<PAGE> 1
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 DECEMBER 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-5888
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)
(216) 439-1830
--------------
(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 February 4,
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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PART 1. FINANCIAL INFORMATION
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<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Six Months and Three Months Ended December 31, 1996
and 1995.................................................. 3
Condensed Consolidated Balance Sheets -
December 31, 1996 and June 30, 1996....................... 4-5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1996 and
1995...................................................... 6
Notes to Condensed Consolidated Financial
Statements................................................ 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information......................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................... 14
</TABLE>
SIGNATURES
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EXHIBIT INDEX
- -------------
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 SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
December 31, December 31,
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $133,988 $116,934 $ 68,109 $ 59,345
Cost of sales 87,217 77,127 44,232 39,115
------- ------- ------- -------
Gross profit 46,771 39,807 23,877 20,230
Selling, general and
administrative expenses 31,702 28,055 16,180 14,150
Corporate charge 1,650 1,724 824 869
------ ------ ------ ------
Operating income 13,419 10,028 6,873 5,211
Interest expense, net 3,615 9,487 1,823 4,715
------- ------- ------- -------
Income before income taxes,
minority interest and cumulative
effect of change in accounting 9,804 541 5,050 496
Provision for income taxes 3,952 400 2,085 295
------- ------- ------- -------
Income before minority interest and
cumulative effect of change
in accounting 5,852 141 2,965 201
Minority interest in consolidated
affiliate 2,857 - 1,506 -
------- ------- ------- -------
Income before cumulative
effect of change in accounting 2,995 141 1,459 201
Cumulative effect of change in
accounting, net of tax benefit - (4,928) - -
------- ------- ------- -------
Net income (loss) $ 2,995 $ (4,787) $ 1,459 $ 201
======= ======= ======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
DECEMBER 31, 1996 AND JUNE 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(Unaudited) (Audited)
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,929 $ 2,453
Accounts receivable, net 38,989 36,537
Inventories 64,916 59,883
Prepaid expenses 2,761 3,866
------- -------
Total current assets 108,595 102,739
------- -------
PROPERTY AND EQUIPMENT:
Land 505 428
Buildings 9,797 9,193
Equipment 25,095 20,665
------- -------
35,397 30,286
Less accumulated depreciation
and amortization (17,196) (15,349)
------- -------
Property and equipment, net 18,201 14,937
COST OF BUSINESSES IN EXCESS
OF NET ASSETS ACQUIRED, NET 13,112 13,318
UNAMORTIZED DEBT ISSUANCE COSTS, NET 1,206 1,100
OTHER ASSETS 1,355 969
------- -------
$142,469 $133,063
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
DECEMBER 31, 1996 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 18,342 $ 10,775
Accounts payable 27,563 27,547
Accrued liabilities 6,923 9,304
Accrued income taxes payable 1,261 2,037
Accrued interest 1,699 1,364
-------- --------
Total current liabilities 55,788 51,027
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 781 863
SENIOR NOTES 43,026 43,026
PUSH-DOWN DEBT 5,724 5,724
MINORITY INTEREST IN CONSOLIDATED AFFILIATE 23,463 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. (18,196) (16,913)
Paid-in capital 21,462 21,462
Retained earnings 10,741 7,556
-------- -------
14,007 12,105
Cumulative currency translation adjustment (320) (288)
-------- -------
Total stockholder's equity 13,687 11,817
-------- -------
$142,469 $133,063
======== =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
<S> <C> <C>
Net income (loss) $ 2,995 $ (4,787)
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 2,857 --
Depreciation and amortization 1,947 2,376
Changes in assets and liabilities:
Accounts receivable, net (2,452) (268)
Inventories (5,033) 5,001
Prepaid expenses and other assets 719 (238)
Accounts payable 16 997
Accrued liabilities (2,046) 674
Accrued income taxes (776) --
Other, net (32) (98)
-------- --------
Net Cash (Used in) Provided by Operating
Activities (1,805) 11,870
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (5,111) (2,093)
-------- --------
Net Cash (Used in) Investing Activities (5,111) (2,093)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreement 62,214 56,816
Payments under credit agreement (54,647) (59,519)
(Repayments) Borrowings of long-term debt (82) 1
Capital contribution from parent 190 5,811
Advances to parent (1,283) (13,341)
-------- --------
Net Cash Provided by
(Used in) Financing Activities 6,392 (10,232)
-------- --------
NET DECREASE IN CASH (524) (455)
BALANCE, BEGINNING OF PERIOD 2,453 2,062
-------- --------
BALANCE, END OF PERIOD $ 1,929 $ 1,607
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
DECEMBER 31, 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 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 Inc. 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 six months and three
months ended December 31, 1996 and 1995, the condensed balance sheet as of
December 31, 1996 and the condensed statements of cash flows for the six months
ended December 31, 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 December 31, 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. These
condensed interim financial statements should 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 January 31, 1997, filed with the Securities and Exchange Commission.
7
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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 56,000 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 six months ended December 31, 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
Advances to Waxman Industries in the accompanying condensed consolidated balance
sheets. Deferred tax assets of $500,000 related to Barnett are included in other
assets as of December 31 and June 30, 1996.
8
<PAGE> 9
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 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' common stock interest.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the six months ended December 31, 1996 and 1995 included
income taxes of $4.7 million and $.3 million and interest of $3.1 million and
$8.8 million, respectively. Waxman USA's cash flow, subject to 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 SIX MONTHS AND THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1995
This Quarterly Report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements regarding certain customer concentration issues
and the sufficiency of the Company's liquidity and sources of capital. These
forward-looking statements are subject to certain risks, uncertainties and other
factors which could cause actual results to differ materially. Additional
information regarding factors that could potentially affect the Company or its
financial results may be included in the Company's filings with the Securities
and Exchange Commission.
Waxman USA owns 49.9% of the common stock of and, together with its preferred
shares, a 54% economic interest in Barnett. Barnett's results are consolidated
with the Company's and the Company records a charge in its statement of
operations for the net income related to the outside stockholder's common stock
interest.
NET SALES
- ---------
Consolidated net sales for the six months and second fiscal quarter ended
December 31, 1996 amounted to $134.0 million and $68.1 million, as compared to
$116.9 million and $59.3 million for the comparable periods last year,
respectively. The increases of 14.6% for the six months and 14.8% for the
quarter are primarily attributable to the increase in Barnett's net sales and a
smaller increase at the Company's wholly owned operations.
Barnett's net sales of $76.4 million and $39.9 million for the six months and
quarter ended December 31, 1996 represent increases of 26.2% and 28.2% over the
comparable periods last year. The increases are primarily attributable to
continued expansion and development of its telesales operations and 1,053 new
product introductions during the preceding twelve month period.
Net sales for the Company's wholly owned operations amounted to $57.6 million
and $28.2 million for the six months and quarter ended December 31, 1996,
respectively, an increase of $1.2 million or 2.1% for the six months and $0.5
9
<PAGE> 10
million or 2.0% for the three months ended December 31, 1996. The Company's
operations have benefited from their strengthened financial condition which has
created additional market opportunities as well as increased direct selling
activities from the Company's foreign operations and an improved economic
environment for certain of the Company's products. The Company's Consumer
Products' operation experienced net sales decreases of 4.4% for the six months
and 4.7% for the quarter ended December 31, 1996. The reduction was primarily
the result of the discontinuance of the electrical products' line and certain
lower margin products in the fourth quarter of fiscal 1996 and the loss of a
customer due to its bankruptcy early in the first quarter of fiscal 1997.
GROSS PROFIT
- ------------
For the six months ended December 31, 1996, gross profit increased $7.0 million
or 17.5% to $46.8 million from $39.8 million for the comparable period last
year. Gross margins increased for the six months ended December 31, 1996,
improving to 34.9% from 34.0% last year. The Company's wholly owned operations'
gross margin improved to 36.1% for the current six month period as compared to
34.7% last year. There was a general improvement at nearly all of the Company's
operations. The largest improvement was at the Consumer Products' operation,
where gross profit margins improved from 34.6% to 36%, primarily due to the
discontinuance of lower margin products.
Gross profit for the quarter ended December 31, 1996 amounted to $23.9 million,
an increase of $3.6 million or 18% over the $20.2 million in the comparable
period last year. The gross margin for the current year's second quarter was
35.1% as compared to 34.1% last year. The Company's wholly owned operations
reported gross margin of 36.3% for the three months ended December 31, 1996 as
compared to 34.6% last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the six months ended
December 31, 1996 and 1995 amounted to $31.7 million or 23.7% of consolidated
net sales and $28.1 million or 24% of consolidated net sales, respectively. For
the Company's wholly owned operations, there was a general decrease of $.3
million in SG&A expenses and, as a percent of net sales, SG&A expenses amounted
to 26.1% and 27.1% for the six months ended December 31, 1996 and 1995,
respectively. Barnett's SG&A expenses increased by $3.9 million to $16.7 million
for the six months ended December 31, 1996, a slight increase when expressed as
a percentage of net sales. Barnett's increase was attributable to the expansion
of its telesales operations which resulted in increased training expenses and
also to Barnett's establishment of a same day shipping policy to benefit its
customers.
For the quarters ended December 31, 1996 and 1995, SG&A expenses amounted to
$16.2 million and $14.2 million, or 23.8% and 23.9% of consolidated net sales,
respectively. SG&A expenses for the Company's wholly owned operations amounted
to $7.5 million, or a 3.3% decrease for the quarter ended December 31, 1996 as
compared to $7.7 million for the same quarter last year. The increase in net
sales, coupled with the slight decrease in expenses at the Company's wholly
owned operations resulted in an overall improvement in the ratio of expenses to
consolidated net sales.
CORPORATE CHARGE
- ----------------
For the six months ended December 31, 1996, the corporate charge decreased to
$1.7 million or 1.2% of net sales as compared to $1.7 million, or 1.5% of net
sales in the comparable period last year. Corporate charge for the second
quarter of fiscal 1997 decreased to $.8 million, or 1.2% of net sales compared
to $.9 million, or 1.5% of net sales, for the comparable quarter last year.
Corporate charges are allocations to the Company of expenses that Waxman
10
<PAGE> 11
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 six months and quarter ended December 31, 1996, interest expense totaled
$3.6 million and $1.8 million, respectively, a decrease of $5.9 million and $2.9
million from the $9.5 million and $4.7 million in the comparable periods last
year. The decrease is primarily due to the repayment of debt with the net
proceeds from the Barnett Public Offering. Average borrowings for the current
year's six months amounted to $64.4 million, with a weighted average interest
rate of 10.5%, as compared to $148.5 million in the same period last year with a
weighted average interest rate of 12.0%.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes for the six months and quarter ended December 31,
1996 amounted to $4.0 million and $2.1 million, respectively, in comparison to
$.4 million and $.3 million for the same periods last year. The provision for
taxes primarily represents Waxman USA's tax provision on a stand-alone basis,
including 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 goodwill amortization and state and foreign taxes.
With the completion of the Barnett Public Offering, Barnett is no longer
included in the consolidated tax group of which Waxman Industries is the
ultimate parent, and is unable to benefit from Waxman Industries' net operating
loss carryforwards.
MINORITY INTEREST IN CONSOLIDATED AFFILIATE
- -------------------------------------------
The Company recorded a charge of $2.9 million and $1.5 million, respectively,
for the six months and quarter ended December 31, 1996 for the 50.1% of
Barnett's net income associated with the outside stockholders' common stock
interest.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
- -----------------------------------------
Effective July 1, 1995, the Company changed its method of accounting for the
cost of obtaining long term business. These costs represent the amount paid in
connection with a customer's commitment to purchase products from the Company
for a specified period. Prior to this change, the Company capitalized the
consideration paid 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 changes suppliers, less the
salvage value received by the Company. These costs were then amortized over the
period deemed to be benefited. The Company's new policy is to amortize these
costs in the fiscal year incurred due to the uncertainty of today's competitive
retail environment. The cumulative effect of this change on prior years of $4.9
million, net of a tax benefit of $3.3 million, is reported as a separate charge
in the six months ended December 31, 1995.
NET INCOME (LOSS)
- -----------------
The Company's net income for the six months and quarter ended December 31, 1996
amounted to $3.0 million and $1.5 million, respectively, an increase over net
income of $0.1 million and $.2 million in the corresponding prior year periods,
before the cumulative effect of the change in accounting in the six months of
fiscal 1996 as discussed above.
11
<PAGE> 12
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At December 31, 1996, the Company had $13.2 million available under its credit
agreement with BankAmerica Business Credit, Inc. (the "Credit Agreement"). The
Credit Agreement, which expires in May 1999, 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 have been classified as a current liability. The Company was in
compliance with all loan covenants at December 31, 1996.
At December 31, 1996, the Company had working capital of $52.8 million and a
current ratio of 1.9 to 1.
The Company relies primarily on Consumer Products for cash flow because
Barnett's cash flow is no longer available to the Company as a result of the
completion of the Barnett Public Offering. Consumer Products' customers include
do-it-yourself warehouse 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 assurances that any such prolonged economic downturns or significant
declines in consumer spending will not have a material adverse impact on the
Consumer Products' business and its ability to generate cash flow. Furthermore,
Consumer Products' largest customer, Kmart and its subsidiary, Builders Square,
in recent years have accounted for approximately 42% to 44% of Consumer
Products' total net sales. The Company has been 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 has determined
to utilize Consumer Products as a vendor. As a result, Consumer Products
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. Furthermore, Kmart has stated that it intends
to sell its Builders Square business, which accounted for 24.8%, 24.7% and 23.2%
of Consumer Products' net sales in fiscal 1996, fiscal 1995 and the six months
ended December 31, 1996. Kmart issued a press release on February 3, 1997,
stating that it was negotiating to sell the Builders Square business to Home
Base, a leading regional warehouse home center, which is not and has not been a
customer of Consumer Products. Although Kmart recently completed a review of its
and Builders Square's vendor relationships, it is likely that any purchaser of
Builders Square would conduct a similar review. 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 does not have any commitments to make substantial capital
expenditures.
The Company believes that the funds generated from operations, together with the
funds available under the Credit Agreement (and any refinancing thereof) 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 its
12 3/4% Deferred Coupon Notes due 2004). The Company does not anticipate that
available cash flow from operations will be sufficient to pay cash interest on
the Deferred Coupon Notes commencing in December 1999. Therefore, the Company
expects to repay or refinance such debt in or prior to December 1999.
12
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DISCUSSION OF CASH FLOWS
- ------------------------
Net cash used by the Company's operations was $1.8 million for the six months
ended December 31, 1996, due mainly to an increase in inventories, accounts
receivable and a decrease in accruals (principally accrued income taxes and
accrued interest payments) which were partially offset by an increase in
accounts payable. Cash flow used for investments totaled $5.1 million, primarily
relating to Barnett's operations, including capital expenditures for improved
management information systems, 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
$6.4 million. Net debt borrowings during the six months ended December 31, 1996
under the Credit Agreement totaled $7.6 million.
13
<PAGE> 14
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 December 31, 1996 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: FEBRUARY 10, 1997 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
14
<PAGE> 15
EXHIBIT INDEX
-------------
EXHIBIT PAPER (P) OR
- ------- ------------
NUMBER DESCRIPTION ELECTRONIC (E)
- ------ ----------- --------------
(27) Financial Data Schedule
(submitted to the Securities
and Exchange Commission in
Electronic Format) E
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,929
<SECURITIES> 0
<RECEIVABLES> 41,334
<ALLOWANCES> (2,345)
<INVENTORY> 64,916
<CURRENT-ASSETS> 108,595
<PP&E> 35,397
<DEPRECIATION> 17,196
<TOTAL-ASSETS> 142,469
<CURRENT-LIABILITIES> 55,788
<BONDS> 49,531
<COMMON> 0
0
0
<OTHER-SE> 13,687
<TOTAL-LIABILITY-AND-EQUITY> 142,469
<SALES> 133,988
<TOTAL-REVENUES> 133,988
<CGS> 87,217
<TOTAL-COSTS> 31,702
<OTHER-EXPENSES> 1,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,615
<INCOME-PRETAX> 9,804
<INCOME-TAX> 3,952
<INCOME-CONTINUING> 5,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,995
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
