.4 million and $36.5
million in fiscal 1996 and the three months ended September 30, 1996,
respectively.
The Company has several smaller operations which are conducted through
its other wholly-owned subsidiaries, WOC Inc. ("WOC") and TWI, International,
Inc. ("TWI"). WOC includes four operations, the largest of which are U.S. Lock
("U.S. Lock") - a distributor of a full line of security hardware products and
LeRan Gas Products ("LeRan") - a supplier of copper tubing, brass fittings and
other related products. WOC's other operations also include its Madison
Equipment division, a supplier of electrical products, and its Medal
Distributing division, a supplier of hardware products. TWI includes foreign
sourcing operations in Mexico, China and Taiwan which support Consumer
Products, Barnett and WOC. Net sales from these smaller operations were $46.0
million and $13.3 million in fiscal 1996 and the three months ended September
30, 1996, respectively. The "Operating Companies" consist of Barnett, Consumer
Products and WOC.
vi
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The current corporate structure of Waxman Industries and its
subsidiaries is as follows:
--------------------------
WAXMAN INDUSTRIES,
INC.
ISSUER OF DEFERRED
COUPON NOTES
--------------------------
|
--------------------------
WAXMAN USA INC.
ISSUER OF THE NOTES
--------------------------
|
-------------------------------------------------------------
| | | |
| ----------- | --------------
--------- WAXMAN --------- TWI,
BARNETT CONSUMER WOC INC. INTER-
INC.(1) PRODUCTS --------- NATIONAL,
--------- GROUP INC. INC. AND
----------- SUBSIDIARIES
--------------
(1) The Company owns approximately 49.9% of the voting capital stock of
Barnett and, together with convertible non-voting preferred stock of Barnett
owned by the Company, approximately 54% of the capital stock of Barnett.
BACKGROUND OF EXCHANGE OFFER;
RECENT SECURITIES OFFERING AND RELATED MATTERS
In connection with the Barnett Public Offering (as defined herein) and
as part of Waxman Industries' efforts to decrease its leverage and increase
its financial flexibility, the Company consummated the Initial Private
Exchange Offer pursuant to which it exchanged $43,026,000 principal amount of
the Company's Old Notes for a like principal amount of Senior Subordinated
Notes and in connection therewith solicited consents to certain amendments to
the indenture pursuant to which the Senior Subordinated Notes were issued.
Generally, the amendments to the Senior Subordinated Note indenture eliminated
virtually all of the restrictive covenants and events of defaults previously
contained in such indenture. In order to satisfy certain obligations of the
Company contained in the Registration Rights Agreement, dated as of April 3,
1996, between the Company and the Trustee, on behalf of the original
purchasers of the Old Notes (the "Registration Rights Agreement"), the Company
filed a registration statement with the Commission with respect to the
Registered Exchange Offer whereby $43,026,000 aggregate principal amount of
New Notes were offered in exchange for Old Notes in order to permit the
holders of such Old Notes to offer and sell the New Notes under the Act. The
registration statement filed in connection with the Registered Exchange Offer
was declared effective by the Commission on October 29, 1996 and the
Registered Exchange Offer was consummated in December 1996. The Company
exchanged $43,025,000 principal amount of New Notes for a like principal
amount of Old Notes in the Registered Exchange Offer and $1,000 principal
vii
<PAGE>
amount of Old Notes remained outstanding immediately subsequent to the
consummation of the Registered Exchange Offer.
During January 1997, the Company consummated the Private Exchange
Offers pursuant to which it exchanged $4,829,000 of the Company's Old Notes
for a like principal amount of Senior Subordinated Notes. The Initial Private
Exchange Offer and the Private Exchange Offers decreased the Company's cash
interest burden and extended the maturity of the Senior Subordinated Notes
exchanged in the Initial Private Exchange Offer and the Private Exchange
Offers until September 1, 2001.
In August 1995, the Company announced that it had decided to sell its
Consumer Products business and entered into a letter of intent, which
subsequently expired, which contemplated the sale of the Consumer Products
business, together with certain supporting operations and certain home center
accounts now serviced by Barnett, to a group consisting of HIG Capital
Management of Miami, Florida along with certain members of Consumer Products'
existing management team for an aggregate cash purchase price of $50 million
plus other consideration which would have given Waxman Industries
approximately a 25% economic interest in Consumer Products on a going forward
basis. Since the consummation of the Barnett Public Offering, the Company has
ceased its efforts to sell Consumer Products and instead retains and continues
to operate Consumer Products and, for fiscal 1996, reported its results as a
continuing operation. Prior period consolidated financial statements have been
reclassified to conform with current period presentation. See "Business" for a
description of Consumer Products, and its recent strategic reorientation, and
Note 3 to the Consolidated Financial Statements for a description of
substantial charges recorded in fiscal 1996 in connection with Consumer
Products. Also see Note 12 to the Consolidated Financial Statements for a
discussion regarding the restatement of certain prior years' financial data to
reflect the correction of an intercompany inventory reconciling item between
Consumer Products and WAMI (as defined herein).
On February 1, 1996, Barnett filed a registration statement with the
Commission with respect to an initial public offering (the "Barnett Public
Offering") of its common stock (the "Barnett Common Stock"). On March 28,
1996, the registration statement with respect to the Barnett Public Offering
was declared effective and on April 3, 1996, the Barnett Public Offering was
consummated. In such offering, 7,207,200 shares, representing approximately
55.1% of the Barnett Common Stock, were sold in the aggregate by Barnett and
the Company at an initial public offering price of $14.00 per share, resulting
in aggregate net proceeds of $92.6 million. As a result of the Company's
conversion of a portion of the convertible non-voting preferred stock of
Barnett to Barnett Common Stock during the fiscal 1996 fourth quarter, as of
June 30, 1996, the Company owned approximately 49.9% of the Barnett Common
Stock and, together with non-voting preferred stock of Barnett owned by the
Company, approximately a 54% economic interest in the capital stock of
Barnett.
Of the $47.7 million of net proceeds received by Barnett in the
Barnett Public Offering, Barnett used (i) $23.0 million to repay all of the
outstanding indebtedness borrowed by it under the secured credit facility (the
"Operating Companies Revolving Credit Facility") among Citicorp USA, Inc., as
agent, and Barnett, Consumer Products and WOC, (ii) $22.0 million to pay a
dividend evidenced by a note payable to the Company and (iii) $2.7 million for
working capital. The $44.9 million of net proceeds received by the Company
from the Barnett Public Offering, together with payment from Barnett of the
$22.0 million note payable described above, were applied primarily to repay
debt including (i) all of the $39.2 million principal amount of Waxman
Industries' 12 1/4% Senior Secured Notes due 1998 and Floating Rate Senior
Secured Notes due 1998 (collectively, the "Senior Secured Notes") plus accrued
interest and redemption premium of approximately $1.7 million, thereby
eliminating the mandatory sinking fund requirements relating to the Senior
Secured Notes which were scheduled to commence in September 1996 and (ii) $5.0
million of the $10.0 million outstanding indebtedness and accrued interest
under the secured term loan (the "Term Loan") among Citibank, N.A., as agent,
and Barnett, Consumer Products and WOC. The remaining net proceeds received by
the Company (approximately $21.0 million) are intended to be used to (i)
reduce additional outstanding indebtedness borrowed by Consumer Products and
WOC under the New Credit Agreement (as defined herein) and/or (ii) retire
Waxman Industries' 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the
"Deferred Coupon Notes") and/or Notes and/or (iii) reinvest in Consumer
Products' and/or WOC's businesses. The Company's business strategy includes
reducing its leverage by the sale of selected assets and to refinance its
remaining indebtedness whenever possible.
In connection with the Barnett Public Offering, Waxman USA entered
into an amendment and restatement of the Operating Companies Revolving Credit
Facility and Term Loan (the "Restated Credit Agreement") to provide for, among
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other things, an approximate one year secured credit facility providing for
revolving credit advances of up to $25.0 million and term loans of up to $5.0
million ("Restated Term Loans") and a release of Barnett from such lending
arrangements. On June 28, 1996, Waxman USA refinanced the Restated Credit
Agreement with a new credit facility (the "New Credit Agreement") provided by
BankAmerica Business Credit, Inc. The New Credit Agreement provides for, among
other things, an approximate three year secured credit facility providing for
revolving credit advances of up to $30.0 million and term loans of up to $5.0
million ("New Term Loans"). Borrowings under the New Credit Agreement are
secured by the accounts receivable, inventory, certain general intangibles and
unencumbered fixed assets of Consumer Products and WOC (the "Borrowers"). In
addition, New Term Loans are also secured by a pledge of 500,000 shares of
Barnett Common Stock owned by the Company (constituting approximately 3.5% of
all outstanding Barnett Common Stock). The New Credit Agreement expires on May
31, 1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a more detailed description of the New Credit
Agreement.
The Old Notes were issued pursuant to exemptions from, or transactions
not subject to, the registration requirements of the Act and applicable state
securities laws. The Company structured the offerings of the Old Notes as
private placements in order to consummate such offerings on a more expeditious
basis than would have been possible had the offerings been registered under
the Act. The Company agreed with the Holders, as a condition to their purchase
of the Old Notes, among other things, to promptly commence the Exchange Offer
following the offerings of the Old Notes. The Company has prepared and filed
the Registration Statement of which this Prospectus forms a part with the
Commission pursuant to the Registration Rights Agreement and the Exchange
Agreements. See "Recent Securities Offering and Related Matters --
Registration Rights Agreement."
During fiscal 1996, the Company conducted a strategic review of its
wholly-owned operations. As a result of the review, a material amount of
charges were incurred. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 3 to the Consolidated Financial
Statements.
See "Recent Securities Offering and Related Matters" for a discussion
of the offering of Old Notes, the agreements referred to above and additional
related agreements. See "Description of Notes" for a discussion of the terms
of the Notes.
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THE EXCHANGE OFFER
Securities Offered..................... Up to $4,830,000 principal amount of
Series B 11 1/8% Senior Notes (the "New
Notes" and, collectively with the Old
Notes, the "Notes"). The terms of the
New Notes and the Old Notes are
identical in all material respects,
except for certain transfer
restrictions and registration rights
relating to the Old Notes.
The Exchange Offer..................... The New Notes are being offered in
exchange for a like principal amount of
Old Notes. The issuance of the New
Notes is intended to satisfy
obligations of the Company contained in
the Exchange Agreements and
Registration Rights Agreement. For
procedures for tendering, see "The
Exchange Offer."
Tenders, Expiration Date;
Withdrawal........................... The Exchange Offer will expire at
Midnight, New York City time, on
March 31, 1997, or such later date and
time to which it is extended (the
"Expiration Date"). The tender of Old
Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to
the Expiration Date. Any Old Notes not
accepted for exchange for any reason
will be returned without expense to the
tendering holder thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Conditions of the
Exchange Offer....................... The Exchange Offer is subject to
customary conditions, any or all of
which may be waived by the Company in
its sole discretion. See "The Exchange
Offer -- Certain Conditions to the
Exchange Offer."
Interest on the New
Notes and Old Notes.................. Interest on the Notes will accrue at
the rate of 11 1/8% per annum until
maturity and will be payable
semi-annually commencing on September
1, 1996. Each New Note will bear
interest from its issuance date. Old
Notes that are accepted for exchange
will accrue interest up to, but not
including and not after, the date of
issuance of the New Notes. Such
interest on the Old Notes properly
surrendered for exchange shall be
payable upon the first interest payment
date of the New Notes. See "Description
of Notes -- Interest."
Acceptance of Old Notes and
Delivery of New Notes............... The Company will accept for exchange
Old Notes which are properly tendered
in the Exchange Offer prior to
Midnight, New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly following the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer;
Period for Tendering Old Notes."
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Federal Income Tax
Consequences......................... The exchange pursuant to the Exchange
Offer will not result in any income,
gain or loss to the holders of the
Notes (the "Holders") or the Company
for federal income tax purposes. See
"Certain Federal Income Tax
Considerations."
Use of Proceeds........................ There will be no proceeds to the
Company from the exchange pursuant to
the Exchange Offer.
Exchange Agent......................... The Huntington National Bank is serving
as Exchange Agent in connection with
the Exchange Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
Based on interpretations of the Staff of the Commission set forth in
certain "no-action" letters issued to third parties and unrelated to the
Company and the Exchange Offer, the Company believes that Holders of Old Notes
(other than any Holder who is an "affiliate" of the Company within the meaning
of Rule 405 under the Act) who exchange their Old Notes for New Notes pursuant
to the Exchange Offer may offer such New Notes for resale, resell such New
Notes, and otherwise transfer such New Notes without compliance with the
registration and prospectus delivery provisions of the Act; provided such New
Notes are acquired in the ordinary course of the Holder's business and such
Holder has no intention, nor any arrangement with any person, to participate
in a distribution of such New Notes. Based on the foregoing "no-action"
letters, the Company believes that a broker-dealer holding Old Notes may
participate in the Exchange Offer provided that it acquired the Old Notes for
its own account as a result of market-making or other trading activities. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes. See "Plan of Distribution." To comply with the
securities laws of certain jurisdictions, it may be necessary to qualify for
sale or register the New Notes prior to offering or selling such New Notes.
The Company does not currently intend to register or qualify the sale of the
New Notes in any such jurisdiction. If a Holder of Old Notes does not exchange
such Old Notes for New Notes pursuant to the Exchange Offer, such Old Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon. In general, the Old Notes may not be offered or sold, unless
registered under the Act, except pursuant to an exemption from, or in a
transaction not subject to, the Act and applicable state securities laws. See
"The Exchange Offer -- Purpose of the Exchange Offer and -- Consequences of
Failure to Exchange."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Old Notes. The terms of the Notes are governed by the
Indenture, dated as of April 1, 1996, between the Company and the United
States Trust Company of New York, as Trustee, and all amendments or
supplements thereto (the "Indenture").
Securities Offered..................... $4,830,000 aggregate principal amount
of Series B 11 1/8% Senior Notes Due
2001.
Interest Payments...................... Commencing on the Exchange Date,
interest on the New Notes will accrue
at the rate of 11 1/8% per annum,
payable semi-annually, commencing
September 1, 1996.
Maturity Date.......................... September 1, 2001.
Optional Redemption.................... The New Notes will be redeemable, in
whole or in part, at the option of the
Company at any time and from time to
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time, at the redemption prices set
forth herein, plus accrued interest.
Change of Control...................... In the event of a Change of Control,
the Company is obligated to make an
offer to purchase all outstanding New
Notes at 101% of the principal amount
thereof plus accrued and unpaid
interest, if any. A Change of Control
includes a management buyout or similar
transaction by the Company's management
and/or directors and their respective
affiliates (but does not include any
such transaction by Melvin and/or
Armond Waxman). A Change of Control
also includes a sale by the Company of
all or substantially all of its assets,
which under applicable governing law is
construed to mean the sale of assets
quantitatively vital to the operation
of the Company and which is out of the
ordinary and substantially affects the
existence and purpose of the Company.
Asset Sale Proceeds.................... The Company is obligated in certain
circumstances to make an offer to
purchase New Notes at a redemption
price of 100% of the principal amount
thereof plus accrued and unpaid
interest, if any, with the net cash
proceeds of certain sales or other
dispositions of assets.
Ranking................................ The Notes are general unsecured
obligations of the Company, ranking
pari passu in right of payment to any
future indebtedness of the Company that
is not subordinated in right of payment
to the Notes and senior in right of
payment to any future indebtedness of
the Company that is subordinated in
right of payment to the Notes. The
Notes will be structurally subordinated
to the New Credit Agreement and any
refinancing thereof.
Certain Covenants...................... The Indenture contains certain
covenants that, among other things,
limit the ability of the Company and
its subsidiaries to incur additional
indebtedness, transfer or sell assets,
pay dividends, make certain other
restricted payments and investments,
create liens or enter into sale
lease-back transactions, transactions
with affiliates and mergers.
For more complete information regarding the Notes, see "Description of
Notes."
RISK FACTORS
Holders of Old Notes should carefully consider the specific factors
set forth under "Risk Factors," as well as the other information and data
included in this Prospectus.
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RISK FACTORS
Holders of Old Notes should consider carefully all of the information
set forth in this Prospectus and, in particular, should evaluate the following
risks before tendering their Old Notes in the Exchange Offer, although the
risk factors set forth below (other than the first risk factor) are generally
applicable to the Old Notes, as well as the New Notes.
Consequences of Failure to Exchange. Holders of Old Notes who do not
exchange their Old Notes for New Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Old Notes as
set forth in the legend thereon as a consequence of the issuance of the Old
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless registered under the
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Act and applicable state securities laws. The Company does not currently
anticipate that it will register the offer and sale of the Old Notes under the
Act. Based on interpretations by the Staff of the Commission, set forth in
certain "no- action" letters issued to third parties and unrelated to the
Company and the Exchange Offer, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than by any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Act) without compliance with the registration and prospectus
delivery provisions of the Act provided that such New Notes are acquired in
the ordinary course of such Holders' business and such Holders have no
intention, nor any arrangement with any person, to participate in the
distribution of such New Notes. Based on the foregoing "no-action" letters,
the Company believes that a broker-dealer holding Old Notes may participate in
the Exchange Offer provided that it acquired the Old Notes for its own account
as a result of market-making or other trading activities. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Act.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making or other trading activities. For a
period of 180 days after the Expiration Date (as defined herein), the Company
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. The Company does not currently intend to
register or qualify the sale of the New Notes in any such jurisdiction.
Leverage. The Company has a high degree of leverage. At September 30,
1996, the Company had outstanding approximately $64.5 million of consolidated
indebtedness (excluding approximately $39.9 million of trade payables and
accrued liabilities). This high degree of leverage may have important
consequences to the Company, including the following: (i) the ability of the
Company to obtain additional financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from
operations will be required to satisfy its debt service obligations; (iii) the
Company may be more highly leveraged than its competitors, which may place it
at a competitive disadvantage; and (iv) the Company's high degree of leverage
may make it more vulnerable in the event of a downturn in its business and may
limit its ability to capitalize on business opportunities. In addition to the
other matters set forth herein under "Risk Factors," the Company's future
performance is subject to prevailing economic conditions and financial,
business and other factors, many of which factors are beyond the Company's
control. The Company currently believes that it must obtain a significant
infusion of funds, either through additional debt refinancing transactions or
the sale of equity and/or assets before any further significant deleveraging
can occur. Cash interest on Waxman Industries' Deferred Coupon Notes is
payable semi-annually commencing December 1999. Waxman Industries'
management's current projections indicate that there will not be sufficient
cash flow from operations to make the December 1999 cash interest payment on
Waxman Industries' Deferred Coupon Notes. Accordingly, Waxman Industries'
management currently intends to pursue a sale of assets or other capital
raising transaction to satisfy such cash requirements. However, there can be
no assurances that Waxman Industries or the Company will be able to consummate
any such sale or capital raising transaction. There can also be no assurance
that Waxman Industries or the Company will be able to refinance the Deferred
Coupon Notes or the Notes at or prior to their respective maturities. In
addition, Waxman Industries is a holding company with no operations of its own
and, therefore, its ability to pay cash interest on the Deferred Coupon Notes
commencing in December 1999 will require an increase in
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the Company's cash flow from current levels or a substantial reduction in the
Company's level of indebtedness or the completion of other capital raising
transactions, including asset sales. There can be no assurance that such
increase in cash flow or reduction in indebtedness or other capital raising
transaction will occur.
Waxman Industries has a high degree of leverage. At September 30,
1996, Waxman Industries had consolidated indebtedness of approximately $129.5
million (excluding approximately $42.0 million of trade payable and accrued
liabilities). If there was an event of default under the indenture governing
the Deferred Coupon Notes (the "Deferred Coupon Note Indenture") which
resulted in a foreclosure upon the collateral securing the Deferred Coupon
Notes, such foreclosure would likely constitute a change of control under the
Indenture (which change of control could result in an event of default if the
Company did not have sufficient funds to repurchase all of the outstanding
Notes tendered pursuant to a Change of Control Offer (as defined herein)).
Deferred Coupon Notes Interest Payments. The terms of Waxman
Industries' Deferred Coupon Notes require cash interest payable semi-annually
commencing December 1999. Waxman Industries' management's current projections
indicate that there will not be sufficient cash flow from operations to make
the December 1999 cash interest payment. See "--Leverage." Accordingly, Waxman
Industries' management currently intends to pursue a sale of assets or other
capital raising transaction to satisfy such cash interest requirements.
However, there can be no assurances that Waxman Industries or the Company will
be able to consummate any such sale or capital raising transaction. There can
also be no assurance that Waxman Industries or the Company will be able to
refinance the Deferred Coupon Notes on or prior to their maturity. If there
was an event of default under the Deferred Coupon Note Indenture which
resulted in a foreclosure upon the collateral securing the Deferred Coupon
Notes, such foreclosure would likely constitute a change of control under the
Indenture (which change of control could result in an event of default if the
Company did not have sufficient funds to repurchase all of the outstanding
Notes tendered pursuant to a Change of Control Offer).
Terms of the New Credit Agreement. The Company is currently party to
the New Credit Agreement. As permitted by the Indenture and under the terms of
the New Credit Agreement, 500,000 shares of Barnett Common Stock (constituting
approximately 3.5% of all outstanding Barnett Common Stock) are pledged to the
lenders under the New Credit Agreement to secure repayment of the New Term
Loans. The New Credit Agreement expires May 31, 1999.
Subordination to the New Credit Agreement. The Notes are general
unsecured obligations of the Company. The Notes are structurally subordinated
to the obligations of Consumer Products and WOC under the New Credit
Agreement. Any default or event of default under the Deferred Coupon Note
Indenture or the Indenture would constitute an event of default under the New
Credit Agreement permitting acceleration thereunder and permitting the holders
of such debt to enforce their security interest in the assets securing the New
Credit Agreement, which include, substantially all the assets of Consumer
Products and WOC, and 500,000 shares of Barnett Common Stock. There can be no
assurance that such collateral would be sufficient to repay in full borrowings
under the New Credit Agreement if they became due.
Reliance on Operations of Subsidiaries; Structural Subordination. The
Company is a holding company whose only material assets are the capital stock
of the Operating Companies and TWI. The Company conducts no business and is
dependent on distributions from the Borrowers and TWI in order to meet its
debt service obligations. There can be no assurance that distributions from
the Borrowers and TWI will be adequate to fund the required payments under the
Company's debt obligations including interest and principal payments on the
Notes. In addition, the New Credit Agreement and applicable state laws will
impose significant restrictions on the payment of dividends. See "Description
of Certain Other Indebtedness--The New Credit Agreement." If an initial public
offering of the capital stock of either of the Borrowers or TWI is
consummated, the ability of the Borrowers or TWI to (i) pay dividends to the
Company would be diminished to the extent of any such capital stock sold to
the public and as may be further limited by any lender which provides
financing to such public company and (ii) make loans to the Company would be
limited to the extent that such transactions would have to be fair to the
holders of such capital stock.
In addition, since the consummation of the Barnett Public Offering,
the cash flow generated by such operations is no longer available to the
Company. Since the consummation of the Barnett Public Offering, the Company
and Waxman Industries rely primarily on Consumer Product for cash flow.
Consumer Products' customers include D-I-Y warehouse home centers, home
improvement centers, mass merchandisers, hardware stores and lumberyards.
Consumer Products may be adversely affected by prolonged economic downturns or
significant declines in consumer spending. There can be
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no assurance that any such prolonged economic downturn or significant decline
in consumer spending will not have a material adverse impact on Consumer
Products' business and its ability to generate cash flow. See " -- Reliance on
Key Customers." Further, as indicated in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the Company has reevaluated
and reoriented the strategic direction of Consumer Products. As a result of
this reevaluation and reorientation, and taking into account the extremely
competitive retail environment in which Consumer Products operates and the
Company's unsuccessful attempt to sell the Consumer Products business, the
Company incurred substantial charges in its quarter ended June 30, 1996
relating to, among other things, the elimination of Consumer Products' home
electrical product lines, the reduction of the number of individual product
offerings, the downsizing of its distribution network from three locations to
two and the reduction of the carrying value of day to day assets and
liabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 3 to the Consolidated Financial
Statements. Although the Company believes that the reevaluation and
reorientation of Consumer Products' strategic direction will improve its
earnings potential, there can be no assurance that Consumer Products results
of operations will improve over time. In addition, in connection with
management's strategic review of its other wholly-owned operations, and as a
result of certain adverse developments affecting those other operations, the
Company incurred additional substantial charges in the fiscal 1996 fourth
quarter. The adverse developments include increased competition from
multi-category retailers and competitive pricing from overseas competitors,
the effect of which was exacerbated by excess manufacturing capacity at the
Company's foreign facilities. There can be no assurance that these adverse
conditions will not continue or that other adverse market factors will not
arise. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 3 to the Consolidated Financial Statements.
The Company derives all of its cash flow from its wholly-owned
subsidiaries. As a result of this holding company structure, the creditors of
the Company, including the holders of the Notes, are structurally subordinated
to all creditors of such subsidiaries with respect to the assets of such
subsidiaries, including the lenders under the New Credit Agreement and trade
creditors. Accordingly, in the event of a dissolution, bankruptcy or
reorganization of any such subsidiary, the holders of the Notes will not be
entitled to receive amounts from any such subsidiary until after payment in
full of all creditors of such subsidiary. At September 30, 1996, the aggregate
amount of indebtedness to which the holders of Notes would have been
structurally subordinated was approximately $15.8 million.
Restrictions Imposed by Terms of Indebtedness; Consequences of
Failure to Comply. The terms and conditions of the Indenture, other
indebtedness of Waxman Industries and the Company and the New Credit Agreement
impose, and any other future indebtedness of Waxman Industries and the Company
will impose, material restrictions that affect, among other things, the
ability of Waxman Industries and the Company and/or their respective
subsidiaries to incur debt, pay dividends, make acquisitions, create liens,
sell assets and make certain investments and materially change the nature or
conduct of their business. Indentures to which the Company and Waxman
Industries are currently party permit the respective company to sell assets to
the extent that such sales are for fair market value and the consideration
received by the selling company consists of at least 85% cash or cash
equivalents and the net proceeds not used to repay indebtedness senior to the
securities issued under the particular indenture, or such securities, or
otherwise not reinvested are used to offer to purchase the respective security
issued under such indenture. The New Credit Agreement provides that the
proceeds from any asset sale must be used to repay debt. The breach of any of
the foregoing covenants would result in a default under the applicable debt
instrument permitting the holders of indebtedness outstanding thereunder,
subject to applicable grace periods, to accelerate such indebtedness. Any such
acceleration may cause a cross-default under the instruments evidencing other
indebtedness of Waxman Industries and/or the Company, including the Indenture,
and there can be no assurance that Waxman Industries and/or the Company would
have sufficient funds to repay such obligations or assets to satisfy such
obligations, including the obligations with respect to the Notes, in the event
of an acceleration of such other indebtedness. See "Description of the Notes"
and "Description of Other Indebtedness." The Company was in compliance with
all loan covenants as of September 30, 1996.
In addition, the New Credit Agreement requires the Borrowers to
maintain cash collateral accounts into which all available funds are deposited
and applied to service amounts outstanding thereunder on a daily basis. If
Consumer Products and WOC, the borrowers under the New Credit Agreement, were
unable to borrow under the New Credit Agreement, due to a default or due to
the failure to meet any other condition required to be met thereunder prior to
borrowing (including any of the representations and warranties contained
therein not being correct before and after giving effect to any such
borrowing), the Borrowers would be left without an available source of cash.
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Control by Principal Stockholders; Certain Anti-Takeover Effects.
Waxman Industries owns all of the outstanding shares of the Company's capital
stock. Approximately 18.9% of the outstanding shares of Waxman Industries'
Common Stock and 82.8% of the outstanding shares of Waxman Industries' Class B
common stock are beneficially owned by Melvin and Armond Waxman, brothers and
the Chairman of the Board and Co-Chief Executive Officer and President and Co-
Chief Executive Officer, respectively, of Waxman Industries (the "Waxman
Principal Stockholders"). These holdings represent 62.0% of the outstanding
voting power of Waxman Industries. Consequently, the Waxman Principal
Stockholders have sufficient voting power to elect the entire Board of
Directors of each of Waxman Industries and the Company and, in general, to
determine the outcome of any corporate transaction or other matter submitted
to the stockholders for approval, including any merger, consolidation, sale of
all or substantially all of Waxman Industries' and the Company's respective
assets or "going private" transactions, and to prevent or cause a change in
control of either Waxman Industries or the Company. In addition, Messrs.
Melvin and Armond Waxman may have an interest in pursuing transactions,
including transactions with affiliates, that in their judgment could enhance
the value of Waxman Industries' capital stock, even though such transactions
might involve risks to the holders of the Notes. In addition, certain
provisions in Waxman Industries' and the Company's respective Certificates of
Incorporation, By-laws and debt instruments, including the Indenture, may be
deemed to have the effect of discouraging a third party from pursuing a
non-negotiated takeover of either Waxman Industries or the Company and
preventing certain changes in control.
Deficiency of Earnings to Fixed Charges. For fiscal 1996 pro forma,
fiscal 1995 and fiscal 1993, the Company's earnings were insufficient to cover
its fixed charges by $22.9 million, $4.3 million and $7.0 million,
respectively. For fiscal 1996 pro forma, earnings included the restructuring
and asset impairment charge of $19.5 million and the operating charge of $14.8
million taken upon completion of management's strategic review of wholly-owned
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Foreign Sourcing. For fiscal 1996, products manufactured outside of
the United States accounted for approximately 27.0% of the total product
purchases made by the Company. Foreign sourcing involves a number of risks,
including the availability of letters of credit, maintenance of quality
standards, work stoppages, transportation delays and interruptions, political
and economic disruptions, foreign currency fluctuations, expropriation,
nationalization, the imposition of tariffs and import and export controls and
changes in governmental policies (including United States' policy toward the
foreign country where the products are produced), which could have an adverse
effect on the Operating Companies' business. The occurrence of certain of
these factors would delay or prevent the delivery of goods ordered by the
Operating Companies' customers, and such delay or inability to meet delivery
requirements could have an adverse effect on the Operating Companies' results
of operations and on the Operating Companies' relationships with their
customers. In addition, the loss of a foreign manufacturer could have a
short-term adverse effect on the Operating Companies' business until
alternative supply arrangements were secured.
Reliance on Key Customers. For fiscal 1996, fiscal 1995 and the three
months ended September 30, 1996, Consumer Products' largest customers, Kmart
and its subsidiary Builders Square, accounted for approximately 11.1%, 13.5%
and 10.2%, respectively, of the Company's total net sales and 42.3%, 43.6% and
41.7% of Consumer Products' total net sales. During the same periods, the
Company's ten largest customers accounted for approximately 22.9%, 24.1% and
25.0% of the Company's total net sales. The loss of, or a substantial decrease
in, the business of one or more of the Company's largest customers could have
a material adverse effect on the Company's operations. The Company was advised
by Kmart that it recently conducted a review of its supply arrangements with
its suppliers of plumbing and hardware products, including Consumer Products,
and had determined to continue utilizing Consumer Products as a vendor. As a
result, the Company believes it will retain all of its Kmart business.
However, all large merchandisers review supply arrangements from time to time
and there can be no assurance that this relationship will continue or as to
the terms of any relationship that does continue. In addition, certain
articles in the financial press in the past year have questioned the financial
condition of Kmart, Consumer Products' largest customer. Furthermore, Kmart
has stated that it intends to sell its Builders Square business, which
accounted for approximately 24.8%, 24.7% and 24.2% of Consumer Products' net
sales in fiscal 1996, fiscal 1995 and the three months ended September 30,
1996, respectively. On February 3, 1997, Kmart issued a press release stating
that it was negotiating to sell its Builders Square business to HomeBase, a
leading regional warehouse home center, which is not a customer of Consumer
Products. There can be no assurance that any purchaser of Builders Square
will continue to do business with the Company or to the extent it does continue
to do business with the Company, as to the amount, terms or conditions of any
sales by such purchaser. Since the consummation of the Barnett Public Offering,
the Company and Waxman Industries rely primarily on Consumer Products for cash
flow. Consumer Products' customers include D-I-Y warehouse home centers, home
improvement centers, mass merchandisers, hardware stores and lumberyards.
Consumer Products may be adversely affected by prolonged economic
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downturns or significant declines in consumer spending. There can be no
assurance that any such prolonged economic downturn or significant decline in
consumer spending will not have a material adverse impact on Consumer
Products' business and its ability to generate cash flow.
Relationship with Waxman Industries. Waxman Industries and certain of
its subsidiaries are parties to an Intercorporate Agreement pursuant to which
Waxman Industries provides certain managerial, administrative and financial
services to such subsidiaries, including, among other things, financial and
treasury functions, tax planning and compliance and insurance and risk
management. The terms upon which these services are provided and the
compensation therefor were not determined in arms' length negotiations. The
subsidiaries who are a party to the Intercorporate Agreement have agreed to
indemnify Waxman Industries with respect to claims arising out of the
provision of these services, except with respect to losses resulting primarily
from Waxman Industries' willful misconduct, bad faith or gross negligence. In
addition, Waxman Industries and certain of its subsidiaries are parties to a
Tax Sharing Agreement. The Company is included in the consolidated group of
domestic corporations of which Waxman Industries is the common parent for
federal income tax purposes and the Company's tax liability is included in the
consolidated federal income tax liability of Waxman Industries. Under federal
law, the Company will be subject to liability for the consolidated federal
income tax liabilities of the consolidated group of which Waxman Industries is
the common parent for any taxable period during which the Company or a
subsidiary is a member of that consolidated group. Waxman Industries has
agreed, however, to indemnify the Company for such federal income tax
liability (and certain state and local tax liabilities) of Waxman Industries
or any of its other subsidiaries that the Company is actually required to pay.
Lack of Public Market. The New Notes are securities for which there
currently is no active market. The Company does not intend to apply for
listing of the New Notes on any securities exchange or for quotation through
the National Association of Securities Dealers Automated Quotation System.
5
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The selected consolidated historical financial data for the fiscal
years ended June 30, 1996, 1995 and 1994 and as of June 30, 1996 and 1995 are
derived from the audited Consolidated Financial Statements of the Company
included elsewhere herein. The selected consolidated historical financial data
for the 1993 fiscal year are derived from the audited financial statements of
the Company not included herein. The selected consolidated historical
financial data for the 1992 fiscal year are derived from the internal
unaudited consolidated financial statements of the Company not included
herein. The historical information as of and for the three months ended
September 30, 1996 and 1995 is unaudited, but in the Company's opinion
reflects all adjustments (consisting only of normal and recurring adjustments)
which are necessary to present fairly the financial position and results of
operations of the Company as of such dates and for such periods. The results
for the three months ended September 30, 1996 are not necessarily indicative
of the results to be expected for the year ending June 30, 1997 or any other
period. The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus. During
fiscal 1996, the Company identified an intercompany inventory reconciling item
between Consumer Products and WAMI and has restated prior year financial
statements to reflect the correction of this item.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------ -----------------------------------
1996(1) 1995 1994 1993 1992 1996(1) 1995(1)
--------- ------ ------ ------ ------ --------- --------
RESTATED(2) RESTATED(2) RESTATED(2) RESTATED(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data(3): (amounts in thousands, except ratio data)
Net sales
Barnett $127,395 $ 109,107 $ 95,225 $ 82,875 $ 72,106 $36,491 $28,856
Consumer Products 61,723 71,971 70,707 67,480 70,040 16,082 16,770
WOC 43,648 46,884 43,131 44,675 47,090 11,563 11,436
TWI 2,301 4,342 4,508 3,413 1,313 1,743 527
--------- -------- -------- -------- -------- ------- -------
Total net sales 235,067 232,304 213,571 198,443 190,549 65,879 57,589
Cost of sales 160,556 152,368 140,262 134,077 123,171 42,985 38,012
--------- -------- -------- -------- -------- ------- -------
Gross profit 74,511 79,936 73,309 64,366 67,378 22,894 19,577
Selling, general and
administrative expenses 66,433 58,590 53,321 50,526 46,750 15,522 13,905
Corporate charge 4,195 3,891 4,217 3,946 3,860 826 855
Restructuring and other
non-recurring charges 19,507 2,779 -- 3,543 -- -- --
------ -------- -------- -------- -------- ------- -------
Operating (loss) income(4) (15,624) 14,676 15,771 6,351 16,768 6,546 4,817
Gain on sale of Barnett 65,917 -- -- -- -- -- --
stock(5)
Interest expense 16,263 18,952 13,790 13,321 13,908 1,792 4,772
------- -------- ------- -------- -------- ------- -------
Income (loss from
continuing operations
before provision for
income taxes, minority
interest, loss on
disposal, extraordinary
loss and cumulative
effect of change in
accounting 34,030 (4,276) 1,981 (6,970) 2,860 4,754 45
Provision (benefit) for
income taxes 17,019 (1,100) 1,100 (1,960) 1,420 1,867 105
Income (loss) from
continuing operations
before minority interest,
loss on disposal,
extraordinary loss and
cumulative effect of ------- ------- ------- ------- -------- ------- ------
change in accounting 17,011 (3,176) 881 (5,010) 1,440 2,887 (60)
Minority interest in
consolidated affiliate 975 -- -- -- -- 1,352 --
(Loss) on and reversal of
loss on disposal of
Consumer Products,
net of tax 6,600 (6,600) -- -- -- -- --
Income (loss) before
extraordinary loss and
cumulative effect of -------- -------- ------- ------- ------- -------- --------
change in accounting 22,636 (9,776) 881 (5,010) 1,440 1,535 (60)
Extraordinary loss, net
of tax benefit(6) 3,750 -- -- -- -- -- --
Cumulative effect of change
in accounting, net of
tax benefit(7) 4,928 -- -- 1,266 -- -- 4,928
------- -------- -------- ------- ------- -------- --------
Net income (loss) $13,958 $(9,776) $ 881 $ (6,276) $ 1,440 $ 1,535 $ (4,988)
======= ======== ======== ======== ======= ======== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AS OF JUNE 30, SEPTEMBER 30,
-------------------------------------------------------------------- ----------------------------
1996(1) 1995 1994 1993 1992 1996(1) 1995(1)
--------- ------ ------ ------ ------ --------- --------
RESTATED (2) RESTATED (2) RESTATED (2) RESTATED (2)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of period):
Working Capital $51,712 $22,522 $39,933 $86,445 $81,746 52,276 11,889
Total Assets 133,063 154,769 167,334 155,358 165,092 139,753 142,930
Total Long-Term Debt, Excluding 43,889 985 994 1,350 1,182 44,009 938
Push-Down Debt
Push-Down Debt(8) 5,724 87,536 87,425 110,313 110,201 5,724 87,564
Stockholder's Equity 11,817 (20,025) (1,090) 18,023 19,381 13,377 (30,746)
Other Data:
Ratio of earnings to fixed charges(9) 2.9x -- 1.1x -- 1.2x 3.2x 1.0x
Adjusted EBITDA(10) --
Barnett 16,290 13,241 11,200 9,979 9,101 4,968 3,704
Other subsidiaries 8,951 10,817 10,863 8,753 12,941 2,985 2,739
----- ------ ------ ----- ------ ------- -------
Total 25,241 24,058 22,063 18,732 22,042 7,953 6,443
====== ====== ====== ====== ====== ======= =======
Depreciation and Amortization 7,612 8,278 7,108 8,401 5,562 1,072 1,173
Capital Expenditures, net 5,166 3,995 3,338 1,396 2,732 3,086 1,466
Cash Interest Expense(11) 6,068 5,974 722 182 152
Ratio of Adjusted EBITDA to Interest 1.6x 1.3x 1.6x 1.4x 1.6x 4.4x 1.4x
Expense
- --------------
(1) In January 1997, the Company consummated the Private Exchange Offers. As
such, pursuant to certain Securities and Exchange Commission rules,
certain June 30, 1996 and September 30, 1996 and 1995 amounts have been
adjusted to reflect the push-down of the remaining Senior Subordinated
Notes which have been (pursuant to the Private Exchange Offers) or are
intended to be repaid (pursuant to additional private exchange offers)
by the Company.
</TABLE>
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED ADJUSTED
---------------------- ----------
<S> <C> <C>
Interest Expense:
Fiscal 1996 $15,463 $16,263
Three Months Ended
September 30,
1996 1,592 1,792
1995 4,572 4,772
Provision for Income
Taxes:
Fiscal 1996 17,319 17,019
Three Months Ended
September 30,
1996 1,942 1,867
1995 180 105
Net Income (Loss):
Fiscal 1996 $ 14,458 13,958
Three Months Ended
September 30,
1996 1,660 1,535
1995 (4,863) (4,988)
Push Down Debt:
at June 30, 1996 -- 5,724
at September 30, 1996 -- 5,724
Total Stockholder's Equity:
at June 30, 1996 17,541 11,817
at September 30, 1996 19,101 13,377
</TABLE>
8
<PAGE>
(2) During fiscal 1996, the Company identified an intercompany inventory
reconciling item between Consumer Products and WAMI and has restated
prior year financial statements to reflect the correction of this item.
The effect of this restatement was as follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
---------------------- -----------
<S> <C> <C>
Total Stockholder's Equity:
at June 30, 1992 $19,781 $19,381
at June 30, 1993 $19,323 $18,023
at June 30, 1994 $ 1,210 $(1,090)
at June 30, 1995 $(17,725) $(20,025)
Operating Income:
Fiscal 1992 $16,968 $16,768
Fiscal 1993 $7,251 $6,351
Fiscal 1994 $16,771 $15,771
Income (loss) from
continuing operations
before minority interest,
loss on disposal,
extraordinary loss and
cumulative effect of
change in accounting:
Fiscal 1992 $1,560 $1,440
Fiscal 1993 $(4,470) $(5,010)
Fiscal 1994 $1,481 $881
Net Income (loss):
Fiscal 1992 $ 1,560 $ 1,440
Fiscal 1993 $(5,736) $(6,276)
Fiscal 1994 $1,481 $881
</TABLE>
Corresponding changes have been made to the consolidated balance sheets
to reduce inventories.
(3) Earnings per share data is not presented and is not meaningful, as the
Company is a wholly-owned subsidiary of Waxman Industries.
4) During fiscal 1996, the Company recorded a $19.5 million
restructuring and asset impairment loss, which included a $7.4 million
restructuring charge primarily attributable to strategic initiatives at
Consumer Products and a $12.1 asset impairment charge attributable to the
Company's U.S. Lock division in accordance with SFAS 121 and a $14.8 charge
related to the reduction of the carrying value of certain assets and
liabilities. During fiscal 1995, the Company incurred $2.8 million in
warehouse closure costs as Consumer Products' distribution network was
downsized from four locations to three. See Note 3 to the Company's
Consolidated Financial Statements for further discussion. During fiscal
1993, the Company recorded a $3.5 million restructuring charge which
included $2.0 million representing the estimated loss to be incurred upon
the proposed disposal of two businesses and $1.5 million representing
costs incurred to consolidate administrative functions and transfer two
of Consumer Products' domestic packaging facilities to Mexico.
(5) Reflects the gain on the Barnett Public Offering as further
described in Note 2 to the Consolidated Financial Statements.
(6) Represents deferred financing costs written off due to the
repayment and refinancing of debt as further described in Notes 2 and 5
to the Consolidated Financial Statements.
(7) See Note 4 to the Consolidated Financial Statements for a discussion
regarding the cumulative effect of a change in accounting in fiscal 1996
for procurement costs of $4.9 million, net of applicable tax benefit of
$3.3 million. In fiscal 1993, a cumulative effect of a change in
accounting of $1.3 million, net of applicable tax benefit of $0.8
million, was made for certain distribution center start up and catalog
development costs.
<PAGE>
(8) Pursuant to certain Securities and Exchange Commission rules, the
Consolidated Financial Statements have been adjusted to reflect the
push-down of certain indebtedness from Waxman Industries comprised of (a)
the debt retired upon consummation of the Private Exchange Offers and the
Initial Private Exchange Offer and (b) the debt which was guaranteed by
the Company and which management retired with a portion of the proceeds
from the Barnett Public Offering. Refer to Notes 5 and 13 to the
Consolidated Financial Statements for a further description of the
push-down debt.
(9) For purposes of calculating this ratio, "earnings" consist of income
(loss) from continuing operations before provision (benefit) for income
taxes, minority interest, loss on disposal, extraordinary loss and
cumulative effect of change in accounting and fixed charges, and "fixed
charges" consist of interest expense, including the interest portion of
rental obligations on capitalized and operating leases (which is deemed
by the Company to be one-third of all of its rental obligations with
respect to operating leases). For fiscal 1995 and fiscal 1993, earnings
were insufficient to cover fixed charges by $4.3 million and $7.0
million, respectively.
9
<PAGE>
(10) Adjusted EBITDA represents income (loss) from continuing operations
before provision (benefit) for income taxes, minority interest, loss on
disposal, extraordinary loss and cumulative effect of change in
accounting plus interest expense, restructuring and asset impairment
losses (which were primarily non-cash) of $19.5 million, $2.8 million and
$3.5 million in fiscal 1996, 1995 and 1993, respectively, depreciation
and amortization, less the gain on sale of Barnett Common Stock of $65.9
million in fiscal 1996. The Company has included adjusted EBITDA data
(which is not a measure of financial performance under generally accepted
accounting principles) because such data is used by certain investors to
measure the ability to service debt. EBITDA is not presented herein as an
alternative to net income, as an indicator of the Company's operating
performance or cash flows, or as a measure of liquidity, but rather to
provide additional information relating to the Company's ability to
service its debt. Fiscal 1993 EBITDA has been adjusted to reflect the
inventory adjustments of $1.0 million (included in cost of sales) and
fiscal 1996 EBITDA has been adjusted to reflect the write-down of assets
upon completion of management's strategic review of its wholly-owned
operations of $14.8 million (as discussed in Note 3 to the Consolidated
Financial Statements).
(11) Cash interest expense reflects the Company's interest expense less
push-down interest expense and the amortization of debt issuance costs.
10
<PAGE>
SELECTED UNAUDITED PRO FORMA OPERATING DATA AND BALANCE SHEET
(In thousands, except ratio data)
The following unaudited pro forma consolidated statements of operations
for the fiscal year ended June 30, 1996 and the three months ended September
30, 1996 and the balance sheet as of September 30, 1996 were derived by
adjusting the consolidated financial statements of the Company to reflect the
consummation of the Private Exchange Offers, the Initial Private Exchange
Offer and the Barnett Public Offering and the application of the net proceeds
therefrom to repay certain indebtedness as described in "Recent Developments"
and the push-down of the remaining outstanding principal amount of Senior
Subordinated Notes as the Company intends to continue to pursue the exchange
of Old Notes for the remaining outstanding principal amount of Senior
Subordinated Notes pursuant to additional private exchange offers as if each
had occurred as of the beginning of the period.
The pro forma adjustments are based on currently available information
and upon certain assumptions that management of the Company believes are
reasonable under the circumstances. The unaudited pro forma consolidated
financial data and accompanying notes should be read in conjunction with the
consolidated financial statements and notes thereto. The unaudited pro forma
consolidated financial data does not purport to represent what the results of
operations or financial position of the Company would actually have been if
the aforementioned transactions had occurred as of the beginning of the
period, or to project the results of operations or financial position for any
future periods or at any future date.
11
<PAGE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: For the three months ended
Year Ended June 30, 1996 September 30, 1996
-------------------------------------------------- --------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
--------------- ----------------- --------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $235,067 $ - $235,067 $65,879 $ - $65,879
Cost of sales 160,556 - 160,556 42,985 - 42,985
--------------- ---------------- --------------- ----------- ------------- -----------
Gross profit 74,511 - 74,511 22,894 - 22,894
Selling, general and
administrative expenses 66,433 150 (1) 66,583 15,522 - 15,522
Corporate charge 4,195 - 4,195 826 - 826
Restructuring and asset
impairment loss 19,507 - 19,507 - - -
-------------- ---------------- --------------- ----------- ------------ -----------
Operating income (loss) (15,624) (150) (15,774) 6,546 6,546
Gain on sale of Barnett stock 65,917 65,917 (2) - - - -
Interest expense 16,263 (9,098)(3) 7,165 1,792 (31)(3) 1,761
Income (loss) from
continuing operations
before provision for
income taxes, minority
interest, loss on
disposal, extraordinary
loss and cumulative
effect of change ------------- ---------------- --------------- ----------- ------------ -----------
in accounting 34,030 (56,969) (22,939) 4,754 31 4,785
Provision (benefit) for income
taxes 17,019 (21,648)(4) (4,629) 1,867 12(4) 1,879
Income (loss) from
continuing operations
before minority interest,
loss on disposal,
extraordinary loss and
cumulative effect of
change in ------------- ---------------- --------------- ----------- ------------ -----------
accounting 17,011 (35,321) (18,310) 2,887 19 2,906
Minority interest 975 3,955 (5) 4,930 1,352 - 1,352
Income (loss) from
continuing operations
before loss on disposal,
extraordinary loss and
cumulative effect of
change in -------------- ---------------- --------------- ----------- ------------ -----------
in accounting $ 16,036 $ (39,276) $ (23,240) $ 1,535 $ 19 $ 1,554
============== ================ =============== =========== ============ ===========
OTHER DATA:
Ratio of earnings to fixed
charges (6) 2.9x - 3.2x 3.3x
Adjusted EBITDA (7)
Barnett $ 16,290 $1,192 (8) $17,482 $4,968 $4,968
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA: For the three months ended
Year Ended June 30, 1996 September 30, 1996
------------------------------------------------- ----------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
-------------- ------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Other USA subsidiaries 8,951 (1,342) 7,609 2,985 2,985
--------------- -------------- -------------- ------------- ------------- ------------
Total $ 25,241 $ (150) $25,091 $ 7,953 $ - $ 7,953
=============== ============== ============== ============= ============= ============
Ratio of Adjusted EBITDA to
Interest Expense (9) 1.6x 1.2x 4.4x 1.7x
</TABLE>
13
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
As of September 30, 1996
------------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Current Assets
Cash 1,211 - 1,211
Accounts Receivable, Net 38,176 - 38,176
Inventories 64,533 - 64,533
Prepaid Expenses 3,041 - 3,041
---------- ------------- ---------
Total Current Assets 106,961 - 106,961
Property and Equipment, net 17,014 - 17,014
Cost of Businesses in Excess of
Net Asset Acquired, Net 13,215 - 13,215
Other Assets 2,563 - 2,563
---------- ------------ ---------
$139,753 - $139,753
======== =========
Current Liabilities:
Current Portion of Long-Term
Debt $14,797 - $14,797
Accounts Payable 28,719 - 28,719
Accrued Liabilities 11,169 - 11,169
-------- ---------
Total Current Liabilities 54,685 - 54,685
Long Term Debt, Net of Current
Portion 983 - 983
Senior Notes 43,026 4,829 (10) 47,855
Push-down Debt 5,724 (4,829)(10) 895
Minority Interest 21,958 - 21,958
Stockholder's Equity:
Preferred Stock - - -
Common Stock - - -
Advances to Waxman
Industries (16,987) - (16,987)
Paid-in Capital 21,462 - 21,462
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
----------- -------------- ------------
<S> <C> <C> <C>
Retained Earnings 9,216 - 9,216
----------- -------------- ------------
13,691 - 13,691
Cumulative currency translation
adjustment (314) (314)
----------- -------------- -------------
Total Stockholder's Equity 13,377 13,377
------------ -------------- ------------
$139,753 $ - $139,753
============ ============== ============
</TABLE>
15
<PAGE>
NOTES TO SELECTED UNAUDITED PROFORMA OPERATING DATA AND BALANCE SHEET
(1) Reflects the inclusion of a full fiscal year of public company costs for
Barnett.
(2) Reflects the exclusion of the gain on sale of Barnett Common Stock as it
is non-recurring and directly attributable to the Barnett Public
Offering.
(3) Reflects (i) the elimination of interest expense and associated
amortization of deferred debt issuance costs related to the application
of the net proceeds from the Initial Private Exchange Offer, the Private
Exchange Offers and Barnett Public Offering to repay certain indebtedness
as described in "Prospectus Summary--Background of Exchange Offer; Recent
Securities Offering and Related Matters" and (ii) the incurrence of
interest expense related to the Notes.
<TABLE>
<CAPTION>
For the Twelve Months For the Three Months
Ended June 30, 1996 Ended September 30, 1996
------------------------------------------ ----------------------------------------
Pro Forma Pro Forma
----------- -----------
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
----------- ------------ ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Companies $ 3,813 $(3,098) $ 715 $ 244 -- $ 244
Revolving Credit Facility/
New Credit Agreement
Term Loan/New Term Loan 1,132 (669) 463 108 -- 108
Notes 1,231 4,240 5,471 1,197 134 1,331
Other Notes 391 -- 391 43 -- 43
Push-Down Debt:
Senior Secured Notes 4,204 (4,204) -- -- -- --
Senior Subordinated 5,492 (5,367) 125 200 (165) 35
Notes
----------- ------------- -------------- --------- ----------- -----------
Total interest expense $ 16,263 $ (9,098) $ 7,165 $ 1,792 $ (31) $ 1,761
=========== ============= ============== ========= =========== ===========
</TABLE>
(4) Reflects the tax effect of the adjustments referred to in footnotes (1),
(2) and (3) above at the effective tax rate of approximately 38%.
(5) Reflects the minority stockholders' interest in the pro forma results of
Barnett. In accordance with the provisions of ARB No. 51 paragraphs 1 and
2 and Regulation 210.3A-02 of Regulation S-X, the Company will continue
to consolidate Barnett in its financial statements.
(6) Earnings were insufficient to cover fixed charges on a pro-forma basis
by $22.3 million. Earnings included the restructuring and asset
impairment charge of $19.5 million and the operating charge of $14.8
million recorded upon completion of management's strategic review of
wholly-owned operations (as further discussed in Note 3 to the
Consolidated Financial Statements).
(7) Adjusted EBITDA represents income from continuing operations before
provision for income taxes, minority interest, loss on disposal,
extraordinary loss and cumulative effect of change in accounting plus
interest expense, restructuring and asset impairment loss (which was
primarily non-cash) of $19.5 million, depreciation and amortization, less
the gain on sale of Barnett Common Stock of $65.9 million. The Company
has included adjusted EBITDA data (which is not a measure of performance
under generally accepted accounting principles) because such data is
used by certain investors to measure the ability to service debt. EBITDA
is not presented herein as an alternative to net income, as an indicator
of the Company's operating performance or cash flows, or as a measure
of liquidity, but rather to provide additional information relating to
the Company's ability to service its debt. Historical and pro forma
EBITDA has been adjusted to reflect the write-down of assets upon
completion of management's strategic review of its wholly-owned operation
of $14.8 million.
(8) Represents a corporate charge to Barnett of $1.3 million in fiscal 1996
which has been discontinued as a result of the Barnett Public Offering
less inclusion of public company costs as explained in (1) above.
(9) For pro forma purposes, EBITDA of Barnett is not included as a result of
the Barnett Public Offering.
(10) Reflects the repayment of certain indebtedness in connection with the
Private Exchange Offers.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Selected Financial Data and the Consolidated Financial Statements, including
the notes thereto, appearing elsewhere herein.
GENERAL
The Company operates in a single business segment -- the distribution
of plumbing, electrical and hardware products. The Company's business is
conducted primarily through Consumer Products and Barnett.
In August 1995, the Company announced that it had decided to sell its
Consumer Products business and entered into a letter of intent, which
subsequently expired, which contemplated the sale of the Consumer Products
business, together with certain supporting operations and certain home center
accounts now serviced by Barnett, to a group consisting of HIG Capital
Management of Miami, Florida along with certain members of Consumer Products'
existing management team for an aggregate cash purchase price of $50 million
plus other consideration which would have given Waxman Industries
approximately a 25% economic interest in Consumer Products on a going forward
basis. Since the consummation of the Barnett Public Offering, the Company
ceased its efforts to sell Consumer Products and instead retains and continues
to operate Consumer Products and, for fiscal 1996, reported its results as a
continuing operation.
On February 1, 1996, Barnett filed a registration statement with the
Commission with respect to the Barnett Public Offering. On March 28,1996, the
registration statement with respect to the Barnett Public Offering was
declared effective and on April 3, 1996, the Barnett Public Offering was
consummated. In such offering, 7,207,200 shares, representing approximately
55.1% of the Barnett Common Stock, were sold in the aggregate by Barnett and
the Company at an initial public offering price per share of $14.00 resulting
in aggregate net proceeds of $92.6 million. As of October 11, 1996, as a
result of the Company's conversion of a portion of the convertible non-voting
preferred stock of Barnett to Barnett Common Stock during the fiscal 1996
fourth quarter, the Company owns approximately 49.9% of the Barnett Common
Stock and, together with its remaining convertible non-voting preferred stock
of Barnett owned by the Company, approximately a 54% economic interest in the
capital stock of Barnett.
The Company recorded a $65.9 million pre-tax gain from the sale of
Barnett Common Stock in fiscal 1996.
In connection with the Barnett Public Offering and as part of Waxman
Industries' efforts to decrease its leverage and increase its financial
flexibility, the Company consummated the Initial Private Exchange Offer
pursuant to which it exchanged $43,026,000 principal amount of the Old Notes
for a like principal amount of Senior Subordinated Notes and in connection
therewith solicited consents to certain amendments to the indenture pursuant
to which the Senior Subordinated Notes were issued. Generally, the amendments
to the Senior Subordinated Note indenture eliminated virtually all of the
restrictive covenants and events of default previously contained in such
indenture. In order to satisfy certain obligations of the Company contained in
the Registration Rights Agreement, the Company filed a registration statement
with the Commission with respect to the Registered Exchange Offer whereby
$43,026,000 aggregate principal amount of New Notes were offered in exchange
for Old Notes in order to permit the holders of the Old Notes to offer and
sell the New Notes under the Act. Such registration statement was declared
effective on October 29, 1996 and the Registered Exchange Offer was
consummated on December 3, 1996. The Company exchanged $43,025,000 principal
amount of New Notes for a like principal amount of Old Notes.
In January 1997, the Company consummated the Private Exchange Offers
pursuant to which it exchanged $4,829,000 of the Company's Old Notes for a
like principal amount of Waxman Industries' Senior Subordinated Notes. The
Initial Private Exchange Offer and the Private Exchange Offers decreased the
Company's cash interest burden and extended the maturity of the Senior
Subordinated Notes exchanged in the Initial Private Exchange Offer and the
Private Exchange Offers until September 1, 2001.
In connection with the likely completion of the Barnett Public
Offering and consequent retention of the Consumer Products business, the
Company embarked upon a strategic review of Consumer Products and its other
wholly-owned operations, taking into account the difficulties encountered
during the sale process of Consumer Products, as well as the recent weaknesses
in the industry in which the Company competes. As a result of management's
review and refocus of Consumer Products as a continuing operation and
consistent with its strategic direction, an $11.9 million
17
<PAGE>
charge, primarily for a reduction in the carrying value of day to day
operating assets and liabilities, has been recorded by Consumer Products in
operating results; which represented an increase of $6.9 million to cost of
goods sold and $5.0 million to selling, general and administrative expenses.
Such charge, comprised of $7.7 million and $4.2 million recorded in the fiscal
1996 third quarter and fourth quarter, respectively, included $5.1 million for
the impairment and write-down of inventory, $2.7 million for certain accounts
receivable balances, $2.0 million representing a portion of the costs of
developing a management information system, $0.5 million of abandoned product
development costs, and $1.6 million for various liabilities.
The traditional customers of certain of WOC's operations, smaller
retail establishments, have been adversely affected by the movement by large
national retailers to expand in more rural locations and to compete with such
smaller retail establishments. In addition, the market has been increasingly
impacted by the availability of lower cost foreign sourcing to both domestic
and foreign competitors. In connection with management's strategic review of
its other wholly-owned operations and as a result of business factors
affecting these other operations, including increased competition from
multi-category retailers and competitive pricing from overseas competitors,
the effect of which was exacerbated by excess manufacturing capacity at the
Company's foreign facilities, the Company recorded an additional charge of
$2.9 million in the fiscal 1996 fourth quarter operating results primarily for
a reduction in the carrying value of day to day operating assets and
liabilities. Such charge included $1.7 million to reduce the carrying value of
inventory and other assets at WOC and TWI, $0.4 million of accelerated
depreciation as a result of a change in the estimated useful lives of certain
property and equipment and $0.8 million for various liabilities.
In addition, during the fourth quarter of fiscal 1996, the Company
recorded a $19.5 million pre-tax restructuring and asset impairment charge.
Below is a summary of the components comprising such charge:
<TABLE>
<CAPTION>
(In millions)
<S> <C>
Exiting product lines $ 4.1
Warehouse closure costs 1.3
Reduction of excess capacity 1.1
Other 0.9
Asset impairment 12.1
-----
Total $19.5
=====
</TABLE>
Exiting product lines: In furtherance of its efforts to strengthen
the Consumer Products business, the Company has decided to eliminate
Consumer Products' electrical product line and reduce the number of
individual products offered in its plumbing and floor care product
lines. These actions will enable Consumer Products to reduce fixed
costs as well as optimize and focus its product offerings to its
major retail customers. Consumer Products is currently winding down
the servicing of the electrical product line as well as reducing the
number of products offered in its plumbing and floor care product
lines and does not expect to incur cash outlays for these reductions.
The $4.1 million charge is primarily for the write-down of related
inventory of which $1.8 million has been disposed of as of June 30,
1996.
Warehouse closure costs: During the fourth quarter of 1996, the
Company downsized Consumer Products' distribution network from three
locations to two and as a result incurred warehouse closure costs of
$1.3 million. The remaining accrual at June 30, 1996 is $0.8 million.
The warehouse closure costs include costs associated with the
remaining noncancellable term of an operating lease of $0.3 million,
incremental employee salaries and benefits associated with closing
the warehouse of $0.5 million, loss on fixed assets of $0.2 million
and other miscellaneous expenses associated with the closing of $0.3
million.
Reduction of excess capacity: With the discontinuance and downsizing
of Consumer Products' product lines, the foreign operations which
support Consumer Products identified excess capacity in both
buildings and equipment. As such, a $1.1 million charge was recorded
to reduce the net book value of buildings by $0.8 million and
equipment by $0.3 million.
Other: In connection with the strategic review, a division of WOC
discontinued certain product offerings which resulted primarily in a
write-down of inventory and excess equipment.
18
<PAGE>
Asset Impairment: The asset impairment charge of $12.1 million
relates to the Company's U.S. Lock division. Due to the continued
decline in the locksmith industry brought about by the competitive
nature of the D-I-Y retail market, as required by SFAS No. 121
"Accounting for the Impairment of Long Lived Assets and for Long-
Lived Assets to Be Disposed of," the Company expensed $9.8 million of
good will and $2.3 million of property and equipment, as the carrying
value for the division exceeded the fair value. Fair value was
determined based on a multiple of cash flows.
Effective July 1, 1995, the Company changed its method of accounting
for procurement costs. Procurement costs represent the amount paid in
connection with a customer's commitment to purchase products from the Company
for a specified period. The amount capitalized is the consideration paid by
the Company to the new or existing customer (x) for the right to supply such
customer for a specified period and (y) to purchase competitor's merchandise
that the customer has on hand when it changes suppliers, less the salvage
value received by the Company. The Company believes that amortization in the
fiscal year incurred for such costs is consistent with the Company's strategic
review of Consumer Products and is preferable due to the uncertainty of
today's competitive retail environment. Previously, the Company amortized
these costs over the period deemed to be benefitted. The cumulative effect of
this change on prior years of $4.9 million, net of applicable income tax
benefit of $3.3 million, is reported separately in the fiscal 1996
consolidated statement of operations. The additional effect of the change in
fiscal 1996 was to decrease the operating loss by $2.1 million.
The Company recorded an extraordinary charge of approximately $3.8
million, net of applicable taxes of $2.5 million, in fiscal 1996 related to a
premium paid on the retirement of the Senior Secured Notes and the accelerated
amortization of the related unamortized debt discount and debt issuance costs
attributed to indebtedness repaid from the net proceeds of the Barnett Public
Offering and the Old Notes and the New Credit Agreement.
In the event Consumer Products were to either lose Kmart or Builders
Square as a customer or Kmart or Builders Square were to significantly curtail
its purchases from Consumer Products, there would be material short term
adverse effects until the Company could modify Consumer Products' cost
structure to be more in line with a reduced revenue base. See "Risk Factors --
Reliance on Key Customers."
RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
During fiscal 1996, the Company identified an intercompany inventory
reconciling item between Consumer Products and WAMI and has restated prior
year financial statements to reflect the correction of this item. See Note 12
to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain items reflected in the
Company's Consolidated Statements of Operations as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of sales 68.3% 65.6% 65.7% 65.2% 66.0%
Gross profit 31.7% 34.4% 34.3% 34.8% 34.0%
Selling, general and
administrative expenses 28.2% 25.2% 25.0% 23.6% 24.1%
Corporate charge 1.8% 1.7% 2.0% 1.3% 1.5%
Restructuring and other non-
recurring charges 8.3% 1.2% -- --
</TABLE>
19
<PAGE>
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------- -------------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
restated
<S> <C> <C> <C> <C> <C>
Operating income (loss) (6.6%) 6.3% 7.3% 9.9% 8.4%
Gain on sale of Barnett stock 28.0% -- -- -- --
Interest expense 6.6% 8.1% 6.4% 2.7% 8.3%
Income (loss) from
continuing operations before
income taxes, minority interest,
loss on disposal, extraordinary
loss and cumulative effect of
change in accounting 14.8% (1.8%) 0.9% 7.2% 0.1%
Provision (benefit) for income
taxes 7.4% (0.4%) 0.5% 2.8% 0.2%
Income (loss) from continuing
operations before minority
interest, loss on disposal,
extraordinary loss and
cumulative effect of change in
accounting 7.4% (1.4%) 0.4% 4.4% (0.1%)
Minority interest in consolidated
affiliate .4% -- -- 2.1% --
(Loss) on and reversal of loss
on disposal of Consumer
Products, net of tax 2.8% (2.8%) -- -- --
Income (loss) before
extraordinary
loss and cumulative effect of
change in accounting 9.8% (4.2%) 0.4% 2.3% (0.1%)
Extraordinary loss, net of tax
benefit 1.6% -- -- -- --
Cumulative effect of change in
accounting, net of tax benefit 2.0% -- -- -- 8.6%
Net income (loss) 6.2% (4.2%) 0.4% 2.3% (8.7%)
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. THREE MONTHS ENDED SEPTEMBER 30, 1995
NET SALES
The Company's net sales for the three months ended September 30, 1996
totaled $65.9 million, an increase of 14.4% compared to $57.6 million in the
comparable quarter in fiscal 1996. Such increase is primarily attributable to
the introduction by Barnett of 1,031 new products and the expansion of
Barnett's telesales operations by 19 telesalespersons over the prior year.
Sales from products introduced over the past twelve months accounted for $3.2
million of such increase. In addition, an expanded promotional flyer campaign
increased the number of Barnett's active customers from 39,000 to 43,000,
contributing $1.3 million to the increase in net sales for the first quarter
of fiscal 1997 as compared to the same period in fiscal 1996.
20
<PAGE>
The Company's wholly-owned operations recorded a net sales increase
of 2.3%, accounting for the remaining increase in the Company's net sales.
Such increase is attributable to additional market opportunities that became
available as a result of the Company's strengthened financial position, an
increase in direct selling activities from the Company's foreign operations
and an improved economic environment for most of the Company's products. The
increase was partially offset by decreased demand from some of the Company's
larger customers, the highly competitive retail industry and Consumer Products
discontinuance of certain lower margin product lines.
GROSS PROFIT
Consolidated gross profit increased by 16.9% to $22.9 million in the
three months ended September 30, 1996, as compared to $19.6 million in the
corresponding prior year period. Consolidated gross profit margin improved to
34.8% in the quarter ended September 30, 1996 from 34.0% for the comparable
period last year. Barnett's gross profit for the quarter ended September 30,
1996 increased by 28.8% to $12.4 million as gross profit margins improved over
the comparable quarter last year. The improvements were the result of
favorable vendor program changes, including additional volume incentive
programs.
Gross profit for the Company's wholly-owned operations for the first
quarter of fiscal 1997 amounted to $10.5 million, an improvement of 5.6% over
$10.0 million in the corresponding period in fiscal 1996. The gross profit
margin improved by 3.2%, and was 35.8% in the quarter ended September 30, 1996
as compared to 34.7% for the quarter ended September 30, 1995, primarily due
to the discontinuance of lower margin product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased from
$13.9 million for the quarter ended September 30, 1995 to $15.5 million for
the current quarter. As a percentage of net sales, SG&A decreased from 24.1%
for the first quarter of fiscal 1996 to 23.6% for the first quarter of fiscal
1997. Barnett's SG&A for the first quarter of fiscal 1997 increased to $8.0
million from $6.3 million in the comparable period last year. The increase was
the result of the addition of 19 telesalespersons, an expansion of Barnett's
marketing staff, an enhanced commitment to a "same day" shipping policy and a
reduction in prepaid freight minimums to customers, as well as public costs
for Barnett as an independent public company. As a percentage of net sales,
Barnett's SG&A were relatively unchanged for the comparable quarters.
SG&A for the Company's wholly-owned operations decreased slightly,
and as a percentage of sales, improved to 25.6% in the first quarter of fiscal
1997 as compared to 26.3% in the same quarter of fiscal 1996. The improvement
is primarily due to higher sales, and the write down of goodwill and other
assets resulting from the adoption of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
in the fourth quarter of fiscal 1996.
CORPORATE CHARGE
Corporate charge decreased to $0.8 million, or 1.3% of net sales, for
the fiscal 1997 first quarter compared to $0.9 million, or 1.5% of net sales,
for the comparable quarter last year. Corporate charges are allocations of
expenses that Waxman Industries incurs to support its corporate activities.
Since the Barnett Public Offering, Waxman Industries no longer allocates a
corporate charge to Barnett. The slight improvement between years is a result
of a decrease in general and administrative expenses at Waxman Industries.
INTEREST EXPENSE
For the quarter ended September 30, 1996, interest expense totaled
$1.8 million, a decrease of $3.0 million from $4.8 million in the comparable
quarter last year. The decrease is primarily due to the repayment of debt with
proceeds from the Barnett Public Offering. Average borrowings for the current
year's quarter amounted to $63.5 million, with a weighted average interest
rate of 11.8%, as compared to $151.1 million in the same quarter last year
with a weighted average interest rate of 12.3%.
21
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $1.9 million and $0.1
million for the first quarter of fiscal 1997 and 1996, respectively. The
provision for the current quarter primarily represents Barnett's tax provision
and state and foreign taxes of the Company's wholly-owned operations. The
difference between the effective and statutory tax rates is primarily due to
domestic losses not benefited and goodwill amortization.
With the completion of the Barnett Public Offering, Barnett is no
longer included in the consolidated tax return of the Company and is unable to
benefit from the Company's net operating loss carryforwards. In accordance
with the provisions of SFAS No. 109, the Company is unable to benefit from its
losses in the current year.
MINORITY INTEREST IN CONSOLIDATED AFFILIATE
The Company recorded a charge of $1.4 million for the quarter ended
September 30, 1996 for the 50.1% of Barnett's net income associated with
outside stockholders' common stock interest.
NET LOSS
The Company's net income for the quarter ended September 30, 1996
amounted to $1.5 million, an improvement over the loss of $60,000 before the
cumulative effect of the change in accounting in the first quarter of fiscal
1996. In the first quarter of fiscal 1996, the Company also recorded a charge
for the cumulative effect of the change in accounting of $4.9 million, net of
a tax benefit of $3.3 million, resulting in a net loss of $5.0 million.
YEAR ENDED JUNE 30, 1996 VS. YEAR ENDED JUNE 30, 1995
NET SALES
The Company's net sales increased $2.8 million, or 1.2%, to $235.1
million in fiscal 1996 from $232.3 million in the prior year.
Barnett's net sales increased $18.3 million, or 16.8%, to $127.4
million in fiscal 1996 from $109.1 million in the prior year. Approximately
78.1% of the increase in Barnett's net sales is attributable to the telesales
operations, primarily resulting from increased sales by existing
telesalespersons and the addition of 25 telesalespersons compared to the prior
year. Contributing to the overall increase in net sales was a net increase of
400 in the total number of products offered by Barnett, which generated
approximately $6.6 million of the net sales increase, as well as an increase
in active customers to 42,000 from 38,000 which accounted for approximately
$4.6 million of the net sales increase during fiscal 1996.
Approximately $3.0 million of Barnett's net sales increase is
attributable to Barnett's inclusion of direct sales in net sales commencing
July 1, 1995. While these products are shipped directly to the customer from
the original equipment manufacturer, Barnett takes title to the products sold
and provides services to the customer and supplier including marketing,
technical assistance and credit and collection activities. Prior to July 1,
1995, direct sales were immaterial and were included in the financial
statements as a net reduction to cost of goods sold. Barnett has intensified
its focus on its direct sales program during the current year and
consequently, direct sales for the fiscal 1996 increased 66.5% over the
corresponding prior year.
Consumer Products' net sales decreased $10.3 million, or 14.2% , to
$61.7 million in fiscal 1996 from $72.0 million in the prior year. The
decrease in Consumer Products' net sales is primarily due to the weakening
retail environment, the loss of two customers and the prior year's net sales
being positively impacted by the expansion of Consumer Products' business with
several of its large customers. Such expansion included initial opening orders
of $2.5 million.
WOC's and TWI's net sales decreased $5.2 million, or 10.3%, to $46.0
million in fiscal 1996 from $51.2 million in the prior year. The decrease in
net sales at WOC is primarily the result of lower selling prices caused by
fluctuations in copper prices and the discontinuance of certain low-margin
accounts. The decrease in net sales at TWI is primarily the result of lower
volume on external sales as additional emphasis was placed on supplying
intercompany shipments.
22
<PAGE>
GROSS PROFIT
Consolidated gross profit margin decreased to 31.7% of net sales in
fiscal 1996 from 34.4% of net sales in the prior year. The decrease is
primarily attributable to the Consumer Products business as a result of
additional cost of goods sold charges of $6.9 million recorded in the current
year related to management's strategic review of its wholly-owned operations
and is primarily comprised of certain inventory carrying costs, which are
included in the $11.9 million charge described above. Also affecting the gross
profit margin decreases for Consumer Products was a strong sales mix from the
expansion of the business in fiscal 1995 and to a lesser extent, increased
supplier costs in the current year. Barnett's gross profit decreased to 33.5%
for fiscal 1996 from 34.2% for last year as a result of the increased revenues
from the above mentioned direct ship programs. Excluding the effect of the
direct shipments, Barnett's gross profit margin remained basically unchanged
between years. The Company's other operations also experienced small decreases
in gross profit margin partially offset by continued improved margins at a
Mexican subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased by $7.8 million, or 13.4%, to $66.4 million for fiscal
1996 from $58.6 million for the prior year. As a percentage of net sales,
these expenses represented 28.2% in fiscal 1996 compared to 25.2% in fiscal
1995. The increase in SG&A expenses is primarily the result of the current
period charges attributed to management's strategic review of its wholly-owned
operations which were recorded at the Consumer Products business of $5.0
million and $2.9 million at the Company's other wholly-owned operations. SG&A
expenses were also impacted at Consumer Products as a result of recording
additional bad debt expense primarily as a result of the weakening retail
environment, which the Company expected would make collection of certain
accounts receivable balances questionable with certain customers undertaking
Chapter 11 proceedings. SG&A expenses as a percentage of net sales decreased
at Barnett and increased at WOC as a result of changes in sales volumes.
CORPORATE CHARGE
Corporate charge increased to $4.2 million, or 1.8% of net sales, for
fiscal 1996 compared to $3.9 million, or 1.7% of net sales, for fiscal 1995.
Corporate charges are allocations to the Company of expenses that Waxman
Industries incurs to support its corporate activities. The increase between
years is a result of increased general and administrative expenses at Waxman
Industries.
INTEREST EXPENSE
Interest expense decreased to $16.3 million for fiscal 1996 from
$19.0 million in the prior year. Average borrowings decreased from $153.7
million to $126.5 million between years and the weighted average interest rate
decreased from 12.8% to 11.7% during the same period. The decrease in average
borrowings is due to the repayment of indebtedness from the net proceeds of
the Barnett Public Offering in the fourth quarter of fiscal 1996.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Pre-tax results increased to income of $34.0 million in fiscal 1996
from a loss of $5.1 million in fiscal 1995 due to the gain on sale of Barnett
Common Stock offset by the restructuring and asset impairment loss. Pre-tax
results include foreign operations loss of $1.3 million in fiscal 1996 and
$0.4 million in fiscal 1995. The decrease in foreign operations' results
between years is primarily the result of a $1.1 million restructuring charge
in fiscal 1996 for the write-down of buildings and equipment due to excess
capacity.
INCOME TAXES
The provision for income taxes was $17.0 million for fiscal 1996 as
compared to a benefit of $1.1 million in fiscal 1995. The effective tax rate
in fiscal 1996 was 50.0% compared to 25.7% in 1995. Differences between the
effective tax rate and the statutory rate are primarily a result of state and
foreign taxes and goodwill amortization which is not deductible for tax
purposes.
23
<PAGE>
REVERSAL OF LOSS ON DISPOSAL
Upon consummation of the Barnett Public Offering, the Company ceased
its efforts to sell Consumer Products. The $6.6 million loss net of applicable
income tax benefit of $4.4 million recorded at June 30, 1995 was reversed in
fiscal 1996.
YEAR ENDED JUNE 30, 1995 VS. YEAR ENDED JUNE 30, 1994
NET SALES
The Company's net sales increased $18.7 million, or 8.8%, to $232.3
million in fiscal 1995 from $213.6 million in fiscal 1994.
Barnett's net sales increased $13.9 million, or 14.6%, to $109.1
million in fiscal 1995 from $95.2 million in 1994. Approximately 91.8% of the
increase in Barnett's net sales is attributable to the telesales operations,
primarily resulting from increased sales by existing telesalespersons and the
addition of 13 telesalespersons in fiscal 1995. Contributing to the overall
increase in net sales was a net increase of 200 in the total number of
products offered by Barnett which generated approximately $6.9 million of
additional net sales and an increase of active customers to 38,000 from 36,000
which accounted for approximately $3.8 million of the net sales increase. The
increased net sales can also be partially attributed to Barnett's other
successful marketing programs, including the introduction of a new catalog in
fiscal 1995 directed to its hardware store customers, coupled with new
merchandising strategics which offer comprehensive customer services.
Consumer Products' net sales increased $1.3 million, or 1.8%, to
$72.0 million in fiscal 1995 from $70.7 million in fiscal 1994. The increase
in Consumer Products' net sales was primarily the result of the expansion of
Consumer Products' business with several of its large customers. The opening
orders for this additional business, which totaled approximately $2.5 million,
were shipped during the first fiscal quarter. This increase was offset due to
the consolidation of two regional do-it-yourself retailers which resulted in
the loss of a customer.
WOC's and TWI's net sales increased $3.6 million, or 7.5%, to $51.2
million in fiscal 1995 from $47.6 million in fiscal 1994. This increase is
primarily the result of changes in volume and higher sales prices associated
with copper products.
GROSS PROFIT
Gross profit increased from $73.3 million in fiscal 1994 to $79.9
million in fiscal 1995. Gross profit margin increased from 34.3% for fiscal
1994 to 34.4% for fiscal 1995. Barnett's gross profit margin was favorably
effected by the increased sales of private label products, which generally
carry a higher gross profit margin, and which increased to 26.6% of Barnett's
net sales during fiscal 1995 compared to 26.4% of Barnett's net sales in the
prior year period. The favorable effect of increased sales of private label
products was offset by increased costs of branded products.
SG&A EXPENSES
SG&A expenses increased by $5.3 million, or 9.9%, to $58.6 million
for fiscal 1995 from $53.3 million for the prior year period. The increase in
SG&A expenses as a percentage of net sales was 25.2% in fiscal 1995 compared
to 25.0% in fiscal 1994 was principally due to increased selling and occupancy
costs, which were partially offset by the leveraging of fixed costs, primarily
administrative expenses, over a larger sales base. SG&A expenses also
increased due to Barnett's August 1995 relocation of its telesales operations
to a new 9,000 square foot "call center" and the expansion or relocation of
several of Barnett's distribution centers.
CORPORATE CHARGE
Corporate charge decreased to $3.9 million, or 1.7% of net sales, for
fiscal 1995 compared to $4.2 million, or 2.0% of net sales, for fiscal 1994.
Corporate charges are allocations to the Company of expenses that Waxman
Industries incurs to support its corporate activities.
24
<PAGE>
RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the fiscal 1995 fourth quarter, the Company downsized Consumer
Products' distribution network from four locations to three and as a result
incurred warehouse closure costs of $2.8 million. During fiscal 1994, the
Company was unable to come to terms with a buyer for its LeRan/Madison
operations which were held for sale as of June 30, 1993. The Company evaluated
the carrying value of the assets previously held for sale and concluded that
no further writedown was required in excess of the $2.0 million reserve
previously established. Therefore, the reversal of the accrued loss on
disposal in the second quarter of 1994 was offset by the writedown of assets
to net realizable value and the accrual for relocation of the administrative
offices.
INTEREST EXPENSE
Interest expense increased to $19.0 million for fiscal 1995 from
$13.8 million in the prior year period. Average borrowings increased from
$116.6 million to $148.0 million between periods and the weighted average
interest rate increased from 11.8% to 12.8% during the same period. The
increase in average borrowing outstanding is due primarily to the advances to
Waxman Industries.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.
Pre-tax results decreased to a loss of $4.3 million in fiscal 1995
from income of $2.0 million in fiscal 1994 due to the restructuring charge of
$2.8 million discussed above and higher interest expense. Pre-tax results
include foreign operations' loss of $0.4 million in fiscal 1995 and income of
$0.7 million in fiscal 1994. This decrease in the foreign operation's results
between years is primarily the result of a non-recurring gain on the sale of
property in fiscal 1994.
INCOME TAXES
The benefit for income taxes was $1.1 million for fiscal 1995
compared to a provision for income taxes of $1.1 million in the prior year.
The effective tax rate was 25.7% in fiscal 1995 compared to 55.5% in fiscal
1994. Differences between the effective tax rate and the statutory rate are
primarily a result of state and foreign taxes and goodwill amortization which
is not deductible for tax purposes.
LOSS ON DISPOSAL
The Company recognized a loss on disposal of Consumer Products of
$6.6 million, net of applicable income tax benefit of $4.4 million in the 1995
fiscal fourth quarter. As discussed above, as a result of the consummation of
the Barnett Public Offering on April 3, 1996, the Company ceased its efforts
to sell the Consumer Products business. Therefore, the loss on disposal of
$6.6 million, net of applicable tax benefit of $4.4 million, recorded as of
June 30, 1995 was reversed in fiscal 1996.
QUARTERLY RESULTS
The following table sets forth selected summary unaudited quarterly
financial information for each quarter in fiscal 1996, fiscal 1995 and the
first quarter in fiscal 1997. In the opinion of management, such information
has been prepared on the same basis as the financial statements appearing
elsewhere in this Prospectus and reflects all necessary adjustments
(consisting of only normal recurring adjustments) for a fair presentation of
such unaudited quarterly results when read in conjunction with the financial
statements and the notes thereto. The operating results for any quarter are
not necessarily indicative of results for any future period and there can be
no assurance that any trends reflected in such results will continue in the
future.
25
<PAGE>
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996 FISCAL 1995
------------ ---------------------------------------------- -----------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1996 1996 1996 1995 1995 1995 1995 1994 1994
------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $65,879 $59,590 $58,543 $59,345 $57,589 $55,142 $58,767 $58,951 $59,444
Gross profit(1)(2) 22,894 18,973 15,731 20,230 19,577 18,186 20,281 20,582 20,887
Operating 6,546 (23,184) (2,468) 5,211 4,817 (1,166) 4,719 5,484 5,639
income(loss) (3)(4)
Income (loss) from 2,887 22,022 (5,152) 201 (60) (4,376) (274) 395 579
continuing
operations before
minority interest,
loss on disposal,
extraordinary loss
and cumulative
effect of change in
accounting(5)
- -------------------
(1) Due to the identification of an intercompany inventory reconciling
item between Consumer Products and WAMI, a $2.3 million charge
originally recorded in the third quarter of fiscal 1996 has been
reversed and charged to years prior to fiscal 1995.
(2) Upon completion of the strategic review, a $1.0 million charge
attributed to inventory obsolescence originally recorded in the
fiscal 1996 third quarter has been reversed and charged to the fourth
quarter of fiscal 1996. The strategic review resulted in charges to
cost of sales of $4.2 million and $2.7 million in the third and
fourth quarter of fiscal 1996, respectively, as further discussed in
Note 3 to the Consolidated Financial Statements.
(3) The company's operating results for each of the first three quarters
of fiscal 1996 have been revised by $250,000 to reflect amortization
expense for procurement costs calculated in accordance with the new
accounting policy, as discussed in Note 4 to the Consolidated
Financial Statements.
(4) Includes restructuring and on other non-recurring charges of $19.5
million and $2.8 million in the fiscal 1996 fourth quarter and fiscal
1995 fourth quarter, respectively. The strategic review resulted in
total charges to operating income of $7.7 million and $7.1 million in
the third quarter and fourth quarter of fiscal 1996, respectively.
(5) Includes the pre-tax gain on sale of Barnett Common Stock of $65.9
million in the fiscal 1996 fourth quarter.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On February 1, 1996, Barnett filed a registration statement with the
Commission with respect to an initial public offering of its common stock. On
March 28, 1996, the registration statement with respect to the Barnett Public
Offering was declared effective and on April 3, 1996, the Barnett Public
Offering was consummated. In such offering, 7,207,200 shares, representing
approximately 55.1% of the Barnett Common Stock, were sold in the aggregate by
Barnett and the Company at an initial public offering price per share of
$14.00, resulting in aggregate net proceeds of $92.6 million. As a result of
the Company's conversion of a portion of the convertible non-voting preferred
stock of Barnett to Barnett Common Stock during the fiscal 1996 fourth
quarter, as of June 30, 1996, the Company owned approximately 49.9% of the
Barnett Common Stock and, together with its remaining non-voting preferred
stock of Barnett owned by the Company, approximately a 54% economic interest
in the capital stock of Barnett.
Of the $47.7 million of net proceeds received by Barnett in the
Barnett Public Offering, Barnett used (i) $23.0 million to repay all of the
outstanding indebtedness borrowed by it under the Operating Companies
Revolving Credit
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Facility, (ii) $22.0 million to pay a dividend evidenced by a note payable to
the Company, which funds were in turn distributed to Waxman Industries and
(iii) $2.7 million for working capital. The $44.9 million of net proceeds
received by the Company from the Barnett Public Offering, together with
payment from Barnett of the $22.0 million note payable described above, were,
or will be, applied primarily to repay debt including (i) all of the $39.2
million principal amount of the Waxman Industries' Senior Secured Notes plus
accrued interest and redemption premium of approximately $1.7 million, thereby
eliminating the mandatory sinking fund requirements relating to the Senior
Secured Notes which were scheduled to commence in September 1996 and (ii) $5.0
million of the $10.0 million outstanding indebtedness and accrued interest
under the Term Loan. The remaining net proceeds received by the Company
(approximately $21.0 million) are intended to be used to (i) reduce additional
outstanding indebtedness borrowed by Consumer Products or WOC under the New
Credit Agreement and/or (ii) retire Waxman Industries' Deferred Coupon Notes
and/or Notes and/or (iii) reinvest in Consumer Products' and/or WOC's
businesses.
The Company's business strategy includes reducing its leverage by the
sale of selected assets and refinancing its remaining indebtedness whenever
possible. These selected assets may include the shares of Barnett Common Stock
owned by the Company, the value and liquidity of which appears to have been
greatly enhanced as a result of the Barnett Public Offering. In addition, the
Company believes that the Barnett Public Offering will be beneficial to the
growth and earnings potential of Barnett. In connection with the Barnett
Public Offering and pursuant to the requirements of certain debt agreements,
if the Company does not utilize the proceeds from the Barnett Public Offering
pursuant to the terms described above, the Company will be required to repay
its outstanding obligations under the New Credit Agreement.
On April 3, 1996, the Company consummated the offer to exchange
$48.75 million principal amount of Old Notes for a like amount of Waxman
Industries' outstanding Senior Subordinated Notes and in connection therewith
solicited consents to certain amendments to the indenture pursuant to which
the Senior Subordinated Notes were issued. Approximately $43.03 million of
Senior Subordinated Notes were exchanged. The Exchange Notes were not
registered under the Act, and may not be offered or sold in the United States
absent registration or an applicable exemption from such registration
requirements. The amendments to the Senior Subordinated Note indenture
eliminated virtually all of the restrictive covenants and events of defaults
previously contained in such indenture. In order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement, the
Company filed a registration statement with the Commission with respect to the
Registered Exchange Offer whereby $43,026,000 aggregate principal amount of
New Notes were offered in exchange for Old Notes in order to permit the
holders of such Old Notes to offer and sell the New Notes under the Act. Such
registration statement was declared effective on October 29, 1996 and the
Registered Exchange Offer was consummated in December 1996. The Company
exchanged $43,025,000 principal amount of New Notes for a like principal
amount of Old Notes and $1,000 principal amount of Old Notes remained
outstanding immediately subsequent to the consummation of the Registered
Exchange Offer.
In January 1997, the Company consummated the Private Exchange Offers
pursuant to which it exchanged $4,829,000 of Old Notes for a like principal
amount of Senior Subordinated Notes. The Initial Private Exchange Offer and
the Private Exchange Offers decreased the Company's cash interest burden and
extended the maturity of the Senior Subordinated Notes exchanged in the
Initial Private Exchange Offer and the Private Exchange Offers until September
1, 2001.
In connection with the Barnett Public Offering, the Company entered
into the Restated Credit Agreement to provide for, among other things, the
Restated Term Loans and a release of Barnett from such lending arrangements.
On June 28, 1996, Waxman Industries refinanced the Restated Credit Agreement
with the New Credit Agreement provided by BankAmerica Business Credit, Inc.
The New Credit Agreement provides for, among other things, an approximate
three year secured credit facility providing for revolving credit advances of
up to $30.0 million and New Term Loans of up to $5.0 million.
The New Credit Agreement provides for revolving credit advances of up
to 85.0% of the amount of eligible accounts receivable and up to the lesser of
(i) $16.0 million or (ii) 60% of the amount of eligible raw and finished goods
inventory. Revolving credit advances will bear interest at a rate equal to (a)
Bank of America's reference rate plus 1.0% or (b) LIBOR plus 2.75%. The New
Credit Agreement includes a letter of credit subfacility of $2.0 million. New
Term Loans will bear interest at a rate per annum equal to .25% over the
interest rate applicable to revolving credit advances under the New Credit
Agreement. Borrowings under the New Credit Agreement will be secured by the
accounts receivable, inventory, certain general intangibles and unencumbered
fixed assets of the Borrowers. In addition, New Term Loans will also be
secured by a pledge of 500,000 shares of Barnett Common Stock owned by the
Company (constituting approximately 3.5% of all outstanding Barnett Common
Stock). The New Credit Agreement will require
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the Borrowers to maintain cash collateral accounts into which all available
funds are deposited and applied to service the facility on a daily basis. The
New Credit Agreement will prevent dividends and distributions by the Borrowers
except in certain limited instances including, so long as there is no Default
or Event of Default, and the Borrowers are in compliance with certain
financial covenants, the payment of interest on the Senior Subordinated Notes
and Deferred Coupon Notes, and will contain customary negative, affirmative
and financial covenants and conditions. The Company was in compliance with all
loan covenants at September 30, 1996.
The New Credit Agreement contains similar events of default as those
contained in the Restated Credit Agreement, which include the following: (i)
any Borrower shall fail to make any payment of principal or interest or any
other amount due under the agreements related to the New Credit Agreement or
fail to perform any covenant (after the expiration of any applicable grace
period) thereunder, or any representation or warranty made in connection
therewith shall prove to have been incorrect in any material respect when made
or deemed made; (ii) any Borrower shall fail to pay any indebtedness having a
principal amount of $250,000 or more; or any other event shall occur or
condition shall exist under any agreement or instrument relating to any such
indebtedness, if the effect of such event or condition is to accelerate, or to
permit the acceleration of (after the expiration of any applicable grace
period), the maturity of such indebtedness; or any such indebtedness shall
become or be declared to be due and payable, or required to be repaid (other
than by a regularly scheduled required prepayment), or the Borrowers shall be
required to repurchase or offer to repurchase such indebtedness, prior to the
stated maturity thereof; (iii) certain events of bankruptcy with respect to
the Borrowers; (iv) there shall occur any Change of Control (as defined in the
New Credit Agreement); and (v) there shall occur an event which would have a
Material Adverse Effect (as defined in the New Credit Agreement). As a result
of the foregoing Material Adverse Effect clause and the requirement to
maintain cash collateral accounts, the borrowings under the New Credit
Agreement and New Term Loans have been classified as a current liability.
As of September 30, 1996, availability under the New Credit Agreement
totaled approximately $14.2 million.
Since the consummation of the Barnett Public Offering, the cash flow
generated by such operations is no longer available to the Company. The
Company relies primarily on Consumer Products for cash flow. Consumer
Products' customers include D-I-Y warehouse home centers, home improvement
centers, mass merchandisers, hardware stores and lumberyards. Consumer
Products may be adversely effected by prolonged economic downturns or
significant declines in consumer spending. There can be no assurance that any
such prolonged economic downturn or significant decline in consumer spending
will not have a material adverse impact on the Consumer Products' business and
its ability to generate cash flow. Further, Consumer Products' largest
customer, Kmart and its subsidiary, Builders Square, accounted for
approximately 42.3%, 43.6% and 41.7% of Consumer Products' total net sales in
fiscal 1996, fiscal 1995 and the three months ended September 30, 1996,
respectively. Kmart has stated that it intends to sell its Builders Square
business, which accounted for approximately 24.8%, 24.7% and 24.2% of
Consumer Products' net sales in fiscal 1996, fiscal 1995 and the three months
ended September 30, 1996, respectively. On February 3, 1997, Kmart issued a
press release stating that it was negotiating to sell its Builders Square
business to HomeBase, a leading regional warehouse home center, which is not
a customer of Consumer Products. There can be no assurance that any purchaser
of Builders Square will continue to do business with the Company or to the
extent it does continue to do business with the Company, as to the amount,
terms or conditions of any sales by such purchaser. See "Risk Factors --
Reliance on Key Customers." The Company was advised by Kmart that it recently
conducted a review of its supply arrangements with its suppliers of plumbing
and hardware products, including Consumer Products, and had determined to
continue utilizing Consumer Products as a vendor. As a result, the Company
believes, subject to the foregoing, it will retain all of its Kmart business.
However, all large merchandisers review supply arrangements from time to time
and there can be no assurance that this relationship will continue or as to the
terms of any relationship that does continue. In the event Consumer Products
were to either lose Kmart or Builders Square as a customer or Kmart or Builders
Square were to significantly curtail its purchases from Consumer Products,
there would be material short-term adverse effects until the Company could
modify Consumer Products' cost structure to be more in line with its reduced
revenue base.
The Company has a tax liability for the year ended June 30, 1996 as a
result of the gain from the Barnett Public Offering. The gain was
substantially offset by net operating loss carry forwards, thus reducing the
tax liability at June 30, 1996 to the alternative minimum tax amount. Also as
a result of the Barnett Public Offering, Barnett is no longer included in the
Company's consolidated tax return. Therefore, the Company's remaining net
operating loss carry forwards are not available to offset Barnett's taxable
income after April 3, 1996, the consummation date of the Barnett Public
Offering.
The Company does not have any commitments to make substantial capital
expenditures.
The Company believes that the funds generated from operations along
with the funds available under the New Credit Agreement will be sufficient to
satisfy Waxman Industries' liquidity requirements until June 1, 1999 (the date
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that the $5.7 million principal payment is due on Waxman Industries' Senior
Subordinated Notes) or, if the Company is able to refinance the Senior
Subordinated Notes, December 1, 1999 (the date that the cash interest becomes
payable by Waxman Industries under the Deferred Coupon Notes). There can be no
assurance that Waxman Industries will be able to pay cash interest on the
Deferred Coupon Notes commencing in December 1999 or that Waxman Industries
will be able to refinance the Senior Subordinated Notes or the Deferred Coupon
Notes.
DISCUSSION OF CASH FLOWS
For the three months ended September 30, 1996, the Company used $2.2
million of cash flow from operations primarily due to an increase in
inventories, accounts receivable and a decrease in accruals (principally
accrued income tax and accrued interest payments) which were partially offset
by an increase in accounts payable. Cash flow used for investments totaled
$3.1 million, primarily relating to Barnett's operations, including capital
expenditures for improved management information systems, including the
buy-out of an operating lease incurred in prior years and expansion and/or
relocation of several of Barnett's distribution centers to accommodate new
product offerings. Cash flow from financing totaled $4.0 million. Net debt
borrowings during the quarter ended September 30, 1996 under the New Credit
Agreement totaled $3.9 million.
At September 30, 1996, the Company had working capital of $51.4
million and a current ratio of 1.9 to 1.
SEASONALITY
The Company's net sales are generally consistent throughout its
fiscal year.
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BUSINESS
GENERAL
The Company believes that it is one of the leading suppliers of
plumbing products to the repair and remodeling market in the United States.
The Company distributes plumbing, hardware and electrical products to
approximately 56,000 customers in the United States, including, plumbing and
electrical repair and remodeling contractors and independent retailers. The
Company's consolidated net sales were $235.1 million in fiscal 1996 and $65.9
million for the three months ended September 30, 1996.
The Company conducts its business primarily through its wholly-owned
subsidiary, Consumer Products and through Barnett, of which the Company owns
approximately 49.9% of the outstanding Barnett Common Stock, and, through the
ownership of certain convertible non-voting preferred stock, approximately a
54% economic interest in the capital stock of Barnett.
The Company has several smaller operations which are conducted
through its other subsidiaries, WOC and TWI. WOC includes four operations, the
largest of which are U.S. Lock - a distributor of a full line of security
hardware products, and LeRan - a supplier of copper tubing, brass fittings and
other related products. WOC's other operations also include its Madison
Equipment division, a supplier of electrical products, and its Medal
Distributing division, a supplier of hardware products. TWI includes the
foreign sourcing operations in Mexico, China and Taiwan which support Consumer
Products, WOC and Barnett.
CONSUMER PRODUCTS
Consumer Products markets and distributes approximately 7,000
products to a wide variety of retailers, primarily D-I-Y warehouse home
centers, home improvement centers, mass merchandisers, hardware stores and
lumberyards. Consumer Products' customers include large national retailers
such as Kmart, Builders Square and Wal- Mart as well as several large regional
D-I-Y retailers. According to rankings of the largest D-I-Y retailers
published in National Home Center News, an industry trade publication,
Consumer Products' customers include 15 of the 25 largest D-I-Y retailers in
the United States. Consumer Products works closely with its customers to
develop comprehensive marketing and merchandising programs designed to improve
their profitability, efficiently manage shelf space, reduce inventory levels
and maximize floor stock turnover. Consumer Products also offers certain of
its customers the option of private label programs.
In recent years, the rapid growth of large mass merchandisers and
D-I-Y retailers has contributed to a significant consolidation of the United
States retail industry and the formation of large, dominant, product specific
and multi-category retailers. These retailers demand suppliers who can offer a
broad range of quality products and can provide strong marketing and
merchandising support. Due to the consolidation in the D-I-Y retail industry,
a substantial portion of Consumer Products' net sales are generated by a small
number of customers. Further, Consumer Products' largest customers, Kmart and
its subsidiary Builders Square, accounted for approximately 42.3% , 43.6% and
41.7% of Consumer Products total net sales in fiscal 1996, fiscal 1995 and the
three months ended September 30, 1996, respectively. As discussed in "Risk
Factors -- Reliance on Key Customers," Kmart has recently advised the Company
that it conducted a review of its plumbing and hardware supply arrangements,
including its relationship with Consumer Products, and had determined to
continue utilizing Consumer Products as a vendor. As a result, the Company
believes that it will retain all of its Kmart business. Furthermore, Kmart has
stated that it intends to sell its Builders Square business, which accounted
for approximately 24.8%, 24.7% and 24.2% of Consumer Products' net sales in
fiscal 1996, fiscal 1995 and the three months ended September 30, 1996,
respectively. On February 3, 1997, Kmart issued a press release stating that
it was negotiating to sell its Builders Square business to HomeBase, a
leading regional warehouse home center, which is not a customer of Consumer
Products. There can be no assurance that any purchaser of Builders Square
will continue to do business with the Company or to the extent it does
continue to do business with the Company, as to the amount, terms or
conditions of any sales by such purchaser. See "Risk Factors - Reliance on Key
Customers." In the event Consumer Products were to either lose Kmart or
Builders Square as a customer or Kmart or Builders Square were to significantly
curtail its purchases from Consumer Products, there would be material short
term adverse effects until the Company could modify Consumer Products' cost
structure to be more in line with its reduced revenue base. As discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company has reevaluated and reorientated the strategic
direction of Consumer Products, taking into account the extremely competitive
retail environment in which Consumer Products operates and the unsuccessful
attempt to sell Consumer Products at an acceptable price. As a result of this
reevaluation and reorientation, the Company incurred substantial charges in
the fiscal 1996 third and fourth quarters relating to, among other things, the
reduction in the number of Consumer Products' product offerings, the
elimination of Consumer
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Products' home electrical product line, the downsizing of its distribution
network from three to two locations and the reduction of the carrying value of
day to day assets and liabilities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 3 to the
Consolidated Financial Statements. In furtherance of its efforts to improve
Consumer Products prospects, the Company has also decided to augment certain
of Consumer Products' existing product lines and enhance the appearance and
value of existing packaging of products.
Consumer Products' marketing strategy includes offering mass
merchandisers and D-I-Y retailers a comprehensive merchandising program which
includes design, layout and setup of selling areas. Sales and service
personnel assist the retailer in determining the proper product mix in
addition to designing department layouts to effectively display products and
optimally utilize available floor and shelf space. Consumer Products supplies
point-of- purchase displays for both bulk and packaged products, including
color-coded product category signs and color- coordinated bin labels to help
identify products, and backup tags to signify products that require
reordering. Consumer Products also offers certain of its customers the option
of private label programs for their plumbing and floor care products. In-house
design, assembly and packaging capabilities enable Consumer Products to react
quickly and effectively to service its customers' changing needs. In addition,
Consumer Products' products are packaged and designed for ease of use, with
"how to" instructions included to simplify installation, even for the
uninitiated D-I-Y consumer.
Consumer Products' sales and service representatives visit stores
regularly to take reorders and recommend program improvements. These
representatives also file reports with Consumer Products, enabling it to stay
abreast of changing consumer demand and identify developing trends. In order
to support its customers' "just-in-time" requirements, Consumer Products has
significantly improved its EDI capabilities, so as to reduce the customers'
inventory levels and increase returns on investment.
Consumer Products operates and distributes its products through two
strategically located distribution facilities in Cleveland, Ohio and Grand
Prairie, Texas.
PRODUCTS
The following is a discussion of Consumer Products' principal product
groups:
Plumbing Products. Consumer Products' plumbing products include
valves and fitting, rubber products, repair kits and tubular products such as
traps and elbows. Many of Consumer Products' plumbing products are sold under
the proprietary trade names Plumbcraft(R), PlumbKing(R) and KF(R). In
addition, Consumer Products offers certain of its customers the option of
private label programs. Consumer Products also offers proprietary lines of
faucets under the trade name Premier(R), as well as a line of shower and bath
accessories under the proprietary trade name Spray Sensations(TM).
Floor Protective Hardware Products. Consumer Products' floor
protective hardware products include casters, doorstops and other floor,
furniture and wall protective items. Consumer Products markets a complete line
of floor protective hardware products under the proprietary trade name KF(R)
and also under private labels.
BARNETT
Barnett, in which the Company owns 49.9% of the outstanding common
stock and, through the ownership of certain convertible non-voting preferred
stock, approximately a 54% economic interest, is a direct marketer and
distributor of an extensive line of plumbing, electrical and hardware products
to over 46,000 active customers throughout the United States. Barnett offers
and promotes approximately 9,700 name brand and private label products through
its industry recognized Barnett(R) catalogs and telesales operations. Barnett
markets its products through three distinct, comprehensive catalogs that
target professional contractors, independent hardware stores and maintenance
managers. Barnett's staff of over 100 knowledgeable telesales, customer
service and technical support personnel work together to serve customers by
assisting in product selection and offering technical advice. To provide rapid
delivery and a strong local presence, Barnett has established a network of 29
distribution centers strategically located in 29 major metropolitan areas
throughout the United States. Through these local distribution centers,
approximately 70% of
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Barnett's orders are shipped directly to the customer and, in almost all
cases, within the same day of receipt of the order. The remaining 30% of the
orders are picked up by the customers at one of Barnett's local distribution
centers. Barnett's strategy of being a low-cost, competitively priced supplier
is facilitated by its volume of purchases and the offshore sourcing of a
significant portion of its private label products. Products are purchased from
over 400 domestic and foreign suppliers.
Barnett believes that its distinctive business model has enabled it
to become a high-volume, cost-efficient direct marketer of competitively
priced plumbing, electrical and hardware products. Barnett's approximately
675-page catalogs offer an extensive selection of products in an easy to use
format enabling customers to consolidate purchases with a single vendor.
Barnett provides an updated version of its catalogs to its customers on
average four times a year. To attract new customers and offer special
promotions to existing customers, Barnett supplements its catalogs with
monthly promotional flyers. Barnett's experienced and knowledgeable inbound
telesales staff, located at Barnett's centralized headquarters in
Jacksonville, Florida, uses Barnett's proprietary information systems to take
customer orders as well as offer technical advice. Barnett's highly trained
outbound telesales staff maintains frequent customer contact, makes telesales
presentations and encourages additional purchases. Targeted customer accounts
are typically assigned an outbound telesalesperson in order to enhance
customer relationships and improve customer satisfaction. Barnett's high
in-stock position and extensive network of local distribution centers enable
it to fulfill approximately 94% of the items included in each customer order
and provide rapid delivery.
MARKETING AND DISTRIBUTION
Barnett markets its products nationwide, principally through regular
catalog and promotional mailings to existing and potential customers,
supported by a telesales operation, and products are shipped from a network of
28 distribution centers allowing for shipment to and pick-up by customers
generally within one day of the receipt of an order. The outbound telesales
operation is utilized to make telephonic sales presentations to potential
customers that have received written promotional materials and to existing
customers. Barnett's inbound telesalespersons provide customer assistance and
take orders. Barnett's outbound and inbound telesales operations are
centralized in Jacksonville, Florida.
Catalogs
Barnett's three approximately 650-page catalogs containing 9,700
plumbing, electrical and hardware products are mailed to its 46,000 active
customers. These quarterly catalogs are supplemented by monthly promotional
flyers, 2.2 million of which were mailed in fiscal 1996. Barnett's targeted
customers include professional contractors, independent hardware stores and
maintenance managers. Barnett has been distributing its principal catalog
since approximately 1958 and believes that the Barnett(R) name has achieved a
very high degree of recognition among Barnett's customers and suppliers.
Barnett makes its initial contact with potential customers primarily
through promotional flyers. Barnett obtains the names of prospective customers
through the rental of mailing lists from outside marketing information
services and other sources. Barnett uses sophisticated proprietary information
systems to analyze the results of individual catalog and promotional flyer
mailings and uses the information derived from these mailings, as well as
information obtained from Barnett's telesales operations, to create and/or
supplement individual customer profiles and to target future mailings. Barnett
updates its mailing lists frequently to delete inactive customers.
Barnett's in-house art department produces the design and layout for
its catalogs and promotional mailings. Barnett's catalogs are indexed and
illustrated, provide simplified pricing and highlight new product offerings.
Telesales
During fiscal 1996, approximately 75.7% of Barnett's net sales were
generated through Barnett's telesales operation. Barnett's telesales operation
has been designed to make ordering its products as convenient and efficient as
possible thereby enabling Barnett to provide superior customer service.
Barnett offers its customers a nationwide toll-free telephone number that is
currently staffed by over 100 telesales, customer service and technical
support
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personnel who utilize Barnett's proprietary, on-line order processing system.
This sophisticated software provides the telesales staff with detailed
customer profiles and information about products, pricing, promotions and
competition. This data enables Barnett to segment its customer base, analyze
mailing effectiveness on a weekly basis, closely track and manage inventory on
a real time basis and quickly react to and capitalize on market opportunities.
Barnett divides its telesales staff into outbound and inbound groups.
Barnett's experience indicates that customer loyalty is bolstered by the
ability of the telesales staff to develop an ongoing personal relationship
with their customers. Barnett's highly trained outbound telesales staff
maintains frequent customer contact, makes telesales presentations and
encourages additional purchases. Inbound telesalespersons are trained to
quickly process orders from existing customers. They increase sales by
informing customers of price breaks for larger orders, companion items and
replacement items with higher margins. Outbound telesalespersons are also
utilized to make telephonic sales presentations to both potential and existing
customers. Also, for several months prior to the opening of new distribution
centers, Barnett utilizes its telesales operation to generate awareness of
Barnett, its product offerings and the upcoming opening of new distribution
centers located near the target customers.
Barnett conducts a customized, in-depth six week training course for
new telesales employees. Training includes the use of role playing and
videotape analysis. Upon satisfactory completion of their training, new
telesales personnel are provided with a dedicated experienced telesales
employee who serves as a "coach" for the next year. In order to better assure
high telesales service levels, telesales supervisors regularly monitor
telesales calls.
Barnett's current focus has been on expanding its telesales staff.
Barnett plans to expand its telesales operations by 20 to 25 telesalespersons
annually over the next several years. Barnett has over 600,000 prospective
customers within its current industry segments and believes that by increasing
the number of telesalespersons it will be able to access these potential
customers in a cost effective manner.
Distribution Centers
Barnett has established a network of 29 local distribution centers
strategically located in 29 major metropolitan areas throughout the United
States. This network enables Barnett to provide rapid and complete product
delivery and provides a strong local presence.
Barnett's distribution centers range in size from approximately
11,000 square feet to 47,000 square feet and average approximately 20,000
square feet. Distribution centers are typically maintained under operating
leases in commercial or industrial centers. Distribution centers primarily
consist of warehouse and shipping facilities but also include "city sales
counters," typically occupying approximately 600 square feet, where customers
can pick up orders or browse through a limited selection of promotional items.
Barnett is often able to generate incremental sales from customers who pick up
their orders. Barnett has initiated a program to enlarge product displays in
the counter area to better promote the breadth of its product lines.
Many of Barnett's customers do not keep high inventory levels and
tend to place orders rather frequently. Barnett's experience indicates that
customers prefer to order from local suppliers and that many local
tradespeople prefer to pick up their orders in person rather than to have them
delivered. Therefore, Barnett intends to continue the expansion of its
distribution center network in order to position itself closer to potential
new customers. During fiscal 1996, approximately 30% of Barnett's orders were
picked up by its customers.
The factors considered in site selection include the number of
prospective customers in the local target area, the existing sales volume in
such area and the availability and cost of warehouse space, as well as other
demographic information. Barnett has substantial expertise in distribution
center site selection, negotiating leases, reconfiguring space to suit its
needs, and stocking and opening new distribution centers. The average
investment required to open a distribution center is approximately $600,000,
including approximately $300,000 for inventory.
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PRODUCTS
Barnett markets an extensive line of over 9,700 plumbing, electrical
and hardware products, many of which are sold under its proprietary trade
names and trademarks. This extensive line of products allows Barnett to serve
as a single source supplier for many of its customers. Many of these products
are higher margin products bearing Barnett's proprietary trade names and
trademarks. In addition, proprietary products are often the customers' higher
margin product offerings.
Barnett tracks sales of new products the first year they are offered
and new products that fail to meet specified sales criteria are discontinued.
To help manage the risk of new product introductions, substantially all new
domestically sourced products are governed by a "12 point agreement" which
allows Barnett to return all slow and non-moving merchandise to its vendor
within the first six months of its offering, without any cost to Barnett.
Barnett believes that its customers respond favorably to the introduction of
new product lines in areas that allow the customers to realize additional cost
savings and to utilize Barnett's catalogs as a means of one-stop shopping for
many of their needs.
Barnett's strategy is to significantly increase the number of product
offerings, as well as its higher margin product offerings. Barnett's catalogs
and monthly promotional flyers emphasize the comparative value of Barnett's
private label products. During fiscal 1996, approximately 27.6% of Barnett's
net sales were generated by the sale of Barnett's private label products.
The following is a discussion of Barnett's principal product groups:
Plumbing Products. Barnett sells branded products of leading plumbing
manufacturers, including Delta(R), Moen(R) and Price Pfister(R). Barnett's
private label plumbing products are also sold under its Barnett(R), Premier(R)
and ProPlusTM trademarks. In fiscal 1996, plumbing products accounted for
76.6% of Barnett's net sales.
Electrical Products. Barnett sells branded products of leading
electrical supply manufacturers, including Philips(R), Westinghouse(R),
Honeywell(R) and General Electric(R). Certain of Barnett's private label
electrical products are sold under its own proprietary trademarks, including
Barnett(R) and Premier(R). In fiscal 1996, electrical products accounted for
15.2% of Barnett's net sales.
Hardware Products. Barnett sells hardware products of leading
hardware product manufacturers, including Kwikset(R) security hardware
products and Milwaukee(R) power tools. Certain of Barnett's hardware products
are also sold under its own proprietary Legend(TM) trademark. In fiscal 1996,
hardware products accounted for 8.2% of Barnett's net sales.
OTHER OPERATIONS
The Company has several other operations, which are conducted through
WOC and TWI. The most significant of these operations are U.S. Lock, a
supplier of security hardware products, and LeRan, a supplier of copper tubing
and specialty plumbing products. U.S. Lock and LeRan, as well as Madison
Equipment and Medal Distributing, are operated as separate divisions of WOC.
TWI includes the foreign sourcing operations in Mexico, China and Taiwan which
support Consumer Products, Barnett and WOC. As a result of management's
strategic review of its wholly-owned operations, certain operating and asset
impairment charges were recorded in fiscal 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In addition,
in connection with management's strategic review of its other wholly-owned
operations and as a result of certain business factors affecting those other
operations, including increased competition from multi-category retailers and
competitive pricing from overseas competitors, the effect of which was
exacerbated by excess capacity at the Company's foreign facilities, the
Company recorded additional substantial charges in the fiscal 1996 fourth
quarter operating results primarily for a reduction in the carrying value of
day to day operating assets and liabilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 3 to the
Consolidated Financial Statements.
34
<PAGE>
U.S. Lock
U.S. Lock, which was acquired by Waxman Industries in 1988, carries a
full line of security hardware products, including locksets, door closers and
locksmith tools. Many of these products are sold under the U.S. Lock(R) and
LegendTM trademarks. U.S. Lock markets and distributes its products primarily
to locksmiths through a telemarketing sales team. U.S. Lock's telemarketing
effort is supplemented with a catalog, that is mailed annually to 5,900
existing customers, and promotional flyers. Since its acquisition by Waxman
Industries, U.S. Lock has increased its number of warehouses from one to four,
three of which are shared with Barnett. Shared facilities allow the Company to
realize additional efficiencies by consolidating space requirements and
reducing personnel costs. In connection with the Company's strategic
reevaluation of its operating units, an asset impairment charge of $12.1
million was recorded at U.S. Lock in fiscal 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 3 to
the Consolidated Financial Statements.
LeRan
LeRan, which was acquired by Waxman Industries in 1985, is a supplier
of copper tubing and fittings, brass valves and fittings, malleable fittings
and related products. Its customers include liquid petroleum gas dealers,
lumberyards, plumbing and mechanical contractors and D-I-Y retailers. LeRan
markets its products primarily through salesmen and outside service
representative organizations. These efforts are supported by a catalog, which
is mailed semiannually to 5,600 existing customers, monthly promotional flyers
and a telemarketing program. LeRan currently services its customers from four
regional warehouses, one of which is shared with Barnett.
Other
WOC's other operations also include its Madison Equipment division, a
supplier of electrical products, and its Medal Distributing division, a
supplier of hardware products.
PURCHASING
For the year ended June 30, 1996, products purchased overseas,
primarily from Taiwan, China and Mexico, accounted for approximately 27.0% of
the total product purchases made by the Company.
TWI, through its subsidiaries, operates the Taiwan and Mainland China
facilities, which assemble and package plumbing and electrical products. In
addition, the facility in Mainland China manufactures and packages plastic
floor protective hardware. The Company believes that these facilities give it
competitive advantages, in terms of cost and flexibility in sourcing. Both
labor and physical plant costs are significantly below those in the United
States.
During fiscal 1991, Waxman Industries purchased WAMI, a small
manufacturer of plumbing pipe nipples in Tijuana, Mexico ("WAMI"). Pipe
nipples are short lengths of pipe from 1/2 of an inch to 6 feet long, threaded
at each end. As a result of this acquisition, the Company is vertically
integrated in the manufacture and distribution of pipe nipples. Since the
acquisition, in order to take advantage of lower labor costs, the Company has
relocated certain of its United States packaging operations to WAMI.
Substantially all of the other products purchased by the Company are
manufactured for it by third parties. The Company estimates that it purchases
products and materials from over approximately 1,200 suppliers and is not
dependent on any single unaffiliated supplier for any of its requirements.
35
<PAGE>
The following table sets forth the approximate percentage of net
sales attributable to the Company's principal products groups:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Plumbing 71% 72% 73%
Electrical 12% 11% 11%
Hardware 17% 17% 16%
----- ----- -----
100% 100% 100%
===== ===== =====
</TABLE>
IMPORT RESTRICTIONS
Under current United States government regulations, all products
manufactured offshore are subject to import restrictions. The Company
currently imports goods from Mexico under the preferential import regulations
commonly known as '807' and as direct imports from China and Taiwan. The '807'
arrangement permits an importer who purchases raw materials in the United
States and then ships the raw materials to an offshore factory for assembly,
to reimport the goods without quota restriction and to pay a duty only on the
value added in the offshore factory.
Where the Company chooses to directly import goods purchased outside
of the United States, the Company may be subject to import quota restrictions,
depending on the country in which assembly takes place. These restrictions may
limit the amount of goods of a particular category that a country may export
to the United States. If the Company cannot obtain the necessary quota, the
Company will not be able to import the goods into the United States. Export
visas for the goods purchased offshore by the Company are readily available.
The above arrangements, both '807' and quota restrictions, may be
superseded by more favorable regulations with respect to Mexico under the
North American Free Trade Agreement ("NAFTA"), or may be limited by revision
or canceled at any time by the United States government. The Company does not
believe that its relative competitive position will be adversely affected by
NAFTA. As a result of the passage of NAFTA, importation from Mexico will
become more competitive in the near future relative to importation from other
exporting countries.
COMPETITION
The Company faces significant competition from different competitors
within each of its product lines, although it has no competitor offering the
range of products in all of the product lines that the Company offers. The
Company believes that its buying power, extensive inventory, emphasis on
customer service and merchandising programs have contributed to its ability to
compete successfully in its various markets. In the areas of electrical and
hardware supplies, the Company faces significant competition from smaller
companies which specialize in particular types of products and larger
companies which manufacture their own products and have greater financial
resources than the Company. Barnett's business competes principally with local
distributors of plumbing, electrical and hardware products. The Company
believes that competition in sales to both mail order customers and retailers
is primarily based on price, product quality and selection, as well as
customer service, which includes speed of responses for mail order customers
and packaging and merchandising for retailers.
EMPLOYEES
As of December 31, 1996, the Company employed 1,306 persons, 285 of
whom were clerical and administrative personnel, 220 of whom were sales
service representatives and 801 of whom were either production or warehouse
personnel. Included in the above numbers are 480 employees of Barnett. Ninety
of the Company's employees are represented by collective bargaining units. The
Company considers its relations with its employees, including those
represented by its collective bargaining units, to be satisfactory.
36
<PAGE>
TRADEMARKS
Several of the trademarks and trade names used by the Company are
considered to have significant value in its business. See "Business -- Consumer
Products -- Products" and " -- Barnett -- Products," and "-- Other Operations."
PROPERTIES
The following table sets forth, as of September 30, 1996, certain
information with respect to the Company's principal physical properties:
<TABLE>
<CAPTION>
LEASE
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET PURPOSE DATE
-------- ----------- ------- -----------
<S> <C> <C> <C>
24455 Aurora Road 125,000 Consumer Products Corporate 6/30/02
Bedford Hts., OH (1) Office and Distribution Center
330 Vine Street 80,000 Medal Distributing 2/28/01
Sharon, PA Office and Distribution Center
902 Avenue T. 77,000 Consumer Products 5/31/00
Grand Prairie, TX (2) Office and Distribution Center
3333 Lenox Avenue 60,000 Barnett Corporate 10/31/03
Jacksonville, FL Office and Distribution Center
300 Jay Street 56,000 LeRan Owned
Coldwater, MI Office and Distribution Center
No. 10, 7th Road 55,000 TWI Owned
Industrial Park Office, Packaging
Taichung, Taiwan and Distribution Center
Republic of China
77 Rodeo Drive 46,000 US Lock Owned
Brentwood, NY Office and Distribution Center
Dan Keng Village 45,000 TWI
Fu Ming County Office, Packaging, Manufacturing Owned
Shenzhen, P.R. China and Distribution Center
</TABLE>
- --------------
(1) Aurora Investment Co., a partnership owned by Melvin and Armond
Waxman, together with certain other members of their families, is the
owner and lessor of this property. Consumer Products has the option
to renew the lease for a five-year term at the market rate at the
time of renewal. Rent expense under this lease was $314,200 in fiscal
1996 and 1995.
(2) Waxman Industries has the option to renew the lease for three
additional five-year terms.
In addition to the properties shown in the table, the Company
operates 9 distribution centers ranging in size from 10,000 to 71,000 square
feet. In addition, Barnett leases 29 distribution centers.
Handl-it Inc., a corporation owned by John S. Peters, the Senior Vice
President - Operations of Waxman Industries and the Company, together with
certain other members of his family, provides Consumer Products with
37
<PAGE>
certain outside warehousing services under several lease arrangements which
expire during or prior to December 1996. Consumer Products may renew these
leases as they expire depending on its requirements at the time. Rent expense
under these lease arrangements was $232,000 for fiscal 1996.
The Company believes that its facilities are suitable for its
operations and provide the Company with adequate productive capacity and that
the related party leases are on terms not materially less favorable than those
that would be available from unaffiliated third parties.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these actions will not
materially affect the financial position or operations of the Company.
ENVIRONMENTAL REGULATIONS
The Company is subject to certain federal, state and local
environmental laws and regulations. The Company believes that it is in
material compliance with such laws and regulations applicable to it. To the
extent any subsidiaries of Waxman Industries are not in compliance with such
laws and regulations, Waxman Industries, as well as such subsidiaries, may be
liable for such non-compliance. However, in any event, the Company is not
aware of any such liabilities which could have a material adverse effect on it
or any of its subsidiaries.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors, executive officers and key
employees of the Company are the same as those of Waxman Industries. Their
respective ages and positions are as follows:
<TABLE>
<CAPTION>
POSITION AT WAXMAN INDUSTRIES AND THE
NAME AGE COMPANY
---- --- -------------------------------------
<S> <C> <C>
Melvin Waxman 62 Chairman of the Board and Co-Chief Executive Officer
Armond Waxman 57 President, Co-Chief Executive Officer, Treasurer and Director
Laurence S. Waxman 39 Senior Vice President and Director
John S. Peters 47 Senior Vice President--Operations
Mark Wester 42 Vice President--Finance
Irving Z. Friedman 63 Director
Samuel J. Krasney 71 Director
William R. Pray 49 Director
Judy Robins 47 Director
</TABLE>
Set forth below is a biographical description of each director,
executive officer and key employee of the Company and Waxman Industries
mentioned above.
Mr. Melvin Waxman was elected Co-Chairman of the Board and Co-Chief
Executive Officer of the Company and Waxman Industries in June 1995. Upon
consummation of the Barnett Public Offering in April 1996, Mr. Waxman became
Chairman of the Board and Co-Chief Executive Officer of the Company. Prior
thereto, Mr. Waxman was the Chairman of the Board and Co-Chief Executive
Officer of the Company since its incorporation in February 1994. Mr. Waxman was
elected Co-Chief Executive Officer of Waxman Industries in May 1988. Mr. Waxman
has been a Chief Executive Officer of Waxman Industries for over 20 years and
has been a director of Waxman Industries since 1962. Mr. Waxman has been
Chairman of the Board of Waxman Industries since August 1976. Mr. Waxman is the
Co- Chairman of the Board of Barnett. Melvin Waxman and Armond Waxman are
brothers.
38
<PAGE>
Mr. Armond Waxman was elected Co-Chairman of the Board, Co-Chief
Executive Officer and Treasurer of the Company and Waxman Industries in June
1995. Upon consummation of the Barnett Public Offering in April 1996, Mr.
Waxman became President and Co-Chief Executive Officer. Prior thereto, Mr.
Waxman was the President, Co-Chief Executive Officer, Treasurer and a Director
of the Company since its incorporation in February 1994. Mr. Waxman was elected
Co-Chief Executive Officer of Waxman Industries in May 1988. Mr. Waxman was the
President and Treasurer of Waxman Industries since August 1976. Mr. Waxman has
been a director of Waxman Industries since 1962 and was Chief Operating Officer
of Waxman Industries from August 1976 to May 1988. Mr. Waxman is the Co-
Chairman of the Board of Barnett. Armond Waxman and Melvin Waxman are brothers.
Mr. Pray was elected the President and Chief Operating Officer of
the Company and Waxman Industries in June 1995 and was Senior Vice President
of the Company from its incorporation in February 1994 to June 1995. Mr. Pray
served as Senior Vice President of Waxman Industries from February 1991 and is
also President of Barnett, a position he has held since 1987. Mr. Pray joined
Barnett in 1979 as Vice President of Sales and Marketing. Upon the
consummation of the Barnett Public Offering in April 1996, Mr. Pray resigned
from his position as an officer of the Company and of Waxman Industries, but
remains a director. He is presently the President and Chief Executive Officer
of Barnett.
Mr. Peters has been Senior Vice President--Operations of the Company
since its incorporation in February 1994. Mr. Peters was elected to the
position of Senior Vice President--Operations of Waxman Industries in April
1988, after serving as Vice President--Operations of Waxman Industries since
February 1985. Prior to that Mr. Peters had been Vice
President--Personnel/Administration of Waxman Industries since February 1979.
Mr. Laurence Waxman has been Senior Vice President of the Company
since its incorporation in February 1994. Mr. Waxman was elected Senior Vice
President of Waxman Industries in November 1993 and is also President of
Consumer Products, a position he has held since 1988. Mr. Waxman joined Waxman
Industries in 1981. Mr. Laurence Waxman is the son of Melvin Waxman. Mr. Waxman
was appointed to the board of directors of Waxman Industries on July 1, 1996.
Mr. Wester joined the Company in October 1996 as Corporate Controller
and was appointed Vice President- Finance effective January 1, 1997. From March
1992 through May 1996, Mr. Wester served as Chief Financial Officer and Chief
Operating Officer of Capital Communications Cooperative, a privately held
telecommunications company. Mr. Wester was employed with Banner Industries/The
Fairchild Corporation from August 1978 through February 1992 where he most
recently served as Vice-President and Corporate Controller. Mr. Wester is also
active as a trustee of an organization serving handicapped children.
Mr. Friedman has been a director of the Company since its
incorporation in February 1994. Mr. Friedman has been a director of Waxman
Industries since 1989. Mr. Friedman has been a certified public accountant with
the firm of Krasney Polk Friedman & Fishman for more than five years.
Mr. Krasney has been a director of the Company since its incorporation
in February 1994. Mr. Krasney has been a director of Waxman Industries since
1977. In September 1993, Mr. Krasney retired from his position as Chairman of
the Board, President and Chief Executive Officer of Banner Aerospace, Inc., a
distributor of parts in the aviation aftermarket, a position he had held since
June 1990. In September 1993, Mr. Krasney also retired from The Fairchild
Corporation (formerly Banner Industries, Inc.) where he had been Vice Chairman
of the Board since 1985. Fairchild is a manufacturer and distributor of
fasteners to the aerospace industry and industrial products for the plastic
injection molding industry and other industrial markets and is a shared tenant
provider of telecommunication services in office buildings. Mr. Krasney is also
a director of FabriCenters of America, Inc.
Mrs. Robins has been a director of the Company since its incorporation
in February 1994. Mrs. Robins has been a director of Waxman Industries since
1980. Mrs. Robins has owned and operated an interior design business for more
than five years. Mrs. Robins is the sister of Melvin and Armond Waxman. Mrs.
Robins' husband is the Secretary of Waxman Industries.
39
<PAGE>
THE COMPANY
BOARD OF DIRECTORS
The number of directors on the Board of Directors of the Company
(the "Company Board") was fixed at six until July 1, 1996, when it was
increased to seven with the appointment of Mr. Laurence Waxman to the Company
Board. Directors of the Company are elected at the annual meeting of
stockholders and hold office for one year and until their successors are
elected. The Company has an Executive Committee and an Audit Committee.
Messrs. Melvin and Armond Waxman and Krasney serve on the Executive Committee
and Messrs. Friedman and Krasney serve on the Audit Committee. The Audit
Committee acts as a liaison between the Company's independent auditors and the
Board of Directors, reviews the scope of the annual audit and the management
letter associated therewith, reviews the Company's annual and quarterly
financial statements and reviews the sufficiency of the Company's internal
accounting controls.
DIRECTOR REMUNERATION
Each director of Waxman Industries who is not an employee of Waxman
Industries received a fee of $3,000 per fiscal quarter for services as a
director during fiscal 1996 plus a fee of $1,000 plus traveling expenses for
each Board meeting he or she attended. Members of the Company Board do not
receive any additional cash compensation for serving as directors of the
Company. In addition, during fiscal 1996, each director who is not an employee
of Waxman Industries was granted 5,000 shares of restricted common stock of
Waxman Industries for each five full years of service such director served on
the Board of Directors of Waxman Industries pursuant to the Waxman Industries
1996 Non- Employee Directors' Restricted Share Plan.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by Waxman
Industries for services rendered to it and its subsidiaries, including the
Company, during fiscal 1996 to the Chief Executive Officer of the Company, and
the other most highly compensated executive officers of the Company in the
fiscal years indicated. Officers of Waxman Industries have not received any
compensation, in addition to the compensation they receive from Waxman
Industries, for serving as officers of the Company; provided, however, that
Mr. Pray is paid by Barnett for services rendered to it and did not receive
any cash compensation for the services he rendered to Waxman Industries or its
other subsidiaries. Upon consummation of the Barnett Public Offering in April
1996, Mr. Pray resigned from his offices at Waxman Industries and the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------
ANNUAL
COMPENSATION(1) AWARDS PAYOUTS
--------------------------------- ----------------------------- -------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) AWARDS($) OPTIONS/SARS(#) PAYOUTS($) COMPENSATION($)(3)
------------------ ---- --------- ----------- ----------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Melvin Waxman 1996 300,000 250,000 -- 200,000(4) -- 90,961
Chairman of the Board 1995 311,065 -- -- -- -- 111,397
and Co-Chief Executive 1994 325,000 100,000 -- 300,000 -- 45,604
Officer
Armond Waxman 1996 350,000 400,000 -- 200,000(4) -- 73,834
President and Co-Chief 1995 353,277 100,000 -- -- -- 97,080
Executive Officer 1994 366,923 200,000 -- 300,000 -- 86,776
William R. Pray 1996 244,423 129,760 -- -- -- 73,227
Former President 1995 228,200 57,607 -- 32,500 -- 39,968(5)
and Chief 1994 206,000 75,000 -- 92,500 -- --
Operating Officer
John S. Peters 1996 96,154 20,750 -- -- -- 12,500
Senior Vice President -- 1995 136,119 22,500 -- -- -- 12,500
Operations 1994 130,018 42,500 -- 52,500 -- 12,500
Laurence S. Waxman 1996 189,098 50,000 -- 50,000 -- 12,549
Senior Vice President 1995 190,480 50,000 -- -- -- 12,544
1994 151,826 65,000 -- 57,500 -- 11,589
--
Michael J. Vantusko(6) 1996 84,461 102,150 -- 40,000 -- --
Vice President
Finance and Chief
Financial Officer
- --------------
(1) Certain executive officers received compensation in fiscal 1994, 1995
and 1996 in the form of perquisites, the amount of which does not exceed
reporting thresholds.
</TABLE>
41
<PAGE>
(2) Messrs. Peters and Vantusko received their bonuses under Waxman
Industries' Profit Incentive Plan. In addition, Mr. Vantusko received
a $75,000 discretionary bonus during fiscal 1996. Mr. Pray received
$100,000 and $25,000 discretionary bonuses in fiscal 1996 and 1994,
respectively. Mr. Laurence Waxman received his bonus pursuant to his
Employment Agreement. Messrs. Armond and Melvin Waxman received their
bonuses at the discretion of the Board of Directors.
(3) For fiscal 1996, 1995 and 1994, amounts principally represent premiums
on split-dollar life insurance policies.
(4) On March 29, 1996, each of Messrs. Melvin and Armond Waxman were
awarded a stock appreciation right ("SAR") with respect to 200,000
shares of the Common Stock of Waxman Industries. The SARs vest in whole
three years after the date of grant but not prior thereto, except in
certain limited circumstances.
(5) Includes the grant of 25,000 shares of Waxman Industries' common stock
to Mr. Pray in June 1995 and the accrual of a tax "gross up" payment
with respect thereto.
(6) Mr. Vantusko terminated his employment with the Company and Waxman
Industries effective December 31, 1996. However, Mr. Vantusko is
providing certain consulting services to the Company.
EMPLOYMENT AGREEMENTS
Upon consummation of the Barnett Public Offering, Mr. Pray resigned
from his offices at Waxman Industries and the Company. Mr. Pray and Barnett
entered into a new 10-year employment agreement pursuant to which Mr. Pray
will continue to serve as President of Barnett at an initial annual salary of
$260,000, plus discretionary bonuses. Effective January 1, 1997, Mr. Pray's
base salary was increased to $300,000 per annum. In addition, pursuant to the
terms of the new employment agreement, Mr. Pray will continue to be provided
with certain benefits and prerequisites currently provided to him, as well as a
$2,000,000 split dollar life insurance policy and will also enter into a money
purchase deferred compensation agreement pursuant to which Barnett will
establish an account into which it will deposit approximately $55,000 annually.
The balance remaining in the account upon the termination of employment of Mr.
Pray shall be paid to him or his beneficiaries, as the case may be. The
employment agreement provides that upon termination of employment by Mr. Pray
for good reason (as defined therein) or by Barnett for any reason other than
death, disability (as defined therein) or cause (as defined therein), Mr. Pray
will be entitled to receive all of the compensation he would otherwise be
entitled to through the end of the term of the agreement. The employment
agreement also contains provisions which restrict Mr. Pray from competing with
Barnett during the term of the agreement and for two years following the
termination thereof.
Mr. Laurence Waxman entered into an employment agreement with Consumer
Products, which became effective as of November 1, 1994 and terminates on
October 31, 1999. Pursuant to such employment agreement, Mr. Laurence Waxman
is to serve as President of Consumer Products, and is also to serve in such
further offices or positions with Consumer Products or any subsidiary or
affiliate of Consumer Products as shall, from time to time, be assigned by the
Board of Directors of Consumer Products. Mr. Laurence Waxman's employment
agreement provides for an annual salary of $200,000 for the first year of the
employment agreement and provides that for each year thereafter the annual
salary will be increased by six percent of the prior year's salary. Additional
increases in salary and the granting of bonuses to Mr. Laurence Waxman will be
determined by Consumer Products, in its sole discretion, based on such
individual's performance and contributions to the success of Consumer
Products, his responsibilities and duties and the salaries of other senior
executives of Consumer Products. During fiscal 1996, Mr. Waxman agreed to
temporarily reduce his annual salary in an effort to support the Company's
cost containment efforts. However, effective October 1, 1996, Mr. Waxman's base
salary returned to $200,000 per annum. The employment agreement provides that
upon termination of employment by Mr. Laurence Waxman for good reason (as
defined therein) or by Waxman Industries for any reason other than death,
disability (as defined therein) or cause (as defined therein), Mr. Laurence
Waxman will be entitled to receive all of the compensation he would otherwise
be entitled to through the end of the term of the agreement. The employment
agreement also contains provisions which restrict Mr. Laurence Waxman from
competing with Waxman Industries or Consumer Products during the term of the
agreement and for two years following the termination thereof.
42
<PAGE>
Mr. Peters entered into an employment agreement with Waxman Industries
which became effective as of January 1, 1992, was amended as of October 23,
1995 and terminates on June 30, 1997. Pursuant to such employment agreement,
Mr. Peters is to serve as Senior Vice President, Operations of Waxman
Industries, and is also to serve in such substitute or further offices or
positions with Waxman Industries or any subsidiary or affiliate of Waxman
Industries as shall, from time to time, be assigned by the Board of Directors
of Waxman Industries. Mr. Peters' employment agreement provides for a minimum
annual salary of $125,000, which salary will be reviewed annually by Waxman
Industries (and shall be reduced by a corresponding percentage reduction in
hours worked in the sole discretion of Waxman Industries to an annual amount
not to be less than $75,000). Mr. Peters' annual salary was decreased to
$90,000 in fiscal 1995 due to a corresponding reduction in hours worked to
three days per week. Increases in salary and the granting of bonuses to Mr.
Peters will be determined by Waxman Industries, in its sole discretion, based
on such individual's performance and contributions to the success of Waxman
Industries, his responsibilities and duties and the salaries of other senior
executives of Waxman Industries. The employment agreement provides that upon
termination of employment for any reason other than death, disability (as
defined therein) or cause (as defined therein), Mr. Peters will be entitled to
receive all of the compensation he would otherwise be entitled to through the
end of the term of the agreement. The employment agreement also contains
provisions which restrict Mr. Peters from competing with Waxman Industries
during the term of the agreement and for two years following the termination
thereof.
STOCK OPTION AND SAR GRANTS
The following tables set forth the information noted for all grants of
stock options and SAR's made by Waxman Industries during fiscal 1996 to each
of the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OPTION/SAR(1) GRANTS IN LAST FISCAL YEAR OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR
OPTION TERM(1)
------------------------------------------------ ----------------------------
% OF TOTAL
OPTIONS
GRANTED TO
OPTIONS EMPLOYEES
GRANTED IN FISCAL EXERCISE EXPIRATION
NAME (#) YEAR PRICE ($/SH) DATE 5%($) 10%($)
---- ----- ------ ------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Laurence S. Waxman 50,000 12.98% $1.00 Feb. 2, 2006 31,445 79,687
Michael J. Vantusko(2) 25,000 6.49% $1.125 Oct. 11, 2005 17,688 44,824
15,000 3.90% $1.00 Feb. 2, 2006 9,433 23,906
</TABLE>
<TABLE>
<CAPTION>
% OF TOTAL
SAR'S
GRANTED TO
SAR'S EMPLOYEES
GRANTED IN FISCAL GRANT PRICE EXPIRATION
NAME #(3) YEAR ($/SH) DATE 5% ($) 10%($)
---- ------ ---- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Melvin Waxman 200,000 50% 3.375 Mar. 29, 2006 424,504 1,075,776
Armond Waxman 200,000 50% 3.375 Mar. 29, 2006 424,504 1,075,776
</TABLE>
43
<PAGE>
- ------------
(1) The potential realizable values represent future opportunity and have
not been reduced to present value in 1996 dollars. The dollar amounts
included in these columns are the result of calculations at assumed
rates set by the Commission for illustration purposes, and these rates
are not intended to be a forecast of the common stock price and are not
necessarily indicative of the values that may be realized by the named
executive officer.
(2) Mr. Vantusko terminated his employment with the Company and Waxman
Industries effective December 31, 1996. However, Mr. Vantusko is
providing certain consulting services to the Company.
(3) On March 29, 1996, each of Messrs. Melvin and Armond Waxman were
awarded an SAR with respect to 200,000 shares of the common stock of
Waxman Industries. The SARs vest in whole three years after the date of
grant but not prior thereto, except in certain limited circumstances.
Such SAR is subject to stockholder approval, which will be sought at
the next meeting of the stockholders of Waxman Industries.
STOCK OPTION AND SAR EXERCISES
The following tables set forth the information noted for all exercises
of stock options and SARs for Waxman Industries during fiscal 1996 by each of
the executive officers named in the Summary Compensation Table:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR- VALUE OF UNEXERCISED IN-THE-
ACQUIRED ON VALUE END(#) MONEY OPTIONS AT
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE FISCAL YEAR-END($)
---- ----------- ----------- ------------------------- ---------------------------------
EXERCISABLE NOT EXERCISABLE
----------- ---------------
<S> <C> <C> <C> <C> <C>
Options:
- -------
Melvin Waxman -- -- 150,000/150,000 337,500 337,500
Armond Waxman -- -- 150,000/150,000 337,500 337,500
William R. Pray -- -- 41,875/58,125 101,327 152,108
John S. Peters 26,250 85,312 None/26,250 -- 59,062
Laurence S. Waxman -- -- 28,750/78,750 64,687 239,687
Michael J. -- -- None/40,000 -- 136,875
Vantusko(1)
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
VALUE SARS AT FISCAL YEAR- VALUE OF UNEXERCISED IN-THE-
ACQUIRED ON VALUE END(#) MONEY SAR'S AT
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE FISCAL YEAR-END($)
---- ----------- ----------- -------------------------- ---------------------------------
SAR's(2): EXERCISABLE NOT EXERCISABLE
- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Melvin Waxman -- -- None/200,000 None 225,000
Armond Waxman -- -- None/200,000 None 225,000
</TABLE>
44
<PAGE>
- -------------
(1) Mr. Vantusko terminated his employment with the Company and Waxman
Industries effective December 31, 1996. However, Mr. Vantusko is
providing certain consulting services to the Company.
(2) On March 29, 1996, each of Messrs. Melvin and Armond Waxman were
awarded an SAR with respect to 200,000 shares of the common stock of
Waxman Industries. The SARs vest in whole three years after the date of
grant but not prior thereto, except in certain limited circumstances.
PRINCIPAL STOCKHOLDERS
CAPITAL STOCK OF THE COMPANY
As of the date of this Prospectus, all of the issued and outstanding
shares of capital stock of the Company are owned by Waxman Industries. Each of
Messrs. Armond and Melvin Waxman may be deemed to be the beneficial owner of
such shares by virtue of their positions as President and Co-Chief Executive
Officer and Chairman of the Board and Co-Chief Executive Officer of Waxman
Industries, respectively, and as controlling stockholders of Waxman
Industries. The mailing address for Waxman Industries and Messrs. Armond and
Melvin Waxman is the executive office of the Company. All of the shares of
capital stock of the Company owned by Waxman Industries have been pledged as
collateral security for the Deferred Coupon Notes. In the event that Waxman
Industries defaults on its obligations to the holders of such indebtedness,
the pledgee thereunder may sell or dispose of the pledged shares of capital
stock and, as a result, could effect a change of control of the Company.
RECENT SECURITIES OFFERING AND RELATED MATTERS
The Reorganization
On April 3, 1996, as part of the Reorganization, the Company issued the
Old Notes in exchange for $43,026,000 aggregate principal amount of
outstanding Senior Subordinated Notes pursuant to the Initial Private Exchange
Offer. In addition to the Initial Private Exchange Offer, the components of
the Reorganization included (i) the Senior Subordinated Consent Solicitation,
(ii) the establishment of a $30.0 million Restated Credit Agreement, (iii) the
Barnett Public Offering, (iv) the defeasance of the Senior Secured Notes and
(v) the repayment of Barnett's borrowings under the Operating Companies Credit
Facility (including $23.0 under the Company's then existing working capital
credit facility and $5.0 million under the Term Loan (the "Barnett
Financing")).
Pursuant to the Registration Rights Agreement, the Company filed a
registration statement with respect to an exchange offer whereby $43,026,000
aggregate principal amount of New Notes were offered in exchange for Old Notes
in order to permit the holders of such Old Notes to offer and sell the New
Notes under the Act. Such registration statement was declared effective by the
Commission on October 29, 1996 and in December 1996 the Company consummated
the Registered Exchange Offer. The Company issued an aggregate of $43,025,000
principal amount of the New Notes in exchange for a like principal amount of
Old Notes and $1,000 principal amount of Old Notes remained outstanding
immediately subsequent to the consummation of the Registered Exchange Offer.
In January 1997, the Company issued $4,829,000 principal amount of Old
Notes in exchange for a like principal amount of Senior Subordinated Notes
pursuant to the Exchange Agreements. The holders of the Old Notes acquired
in the Private Exchange Offers are entitled to the rights of a "holder," as
defined in, and pursuant to, the Registration Rights Agreement, with the
Company's obligations thereunder commencing upon the consummation of the
Private Exchange Offers.
45
<PAGE>
Registration Rights Agreement
Pursuant to the Registration Rights Agreement, the Company has agreed
to use its best efforts to register the Exchange Offer under the Act.
Pursuant to the Registration Rights Agreement, the Company has agreed
to use its best efforts (i) to file, within 60 days of the issuance of the Old
Notes to the Holders, a registration statement under the Act with respect to
an exchange offer whereby securities substantially identical to the Old Notes
would be offered for exchange with the Old Notes in order to permit the
Holders to offer and sell the New Notes under the Act and (ii) to cause such
registration statement to become effective within 120 days of the date of
issuance of the Old Notes. Upon the registration statement being declared
effective, the Company will offer the New Notes in exchange for surrender of
the Old Notes. The Company has agreed to keep the Exchange Offer pursuant to
the registration statement open for not less than 30 days (or longer if
required by applicable law) after the date notice of such offer is mailed to
the Holders. In the event that the Company or the holders of 25% in aggregate
principal amount of the Old Notes reasonably determine in good faith that
because of any change in law or applicable interpretations of the Staff of the
Commission the Company is not permitted to effect the Exchange Offer, or if
for any other reason the Exchange Offer is not consummated within 180 days of
the date of the Registration Rights Agreement or if a holder of the Old Notes
is not permitted, because of a change in law or interpretations of the Staff
of the Commission, to participate in the Exchange Offer, the Company will, at
its cost, (a) as promptly as practicable, file a shelf registration statement
covering resales of the Old Notes, (b) use its best efforts to cause such
shelf registration statement to be declared effective under the Securities Act
and (c) use its best efforts to keep continuously effective such shelf
registration statement until three years after the issuance of the Old Notes
or such shorter period ending when all of the Old Notes eligible for sale
thereunder have been sold thereunder. In the event that the registration
statement is not filed or effective by, or continuously effective through, the
dates referred to above or the Commission shall have issued a stop order
suspending the effectiveness of the registration statement or any shelf
registration statement with respect to the Old Notes at a time when such
registration statement or shelf registration statement, as the case may be, is
required to be kept effective by the Company or the prospectus contained in
any such registration statement or shelf registration statement, as amended or
supplemented, shall (x) not contain current information required by the
Securities Act and the rules and regulations promulgated thereunder or (y)
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, the Company has agreed to pay, or cause to be paid, as liquidated
damages and not as a penalty to each holder of Old Notes, an amount equal to
$0.05 per week per $1,000 of principal amount of Old Notes held by such
holder, for each week during the 90-day period beginning on the date referred
to above or the date of the order suspending effectiveness or the date on
which the prospectus shall not contain such current information or shall
contain any such untrue statement or omit to state any such material fact.
Such liquidated damages shall be increased by $0.05 per week per $1,000 of
principal amount of Old Notes at the beginning of each subsequent 90-day
period up to a maximum aggregate amount of $0.20 per week per $1,000 of
principal amount of Old Notes. The Company has agreed to pay all expenses
incident to the Company's performance of or compliance with the Registration
Rights Agreement, including the reasonable fees and expenses of counsel to the
original purchasers of the Old Notes but excluding any underwriting fees,
discounts or commissions attributable to the sale of the Old Notes. Each of
the Company and the Trustee, on behalf of the original purchasers of the Old
Notes, pursuant to the Registration Rights Agreement, have agreed to indemnify
the other party, its officers, directors and controlling persons in respect of
certain liabilities and expenses arising, under certain circumstances, out of
any registration of the Old Notes pursuant to the Registration Rights
Agreement. The Company has prepared and filed the Registration Statement of
which this Prospectus forms a part pursuant to the Registration Rights
Agreement.
46
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF EXCHANGE OFFER
The outstanding Old Notes in the aggregate principal amount of
$4,830,000 were originally issued in April 1996 and January 1997 in private
placements primarily to certain institutional and accredited investors. The
offer and sale of the Old Notes was not registered under the Act in reliance
upon the exemption therefrom provided by Section 4(2) of the Act. The Old Notes
may not be reoffered, resold, or transferred other than pursuant to an
effective registration statement filed pursuant to the Act or unless an
exemption from the registration requirements of the Act is available.
Pursuant to Rule 144 promulgated under Act, the Old Notes may generally
be resold, subject to certain conditions specified in the Rule, (a) commencing
two years after the date of original issuance, in an amount up to, for any
three-month period, the greater of 1% of the principal amount at maturity of
the Old Notes then outstanding or the average weekly trading volume of the Old
Notes during the four calendar weeks immediately preceding the filing of the
required notice of sale with the Commission, and (b) commencing three years
after the date of original issuance, in any amount and otherwise without
restriction by a Holder who is not, and has not been for the preceding three
months, an affiliate of the Company. Following the Exchange Offer, the
calculation of the amount of permissible sales under Rule 144 may depend on
the combined amount of outstanding Old Notes and New Notes, and the trading
volume of the Old Notes and the New Notes together. Additionally, under
certain circumstances, an exemption from the registration requirements of the
Act may be available for the resale of the Old Notes to "Qualified
Institutional Buyers" under Rule 144A promulgated thereunder. Certain other
exemptions may also be available under other provisions of the federal
securities laws for the resale of the Old Notes.
In connection with the original sale of the Old Notes, the Company
entered into the Exchange Agreements, pursuant to which the Company agreed to
file with the Commission a registration statement covering the exchange by the
Company of the New Notes for the Old Notes in a transaction designed to
provide certain Holders of Old Notes with an opportunity to acquire New Notes
which, unlike the Old Notes, may be offered for resale, resold and otherwise
transferred without compliance with the registration and prospectus delivery
requirements of the Act. Holders who are unable or choose not to exchange
their Old Notes pursuant to this Exchange Offer will continue to hold
securities that are subject to restrictions on transfer pursuant to the Act.
The Company has no obligation to provide for the registration under the Act of
Old Notes outstanding after the expiration of the Exchange Offer. Such Holders
should consult their own legal counsel for advice as to any restrictions that
might apply to the resale of their Old Notes. The New Notes otherwise will be
identical in all material respects (including interest rate, maturity and
restrictive covenants) to the Old Notes for which they may be exchanged
pursuant to this Exchange Offer.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), the Company will accept for exchange Old Notes
which are properly tendered on or prior to the Expiration Date and not
withdrawn as permitted below. As used herein, the term "Expiration Date" means
Midnight, New York City time, on March 31, 1997; provided, however, that if the
Company, in its sole discretion, has extended the period of time during which
the Exchange Offer is open, the term "Expiration Date" means the latest time
and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $4,830,000 aggregate principal
amount at maturity of Old Notes were outstanding. This Prospectus, together
with the Letter of Transmittal, is first being sent on or about February 21,
1997, to all Holders of Old Notes known to the Company. The Company's
obligation to accept Old Notes for exchange pursuant to the Exchange Offer
is subject to certain conditions as set forth under "-- Certain Conditions to
the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to
time, to extend the period of time during which the Exchange Offer is open,
and thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof. During any such
extension, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not
47
<PAGE>
accepted for exchange for any reason will be returned without expense to the
tendering Holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "-- Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Old Notes as
promptly as practicable, such notice in the case of any extension to be issued
by means of a press release or other public announcement no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. In the event that the Company amends the Exchange
Offer, the Company will amend this Prospectus as required by the Federal
Securities laws.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set
forth below and the acceptance thereof by the Company will constitute a
binding Agreement between the tendering Holder and the Company upon the terms
and subject to the conditions set forth in the Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to The
Huntington National Bank (the "Exchange Agent") at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book- Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date, or (iii) the Holder must
comply with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered Holder of the Old
Notes who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm which
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Old
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time
of receipt) and acceptance of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Old Notes not properly tendered or to not accept
any particular Old Notes which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange
Offer as to any particular Old Notes either before or after the Expiration
Date (including the right to waive the ineligibility of any Holder who seeks
to tender Old Notes in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Old Notes either
before or after the Expiration Date (including the Letter of Transmittal and
the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes for exchange must be cured
48
<PAGE>
within such reasonable period of time as the Company shall determine. Neither
the Company, the Exchange Agent nor any other person shall be under any duty
to give notification of any defect or irregularity with respect to any tender
of Old Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the New Notes are to be issued, or untendered Old Notes are to be
reissued, to a person other than the Holder thereof, the Old Notes surrendered
for exchange must be properly endorsed or accompanied by appropriate bond
powers in satisfactory form as determined by the Exchange Agent in its sole
discretion. If Old Notes are registered in the name of the person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange
must be properly endorsed or accompanied by appropriate bond powers in
satisfactory form as determined by the Exchange Agent in its sole discretion,
duly executed by the registered Holder with the signature thereon guaranteed
by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or powers of attorney
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Exchange
Agent of their authority to so act must be submitted.
Tenders must be made in round number multiples of the principal
amount of $1,000. Subject to the foregoing, tendering Holders of Old Notes may
tender less than the aggregate principal amounts represented by the Old Notes
deposited with the Company provided they appropriately indicate this fact on
the Letter of Transmittal accompanying the tendered Old Notes. If less than
all of the Old Notes evidenced by a submitted certificate are to be tendered,
a reissued certificate representing the untendered Old Notes, together with a
certificate representing the New Notes, will be sent to such tendering Holder,
unless otherwise provided in the appropriate box on the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among
other things, the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, that neither the Holder nor
any such other person has an intention to, or an arrangement or understanding
with any person, to participate in the distribution of such New Notes and that
neither the Holder nor any such other person is an "affiliate," as defined
under Rule 405 of the Act, of the Company. A broker-dealer holding Old Notes
may participate in the Exchange Offer provided that it acquired the Old Notes
for its own account as a result of market-making or other trading activities.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning the Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Old
Notes properly tendered and will issue the New Notes promptly after acceptance
of the Old Notes. See "-- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note
will receive a New Note having a principal amount at maturity equal to that of
the surrendered Old Note. Interest on the New Notes will accrue from the date
of original issuance of the Old Notes.
In all cases, issuance of New Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book- Entry Confirmation of such Old Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer (including, without limitation, the determination that the
tendering Holder is an affiliate of the Company or is not acquiring the New
Notes in the ordinary course of business with no arrangement or understanding
with any person to participate in the distribution of the New Notes) or if Old
Notes are submitted for a greater principal amount than the Holder desires to
exchange, such unaccepted
49
<PAGE>
or non-exchanged Old Notes will be returned without expense to the tendering
Holder thereof (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described below, such non-exchanged Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of
the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent, if requested by the Company, will make a request
to establish an account with respect to the Old Notes at the Book-Entry
Transfer Facility for purposes of the Exchange Offer within two business days
after the date of this Prospectus, and any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of Old Notes by causing the Book-Entry Transfer Facility to transfer
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old
Notes and the Old Notes are not immediately available, or time will not permit
such Holder's Old Notes or other required documents to reach the Exchange
Agent before the Expiration Date, or the procedure for book-entry transfer
cannot be completed on a timely basis, a tender may be effected if (i) the
tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the
Company (by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the Holder of Old Notes and the amount
of Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must
be received by the Exchange Agent at one of the addresses set forth below
under "Exchange Agent." Any such notice of withdrawal must specify the name of
the person having tendered the Old Notes to be withdrawn, identify the Old
Notes to be withdrawn (including the principal amount of such Old Notes), and
(where certificates for Old Notes have been transmitted) specify the name in
which such Old Notes are registered, if different from that of the withdrawing
Holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing Holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which
50
<PAGE>
are not exchanged for any reason will be returned to the Holder thereof
without cost to such Holder (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
above, such Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility for the Old Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "-- Procedures for Tendering Old Notes" above at any time on
or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the
Company shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer, if
at any time before the acceptance of such Old Notes for exchange or the
exchange of the New Notes for such Old Notes, any of the following events
shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to
restrain or prohibit the making or consummation of the Exchange Offer
or any other transaction contemplated by the Exchange Offer, or
assessing or seeking any damages as a result thereof or in connection
therewith, or (ii) resulting in a material delay in the ability of
the Company to accept for exchange or exchange some or all of the Old
Notes pursuant to the Exchange Offer, or any statute, rule,
regulation, order or injunction shall be sought, proposed,
introduced, enacted, promulgated or deemed applicable to the Exchange
Offer or any of the transactions contemplated by the Exchange Offer
by any government or governmental authority, domestic or foreign, or
any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or
foreign, that in the sole judgment of the Company might directly or
indirectly result in any of the consequences referred to in clauses
(i) or (ii) above or, in the sole judgment of the Company, might
result in the holders of New Notes having obligations with respect to
resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the
cover page of this Prospectus, or would otherwise make it inadvisable
to proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or
general limitation on prices for, or trading in, securities on any
national securities exchange or in the over-the-counter market, (ii)
any limitation by any governmental agency or authority which may
adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration
of a banking moratorium or any suspension of payments in respect of
banks in the United States or any limitation by any governmental
agency or authority which adversely affects the extension of credit
or (iv) a commencement of war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time
of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties,
assets, liabilities, financial condition, operations, results of
operations or prospects of the Company and its subsidiaries taken as
a whole that, in the sole judgment of the Company, is or may be
adverse to the Company, or the Company shall have become aware of
facts that, in the sole judgment of the Company, have or may have
adverse significance with respect to the value of the Old Notes or
the New Notes;
which, in the sole judgment of the Company in any case, and regardless of the
circumstances (including any action by the Company) giving rise to any such
condition, makes it inadvisable to proceed with the Exchange Offer and/or with
such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company
at any time to exercise any of the
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foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
EXCHANGE AGENT
The Huntington National Bank has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
THE HUNTINGTON NATIONAL BANK
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail/Overnight Courier: By Facsimile Transmission: By Hand:
(216) 344-6584 In Cleveland, Ohio:
The Huntington National Bank Confirm by Telephone: The Huntington National Bank
917 Euclid Avenue (216) 344-6662 917 Euclid Avenue
Cleveland, Ohio 44115 Cleveland, Ohio 44115
Attention: Corporate Trust CM23 Attention: Corporate Trust CM23
In New York, New York:
The Huntington National Bank
In care of The Bank of New York
Drop Window Services
101 Barclay Street
New York, New York 10286
</TABLE>
DELIVERY OF LETTERS OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer, and will not make any payment to brokers,
dealers, or others soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the
Exchange Offer will be paid by the Company and are estimated in the aggregate
to be $25,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Act, except pursuant to an
exemption from, or in a transaction not subject to, the Act and applicable
state securities laws. The Company has no obligation to, and does not
currently anticipate that it will, register the offer and sale of the Old
Notes under the Act. Based on interpretations by the Staff of the Commission,
set forth in certain "no-action" letters issued to third parties and unrelated
to the Company and the Exchange Offer, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold or otherwise transferred by Holders thereof (other than any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Act) without compliance with the registration and prospectus
delivery provisions of the Act provided that such New Notes are acquired in
the ordinary course of such Holders' business and such Holders have no
intention, nor any arrangement with any person, to participate in the
distribution of such New Notes. If any Holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such Holder (i) could not rely on the
applicable interpretations of the Staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available April 13, 1989) or similar letters and
(ii) must comply with the registration and prospectus delivery requirements of
the Act in connection with any resale transaction. A broker-dealer holding Old
Notes may participate in the Exchange Offer provided that it acquired the Old
Notes for its own account as a result of market-making or other trading
activities. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus
meeting the requirements of the Act in connection with any resale of such New
Notes since such broker-dealer may be considered a statutory underwriter. Such
prospectus may be the prospectus relating to the Exchange Offer only if it
contains a plan of distribution with respect to such resale transactions (but
need not name the broker-dealer or disclose the amount of New Notes held by
the broker-dealer). See "Plan of Distribution." In addition, to comply with
the securities laws of certain jurisdictions, if applicable, the New Notes may
not be offered or sold unless they have been registered or qualified for sale
in such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company does not currently intend to
register or qualify the sale of the New Notes in any such jurisdictions.
DESCRIPTION OF THE NOTES
The Old Notes have been, and the New Notes will be, issued under the
indenture dated as of April 1, 1996 (the "Indenture") between the Company and
the Trustee. The following summary of certain provisions of the Indenture
contains the material terms of the Notes, but does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to all of
the provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part of the Indenture by reference to the Trust
Indenture Act, as in effect on the date of the Indenture. The definitions of
certain capitalized terms used in the following summary are set forth below
under "Certain Definitions."
GENERAL
The New Notes will be issued only in registered form, without
coupons, in denominations of $1,000 and integral multiples of $1,000.
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes will be transferable, at the corporate trust office or agency of the
Exchange Note Trustee in the City of New York maintained for such purposes at
114 West 47th Street, New York, New York 10036-1532. No service charge will be
made for any registration of transfer or exchange of the Notes, except for any
tax or other governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The New Notes will be unsecured obligations of the Company, limited
to $48,750,000 aggregate principal amount, and will mature on September 1,
2001. Interest on the Notes will accrue at the rate of 11 1/8% per annum and
will be payable semi-annually on March 1 and September 1, commencing September
1, 1996 to the holders of record
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<PAGE>
of Notes at the close of business on the February 15 and August 15 immediately
preceding such interest payment date. Interest on the Notes will accrue from
the most recent date to which interest has been paid or, if no interest has
been paid, from the Issue Date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Interest on overdue principal
and (to the extent permitted by law) on overdue installments of interest, will
accrue at the rate of interest borne by the Notes.
REDEMPTION
Optional Redemption. The Notes will be redeemable, in whole or in
part, at the option of the Company, if redeemed during the 12-month period
beginning on June 1 of the years indicated below at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1996........................................ 101.719%
1997 and thereafter......................... 100.000%
</TABLE>
Selection and Notice. In the event that less than all of the Notes are
to be redeemed at any time, selection of Notes for redemption will be made by
the Note Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not listed on a national securities exchange, on a pro rata basis, by lot or by
such method as the Note Trustee shall deem fair and appropriate, provided,
however, that no Notes of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption.
CHANGE OF CONTROL
In the event of a Change of Control (the date of such occurrence
being the "Change of Control Date"), the Company shall notify the holders in
writing of such occurrence and shall make an offer to purchase (the "Change of
Control Offer"), on a business day (the "Change of Control Payment Date") not
later than 60 days following the Change of Control Date, all Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the Change of Control Payment
Date. Notice of a Change of Control Offer shall be mailed by the Company to
the holders not less than 25 days nor more than 45 days before the Change of
Control Payment Date. The Change of Control Offer is required to remain open
for at least 20 business days and until the close of business on the business
day next preceding the Change of Control Payment Date.
The Company will comply with any tender offer rules under the
Exchange Act, which may then be applicable, including, but not limited to,
Rule 14e-1, in connection with any Change of Control Offer required to be made
by the Company to repurchase the Notes as a result of a Change of Control.
PROVISION OF FINANCIAL INFORMATION
Pursuant to the Indenture, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will submit for filing with the Commission such annual reports,
quarterly reports and other documents and distribute or cause to be
distributed to holders of the Notes copies of such annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the
Company were so subject. Such annual reports will contain consolidated
financial statements and notes thereto, together with an opinion thereon
expressed by an independent public accounting firm, and management's
discussion and analysis of financial condition and results of operations and
such quarterly reports will contain unaudited condensed consolidated financial
statements for the first three quarters of each fiscal year.
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<PAGE>
CERTAIN COVENANTS
Set forth below are certain covenants which are contained in the
Indenture.
Limitation on Additional Indebtedness. The Indenture will provide
that the Company shall not, and shall not cause or permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume, issue,
guarantee or in any manner become liable for or with respect to the payment
of, any Attributable Indebtedness or Indebtedness (including any Acquired
Indebtedness) except for (each of which shall be given independent effect):
(a) Indebtedness of the Company under the Notes and the
Indenture;
(b) Indebtedness of Subsidiaries of the Company outstanding
from time to time pursuant to the Credit Agreement not to exceed at any one
time, an amount (the "Permitted Amount") equal to, when added to the principal
amount of Indebtedness of Subsidiaries of the Company outstanding pursuant to
clause (h) below, (A) the sum of 85% of the net book value of the accounts
receivable and 50% of the net book value of the inventory of the Subsidiaries
of the Company, in each case calculated on a consolidated basis in accordance
with GAAP minus (B) the amount of Indebtedness pursuant to the Credit
Agreement prepaid after the Issue Date with the Net Cash Proceeds from an
Asset Sale pursuant to the provisions described below under "Disposition of
Proceeds of Asset Sales";
(c) Indebtedness of the Company and Subsidiaries of the
Company outstanding on the Issue Date;
(d) Indebtedness of the Company that is subordinated or pari
passu in right of payment to the Notes if, immediately after giving pro forma
effect to the incurrence thereof, the Consolidated Interest Coverage Ratio of
the Company would be equal to or greater than 2.25:1;
(e) Indebtedness of a Subsidiary of the Company issued to
and held by the Company or a Wholly- Owned Subsidiary of the Company or
Indebtedness of the Company to a Wholly-Owned Subsidiary of the Company in
respect of intercompany advances or transactions;
(f) Indebtedness represented by Interest Rate Protection
Obligations and Currency Hedging Agreements of Subsidiaries of the Company
with respect to Indebtedness of Subsidiaries of the Company (which
Indebtedness is otherwise permitted to be incurred under this covenant) to the
extent the notional principal amount of such Interest Rate Protection
Obligations or Currency Hedging Agreements, as the case may be, does not
exceed the principal amount of the Indebtedness to which such Interest Rate
Protection Obligations or Currency Hedging Agreements, as the case may be,
relate;
(g) any replacements, renewals, refinancing and extensions
of Indebtedness incurred under clauses (a), (c) and (d) above, provided that
(i) any such replacement, renewal, refinancing and extension (x) shall not
provide for any mandatory redemption, amortization or sinking fund requirement
in an amount greater than or at a time prior to the amounts and times
specified in the Indebtedness being replaced, renewed, refinanced or extended
and (y) shall be contractually subordinated to the Notes at least to the
extent, if at all, that the Indebtedness being replaced, renewed, refinanced
or extended is subordinate to the Notes, (ii) any such Indebtedness of any
Person must be replaced, refinanced or extended with Indebtedness incurred by
such Person or by the Company and (iii) the principal amount of Indebtedness
incurred pursuant to this clause (g) (or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration of the maturity thereof, the original issue price
of such Indebtedness) shall not exceed the sum of the principal amount (or
with respect to Indebtedness which provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the accreted value thereof) of
Indebtedness so replaced, renewed, refinanced or extended, plus accrued
interest, the amount of any premium required to be paid in connection with
such replacement, renewal, refinancing or extension pursuant to the terms of
such Indebtedness or the amount of any premium reasonably determined by the
Company as necessary to accomplish such replacement, renewal, refinancing or
extension by means of a tender offer or privately negotiated purchase, and the
amount of fees and expenses incurred in connection therewith; and
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<PAGE>
(h) in addition to the items referred to in clauses (a)
through (g) above, (x) Indebtedness and Attributable Indebtedness of the
Company or Subsidiaries of the Company in an aggregate principal amount not to
exceed $5,000,000 at any one time outstanding, provided that Indebtedness of
Subsidiaries of the Company shall not exceed at any one time, when added to
the principal amount of Indebtedness outstanding pursuant to the preceding
clause (b), the Permitted Amount and (y) additional Indebtedness and
Attributable Indebtedness of the Company in a aggregate principal amount not
to exceed $10,000,000 at anytime outstanding.
Limitation on Investments, Loans and Advances. The Indenture will
provide that the Company shall not make and shall not permit any of its
Subsidiaries to make any direct or indirect advance, loan, or other extension
of credit to (including any guarantee of a loan or other extension of credit)
or investment in, capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others or otherwise), or purchase of Capital Stock, bonds,
notes, debentures or other securities issued by, any other Person
(collectively, "Investments"), except: (i) Investments by the Company or a
Subsidiary of the Company in any Wholly- Owned Subsidiary of the Company
(including any such Investment pursuant to which a Person becomes a Wholly-
Owned Subsidiary of the Company) or in the Company by any Subsidiary of the
Company; (ii) Investments represented by receivables created or acquired in
the ordinary course of business or the settlement of such receivables in the
ordinary course of business; (iii) Investments permitted to be made pursuant
to the "Limitation on Restricted Payments" covenant below; (iv) Investments
represented by advances to employees of the Company or its Subsidiaries made
in the ordinary course of business and consistent with past business
practices; and (v) Permitted Investments.
Limitation on Restricted Payments. The Indenture will provide that
the Company shall not make, and shall not permit any of its Subsidiaries to
make, directly or indirectly, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and
be continuing at the time of or after giving effect to such Restricted
Payment;
(b) at the time of and after giving effect to such
Restricted Payment, the Company could incur at least $1.00 of Indebtedness
pursuant to clause (d) of the "Limitation on Additional Indebtedness" covenant
above; and
(c) immediately after giving effect to such Restricted
Payment, the aggregate of all Restricted Payments declared or made after the
Issue Date through and including the date of such Restricted Payment does not
exceed the sum of (1) 50% of the Company's Consolidated Net Income (or in the
event such Consolidated Net Income shall be a deficit, minus 100% of such
deficit) from and including April 1, 1996 to and including the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment (the
"Base Period"), (2) 100% of the aggregate Net Proceeds received by the Company
from (x) the issue or sale, during the Base Period, of Capital Stock (other
than Disqualified Stock) of the Company, or any Indebtedness or other
securities of the Company convertible into or exercisable or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company which has been so
converted, exercised or exchanged, as the case may be and (y) any common
equity contribution made to the Company during the Base Period plus (3) in the
case of the disposition of any Investment (other than an Investment which is a
loan) made after the Issue Date or the repayment or disposition of any loan
made after the Issue Date (other than any such Investment or loan made
pursuant to clause (i), (ii) (iv) or (v) of the "Limitation on Investments,
Loans and Advances" covenant above) an amount equal to, with respect to any
such Investment (other than an Investment which is a loan) the lesser of the
net cash proceeds received on disposition with respect to such Investment or
the initial amount of such Investment, in either case, less the cost of
disposition of such Investment and with respect to any such loan, an amount
equal to any cash received on account of (a) the repayment of principal on
such loan or (b) the disposition of such loan, less the cost of such
disposition and in each of the foregoing cases, not to exceed the principal
amount of such disposed of loan. For purposes of determining the amount
expended for Restricted Payments, cash distributed shall be valued at the face
amount thereof and property other than cash shall be valued at its Fair Market
Value.
The provisions of this covenant shall not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if such
payment would comply with the provisions of the Indenture at the date of the
declaration of such payment, (ii) the retirement of any shares of Capital
Stock of the Company or Indebtedness of the Company which is subordinated in
right of payment to the Notes by conversion into, or by an exchange for,
shares of Capital Stock
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<PAGE>
of the Company that are not Disqualified Stock or out of the Net Proceeds of
the substantially concurrent sale (other than to a Subsidiary of the Company)
of other shares of Capital Stock (other than Disqualified Stock) of the
Company, (iii) the redemption or retirement of Indebtedness of the Company
which is subordinated in right of payment to the Notes in exchange for, by
conversion into, or out of the Net Proceeds of, a substantially concurrent
sale of Indebtedness of the Company which is subordinated in right of payment
to the Notes (other than to a Subsidiary of the Company) that (x) is
contractually subordinated in right of payment to the Notes at least to the
same extent that the Indebtedness being redeemed or retired is subordinated to
the Notes and (y) is permitted to be incurred in accordance with the covenant
described under "Limitation on Additional Indebtedness" above, (iv) dividends
to Waxman Industries to satisfy interest payments on the Deferred Coupon
Notes, including any Deferred Coupon Note Refinancing Indebtedness, provided
that any such dividend is used on the date such dividend is paid to make
interest payments on the Deferred Coupon Notes or Deferred Coupon Note
Refinancing Indebtedness, as the case may be, and provided further that no
Default or Event of Default shall have occurred and be continuing after the
payment of any such dividend (v) the redemption or retirement, or dividends to
Waxman Industries for the redemption or retirement, (by way of open market
purchase or otherwise), within 365 days of the Issue Date, of Deferred Coupon
Notes or Deferred Coupon Note Refinancing Indebtedness in an amount not to
exceed the aggregate net cash proceeds received by the Company or Barnett from
the sale of shares of Capital Stock of Barnett representing not more than
55.1% of the Barnett Common Stock pursuant to the Barnett Public Offering that
are in excess of $75.0 million, provided no Default or Event of Default shall
have occurred and be continuing after such redemption or retirement or the
payment of such dividend, as the case may be, (vi) the payment of any dividend
or distribution by the Company to Waxman Industries (A) pursuant to the Tax
Sharing Agreement, which dividend or distribution is used solely to pay income
taxes and may not exceed the lesser of (x) income taxes actually paid by
Waxman Industries (on a consolidated basis with its Subsidiaries) and (y) the
amount of income taxes which would be paid by the Company and its Subsidiaries
if they were a consolidated tax paying group filing a consolidated return and
(B) which dividend or distribution is used solely to pay taxes (other than
income taxes) actually payable by Waxman Industries; and (vii) Restricted
Payments consisting of 50% of Eligible Sale Proceeds (100% in the case of
clause (iv) above), provided no Default or Event of Default shall have
occurred and be continuing after the making of such Restricted Payment.
In determining the amount of Restricted Payments permissible under
clause (c) above, amounts expended pursuant to clauses (i), (ii), (iv) and
(vii) above shall be included as Restricted Payments.
Limitation on Liens. In addition to the restrictions described below
under "Impairment of Security Interest," the Indenture will provide that the
Company shall not, and the Company shall not permit, cause or suffer any of
its Subsidiaries to, create, incur, assume or suffer to exist any Lien of any
kind upon any of its property or assets now owned or hereafter acquired by it,
which (a) secures Indebtedness of the Company subordinated in right of payment
to the Notes, unless the Notes are secured by a Lien on such property that is
senior to such Lien or (b) secures Indebtedness of the Company which is pari
passu in right of payment with the Notes, unless the Notes are secured by a
Lien on such property that is equal and ratable with such Lien, except for
Liens existing as of the Issue Date and Permitted Liens.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture will provide that the Company shall not, and shall
not permit any Subsidiary of the Company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective or enter into any
Agreement with any Person that would cause any consensual encumbrance or
restriction of any kind on the ability of any Subsidiary of the Company to (a)
pay dividends, in cash or otherwise, or make any other distributions on its
Capital Stock or any other interest or participation in, or measured by, its
profits owned by, or pay any Indebtedness owed to, the Company or a Subsidiary
of the Company, (b) make any loans or advances to the Company or any
Subsidiary of the Company or (c) transfer any of its properties or assets to
the Company or to any Subsidiary of the Company, except, in each case, for
such encumbrances or restrictions existing under or contemplated by or by
reason of any restrictions existing under (i) the Credit Agreement as in
effect on the Issue Date, (ii) any restrictions existing under any Agreement
that refinances, replaces, amends or extends an Agreement containing a
restriction permitted by clause (i); provided that the terms and conditions of
any such restrictions are not materially less favorable to the holders of the
Notes than those under or pursuant to the Agreement being refinanced,
replaced, amended or extended or (iii) customary non-assignment or sublease
provisions of any Agreement of the Company or its Subsidiaries.
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Disposition of Proceeds of Asset Sales. The Indenture will provide
that the Company shall not, and shall not permit any of its Subsidiaries to,
make any Asset Sale unless (i) such Asset Sale is for Fair Market Value and
(ii) the net proceeds therefrom consist of at least 75% cash or Cash
Equivalents (with Indebtedness of the Company or its Subsidiaries assumed by
the purchaser being counted as cash for such purposes if the Company and its
Subsidiaries are permanently released from all liability therefor).
The Company shall or shall cause its Subsidiaries to, within 360 days
of receipt of any Net Cash Proceeds from an Asset Sale, (x) apply such Net
Cash Proceeds to permanently prepay Indebtedness outstanding under the Credit
Agreement, (y) apply such Net Cash Proceeds to acquire or construct assets of
the Company or a Subsidiary of the Company in lines of business related to the
Company's and its Subsidiaries' businesses as in existence on the Issue Date
or (z) to the extent such Net Cash Proceeds are not applied as provided in the
previous clauses (x) and (y), designate such Net Cash Proceeds as "Excess
Proceeds" subject to disposition as provided in the next succeeding paragraph;
provided, however, that (i) to the extent that the Net Cash Proceeds applied
to permanently prepay Indebtedness consist in whole or in part of Barnett Sale
Proceeds, then such Barnett Sale Proceeds may be applied to prepay such
Indebtedness to the extent required by the terms of the Credit Agreement (as
in existence on the Issue Date) and to the extent such prepayment is not so
required, such Barnett Sale Proceeds shall be used to permanently prepay such
Indebtedness and to make an offer to purchase Securities as set forth below on
a pro rata basis based on the aggregate principal amount of Indebtedness
outstanding under the Credit Agreement and the Securities outstanding, (ii) up
to $10.0 million of Barnett Sale Proceeds may be applied pursuant to clause
(x) above and not subject to the preceding clause (i) provided that any such
Barnett Sale Proceeds so applied must be applied to permanently prepay
Permitted Barnett Secured Indebtedness then outstanding.
When the aggregate amount of unutilized Excess Proceeds equals or
exceeds $2.5 million, the Company shall make an offer to repurchase an
aggregate principal amount of Notes equal to such Excess Proceeds at a price
in cash equal to 100% of the outstanding principal amount thereof plus accrued
and unpaid interest, if any, to the repurchase date. If the aggregate
principal amount of Notes tendered exceeds the amount of Excess Proceeds, the
Notes tendered will be purchased on a pro rata basis. The Company shall,
subject to the provisions described herein, be required to repurchase all
Exchange Notes validly tendered into such offer and not withdrawn. Such offer
is required to remain open for at least 20 business days. Upon completion of
such offer to repurchase, the amount of Excess Proceeds shall be reset to zero
and any unutilized Excess Proceeds may be utilized by the Company for any
purpose.
The provisions of this covenant shall not apply to any Eligible Sale
Proceeds used in accordance with clause (iv) of the "Limitations on Restricted
Payments" covenant above and shall otherwise only apply to 50% of any Eligible
Sale Proceeds.
The Company will comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable, in the event that an Asset Sale occurs and the
Company is required to repurchase Notes as described above.
Limitation on Transactions with Affiliates. The Indenture will
provide that the Company shall not, and shall not permit, cause, or suffer any
Subsidiary of the Company to, conduct any business or enter into any
transaction or series of transactions with or for the benefit of any of their
respective Affiliates (each an "Affiliate Transaction"), except in good faith
and on terms that are no less favorable to the Company or such Subsidiary, as
the case may be, than those that could have been obtained in a comparable
transaction on an arms' length basis from a Person not an Affiliate of the
Company or such Subsidiary. With respect to any Affiliate Transaction (and
each series of related Affiliate Transactions which are similar or part of a
common plan) involving aggregate payments or other market value in excess of
$1,000,000 the Company shall deliver an officers' certificate to the Trustee
certifying that such Affiliate Transaction (or series of related Affiliate
Transactions) complies with the foregoing provisions and that such Affiliate
Transaction (or series of related Affiliate Transactions) was approved by a
majority of the Independent Directors of the Company and the Board of
Directors of the Company as a whole. Notwithstanding the foregoing, the
restrictions set forth in this covenant shall not apply to (x) customary
directors' fees and consulting fees or (y) any Affiliate Transaction pursuant
to and in accordance with the provisions of the Tax Sharing Agreement,
Intercorporate Agreement, Barnett Intercorporate Agreement or the Trademark
License Agreements.
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Limitation on Issuances and Sales of Preferred Stock by Subsidiaries.
The Indenture will provide that the Company (i) will not permit any of its
Subsidiaries to issue any Preferred Stock (other than to the Company or a
Wholly- Owned Subsidiary of the Company) and (ii) will not permit any Person
(other than the Company or a Wholly-Owned Subsidiary of the Company) to own
any Preferred Stock of any Subsidiary of the Company.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Indenture will provide that the Company shall not consolidate
with or merge with or into or sell, assign, convey, lease, transfer or
otherwise dispose of or cause or permit any Subsidiary of the Company to sell,
assign, convey, lease, transfer or otherwise dispose of all or substantially
all of the Company's and the Company's Subsidiaries' properties and assets
(determined on a consolidated basis for the Company and the Company's
Subsidiaries taken as a whole) to any Person or Persons in a single
transaction or through a series of related transactions or permit any of its
Subsidiaries to do any of the foregoing, unless: (a) the Company shall be the
continuing Person or the Person formed by or surviving such consolidation or
merger or the Person to which such sale, assignment, conveyance, lease,
transfer or other disposition is made (the "surviving entity") shall be a
corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia; (b) the surviving entity (in
the case of a merger or consolidation in which the Company is not the
surviving Person or any sale, assignment, conveyance, lease, transfer or other
disposition of all or substantially all of the Company's properties and
assets) shall expressly assume, by a supplemental indenture executed and
delivered to the Trustee, in form and substance reasonably satisfactory to the
Trustee, all of the obligations of the Company under the Notes and the
Indenture; (c) immediately before and immediately after giving effect to such
transaction, or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing; (d) the Company or the
surviving entity (in the case of a merger or consolidation in which the
Company is not the surviving Person or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the
Company's properties and assets) shall immediately after giving effect to such
transaction or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions) have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction or series of transactions; (e)
immediately after giving effect to such transaction or series of transactions,
the Company or the surviving entity (in the case of a merger or consolidation
in which the Company is not the surviving Person or any sale, assignment,
conveyance, lease, transfer or other disposition of all or substantially all
of the Company's properties and assets) could incur $1.00 of Indebtedness
pursuant to clause (d) of the "Limitation on Additional Indebtedness" covenant
described above; and (f) the Company or the surviving entity (in the case of a
merger or consolidation in which the Company is not the surviving Person or
any sale, assignment, conveyance, lease, transfer or other disposition of all
or substantially all of the Company's properties and assets) shall have
delivered to the Trustee an Officer's Certificate stating that such
consolidation, merger, sale, assignment, conveyance, lease, transfer or other
disposition and, if a supplemental indenture is required in connection with
such transaction or series of transactions, such supplemental indenture
complies with this covenant and that all conditions precedent in the Indenture
relating to the transaction or series of transactions have been satisfied.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) default in the payment of any interest on the Notes when
it becomes due and payable, and continuance of any such default for a period
of 30 days; or
(ii) default in the payment of the principal of, or premium,
if any, on the Notes when due (including a default in payment upon an offer to
purchase required to be made by the Indenture); or
(iii) default in the performance, or breach, of any covenant
in the Indenture (other than defaults specified in clause (i) or (ii) above),
and continuance of such default or breach for a period of 30 days after
written notice to the Company by the Trustee or to the Company and the Trustee
by the holders of at least 25% in aggregate principal amount of the
outstanding Notes; or
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(iv) failure by the Company or any of its Subsidiaries (a)
to make any payment when due with respect to any other Indebtedness under one
or more classes or issues of Indebtedness which one or more classes or issues
of Indebtedness are in an aggregate principal amount of $5,000,000 or more; or
(b) to perform any term, covenant, condition, or provision of one or more
classes or issues of Indebtedness which one or more classes or issues of
Indebtedness are in an aggregate principal amount of $5,000,000 or more, which
failure, in the case of this clause (b), results in an acceleration of the
maturity thereof; or
(v) one or more judgments, orders or decrees for the payment
of money in excess of $5,000,000, either individually or in an aggregate
amount, shall be entered against the Company or any of its Subsidiaries or any
properties of the Company or any of its Subsidiaries and shall not be
discharged and there shall have been a period of 60 days during which a stay
of enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(vi) certain events of bankruptcy or insolvency with respect
to the Company or any of its Material Subsidiaries shall have occurred.
If an Event of Default (other than an Event of Default specified in
clause (vi) above with respect to the Company) occurs and is continuing, then
the Trustee or the holders of at least 25% in aggregate principal amount of
the outstanding Notes may, by written notice, and the Trustee upon the request
of the holders of not less than 25% in aggregate principal amount of the
outstanding Notes shall, declare the principal of, premium, if any, and
accrued interest on, all the Notes to be due and payable immediately. Upon any
such declaration, such principal, premium, if any, and accrued interest shall
become due and payable immediately. If an Event of Default specified in clause
(vi) above with respect to the Company occurs and is continuing, then the
principal of, premium, if any, and accrued interest on, all the Notes shall
ipso facto become and be immediately due and payable without any declaration
or other act on the part of the Note Trustee or any holder.
After a declaration of acceleration, the holders of a majority in
aggregate principal amount of outstanding Notes may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default
have been cured or waived, other than nonpayment of principal of, premium, if
any, and accrued interest on the Notes that has become due solely as a result
of such acceleration and if the rescission of acceleration would not conflict
with any judgment or decree. The holders of a majority in aggregate principal
amount of the outstanding Notes also have the right to waive past defaults
under the Indenture except a default in the payment of the principal of,
premium, if any, or interest on any Note, or in respect of a covenant or a
provision which cannot be modified or amended without the consent of all
holders.
No holder of any of the Notes has any right to institute any
proceeding with respect to the Indenture or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of the outstanding Notes
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 15 days after receipt of such notice and the Trustee has not
within such 15-day period received directions inconsistent with such written
request by holders of a majority in aggregate principal amount of the
outstanding Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a Note for the enforcement of the payment of the
principal of, premium, if any, or accrued interest on, such Note on or after
the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required
to exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise thereof as a prudent Person
would exercise under the circumstances in the conduct of such Person's own
affairs. Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee is not under any obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders unless
such holders shall have offered to such Trustee reasonable indemnity. Subject
to certain provisions concerning the rights of the Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust, or power conferred
on the Trustee.
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DEFEASANCE
The Company may at any time terminate all of its obligations with
respect to the Notes ("defeasance"), except for certain obligations, including
those regarding any trust established for a defeasance and obligations to
register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain agencies in respect of Notes.
The Company may at any time terminate its obligations under certain covenants
set forth in the Indenture, some of which are described under "Certain
Covenants" above, and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes issued
under the Indenture ("covenant defeasance"). In order to exercise either
defeasance or covenant defeasance, the Company must irrevocably deposit in
trust with the Trustee, for the benefit of the holders of the Notes, money or
U.S. government obligations, or a combination thereof, in such amounts as will
be sufficient to pay the principal of, and premium, if any, and accrued
interest on the Notes to redemption or maturity, as the case may be, and
comply with certain other conditions, including the delivery of opinions as to
certain tax and bankruptcy matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange
of Notes) as to all outstanding Notes when either (a) all such Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Notes which have been replaced or paid and Notes for the payment of which
money has theretofore been deposited in trust or segregated and held in trust
by the Company and thereafter repaid to the Company or discharged from such
trust) have been delivered to the Trustee for cancellation and the Company has
paid all sums payable by it under the Indenture; or (b)(i) all such Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable or have been called for redemption and the Company has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust
for the purpose an amount of money sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal, premium, if any, and accrued interest to the date
of such deposit or redemption, as the case may be; (ii) the Company has paid
all sums payable by it under the Indenture; and (iii) the Company has
delivered irrevocable instructions to the Trustee to apply the deposited money
toward the payment of the Notes at maturity or the redemption date, as the
case may be. In addition, the Company must deliver an Officers' Certificate
and an Opinion of Counsel stating that all conditions precedent to
satisfaction and discharge have been complied with.
AMENDMENTS AND WAIVERS
From time to time the Company, when authorized by resolution of its
Board of Directors, and the Trustee may, without the consent of the holders of
the Notes, amend, waive or supplement the Indenture or the Notes for certain
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the Indenture under the
Trust Indenture Act or making any change that does not adversely affect the
rights of any holder. Other amendments and modifications of the Indenture or
the Notes may be made by the Company and the Trustee with the consent of the
holders of not less than a majority of the aggregate principal amount of the
outstanding Notes; provided, however, that no such modification or amendment
may, without the consent of the holder of each outstanding Note affected
thereby, (i) reduce the principal amount outstanding of, extend the fixed
maturity of, or alter the redemption provisions of, the Notes, (ii) change the
currency in which any Notes or any principal, premium or the accrued interest
thereon is payable, (iii) reduce the percentage in principal amount
outstanding of Notes, who must consent to an amendment, supplement or waiver
or consent to take any action under the Indenture or the Notes, (iv) impair
the right to institute suit for the enforcement of any payment on or with
respect to the Notes, (v) waive a default in payment with respect to the
Notes, (vi) reduce the rate or extend the time for payment of interest on the
Notes or (vii) following the mailing of a Change of Control Offer, modify the
provisions of the Indenture with respect to such Change of Control Offer in a
manner adverse to any holder.
REGARDING THE TRUSTEE
United States Trust Company of New York will serve as Trustee under
the Indenture.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means with respect to any Person,
Indebtedness of another Person existing at the time such other Person becomes
a Subsidiary of such Person or is merged with or into such Person or a
Subsidiary of such Person including, without limitation, Indebtedness incurred
in connection with, or in anticipation of, such other Person becoming a
Subsidiary of such Person or the merger of such other Person with or into such
Person.
"Affiliate" of any specified Person means any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfer of cash or other property to others or payment for property or
services for the account or use of others, or otherwise) to, or purchase or
acquisition of Capital Stock in, any other Person by the Company or any of its
Subsidiaries, in either case pursuant to which such Person shall become a
Subsidiary of the Company or any of its Subsidiaries or shall be merged with
or into the Company or any of its Subsidiaries or (ii) any acquisition by the
Company or any of its Subsidiaries of the assets of any Person which
constitute substantially all of an operating unit or business of such Person.
"Asset Sale" means with respect to any Person any direct or indirect
sale, conveyance, transfer, lease or other disposition to any other Person
other than such Person or a Subsidiary of such Person, in one transaction or a
series of related transactions, of (i) any Capital Stock of any Subsidiary of
such Person (whether structured as a sale, issuance or other disposition by
such Person or a Subsidiary of such Person) or (ii) any other property or
asset of such Person (other than cash or Cash Equivalents) or any Subsidiary
of such Person, in each case, other than inventory in the ordinary course of
business and other than isolated transactions which do not exceed $1,000,000
individually. For the purposes of this definition, the term "Asset Sale" shall
not include (x) any disposition of properties and assets of such Person or any
Subsidiary of such Person that is governed under and complies with the
requirements set forth in "Consolidation, Merger, Conveyance, Transfer or
Lease" above or (y) any sale by the Company of its Capital Stock.
"Attributable Indebtedness" means, in respect of a Sale/Leaseback
Transaction, as at the time of determination, the present value (discounted at
the interest rate borne by the Notes compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Barnett Common Stock" means the common stock, $.01 par value per
share, of Barnett.
"Barnett Intercorporate Agreement" means the Intercorporate Agreement
among Waxman Industries, the Company, Barnett, Consumer Products and WOC as in
existence as of the consummation of the Barnett Public Offering.
"Barnett Public Offering" means the initial public offering of
Barnett Common Stock.
"Barnett Sale Proceeds" means the net proceeds from the sale of
Barnett Common Stock.
"Board Resolution" means with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such
Person, to have been duly adopted by the Board of Directors of such Person and
to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations, rights in, or other equivalents (however
designated and whether voting or non-voting) of such Person's capital stock,
whether outstanding
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on the Issue Date or issued after the Issue Date, and any and all rights,
warrants or options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required to be
classified and accounted for as a capital lease obligation under GAAP, and,
for the purpose of the Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
"Cash Equivalents" means, at any time (i) any evidence of
Indebtedness with a maturity of 180 days or less issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) certificates of deposit
or acceptances with a maturity of 180 days or less of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500,000,000; (iii)
commercial paper with a maturity of 180 days or less issued by a corporation
(except an Affiliate of the Company) organized under the laws of any state of
the United States or the District of Columbia and rated at least A-1 by
Standard & Poor's Corporation or at least P-1 by Moody's Investors Service,
Inc.; and (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States, in each case maturing within
one year from the date of acquisition; provided, however, that the terms of
such agreements comply with the guidelines set forth in the Federal Financial
Agreements of Depository Institutions with Securities Dealers and Others, as
adopted by the Comptroller of the Currency.
"Change of Control" means (i) the direct or indirect, sale, lease,
exchange or other transfer of all or substantially all of the assets of the
Company to any Person or entity or group (as such term is used in Section
13(d)(3) of the Exchange Act) (a "Group of Persons") other than Permitted
Holders, (ii) the merger or consolidation of the Company or Waxman Industries
with or into another corporation with the effect that the then existing
shareholders of the Company or Waxman Industries, as the case may be, together
with the Permitted Holders beneficially own (within the meaning of Rule 13d-3
under the Exchange Act) securities representing less than 50% of the Voting
Power of the surviving corporation of such merger or the corporation resulting
from such consolidation and do not otherwise have the right or ability by
contract or otherwise to elect a majority of the Board of Directors of such
surviving corporation, (iii) the replacement of a majority of the Board of
Directors of the Company or Waxman Industries from the directors who
constituted such Board of Directors on the Issue Date, and such replacement
shall not have been approved by a majority of such Board of Directors then
still in office who either were (x) members of such Board of Directors on the
Issue Date or (y) whose election as a member of such Board of Directors was
approved in the manner provided in this clause (iii) or (iv) a Person or Group
of Persons shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company or Waxman Industries representing 35% or more of the
Voting Power of the Company or Waxman Industries, as the case may be, and, at
such time, Permitted Holders are not the beneficial owners (as so defined) of
securities representing a greater percentage of such Voting Power and do not
otherwise have the right or ability by contract or otherwise to elect a
majority of the Board of Directors of the Company or Waxman Industries, as the
case may be.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period increased
(to the extent deducted in determining Consolidated Net Income) by the sum of
the following for such period: (i) all income taxes of such Person paid or
accrued according to GAAP for such period (other than income taxes
attributable to extraordinary, unusual or non-recurring gains); (ii)
Consolidated Interest Expense of such Person for such period; (iii)
depreciation expense of such Person for such period; (iv) amortization expense
of such Person for such period including, without limitation, amortization of
capitalized debt issuance costs; and (v) any other non-cash charges of such
Person for such period (excluding any non-cash charge to the extent that it
requires an accrual of or a reserve for cash disbursements for any future
period).
"Consolidated Interest Coverage Ratio" means, with respect to any
Person, the ratio of (i) Consolidated Cash Flow of such Person for the four
full fiscal quarters for which financial statements are available that
immediately precede the date of the transaction or other circumstances giving
rise to the need to calculate the Consolidated Interest
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Coverage Ratio (the "Transaction Date") to (ii) Consolidated Interest Expense
of such Person and the aggregate amount of dividends or other distributions
declared or paid on Capital Stock (other than Common Stock) of such Person and
its Subsidiaries, in each case for such four full fiscal quarter period. For
purposes of this definition, "Consolidated Cash Flow" and the items referred
to in the preceding clause (ii) shall be calculated after giving effect on a
pro forma basis for the period of such calculation to (i) the incurrence or
retirement of any Indebtedness of such Person or any of its Subsidiaries,
other than the incurrence or repayment of Indebtedness in the ordinary course
of business pursuant to working capital or revolving credit facilities, at any
time during the period (the "Reference Period") (A) commencing on the first
day of the four full fiscal quarter period for which financial statements are
available that precedes the Transaction Date and (B) ending on and including
the Transaction Date, including, without limitation, the incurrence of the
Indebtedness giving rise to the need to make such calculation, as if such
incurrence or retirement occurred on the first day of the Reference Period;
provided, that if such Person or any of its Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the above clause shall
give effect to the incurrence of such guaranteed Indebtedness as if such
Person or Subsidiary had directly incurred such guaranteed Indebtedness and
(ii) any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of the Company or any Subsidiary of the Company (including any Person who
becomes a Subsidiary of the Company as a result of the Asset Acquisition)
incurring Acquired Indebtedness) occurring during the Reference Period and any
retirement of Indebtedness in connection with such Asset Sales, as if such
Asset Sale or Asset Acquisition and/or retirement occurred on the first day of
the Reference Period. Furthermore, in calculating the denominator (but not the
numerator) of this "Consolidated Interest Coverage Ratio," (1) interest on
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate,
a eurocurrency interbank offered rate, or other rates, then the interest rate
based upon a factor of a prime or similar rate shall be deemed to have been in
effect; and (3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Rate Protection Obligations, shall be deemed
to have accrued at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Interest Expense" means, with respect to any Person for
any period, without duplication, the sum of (a) the cash and non-cash interest
expense of such Person and its Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP (net of any interest income)
consistently applied, including, without limitation, (w) any amortization of
debt discount, (x) the net cost under Interest Rate Protection Obligations and
Currency Hedging Agreements insofar as they relate to interest, (y) the
interest portion of any deferred payment obligation and (z) all accrued
interest, and (b) the aggregate amount of the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by such Person and its Subsidiaries during such period as determined
on a consolidated basis in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person")
in which the Person in question or one of its Subsidiaries has a joint
interest with one or more other Persons (which interest does not cause the Net
Income of such other Person to be consolidated into the Net Income of the
Person in question in accordance with GAAP) shall be included only to the
extent of the amount of dividends or distributions actually paid to the Person
in question or the Subsidiary, (b) the Net Income of any Subsidiary of the
Person in question that is subject to any restriction or limitation on the
payment of dividends or the making of other distributions (including
limitations resulting from the ownership of less than 100% of the Capital
Stock of such Subsidiary) shall be excluded to the extent of such restriction
or limitation, (c)(i) the Net Income (or loss) of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition and (ii) any net gain or loss resulting from an Asset Sale by the
Person in question or any of its Subsidiaries shall be excluded, and (d)
extraordinary gains and losses and any one-time increase or decrease to Net
Income recorded because of the adoption of new accounting policies, practices
or standards required or permitted by generally accepted accounting principles
shall be excluded.
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"Consolidated Net Worth" means, with respect to any Person at any
date of determination, the consolidated equity represented by the shares of
such Person's Capital Stock (other than Disqualified Stock) at such date, as
determined on a consolidated basis in accordance with GAAP.
"Covered Amount" means with respect to any disposition of Capital
Stock of Barnett or any Asset Sale involving WOC Inc. an amount equal to the
excess of (x) the aggregate fair value of the Capital Stock of Barnett owned
by the Company and its Subsidiaries immediately upon consummation of such
disposition or Asset Sale less the aggregate principal amount of any
outstanding Permitted Barnett Secured Indebtedness after taking into account
the application of the proceeds of such disposition or Asset Sale over (y) the
product of (i) the aggregate principal amount of Notes and other Indebtedness
incurred after the Issue Date that is pari passu or structurally senior in
right of payment (other than Indebtedness under the Credit Agreement) to the
Notes and is outstanding after taking into account the application of the
proceeds of such disposition or Asset Sale and (ii) two (2).
"Credit Agreement" means the credit agreement entered into between
the Company, certain of the Subsidiaries of the Company, the lenders listed
therein and Citicorp USA, Inc., as agent, providing for working capital and
other financing, as the same may at any time be amended, amended and restated,
supplemented or otherwise modified, including any refinancing, refunding,
replacement or extension thereof which provides for working capital and other
financings, whether by the same or any other lender or group of lenders.
"Currency Hedging Obligations" means with respect to any Person, the
obligations and/or rights of such Person under currency hedging arrangements
designed to protect such Person against currency fluctuations.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Deferred Coupon Notes" means Waxman Industries' $92,797,000
aggregate principal amount at maturity of 12 3/4% Deferred Coupon Notes due
June 1, 2004.
"Deferred Coupon Note Refinancing Indebtedness" means any
Indebtedness the net proceeds of which are used entirely to refinance, in
whole or in part, the Deferred Coupon Notes provided that (i) such
Indebtedness does not accrue interest prior to June 1, 1999, (ii) after June
1, 1999 such Indebtedness does not accrue interest at a rate per annum in
excess of the rate per annum that the Deferred Coupon Notes, as in existence
on the Issue Date, accrue interest and (iii) such Indebtedness does not
provide for any mandatory redemption, amortization or sinking fund requirement
earlier than six months after the final maturity of the Notes.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes.
"Eligible Sale Proceeds" means an amount equal to the excess of (i)
the net cash proceeds received from any disposition of Capital Stock of
Barnett or any Asset Sale involving WOC over (ii) the Covered Amount.
"Fair Market Value" or "fair value" means, with respect to any asset
or property, the price which could be negotiated in an arm's-length free
market transaction, for cash, between a willing seller and a willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. With respect to any Person, Fair Market Value shall be determined
by the Board of Directors of such Person (and with respect to the Company or a
Subsidiary of the Company, a majority of the Independent Directors of the
Company) acting in good faith and shall be evidenced by a Board Resolution
delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are applicable as of the
date of determination.
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"Indebtedness" means, with respect to any Person, without
duplication, (i) any liability, contingent or otherwise, of such Person (A)
for borrowed money (whether or not the recourse of the lender is to the whole
of the assets of such Person or only to a portion thereof), (B) evidenced by a
note, debenture or similar instrument or letter of credit (including purchase
money obligations but excluding undrawn documentary letters of credit for
trade payables arising in the ordinary course of business) or (C) for the
payment of money relating to a Capitalized Lease Obligation or other
obligation relating to the deferred purchase price of property (other than
trade payables or accrued liabilities arising in the ordinary course of
business); (ii) any liability of others of the kind described in the preceding
clause (i) which the Person has guaranteed or which is otherwise its legal
liability; (iii) any obligation secured by a lien to which the property or
assets of such Person are subject, whether or not the obligations secured
thereby shall have been assumed by or shall otherwise be such Person's legal
liability (the amount of such obligation being deemed to be the lesser of the
fair value of such property or asset or the amount of the obligation so
secured); and (iv) any and all deferrals, renewals, extensions and refundings
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clause (i), (ii) or (iii).
"Independent Director" means any director that (i) is not and has not
been an officer or employee of Waxman Industries or any of its Affiliates,
(ii) does not have any relationship that, in the opinion of the Board of
Directors of the Company (exclusive of any such Independent Director), would
interfere with his/her exercise of independent judgment in carrying out the
responsibilities of directors and (iii) with respect to any transaction or
series of related transactions, does not have any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions.
"Intercorporate Agreement" means the Intercorporate Agreement among
Waxman Industries, the Company, Barnett, Consumer Products and WOC dated as of
May 20, 1994, as amended to date.
"Interest Rate Protection Obligations" means the obligations and/or
rights of any Person pursuant to any arrangement with any other Person,
designed to protect such Person against fluctuations in interest rates,
whereby, directly or indirectly, such Person is entitled to receive from time
to time periodic payments calculated by applying either a floating or a fixed
rate of interest on a stated notional amount in exchange for periodic payments
made by such Person calculated by applying a fixed or a floating rate of
interest on the same notional amount and shall include without limitation,
interest rate swaps, caps, floors, collars and similar agreements.
"Lien" means any mortgage, lien (statutory or other), pledge,
security interest, encumbrance, claim, hypothecation, assignment for security,
deposit arrangement or preference or other security Agreement of any kind or
nature whatsoever. For purposes of the Indenture, a Person shall be deemed to
own subject to a Lien any property which it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sale Agreement,
capital lease or other title retention Agreement.
"Material Subsidiary" means, with respect to any Person, any
Subsidiary of such Person which would be a "significant subsidiary" pursuant
to Article 1-02 of Regulation S-X.
"Net Cash Proceeds" means, with respect to any Asset Sale the
proceeds thereof in the form of cash or Cash Equivalents, including payments
in respect of deferred payment obligations when received in the form of cash
or Cash Equivalents net of (i) brokerage commissions and other reasonable fees
and expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale; (ii) provisions for all taxes payable within one
year as a result of such Asset Sale; (iii) payments made to retire
Indebtedness secured by the assets subject to such Asset Sale to the extent
required pursuant to the terms of such Indebtedness; (iv) appropriate amounts
to be provided by the Company or any Subsidiary of the Company, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any of its
Subsidiaries, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, provided, however, that the
amount of any such reserve at such time that such amount is no longer required
to be provided as a reserve in accordance with GAAP and is not applied to the
liability for which such reserve was established shall be deemed Net Cash
Proceeds; and (v) any amount required to be paid to any Person owning a
beneficial interest in the property or assets sold in an amount proportionate
to such beneficial interest.
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"Net Income" means, with respect to any Person for any period, the
net income (loss) of such Person and its Subsidiaries determined in accordance
with GAAP.
"Net Proceeds" means with respect to any Person, (a) in the case of
any sale of Capital Stock by such Person or common equity contribution to such
Person, the aggregate net cash proceeds received by such Person after payment
of expenses, commissions and the like, if any, incurred in connection
therewith, (b) in the case of the issuance of any Indebtedness by such Person,
the aggregate net cash proceeds received by such Person, after payment of
expenses, commissions and the like incurred in connection therewith, or (c) in
the case of any exchange, exercise, conversion or surrender of outstanding
securities of any kind of the Company for or into shares of Capital Stock of
the Company which is not Disqualified Stock, the net cash proceeds received by
the Company upon such exchange, exercise, conversion or surrender (plus, with
respect to the issuance of any such securities after the Issue Date, the net
cash proceeds received by such person upon the issuance of such securities),
less any and all payments made to the holders, e.g., on account of fractional
shares, and less all expenses, commissions and the like incurred by the
Company in connection therewith.
"Permitted Barnett Secured Indebtedness" means Indebtedness of the
Company or any of its Subsidiaries in an aggregate principal amount not to
exceed $5.0 million that is secured by a Lien described under clause (h) of
the definition of "Permitted Liens" less the principal amount of Permitted
Barnett Secured Indebtedness permanently prepaid pursuant to the "Disposition
of Proceeds of Asset Sales" covenant.
"Permitted Holders" means Armond Waxman, Melvin Waxman, trusts for
the benefit of any of Armond Waxman, Melvin Waxman or members of their
families, the heirs of or administrators or executors for the respective
estates of Armond Waxman or Melvin Waxman or any Person, entity or group of
Persons controlled by any of the foregoing.
"Permitted Investments" means (i) obligations of the United States
government due within one year; (ii) certificates of deposit or Eurodollar
deposits due within one year with a commercial bank having capital funds of at
least $500,000,000 or more; (iii) commercial paper rated at least A-1 by
Standard & Poor's Corporation or at least P-1 by Moody's Investors Service,
Inc.; (iv) debt of any state or political subdivision that is rated among the
two highest rating categories obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc. and is due within one year; (v)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States
Government or issued by any agency thereof and backed by the full faith and
credit of the United States, in each case maturing within one year from the
date of acquisition; provided, however, that the terms of such agreements
comply with the guidelines set forth in the Federal Financial Agreements of
Depository Institutions with Securities Dealers and Others, as adopted by the
Comptroller of the Currency; and (vi) Investments represented by Interest Rate
Protection Obligations and Currency Hedging Agreements.
"Permitted Liens" means, with respect to any Person, any Lien arising
by reason of (a) any judgment, decree or order of any court, so long as such
Lien is being contested in good faith and is adequately bonded, and any
appropriate legal proceedings which may have been duly initiated for the
review of such judgment, decree or order shall not have been finally
terminated or the period within which such proceedings may be initiated shall
not have expired; (b) taxes, assessments, governmental charges or claims not
yet delinquent or which are being contested in good faith; (c) security for
payment of workers' compensation or other insurance or social security
legislation; (d) security for the performance of tenders, contracts (other
than contracts for the payment of money) or leases (excluding any Capitalized
Lease Obligations); (e) deposits to secure public or statutory obligations, or
in lieu of surety, performance or appeal bonds, entered into in the ordinary
course of business; (f) Liens arising by operation of law in favor of
carriers, warehousemen, landlords, mechanics, materialmen, laborers, employees
or suppliers, incurred in the ordinary course of business for sums which are
not yet delinquent or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof; (g) easements,
rights-of-way, zoning and similar covenants and restrictions and other similar
encumbrances or title defects which, in the aggregate, are not substantial in
amount, and which do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of such Person or any of its Subsidiaries; (h) Liens on up to
$10.0 million fair value of Barnett Common Stock provided such Liens secure
not more than $5.0 million of Permitted Barnett Secured
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Indebtedness; and (i) Liens arising in the ordinary course of business in
favor of custom and revenue authorities to secure payment of custom duties.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
or government or agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Restricted Payment" means any of the following: (i) the declaration
or payment of any dividend or any other distribution on Capital Stock of the
Company or any Subsidiary of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Subsidiary of the Company (other than (x) dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase Capital Stock (other than Disqualified
Stock), and (y) in the case of Subsidiaries of the Company, dividends or
distributions payable to the Company or to a Wholly-Owned Subsidiary of the
Company), (ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Subsidiaries, (iii)
the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking fund payment,
of any Indebtedness of the Company which is subordinated in right of payment
to the Notes (other than Indebtedness of the Company acquired in anticipation
of satisfying a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition) and
(iv) the making of any Investment other than pursuant to clause (i), (ii),
(iv) or (v) of the "Limitation on Investments, Loans and Advances" covenant
above.
"Senior Secured Notes" means the 12 1/4% Fixed Rate Senior Secured
Notes due September 1, 1998 and Floating Rate Senior Secured Notes due
September 1, 1998 of Waxman Industries.
"Subsidiary" means with respect to any Person (i) a corporation a
majority of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly,
owned by such Person, by one or more Subsidiaries of such Person or by such
Person and one or more Subsidiaries of such Person or (ii) any other Person
(other than a corporation) in which such Person, one or more Subsidiaries of
such Person or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof, has at least a
majority ownership interest.
"Tax Sharing Agreement" means the Tax Sharing Agreement among Waxman
Industries and certain of its subsidiaries, dated as of May 20, 1994, as in
existence on the Issue Date.
"Trademark License Agreements" means the Trademark License Agreements
among certain of the Operating Companies dated as of May 20, 1994, as in
existence on the Issue Date.
"Voting Power" means, with respect to any Person, the power under
ordinary circumstances pursuant to the ownership of shares of any class or
classes of Capital Stock to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or
not, at the time, stock of any other class or classes shall have, or might
have, voting power by reason of the happening of any contingency).
"Wholly-Owned Subsidiary" means with respect to any Person any
Subsidiary of such Person, 100% of the Capital Stock of which (other than
shares of Capital Stock representing any director's qualifying shares or
investments by foreign nationals mandated by applicable law) is owned by such
Person, by a Wholly-Owned Subsidiary of such Person or by such Person and one
or more Wholly-Owned Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
THE NEW CREDIT AGREEMENT
In connection with the Barnett Public Offering, Waxman USA entered
into an amendment and restatement of the Operating Companies Revolving Credit
Facility and Term Loan (the "Restated Credit Agreement") to provide for, among
other things, an approximate one year secured credit facility providing for
revolving credit advances of up to $25.0 million and term loans of up to $5.0
million ("Restated Term Loans") and a release of Barnett from such lending
arrangements. On June 28, 1996, Waxman Industries refinanced the Restated
Credit Agreement with the New Credit Agreement provided by BankAmerica
Business Credit, Inc. The New Credit Agreement provides for, among other
things, an approximate three year secured credit facility providing for
revolving credit advances of up to $30.0 million and New Term Loans of up to
$5.0 million.
The New Credit Agreement provides for revolving credit advances of up
to 85.0% of the amount of eligible accounts receivable and up to the lesser of
(i) $16 million or (ii) 60% of the amount of eligible raw and finished goods
inventory. Revolving credit advances bears interest at a rate equal to (a)
Bank of America's reference rate plus 1.0% or (b) LIBOR plus 2.75%. The New
Credit Agreement includes a letter of credit subfacility of $2.0 million. New
Term Loans bear interest at a rate per annum equal to .25% over the interest
rate applicable to revolving credit advances under the New Credit Agreement.
Borrowings under the New Credit Agreement are secured by the accounts
receivable, inventory, certain general intangibles and unencumbered fixed
assets of the Borrowers. In addition, New Term Loans are also secured by a
pledge of 500,000 shares of Barnett Common Stock (constituting approximately
3.5% of all outstanding Barnett Common Stock) owned by the Company. The New
Credit Agreement requires the Borrowers to maintain cash collateral accounts
into which all available funds are deposited and applied to service the
facility on a daily basis. The New Credit Agreement prevents dividends and
distributions by the Borrowers except in certain limited instances including,
so long as there is no Default or Event of Default, and the Borrowers are in
compliance with certain financial covenants, the payment of interest on the
Senior Subordinated Notes and Deferred Coupon Notes, and contains customary
negative, affirmative and financial covenants and conditions.
The New Credit Agreement contains similar events of default as those
contained in the Restated Credit Agreement, which include the following: (i)
any Borrower shall fail to make any payment of principal or interest or any
other amount due under the agreements related to the New Credit Agreement or
fail to perform any covenant (after the expiration of any applicable grace
period) thereunder, or any representation or warranty made in connection
therewith shall prove to have been incorrect in any material respect when made
or deemed made; (ii) any Borrower shall fail to pay any indebtedness having a
principal amount of $250,000 or more; or any other event shall occur or
condition shall exist under any agreement or instrument relating to any such
indebtedness, if the effect of such event or condition is to accelerate, or to
permit the acceleration of (after the expiration of any applicable grace
period), the maturity of such indebtedness; or any such indebtedness shall
become or be declared to be due and payable, or required to be repaid (other
than by a regularly scheduled required prepayment), or the Borrowers shall be
required to repurchase or offer to repurchase such indebtedness, prior to the
stated maturity thereof; (iii) certain events of bankruptcy with respect to
the Borrowers; (iv) there shall occur any Change of Control (as defined in the
New Credit Agreement); and (v) there shall occur an event which would have a
Material Adverse Effect (as defined in the New Credit Agreement).
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain income tax consequences is based
on laws, regulations, rulings and decisions now in effect, all of which are
subject to change, possibly on a retroactive basis. The discussion does not
cover all aspects of federal taxation that may be relevant to, or the actual
tax effect that any of the matters described herein will have on, particular
Holders, and does not address state, local, foreign or other tax laws. Certain
Holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations, nonresident aliens,
taxpayers subject to the alternative minimum tax and persons in special
situations such as those that hold the Old Notes or New Notes as part of a
hedging or conversion transaction or straddle) may be subject to special rules
not discussed below. The description assumes that Holders of the New Notes
will hold the New Notes as "capital
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assets" (generally, property held for investment purposes) within the
meaning of Section 1221 of the Code. EACH HOLDER SHOULD CONSULT ITS OWN TAX
ADVISOR IN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES
TO THE PARTICULAR HOLDER OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE
OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange
Offer should not be treated as an exchange or other taxable event for federal
income tax purposes because, under regulations proposed by the United States
Treasury, the New Notes should not be considered to differ materially in kind
or extent from the Old Notes. Rather, the New Notes received by a Holder
should be treated as a continuation of the Old Notes in the hands of such
Holder. As a result, there should be no federal income tax consequences to
Holders who exchange Old Notes for New Notes pursuant to the Exchange Offer
and any such Holder should have the same adjusted basis and holding period in
the New Notes as it had in the Old Notes immediately before the exchange.
HOLDING AND DISPOSITION OF NOTES
Stated Interest. Holders of New Notes will include stated interest in
gross income in accordance with their methods of accounting.
Original Issue Discount. If, as anticipated, neither the Old Notes
nor the Senior Subordinated Notes are considered to be Publicly Traded (and
assuming that the Old Notes are not considered to have been issued in a
potentially abusive transaction), with the result that the issue price of the
Old Notes equals their principal amount, the New Notes, as a continuation of
the Old Notes, will not be considered to bear OID. In the event that the issue
price is otherwise determined, the New Notes will be considered to bear OID to
the extent that their principal amount exceeds their issue price at the time
of the issuance of the Old Notes (provided that such excess is not less than
1/4 of 1% multiplied by the product of the principal amount and the number of
complete years to maturity of the Old Notes). Each holder of a New Note will
be required to include in gross income for each taxable year the sum of the
daily portions of OID attributable to each day during the taxable year in
which such holder held the New Notes. Such daily portion is determined by
allocating to each day a ratable portion of the OID allocable to the accrual
period in which such day is included. The amount of OID allocable to each full
accrual period is the product of the adjusted issue price of the New Notes at
the beginning of such accrual period and the yield to maturity of the New
Notes, less the amount of stated interest allocable to the accrued period. The
adjusted issue price of a New Note at the beginning of an accrual period is
equal to its issue price, increased by any prior accruals of OID and decreased
by the amount of any payments previously made on the New Notes, other than
payments of stated interest.
Disposition of New Notes. If a New Note is redeemed, sold or
otherwise disposed of, a Holder thereof generally will recognize gain or loss
equal to the difference between the amount realized on the redemption, sale or
other disposition of such New Note and such Holder's adjusted basis in the New
Note. A Holder's tax basis in a New Note will be increased by the amount of
any OID that is includible in such Holder's income. Subject to the market
discount rules discussed below, such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if, on the date of the sale, the
Holder has a holding period for the New Notes (which would include the holding
period of the Old Notes) of more than one year.
Market Discount. Under the market discount rules of the Code, an
exchanging Holder (other than a Holder who made the election described below)
who purchased an Old Note with "market discount" (generally defined as the
amount by which the adjusted issue price of the Old Note on the Holder's date
of purchase exceeds the Holder's purchase price) will be required to treat any
gain recognized on the redemption, sale or other disposition of the New Note
received in the exchange as ordinary income to the extent of the market
discount that accrued during the holding period of such New Note (which would
include the holding period of the Old Note). Further, the Code requires that
partial principal payments on a market discount bond be included in gross
income to the extent that such payments do not exceed the accrued market
discount on such bond. A Holder of an Old Note who has acquired an Old Note
who has not made the election described below also will be required to defer
deduction of a portion of interest on debt incurred on continued to purchase
or carry the Old Note or New Note until disposition of the New Note in a
taxable transaction. A Holder
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who has elected under applicable Code provisions to include market discount in
income annually as such discount accrues will not, however, be required to
treat any gain recognized as ordinary income under these rules. Holders should
consult their tax advisors as to the portion of any gain that would be taxable
as ordinary income under these provisions. Subsequent holders who acquire New
Notes at a market discount also will be subject to these rules.
Acquisition Premium. An exchanging Holder who acquired an Old Note
(or a subsequent Holder of a New Note who acquires such New Note) at a cost in
excess of its adjusted issue price (i.e., its original issue price increased
by the portion of OID previously includible in the gross income of all prior
holders, determined without regard to any reduction of OID attributable to any
acquisition premium paid by prior holders, and decreased by all payments
previously made thereon) immediately after such acquisition, but less than or
equal to its stated redemption price at maturity, will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules contained in the Code, such Holder generally would be entitled to a
reduction in the amount of interest otherwise includible in income with
respect to such Note.
Amortizable Bond Premium. Generally, if the initial tax basis of an
Old Note (or a New Note in the case of a subsequent Holder of a New Note) for
a holder exceeds its stated redemption price at maturity (which will be
determined by reference to an earlier call date if the call price would reduce
the amount of premium), such excess may be treated as "amortizable bond
premium" that is allocated among the interest payments on the Old Note (and
the New Note after the Exchange) using a constant interest rate method over
the Old Note's remaining term. In such case, a holder will not have to report
any OID in income. The amount allocated to each interest payment would be
applied against and reduce the amount of such interest payment (with a
corresponding reduction in basis). This interest offset would be available
only if an election under Section 171 of the Code is made or is in effect.
This election would apply to all debt instruments held or subsequently
acquired by the electing holder on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent
of the IRS.
Applicable High-Yield Discount Obligation Rules. The otherwise allowable
deductions for accrued OID on debt instruments issued by a corporation will be
deferred, and in certain circumstances subject to disallowance in part, if
such debt instruments constitute applicable high yield discount obligations
("AHYDOs"). The New Notes will constitute AHYDOs if: (i) the yield to maturity
of the New Notes exceed the relevant applicable federal rate at the time of
issue of the Old Notes (the "AFR") by more than 5 percentage points and (ii)
contrary to the Company's expectations, they have "significant original issue
discount" as defined in Section 163(i)(2) of the Code. If the New Notes
constitute AHYDOs then the Company will not be entitled to deduct OID accruing
with respect thereto until such interest is actually paid. In addition, if the
yield to maturity of the New Notes exceeds the AFR by more than 6 percentage
points then a portion of such interest corresponding to such excess (i) will
not be deductible by the Company at any time and (ii) may be eligible for the
dividends received deduction available to corporate holders in certain
circumstances.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of principal (including any amounts in respect
of OID), premium, and any accrued interest with respect to a New Note, and the
proceeds of a sale of a New Note within the United States will be subject to
information reporting, and possibly to "backup withholding" at a rate of 31%
if the Holder fails to provide its taxpayer identification number on Service
Form W-9, or otherwise fails to establish an exemption from backup
withholding.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant
to the Exchange Offer.
PLAN OF DISTRIBUTION
A broker-dealer holding Old Notes may participate in the Exchange
Offer provided that it acquired the Old Notes for its own account as a result
of market-making or other trading activities. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. This Prospectus, as it may be amended or supplemented from time to
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time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. For a period
of 180 days after the Expiration Date, the Company will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes
by broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Act and any profit on any such resale
of New Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer other than commissions or concessions
of any brokers or dealers and will indemnify the holders of the Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Act.
LEGAL MATTERS
The legality of the securities covered by this Prospectus has been
passed upon by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York,
counsel to the Company.
EXPERTS
The audited consolidated financial statements of the Company as of
June 30, 1996 and 1995 and for each of the three years in the period ended
June 30, 1996 included in this Prospectus and elsewhere in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports. Reference is made to said report which includes an
explanatory paragraph with respect to the changes in method of accounting for
long-lived assets and procurement costs as discussed in Notes 3 and 4 to the
Consolidated Financial Statements.
72
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1996
and June 30, 1996 F-2-3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995 F-4
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1995 F-5
Notes to Condensed Consolidated Financial Statements F-6
Audited Financial Statements:
Report of Independent Public Accountants F-9
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-10
Consolidated Statements of Operations for the years ended
June 30, 1996, 1995 and 1994 F-11
Consolidated Statements of Stockholder's Equity for the years
ended June 30, 1996, 1995 and 1994 F-12
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994 F-13-14
Notes to Consolidated Financial Statements F-15
F-1
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1996 AND JUNE 30, 1996
(IN THOUSANDS)
ASSETS
September 30, June 30,
1996 1996
(Unaudited) (Audited)
----------- ---------
CURRENT ASSETS:
Cash $ 1,211 $ 2,453
Accounts receivable, net 38,176 36,537
Inventories 64,533 59,883
Prepaid expenses 3,041 3,866
-------- --------
Total current assets 106,961 102,739
-------- --------
PROPERTY AND EQUIPMENT:
Land 505 428
Buildings 9,433 9,193
Equipment 23,434 20,665
-------- --------
33,372 30,286
Less accumulated depreciation
and amortization (16,358) (15,349)
-------- --------
Property and equipment, net 17,014 14,937
COST OF BUSINESSES IN EXCESS
OF NET ASSETS ACQUIRED, NET 13,215 13,318
UNAMORTIZED DEBT ISSUANCE COSTS, NET 1,140 1,100
OTHER ASSETS 1,423 969
-------- --------
$139,753 $133,063
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
F-2
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1996 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, June 30,
1996 1996
(Unaudited) (Audited)
----------- ---------
CURRENT LIABILITIES:
Current portion of long-term debt $ 14,797 $ 10,775
Accounts payable 28,719 27,547
Accrued liabilities 8,134 9,304
Accrued income taxes payable 2,533 2,037
Accrued interest 502 1,364
--------- ---------
Total current liabilities 54,685 51,027
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 983 863
SENIOR NOTES 43,026 43,026
PUSH-DOWN DEBT (NOTE 6) 5,724 5,724
MINORITY INTEREST IN CONSOLIDATED AFFILIATE 21,958 20,606
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 1,000 shares - -
Common Stock, $.01 par value per share:
Authorized 9,000 shares; 100 shares issued and
outstanding - -
Advances to Waxman Industries, Inc. (16,987) (16,913)
Paid-in capital 21,462 21,462
Retained earnings (Note 6) 9,216 7,556
--------- ---------
13,691 12,105
Cumulative currency translation adjustment (314) (288)
--------- ---------
Total stockholder's equity 13,377 11,817
--------- ---------
$139,753 $133,063
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
F-3
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
1996 1995
--------- ---------
Net sales $ 65,879 $ 57,589
Cost of sales 42,985 38,012
--------- ---------
Gross profit 22,894 19,577
Selling, general and administrative
expenses 15,522 13,905
Corporate charge 826 855
--------- ---------
Operating income 6,546 4,817
Interest expense, net (Note 6) 1,792 4,772
--------- ---------
Income before income taxes, minority
interest and cumulative effect of
change in accounting 4,754 45
Provision for income taxes (Note 6) 1,867 105
--------- ---------
Income (loss) before minority interest and
cumulative effect of change in accounting 2,887 (60)
Minority interest in consolidated
affiliate 1,352 -
--------- ---------
Income (loss) before cumulative effect of
change in accounting 1,535 (60)
Cumulative effect of change in accounting,
net of tax benefit - (4,928)
--------- ---------
Net income (loss) (Note 6) $ 1,535 $ (4,988)
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income (loss) $ 1,535 $ (4,988)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Cumulative effect of change in accounting -- 8,213
Minority interest in consolidated affiliate 1,352 --
Depreciation and amortization 1,072 1,173
Changes in assets and liabilities:
Accounts receivable, net (1,639) (898)
Inventories (4,650) 3,738
Prepaid expenses and other assets 371 448
Accounts payable 1,172 1,007
Accrued liabilities (1,170) (229)
Accrued income taxes 496 --
Accrued interest (862) 784
Other, net (26) (62)
-------- --------
Net Cash Provided by (Used in) Operating
Activities (2,349) 9,186
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (3,086) (1,466)
-------- --------
Net Cash (Used in) Investing Activities (3,086) (1,466)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreement 32,178 56,816
Payments under credit agreement (28,156) (59,477)
Borrowings (Repayments) of long-term debt 120 (19)
Capital contribution from parent 125 1,043
Advances from (to) parent (74) (6,715)
-------- --------
Net Cash Provided by
(Used in) Financing Activities 4,193 (8,352)
-------- --------
NET DECREASE IN CASH (1,242) (632)
BALANCE, BEGINNING OF PERIOD 2,453 2,062
-------- --------
BALANCE, END OF PERIOD $ 1,211 $ 1,430
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
F-5
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
Waxman USA Inc. ("Waxman USA"), a wholly owned subsidiary of Waxman Industries,
Inc. ("Waxman Industries"), was formed on February 2, 1994. The accompanying
condensed consolidated financial statements include the accounts of Waxman USA,
its wholly owned subsidiaries and its affiliate, Barnett Inc. (collectively,
the "Company"). Waxman USA owns approximately 49.9% of the voting capital stock
of Barnett Inc. ("Barnett") and, together with non-voting convertible preferred
stock of Barnett owned by Waxman USA, owns approximately 54% of the capital
stock of Barnett. The portion of Barnett not owned by Waxman USA is reflected
as minority interest in the accompanying condensed consolidated balance sheets.
All significant intercompany transactions and balances are eliminated in
consolidation.
During fiscal 1994, Waxman Industries restructured its domestic operations such
that Waxman Industries is now a holding company whose only material assets are
the capital stock of its subsidiaries (the "Corporate Restructuring"). As part
of the Corporate Restructuring, Waxman Industries formed (a) Waxman USA as a
holding company for the subsidiaries that comprise and support Waxman
Industries' domestic operations, (b) Waxman Consumer Products Group Inc.
("Consumer Products"), to own and operate Consumer Products Group division, and
(c) WOC Inc. ("WOC"), to own and operate Waxman USA's domestic subsidiaries,
other than Barnett and Consumer Products. On May 20, 1994, Waxman
Industries completed the Corporate Restructuring by (i) contributing the
capital stock of Barnett to Waxman USA, (ii) contributing the assets and
liabilities of the Consumer Products Group division to Consumer Products, (iii)
contributing the assets and liabilities of Madison Equipment division to WOC.,
(iv) contributing the assets and liabilities of Medal Distributing division to
WOC, (v) merging U.S. Lock Corporation and LeRan Copper & Brass Inc. into WOC,
(vi) contributing the capital stock of TWI International, Inc. ("TWI") to
Waxman USA and (vii) contributing the capital stock of Western American
Manufacturing Inc. ("WAMI") to TWI. This restructuring was accounted for based
upon each entity's historical carrying amounts.
The condensed consolidated statements of operations for the three months ended
September 30, 1996 and 1995, the condensed balance sheet as of September 30,
1996 and the condensed statements of cash flows for the three months ended
September 30, 1996 and 1995 have been prepared by the Company without audit,
while the condensed balance sheet as of June 30, 1996 was derived from audited
financial statements. In the opinion of management, these financial statements
include all adjustments, all of which are normal and recurring in nature,
necessary to present fairly the financial position, results of operations and
cash flows of the Company as of September 30, 1996 and for all periods
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
disclosures included herein are adequate and provide a fair presentation of
interim period results. Interim financial statements are not necessarily
indicative of financial position or operating results for an entire year. It is
suggested that these condensed interim financial
F-6
<PAGE>
statements be read in conjunction with the audited financial statements and the
notes thereto for the fiscal year ended June 30, 1996, included in the
Company's Registration Statement on Form S-4, dated October 29, 1996, filed
with the Securities and Exchange Commission.
NOTE 2 - BUSINESS
The Company believes that it is a leading supplier to the home repair and
remodeling market in the United States. Primarily through its wholly owned
subsidiaries, Consumer Products, WOC, and TWI and its affiliate Barnett, the
Company markets and distributes a broad range of plumbing, electrical and
hardware products to over 55,000 customers in the United States, including
do-it-yourself warehouse home centers, home improvement centers, mass
merchandisers, hardware stores, lumberyards and to plumbing and electrical
repair and remodeling contractors, independent hardware stores and maintenance
managers.
NOTE 3 - INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109).
Waxman USA participates in the consolidated tax group of which Waxman
Industries is the common parent. Commencing July 1, 1994, Waxman USA began
participating in a new tax sharing agreement with Waxman Industries. Under this
agreement, Waxman USA's federal tax liability is equal to the lesser of (i) its
federal tax liability calculated on a stand-alone basis or (ii) Waxman
Industries' federal tax liability. The Company files separate income tax
returns in certain states based on the results of operations within the
applicable states. At June 30, 1996, Waxman Industries had approximately $54.3
million of available domestic net operating loss carryforwards which will
expire between 2008 and 2011. The benefit of these net operating loss
carryforwards has been reduced 100% by a valuation allowance. Waxman Industries
will continue to evaluate the valuation allowance and to the extent that Waxman
Industries is able to recognize tax benefits in the future, such recognition
will favorably affect future results of operations. Waxman Industries also has
alternative minimum tax carryforwards of approximately $663,000 at June 30,
1996 which are available to reduce future regular income taxes over an
indefinite period.
As a result of the Barnett Public Offering (as defined below), Barnett is no
longer included in the consolidated tax group. Therefore, Waxman Industries'
remaining net operating loss carryforwards are not available to offset
Barnett's taxable income. The tax provision for the three months ended
September 30, 1996 represents a tax provision based on Waxman USA as a stand
alone taxpayer, Barnett's tax provision and a provision for state and foreign
taxes. Deferred taxes and amounts payable to Waxman USA's parent corporation,
are included in the accompanying condensed consolidated balance sheets.
Deferred tax assets of $500,000 related to Barnett are included in other assets
as of September 30 and June 30, 1996.
NOTE 4 - BARNETT
In April 1996, Barnett completed an initial public offering (the "Barnett
Public Offering") of its common stock (the "Barnett Common Stock"). In the
offering, 7,207,200 shares, representing approximately 55.1% of the Barnett
Common Stock, were sold in the aggregate by Barnett and Waxman USA at an
F-7
<PAGE>
initial public offering price per share of $14.00. Since the consummation of
the Barnett Public Offering, the cash flow generated by Barnett is no longer
available to Waxman USA other than the pro rata amounts, if any, distributed by
Barnett in the form of a common stock dividend. Waxman USA consolidates
Barnett's financial results and records a charge on its statement of operations
for the net income related to the outside stockholders' interest.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended September 30, 1996 and 1995
included income taxes of $1.4 million and $0.2 million and interest of $2.3
million and $3.8 million, respectively. Waxman USA's cash flow, within certain
restrictions, are upstreamed to Waxman Industries to service interest payments
and administrative costs.
NOTE 6 - SUBSEQUENT EVENT
In January 1997, the Company issued an additional $4.8 million principal amount
of 11 1/8% Senior Notes due September 1, 2001 (the Senior Notes) for a like
aggregate principal amount of Waxman Industries' 13 3/4% Senior Subordinated
Notes due 1999 (the "Senior Subordinated Notes"). The Company also intends to
continue pursuing the exchange of the remaining outstanding principal amount
of Senior Subordinated Notes, $895,000, not previously exchanged. As such,
pursuant to certain Securities and Exchange Commission rules, certain
June 30, 1996 and September 30, 1996 and 1995 amounts have been adjusted to
reflect the push-down of the Senior Subordinated Notes and the related interest
expense. The effect of the adjustments were as follows:
As Previously
-------------
Reported Adjusted
-------- --------
INTEREST EXPENSE:
Three Months Ended
September 30,
1996 1,592 1,792
1995 4,572 4,772
PROVISION FOR INCOME TAXES:
Three Months Ended
September 30,
1996 1,942 1,867
1995 180 105
NET INCOME (LOSS):
Three Months Ended
September 30,
1996 1,660 1,535
1995 (4,863) (4,988)
PUSH DOWN DEBT:
at June 30, 1996 - 5,724
at September 30, 1996 - 5,724
TOTAL STOCKHOLDER'S EQUITY:
at June 30, 1996 17,541 11,817
at September 30, 1996 19,101 13,377
F-8
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of Waxman USA Inc.:
We have audited the accompanying consolidated balance sheets of Waxman USA
Inc., (a Delaware corporation) and subsidiaries (the "Company") as of June 30,
1996 and 1995, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended June 30, 1996. As explained in Note 12, certain financial statements as
of and for the years ended prior to June 30, 1996 have been restated. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waxman USA Inc. and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
As explained in Notes 3 and 4 to the financial statements, in fiscal
1996, the Company changed its method of accounting for long-lived assets and
procurement costs.
Cleveland, Ohio, Arthur Andersen LLP
October 7, 1996
(except with respect to the matter discussed in
Note 13 as to which the date is January 29, 1997).
F-9
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, 1996 June 30, 1995
------------- -------------
restated
--------
ASSETS
Current Assets:
Cash $ 2,453 $ 2,062
Accounts receivable, net 36,537 33,440
Inventories 59,883 68,631
Prepaid expenses 3,866 4,662
-------- --------
Total current assets 102,739 108,795
-------- --------
Property and Equipment:
Land 428 394
Buildings 9,193 10,035
Equipment 20,665 18,217
-------- --------
30,286 28,646
Less accumulated depreciation and amortization (15,349) (13,274)
-------- --------
14,937 15,372
-------- --------
Cost of Businesses in Excess of Net
Assets Acquired, net 13,318 23,857
Unamortized Debt Issuance Costs, net 1,100 5,553
Other Assets 969 1,192
-------- --------
$133,063 $154,769
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt $ 10,775 $ 59,412
Accounts payable 27,547 19,070
Accrued liabilities 9,304 5,862
Accrued income taxes payable 2,037 --
Accrued interest 1,364 1,929
-------- --------
Total current liabilities 51,027 86,273
-------- --------
Long-Term Debt, net of current portion 863 985
Exchange Notes 43,026 --
Push-Down Debt (Notes 5 and 13) 5,724 87,536
Commitments and Contingencies
Minority Interest 20,606 --
Stockholder's Equity
Preferred stock, $0.10 par value
per share; authorized and
unissued 1,000 shares -- --
Common stock, $0.01 par value per
share; 9,000 shares authorized;
100 shares issued and outstandiing -- --
Paid-in capital 21,462 21,462
Retained earnings (deficit) 7,556 (13,893)
Advances to Waxman Industries, Inc. (16,913) (27,453)
-------- --------
12,105 (19,884)
Cumulative currency translation adjustments (288) (141)
-------- --------
Total stockholder's equity 11,817 (20,025)
-------- --------
$133,063 $154,769
======== ========
The accompanying notes to consolidated financial statements are an intergral
part of these balance sheets.
F-10
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
restated
--------
<S> <C> <C> <C>
Net sales $235,067 $232,304 $213,571
Cost of sales 160,556 152,368 140,262
-------- -------- --------
Gross profit 74,511 79,936 73,309
Selling, general and
administrative expenses 66,433 58,590 53,321
Corporate charge 4,195 3,891 4,217
Restructuring and asset
impairment loss 19,507 2,779 --
-------- -------- --------
Operating income (loss) ($15,624) 14,676 15,771
Gain on sale of Barnett stock 65,917 -- --
Interest expense 16,263 18,952 13,790
-------- -------- --------
Income (loss) from continuing operations
before income taxes, minority
interest, disposal, extraordinary
loss and cumulative effect
of change in accounting 34,030 (4,276) 1,981
Provision (benefit) for income taxes 17,019 (1,100) 1,100
-------- -------- --------
Income (loss) from continuing operations
before minority interest, disposal,
extraordinary loss and cumulative
effect of change in accounting 17,011 (3,176) 881
Minority interest in consolidated affiliate 975 -- --
Reversal of loss on (loss on) disposal of
Consumer Products, net of tax 6,600 (6,600) --
-------- -------- --------
Income (loss) before extraordinary loss
and cumulative effect of change in accounting 22,636 (9,776) 881
Extraordinary loss, net of tax benefit 3,750 -- --
Cumulative effect of change in accounting,
net of tax benefit (Note 4) 4,928 -- --
-------- -------- --------
Net income (loss) $13,958 $(9,776) $881
======== ======== ========
Pro forma effect assuming the change
in accounting principle is applied
retroactively:
Income (loss) before extraordinary loss $22,636 ($11,131) $1,374
======== ======== ========
Net income (loss) $18,886 ($11,131) $1,374
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an intergral
part of these balance sheets.
F-11
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousnads)
<TABLE>
<CAPTION>
Cumulative
Retained Advances Currency Total
Preferred Common Paid-in Earnings to Waxman Translation Stockholder's
Stock Stock Capital (deficit) Industries, Inc. Adjustment Equity
--------- ------ ------- --------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1993, as restated $ -- $ -- $29,843 $(47,421) $ 35,352 $ 249 $ 18,023
Net income 881 881
Capital contribution from parent,
net 32,125 32,125
Advance to parent, net (520) (520)
Contribution of intercompany
balances with Waxman
Industries, Inc. in connection
with the Corporate Restructuring 42,847 (42,847) --
Dividend to Waxman Industries,
Inc. in connection with the
Corporate Resturcturing (51,228) (51,228)
Currency translation adjustment (371) (371)
--------- ------ ------- --------- ---------------- ----------- -------------
Balance June 30, 1994, as restated -- -- 21,462 (14,415) (8,015) (122) (1,090)
Net loss (9,776) (9,776)
Capital contribution from
parent, net 10,298 10,298
Advances to parent, net (19,438) (19,438)
Currency translation
adjustment (19) (19)
--------- ------ ------- --------- ---------------- ----------- -------------
Balance June 30, 1995 as restated -- -- 21,462 (13,893) (27,453) (141) (20,025)
Net income 13,958 13,958
Capital contribution from parent,
net 7,491 7,491
Advances from parent, net 10,540 10,540
Currency translation
adjustment (147) (147)
--------- ------ ------- --------- ---------------- ----------- -------------
Balance June 30, 1996 $ -- $ -- $21,462 $ 7,556 $(16,913) $(288) $ 11,817
========= ====== ======= ========= ================ =========== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-12
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
Cash From (Used For): 1996 1995 1994
- --------------------- ---- ---- ----
restated restated
-------- --------
Operations:
<S> <C> <C> <C>
Net income (loss) $ 13,958 $ (9,776) $ 881
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operations:
Cumulative effect of change in accounting 8,213 -- --
Extraordinary loss 6,251 -- --
Restructuring and asset impairment loss 19,507 2,779 --
Gain on sale of Barnett stock (65,917) -- --
Other non-cash charges 7,096 -- --
(Reversal of loss on) loss on disposal of
Consumer Products (11,000) 11,000 --
Minority interest in income of consolidated affiliate 975 -- --
Depreciation and amortization 7,612 8,278 7,108
Deferred income taxes (500) -- --
Bad debt provision 4,325 692 617
Changes in assets and liabilities:
Accounts receivable, net (6,131) 576 (1,692)
Inventories (2,718) 1,270 (7,486)
Prepaid expenses 796 (144) 59
Accounts payable 4,722 (972) (201)
Accrued liabilities 1,077 (1,297) 237
Other, net (147) (19) (371)
-------- -------- --------
Net cash (used for) provided by operations (11,881) 12,387 (848)
-------- -------- --------
Investments:
Capital expenditures, net (5,166) (3,995) (3,338)
Change in other assets (2,832) (2,381) (1,222)
Net proceeds from sale of Barnett stock 92,636 -- --
-------- -------- --------
Net cash provided by (used for) investments 84,638 (6,376) (4,560)
-------- -------- --------
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
Financing:
<S> <C> <C> <C>
Borrowings under credit agreements 209,182 241,953 54,891
Payments under credit agreements (248,941) (237,178) (15,948)
Borrowings under term loan 5,000 -- 15,000
Repayments under term loan (14,000) (1,000) --
Push-down debt -- -- (23,000)
Debt issuance costs (1,488) (649) (4,515)
Retirement of Senior Secured Notes (39,150) -- --
Premium on early retirement of Senior Secured Notes (1,000) -- --
Advances from (to) Waxman Industries, Inc., net 10,540 (19,438) (43,367)
Capital contribution from parent, net 7,491 10,298 32,125
Net dividend to parent in connection with the
Corporate Restructuring -- -- (8,381)
-------- -------- --------
Net cash (used for) provided by financing (72,366) (6,014) 6,805
-------- -------- --------
Net increase (decrease) in cash 391 (3) 1,397
Balance, beginning of period 2,062 2,065 668
-------- -------- --------
Balance, end of period $ 2,453 $ 2,062 $ 2,065
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-14
<PAGE>
WAXMAN USA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(in thousands)
1. Summary of Significant Accounting Policies
A. Basis of Consolidation and Reorganization
The accompanying consolidated financial statements include the accounts of
Waxman USA Inc. ("Waxman USA"), its wholly-owned subsidiaries and its affiliate
Barnett Inc. (collectively, the "Company"). Waxman USA owns approximately 49.9%
of the voting capital stock of Barnett Inc. ("Barnett") and, together with
non-voting preferred stock of Barnett owned by Waxman USA, owns approximately
54% of the capital stock of Barnett (See Note 2 for a discussion of the
Company's ability to convert such preferred stock). The portion of Barnett not
owned by Waxman USA is reflected as minority interest in the accompanying
consolidated balance sheets. All significant intercompany transactions and
balances are eliminated in consolidation.
Waxman USA, a wholly-owned subsidiary of Waxman Industries, Inc. ("Waxman
Industries"), was formed on February 2, 1994. During fiscal 1994, Waxman
Industries restructured its domestic operations such that Waxman Industries is
now a holding company whose only material assets are the capital stock of its
subsidiaries (the "Corporate Restructuring"). As part of the Corporate
Restructuring, Waxman Industries formed (a) Waxman USA as a holding company for
the subsidiaries that comprise and support Waxman Industries' domestic
operations, (b) Waxman Consumer Products Group Inc. ("Consumer Products"), to
own and operate Consumer Products Group division, and (c) WOC Inc. ("WOC"), to
own and operate Waxman USA's domestic subsidiaries, other than Barnett and
Consumer Products. On May 20, 1994, Waxman Industries completed the Corporate
Restructuring by (i) contributing the capital stock of Barnett to Waxman USA,
(ii) contributing the assets and liabilities of the Consumer Products Group
division to Consumer Products, (iii) contributing the assets and liabilities
of Madison Equipment division to WOC, (iv) contributing the assets and
liabilities of Medal Distributing division to WOC, (v) merging U.S. Lock
Corporation and LeRan Copper & Brass Inc. into WOC, (vi) contributing the
capital stock of TWI International, Inc. ("TWI") to Waxman USA and (vii)
contributing the capital stock of Western American Manufacturing Inc. ("WAMI")
to TWI. The "Operating Companies" consist of Barnett, Consumer Products and
WOC. This restructuring was accounted for based upon each entity's historical
carrying amounts.
The Company operates in a single business segment - the distribution of
plumbing, electrical and hardware products.
B. Restricted Cash Balances
In accordance with the terms of the New Credit Agreement (as defined in
Note 5), all restricted cash balances have been excluded from cash and have
been applied against outstanding borrowings under the New Credit Agreement.
Cash balances represent certain unrestricted operating accounts and accounts of
foreign operations.
C. Accounts Receivable
Accounts receivable are presented net of allowances for doubtful accounts
of $2,219 and $1,422 at June 30, 1996 and 1995, respectively. Bad debt expense
totaled $4,325 in 1996, including $2.7 million of expense that was included in
the $14.8 million charge from the Company's strategic review and reorientation
of its operations, $692 in 1995 and $617 in 1994.
F-15
<PAGE>
The Company sells plumbing, electrical and hardware products throughout
the United States to do-it-yourself retailers, mass merchandisers, smaller
independent retailers and plumbing, electrical repair and remodeling
contractors. The Company performs ongoing credit evaluations of its customers'
financial condition. For 1996 and 1995, Consumer Products' largest customers,
Kmart and its subsidiary Builders Square, accounted for approximately 11.1% and
13.5% of the Company's total net sales and 42.3% and 43.6% of Consumer
Products' total net sales. During the same periods, the Company's ten largest
customers accounted for approximately 22.9% and 24.1% of the Company's total
net sales and approximately 26% and 25% of accounts receivable at June 30, 1996
and 1995, respectively.
The Company has been advised by Kmart that it is in the process of
conducting a review of its supply arrangements with its suppliers of plumbing
and hardware products, including Consumer Products, and will make a decision
regarding which vendors it will utilize by the end of December 1996. Although
the Company has had a long relationship with Kmart, there can be no assurance
that this relationship will continue or as to the terms of any relationship
that does continue.
D. Inventories
At June 30, 1996 and 1995, inventories, consisting primarily of finished
goods, are carried at the lower of first-in, first-out (FIFO) cost or market.
The Company regularly evaluates its inventory carrying value, with appropriate
consideration given to any excess, slow-moving and/or nonsalable inventories.
The Company recorded a $4.9 million charge in the year ended June 30, 1996 in
connection with the evaluation of its inventory carrying value during the
review of the strategic direction of the Company (see Note 3).
E. Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, buildings and equipment are depreciated on a straight-line basis over
the estimated useful lives of the related assets. Depreciable lives are 15 to
40 years for buildings and 3 to 15 years for equipment. Leasehold improvements
are amortized on a straight-line basis over the term of the lease or the useful
life of the asset, whichever is shorter. For income tax purposes, accelerated
methods are used. Depreciation expense totaled $3,185 in 1996, $2,534 in 1995,
and $2,419 in 1994.
F. Earnings Per Share
Waxman USA, as a wholly-owned subsidiary of Waxman Industries, had minimal
common shares outstanding. As such, historical earnings per share amounts are
not considered meaningful.
G. Cost of Businesses in Excess of Net Assets Acquired
Cost of businesses in excess of net assets acquired is being amortized
primarily over 40 years using the straight-line method. Management has
evaluated its accounting for goodwill in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," on an originating entity basis considering future
undiscounted operating cash flows and believes that the net asset is realizable
and the amortization period is appropriate. During fiscal 1996, the Company
determined that $9.8 million of goodwill was impaired at its U.S. Lock division
(See Note 3B). Management continues to reevaluate the realizability of these
assets. Goodwill amortization expense totaled $718 in 1996, $764 in 1995 and
$724 in 1994. Accumulated amortization totaled $15,772 and $5,233 at June 30,
1996 and 1995, respectively.
H. Unamortized Debt Issuance Costs
Unamortized debt issuance costs relate to the long-term and push-down debt
(see Note 5) and are amortized over the life of the related debt. The Company
incurred an extraordinary charge in fiscal 1996 related to the accelerated
amortization of unamortized debt issuance costs. (See Note 2).
F-16
<PAGE>
I. Foreign Currency Translation
All balance sheet accounts of foreign subsidiaries are translated at the
exchange rate as of the end of the fiscal year. Income statement items are
translated at the average currency exchange rates during the fiscal year. The
resulting translation adjustment is recorded as a component of stockholder's
equity. Foreign currency transaction gains or losses are included in the
consolidated statements of operations as incurred.
J. Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
K. Impact of New Accounting Standards
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of," and SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company adopted SFAS No. 121 and recorded a charge in fiscal
1996 for the impairment of long-lived assets at its U.S. Lock division (See
Note 3B). In the event that facts and circumstances in the future indicate that
other long-lived assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to fair value is required. Management is
currently evaluating the impact, if any, the adoption of SFAS No. 123 will have
on the financial statements. Management expects to adopt SFAS No. 123 in the
first quarter of fiscal 1997.
L. Basis of Presentation
Certain prior year financial statement items have been reclassified to
conform to the current year's presentation.
2. Barnett Public Offering and Extraordinary Charge
On February 1, 1996, Barnett filed a registration statement with the
Securities and Exchange Commission with respect to an initial public offering
(the "Barnett Public Offering") of its common stock (the "Barnett Common
Stock"). On March 28, 1996, the registration statement with respect to the
Barnett Public Offering was declared effective and on April 3, 1996, the
Barnett Public Offering was consummated. In such offering, 7,207.2 shares,
representing approximately 55.1% of the Barnett Common Stock, were sold in the
aggregate by Barnett and Waxman USA at an initial public offering price of
$14.00 per share. As of June 30, 1996, as a result of the Company's conversion
of a portion of the convertible non-voting preferred stock of Barnett, which is
owned solely by Waxman USA, to Barnett Common Stock during the fourth quarter,
Waxman USA owns approximately 49.9% of the Barnett Common Stock and owns
approximately a 54% economic interest in the capital stock of Barnett. In
connection with the Barnett Public Offering, the Company entered into a
standstill agreement with Barnett, pursuant to which the Company agreed not to
acquire any securities of Barnett which would result in the ownership by the
Company or its subsidiaries of a majority of the Barnett Common Stock. The
standstill agreement between the Company and Barnett may only be amended,
modified or terminated with the approval of a majority of the independent
directors of each of Waxman Industries and Barnett. In addition, pursuant to
the Certificate of Designations establishing the non-voting convertible
preferred stock, the non-voting convertible preferred stock may only be
converted to the extent that the aggregate number of shares of Barnett Common
Stock issuable upon conversion of the non-voting convertible preferred stock,
when added to the number of shares of Barnett Common Stock then held by such
holder, would not cause the Company's direct or indirect ownership of Barnett
Common Stock to equal or exceed a majority of the outstanding shares of Barnett
Common Stock. Since the consummation of the Barnett Public Offering, the cash
flow generated by such operation is no longer available to Waxman USA, other
than the amounts paid to Waxman USA pursuant to the New Intercorporate
Agreement (discussed in Note 9) or the pro rata amounts, if any, distributed by
Barnett in the form of a common stock dividend.
Waxman USA recorded a $65.9 million pre-tax gain from the sale of Barnett
Common Stock.
Of the $47.7 million of net proceeds received by Barnett in the Barnett
Public Offering, Barnett used (i) $23.0 million to repay all of the outstanding
indebtedness borrowed by it under the secured credit facility (the "Operating
F-17
<PAGE>
Companies Revolving Credit Facility") among Citicorp USA, Inc. as agent, and
Barnett, Consumer Products and WOC, (ii) $22.0 million to pay a dividend
evidenced by a note payable to Waxman USA, and (iii) $2.7 million for working
capital. The $44.9 million of net proceeds received by Waxman USA from the
Barnett Public Offering, together with payment from Barnett of the $22.0
million note payable described above, were applied primarily to repay debt
including (i) all of the $39.2 million principal amount of Waxman Industries'
12 1/4% Senior Secured Notes due 1998 and Floating Rate Senior Secured Notes
due 1998 (collectively, the "Senior Secured Notes") plus accrued interest and
redemption premium of approximately $1.7 million, thereby eliminating the
mandatory sinking fund requirements relating to the Senior Secured Notes which
were scheduled to commence in September 1996, and (ii) $5.0 million of the
$10.0 million outstanding indebtedness and accrued interest under the secured
term loan (the "Term Loan") among Citibank, N.A., as agent, and Barnett,
Consumer Products and WOC. The remaining net proceeds received by Waxman USA
(approximately $21.0 million) are intended to be used to (i) reduce additional
outstanding indebtedness borrowed by Consumer Products or WOC under the New
Credit Agreement, described in Note 5, and/or (ii) retire Waxman Industries' 12
3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred Coupon
Notes") and/or Waxman USA's 11-1/8% Senior Notes due 2001 (the "Exchange
Notes") and/or (iii) reinvest in Consumer Products' and/or WOC's businesses.
The Company recorded an extraordinary charge of approximately $3.8
million, net of applicable taxes of $2.5 million, in 1996 related to a premium
paid on the retirement of the Senior Secured Notes and the accelerated
amortization of the related unamortized debt discount and debt issuance costs
attributed to indebtedness repaid from the net proceeds of the Barnett Public
Offering and Exchange Notes and New Credit Agreement, as discussed in Note 5.
3. Management's Review of Wholly-Owned Operations
A. Discontinued Operations of Consumer Products
In August 1995, Waxman Industries announced its decision to sell the
Consumer Products business and entered into a letter of intent, which
subsequently expired, to sell the business for $50.0 million in cash plus a
remaining economic interest in the business sold. Consumer Products was
reported as a discontinued operation as of June 30, 1995 and an estimated loss
on disposal of $6.6 million, net of applicable income tax benefit of $4.4
million, was recorded, representing the difference between the net book value
of the assets to be sold at June 30, 1995 and the expected net proceeds from
the sale.
Net assets related to Consumer Products at June 30, 1995 consisted of
working capital of $51,944, net property and equipment of $5,278, other assets
of $10,332 and bank debt of $2,689, before allowance for the estimated loss on
disposal. Consumer Products' net sales were $71,971 and operating income was
$3,045 in 1995. The 1995 operating income was negatively impacted by the
restructuring charge of $2,779 discussed below.
Upon consummation of the Barnett Public Offering, described in Note 2, the
Company ceased its efforts to sell Consumer Products and instead retains and
continues to operate Consumer Products. Prior periods have been restated to
conform to the current period presentation of Consumer Products as a continuing
operation and the $11.0 million pre-tax loss on disposal recorded at June 30,
1995 has been reversed in 1996.
B. Strategic Review of Operations - Fiscal 1996
In connection with the likely completion of the Barnett Public Offering
and the consequent retention of the Consumer Products business, the Company
embarked upon a strategic review of Consumer Products and its other
wholly-owned operations, taking into account the difficulties encountered
during the sale process of Consumer Products, as well as the recent weaknesses
in the industry in which the Company competes. As a result of management's
review and refocus of Consumer Products as a continuing operation and
consistent with its strategic direction, an $11.9 million charge, primarily for
a reduction in the carrying value of day to day operating assets and
liabilities, has been recorded by Consumer Products in operating results, which
represented an increase of $6.9 million to cost of goods sold and $5.0 million
to selling, general and administrative expenses. Such charge included $5.1
million for the impairment and write-down of inventory, $2.7 million for
certain accounts receivable balances, $2.0 million representing a portion of
the costs of developing a management information system, $0.5 million of
abandoned product development costs, and $1.6 million for various liabilities.
The traditional customers of certain of WOC's operations, smaller retail
establishments, have been adversely affected by the movement of large national
retailers to expand in more rural locations and to compete with smaller retail
F-18
<PAGE>
establishments. In addition, the market has been increasingly impacted by the
availability of lower cost foreign sourcing to both domestic and foreign
competitors. In connection with management's strategic review of its other
wholly-owned operations and as a result of certain business factors affecting
these other operations, including competition from multi-category retailers and
competitive pricing from overseas competitors, the effects of which were
exacerbated by excess manufacturing capacity at the Company's foreign
facilities, the Company recorded an additional charge of $2.9 million in the
1996 fourth quarter operating results primarily for a reduction in the carrying
value of day to day operating assets and liabilities. Such charge included $1.7
million to reduce the carrying value of inventory and other assets at WOC and
TWI, $0.4 million of accelerated depreciation as a result of a change in the
estimated useful lives of certain property and equipment and $0.8 million for
various liabilities.
In addition, during the fourth quarter of 1996, the Company recorded a
$19.5 million pre-tax restructuring and asset impairment charge. Below is a
summary of the components comprising such charge:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Exiting product lines $ 4.1
Warehouse closure costs 1.3
Reduction of excess capacity 1.1
Other 0.9
Asset impairment 12.1
-----
Total $19.5
=====
</TABLE>
Exiting product lines: In furtherance of its efforts to strengthen the
Consumer Products business, the Company has decided to eliminate Consumer
Products' electrical product line and reduce the number of individual
products offered in its plumbing and floor care product lines. These
actions will enable Consumer Products to reduce fixed costs as well as
optimize and focus its product offerings to its major retail customers.
Consumer Products is currently winding down the servicing of the
electrical product line as well as reducing the number of products offered
in its plumbing and floor care product lines and does not expect to incur
cash outlays for these reductions. The $4.1 million charge is primarily
for the write-down of related inventory of which $1.8 million has been
disposed of as of June 30, 1996.
Warehouse closure costs: During the fourth quarter of 1996, the Company
downsized Consumer Products' distribution network from three locations to
two and as a result incurred warehouse closure costs of $1.3 million. The
remaining accrual at June 30, 1996 is $0.8 million. The warehouse closure
costs included costs associated with the remaining noncancellable term of
an operating lease of $0.3 million, incremental employee salaries and
benefits associated with closing the warehouse of $0.5 million, loss on
fixed assets of $0.2 million and other miscellaneous expenses associated
with the closing of $0.3 million.
Reduction of excess capacity: With the discontinuance and downsizing of
Consumer Products' product lines, the foreign operations which support
Consumer Products identified excess capacity in both buildings and
equipment. As such, a $1.1 million charge was recorded to reduce the net
book value of buildings by $0.8 million and equipment by $0.3 million.
Other: In connection with the strategic review, a division of WOC
discontinued certain product offerings which resulted primarily in a
write-down of inventory and excess equipment.
Asset impairment: The asset impairment charge of $12.1 million relates to
the Company's U.S. Lock division. Due to the continued decline in the
locksmith industry brought about by the competitive nature of the
do-it-yourself retail market, as required by SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," the Company expensed $9.8 of goodwill and $2.3 million of
property and equipment, as the carrying value for the division exceeded
the fair value. Fair value was determined based on a multiple of cash
flows.
C. Restructuring Charge - Fiscal 1995 and Fiscal 1994
During the fourth quarter of 1995, the Company downsized Consumer
Products' distribution network from four locations to three and as a result
incurred warehouse closure costs of $2.8 million. The remaining accrual for
such closure at June 30, 1996 is $0.4 million. The warehouse closure costs
included costs associated with the remaining noncancellable term of an
operating lease of $0.8 million, salaries and benefits incurred after
operations ceased, associated with closing the
F-19
<PAGE>
warehouse of $0.5 million, loss on fixed assets of $0.3 million and disposal of
inventory associated with exiting a product line of $1.2 million.
During the fourth quarter of 1993, the Company recorded a $2.0 million
restructuring charge for an estimate of the loss to be incurred upon the sale
of two entities, including anticipated operating results through the projected
disposal dates. The Company was unable to come to terms with the prospective
buyer of the two entities. The Company evaluated the net realizable value of
the carrying value of the assets previously held for sale in accordance with
its normal ongoing policy regarding impairment and concluded that no further
writedown of the net carrying value of the assets was required in excess of the
reserve previously established. Therefore, the reversal of the accrued loss on
disposal in the second quarter of 1994 was offset by the writedown of assets to
net realizable value and the accrual for relocation of the administrative
offices. There was no accrual remaining at June 30, 1996.
4. Change in Accounting
Effective July 1, 1995, the Company changed its method of accounting for
procurement costs. Procurement costs represent the amount paid in connection
with a customer's commitment to purchase products from the Company for a
specified period. The amount capitalized is the consideration paid by the
Company to the new or existing customer (i) for the right to supply such
customer for a specified period and (ii) to purchase competitor's merchandise
that the customer has on hand when it switches suppliers, less the salvage
value received by the Company. The Company believes that amortization in the
fiscal year incurred for such costs is consistent with the Company's strategic
review of Consumer Products and is preferable due to the uncertainty of today's
competitive retail environment. Previously the Company amortized these costs
over the period deemed to be benefited. The cumulative effect of this change on
prior years of $4,928, net of applicable income tax benefit of $3,285, is
reported separately in the 1996 consolidated statement of operation. The
additional effect of the change in 1996 was to decrease the operating loss by
$2,142. Amortization expense for procurement costs totaled $2,200 in 1996,
$2,752 in 1995 and $2,330 in 1994. Under the old accounting method, at each
balance sheet date, the Company reviewed the remaining capitalized balance of
procurement costs by customer to ensure realizability of the asset based upon
expected future sales and net profit margin.
5. Debt
A. Long-Term Debt
Total long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Barnett Credit Agreement $ -- $ --
New Credit Agreement 4,915 --
New Term Loans 5,000 --
Operating Companies Revolving Credit Facility,
repaid in 1996 -- 43,708
Term Loan, repaid in 1996 -- 14,000
Other notes, maturing through 2007,
bearing interest at rates ranging
from 7.4% to 9.0%, secured by the
land and building of TWI. 1,723 2,689
-------- --------
Subtotal-long-term debt 11,638 60,397
Less: current portion (10,775) (59,412)
-------- --------
Long-term debt, net of current portion $ 863 $ 985
======== ========
</TABLE>
In connection with the Barnett Public Offering, Barnett entered into a
revolving credit agreement with a bank for an unsecured three-year credit
facility providing for borrowings of up to $15.0 million, including a letter of
credit
F-20
<PAGE>
subfacility of $4.0 million (the "Barnett Credit Agreement"). Borrowings
under the Barnett Credit Agreement will bear interest, at Barnett's option, at
the prime rate minus 75 basis points or LIBOR plus 100 basis points. Barnett is
required to pay a commitment fee of 0.1% per annum on the unused commitment.
The Barnett Credit Agreement will provide funds for working capital and general
corporate purposes. At June 30, 1996, Barnett had $3.5 million outstanding
under the letter of credit subfacility. The Barnett Credit Agreement contains
customary affirmative and negative covenants, including certain covenants
requiring Barnett to maintain debt to net worth, interest coverage and current
ratios, as well as a minimum net worth test. Barnett was in compliance with all
covenants at June 30, 1996.
On June 28, 1996, Consumer Products and WOC (the "Borrowers") entered into
a new credit facility (the "New Credit Agreement") provided by BankAmerica
Business Credit, Inc. The New Credit Agreement provides for, among other
things, revolving credit advances of up to $30.0 million and term loans of up
to $5.0 million ("New Term Loans"). The New Credit Agreement expires May 31,
1999.
The New Credit Agreement provides for revolving credit advances of up to
85% of the amount of eligible accounts receivable and up to the lesser of (i)
$16.0 million or (ii) 60% of the amount of eligible raw and finished goods
inventory. Revolving credit advances bear interest at a rate equal to (a) Bank
of America's reference rate plus 1.0% or (b) LIBOR plus 2.75%. The weighted
average interest rate on borrowings outstanding under the New Credit Agreement
and Operating Companies Credit Facility was 9.58% in 1996. The Company is
required to pay a commitment fee of 0.5% per annum on the unused commitment.
The New Credit Agreement includes a letter of credit subfacility of $2.0
million, of which $1.3 million was outstanding at June 30, 1996. New Term Loans
bear interest at a rate per annum equal to .25% over the interest rate
applicable to revolving credit advances under the New Credit Agreement.
Borrowings under the New Credit Agreement are secured by the accounts
receivable, inventory, certain general intangibles and unencumbered fixed
assets of the Borrowers. In addition, New Term Loans are also secured by a
pledge of 500,000 shares of Barnett Common Stock owned by Waxman USA
(constituting approximately 3.5% of all outstanding Barnett Common Stock). The
New Credit Agreement requires the Borrowers to maintain cash collateral
accounts into which all available funds are deposited and applied to service
the facility on a daily basis. The New Credit Agreement prevents dividends and
distributions by the Borrowers except in certain limited instances including,
so long as there is no default or event of default, and the Borrowers are in
compliance with certain financial covenants, the payment of interest on the
Senior Subordinated Notes and Deferred Coupon Notes of Waxman Industries, and
contains customary negative, affirmative and financial covenants and conditions
such as minimum EBITDA and minimum tangible net worth. The Company was in
compliance with all covenants at June 30, 1996. As of June 30, 1996,
availability under the New Credit Agreement totaled approximately $16.2
million.
The New Credit Agreement contains events of default including the
following: (i) any Borrower shall fail to make any payment of principal or
interest or any other amount due under the agreements related to the New Credit
Agreement or fail to perform any covenant (after the expiration of any
applicable grace period) thereunder, or any representation or warranty made in
connection therewith shall prove to have been incorrect in any material respect
when made or deemed made; (ii) any Borrower shall fail to pay any indebtedness
having a principal amount of $250,000 or more; or any other event shall occur
or condition shall exist under any Agreement or instrument relating to any such
indebtedness, if the effect of such event or condition is to accelerate, or to
permit the acceleration of (after the expiration of any applicable grace
period), the maturity of such indebtedness; or any such indebtedness shall
become or be declared to be due and payable, or required to be repaid (other
than by a regularly scheduled required prepayment), or the Borrowers shall be
required to repurchase or offer to repurchase such indebtedness, prior to the
stated maturity thereof; (iii) certain events of bankruptcy with respect to the
Borrowers; (iv) there shall occur any Change of Control (as defined in the New
Credit Agreement); and (v) there shall occur an event which would have a
Material Adverse Effect (as defined in the New Credit Agreement). As a result
of the Material Adverse Effect clause and the requirement to maintain cash
collateral accounts, the borrowings under the New Credit Agreement and New Term
Loans have been classified as a current liability.
On May 20, 1994, the Operating Companies entered into the Operating
Companies Revolving Credit Facility and Term Loan. In connection with the
Barnett Public Offering, the Company entered into an amendment and restatement
of the Operating Companies Revolving Credit Facility and Term Loan ("Restated
Credit Agreement") (See Note 2). The initial borrowings under the New Credit
Agreement along with proceeds from the New Term Loan were used to repay the
borrowings under the Restated Credit Agreement.
B. Exchange Notes
On April 3, 1996, Waxman USA consummated an offer to exchange $48.75
million principal amount of its 11-1/8% Senior Notes due September 1, 2001 (the
"Exchange Notes") for a like amount of Waxman Industries' outstanding 13-3/4%
Senior Subordinated Notes due 1999 (the " Senior Subordinated Notes"), which
had been pushed
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<PAGE>
down to the Company (see Note 5C), and in connection therewith solicited
consents to certain amendments to the indenture pursuant to which the Senior
Subordinated Notes were issued. Approximately $43.0 million principal amount of
Senior Subordinated Notes were exchanged.
The Exchange Notes are general unsecured obligations of the Company
ranking pari passu in right of payment to any future indebtedness of Waxman USA
that is not subordinated in right of payment to the Exchange Notes and senior
in right of payment to any future indebtedness of Waxman USA that is
subordinated in right of payment to the Exchange Notes. The Exchange Notes are
structurally subordinated to the New Credit Agreement and any refinancing
thereof. The indenture under which the Exchange Notes were issued (the
"Exchange Note Indenture") contains certain covenants that, among other things,
limit the ability of Waxman USA and its subsidiaries to incur additional
indebtedness, transfer or sell assets, pay dividends, make certain other
restricted payments or investments, create liens or enter into sale lease-back
transactions, transactions with affiliates and mergers. The Company was in
compliance with all covenants at June 30, 1996.
In the event of a Change of Control, as defined in the Exchange Note
Indenture, Waxman USA is obligated to make an offer to purchase all outstanding
Exchange Notes at 101% of the principal amount thereof plus accrued and unpaid
interest, if any. Waxman USA is obligated in certain circumstances to make an
offer to purchase Exchange Notes at a redemption price plus unpaid interest, if
any, with the net cash proceeds of certain sales or other dispositions of
assets. The Exchange Notes are redeemable, in whole or in part, at the option
of the Company, at a price of 101.719% of the principal amount thereof until
June 1, 1997 when the redemption price is equal to the principal amount of the
notes.
The Exchange Notes have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from such registration.
C. Push-Down Debt
As discussed above, Waxman USA exchanged approximately $43.0 million of
the $48.75 million of Senior Subordinated Notes for Exchange Notes on April 3,
1996. The remaining $5.7 million of Senior Subordinated Notes (see Note 13 -
Subsequent Event -- for the adjustments made to the push down debt amount) is
no longer classified as push-down debt as of June 30, 1996 as (i) Waxman USA
has not assumed this debt of Waxman Industries, (ii) Waxman USA is not planning
a debt or equity offering from which proceeds would be used to repay this debt
and (iii) Waxman USA does not guarantee nor has its assets been pledged as
collateral for this debt. Also, as discussed in Note 2, Waxman USA utilized the
funds received from the Barnett Public Offering to repay certain debt. As such,
in accordance with certain Securities and Exchange Commission rules, the
consolidated financial statements presented herein have been adjusted to
reflect push-down adjustments from Waxman Industries, including debt which
Waxman USA or Waxman Industries refinanced, or that was guaranteed by the
Company, together with related interest expense and debt issuance costs.
Borrowings that were secured by the inventories and accounts receivable of
certain subsidiaries of the Company have also been pushed down in 1994. The
push-down adjustments have been made for all periods presented in the
accompanying consolidated financial statements. Debt pushed-down from Waxman
Industries consisted of the following:
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Senior Secured Notes $ -- $38,786
Senior Subordinated Notes -- 48,750
--------- -------
$ -- $87,536
========= =======
</TABLE>
Interest expense, including amortization of debt issuance costs related to
the pushed-down debt, totaled $8,651 in 1996, $12,187 in 1995 and $13,068 in
1994. Unamortized debt issuance costs of $2,990 and accrued interest of $1,929,
relating to the pushed-down debt has also been reflected in the accompanying
consolidated balance sheet as of June 30, 1995. The net effect of push-down
accounting adjustments has been reflected as a contribution to Stockholder's
Equity in the accompanying consolidated financial statements.
F-22
<PAGE>
1. Senior Secured Notes
In September 1991, Waxman Industries completed a private placement of $50
million of 7-year Senior Secured Notes, including detachable warrants to
purchase 1.0 million shares of Waxman Industries' common stock. At the time of
issuance, the Senior Secured Notes included $42.5 million of 12 1/4% fixed rate
notes and $7.5 million of floating rate notes with interest at 300 basis points
over the 90 day LIBOR rate. The Senior Secured Notes were redeemable in whole
or in part, at the option of Waxman Industries, after September 1, 1995 at a
price of 102.45% for the fixed rate notes and 103% for the floating rate notes.
Annual mandatory redemption payments of $14.45 million for the fixed rate
notes, and $2.55 million for the floating rate notes were to be due on each of
September 1, 1996 and September 1, 1997. As discussed in Note 2, Waxman
Industries retired the Senior Secured Notes with a portion of the net proceeds
from the Barnett Public Offering. Waxman USA incurred an extraordinary charge
upon the early retirement of these notes which primarily represented the
acceleration of unamortized debt issuance costs and the premium paid. The
Senior Secured Notes, which were guaranteed by Waxman USA and secured by a
pledge of all of the outstanding stock of Barnett, Consumer Products and WOC,
were senior in right of payment to all subordinated indebtedness and pari passu
with all other senior indebtedness of Waxman Industries.
2. Senior Subordinated Notes
In June 1989, Waxman Industries issued $100 million principal amount of
Senior Subordinated Notes. The Senior Subordinated Notes were redeemable in
whole or in part, at the option of Waxman Industries, after June 1, 1995 at a
price of 103.438% which would decrease annually to 100% of the principal amount
at the maturity date. During 1994, Waxman Industries exchanged $50 million
principal amount of the Senior Subordinated Notes for a like amount of 12 3/4%
Deferred Coupon Notes due 2004. The Deferred Coupon Notes are secured by a
pledge of the capital stock of Waxman USA. As discussed above, Waxman USA
issued Exchange Notes in exchange for $43.0 million principal amount of Senior
Subordinated Notes in fiscal 1996. The Senior Subordinated Notes are
redeemable, in whole or in part, at the option of Waxman Industries, at a price
of 101.719% of the principal amount thereof until June 1, 1997 when the
redemption price is equal to the principal amount of the notes. As a result of
the exchange offer discussed above, the remaining holders of the Senior
Subordinated Notes are no longer entitled to the benefits of restrictive
covenants and virtually all events of default have been eliminated.
D. Miscellaneous
The Company made interest payments of $6,068 in 1996, $5,606 in 1995 and
$603 in 1994.
Management believes the carrying values of its bank loans approximate
their fair values as they bear interest based upon the banks' prime lending
rates. No quoted market prices are available for the Exchange Notes as the debt
is not traded. However, since such notes were issued in April 1996, the Company
believes the fair value is not materially different from the carrying value.
6. Income Taxes
Waxman USA accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). SFAS No. 109 utilizes an asset and liability approach
and deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
Waxman USA participates in the consolidated tax group of which Waxman
Industries is the common parent. Commencing July 1, 1994, Waxman USA began
participating in a new tax sharing agreement with Waxman Industries. Under this
agreement, Waxman USA's federal tax liability is equal to the lesser of (i) the
federal tax liability calculated on a stand-alone basis or (ii) Waxman
Industries' federal tax liability. Waxman Industries had approximately $50.0
million of available domestic net operating loss carryforwards at June 30, 1996
for income tax purposes, which expire through 2011. Upon the consummation of
the initial public offering, Barnett is no longer included in the consolidated
tax group. The Company's liability for federal taxes at June 30, 1996 includes
the alternative minimum tax to be paid by Waxman Industries and Barnett's
liability for the period April 3, 1996 through June 30, 1996. The Company files
separate income tax returns in certain states based on the results of
operations within the applicable states.
F-23
<PAGE>
The components of income (loss) from continuing operations before income
taxes, minority interest, disposal, extraordinary loss and cumulative effect of
change in accounting are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Domestic $35,280 $(3,894) $1,243
Foreign (1,250) (382) 738
------- ------- ------
Total $34,030 $(4,276) $1,981
======= ======= ======
</TABLE>
The domestic income (loss) from continuing operations before income taxes,
minority interest, loss on disposal, extraordinary loss and cumulative effect
of change in accounting includes all interest expense related to the push-down
debt.
The components of the provision (benefit) for income taxes, calculated on
a stand-alone basis, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Federal............. $14,869 $(1,280) $ 900
State and Foreign........ 2,150 180 200
------- ------- -------
$17,019 $(1,100) $1,100
======= ======= =======
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. The deferred tax assets and liabilities relate
primarily to depreciation of the Company's property and equipment, certain
accrued liabilities and inventory.
Deferred taxes and amounts payable to Waxman Industries are included in
Advances to Waxman Industries, Inc. in the accompanying consolidated balance
sheets. Deferred tax assets of $500 related to Barnett are included in other
assets as of June 30, 1996.
The following table reconciles the U.S. statutory rate applied to pretax
income to the Company's provision (benefit) for income taxes:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Statutory Rate applied to pretax $11,910 $(1,497) $674
income..................................
State and foreign taxes, net............ 1,398 117 132
Goodwill amortization................... 3,672 267 246
Other................................... 39 13 48
-------- --------- -------
Provision (benefit) for income taxes . $17,019 $(1,100) $1,100
======== ========= =======
</TABLE>
The Company made income tax payments of $993 in 1996, $510 in 1995 and
$368 in 1994.
F-24
<PAGE>
7. Lease Commitments
The Company leases certain warehouse and office facilities and
equipment under operating lease agreements, which expire at various dates
through 2003.
Future minimum rental payments are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
<S> <C>
1997 $3,978
1998 3,395
1999 2,758
2000 1,956
2001 1,042
Thereafter 1,376
-------
$14,505
=======
</TABLE>
Total rent expense charged to operations was $4,183 in 1996, $4,922 in
1995, and $3,894 in 1994.
Consumer Products leases certain warehouse space from related parties.
Related parties rent expense totaled $546 in 1996, $588 in 1995 and $471 in
1994.
8. Profit Sharing Plan and 401(K) Plan
The eligible employees of certain subsidiaries of the Company participate
in Waxman Industries' trusteed, profit sharing and 401(K) retirement plan.
Contributions are discretionary and are determined by Waxman Industries' Board
of Directors. There was no profit sharing contribution in 1996, 1995 or 1994.
The Company offers no other post-retirement or postemployment benefits.
9. Related-Party Transactions
The Company engages in certain business transactions with Waxman
Industries and affiliates. Sales and purchases to Waxman Industries affiliates
in 1996, 1995 and 1994 were immaterial.
Management fees charged to the Company by Waxman Industries are presented
in the accompanying consolidated statements of operations as corporate charge.
Commencing July 1, 1994, in accordance with the Intercorporate Agreement, the
management fees charged to the Company are the lesser of (a) 2% of the net
sales or (b) the actual cost of providing services to the Company and as of
April 3, 1996 are the lesser of (i) 3% of the net sales or (ii) the actual cost
of providing services to the Company and its wholly-owned subsidiaries. The
Company has been assessed the actual costs incurred by Waxman Industries for
all periods after July 1, 1994. Prior to July 1, 1994, management fees charged
to the Company materially approximated actual costs incurred by Waxman
Industries.
F-25
<PAGE>
In connection with the Barnett Public Offering, Barnett and Waxman
Industries, among others, including Waxman USA have entered into a New
Intercorporate Agreement. Waxman Industries will provide certain managerial,
administrative and financial services to Barnett and Barnett will pay Waxman
Industries the allocable cost of the salaries and expenses of Waxman
Industries' employees while they are rendering such services plus actual out of
pocket expenses incurred. In addition to the services to be provided by Waxman
Industries to Barnett pursuant to the New Intercorporate Agreement, Barnett
will continue to provide services to certain wholly-owned operating divisions
of WOC. These services include the utilization of Barnett's management
information systems, financial accounting, order processing and billing and
collection services. These wholly-owned divisions of WOC will pay Barnett the
allocable cost of the salaries and expenses of Barnett's employees while they
are rendering such services plus actual out of pocket expenses incurred.
On May 20, 1994, Waxman Industries exchanged $50 million of its Senior
Subordinated Notes for $50 million initial accreted value of 12 3/4% Senior
Secured Deferred Coupon Notes. The Deferred Coupon Notes are secured by a
pledge of the capital stock of the Company.
The following is a reconciliation of the activity contributed to
capital related to the push-down debt described in Notes 5 and 13:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Push-down interest expense,
including amortization of
debt issuance $ 9,451 $ 12,187 $ 13,068
Change in push-down debt (85) (111) 22,888
Income taxes (702) (1,388) (4,677)
Change in push-down
interest accrual (708) (10) 133
Change in push-down of unamortized
debt issuance costs (465) (380) 713
-------- -------- --------
Capital contribution from
Waxman Industries, net $ 7,491 $ 10,298 $ 32,125
======== ======== ========
</TABLE>
F-26
<PAGE>
10. Segment and Geographic Information
The Company operates in a single business segment - the distribution of
plumbing, electrical and hardware products. The following table shows certain
financial information by geographic area:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales:
Domestic $232,766 $227,961 $209,062
Foreign 29,156 31,837 31,785
Intersegment elimination (26,855) (27,494) (27,276)
-------- -------- --------
$235,067 $232,304 $213,571
======== ======== ========
Operating income (loss):
Domestic $(14,530) $14,862 $15,033
Foreign (1,094) (186) 738
-------- -------- --------
$(15,624) $14,676 $15,771
======== ======== ========
Total assets:
Domestic $119,344 $139,140 $150,912
Foreign 13,719 15,629 16,422
-------- -------- --------
$133,063 $154,769 $167,334
======== ======== ========
</TABLE>
11. CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the consolidated financial statements.
12. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
During 1996, the Company identified an intercompany inventory reconciling
item between Consumer Products and WAMI and has restated prior year financial
statements to reflect the correction of this item. The effect of the
restatement was as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
------------- -----------
<S> <C> <C>
Total Stockholder's Equity
at June 30, 1993 $19,323 $18,023
at June 30, 1994 1,210 (1,090)
at June 30, 1995 (17,725) (20,025)
Operating income 1994 $16,771 $15,771
Income (loss) from continuing
operations before minority interest,
disposal, extraordinary loss and
cumlative effect of change in accounting 1944 $1,481 $881
Net income 1994 $1,481 $881
</TABLE>
Corresponding changes have been made to the consolidated balance sheet to
reduce inventories.
F-27
<PAGE>
13. SUBSEQUENT EVENT
In January 1997, the Company issued an additional $4.8 million principal
amount of Exchange Notes for a like aggregate principal amount of Senior
Subordinated Notes. The Company also intends to continue pursuing the exchange
of the remaining outstanding principal amount of Senior Subordinated
Notes, $895,000, not previously exchanged. As such, pursuant to certain
Securities and Exchange Commission Rules, certain June 30, 1996 amounts have
been adjusted to reflect the push-down of Senior Subordinated Notes and the
related interest expense. The effect of the adjustments were as follows:
<TABLE>
<CAPTION>
As Previously
Reported Adjusted
-------------- -----------
<S> <C> <C>
Interest Expense $15,463 $16,263
Provision for Income Taxes 17,319 17,019
Net Income (Loss): 14,458 13,958
Push Down Debt:
at June 30, 1996 0 5,724
Total Stockholder's Equity:
at June 30, 1996 17,541 11,817
F-28
</TABLE>
