<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
MARCH 31, 1994
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 INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 34-0899894
(State of Incorporation) (I.R.S. Employer
Identification Number)
24460 Aurora Road
Bedford Heights, Ohio 44146
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(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
--- ---
9,486,956 shares of Common Stock, $.01 par value, and 2,225,206 shares of Class
B Common Stock, $.01 par value, were issued and outstanding as of May 17, 1994.
<PAGE> 2
<TABLE>
INDEX
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
- - -----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Nine Months and Three Months
Ended March 31, 1994 and 1993...................................................................... 3-4
Consolidated Balance Sheets - March 31, 1994
and June 30, 1993................................................................................... 5-6
Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 1994 and 1993...................................................................... 7
Notes to Consolidated Financial Statements -
March 31, 1994 and 1993............................................................................ 8-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................... 14-18
PART II. OTHER INFORMATION
- - --------------------------
Item 6. Exhibits and Reports on Form 8-K............................................................. 19
SIGNATURES............................................................................................ 19
- - ----------
</TABLE>
<PAGE> 3
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
For the Nine Months and Three Months Ended March 31, 1994 and 1993
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
1994 1993 1994 1993
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales $160,245 $153,957 $ 52,311 $48,583
Cost of sales 104,180 102,035 33,761 31,810
-------- -------- -------- -------
Gross profit 56,065 51,922 18,550 16,773
Operating expenses 41,769 39,729 14,137 12,868
-------- -------- -------- -------
Operating income 14,296 12,193 4,413 3,905
Interest expense, net 15,635 15,242 5,293 5,089
-------- -------- -------- -------
Loss from continuing operations
before income taxes, extraordinary
charge and cumulative effect of
accounting change (1,339) (3,049) (880) (1,184)
Provision (benefit) for income taxes -- (1,429) 61 (474)
-------- -------- -------- -------
Loss from continuing operations
before extraordinary charge and
cumulative effect of accounting change (1,339) (1,620) (941) (710)
Discontinued Operations - Ideal
Income (loss) from discontinued
operations, net of taxes (3,249) 1,300 (4,250) (218)
Loss on disposal, without tax benefit (38,343) (38,343)
-------- -------- -------- -------
Loss before extraordinary charge and
cumulative effect of accounting change (42,931) (320) (43,534) (928)
Extraordinary charge, early retirement
of debt, without tax benefit (6,625) -- (6,625) --
Cumulative effect of change in
accounting for warehouse and
catalog costs, without tax benefit -- (2,110) -- --
-------- -------- -------- -------
Net loss $(49,556) $(2,430) $(50,159) $ (928)
======== ======= ======== =======
</TABLE>
..continued..
Page 3
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
For the Nine Months and Three Months Ended March 31, 1994 and 1993
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary and fully diluted earnings
(loss) per share:
From continuing operations $ (.11) $ (.14) $ (.08) $ (.06)
Discontinued operations:
Income (loss) from discontinued operations (.28) .11 (.36) (.02)
Loss on disposal (3.29) -- (3.28) --
Extraordinary charge (.57) -- (.57) --
Cumulative effect of accounting
change -- (.18) -- --
------ ------ ------ ------
Net loss $(4.25) $ (.21) $(4.29) $ (.08)
====== ====== ====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
Page 4
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 1994 and June 30, 1993
ASSETS
<CAPTION>
March 31, June 30,
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 529 $ 406
Accounts receivable, net 37,297 32,432
Inventories 77,929 69,728
Prepaid expenses 4,800 4,844
Net assets held for sale -- 10,266
Net assets (liabilities) of discontinued operations (500) 29,156
-------- --------
Total current assets 120,055 146,832
-------- --------
PROPERTY AND EQUIPMENT:
Land 1,852 1,420
Buildings 11,816 11,172
Equipment 19,953 18,229
-------- --------
33,621 30,821
Less accumulated depreciation
and amortization (16,675) (14,361)
-------- --------
Property and equipment, net 16,946 16,460
-------- --------
COST OF BUSINESSES IN EXCESS OF
NET ASSETS ACQUIRED, NET 24,955 24,448
OTHER ASSETS 12,721 9,311
-------- --------
$174,677 $197,051
======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 1994 and June 30, 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
March 31, June 30,
1994 1993
-------- --------
(in thousands, except per share amounts)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,178 $ 2,493
Accounts payable 23,197 18,604
Accrued liabilities 14,223 6,548
-------- --------
Total current liabilities 40,598 27,645
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 32,602 22,567
SENIOR SECURED NOTES 38,646 38,563
SUBORDINATED DEBT 100,780 100,780
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 2,000 shares -- --
Common Stock, $.01 par value per share:
Authorized 22,000 shares; Issued 9,484
at March 31, 1994 and 9,424 at
June 30, 1993 95 94
Class B common stock, $.01 par value
per share:
Authorized 6,000 shares; Issued
2,229 at March 31, 1994 and
2,238 at June 30, 1993 23 23
Paid-in capital 18,598 18,467
Retained deficit (55,993) (6,437)
-------- --------
(37,277) 12,147
Cumulative currency translation
adjustments (672) (4,651)
-------- --------
Total stockholders' equity (deficit) (37,949) 7,496
-------- --------
$174,677 $197,051
======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended March 31, 1994 and 1993
<CAPTION>
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
CASH FROM (USED FOR):
OPERATIONS
Loss from continuing operations $( 1,339) $ (1,620)
Adjustments to reconcile loss
from continuing operations:
Depreciation and amortization 5,573 5,696
Changes in assets and liabilities:
Accounts receivable (1,026) (332)
Inventories (6,537) 1,336
Prepaid expenses 187 1,954
Accounts payable 3,261 (10,174)
Accrued liabilities 1,038 (549)
-------- --------
Net cash from provided by (used for)
continuing operations 1,157 (3,689)
Earnings (loss) from discontinued operations (3,249) 1,300
Loss on disposal of discontinued operations (38,343) --
Other, net 3,979 (2,550)
Change in net assets of discontinued operations 29,656 300
-------- --------
Net cash used for operating activities (6,800) (4,639)
-------- --------
INVESTMENTS:
Proceeds from sale of business 3,006 --
Capital expenditures (2,280) (791)
Change in other assets (3,321) (1,811)
-------- --------
Net cash used for investments (2,595) (2,602)
-------- --------
FINANCING:
Net borrowings under credit agreements 9,848 8,348
Repayments of long-term debt (330) (453)
Dividends paid -- (700)
-------- --------
Net cash from financing 9,518 7,195
-------- --------
NET INCREASE (DECREASE) IN CASH 123 (46)
BALANCE, BEGINNING OF PERIOD 406 194
-------- --------
BALANCE, END OF PERIOD $ 529 $ 148
======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994 and 1993
(in thousands, except per share amounts)
Management believes that the information furnished in the accompanying
consolidated financial statements reflects all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair presentation of
the Company's financial position and results of operations for the periods
presented. The results of operations for the nine months and three months
ended March 31, 1994 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1994 or any other period. The
information reported in the consolidated financial statements and the notes
below should be read in conjunction with the Company's Annual Report on Form
10-K/A for the fiscal year ended June 30, 1993.
1. Business
--------
The Company believes that it is one of the leading suppliers of
plumbing products to the home repair and remodeling market in the
United States. The Company distributes plumbing, electrical and
hardware products, in both packaged and bulk form, to do-it-yourself
(D-I-Y) retailers, mass merchandisers, smaller independent retailers
and plumbing, electrical repair and remodeling contractors. The
Company performs ongoing credit evaluations of its customers'
financial condition. The Company's largest customer accounted for
approximately 12.3% and 11.5% of the Company's net sales from
continuing operations for the nine months ended March 31, 1994 and
1993, respectively.
2. Consolidation and Prior-Year Reclassification
---------------------------------------------
The accompanying consolidated financial statements include the
accounts of Waxman Industries, Inc. and its wholly-owned subsidiaries
(the Company). All significant intercompany transactions and balances
are eliminated in consolidation.
The accompanying June 30, 1993 balance sheet has been restated to
reflect the discontinued operations discussed in Note 3 and the
reclassification of certain debt amounts from current to long-term as
a result of the Company's successful solicitation of consents to
obtain waivers of certain covenant violations that existed at June 30,
1993 and the subsequent modification of certain of the Company's debt
agreements. See Note 6.
3. Discontinued Operations - Ideal
-------------------------------
Effective March 31, 1994, the Company adopted a plan to dispose of its
Canadian subsidiary, Ideal Plumbing Group, Inc. (Ideal). Unlike the
Company's U.S. operations which supply products to customers in the
home repair and remodeling market through mass retailers, Ideal
primarily serves customers in the Canadian new construction market
through independent contractors. Accordingly, Ideal is reported as a
discontinued operation at March 31, 1994 and the consolidated
financial statements have been reclassified to report separately
Ideal's net assets and results of operations. Prior period
consolidated financial statements have been reclassified to conform to
the current period presentation.
Page 8
<PAGE> 9
At the time the plan of disposition was adopted, the Company expected
that the disposition would be accomplished through a sale of the
business to a group of investors which included members of Ideal's
management. Such transaction would have required the consent of
Ideal's Canadian banks as borrowings under its bank credit agreements
were collateralized by all of the assets and capital stock of Ideal.
The bank considered the management group's acquisition proposal;
however, the proposal was subsequently rejected. On May 5, 1994,
without advance notice, the bank filed an involuntary bankruptcy
petition against Ideal citing defaults under the bank credit agreement
(borrowings under these agreements are non-recourse to Waxman
Industries, Inc). The Company has not contested the bank's efforts to
effect the orderly disposition of Ideal. As a result, the Company's
ownership and control of Ideal is likely to cease prior to June 30,
1994.
The estimated loss on disposal totals $38.3 million, without tax
benefit, and represents a complete write-off of the Company's
investment in Ideal. The loss includes the estimated loss on
disposal, a provision for anticipated operating losses until disposal,
provisions for other estimated costs to be incurred in connection with
the disposal, and a $6.4 million foreign currency exchange loss which
results from the elimination of the currency translation adjustments
relating to Ideal. In accordance with SFAS No. 109, "Accounting for
Income Taxes", any tax benefits relating to the loss on disposal have
been reduced 100% by a valuation allowance. The Company will continue
to evaluate the valuation allowance and to the extent it is determined
that such allowance is no longer required, the tax benefit of such
loss on disposal may be recognized in the future.
Net liabilities of the discontinued operation at March 31, 1994
consist of current assets and plant, property and equipment, current
liabilities and bank borrowings after deducting an allowance for the
estimated loss on disposal and costs to dispose.
Summary operating results of the discontinued operation for the
periods presented are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31 March 31
-------------------- -----------------------
1994 1993 1994 1993
------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $87,265 $118,455 $18,449 $31,371
Costs and expenses 90,261 115,960 22,597 31,793
------- -------- --------- --------
Income (loss) before
income taxes (2,996) 2,495 (4,148) (422)
Income taxes 253 1,195 102 (204)
------- -------- --------- --------
Net income (loss) $(3,249) $ 1,300 $(4,250) $ (218)
======== ======== ========= ========
</TABLE>
4. Earnings Per Share
------------------
Primary earnings per share have been computed based on the weighted
average number of shares and share equivalents outstanding, which
totaled 11,674 and 11,666 for the three and nine months ended March
31, 1994, respectively. The weighted average number of shares and
share equivalents outstanding totaled 11,662 for both the three and
nine months ended March 31, 1993. Share equivalents include the
Company's common stock purchase warrants. The conversion of the
Company's Convertible Subordinated
Page 9
<PAGE> 10
Debentures due March 15, 2007 into shares of common stock was not
assumed in computing fully diluted earnings per share in either 1994 or
1993, as the effect would be antidilutive.
5. Income Taxes
-----------
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
The adoption of SFAS 109 had no effect on the Company's financial
position or results of operations. In accordance with the provisions
of SFAS 109, the Company is unable to tax benefit losses in the current
period.
The Company currently has $11.5 million of available domestic net
operating loss carryforwards which expire in 2008. In addition, as a
result of the anticipated disposition of Ideal, the Company currently
estimates that it will have available additional net operating loss
carry forwards of approximately $30 million.
SFAS 109 requires the recognition of income tax benefits for loss
carryforwards which have not previously been recorded. The tax
benefits recognized must be reduced by a valuation allowance in certain
circumstances. Upon adoption of SFAS 109, the benefit of the Company's
net operating loss carryforwards was reduced 100% by a valuation
allowance. The Company will continue to evaluate the valuation
allowance and to the extent that the Company is able to recognize tax
benefits in the future, such recognition will favorably affect future
results of operations.
6. Debt:
----
A. Long-Term Debt
--------------
Long-term debt at March 31, 1994 consisted of the following:
<TABLE>
<S> <C>
Domestic revolving credit agreements $30,794
Other notes payable 4,986
-------
Subtotal - long-term debt 35,780
Less: current portion (3,178)
-------
Long-term debt, net $32,602
-------
</TABLE>
The Company has a secured revolving credit facility with two banks
which provides for availability of up to $30 million and expires on
December 31, 1995. At June 30, 1993, a "cross-default" provision
contained in the credit agreement would have been triggered, and
borrowings thereunder would have been subject to acceleration if, due
to a covenant violation related to the Senior Secured Notes (defined
below), such notes were accelerated. As discussed in B. below, the
Company has received consents from the requisite number of holders of
the Senior Secured Notes to waive such covenant violation.
In December 1993, Barnett Inc. (Barnett), a wholly-owned subsidiary of
the Company, entered into a secured revolving credit facility with a
domestic bank. The credit facility provides for availability of up to
$5 million and expires on May 31, 1994. Borrowings under this
facility are secured by substantially all of Barnett's assets.
Interest on the unpaid principal is based on the bank's prime rate
plus 1.5% or LIBOR plus 3%.
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<PAGE> 11
In May 1994, both the domestic revolving credit facility and the
Barnett revolving credit facility were terminated by the Company, and
borrowings thereunder were refinanced as part of the Company's debt
restructuring. See Note 9. Borrowings under the Barnett revolving
credit facility at March 31, 1994 are classified as long-term debt as
they were subsequently refinanced using proceeds from long-term debt
obligations.
B. Senior Secured Notes
--------------------
In September 1991, the Company completed a private placement of Senior
Secured Notes due September 1, 1998 (the Senior Secured Notes). As of
June 30, 1993, the Company was not in compliance with the operating
cash flow covenant contained in the Senior Secured Note indenture. As
a result of the covenant violation, the trustee or the holders of 25%
of the Senior Secured Notes had the right, at their discretion, to
declare the Company to be in default under the indenture and cause the
amounts due under the Senior Secured Notes to be subject to
acceleration. In addition, as a result of the Company's 1993
operating results as well as the unfavorable impact of the decline in
the Canadian dollar on cumulative currency translation adjustments,
the Company's consolidated stockholders' equity at June 30, 1993 and
September 30, 1993 was below the minimum net worth requirement under
the Senior Secured Note indenture. Under the terms of the indenture,
the Company would have been required to offer to purchase $5 million
of the Senior Secured Notes every six months.
During November 1993, the Company completed a solicitation of consents
from the holders of the Senior Secured Notes to waive noncompliance
with the operating cash flow covenant and amend certain provisions of
the Senior Secured Note indenture. Effectiveness of the waiver and
amendments required the consent of holders of at least 66-2/3% of the
outstanding principal amount of the securities. The effect of the
consent was to cure the noncompliance with the operating cash flow
covenant as well as amend the net worth and certain other financial
covenants to relieve the Company of its obligation to offer to
purchase $5 million of Senior Secured Notes on May 30, 1994 and
provide that future compliance will not be negatively impacted by the
Company's fiscal 1993 operating results or fluctuations in foreign
currency on cumulative translation adjustments.
During May 1994, the Company received requisite consents from the
holders of the Senior Secured Notes to, among other things, permit the
completion of the Company's debt restructuring (see Note 9) and
eliminate any prospective defaults resulting from the adverse results
and events relating to the Company's discontinued Canadian operations.
See Note 9.
C. Senior Subordinated Notes
-------------------------
In June 1989, the Company issued $100 million principal amount of
13-3/4% Senior Subordinated Notes (the Subordinated Notes) due June 1,
1999. As a result of the Company's 1993 operating results as well as
the unfavorable impact of the decline in the Canadian dollar on
cumulative currency translation adjustments, the Company's
consolidated stockholders' equity at June 30, 1993 and September 30,
1993 was below the $15 million minimum net worth requirement under the
Subordinated Note indenture. Under the terms of the Subordinated Note
indenture, the Company would have been required to offer to purchase
$10 million of the Subordinated Notes every six months.
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<PAGE> 12
During November 1993, the Company completed a solicitation of
consents from the holders of the Subordinated Notes to waive the
Company's obligation to offer to purchase on December 31, 1993 $10
million principal amount of the Subordinated Notes as well as amend
certain provisions of the Subordinated Note indenture. Effectiveness
of the waiver and amendments required the consent of holders of at
least 66-2/3% of the outstanding principal amount of the Subordinated
Notes. The effect of the consent was to relieve the Company of its
obligation to offer to purchase $10 million Subordinated Notes on
December 31, 1993 as well as amend the minimum net worth covenant to
provide that future compliance will not be negatively impacted by the
Company's cumulative currency translation adjustments.
During May 1994, the Company refinanced $50 million of the
Subordinated Notes. In addition, it received requisite consents from
the holders of the Subordinated Notes to, among other things, permit
the completion of the Company's debt restructuring and eliminate any
prospective defaults which result from the adverse results and events
relating to the Company's discontinued Canadian operations See Note
9.
D. Convertible Subordinated Debentures
-----------------------------------
In March 1987, the Company issued 6-1/4% Convertible Subordinated
Debentures (the Debentures) due March 15, 2007 of which approximately
$2 million remained outstanding as of December 31, 1993. As a result
of the Company's 1993 operating results, as well as the unfavorable
impact of the decline in the Canadian dollar on cumulative currency
translation adjustments, the Company's consolidated stockholders'
equity was below the minimum net worth requirement under the Debenture
indenture at both June 30, 1993 and September 30, 1993. As a result,
the Company would have been required to make a purchase offer at
December 31, 1993 for substantially all of the Debentures currently
outstanding. However, in December 1993, the Company commenced and
successfully completed a solicitation of consents from the holders of
the Debentures to defer until April 30, 1994 the Company's obligation
to offer to purchase $1.9 million of the Debentures. In connection
with the solicitation, the interest rate on the Debentures was
adjusted to 9.5% and the conversion price was reduced from $9.58 to
$3.25 per share.
On April 28, 1994, the Company made an offer to purchase $1.9 million
of the Debentures. If the offer is accepted, such purchase is
expected to be consummated on June 15, 1994.
7. Supplemental Cash Flow Information
----------------------------------
Cash payments during the nine months ended March 31, 1994 and 1993
included income taxes of $401 and $635, and interest of $12,769 and
$12,281 respectively.
8. Sale of Businesses
------------------
At June 30, 1993, net assets held for sale in the accompanying
consolidated balance sheets related to the proposed disposal of three
operating entities in which the Company had entered into letters of
intent with prospective buyers.
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<PAGE> 13
During October 1993, the Company completed the sale of one of its
Canadian operations, H. Belanger Plumbing Accessories, Ltd.
(Belanger). The Company sold all of the capital stock of Belanger in
exchange for approximately U.S. $3 million in cash and a U.S. $0.3
million promissory note. The promissory note, which matures on
October 14, 1996, provides for three equal consecutive annual
payments. Interest is payable annually at a rate of 7%. The loss on
the sale of Belanger was approximately $3 million.
The Company was unable to come to terms with the prospective buyer of
the other two entities. At the present time, the Company is not
engaged in any other negotiations with respect to the sale of these
entities. As such, the consummation of a sale of these businesses is
not expected to occur in the foreseeable future, if at all.
Accordingly, these businesses are no longer reflected as net assets
held for sale in the consolidated balance sheet at March 31, 1994.
9. Subsequent Events - Debt Restructuring and Extraordinary Charge
---------------------------------------------------------------
A. Debt Restructuring
------------------
On May 20, 1994, the Company completed a restructuring of its
debt which included a refinancing of $50 million of its Subordinated
Notes as well as all borrowings under its existing domestic bank credit
facilities. As part of the restructuring, the Company exchanged $50
million of its Subordinated Notes for $50 million initial accreted value
of 12.75% Senior Secured Deferred Coupon Notes due 2004 (the Deferred
Coupon Notes) along with detachable warrants to purchase 2.95 million
shares of the Company's common stock. The Deferred Coupon Notes have no
cash interest requirements until 1999. In addition, the Operating
Companies (as defined below) entered into a new $55 million, four year,
secured credit facility with an affiliate of Citibank, N.A., as agent,
which includes a $20 million letter of credit subfacility. The
domestic credit facility, which has an initial term of three years will
be extended for an additional year if the Senior Secured Notes have been
redeemed within 33 months after the initial borrowing under the domestic
credit facility. The domestic credit facility will be subject to
borrowing base formulas. Borrowings under the domestic credit facility
will bear interest at (i) the per annum rate of 1.5% plus the highest of
(a) the prime rate of Citibank, N.A., (b) the federal funds rate plus
0.5% and (c) a formula with respect to three month certificates of
deposit of major United States money market banks or (ii) LIBOR plus
3.0%. These rates will be increased by 0.5% until such time as the
domestic term loan, discussed below, has been repaid in full. These
rates will be increased by 0.5% if Waxman USA achieves certain
performance criteria based on the ratio of EBITDA to fixed charged. The
facility will include a letter of credit subfacility of $20 million.
The domestic credit facility will be secured by the accounts receivable,
inventory, certain general intangibles and unencumbered fixed assets of
the Operating Companies and 65% of the capital stock of one subsidiary
of TWI. The Operating Companies also entered into a $15.0 million
three-year term loan with Citibank, N.A., as agent. The domestic term
loan will bear interest at a rate per annum equal to 2.0% over the
interest rate under the domestic credit facility and will be secured by
a junior lien on the collateral under the domestic credit facility. A
one-time fee of 1.0% of the principal amount outstanding under the
domestic term loan will be payable if such loan is not repaid within 6
months after May 20, 1994. Principal payments on the domestic term loan
of $1.0 million each will be required quarterly commencing at the end of
the third quarter following May 20, 1994. The domestic term loan will
be required to be prepaid if Waxman USA completes a financing sufficient
to retire the Subordinated Notes, the Senior Secured Notes and the
domestic term loan. The domestic term loan will contain negative,
affirmative and financial covenants,
Page 13
<PAGE> 14
conditions and events of default substantially the same as those under
the domestic credit facility. The initial borrowings under the
revolving credit facility (which totaled approximately $27.2 million)
along with proceeds from the domestic term loan were used to repay all
borrowings under the Company's existing domestic bank credit
facilities as well as fees and expenses associated with the
restructuring.
B. Corporate Restructuring
-----------------------
The Company has restructured (the "Corporate Restructuring") its
domestic operations such that the Company will be a holding company
whose only material assets will be the capital stock of its
subsidiaries. As part of the Corporate Restructuring, the Company has
formed (a) Waxman USA Inc. ("Waxman USA"), as a holding company for
the subsidiaries that comprise and support the Company's domestic
operations, (b) Waxman Consumer Products Group Inc., a wholly owned
subsidiary of Waxman USA, to own and operate Waxman Industries'
Consumer Products Group Division, and (c) WOC Inc. ("WOC"), a wholly
owned subsidiary of Waxman USA, to own and operate Waxman USA's
domestic subsidiaries, other than Barnett and Consumer Products. On
May 20, 1994, the Company restructured its operation by (i)
contributing the capital stock of Barnett to Waxman USA, (ii)
contributing the assets and liabilities of the Consumer Products
Division to Consumer Products, (iii) contributing the assets and
liabilities of its Madison Equipment Division to WOC, (iv)
contributing the assets and liabilities of its Medal Distributing
Division to WOC, (v) merging U.S. Lock Corporation ("U.S. Lock") and
LeRan Copper & Brass, Inc. ("LeRan"), each a wholly owned subsidiary
of the Company, into WOC, (vi) contributing the capital stock of TWI,
International, Inc. ("TWI") to Waxman USA and (vii) contributing the
capital stock of Western American Manufacturing, Inc. ("WAMI") to TWI.
The Operating Companies consist of Barnett, Consumer Products and WOC.
C. Extraordinary Charge
--------------------
As a result of the refinancing of the $50 million of Subordinated
Notes as well as borrowings under the domestic bank credit facilities,
the Company incurred an extraordinary charge which totaled $6.6
million, without tax benefit, and included the fees paid upon the
exchange of the Subordinated Notes along with the accelerated
amortization of unamortized debt discount and issuance costs. The
Company has accrued for the extraordinary charge at March 31, 1994.
The $6.6 million extraordinary charge is included in accrued
liabilities in the accompanying balance sheet at March 31, 1994.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
A. Results of Operations
---------------------
Overview
--------
Effective March 31, 1994, the Company adopted a plan to dispose of its
Canadian subsidiary, Ideal Plumbing Group Inc. (Ideal). Unlike the
Company's U.S. Operations which supply products to customers in the home
repair and remodeling market through mass retailers, Ideal primarily serves
customers in the Canadian new construction market through independent
contractors. This action was prompted by a number of factors which had
adversely affected Ideal's results of operations over the past several years
and more recently
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had resulted in severe liquidity problems and jeopardized Ideal's ability to
continue conducting its operations. At the time the plan of disposition was
adopted, the Company expected that the disposition would be accomplished
through a sale of the business to a group of investors which included
members of Ideal's management. Such transaction would have required the
consent of Ideal's Canadian banks as borrowings under its bank credit
agreements were collateralized by all of the assets and capital stock of
Ideal. The bank considered the management group's acquisition proposal;
however, the proposal was subsequently rejected. On May 5, 1994, without
advance notice, Ideal's Canadian bank filed an involuntary bankruptcy
petition against Ideal citing defaults under the bank credit agreements
(borrowings under these agreements are non-recourse to Waxman Industries).
The Company has not contested the bank's efforts to effect the orderly
disposition of Ideal. As a result, the Company's ownership and control of
Ideal is likely to cease prior to June 30, 1994. The estimated loss on
disposal totals $38.3 million, without tax benefits, and represents a
complete write-off of the Company's investment in Ideal. See Note 3 to
Notes to Consolidated Financial Statements.
At March 31, 1994, Ideal is reported as a discontinued operation and the
Company's consolidated financial statements have been reclassified to report
separately Ideal's net assets and results of operations. Prior period
consolidated financial statements have been reclassified to conform to the
current period presentation.
Net Sales
---------
Net sales from the Company's continuing operations for the 1994 third
quarter totaled $52.3 million, compared with $48.6 million in the 1993 third
quarter, an increase of 7.7%. Net sales for the 1994 nine month period
increased 4.1%, from $154.0 million to $160.2 million. The Company's net
sales were adversely affected by the sale of H. Belanger Plumbing
Accessories (Belanger) in October 1993. Net sales increased 6.5% and 11.6%
for the nine months and three months ended March 31, 1994, respectively,
after excluding the impact of Belanger. The net sales increases are
primarily the result of the continued growth of the Company's Barnett Inc.
subsidiary (Barnett). Barnett's net sales increased 16.5% from $20.6
million in the 1993 third quarter to $24.0 million in the 1994 third quarter
and 14.2% from $61.2 million in the 1993 nine month period to $69.9 million
in the 1994 nine month period. New product introductions accounted for
$2.2 million and $5.0 million of the increases for the 1994 third quarter
and nine month period, respectively. The remainder of Barnett's increases
were the result of opening additional mail order warehouses, as well as the
growth of Barnett's existing customer base. Barnett opened two additional
warehouses during the 1994 nine month period, increasing the total number of
warehouses to 28. Also contributing to the increases in net sales were
higher net sales from the Company's Consumer Products division (Consumer
Products). Consumer Product's net sales increased 9.8% from $15.7 million
in the 1993 third quarter to $17.2 million in the 1994 third quarter and
4.5% from $50.9 million in the 1993 nine month period to $53.2 million in
the 1994 nine month period. The increase in Consumer Product's net sales is
primarily the result of the sale of additional product lines to several of
its existing customers.
Gross Profit
------------
The Company's gross margins increased from 34.5% for the 1993 third quarter
to 35.5% for the 1994 third quarter and increased from 33.7% in the 1993
nine month period to 35.0% in the 1994 nine month period. The increase in
the Company's gross margins is primarily a result of improved margins at
Barnett. Barnett's gross margins have been favorably impacted by increased
sales of higher margin proprietary branded products. The
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favorable impact of Barnett's margins was offset, in part, by lower gross
margins at Consumer Products. Consumer Products' margins declined as a
result of proportionately lower sales of higher margin packaged products, as
well as competitive pressures within its market.
Operating Expenses
------------------
Operating expenses from the Company increased 9.9% for the 1994 third
quarter from $12.9 million in the 1993 third quarter to $14.1 million in the
1994 third quarter and 5.1% for the 1994 nine month period from $39.7
million in the 1993 nine month period to $41.8 million in the 1994 nine
month period. These increases were due primarily to increases in operating
expenses for Barnett. Barnett's operating expenses increased approximately
$0.9 million in the 1994 third quarter and $2.5 million in the 1994 nine
month period. These increases primarily related to higher catalog costs as
well as the opening of new mail order warehouses during the 1994 nine month
period.
Operating Income
-----------------
The Company's operating income totaled $4.4 million or 8.4% of net sales and
$3.9 million or 8.0% of net sales for the 1994 and 1993 third quarters,
respectively. For the 1994 and 1993 nine month periods, operating income
totaled $14.3 million or 8.9% of net sales and $12.2 million or 7.9% of net
sales, respectively.
The Company's operating income increased 13.1% and 17.3% for the 1994 third
quarter and nine month period, respectively, as compared with the prior year
periods. Excluding the impact of Belanger which was sold in October 1993,
operating income increased 14.9% and 18.8%, respectively. The improved
operating income was the result of higher gross margins offset, in part, by
increased operating expenses.
Interest Expense
----------------
The Company's interest expense totaled $5.3 million for the 1994 third
quarter, compared with $5.1 million for the 1993 third quarter. Interest
expense totaled $15.6 million for the 1994 nine month period, compared with
$15.2 million for the 1993 nine month period. Average borrowings
outstanding increased from $158.7 million and $158.1 million in the 1993
third quarter and nine month periods, respectively, to $172.4 million and
$168.5 million for the same periods in the current year. The increase in
average borrowings outstanding is due to increased working capital needs
relating to the growth of the Company's operations. The weighted average
interest rate decreased from 12.6% in both the 1993 third quarter and nine
month period, respectively, to 12.0% and 12.1% in each of the same periods
in the current fiscal year.
Income Taxes
------------
In accordance with the provisions of SFAS 109, the Company is unable to
benefit losses in the current year. The Company has $11.5 million of
available domestic net operating loss carryforwards which expire in 2008,
the benefit of which has been reduced 100% by a valuation allowance. The
Company will continue to evaluate the valuation allowance and to the extent
that the Company is able to recognize tax benefits in the future, such
recognition will favorably affect future results of operations. See Note 5
for a discussion of anticipated additional net operating losses which would
result from the disposition of Ideal.
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Loss From Continuing Operations
-------------------------------
The Company's loss from continuing operations for the 1994 third quarter
totaled $0.9 million compared with a loss of $0.7 million in the 1993 third
quarter. For the 1994 nine month period, the loss from continuing
operations totaled $1.3 million compared with a loss of $1.6 million in the
1993 nine month period. The increase in the loss from continuing operations
in the current year periods is due to the Company's inability to tax benefit
losses in the current year.
Discontinued Operations
-----------------------
The Company's net loss from discontinued operations for the 1994 third
quarter totaled $4.2 million, compared with a net loss of $0.2 million in
the 1993 third quarter. For the 1994 nine month period, the net loss from
discontinued operations totaled $3.2 million, compared with net income of
$1.3 million in the 1993 nine month period. The Company recognized a loss
on the disposal of Ideal of approximately $38.3 million in the 1994 third
quarter.
Extraordinary Charge
--------------------
The Company recognized a $6.6 million extraordinary charge, without tax
benefit, in the 1994 third quarter as a result of the refinancing of the $50
million of Subordinated Notes as well as borrowings under the domestic bank
credit facilities. The extraordinary charge included the fees paid upon the
exchange of the Subordinated Notes along with the accelerated amortization
of unamortized debt discount and issuance costs.
Net Loss
--------
The Company's net loss (including those relating to Ideal) for the 1994
third quarter totaled $50.2 million, compared with a loss of $0.9 million in
the 1993 third quarter. For the 1994 nine month period, the net loss
totaled $49.6 million compared with a net loss of $2.4 million in the 1993
nine month period. The 1993 nine month period includes a $2.1 million
charge for the cumulative effect of a change in accounting for warehouse and
catalog costs, which was made during the fourth quarter of fiscal 1993 and
was applied retroactively to July 1, 1992.
B. Liquidity and Capital Resources
-------------------------------
On May 20, 1994, the Company completed a financial restructuring which was
undertaken to modify the Company's capital structure to facilitate the
growth of its domestic businesses by reducing cash interest expense and
increasing the Company's liquidity. See Note 9 to Notes to Consolidated
Financial Statements.
As part of the restructuring, the Company exchanged $50 million of its
13-3/4% Senior Subordinated Notes due 1999 (the Subordinated Notes) for $50
million initial accreted value of 12-3/4% Senior Secured Deferred Coupon
Notes due 2004 (the Deferred Coupon Notes). Approximately $48.8 million of
the Subordinated Notes remain outstanding. The Deferred Coupon Notes have
no cash interest requirements until June 1, 1999. As a result of the
exchange, the Company's cash interest requirements have been reduced by
approximately $6.9 million annually for five years. In addition, the $50
million of Subordinated Notes
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exchanged can be used to satisfy the Company's mandatory redemption
requirements with respect to such issue and, as such, the $20 million
mandatory redemption payments due on June 1, 1996 and 1997 have been
satisfied and the mandatory redemption payment due on June 1, 1998 has been
reduced to $8.8 million. The Company does, however, continue to have annual
mandatory redemption payments of $17.0 million commencing on September 1,
1996 with respect to its Senior Secured Notes due 1998.
In connection with the refinancing, the Operating Companies entered into a
new $55 million secured revolving credit facility with three banks as well
as a $15 million term loan. The secured revolving credit facility, which
provides for availability up to $55 million subject to borrowing base
formulas, expires on May 20, 1997; however, the facility will be extended
until May 20, 1998 if certain refinancing conditions have been satisfied.
The Company expects that availability under the revolving credit facility
will be approximately $21 million after the initial borrowing. The term
loan expires on May 20, 1997 and requires principal payments of $1.0 million
per quarter commencing on March 1, 1995. See Note 9A to Notes to
Consolidated Financial Statements for a more complete discussion of the new
domestic credit facility and domestic term loan.
On April 28, 1994, the Company made a mandatory offer to purchase $1.9
million of its 9.25% Convertible Subordinated Debentures due 2007. If such
offer is accepted, the purchase is expected to be consummated on June 15,
1994.
The Company does not have any commitments to make substantial capital
expenditures. However, the Company does expect to open 3 to 4 Barnett
warehouses over the next twelve months. The average cost to open a Barnett
warehouse is approximately $0.5 million.
The Company expects to incur approximately $0.5 million of costs relating to
the disposition of Ideal.
As a result of the issuance of the Deferred Coupon Notes which reduces cash
interest requirements by $6.9 million annually until June 1, 1999, the
Company believes that funds generated from operations along with funds
available under the Company's revolving credit facility will be sufficient
to satisfy the Company's liquidity requirements for the next twelve months
as well as until the revolving credit facility expires.
Discussion of Cash Flows
------------------------
For the 1994 nine month period, the Company's continuing operations
generated $1.2 million of cash flow from operations which included a use of
$3.1 million of cash for increased working capital. The Company's working
capital levels have increased in response to its higher net sales levels.
Cash flow used for investments totaled $2.6 million. During October 1993,
the Company generated approximately $3.0 million of cash from the sale of
Belanger. Capital expenditures totaled approximately $2.3 million in the
1994 nine month period. Changes in other assets increased approximately
$3.3 million as a result of costs associated with the refinancing.
Financing activities generated approximately $9.5 million of cash flow as
the Company increased amounts outstanding under its revolving credit
facilities.
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PART II. OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K
a. No exhibits required.
b. There were no reports on Form 8-K filed during the
quarter.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
-----------------------
Registrant
Date: May 23, 1994 By:_________________________
Neal R. Restivo
Vice President, Finance and
Chief Financial Officer
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