<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 SEPTEMBER 30, 1999
------------------
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
-------- ----------
(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
--------------
(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 5,
1999.
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WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and 1998.................................... 3
Condensed Consolidated Balance Sheets - September 30, 1999 and June 30, 1999...... 4 -5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1999 and 1998.................................... 6
Notes to Condensed Consolidated Financial Statements.............................. 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 11 - 16
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information.................................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
</TABLE>
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PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN USA INC. AND SUBSIDIARIES
--------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 22,837 $ 28,229
Cost of sales 15,652 19,141
-------- --------
Gross profit 7,185 9,088
Selling, general and administrative expenses 5,888 7,321
Corporate Charge 525 870
Non-recurring and procurement charges 150 1,350
-------- --------
Operating income (loss) 622 (453)
Equity earnings of Barnett 1,604 1,527
Amortization of deferred U.S. Lock gain 49 --
Interest expense, net 1,167 1,500
-------- --------
Income (loss) before income taxes 1,108 (426)
Provision (benefit) for income taxes 383 (162)
-------- --------
Net income (loss) $ 725 $ (264)
======== ========
Other comprehensive income (loss):
Foreign currency translation adjustment 121 26
-------- --------
Comprehensive income (loss) $ 846 $ (238)
======== ========
</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, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 56 $ 1,376
Trade receivables, net 14,436 10,686
Other receivables 4,141 4,212
Inventories 17,618 19,052
Prepaid expenses 2,896 2,276
-------- --------
Total current assets 39,147 37,602
-------- --------
INVESTMENT IN BARNETT 37,989 36,385
-------- --------
PROPERTY AND EQUIPMENT:
Land 434 430
Buildings 3,093 3,004
Equipment 13,055 12,675
-------- --------
16,582 16,109
Less accumulated depreciation and amortization (6,334) (5,998)
-------- --------
Property and equipment, net 10,248 10,111
-------- --------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 7,853 7,920
UNAMORTIZED DEBT ISSUANCE COSTS, NET 627 565
DEFERRED TAX ASSET 537 540
OTHER ASSETS 779 451
-------- --------
$ 97,180 $ 93,574
======== ========
</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, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,626 $ 812
Accounts payable 6,820 6,837
Accrued liabilities 2,781 2,982
Accrued income taxes payable 1,049 1,314
Accrued interest 332 1,330
-------- --------
Total current liabilities 17,608 13,275
-------- --------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 870 933
SENIOR NOTES 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK 7,704 7,753
STOCKHOLDER'S EQUITY:
Preferred stock, $.10 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. (9,830) (8,369)
Paid-in capital 21,462 21,462
Retained earnings 24,419 23,694
-------- --------
36,051 36,787
Cumulative currency translation adjustment (908) (1,029)
-------- --------
Total stockholder's equity 35,143 35,758
-------- --------
$ 97,180 $ 93,574
======== ========
</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, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 725 $ (264)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Non-recurring charges -- 1,350
Amortization of deferred U.S. Lock gain (49) --
Equity earnings of Barnett (1,604) (1,527)
Depreciation and amortization 469 470
Deferred income taxes 3 --
Changes in assets and liabilities:
Trade receivables, net (3,750) (1,039)
Inventories 1,434 2,063
Other assets (877) (615)
Accounts payable (17) 1,066
Accrued liabilities (201) (934)
Accrued interest (998) (971)
Accrued taxes (265) (23)
Other, net 121 26
-------- --------
Net Cash Used in Operating Activities (5,009) (398)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (473) (1,305)
-------- --------
Net Cash Used in Investing Activities (473) (1,305)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements 20,109 23,705
Payments under credit agreements (14,295) (21,012)
Debt issuance costs (128) --
Advances to parent (1,461) (782)
Repayments of long-term debt, net (63) (15)
-------- --------
Net Cash Provided by
Financing Activities 4,162 1,896
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,320) 193
BALANCE, BEGINNING OF PERIOD 1,376 73
-------- --------
BALANCE, END OF PERIOD $ 56 $ 266
======== ========
</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, 1999
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"). All significant intercompany transactions and
balances are eliminated in consolidation. As of September 30, 1999, the Company
owned 44.3% of the common stock of Barnett Inc. (the "Barnett Common Stock"), a
direct marketer and distributor of plumbing, electrical, hardware, and security
hardware products' 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, 1999 and 1998, the condensed balance sheet as of
September 30, 1999 and the condensed statements of cash flows for the three
months ended September 30, 1999 and 1998 have been prepared by the Company
without audit, while the condensed balance sheet as of June 30, 1999 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, 1999 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 or
other interim periods. 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 Annual Report on Form 10-K for the
fiscal year ended June 30, 1999, filed with the Securities and Exchange
Commission.
Over the past several years, the Company and Waxman Industries, Inc.
("Waxman Industries"), the Company's parent, have endeavored to reduce their
high level of debt through the monetization of assets and to improve the
efficiencies of their continuing businesses. As a result, the Company and Waxman
Industries have undertaken various initiatives to raise cash, improve cash flow
and reduce their debt obligations and / or improve financial flexibility during
that period. The Company believes that operating cash flow, together with
borrowings under its working capital credit facilities, and the monetization,
from time to time, of a portion of the Barnett Common Stock or other selected
assets, will be sufficient for at least the next 12 to 15 months to fund its
working capital requirements. However, ultimately, the Company and Waxman
Industries, will not be able to continue to make all of the interest and
principal payments under their debt obligations without a significant
appreciation in, and monetization of, the value of the shares of common stock of
Barnett owned by the Company and/or a restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the
repurchase of its shares owned by the Company. The Company continues to have
discussions with Barnett's management regarding a share repurchase and continues
to evaluate opportunities to monetize all or a portion of its investment in
Barnett, including as part of a comprehensive plan to eliminate a significant
portion of debt. The Company and Waxman Industries also continue discussions
with certain bondholders regarding potential debt reduction / restructuring
transactions. At this time, the Company does not have an agreement to monetize
its investment in Barnett or reduce the high level of debt. However, the Company
and Waxman Industries continue to pursue a debt restructuring and / or debt
elimination plan. Accordingly, the accompanying condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern and, as such, adjustments, if any, that may be required for presentation
on another basis have not been considered.
NOTE 2 - BUSINESS
--------
The Company is a direct, wholly-owned subsidiary of Waxman Industries.
The common stock of Waxman Industries is quoted on the Over-The-Counter Bulletin
Board under the symbol "WAXX." The Company is a
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supplier of specialty plumbing, hardware and other products to the repair and
remodeling market in the United States. The Company distributes its products to
approximately 1,400 customers, including a wide variety of large national and
regional retailers, independent retail customers and wholesalers.
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 Medal
Distributing, a supplier of hardware products and, included the operations of
U.S. Lock, a distributor of a full line of security hardware products, prior to
its January 1, 1999 sale to Barnett. TWI includes the Company's foreign
operations, including manufacturing, packaging and sourcing operations in China
and Taiwan, and an operation in Mexico that threads galvanized, black, brass,
and chrome pipe and imports malleable fittings. Consumer Products, WOC and
Barnett utilize the Company's and non-affiliated foreign suppliers.
At September 30, 1999, the Company owned 44.3% of Barnett, a direct
marketer and distributor of an extensive line of plumbing, electrical, hardware,
and security hardware products to approximately 73,400 active customers
throughout the United States. Barnett offers approximately 21,000 name brand and
private label products through its industry-recognized Barnett(R) and U.S.
Lock(R) catalogs and telesales operations. Barnett markets its products through
six distinct, comprehensive catalogs that target professional contractors,
independent hardware stores, maintenance managers, security hardware installers,
liquid propane gas dealers, and locksmiths. In January 1999, the Company
completed the sale of U.S. Lock to Barnett. Barnett's net sales for fiscal 1999
were $241.4 million. The Company recorded equity earnings from this investment
of $1.6 million and $1.5 million for the quarters ended September 30, 1999 and
1998, respectively. 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 SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the asset
and liability method, where deferred tax assets and liabilities are recognized
for the future tax consequences attributable to net operating loss carryforwards
and to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
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 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 $48.0
million of available domestic net operating loss carryforwards for income tax
purposes at June 30, 1999, which expire 2009 through 2013. 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 in
Advances to Waxman Industries, Inc. in the accompanying condensed consolidated
balance sheets.
The Company's tax provisions for the three months ended September 30,
1999 and 1998 represent the Company's stand-alone tax provision.
NOTE 4 - BARNETT
-------
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common
Stock as of September 30, 1999. This investment is accounted for under the
equity method of accounting.
The following table presents unaudited summary financial data for
Barnett at September 30, 1999 and June 30, 1999 and for the three months ended
September 30, 1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
Statement of income data: 1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 67,400 $ 52,391
</TABLE>
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<TABLE>
<S> <C> <C>
Gross profit 21,734 17,176
Net income 3,618 3,441
Balance sheet data:
Current assets $100,220 $ 94,941
Non-current assets 55,073 54,245
Current liabilities 26,965 24,615
Non-current liabilities 33,000 33,000
</TABLE>
NOTE 5 - NON-RECURRING AND PROCUREMENT CHARGES
-------------------------------------
In the first quarter of fiscal 1999, Consumer Products recorded a
non-recurring charge of $1.35 million related to the relocation of its Bedford
Heights, Ohio warehouse to Groveport, Ohio. Included in the charge were
severance benefits for personnel and the loss on the write-off of tangible
assets at the Bedford Heights warehouse. The Company believes that the
relocation to a more modern and efficient facility has enabled Consumer Products
to provide more sophisticated distribution services to its customers and has
helped it remain competitive through annual cost savings.
Procurement costs represent the amount paid by the Company in
connection with a customer's agreement to purchase products from the Company for
a specific period. The amount includes the consideration paid to the new or
existing customer (i) for the right to supply such customer for a specified
period, (ii) to assist such customer in reorganizing its store aisles and
displays in order to accommodate the Company's products and (iii) 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 expenses
these costs in the fiscal year incurred. Procurement costs for (i) above totaled
$150,000 in the fiscal 2000 first quarter. The Company did not incur this type
of cost in the fiscal 1999 first quarter. The Company did not incur procurement
costs related to (ii) above in the fiscal 2000 and 1999 first quarters. These
types of procurement costs are included as procurement charges in the
accompanying consolidated statements of operations. Procurement costs for (iii)
above totaled $0.3 million and $0.5 million the first quarter of fiscal 2000 and
1999, respectively, and are included as a contra-sales amount in net sales in
the accompanying consolidated statements of operations.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1999 and 1998
included interest of $2.1 million and $2.4 million, respectively. The Company
made no federal income tax payments in the first quarter of fiscal 2000 or
fiscal 1999. However, the Company paid $0.4 million in state taxes in the first
quarter of fiscal 2000. Waxman USA's cash flow, within certain restrictions, is
upstreamed to Waxman Industries to service interest payments and administrative
costs.
NOTE 7 - EARNINGS PER SHARE
------------------
Earnings per share data is not presented and is not meaningful, as the
Company is a wholly-owned subsidiary of Waxman Industries.
NOTE 8 - SEGMENT INFORMATION
-------------------
The Company's businesses distribute specialty plumbing products,
galvanized, black, brass and chrome pipe nipples, imported malleable fittings,
and other products. Since the foreign sourcing and manufacturing operations sell
a significant portion of their products through the Company's other wholly-owned
operations, which primarily sell to retailers, and to Barnett, a distributor,
the Company has classified its business segments into retail and non-retail
categories. Products are sold to (i) retail operations, including large national
and regional retailers, D-I-Y home centers and smaller independent retailers in
the United States, and (ii) non-retail operations, including wholesale and
industrial supply distributors in the United States. Sales outside of the United
States are not significant. Until the January 1, 1999 sale of U.S. Lock, the
Company also distributed security hardware to non-retail operations, including
security hardware
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installers and locksmiths. Set forth below is certain financial data relating to
the Company's business segments (in thousands of dollars).
<TABLE>
<CAPTION>
Corporate
Retail Non-Retail and Other Elimination Total
------ ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 2000 three months $ 17,350 $ 8,579 -- $ (3,092) $ 22,837
Fiscal 1999 three months 18,487 13,184 -- (3,442) 28,229
Operating income (loss):
Fiscal 2000 three months $ 927 $ 220 $ (525) -- $ 622
Fiscal 1999 three months (1,002) 1,419 (870) -- (453)
Identifiable assets:
September 30, 1999 $ 44,705 $ 17,532 $ 34,943 -- $ 97,180
June 30, 1999 45,017 15,866 32,691 -- 93,574
</TABLE>
The Company's foreign operations manufacture, assemble, source and
package products that are distributed by the Company's wholly-owned operations,
Barnett, retailers and other non-retail customers. Net sales for those foreign
operations amounted to $11.7 million and $9.0 million for the first quarter of
fiscal 2000 and 1999, respectively. Of these amounts, approximately $3.1 million
and $3.4 million were intercompany sales for the first quarter of fiscal 2000
and 1999, respectively. Identifiable assets for the foreign operations were
$20.0 million and $18.7 million at September 30, 1999 and June 30, 1999,
respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
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,
uncertainties and assumptions, including, but not limited to, the risk that the
Company and/or Waxman Industries may not be able to implement their 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, uncertainties and assumptions
which are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission, including this Report. Should
one or more of those risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein.
A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------
AND 1998
--------
Net Sales
- ---------
Net sales for the fiscal 2000 first quarter ended September 30, 1999
totaled $22.8 million, as compared to $28.2 million for the fiscal 1999 first
quarter. Excluding the results of U.S. Lock, which was sold effective January 1,
1999, comparable net sales for the remaining businesses increased 5.3 percent
from the recasted net sales of $21.7 million for the fiscal 1999 first quarter.
As we have discussed previously, net sales originating from our Asian operations
continue to increase due to the direct import program to retailers, which is
managed by Consumer Products, and due to additional sales to Barnett. The direct
import program for certain retailers requires coordination between the
customers, who receive the direct shipment into their warehouses, the billing
and collection services from our Asian operations, and selling, administrative
and customer services from Consumer Products. We anticipate that this program
will continue to play an important part in the Company's results and have begun
presenting the Company's operating segment results based on business with
retailers and non-retailers.
Net sales to retailers amounted to $17.4 million for the first quarter
ended September 30, 1999, a decrease from the $18.5 million for the same period
last year. Sales to Hechinger / Builders Square decreased to $0.1 million in the
fiscal 2000 first quarter, as compared to $1.9 million in the same period last
year, while sales to Kmart and certain other retailers increased. As previously
disclosed by the Company, Consumer Products was informed that the Hechinger /
Builders Square operations were consolidating their supplier relationships and
Consumer Products would retain only the bulk plumbing business beginning in
January 1999. During the fiscal 1999 third quarter, the Company signed a
three-year agreement with Kmart, which the Company expects will result in
additional annual net sales of $4 to $5 million. The Company also began shipping
to Target, a new customer, in September 1999. The Company believes that
discussions with several other major retailers should result in new and expanded
business opportunities for its Consumer Products and Asian operations in this
fiscal year. A portion of this additional business, which would include
showerheads, faucets, floor care products, and packaged plumbing items, will be
shipped under the direct import program from the Company's Asian facilities.
Non-retail net sales amounted to $8.6 million for the fiscal 2000 first
quarter, a decrease from $13.2 million for the same period in fiscal 1999.
Excluding the net sales of U.S. Lock, which amount to $6.5 million in the fiscal
1999 first quarter, non-retail net sales would have increased by $1.9 million.
This increase is primarily due to an increase in net sales to Barnett.
Gross Profit
- ------------
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Gross profit for the fiscal 2000 first quarter was $7.2 million, with a
gross profit margin of 31.5 percent, as compared to gross profit of $9.1 million
and a gross profit margin of 32.2 percent for the three months ended September
30, 1998. Excluding U.S. Lock from the prior year results, gross profit
increased by $0.3 million from the recasted fiscal 1999 first quarter gross
profit of $6.9 million, while the gross profit margin would have decreased from
32.0 percent. The decrease in the gross margin is primarily attributable to a
higher proportion of sales from the direct import sales program, which has a
lower gross margin as well as lower selling, general and administrative
expenses. The termination of the packaged plumbing program sales to Hechinger /
Builders Square reduced the Company's gross profit and offset the increased
gross profit from sales to other retailers. In addition, competitive pricing
pressure from overseas suppliers of pipe nipples and valves has reduced the
Company's sales and gross margins for those products.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
decreased from $7.3 million for the quarter ended September 30, 1998 to $5.9
million for the quarter ended September 30, 1999. Included in the prior year's
results are $1.3 million in SG&A expenses related to U.S. Lock. Excluding the
SG&A expenses related to U.S. Lock, as a percentage of net sales, SG&A expenses
decreased from 27.6% for the fiscal 1999 first quarter to 25.8% for the fiscal
2000 first quarter. The decreased percentage of expenses to net sales is due to
a higher proportion of sales from the Asian operations and an increase in sales
through the direct import program, which have lower SG&A expenses.
Non-Recurring and Procurement Charges
- -------------------------------------
In the fiscal 1999 first quarter, the Company recorded $1.35 million in
non-recurring charges related to costs involved in the relocation of the
Consumer Products' Bedford Heights warehouse to Groveport, Ohio. In the fiscal
2000 first quarter, the Company recorded procurement costs of $150,000 related
to customer agreements to purchase products from the Company for a period of
time.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its ownership interest in
Barnett of $1.6 million for the quarter ended September 30, 1999, as compared to
$1.5 million for the same quarter in fiscal 1999.
Amortization of Deferred Gain on Sale of U.S. Lock
- --------------------------------------------------
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$29.9 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $17.7 million, with approximately $9.9
million being recognized in the fiscal 1999 third quarter. The remaining $7.8
million was reported as a deferred gain in the Company's consolidated balance
sheet due to the Company's continued ownership of 44.3% of Barnett, the acquirer
of U.S. Lock. The Company is recognizing the deferred gain as the goodwill
generated by the purchase of U.S. Lock is amortized by Barnett, or as the
Company reduces its ownership interest in Barnett. In the fiscal 2000 first
quarter, the Company recognized $49,000 of this deferred gain.
Interest Expense
- ----------------
For the quarter ended September 30, 1999, net interest expense totaled
$1.2 million, as compared to $1.5 million for the first quarter in fiscal 1999.
Average borrowings for the current year's quarter amounted to $39.2 million,
with a weighted average interest rate of 11.1%, as compared to $53.2 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 $0.4 million for the first
quarter of fiscal 2000, as compared to a tax benefit of $0.2 million for the
same quarter last year. The provisions represent Waxman USA's tax provision on a
stand-alone basis, including various 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.
12
<PAGE> 13
Net Loss
- --------
The Company's net income for the quarter ended September 30, 1999
amounted to $0.7 million, as compared to the loss of $0.3 million in the fiscal
1999 first quarter. The first quarter of fiscal 1999 was affected by the $1.35
million non-recurring charge associated with the relocation of a warehouse.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Over the past several years, the Company and Waxman Industries have
endeavored to reduce their high level of debt through the monetization of assets
and to improve the efficiencies of their continuing businesses. As a result, the
Company and Waxman Industries have undertaken various initiatives to raise cash,
improve cash flow and reduce debt obligations and / or improve financial
flexibility during that period. The Company believes that operating cash flow,
together with borrowings under its working capital credit facilities, and the
monetization, from time to time, of a portion of the Barnett Common Stock, will
be sufficient for at least the next 12 to 15 months to fund its working capital
requirements. However, ultimately, the Company and Waxman Industries will not be
able to continue to make all of the interest and principal payments under their
debt obligations without a significant appreciation in, and monetization of, the
value of the shares of common stock of Barnett owned by the Company and/or a
restructuring of such debt instruments. The Company and Waxman Industries
continue their efforts to complete a financial restructuring plan, which
includes the sale of the investment in Barnett and a restructuring and / or
elimination of debt. Pending the completion of a comprehensive financial
restructuring, the Company may also pursue the sale, from time to time, of a
portion of its shares of Barnett or other selected assets to provide it with
additional liquidity and financial flexibility.
As stated previously, the Company and Waxman Industries' business
strategy includes the reduction of their interest expense and their leverage by
the sale of selected assets and/or the refinancing or reduction of their
remaining indebtedness whenever possible. To that end, the Company and Waxman
Industries completed the sale of U.S. Lock for approximately $33.0 million in
January 1999. The Company and Waxman Industries believe their operating cash
flow, the borrowing availability under the Loan and Security Agreement and
proceeds from sales of selected assets will be sufficient to fund current
liquidity and working capital requirements, capital expenditures and the first
few semi-annual interest payments on Waxman Industries' 12 3/4% Senior Secured
Deferred Coupon Notes due 2004 (the "Deferred Coupon Notes"). The first
semi-annual cash interest payment of approximately $6 million under the Deferred
Coupon Notes is due on December 1, 1999. Without the completion of a financial
restructuring plan as described above, the Company and Waxman Industries
currently believe that, while they will be able to pay their near-term debt
maturities and cash interest requirements, they will not be able to continue to
make all of the interest and principal payments under their debt obligations
without a significant appreciation in, and monetization of, the value of the
Barnett Common Stock and/or a restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the
repurchase of its shares owned by the Company. The Company continues to have
discussions with Barnett's management regarding a share repurchase and continues
to evaluate other opportunities to monetize all or a portion of its investment
in Barnett, including as part of a comprehensive plan to eliminate a significant
portion of debt. The Company and Waxman Industries also continue to have
discussions with certain of their bondholders regarding potential debt reduction
/ restructuring transactions. At this time, the Company does not have an
agreement to monetize its investment in Barnett or reduce the high level of
debt. However, the Company and Waxman Industries continue to pursue a debt
restructuring and / or debt elimination plan. As discussed above, the Company
may also pursue the sale, from time to time, of a portion of its shares of
Barnett or other selected assets to provide it with additional liquidity and
financial flexibility. There can be no assurance that the Company will be able
to consummate such financial restructuring or any of the other aforementioned
transactions.
In June 1999, the Company entered into the Loan and Security Agreement
with Congress Financial Corporation to replace the Credit Agreement with
BankAmerica Business Credit, Inc. that was to expire on July 15, 1999. The Loan
and Security Agreement is between Consumer Products, WOC, WAMI and WAMI Sales,
as borrowers (the "Borrowers"), with the Company, Waxman Industries, Inc. and
TWI as guarantors. The Loan and Security Agreement provides for, among other
things, revolving credit advances of up to $20.0 million. As of
13
<PAGE> 14
September 30, 1999, the Company had $5.3 million in borrowings under the
revolving credit line of the facility and had approximately $10.9 million
available under such facility. The Loan and Security Agreement expires on
September 1, 2001, but may be extended under certain conditions.
The Loan and Security Agreement provides for revolving credit advances
of (a) up to 85.0% of the amount of eligible accounts receivable, (b) up to the
lesser of (i) $10.0 million or (ii) 60% of the amount of eligible raw and
finished goods inventory and (c) up to the lesser of (i) $5.0 million or (ii)
70% of the fair market value of 500,000 shares of Barnett Inc. common stock.
Revolving credit advances bear interest at a rate equal to (a) First Union
National Bank's prime rate plus 0.5% or (b) LIBOR plus 2.50%. The Loan and
Security Agreement includes a letter of credit subfacility of $10.0 million,
with none outstanding at September 30, 1999. Borrowings under the Loan and
Security Agreement are secured by the accounts receivable, inventories, certain
general intangibles, and unencumbered fixed assets of Waxman Industries, Inc.,
Consumer Products, TWI, International Inc. and WOC, and a pledge of 65% of the
stock of various foreign subsidiaries. In addition, up to $5.0 million of
indebtedness under the Loan and Security Agreement is also secured by a pledge
of 500,000 shares of Barnett Common Stock owned by the Company (constituting
approximately 3.1% of all outstanding Barnett Common Stock). The Loan and
Security 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 Loan and Security 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 Notes and the Waxman Industries' Deferred Coupon Notes, and contains
customary negative, affirmative and financial covenants and conditions. The
Company was in compliance with all loan covenants at September 30, 1999. The
Loan and Security Agreement also contains a material adverse condition clause
which allows Congress Financial Corporation to terminate the Agreement under
certain circumstances.
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 and, prior to January 1, 1999, U.S. Lock
for cash flow. The sale of U.S. Lock further increases the Company's dependence
on Consumer Products' business. Consumer Products' customers include D-I-Y
warehouse home centers, home improvement centers, mass merchandisers and
hardware stores. 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, Consumer
Products has a high proportion of its sales with a concentrated number of
customers. One of Consumer Products' largest customers, Kmart, accounted for
approximately 20.8% of net sales for Consumer Products in fiscal 1999. In July
1997, Kmart agreed to sell its Builders Square chain to Leonard Green &
Partners, a merchant-banking firm. Leonard Green also acquired another home
improvement retailer, Hechinger Co., and has combined the two companies to form
the nation's third largest home improvement chain. In August 1998, Consumer
Products was informed that the Hechinger / Builders Square operations were
consolidating their supplier relationships and Consumer Products would retain
only the bulk plumbing business, beginning in January 1999. The combined
operations of Hechinger / Builders Square, accounted for approximately $3.7
million, or 7.8% and 3.8% of Consumer Products and the Company's net sales in
fiscal 1999, respectively. Hechinger / Builders Square filed for Chapter 11
bankruptcy protection in June 1999, and for Chapter 7 liquidation in September
1999. Consumer Products' accounts receivable from Hechinger / Builders Square
was $0.3 million at the time of the bankruptcy filing. In the event Consumer
Products were to lose any additional large retail accounts as a customer or one
of its largest accounts were to significantly curtail its purchases from
Consumer Products, there would be material short-term adverse effects until the
Company could further modify Consumer Products' cost structure to be more in
line with its anticipated revenue base. Consumer Products would likely incur
significant charges if additional materially adverse changes in its customer
relationships were to occur.
The Company paid $0.4 million in income taxes in the first quarter of
fiscal 2000. At June 30, 1999, Waxman Industries had $48.0 million of available
domestic net operating loss carryforwards for income tax purposes, which expire
2009 through 2013, and $41.3 million of original issue discount, as of June 30,
1999, that has been expensed on Waxman Industries' financial statements and will
become deductible for tax purposes when the interest on the Deferred Coupon
Notes is paid. In the event the Company and Waxman Industries complete a
financial restructuring, which includes the sale of the investment in Barnett
and, recognizes a gain from that sale, Waxman Industries will be able to use the
net operating loss carryforwards to offset income taxes that will be payable and
the Company will share inn this benefit through the tax sharing agreement with
Waxman Industries.
14
<PAGE> 15
The Company has total future lease commitments for various facilities
and other leases totaling $2.7 million, of which approximately $1.2 million is
due in fiscal 2000 and $0.3 million was paid in the first quarter of fiscal
2000. The Company does not have any other commitments to make substantial
capital expenditures. The fiscal 2000 capital expenditure plan includes
expenditures to improve the efficiencies of the Company's operations, to provide
new data technology and certain expansion plans for the Company's foreign
operations. Except as noted below, all operations have completed their Year 2000
compliance. Year 2000 modifications at TWI are nearly completed and are
undergoing testing and final modifications will continue for the next 30 to 60
days. The expenditures included approximately $13,000 for hardware, $10,000 for
software and $10,000 in labor to make the Year 2000 modifications. CWI's
modifications and timetable are similar to those of TWI, with the costs expected
to total approximately $11,000 for hardware, $14,000 for software and $2,000 in
labor to make the Year 2000 modifications.
At September 30, 1999, the Company had working capital of $21.5 million
and a current ratio of 2.2 to 1.
DISCUSSION OF CASH FLOWS
- ------------------------
Net cash used for operations was $5.0 million in the fiscal 2000 first
quarter principally due to an increase in trade receivables and other assets and
a decrease in accrued interest, offset by a decrease in inventories. Also
affecting net cash used for operations was $1.6 million in equity earnings of
Barnett. Excluding this item, the net cash used by operations was $3.4 million.
Cash flow used in investments totaled $0.5 million, attributable to capital
expenditures. Cash flow provided by financing activities, and net borrowings
under the Company's credit facilities, offset by increased advances to Waxman
Industries, totaled approximately $4.2 million.
YEAR 2000
- ---------
The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its businesses.
The Company continues to implement plans at certain of its operations to ensure
those systems continue to meet its internal and external requirements. A summary
of the progress made by each of the Company's operations is provided below.
During fiscal 1998, the Company's largest division, Consumer Products,
completed a version upgrade of its J.D. Edwards software, which was Year 2000
compliant. In addition, Consumer Products made certain modifications to it
systems and completed the testing of its information systems in fiscal 1998 to
insure that it is Year 2000 compliant. Consumer Products utilizes IBM AS400
hardware, NT servers and personal computers that are also Year 2000 compliant.
The specific cost of upgrading the hardware and software in fiscal 1998 was
approximately $0.8 million; however, the majority of this cost was part of a
process of developing Consumer Products' capabilities to serve its customers and
to operate its business, with Year 2000 compliance being an additional benefit.
The Company's corporate office completed the development of its
accounting package in March 1999, using Consumer Products' hardware and
software. The accounting package was develop by internal personnel with MIS
support at no additional cost, using the standard reporting format developed for
Consumer Products.
In August 1998, WAMI's PC-based Year 2000 software upgrade was provided
by the software manufacturer at no cost and has been installed and tested. As
part of a periodic replacement of hardware, WAMI has replaced certain PC's for
approximately $10,000 to upgrade its remaining hardware to be Year 2000
compliant. WAMI's software and hardware have been reviewed by an external
information technology professional for Year 2000 compliance.
Medal Distributing has an IBM System 36, which was upgraded, with
software modifications completed to be Year 2000 compliant. The modifications
were completed in July 1999, at a cost of approximately $10,000.
Based on information from hardware and software vendors, the PC-based
information systems at TWI will require minor modifications to be Year 2000
compliant. The majority of these modifications were completed as of September
30, 1999 and financed through working capital with minimal cost. The remaining
modifications to the
15
<PAGE> 16
information technology systems will be completed in the next quarter. The
expenditures included approximately $13,000 for hardware, $10,000 for software
and $10,000 in labor to make the Year 2000 modifications. CWI's modifications
and timetable are similar to those of TWI, with the costs expected to total
approximately $11,000 for hardware, $14,000 for software and $2,000 in labor to
make the Year 2000 modifications.
The Company has reviewed its non-information technology systems and
believes that the systems are Year 2000 compliant.
The Company's operations have developed questionnaires and contacted
key suppliers and customers regarding their Year 2000 compliance to determine
any impact on its operations. In general, the suppliers and customers have
developed or are in the process of developing plans to address Year 2000 issues.
The Company will continue to monitor and evaluate the progress of its suppliers
and customers on this critical matter and develop alternate suppliers as
required. Although there is uncertainty of the ultimate impact that the Year
2000 may have on our customers and suppliers, the Company believes that is has
taken prudent business measures with its internal systems and continues to
monitor the progress made by its customers and vendors to minimize the affect,
if any, that Year 2000 may have on its business.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
16
<PAGE> 17
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, 1999 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 INDUSTRIES, INC.
-----------------------
REGISTRANT
DATE: NOVEMBER 8, 1999 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
17
<PAGE> 18
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>
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001014372
<NAME> WAXMAN USA INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 56
<SECURITIES> 0
<RECEIVABLES> 15,440
<ALLOWANCES> (1,004)
<INVENTORY> 17,618
<CURRENT-ASSETS> 39,147
<PP&E> 16,582
<DEPRECIATION> (6,334)
<TOTAL-ASSETS> 97,180
<CURRENT-LIABILITIES> 17,608
<BONDS> 36,725
0
0
<COMMON> 0
<OTHER-SE> 35,143
<TOTAL-LIABILITY-AND-EQUITY> 97,180
<SALES> 22,837
<TOTAL-REVENUES> 22,837
<CGS> 15,652
<TOTAL-COSTS> 6,413
<OTHER-EXPENSES> 150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,167
<INCOME-PRETAX> 1,108
<INCOME-TAX> 383
<INCOME-CONTINUING> 725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 725
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
