<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1993
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)
DELAWARE
(STATE OF INCORPORATION)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
34-0899894
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
44146
(ZIP CODE)
(216) 439-1830
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
9,433,183 shares of Common Stock, $.01 par value, and 2,228,693 shares of Class
B Common Stock, $.01 par value, were issued and outstanding as of November 10,
1993.
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INDEX
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -- Three months ended September 30, 1993
and 1992................................................................ 3
Consolidated Balance Sheets -- September 30, 1993 and June 30, 1993....... 4-5
Consolidated Statements of Cash Flows -- Three months ended September 30,
1993 and 1992........................................................... 6
Notes to Consolidated Financial Statements -- September 30, 1993 and
1992.................................................................... 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 12-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................... 16
SIGNATURES........................................................................... 16
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992
<CAPTION>
1993 1992
------- --------
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales....................................................... $91,400 $101,323
Cost of sales................................................... 63,684 71,493
------- --------
Gross profit............................................... 27,716 29,830
Selling, general, and administrative expenses................... 21,061 22,771
------- --------
Operating income................................................ 6,655 7,059
Interest expense................................................ 6,076 6,327
------- --------
Income before income taxes and cumulative effect of accounting
change........................................................ 579 732
Provision for income taxes...................................... 50 310
------- --------
Net income before cumulative effect of accounting change........ 529 422
Cumulative effect of change in accounting for warehouse and
catalog costs, without tax benefit............................ -- (2,110)
------- --------
Net income (loss)............................................... $ 529 $ (1,688)
======= ========
Primary and fully diluted earnings (loss) per share:
Income before cumulative effect of accounting change....... $ .05 $ .04
Cumulative effect of accounting change..................... -- (.18)
------- --------
Net income (loss).......................................... $ .05 $ (.14)
======= ========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
3
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 1993 AND JUNE 30, 1993
ASSETS
<CAPTION>
SEPTEMBER 30, JUNE 30,
1993 1993
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash.......................................................... $ 2,488 $ 2,001
Accounts receivable, net...................................... 60,592 58,435
Inventories................................................... 95,973 96,941
Prepaid expenses.............................................. 6,986 7,089
Net assets held for sale...................................... 10,436 10,266
------------- --------
Total current assets....................................... 176,475 174,732
------------- --------
Property and Equipment:
Land.......................................................... 4,868 4,896
Buildings..................................................... 17,840 17,920
Equipment..................................................... 25,625 25,880
------------- --------
48,333 48,696
Less accumulated depreciation and amortization................ (17,427) (17,065)
------------- --------
Property and equipment, net................................... 30,906 31,631
------------- --------
Cost of Businesses in Excess of Net Assets Acquired, net........ 62,363 64,247
Other Assets.................................................... 10,198 10,073
------------- --------
$ 279,942 $280,683
============= ========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
4
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 1993 AND JUNE 30, 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
SEPTEMBER 30, JUNE 30,
1993 1993
------------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt............................. $ 5,317 $ --
Bank debt..................................................... 35,158 38,671
Long-term debt classified as current.......................... 3,258 184,761
Accounts payable.............................................. 42,088 40,277
Accrued liabilities........................................... 11,563 9,478
------------- --------
Total current liabilities................................ 97,384 273,187
------------- --------
Long-Term Debt, net of current portion.......................... 38,520 --
Senior Secured Notes............................................ 38,591 --
Senior Subordinated Notes....................................... 98,750 --
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 9,432 at September 30, 1993 and 9,424 at June 30,
1993..................................................... 94 94
Class B common stock, $.01 par value per share:
Authorized 6,000 shares;
Issued 2,230 at September 30, 1993 and 2,238 at June 30,
1993..................................................... 23 23
Paid-in capital............................................... 18,467 18,467
Retained deficit.............................................. (5,908) (6,437)
------------- --------
12,676 12,147
Cumulative currency translation adjustments................... (5,979) (4,651)
------------- --------
Total stockholders' equity............................... 6,697 7,496
------------- --------
$ 279,942 $280,683
============= ========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
5
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992
<CAPTION>
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FROM (USED FOR):
OPERATIONS:
Net income (loss)..................................... $ 529 $(1,688)
Adjustments to reconcile net income (loss) to net cash
from (used for) operations:
Cumulative effect of accounting change........... -- 2,110
Depreciation and amortization.................... 2,454 2,540
Changes in assets and liabilities:
Accounts receivable.............................. (2,157) (3,829)
Inventories...................................... 441 2,984
Prepaid expenses................................. 103 404
Accounts payable................................. 1,811 (9,838)
Accrued liabilities.............................. 2,085 904
Other, net....................................... (1,498) (1,946)
------- -------
Net cash from (used for) operations......... 3,768 (8,359)
------- -------
INVESTMENTS:
Capital expenditures....................................... (232) (29)
Change in other assets..................................... 880 331
------- -------
Net cash from investments................... 648 302
------- -------
FINANCING:
Net borrowings (repayments) under credit agreements........ (3,745) 5,447
Repayments of long-term debt............................... (184) (250)
Dividends paid............................................. -- (233)
------- -------
Net cash from (used for) financing.......... (3,929) 4,964
------- -------
NET INCREASE (DECREASE) IN CASH................................. 487 (3,093)
BALANCE, BEGINNING OF PERIOD.................................... 2,001 3,841
------- -------
BALANCE, END OF PERIOD.......................................... $ 2,488 $ 748
======= =======
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
6
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1993 AND 1992
(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 and 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 three months ended September 30,
1993 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 for the fiscal year
ended June 30, 1993.
1. BUSINESS
The Company markets a variety of products to the home repair and remodeling
market in the United States and Canada. In the U.S., the Company's plumbing,
electrical and hardware products are sold primarily to home improvement centers,
warehouse home centers, mass merchandisers, hardware stores, lumber yards and,
through its mail order and telemarketing operations, to independent retailers,
contractors and locksmiths. In Canada, the Company is one of the largest
suppliers of plumbing and heating products, serving repair and remodeling
contractors, residential and commercial construction contractors and retailers.
2. CONSOLIDATION
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.
3. EARNINGS PER SHARE
Primary earnings per share have been computed based on the weighted average
number of shares and share equivalents outstanding, which totaled 11,662 for
both the three months ended September 30, 1993, and 1992. Share equivalents
include the Company's common stock purchase warrants. The conversion of the
Company's 6.25% Convertible Subordinated Debentures due March 15, 2007 into
shares of common stock was not assumed in computing fully diluted earnings per
share in either 1993 or 1992, as the effect would be antidilutive.
4. 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.
The Company currently has $11,547 of available domestic net operating loss
carryforwards which expire in 2008. A foreign subsidiary of the Company has
foreign tax net operating loss carryforwards of Cdn. $12,277 (approximately U.S.
$9,203) which expire over the period from 1997 to 2000.
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.
The Company's provision for income taxes for the quarter ended September
30, 1993 was favorably affected by the utilization of net operating loss
carryforwards. Accordingly, the Company's current period provision for income
taxes primarily relates to state and foreign tax expense items.
7
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<TABLE>
5. DEBT:
Total debt at September 30, 1993 consisted of the following:
<S> <C>
Bank debt:
Canadian operating credit agreement.................................. $ 35,158
--------
Long-term debt classified as current:
Convertible Subordinated Debentures.................................. 2,030
Other notes payable.................................................. 1,228
--------
Subtotal -- Long-term debt classified as current................ 3,258
--------
Long-term debt:
Domestic revolving credit agreement.................................. 21,500
Canadian term loan................................................... 18,364
Other notes payable.................................................. 3,973
--------
Subtotal -- long-term debt...................................... 43,837
Less: current portion................................................ (5,317)
--------
Long-term debt, net............................................. 38,520
--------
Senior Secured Notes...................................................... 38,591
Senior Subordinated Notes................................................. 98,750
--------
Total debt, net of current portion.............................. $214,277
========
</TABLE>
A. BANK DEBT
The Company has a secured revolving credit facility with a bank which
provides for availability up to $30 million and expires on December 31, 1995.
Borrowings under the credit agreement as of June 30, 1993 are presented as
long-term debt classified as current in the accompanying consolidated balance
sheets as a result of a covenant violation under the Company's Senior Secured
Note indenture as of that date. A "cross-default" provision contained in the
credit agreement would be triggered, and borrowings thereunder would be subject
to acceleration, if the Senior Secured 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. As such,
borrowings under the credit agreement as of September 30, 1993 are presented as
long-term debt in the accompanying consolidated balance sheets.
In connection with the 1989 acquisition of The Ideal Group of Companies,
Inc. (Ideal), a subsidiary of the Company entered into an operating credit
agreement and a term loan agreement with a Canadian bank. The operating credit
facility expires on June 30, 1994, and as such, borrowings thereunder are
classified as bank debt in the current liability section of the consolidated
balance sheets. Ideal was not in compliance with several financial covenants
contained in the operating credit and term loan agreements as of June 30, 1993
but has received waivers for such noncompliance. However, in the absence of
additional waivers or an amendment to these loan agreements, additional covenant
violations could occur during fiscal 1994. Under the terms of the loan
agreements, Ideal is required to test its compliance with the various financial
covenants contained therein as of June 30 and December 31 of each year. If
additional covenant violations do occur and are continuing and not waived or
cured, the bank may, at its sole discretion after the giving of notice and the
expiration of applicable grace periods, take various actions including
acceleration of the amounts due thereunder. The Canadian loan agreements are
non-recourse to Waxman Industries, Inc. However, acceleration of the loans would
trigger a default under the "cross-default" provisions of all the Company's
other debt instruments.
8
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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, which requires the Company to
maintain a minimum ratio of operating cash flow to interest expense of 1.1 to
1.0. 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. As a result, borrowings
under the Senior Secured Notes are presented as long-term debt classified as
current in the accompanying consolidated balance sheets as of June 30, 1993. 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 adjustment, the Company's consolidated stockholder's equity at June
30, 1993 and September 30, 1993 was below the $35 million as adjusted minimum
net worth requirement under the Senior Secured Note indenture. Under the terms
of the indenture, the Company is required to offer to purchase $5 million of the
Senior Secured Notes every six months.
During November 1993, the Company commenced 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. On November 10, 1993, the Company successfully completed the consent
solicitation having received consents from the requisite number of holders. The
effect of the consent is to cure the noncompliance with the operating cash flow
covenant as well as amend the minimum 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 currency
translation adjustment. As such, borrowings under the Senior Secured Notes are
classified as long-term in the accompanying consolidated balance sheets as of
September 30, 1993. The Company was in compliance with the amended operating
cash flow covenant as of September 30, 1993.
C. SENIOR SUBORDINATED NOTES
In June 1989, the Company issued $100 million principal amount of 13 3/4%
Senior Subordinated Notes (the 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 adjustment,
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 Note
indenture. Under the terms of the Note indenture, the Company is required to
offer to purchase $10 million of the Notes every six months.
During November 1993, the Company commenced a solicitation of consents from
the holders of the Notes to waive the Company's obligation to offer to purchase
on December 31, 1993, $10 million principal amount of the Notes as well as amend
certain provisions of the 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 Notes. On November 10, 1993, the Company
successfully completed the consent solicitation having received consents from
the requisite number of holders. The effect of the consent is to relieve the
Company of its obligation to offer to purchase $10 million of 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 fiscal 1993
operating results or fluctuations in foreign currency on cumulative currency
translation adjustment. As such, borrowings under the Notes are classified as
long-term in the accompanying consolidated balance sheets as of September 30,
1993.
D. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1987, the Company issued 6 1/4% Convertible Subordinated
Debentures due March 15, 2007 (the Debentures) of which approximately $2.0
million remained outstanding as of September 30, 1993. As a
9
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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
adjustment, the Company's consolidated stockholders' equity was below the $8.0
million minimum net worth requirement under the Debenture indenture at both June
30, 1993 and September 30, 1993. The Company's actual consolidated stockholders'
equity at June 30, 1993 and September 30, 1993, was $7.5 million and $6.7
million, respectively. As such, the Company is required to make a purchase offer
at December 31, 1993 for substantially all of the Debentures currently
outstanding.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended September 30, 1993 and 1992
included income taxes of $167 and $487, and interest of $3,469 and $3,637,
respectively.
7. SALE OF BUSINESS
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.$3.0
million in cash and a U.S. $0.3 million promissory note. At September 30, 1993,
the net assets of Belanger were included in the accompanying consolidated
balance sheets as net assets held for sale and stated at net realizable value.
In addition to Belanger, the Company had entered into a letter of intent
with a prospective buyer of two small domestic operating units. As of September
30, 1993, the Company was unable to come to terms with such prospective buyer.
These businesses are reflected as net assets held for sale in the consolidated
balance sheet at September 30, 1993.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. RESULTS OF OPERATIONS
Net sales for the quarter ended September 30, 1993 totaled $91.4 million,
compared with $101.3 million in the first quarter of the prior year, a decline
of 9.8%. Sales from the Company's U.S. operations increased approximately 1.0%
over the prior year first quarter, primarily as a result of the continued growth
of Barnett Inc., the largest unit in the Company's mail order and telemarketing
operation. Management believes that the change in sales from its U.S. operations
is primarily the result of changes in volume. The U.S. sales increase, however,
was offset by a 21.3% decline in sales from the Company's Canadian operations,
which was primarily due to the continuing weak economic conditions in Canada,
specifically in the residential and commercial construction markets which have
been negatively impacted by declines in housing starts and building permits
since 1990. The Canadian operations' net sales were also adversely affected by a
7.9% decrease in the average currency exchange rate used to translate the
Canadian operations' income statement accounts into U.S. dollars. The Company's
sales in Canada for the quarter ended September 30, 1993 were also affected by
the closing of a large branch operation. Sales from the Company's Canadian
operations declined 8.9% between periods, when stated in Canadian dollars after
excluding prior year sales from the closed branch. The decline in the Canadian
operations' sales is the result of lower volume as well as lower pricing in
certain regional markets which has been necessary as a result of increased
competitive pressures and the weak Canadian economy, especially within the
Ontario market, which has been impacted most severely by the decline in
construction activity. Sales from the Company's U.S. operations represented
approximately 58% of consolidated sales in the quarter ended September 30, 1993,
compared with 52% in the first quarter of the prior year.
Gross profit as a percentage of sales was 30.3% for the quarter ended
September 30, 1993, compared with 29.4% in the prior year period. The increase
in gross profit percentage is attributable to a slight increase in margins from
the Company's U.S. operations and proportionally lower sales from Canadian
operations, where margins have historically been lower than those from U.S.
operations.
Operating expenses for the quarter ended September 30, 1993 totaled $21.1
million versus $22.8 million in the first quarter of the prior year, a reduction
of $1.7 million or 7.5%. In Canada, operating expenses dropped 20.1% as a result
of cost-reduction measures in response to lower revenue levels. The Canadian
10
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operations' operating expenses for the quarter ended September 30, 1993 were
also favorably impacted by the closing of the branch operation discussed above.
Ideal's headcount for the first quarter of fiscal 1994 was reduced 13% as
compared with the first quarter in fiscal 1993. Operating expenses from U.S.
operations were flat.
Operating income totaled $6.7 million in the current quarter versus $7.1
million in the corresponding period last year. As a percentage of sales,
operating income increased to 7.3% from 7.0% as a result of the increase in
gross profit margins and the reduction in operating expenses between periods.
Interest expense totaled $6.1 million for the three months ended September
30, 1993, compared with $6.3 million in the prior year period. Average
borrowings outstanding decreased from $227.5 million in the first quarter last
year to $223.2 million in the current quarter. The weighted average interest
rate also decreased slightly between periods from 11.0% to 10.7%, primarily as
the result of a reduction in the Canadian prime lending rate, which averaged
5.8% in the current quarter versus 6.5% in the prior quarter.
The provision for income taxes totaled $50,000 for the quarter ended
September 30, 1993, compared with $310,000 in the prior year period. The current
quarter provision was favorably impacted by the utilization of net operating
loss carryforwards. Income before cumulative effect of accounting change for the
current quarter totaled $0.5 million, or $.05 per share, compared with $0.4
million, or $.04 per share, in the first quarter last year. Net income totaled
$.5 million, or $.05 per share, versus a net loss of $1.7 million, or $.14 per
share in the prior year quarter. The prior year net loss includes a charge of
$2.1 million, or $.18 per share, for the cumulative effect of a change in
accounting for warehouse and catalog costs, which was made during the fourth
quarter of the prior year and was applied retroactively to July 1, 1992.
B. LIQUIDITY AND CAPITAL RESOURCES
As discussed in the Notes to the Consolidated Financial Statements, during
November 1993, the Company successfully completed the solicitation of consents
from holders of its Senior Secured Notes due September 1, 1998 and Senior
Subordinated Notes due June 1, 1999. The effect of the consents was to cure the
Company's noncompliance with the operating cash flow covenant under the Senior
Secured Notes and amend certain covenants and provisions in both the Senior
Secured Note and Senior Subordinated Note indentures. The amendments modify,
among other things, certain covenants (including the operating cash flow
covenant under the Senior Secured Notes and the minimum net worth covenants
under both debt issues) so that future compliance with the covenants will not be
negatively impacted by either the Company's fiscal 1993 operating results or the
impact of fluctuations in foreign currency on cumulative currency translation
adjustment. In addition, the amendments increase by $5 million the amount of
senior indebtedness the Company may incur for working capital purposes and
permits Barnett Inc. to incur up to $5 million of secured indebtedness for
general corporate purposes. The consents also relieved the Company of its
obligation to offer to purchase $10 million of Senior Subordinated Notes on
December 31, 1993. As a result, borrowings under both the Senior Secured Notes
and the Senior Subordinated Notes have been classified as long-term in the
Company's consolidated balance sheets as of September 30, 1993.
The Company's Canadian subsidiary, Ideal, has a revolving credit facility
(the "Ideal Operating Credit Agreement") and term loan agreement with two
Canadian banks (the "Ideal Term Loan Agreement"; together, the "Canadian Credit
Agreements"). The Ideal Operating Credit Agreement provides for borrowings up to
Cdn. $60 million subject to borrowing base formulas. Borrowings under the Ideal
Credit Agreement, which are non-recourse to Waxman Industries, Inc., totaled
Cdn. $46.9 million (approximately U.S. $35.2 million) at September 30, 1993.
Availability under this credit agreement totaled $0.9 million at September 30,
1993 and has ranged from $0 to $2.1 million during the last three fiscal
quarters. At September 30, 1993, Cdn. $24.5 million (approximately U.S. $18.4
million) was outstanding under the Ideal Term Loan Agreement. Borrowings under
the Ideal Term Loan Agreement are payable in semi-annual installments through
December 1996. The Company's Canadian operation has been able to meet its
operating obligations using cash flow from operations along with the
availability under the Ideal Operating Credit Agreement during the last three
quarters. However, in the absence of additional waivers or an amendment to these
credit agreements, additional covenant violations could occur during fiscal
1994. Under the terms of those agreements, compliance with the various financial
covenants contained therein will be next tested as of
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December 31, 1993. If at that date, additional covenant violations do occur and
are continuing and not waived or cured, the Canadian bank may, at its sole
discretion after the giving of notice and the expiration of applicable grace
periods, take various actions including acceleration of the amounts due under
the agreements. Although such debt is non-recourse to Waxman Industries, Inc.,
acceleration of amounts due under these agreements would trigger a default under
the "cross-default" provisions of substantially all the Company's other domestic
debt instruments.
As previously disclosed in the Company's Form 10-K for the fiscal year
ended June 30, 1993, the Company intends to undertake a financial restructuring
which may include one or more of the following: additional amendments to its
bank credit agreements, redemption and repurchases of a portion of its public
debt and amendments to its remaining public debt. The goal of this restructuring
is to cure any defaults, reduce the Company's cash interest expense and
generally provide the Company with greater operating and financial flexibility.
The Company has successfully completed the first step in the restructuring which
resulted in receipt of consents from the holders of the Senior Secured Notes and
the Senior Subordinated Notes. The Company intends to continue moving forward
with its financial restructuring and will attempt to obtain amendments to its
Canadian bank credit agreements as well as evaluate refinancing alternatives
with respect to its domestic debt. There can be no assurances, however, that the
Company will be able to enter into such amendments or be able to successfully
complete a refinancing of its domestic debt.
Ideal has been subject to a number of factors which have adversely
affected, and may continue to adversely affect, its liquidity and ability to
continue conducting its operations. The prolonged Canadian recession, which has
particularly affected the new residential and commercial construction markets
and has been the most severe in certain areas in which Ideal's business is
concentrated, e.g. Ontario, has significantly adversely affected Ideal's
business. As a result of these factors, together with a decline in the Canadian
dollar and the closing of certain unprofitable branches, Ideal's net sales
decreased from $247.1 million in fiscal 1990 to $153.9 million in fiscal 1993.
The Company's consolidated net worth has decreased to a level which is
expected to obligate the Company to offer to purchase $1.9 million of the
Company's Convertible Subordinated Debentures on December 31, 1993. The Company
will likely solicit consents from the holders of the Convertible Debentures in
order to obtain waivers or indenture modifications to relieve the Company of its
obligations to offer to purchase such debt. Restrictions under other agreements
will prohibit the Company from making such repurchase.
At September 30, 1993, the Company's working capital was $79.1 million. For
the quarter ended September 30, 1993, the Company generated $3.8 million of cash
flow from operations of which approximately $.8 million resulted from changes in
assets and liabilities. Cash flow from investments totaled $.6 million.
Financing activities used approximately $3.9 million of cash flow as the Company
reduced amounts outstanding under its revolving credit facilities using cash
generated from operations.
The Company does not have any commitments to make substantial capital
expenditures. However, the Company expects to open two additional Barnett
warehouses during the remainder of fiscal 1994, subject to the adequacy of cash
flows generated from operations and funds available under the Company's credit
facility. The average cost to open a Barnett warehouses is approximately $0.5
million. In addition, future cash outlays to be made in connection with the
fiscal 1993 restructuring charges made by the Company are expected to be less
than $0.2 million and will be paid using cash flows generated from operations.
The Company has several credit facilities which provide availability for
working capital needs. As discussed above, the Company's Canadian bank has
waived the covenant violations contained in its agreements as of June 30, 1993
and continues, along with the Company's domestic bank, to provide the Company
with funds for operations in accordance with the terms of the agreements. The
Company's domestic secured credit agreement provides for availability up to $30
million subject to borrowing base formulas. Borrowings under this domestic
credit facility, which expires on December 31, 1995, totaled $21.5 million at
September 30, 1993. Availability at September 30, 1993 totaled $6.4 million.
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During October 1993, the Company completed the sale of one of its Canadian
operations for cash and a promissory note. Refer to Note 7. The cash proceeds
from such sale, which totaled approximately U.S. $3.0 million will be used for
general corporate purposes.
As a result of the successful completion of the consent solicitation which
cured covenant violations and relieved the Company of the purchase obligations
discussed above, the Company believes that amounts available under its current
domestic revolving credit agreement and from indebtedness permitted to be
incurred at the Barnett Inc. level, together with cash from operations and the
proceeds from the sale of the small Canadian operation will be sufficient to
satisfy the liquidity requirements of the Company's domestic operations for the
remainder of fiscal 1994. The ability of the Company's Canadian operations to
meet its liquidity requirements is dependent upon its ability to successfully
amend its bank credit agreements and its ability to maximize its cash flows. If
the Canadian operation finds that it is unable to meet its liquidity
requirements it will be necessary for it to undertake such other actions as may
be appropriate under the circumstances. Although the debt is non-recourse to
Waxman, if such actions resulted in an acceleration of amounts due under the
Canadian operations' bank agreements, "cross-default" provisions under
substantially all of the Company's other domestic debt instruments would be
triggered which could result in an acceleration of such domestic debt impact the
liquidity of the Company's domestic operations.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
Registrant
Date: March 8, 1994 By /s/ NEAL R. RESTIVO
--------------------------------
Neal R. Restivo
Vice President, Finance and
Chief Financial Officer
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