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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 333-3689
WAXMAN USA INC.
---------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-1761514
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(State of Incorporation) (I.R.S. Employer
Identification Number)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
--------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(440) 439-1830
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(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
--- ---
100 shares of Common Stock, $.01 par value, were outstanding as of November 10,
1997.
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
INDEX TO FORM 10-Q
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART 1. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1997 and 1996........................................3
Condensed Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997..................................................4-5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1997 and 1996.....................................6
Notes to Condensed Consolidated Financial Statements.......................................7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................9-12
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information .............................................................................13
Item 6. Exhibits and Reports on Form 8-K...............................................................13
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
----------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales $28,157 $33,266
Cost of sales 18,656 22,736
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Gross profit 9,501 10,530
Selling, general and administrative
expenses 6,536 7,530
Restructuring and non-recurring charges 133 --
Corporate charge 827 826
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Operating income 2,005 2,174
Equity earnings of Barnett 1,464 1,346
Interest expense, net 1,341 1,608
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Income before income taxes and extraordinary loss 2,128 1,912
Provision for income taxes 815 252
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Income before extraordinary loss 1,313 1,660
Extraordinary loss, net of tax 115 --
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Net income $ 1,198 $ 1,660
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
(Unaudited) (Audited)
----------- ---------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 547 $ 9,326
Trade receivables, net 14,538 13,617
Other receivables 2,933 2,828
Inventories 24,570 24,411
Prepaid expenses 1,804 2,143
Net assets held for sale -- 3,945
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Total current assets 44,392 56,270
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INVESTMENT IN BARNETT 24,764 22,700
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PROPERTY AND EQUIPMENT:
Land 512 482
Buildings 4,060 4,009
Equipment 11,169 10,917
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15,741 15,408
Less accumulated depreciation and amortization (7,362) (7,065)
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Property and equipment, net 8,379 8,343
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COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 8,390 8,771
UNAMORTIZED DEBT ISSUANCE COSTS, NET 782 1,043
OTHER ASSETS 972 817
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$ 87,679 $ 97,944
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,707 $ 5,920
Accounts payable 9,030 8,615
Accrued liabilities 6,206 8,570
Accrued income taxes payable 441 46
Accrued interest 372 1,807
-------- --------
Total current liabilities 24,756 24,958
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OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 373 307
SENIOR NOTES 35,855 47,855
SENIOR SUBORDINATED NOTES 895 895
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 1,000 shares -- --
Common Stock, $.01 par value per share:
Authorized 9,000 shares; 100 shares issued and
outstanding -- --
Advances to Waxman Industries, Inc. (13,144) (13,903)
Paid-in capital 21,462 21,462
Retained earnings 17,909 16,711
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26,227 24,270
Cumulative currency translation adjustment (427) (341)
-------- --------
Total stockholder's equity 25,800 23,929
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$ 87,679 $ 97,944
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
<S> <C> <C>
Net income $ 1,198 $ 1,660
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Restructuring and non-recurring charge 133 --
Extraordinary loss - deferred financing cost write-off 115 --
Equity earnings of Barnett (1,464) (1,346)
Depreciation and amortization 877 477
Other non-cash charges -- (1,873)
Changes in assets and liabilities:
Trade receivables, net (921) (1,310)
Other receivables (105) --
Inventories (159) (1,708)
Prepaid expenses and other assets 326 636
Accounts payable 415 828
Accrued liabilities (2,497) (1,158)
Accrued income taxes 395 (194)
Accrued interest (1,435) (862)
Other, net (86) (26)
-------- --------
Net Cash Used in Operating Activities (3,208) (4,876)
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CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Net cash proceeds from sale of business 3,203 --
Capital expenditures, net (386) (434)
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Net Cash Provided by (Used in) Investing Activities 2,817 (434)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements 33,288 32,178
Payments under credit agreements (30,501) (28,156)
Repurchase of Senior Notes (12,000) --
Borrowings of long-term debt 66 120
Advances from (to) parent 759 (74)
-------- --------
Net Cash Provided by (Used in) Financing Activities (8,388) 4,068
-------- --------
NET DECREASE IN CASH (8,779) (1,242)
BALANCE, BEGINNING OF PERIOD 9,326 2,453
-------- --------
BALANCE, END OF PERIOD $ 547 $ 1,211
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 1997 AND 1996
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accompanying condensed consolidated financial statements include
the accounts of Waxman USA Inc. ("Waxman USA") and its wholly-owned subsidiaries
(collectively, the "Company"). As of September 30, 1997, Waxman USA owns
approximately 44.6% of the common stock of Barnett Inc. ("Barnett Common Stock")
and accounts for Barnett Inc. ("Barnett") under the equity method of accounting.
The condensed consolidated statements of operations for the three months ended
September 30, 1997 and 1996, the condensed balance sheet as of September 30,
1997 and the condensed statements of cash flows for the three months ended
September 30, 1997 and 1996 have been prepared by the Company without audit,
while the condensed balance sheet as of June 30, 1997 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, 1997 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 statements be read in
conjunction with the audited financial statements and the notes thereto,
included in the Company's Form 10-K for the fiscal year ended June 30, 1997,
filed with the Securities and Exchange Commission.
NOTE 2 - BUSINESS
--------
The Company is a direct, wholly-owned subsidiary of Waxman Industries,
Inc. ("Waxman Industries"). The common stock of Waxman Industries trades on the
New York Stock Exchange under the symbol "WAX." The Company believes it is one
of the leading suppliers of specialty plumbing, security hardware and other
products to the repair and remodeling market in the United States. The Company
distributes its products to approximately 6,800 customers, including a wide
variety of large national and regional retailers, professional security
installers and independent retail customers.
The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WOC
Inc. ("WOC") and TWI, International, Inc. ("TWI"). WOC is comprised of two
divisions, U.S. Lock ("U.S. Lock"), a distributor of a full line of security
hardware products, and Medal Distributing, a supplier of hardware products. TWI
includes the Company's foreign sourcing operations, including manufacturing,
packaging and sourcing operations in China and Taiwan, and an operation in
Mexico that threads galvanized and black pipe and imports malleable fittings.
Consumer Products, WOC and Barnett utilize the Company's and non-affiliated
foreign sourcing suppliers.
The Company currently owns 44.6% of Barnett, a direct marketer and
distributor of an extensive line of plumbing, electrical, hardware, HVAC and
other products to approximately 60,000 active customers throughout the United
States. Barnett offers approximately 10,200 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. In the first quarter of fiscal 1998, the Company
recognized $1.5 million in equity income from this investment.
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In April 1996, the Company completed an initial public offering of the
Barnett Common Stock at $14.50 per share, reducing its interest in the former
wholly-owned subsidiary to 49.9% of the outstanding Barnett Common Stock and,
together with certain convertible non-voting preferred stock, approximately a
54% economic interest (the "Barnett Initial Public Offering"). In April 1997,
the Company completed a secondary offering of 1.3 million shares of Barnett
Common Stock at $17.50 per share, reducing its voting and economic interest to
44.5% (the "Barnett Secondary Offering") and, accordingly, began to account for
its interest in Barnett under the equity method of accounting. At June 30, 1997,
the Company owned nearly 7.2 million shares of Barnett's outstanding common
stock. In July 1997, as a result of the sale of a substantial portion of the
business of LeRan Gas Products ("LeRan"), one of WOC's operations, to Barnett,
the Company received cash and an additional 24,730 shares of Barnett Common
Stock which increased the Company's ownership to 44.6%. The Barnett Common
Stock trades on the Nasdaq National Market under the symbol "BNTT."
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 109." SFAS 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.
The Company participates in the consolidated tax group of which Waxman
Industries is the common parent. Commencing July 1, 1994, the Company began
participating in a new tax sharing agreement with Waxman Industries. Under this
agreement, the Company'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 $46.7
million of available domestic net operating loss carryforwards for income tax
purposes at June 30, 1997, which expire through 2010. Upon consummation of the
Barnett Initial Public Offering, Barnett is no longer included in the
consolidated tax group. The Company's liability for taxes at September 30, 1997
includes state and various foreign taxes. The Company files separate income tax
returns in certain states based on the results of operations within the
applicable states.
Deferred taxes and amounts payable to Waxman Industries, are included
Advances to Waxman Industries in the accompanying condensed consolidated balance
sheets.
NOTE 4 - BARNETT
-------
The Company owns 7,186,530 shares, or 44.6%, of the Barnett Common
Stock as of September 30, 1997, which is accounted for under the equity method
of accounting. In April 1996, the Company completed the Barnett Initial Public
Offering, receiving net proceeds of $92.6 million, after the underwriters'
discount, and recorded a $65.9 million pre-tax gain. In April 1997, the Company
completed the Barnett Secondary Offering, receiving net proceeds, after the
underwriters' discount, of $21.6 million, and recorded a $16.7 million pre-tax
gain. The Company converted the remaining convertible non-voting preferred stock
of Barnett it owned to Barnett Common Stock. In July 1997, the Company received
24,730 shares of Barnett as a result of the sale of the gas products business of
LeRan to Barnett (see Note 5). The market value of the Barnett Common Stock
owned by the Company at September 30, 1997 was $152.7 million, valued as of the
closing sales price on such date of $21.25, in comparison to the Company's
carrying value of $24.8 million.
The following table presents unaudited summary financial data for
Barnett at September 30, 1997 and for the three months then ended (in thousands
of dollars):
<TABLE>
<CAPTION>
Statement of income data: Balance sheet data:
<S> <C> <C> <C>
Net sales $ 46,768 Working capital $ 45,191
Operating income 5,326 Total assets 85,484
Net income 3,283 Stockholders' equity 64,528
</TABLE>
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NOTE 5 - SALE OF DIVISIONS
-----------------
Effective July 1, 1997, the Company sold the gas products
business of LeRan to Barnett for $3.2 million in cash and 24,730 shares
of Barnett Common Stock, with a value of $0.6 million at the time of
the transaction. The Company's loss on the sale, net of certain costs
associated with disposing of assets not included in the transaction and
the closing of certain warehouses, is approximately $0.1 million. The
Company owns a 56,000 square foot facility in Coldwater, Michigan that
was previously utilized by LeRan. The Company consummated a sale of
this facility in the first quarter of fiscal 1998 and received the
proceeds in October 1997. Included in the quarter ended September 30,
1996 are sales for LeRan of $3.8 million and operating income of $0.2
million.
In April 1997, the Company sold Madison Equipment Company
("Madison"), a division of WOC, for $2.0 million in cash. The sale of
Madison resulted in a loss of $0.7 million, which was included as a
non-recurring charge in the quarter ended June 30, 1997. Included in
the quarter ended September 30, 1996 are sales for Madison of $1.7
million and operating income of $0.1 million.
NOTE 6 - SENIOR NOTE PURCHASE OFFER
--------------------------
In May 1997, the Company commenced an offer to purchase $12.0 million
principal amount of its 11 1/8% Senior Notes due 2001 (the "Senior Notes") at
par (the "Purchase Offer"). The offer expired on July 2, 1997 with $2.5 million
of the notes tendered. On July 3, 1997, the Company called for redemption the
$9.5 million of Senior Notes that had not been tendered in the Purchase Offer,
and on August 4, 1997, the Company completed the note redemption. The Company
used a portion of the net proceeds from the Barnett Secondary Offering (herein
defined) to purchase the Senior Notes. The Company has recorded an extraordinary
charge of $0.2 million in the quarter ended September 30, 1997 related to the
write-off of unamortized deferred financing costs associated with the purchase
and redemption of these Senior Notes.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1997 and 1996
included and interest of $2.8 million and $2.3 million. The Company paid no
federal income taxes in the first quarter of fiscal 1998 and $0.5 million in the
fiscal 1997 first quarter. Waxman USA's cash flow, within certain restrictions,
are upstreamed to Waxman Industries to service interest payments and
administrative costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------
AND 1996
--------
This Quarterly Report contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are based on the beliefs of the Company and its management. When used in this
document, the words "anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "should," and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainities and assumptions, including, but not limited to, the risk that the
Company may not be able to implement its deleveraging strategy in the intended
manner, risks associated with currently unforeseen competitive pressures and
risks affecting the Company's industry, such as decreased consumer spending,
customer concentration issues and the effects of general economic conditions. In
addition, the Company's business, operations and financial condition are subject
to the risks, uncertainities and assumptions which are described in the
Company's reports and statements filed from time to time with the Securities
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and Exchange Commission, including this Report. Should one or more of those
risks or uncertainities materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein.
Net Sales
- ---------
Net sales for the fiscal 1998 first quarter ended September 30, 1997
totaled $28.2 million, a decrease of $5.1 million from the $33.3 million for the
comparable quarter in fiscal 1997. Included in the prior year first fiscal
quarter were net sales of $5.5 million for LeRan and Madison, which were
recently sold by the Company. Excluding the sales from those operations,
comparable net sales increased by 1.3%. U.S. Lock and the Company's foreign
sourcing operations recorded net sales increases for the fiscal 1998 first
quarter, in comparison to the same period last year, of 21.5% and 11.2%,
respectively. Sales made by the foreign sourcing operations to Barnett account
for nearly all of their reported sales and have increased due to the growth of
Barnett. U.S. Lock's increase in net sales is attributable to an increase in the
number of monthly catalogs mailed and the expansion in the number of
professional telesales representatives. During the same comparable periods,
Consumer Products Group net sales decreased by approximately $1.0 million, or
6%, due to the loss of net sales of $1.1 million to Ernst, which closed its
operation in the first quarter of fiscal 1997. Excluding the loss of Ernst
business, net sales for Consumer Products Group increased slightly.
Gross Profit
- ------------
Gross profit margin increased to 33.7% from 31.7%, but gross profit
decreased to $9.5 million from $10.5 million for the three months ended
September 30, 1997, as compared to the corresponding quarter in the prior fiscal
year. The decrease in gross profit is attributable to the sale of LeRan and
Madison which contributed $1.3 million in gross profit in the quarter ended
September 30, 1996, at an average gross profit margin of 23.5%. Gross profit
margins for the continuing businesses are higher than the margins of the
operations sold and improved for the fiscal 1998 first quarter as compared to
the same quarter last year. The improvement is due to a combination of product
mix, price increases and lower costs on certain products manufactured in China.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
decreased from $7.5 million for the quarter ended September 30, 1996 to $6.5
million for the current quarter. As a percentage of net sales, SG&A expenses
increased from 22.6% for the first fiscal quarter of 1997 to 23.2% for the first
fiscal quarter of 1998. All of the reduction is due to the non-inclusion of
LeRan and Madison's results in the fiscal 1998 first quarter results. Excluding
those operations which were recently sold, SG&A expenses were nearly identical
for the comparable quarters, but increased as a percentage of sales due to the
reduction in net sales.
Restructuring and Non-recurring Charges
- ---------------------------------------
In the quarter ended September 30, 1997, the Company recorded a
non-recurring charge of $133,000 associated with the sale of the principal
business of LeRan to Barnett and the costs of closing several facilities
utilized by the business and other closing costs.
Corporate Charge
- ----------------
The corporate charge of $0.8 million, or 2.9% of net sales, for the
fiscal 1998 first quarter was nearly identical to the $0.8 million, or 2.5% of
net sales, for the comparable quarter last year. Corporate charges are
allocations to the Company of expenses that Waxman Industries incurs to support
its corporate activities.
Equity Earnings of Barnett
- --------------------------
In the first fiscal quarter of 1998, the Company recorded equity
earnings from its 44.6% investment in Barnett of $1.5 million, as compared to
$1.3 million in the first fiscal quarter of 1997. The increase in equity
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earnings is attributable to the increase in Barnett's net income which more than
offset the impact of the reduction in the Company's ownership in Barnett from
49.9% to the current 44.6% level.
Interest Expense
- ----------------
For the quarter ended September 30, 1997, interest expense totaled $1.3
million, a decrease of $0.3 million from the $1.6 million in the comparable
quarter last year. The decrease is primarily due to the repayment of debt with
the net proceeds from the Barnett Secondary Offering. Average borrowings for the
current year's quarter amounted to $48.6 million, with a weighted average
interest rate of 10.6%, as compared to $57.8 million in the same quarter last
year with a weighted average interest rate of 10.4%.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.8 million and $0.3
million for the first fiscal quarter of 1998 and 1997, respectively. The
provision for the current quarter primarily represents Waxman USA's tax
provision on a stand-alone basis, including 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 goodwill amortization and state and
foreign taxes.
Extraordinary Loss
- ------------------
The Company incurred an extraordinary charge of $0.1 million, net of
tax, associated with the write-off of deferred financing costs from the
repurchase of $12.0 million of Senior Notes in July and August 1997. (See Note
6)
Net Income
- ----------
The Company's net income for the quarter ended September 30, 1997
amounted to $1.2 million, a decrease of $0.5 million over income of $1.7 million
in the first fiscal quarter of 1997.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At September 30, 1997, the Company had $14.4 million available under
the credit agreement with BankAmerica Business Credit, Inc. (the "Credit
Agreement"). The Credit Agreement contains certain covenants and restrictions,
including a material adverse effect clause and the requirement to maintain cash
collateral accounts. Accordingly, borrowings under the Credit Agreement and Term
Loans (herein defined) have been classified as a current liability. Due to
changes in the Company's financial structure and continuing operations, the
Company negotiated certain covenant modifications to the Credit Agreement
effective September 30, 1997. The Company was in compliance with all loan
covenants at September 30, 1997.
The Company entered into the Credit Agreement in June 1996. The Credit
Agreement provides for, among other things, revolving credit advances of up to
$30.0 million and term loans (the "Term Loans") of up to $5.0 million. At
September 30, 1997, there were $5.0 million of Term Loans outstanding. The
Credit Agreement and Term Loans expire May 31, 1999.
In May 1997, the Company commenced the Purchase Offer for $12.0 million
of Senior Notes, at par. In July 1997, the Purchase Offer expired with $2.5
million principal amount of Senior Notes tendered. Upon the expiration of the
Purchase Offer, the Company called for redemption of the $9.5 million principal
amount of Senior Notes that had not been tendered in the Purchase Offer and
completed the redemption of these notes in August 1997. Pending the application
of these funds, the Company had reinvested the funds in its businesses, thereby
effectively reducing borrowings under its working capital line of credit and, at
June 30, 1997, had $8.9 million invested in short-term liquid investments. The
Company's business strategy includes the reduction of its interest expense and
its leverage by the sale of selected assets and the refinancing of its remaining
indebtedness whenever possible.
11
<PAGE> 12
Since the consummation of the Barnett Initial Public Offering, the cash
flow generated by Barnett 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 affected 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. Furthermore, one of Consumer Products' largest customers, Kmart,
accounted for approximately 16.5% and 17.6% of net sales for Consumer Products
in fiscal 1997 and fiscal 1996, respectively, and Kmart's subsidiary, Builders
Square, accounted for approximately 21.9% and 24.7% of Consumer Products net
sales in fiscal 1997 and fiscal 1996, respectively. During fiscal 1997, the
Company was advised by Kmart that, after it had completed a vendor review,
Consumer Products had successfully retained the supply arrangements for plumbing
and hardware products. In fiscal 1997, Kmart also announced that it began
accounting for its Builders Square operations as a discontinued operation and
intended to sell the business. In July 1997, Kmart announced that it agreed to
sell its Builders Square chain to Leonard Green & Partners, a merchant-banking
firm. Leonard Green announced that it had also agreed to buy another home
improvement retailer, Hechinger Co., and that it would combine the two outfits
into the nation's third largest home improvement chain. Although Consumer
Products is a long term supplier to Kmart and Builders Square, as well as a
supplier to Hechingers, there can be no assurance that any of the foregoing
relationships will continue or as to the terms of any of the relationships that
do continue. In the event Consumer Products were to lose either Kmart or
Builders Square as a customer or Kmart, Builders Square or the surviving entity
through the Builders Square / Hechingers merger, were to significantly curtail
its purchases from Consumer Products, there would be material adverse effects
until the Company could modify Consumer Products' cost structure to be more in
line with its reduced revenue base.
The Company does not have any commitments to make substantial capital
expenditures; however, during fiscal 1998, it has begun to modify its
information technology systems and software to be Year 2000 compatible. The most
significant expenditure will be at Consumer Products, which has budgeted
approximately $1.0 million in total capital expenditures. Of the capital
expenditures at Consumer Products, it is estimated that approximately $0.7
million will be spent on Year 2000 compliance which is expected to be completed
by June 30, 1998. Other operations of the Company are also working toward being
Year 2000 compliant and the Company anticipates that all of its operations will
complete the modifications in calander 1998.
The Company believes that the funds generated from operations along
with the funds available under the Credit Agreement will be sufficient to
satisfy the Company's liquidity requirements until December 1, 1999 (the date
that cash interest becomes payable by Waxman Industries under Waxman Industries'
12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred Coupon
Notes")). The Company believes that there will not be sufficient cash flow from
operations to make the December 1999 interest payments on the Deferred Coupon
Notes. Accordingly, Waxman Industries intends to refinance all or a part of the
Deferred Coupon Notes at or prior to maturity and/or to pursue a sale of assets
or other capital raising transaction to satisfy such cash requirement. However,
there can be no assurance that any such refinancing or capital raising
transaction will be consummated.
At September 30, 1997, the Company had working capital of $19.6 million
and a current ratio of 1.8 to 1.0.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $3.2 million in the fiscal 1998 first
quarter principally due to an increase in trade receivables and a decrease in
accrued liabilities and accrued interest. Also affecting net cash used for
operations was $1.5 million in equity earnings of Barnett. Excluding this item,
the net cash used for operations was $1.7 million. Cash flow provided by
investments totaled $2.8 million, primarily attributable to the proceeds from
the sale of LeRan to Barnett for $3.2 million in cash and $0.6 million in
Barnett Common Stock, which was partially offset by capital expenditures of $0.4
million. Cash flow used for financing activities and net repayments under the
Company's credit facilities totaled $8.4 million, primarily due to the
repurchase of $12.0 million of Senior Notes in July and August 1997.
12
<PAGE> 13
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) See Exhibit 27.
b) Form 8-K
None
All other items in Part II are either inapplicable to the Company
during the quarter ended September 30, 1997 or the answer is negative or a
response has been previously reported and an additional report of the
information need not be made, pursuant to the instructions to Part II.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN USA INC.
---------------
REGISTRANT
DATE: NOVEMBER 12, 1997 BY: /S/ MARK W. WESTER
MARK W. WESTER
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
13
<PAGE> 14
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT PAPER (P) OR
- ------- ------------
NUMBER DESCRIPTION ELECTRONIC (E)
- ------ ----------- --------------
<S> <C> <C>
(27) Financial Data Schedule E
(submitted to the Securities
and Exchange Commission in
Electronic Format)
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001014372
<NAME> WAXMAN USA, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 547
<SECURITIES> 0
<RECEIVABLES> 18,701
<ALLOWANCES> (1,230)
<INVENTORY> 24,570
<CURRENT-ASSETS> 44,392
<PP&E> 15,741
<DEPRECIATION> (7,362)
<TOTAL-ASSETS> 87,679
<CURRENT-LIABILITIES> 24,756
<BONDS> 37,123
0
0
<COMMON> 0
<OTHER-SE> 25,800
<TOTAL-LIABILITY-AND-EQUITY> 87,679
<SALES> 28,157
<TOTAL-REVENUES> 28,157
<CGS> 18,656
<TOTAL-COSTS> 9,501
<OTHER-EXPENSES> 960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,341
<INCOME-PRETAX> 2,005
<INCOME-TAX> 815
<INCOME-CONTINUING> 2,128
<DISCONTINUED> 0
<EXTRAORDINARY> 115
<CHANGES> 0
<NET-INCOME> 1,198
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
