<PAGE> 1
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* *
* AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1994 *
* REGISTRATION NO. 33-54209 *
* *
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SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WAXMAN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
5074
(Primary Standard Industrial Classification Code Number)
34-0899894
(I.R.S. Employer Identification Number)
24460 Aurora Road
Bedford Heights, Ohio 44146
(216) 439-1830
(Address, including zip code, and telephone number,
including area code, of registrant's principal offices)
ARMOND WAXMAN
24460 Aurora Road
Bedford Heights, Ohio 44146
(216) 439-1830
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
Copies to:
SCOTT M. ZIMMERMAN, ESQ.
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, New York 10022
(212) 758-9500
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a),
may determine.
<PAGE> 2
WAXMAN INDUSTRIES, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND HEADING PROSPECTUS CAPTION OR LOCATION
-------------------------------- ------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Available Information; Inside Front Cover and
Prospectus Outside Back Cover Pages of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Prospectus Summary; Selected Financial Data;
Charges, and Other Information Risk Factors; Consolidated Financial Statements
4. Terms of the Transaction Prospectus Summary; Use of Proceeds; The
Exchange Offer; Certain Federal Income Tax
Considerations; Description of Notes
5. Pro Forma Financial Information Not Applicable
6. Material Contacts with the Company Being Not Applicable
Acquired
7. Additional Information Required for Reoffering Not Applicable
Persons and Parties Deemed to be Underwriters
8. Interests of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information With Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information With Respect to Registrants Other Outside Front Cover Page of Prospectus;
Than S-3 or S-2 Registrants Available Information; Prospectus Summary; Risk
Factors; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Management;
Principal Stockholders; Recent Securities
Offering and Related Matters; Consolidated
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3 Companies Not Applicable
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i
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<TABLE>
<S> <C>
16. Information With Respect to S-2 or S-3 Not Applicable
Companies
17. Information With Respect to Companies Other Not Applicable
Than S-3 or S-2 Companies
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Not Applicable
Authorizations are to be Solicited
19. Information if Proxies, Consents or Management; Principal Stockholders
Authorizations are not to be Solicited, or in
an Exchange Offer
</TABLE>
ii
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* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. *
* A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY *
* NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN *
* WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
***************************************************************************
SUBJECT TO COMPLETION: PRELIMINARY PROSPECTUS DATED AUGUST 16, 1994
PROSPECTUS
OFFER FOR ANY AND ALL OUTSTANDING
SERIES A 12 3/4% SENIOR SECURED DEFERRED COUPON NOTES DUE 2004
IN EXCHANGE FOR
SERIES B 12 3/4% SENIOR SECURED DEFERRED COUPON NOTES DUE 2004
OF
WAXMAN INDUSTRIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT,
NEW YORK CITY TIME, ON SEPTEMBER __, 1994, UNLESS EXTENDED.
Waxman Industries, Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to issue an aggregate principal amount of up
to $92,797,000 at maturity of Series B 12 3/4% Senior Secured Deferred Coupon
Notes due 2004 (the "New Notes") of the Company in exchange for a like
principal amount at maturity of the issued and outstanding Series A 12 3/4%
Senior Secured Deferred Coupon Notes due 2004 (the "Old Notes" and, together
with the New Notes, the "Notes") of the Company from the holders (the
"Holders") thereof.
The Old Notes were originally issued by the Company in a private
placement to certain institutional investors. The Old Notes are eligible for
trading in the Private Offering, Resales and Trading through Automated Linkages
("Portal") market and are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Act"). After the Exchange Offer, the
Old Notes that remain outstanding will continue to be subject to the
restrictions on transfer contained in the legend thereon and may not be offered
or sold except pursuant to an exemption from, or in a transaction not subject
to the registration requirements of, the Act. The Common Stock, par value $.01
per share, of the Company ("Common Stock"), is traded on the New York Stock
Exchange, Inc. (the "NYSE") under the symbol "WAX". On August 12, 1994, the
last reported sales price per share of Common Stock, as reported by the NYSE,
was $1.88.
The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes. The terms of the Notes are governed by the
Indenture, dated as of May 20, 1994, between the Company and The Huntington
National Bank, as Trustee (the "Trustee"), and all amendments and supplements
thereto (the "Indenture"). The Notes are secured by all of the capital stock
of Waxman USA Inc., a Delaware corporation and wholly owned subsidiary of the
Company ("Waxman USA"), and by all of the capital stock of the future direct
subsidiaries of the Company. See "Description of Notes -- Security."
Substantially all of the assets of Waxman USA are pledged to the lenders under
the Debt Financing (as defined below) and thus the pledge of the capital stock
of Waxman USA for the benefit of the holders of the Notes is structurally
subordinated to the rights of such lenders. The capital stock of Waxman USA is
privately held by the Company and constitutes substantially all of the
Company's assets. The Company is dependent on distributions from Waxman USA
(which is in turn dependent on distributions from its operating subsidiaries)
in order to meet its debt service obligations, including its payment
obligations with respect to the Notes. See "Risk Factors -- Reliance on
Operations of Subsidiaries; Structural Subordination" and "-- Restrictions
Imposed by Terms of Indebtedness."
The indebtedness evidenced by the Notes will rank senior in right of
payment to all existing and future subordinated indebtedness of the Company,
and will rank pasi passu in right of payment with all other existing or future
unsubordinated indebtedness of the Company. The indebtedness evidenced by the
Notes will not be subordinate in right of payment to any existing or, without
the consent of the holders of the Notes, future indebtedness of the Company.
See "Description of the Notes -- Ranking."
The New Notes and the Old Notes remaining after the Exchange Offer
mature on June 1, 2004. The New Notes will be issued at a discount to their
aggregate principal amount at maturity. Interest will not accrue on the New
Notes and the Old Notes remaining after the Exchange Offer prior to June 1,
1999. Thereafter, interest on the Notes will be payable semiannually at the
rate of 12 3/4% per annum until maturity. The Notes are redeemable at the
option of the Company at any time on or after June 1, 1999 at the redemption
prices set forth therein. See "Description of Notes -- Redemption."
<PAGE> 5
Upon a Public Equity Offering (as defined herein), up to $25.0 million
principal amount at maturity of Notes may, until June 1, 1997, be redeemed at
the option of the Company at 112.75% of the Accreted Value (as defined herein)
thereof with the net proceeds of such Public Equity Offering; provided,
however, that not less than $65.0 million aggregate principal amount at
maturity of the Notes remains outstanding upon the completion of such
redemption. In the event of a Change of Control (as defined herein), the
Company will be obligated to make an offer to purchase all outstanding Notes at
a redemption price of 101% of the Accreted Value thereof, plus accrued and
unpaid interest, if any.
On May 20, 1994, the Company issued the Old Notes together with
warrants (the "Warrants") to purchase 2,950,000 shares of Common Stock in
exchange for $50,000,000 aggregate principal amount of the Company's then
outstanding 13 3/4% Senior Subordinated Notes due June 1, 1999 pursuant to a
private exchange offer (the "Private Exchange Offer") which was a part of a
series of interrelated transactions (the "Reorganization"). In addition to the
Private Exchange Offer, the components of the Reorganization included (i) the
solicitation of the consents of the holders of the Senior Subordinated Notes to
certain waivers of and the adoption of certain amendments to the indenture
governing the Senior Subordinated Notes, (ii) the establishment of a $55
million revolving credit facility, and a $15 million term loan, (iii) the
solicitation of the consents of the holders of the Senior Secured Notes (as
hereinafter defined) to certain waivers of and the adoption of certain
amendments to the indenture governing the Senior Secured Notes and (iv) the
repayment of the borrowings under the Company's then existing domestic
revolving credit facilities. See "Recent Securities Offering and Related
Matters -- The Reorganization."
The offer and sale of the New Notes are being registered under the
Registration Statement of which this Prospectus forms a part in order to
satisfy certain obligations of the Company contained in the Registration Rights
Agreement, dated as of May 20, 1994, among the Company and the Trustee, on
behalf of the original purchasers of the Old Notes (the "Debt Registration
Rights Agreement"). Based on interpretations by the Staff of the Securities
and Exchange Commission (the "Commission") set forth in certain "no-action"
letters issued to third parties and unrelated to the Company and the Exchange
Offer, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Act),
without compliance with the registration and prospectus delivery provisions of
the Act, provided that such New Notes are acquired in the ordinary course of
such Holders' business and such Holders have no intention, nor any arrangement
with any person, to participate in the distribution of such New Notes. A
broker-dealer holding Old Notes may participate in the Exchange Offer provided
that it acquired the Old Notes for its own account as a result of market-making
or other trading activities. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Act. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. For a period of 180 days after
the Expiration Date (as defined herein), the Company will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will accept for exchange Old Notes validly tendered prior
to Midnight, New York City time, on __, 1994, unless extended by the
Company in its sole discretion (the "Expiration Date"). Tenders of Old Notes
may be withdrawn at any time prior to the Expiration Date. The Exchange Offer
is subject to certain customary conditions. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer."
The Company will not receive any proceeds from the Exchange Offer.
Pursuant to the Debt Registration Rights Agreement, the Company will pay all
the expenses incident to the Exchange Offer. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. In the event the Company terminates
the Exchange Offer and does not accept for exchange any Old Notes, the Company
will promptly return the Old Notes to the Holders thereof. See "The Exchange
Offer."
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 6
THE NOTES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA. THE NOTES
ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
THIS DOCUMENT MAY NOT BE PASSED ON IN THE UNITED KINGDOM TO ANY PERSON
UNLESS THAT PERSON IS OF A KIND DESCRIBED IN ARTICLE 9(3) OF THE FINANCIAL
SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1988 OR IS A
PERSON TO WHOM THIS DOCUMENT MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER CHAPTER 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN
ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL
TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO
BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
THE DATE OF THIS PROSPECTUS IS _____ __, 1994.
<PAGE> 7
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (together
with all amendments thereto referred to herein as the "Registration Statement")
under the Act, with the Commission covering the securities being offered by
this Prospectus. This Prospectus does not contain all the information set
forth or incorporated by reference in the Registration Statement and the
exhibits and schedules relating thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered by
this Prospectus, reference is made to the Registration Statement and the
exhibits and schedules thereto which are on file at the offices of the
Commission and may be obtained upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and are qualified in
all respects by such reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Commission. The Registration Statement, as well as such
periodic reports, proxy statements and other information, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549; Suite 1400, Northwest
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and 7 World
Trade Center, New York, New York 10048. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company's
common stock is listed on the NYSE. Reports, proxy statements and other
information may also be inspected at the offices of the NYSE, 20 Broad Street,
New York, New York 1005.
- ii -
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
Background of Exchange Offer;
Recent Securities Offering and Related Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Consequences of Exchanging Old Notes
Pursuant to the Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Summary Description of the New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consequences of Failure to Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Security for the Notes; Value of the Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reliance on Operations of Subsidiaries; Structural Subordination . . . . . . . . . . . . . . . . . . . . . . . . . 3
Restrictions Imposed by Terms of Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Control by Principal Stockholders; Certain Anti-Takeover Effects . . . . . . . . . . . . . . . . . . . . . . . . . 4
Deficiency of Earnings to Fixed Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Foreign Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Reliance on Key Customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Lack of Public Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Original Issue Discount Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
NOTES TO SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Nine Months Ended March 31, 1994 Versus March 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Fiscal 1993 Versus Fiscal 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fiscal 1992 Versus Fiscal 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Discussion of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Impact of New Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Barnett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consumer Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Other Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Import Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Environmental Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
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<TABLE>
<S> <C>
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Stock Option and SAR Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Stock Option and SAR Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
RECENT SECURITIES OFFERING AND RELATED MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
THE EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Purpose of Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Terms of the Exchange Offer; Period for Tendering Old Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Procedures for Tendering Old Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Acceptance of Old Notes for Exchange; Delivery of New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Book-Entry Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Guaranteed Delivery Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Withdrawal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Certain Conditions to the Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Consequences of Failure to Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Maturity, Interest and Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Provision of Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Consolidation, Merger, Conveyance, Transfer or Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Satisfaction and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Regarding the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Holding and Disposition of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Backup Withholding and Information Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
</TABLE>
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<PAGE> 10
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements appearing elsewhere in this Prospectus. References in this
Prospectus to a particular fiscal year refer to the 12-month period ended on
June 30 in that year. Unless the context otherwise indicates, all references
to the "Company" are to the continuing operations of Waxman Industries, Inc.
and its subsidiaries and divisions and to the business conducted through such
subsidiaries and divisions.
THE COMPANY
The Company believes it is one of the leading suppliers of plumbing
products to the home repair and remodeling market in the United States. The
Company conducts its business in the United States primarily through its
wholly-owned subsidiaries, Barnett Inc. ("Barnett") and Waxman Consumer
Products Group Inc. ("Consumer Products"). The Company distributes plumbing,
electrical and hardware products, in both packaged and bulk form, to over
45,000 customers in the United States, including do-it-yourself ("D-I-Y")
retailers, mass merchandisers, smaller independent retailers and plumbing and
electrical repair and remodeling contractors. The Company's consolidated net
sales (excluding sales from discontinued operations) were $204.8 million in
fiscal 1993.
The Company's domestic business is conducted primarily through Barnett
and Consumer Products. Through their nationwide network of warehouses and
distribution centers, Barnett and Consumer Products provide their customers
with a single source for an extensive line of competitively priced quality
products. The Company's strategy of being a low-cost supplier is facilitated
by its purchase of a significant portion of its products from low-cost foreign
sources. Barnett's marketing strategy is directed predominantly to repair and
remodeling contractors and independent retailers, as compared to Consumer
Products' strategy of focusing on mass merchandisers and larger D-I-Y
retailers.
Based on management's experience and knowledge of the industry, the
Company believes that Barnett is the only national mail order and telemarketing
operation distributing plumbing, electrical and hardware products in the United
States. Barnett's marketing strategy is comprised of frequent catalog and
promotional mailings, supported by 24-hour telemarketing operations. Barnett
has averaged 15% net sales growth per annum during the period from fiscal 1991
to fiscal 1993 through (i) the expansion of its warehouse network to increase
its market penetration, (ii) the introduction of new product offerings and
(iii) the introduction of an additional catalog targeted at a new customer
base. Barnett's net sales were $82.9 million in fiscal 1993.
Consumer Products markets and distributes its products to a wide variety
of retailers, primarily national and regional warehouse home centers, home
improvement centers and mass merchandisers. An integral element of Consumer
Products' marketing strategy of serving as a single source supplier is offering
mass merchandisers and D-I-Y retailers innovative comprehensive marketing and
merchandising programs designed to improve their profitability, efficiently
manage shelf space, reduce inventory levels and maximize floor stock turnover.
Consumer Products' customers currently include national retailers such as
Kmart, Builders Square, Home Depot and Wal-Mart, as well as large regional
D-I-Y retailers. According to the most recent rankings of the largest D-I-Y
retailers published by National Home Center News, an industry trade
publication, Consumer Products' customers include 16 of the 25 largest D-I-Y
retailers in the United States. Management believes that Consumer Products is
the only supplier to the D-I-Y market that carries a complete line of plumbing,
electrical and floor protective hardware products, in both package and bulk
form. Consumer Products' net sales were $67.5 million in fiscal 1993 and have
remained generally consistent since fiscal 1991.
The Company, through its smaller domestic operations, also distributes a
full line of security hardware products and copper tubing, brass fittings and
other related products. Net sales from these other operations were $48.1
million in fiscal 1993.
The Company's business strategy is designed to capitalize on the growth
prospects for Barnett and Consumer Products. The Company's current strategy
includes the following elements:
- v -
<PAGE> 11
o Expansion of Barnett. Since its acquisition in 1984, Barnett's
revenues and operating income have grown at compound annual rates
of 11.3% and 11.1% respectively. The Company intends to continue
to expand Barnett's national warehouse network and expects to
open as many as four new warehouses during each of the next
several fiscal years. Barnett expects to fund this expansion
using cash flow from operations and/or available borrowings under
the Debt Financing. Barnett also intends to continue expanding
its product offerings, allowing its customers to utilize its
catalogs as a means of one-stop shopping for many of their needs.
In an effort to further increase profitability, Barnett is also
increasing the number of higher margin product offerings bearing
its proprietary trade names and trademarks.
o Enhance Competitive Position of Consumer Products. During the
past 24 months, Consumer Products has restructured its sales and
marketing functions in order to better serve the needs of its
existing and potential customers. Consumer Products restructured
its sales department by defining formal regions of the country
for which regional sales managers would have responsibility.
Prior to the restructuring, sales managers had responsibility for
specific customers without regard to location. In addition, as
part of the restructuring, in fiscal 1993 a marketing department
was established, separate and apart from the sales department.
The marketing department is staffed with product managers who
have the responsibility of identifying new product programs. The
restructuring of the sales and marketing departments is complete
at this time. Consumer Products' strategy is to achieve
consistent growth by expanding its business with existing
customers and by developing new products and new customers. In
order to increase business with existing customers, Consumer
Products is focusing on developing strategic alliances with its
customers. Consumer Products seeks to (i) introduce new products
within existing categories, as well as new product categories,
(ii) improve customer service, (iii) introduce full service
marketing programs and (iv) achieve higher profitability for both
the retailer and Consumer Products.
The Reorganization described below was an important element of this
strategy because it lowered the Company's cash interest expense, permitting the
Company to reinvest a greater portion of its cash flow in its domestic
businesses; stabilized the Company's capital structure by, among other things,
eliminating the impact of the adverse operating results of the Company's
discontinued Canadian operations on the Company's domestic operations; and
generally provided the Company with greater operating and financial
flexibility.
Discontinued Operations
Effective March 31, 1994, the Company adopted a plan to dispose of its
Canadian subsidiary, Ideal Plumbing Group, Inc. ("Ideal"). Unlike the
Company's United States operations which supply products to customers in the
home repair and remodeling market through mass retailers, Ideal primarily
served 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 and financial
information contained herein as of such date have been reclassified to report
separately Ideal's net assets and results of operations. Prior period
consolidated financial statements and financial information have been
reclassified to conform to the current period presentation.
Ideal determined in April 1994 that, as of March 31, 1994, it was in
violation of several financial covenants included in its Canadian bank credit
agreements, including those related to the maintenance of a specified working
capital ratio, interest coverage ratio and borrowing base formulas. In
addition, on April 15, 1994, Ideal failed to make a Cdn. $150,000 payment on
the term loan portion of such credit agreements.
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 the lenders under Ideal's
Canadian bank credit agreements as borrowings under such 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 agreements (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. On May 30, 1994, Ideal was declared
bankrupt by the Canadian courts and, as a result, the Company's ownership and
control of Ideal effectively ceased on such date. Upon the petition of Ideal's
Canadian lenders, Coopers & Lybrand Ltd. was appointed as trustee to liquidate
the assets of Ideal. As of the date of this Prospectus, the Company has been
advised that Ideal is no longer operating and that certain of Ideal's branch
operations have been sold but that the trustee has not yet liquidated the
remaining inventory, accounts receivable and fixed assets of Ideal.
Ideal's defaults under its Canadian bank credit agreements and
subsequent bankruptcy do not trigger a "cross-default" under, or result in any
violation of the debt covenants contained in, the Company's or its subsidiaries'
outstanding debt obligations other than under the Company's $155,000 principal
amount outstanding of Convertible Debentures. In addition, neither the Company
nor any of its subsidiaries has any liability to creditors of Ideal as a result
of Idea's bankruptcy.
- vi -
<PAGE> 12
The Company's principal executive offices are located at 24460 Aurora
Road, Bedford Heights, Ohio 44146, Telephone (216) 439-1830.
BACKGROUND OF EXCHANGE OFFER;
RECENT SECURITIES OFFERING AND RELATED MATTERS
On May 20, 1994, the Company issued Series A 12 3/4% Senior Secured
Deferred Coupon Notes Due 2004 having an initial accreted value of $50,000,000
(the "Old Notes") together with warrants (the "Warrants") to purchase 2,950,000
shares of common stock, par value $.01 per share, of the Company ("Common
Stock") in exchange for $50,000,000 aggregate principal amount of the Company's
outstanding 13 3/4% Senior Subordinated Notes due June 1, 1999 (the "Senior
Subordinated Notes") pursuant to a private exchange offer (the "Private
Exchange Offer") which was a part of a series of interrelated transactions (the
"Reorganization"). In addition to the Private Exchange Offer, the components
of the Reorganization included (i) the solicitation of the consents of the
holders of the Senior Subordinated Notes to certain waivers of and the adoption
of certain amendments to the indenture governing the Senior Subordinated Notes
(the "Senior Subordinated Consent Solicitation"), (ii) the establishment of a
$55 million revolving credit facility (the "Domestic Credit Facility") and a
$15 million term loan (the "Domestic Term Loan"; and together with the Domestic
Credit Facility, the "Debt Financing"), (iii) the solicitation of the consents
of the holders of the Senior Secured Notes to certain waivers of and the
adoption of certain amendments to the indenture governing the Senior Secured
Notes (the "12 1/4% Consent Solicitation") and (iv) the repayment of the
borrowings under the Company's then existing domestic revolving credit
facilities (including $27.6 under the Company's then existing working capital
credit facility and $1.2 million under the $5.0 million revolving credit
facility of Barnett (the "Barnett Financing")). See "Recent Securities
Offering and Related Matters -- The Reorganization."
In connection with the Reorganization, the Company restructured (the
"Corporate Restructuring") its domestic operations such that after giving
effect thereto the Company became a holding company whose only material assets
are the capital stock of its subsidiaries. As part of the Corporate
Restructuring, the Company 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 (the "Consumer Products Division"; all references
herein to "Consumer Products" shall include the Consumer Products Division and
Waxman Consumer Products Group Inc., unless the context otherwise requires),
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 effected the Corporate Restructuring 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.
- vii -
<PAGE> 13
As a result of the Corporate Restructuring, the corporate structure of
the Company and its subsidiaries is as follows:
WAXMAN INDUSTRIES, INC.
WAXMAN USA INC. IDEAL HOLDING GROUP, INC.(1)
BARNETT, WAXMAN WOC INC. TWI, INTERNATIONAL, IDEAL
INC. CONSUMER INC. PLUMBING
PRODUCTS GROUP,
GROUP INC. INC.(1)
CWI INTERNATIONAL
CHINA LIMITED
______________________
Each subsidiary depicted above is a wholly owned subsidiary.
(1) Ideal Holding Group, Inc.'s sole asset, Ideal Plumbing Group, Inc., is
currently being liquidated pursuant to Canadian bankruptcy laws.
The Old Notes were issued pursuant to exemptions from, or transactions
not subject to, the registration requirements of the Act and applicable state
securities laws. The Company structured the offering of the Old Notes and
Warrants as a private placement in order to consummate such offering on a more
expeditious basis than would have been possible had the offering and sale been
registered under the Act. The original purchasers of the Old Notes, as a
condition to their purchase of the Old Notes and Warrants, required the Company
to enter into a registration rights agreement pursuant to which the Company
agreed, among other things, to promptly commence the Exchange Offer following
the offering of the Old Notes. The Company has prepared and filed the
Registration Statement of which this Prospectus forms a part with the
Commission pursuant to such registration rights agreement. The original
purchasers of the Warrants, as a condition to their purchase of the Warrants
and Old Notes, also required the Company to enter into a registration rights
agreement pursuant to which the Company agreed, among other things, to file
promptly a registration statement under the Act to permit such original
purchasers to offer and sell under the Act the Warrants and shares of Common
Stock issuable upon exercise of the Warrants. The Company has prepared and
filed a registration statement with the Commission pursuant to such
registration rights agreement. See "Recent Securities Offering and Related
Matters -- Registration Rights Agreements."
See "Recent Securities Offering and Related Matters" for a discussion of
the offering of Old Notes, the agreements referred to above and additional
related agreements. See "Description of Notes" for a discussion of the terms
of the Notes.
THE EXCHANGE OFFER
- viii -
<PAGE> 14
Securities Offered . . . . . . . . . . . . Up to $92,797,000 principal
amount at maturity of Series
B 123/4% Senior Secured
Deferred Coupon Notes (the
"New Notes" and, collectively
with the Old Notes, the
"Notes"). The terms of the
New Notes and the Old Notes
are identical in all material
respects, except for certain
transfer restrictions and
registration rights relating
to the Old Notes.
The Exchange Offer . . . . . . . . . . . . The New Notes are being
offered in exchange for a like
principal amount at maturity
of Old Notes. The issuance
of the New Notes is intended
to satisfy obligations of the
Company contained in the
Registration Rights
Agreement, dated as of May
20, 1994, by and among the
Company and the Trustee, on
behalf of the original
purchasers of the Old Notes.
For procedures for tendering,
see "The Exchange Offer."
Tenders, Expiration Date;
Withdrawal . . . . . . . . . . . . . . . The Exchange Offer will
expire at Midnight, New York
City time, on July __, 1994,
or such later date and time
to which it is extended (the
"Expiration Date"). The
tender of Old Notes pursuant
to the Exchange Offer may be
withdrawn at any time prior
to the Expiration Date. Any
Old Notes not accepted for
exchange for any reason will
be returned without expense
to the tendering holder
thereof as promptly as
practicable after the
expiration or termination of
the Exchange Offer.
Conditions of the
Exchange Offer . . . . . . . . . . . . . The Exchange Offer is subject
to customary conditions, any
or all of which may be waived
by the Company in its sole
discretion. See "The
Exchange Offer -- Certain
Conditions to the Exchange
Offer."
Interest on the New
Notes and Old Notes . . . . . . . . . . . Interest will not accrue on
the Notes prior to June 1,
1999. Thereafter, interest
on the Notes will be payable
semiannually at the rate of
12 3/4% per annum until
maturity. See "Description
of Notes -- Interest."
Acceptance of Old Notes and
Delivery of New Notes . . . . . . . . . . The Company will accept for
exchange Old Notes which are
properly tendered in the
Exchange Offer prior to
Midnight, New York City time,
on the Expiration Date. The
New Notes issued pursuant to
the Exchange Offer will be
delivered promptly following
the Expiration Date. See
"The Exchange Offer -- Terms
of the Exchange Offer; Period
for Tendering Old Notes."
- ix -
<PAGE> 15
Federal Income Tax
Consequences . . . . . . . . . . . . . . The exchange pursuant to the
Exchange Offer will not
result in any income, gain or
loss to the holders of the
Notes (the "Holders") or the
Company for federal income
tax purposes. See "Certain
Federal Income Tax
Considerations."
Use of Proceeds . . . . . . . . . . . . . . There will be no proceeds to
the Company from the exchange
pursuant to the Exchange
Offer.
Exchange Agent . . . . . . . . . . . . . . The Huntington National Bank
is serving as Exchange Agent
in connection with the
Exchange Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
Based on interpretations of the Staff of the Commission set forth in
certain "no-action" letters issued to third parties and unrelated to the
Company and the Exchange Offer, the Company believes that Holders of Old Notes
(other than any Holder who is an "affiliate" of the Company within the meaning
of Rule 405 under the Act) who exchange their Old Notes for New Notes pursuant
to the Exchange Offer may offer such New Notes for resale, resell such New
Notes, and otherwise transfer such New Notes without compliance with the
registration and prospectus delivery provisions of the Act; provided such New
Notes are acquired in the ordinary course of the Holder's business and such
Holder has no intention, nor any arrangement with any person, to participate in
a distribution of such New Notes. Based on the foregoing "no-action" letters,
the Company believes that a broker-dealer holding Old Notes may participate in
the Exchange Offer provided that it acquired the Old Notes for its own account
as a result of market-making or other trading activities. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." To comply with the securities laws of certain jurisdictions, it
may be necessary to qualify for sale or register the New Notes prior to
offering or selling such New Notes. The Company does not currently intend to
register or qualify the sale of the New Notes in any such jurisdiction. If a
Holder of Old Notes does not exchange such Old Notes for New Notes pursuant to
the Exchange Offer, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Notes may not be offered or sold, unless registered under the Act except
pursuant to an exemption from, or in a transaction not subject to, the Act and
applicable state securities laws. See "The Exchange Offer -- Purpose of the
Exchange Offer and -- Consequences of Failure to Exchange."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Old Notes. The terms of the Notes are governed by the
Indenture, dated as of May 20, 1994, between the Company and The Huntington
National Bank, as Trustee, and all amendments or supplements thereto (the
"Indenture").
Securities Offered . . . . . . . . . . . . . $92,797,000 aggregate
principal amount at maturity
(having an initial Accreted
Value of approximately $50
million) of Series B 12 3/4%
Senior Secured Deferred
Coupon Notes Due 2004.
Interest Payments . . . . . . . . . . . . . . Commencing June 1, 1999,
interest on the New Notes
will accrue at the rate of
12 3/4% per annum, payable
semi- annually, commencing
December 1, 1999.
- x -
<PAGE> 16
Maturity Date . . . . . . . . . . . . . . . June 1, 2004.
Original Issue Discount . . . . . . . . . . For federal income tax
purposes, the New Notes will
be treated as having been
issued with "original issue
discount" equal to the
difference between the issue
price of New Notes and the
sum of all cash payments
(whether denominated as
principal or interest) to be
made thereon. Each holder of
a New Note must include in
gross income for federal
income tax purposes a portion
of such original issue
discount for each day during
each taxable year in which a
Note is held even though
interest does not begin to
accrue until June 1, 1999,
and no cash interest payments
will be received prior to
December 1, 1999. See
"Certain Federal Income Tax
Consequences."
Optional Redemption . . . . . . . . . . . . The New Notes will be
redeemable, in whole or in
part, at the option of the
Company on or after June 1,
1999, at the redemption
prices set forth herein, plus
accrued interest.
Optional Redemption Upon
a Public Equity Offering . . . . . . . . . Until June 1, 1997, upon a
Public Equity Offering up to
$25.0 million principal
amount at maturity of New
Notes may be redeemed at the
option of the Company at
112.75% of the Accreted Value
thereof with the net proceeds
of such Public Equity
Offering, provided, however,
that not less than $65.0
million aggregate principal
amount at maturity of the New
Notes remains outstanding
upon the completion of such
redemption. The Company has
no present intention of
completing a Public Equity
Offering in the near future.
Change of Control . . . . . . . . . . . . . In the event of a Change of
Control, the Company is
obligated to make an offer to
purchase all outstanding New
Notes at 101% of the Accreted
Value thereof plus accrued
and unpaid interest, if any.
A Change of Control includes
a management buyout or
similar transaction by the
Company's management and/or
directors and their
respective affiliates (but
does not include any such
transaction by Melvin and/or
Armond Waxman). A Change of
Control also includes a sale
by the Company of all or
substantially all of its
assets, which under
applicable governing law is
construed to mean the sale of
assets quantitatively vital
to the operation of the
Company and which is out of
the ordinary and
substantially affects the
existence and purpose of the
Company.
Asset Sale Proceeds . . . . . . . . . . . . The Company is obligated in
certain circumstances to make
an offer to purchase New
Notes at a redemption price
of 100% of the Accreted Value
thereof plus accrued and
unpaid interest, if any, with
the net cash proceeds of
certain sales or other
dispositions of assets.
Ranking . . . . . . . . . . . . . . . . . . The New Notes will be senior
obligations of the company
ranking senior in right of
payment to the Company's
subordinated indebtedness,
including the Senior
- xi -
<PAGE> 17
Subordinated Notes and the
Convertible Debentures, and
pari passu in right of
payment with all
unsubordinated indebtedness
of the Company.
Security . . . . . . . . . . . . . . . . . The New Notes will be secured
by a lien on and security
interest in all of the issued
and outstanding capital stock
of Waxman USA and all future
direct domestic subsidiaries
of the Company other than
those that relate to the
business conducted by Ideal
and 65% of the issued and
outstanding capital stock of
the current and future direct
foreign subsidiaries of the
Company (and the domestic
holding companies thereof)
other than those that relate
to the business conducted by
Ideal.
Certain Covenants . . . . . . . . . . . . . The Indenture contains certain
covenants that, among other
things, limit the ability of
the Company and its
subsidiaries to incur
additional indebtedness,
transfer or sell assets, pay
dividends, make certain other
restricted payments and
investments, create liens or
enter into sale lease-back
transactions, transactions
with affiliates and mergers.
For more complete information regarding the Notes, see "Description of
Notes."
RISK FACTORS
Holders of Old Notes should carefully consider the specific factors set
forth under "Risk Factors," as well as the other information and data included
in this Prospectus.
- xii -
<PAGE> 18
RISK FACTORS
Holders of Old Notes should consider carefully all of the information
set forth in this Prospectus and, in particular, should evaluate the following
risks before tendering their Old Notes in the Exchange Offer, although the risk
factors set forth below (other than the first risk factor) are generally
applicable to the Old Notes, as well as the New Notes.
Consequences of Failure to Exchange. Holders of Old Notes who do not
exchange their Old Notes for New Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Old Notes as set
forth in the legend thereon as a consequence of the issuance of the Old Notes
pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless registered under the
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Act and applicable state securities laws. The Company does not currently
anticipate that it will register the offer and sale of the Old Notes under the
Act. Based on interpretations by the Staff of the Commission, set forth in
certain "no-action" letters issued to third parties and unrelated to the
Company and the Exchange Offer, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than by any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Act) without compliance with the registration and prospectus
delivery provisions of the Act provided that such New Notes are acquired in the
ordinary course of such Holders' business and such Holders have no intention,
nor any arrangement with any person, to participate in the distribution of such
New Notes. Based on the foregoing "no-action" letters, the Company believes
that a broker-dealer holding Old Notes may participate in the Exchange Offer
provided that it acquired the Old Notes for its own account as a result of
market-making or other trading activities. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Act. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. For a period of 180 days after the
Expiration Date (as defined herein), the Company will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
The Company does not currently intend to register or qualify the sale of the
New Notes in any such jurisdiction.
Leverage. The Company has a high degree of leverage. At March 31,
1994, the outstanding consolidated indebtedness (excluding trade payables and
accrued liabilities) of the Company's continuing operations was $175.2 million.
On a pro forma basis, at March 31, 1994, after giving effect to the
Reorganization, the outstanding amount of such indebtedness (excluding trade
payables and accrued liabilities) would have been approximately $186.4 million.
This high degree of leverage may have important consequences, including the
following: (i) the ability of the Company to obtain additional financing in the
future for working capital, capital expenditures, debt service requirements or
other purposes may be impaired; (ii) a substantial portion of the Company's
cash flow from operations will be required to satisfy debt service obligations;
(iii) the Company may be more highly leveraged than companies with which it
competes, which may place it at a competitive disadvantage; and (iv) the
Company's high degree of leverage may make it more vulnerable in the event of a
downturn in its business and may limit its ability to capitalize on business
opportunities. Although the Company believes that its operating cash flow as
well as amounts available under the Domestic Credit Facility will be sufficient
to fund working capital, capital expenditures and debt service requirements for
the next 24 months, the Company's ability to satisfy its obligations will be
dependent upon its future performance, which is subject to prevailing economic
conditions and financial, business and other factors, including factors beyond
the Company's control. Commencing March 1995, the Company is required to make
quarterly principal payments of $1.0 million under its Domestic Term Loan. In
addition, the Company is required to make mandatory sinking fund payments of
$17.0 million on each of September 1, 1996 and September 1, 1997 with respect
to the Senior Secured Notes and a single payment of $8.75 million on June 1,
1998
- 1 -
<PAGE> 19
with respect to the Senior Subordinated Notes. In addition, the Debt Financing
matures on May 20, 1997, subject to extension in certain events. The Company
currently believes that additional equity must be injected into the business
before any significant deleveraging can occur. However, there can be no
assurances as to the timing or likelihood of such deleveraging.
To the Company's knowledge, neither its high degree of leverage nor the
bankruptcy of Ideal had resulted in the refusal by any of its customers,
suppliers or manufacturers to do business with the Company or in the alteration
of material terms which have had a material impact on the Company's business.
Security for the Notes; Value of the Collateral. The Old Notes are, and
the New Notes will be, secured by a pledge of all of the outstanding shares of
capital stock of Waxman USA and the future direct domestic subsidiaries of the
Company and 65% of the capital stock of the future direct foreign subsidiaries
of the Company, and the domestic holding companies of such foreign
subsidiaries. Since none of such subsidiaries has publicly traded securities,
the value of their capital stock will not be readily ascertainable and will
depend upon the market value of the assets and business of such subsidiaries.
There can be no assurances that the proceeds from the sale or sales of the
capital stock pledged to secure the Notes would be sufficient to satisfy any
amounts due thereunder.
The rights of the Trustee to foreclose upon and dispose of the pledged
collateral is likely to be significantly impaired by applicable bankruptcy law
if a bankruptcy proceeding were to be commenced by or against the Company,
prior to the Trustee's having disposed of the pledged collateral. Under Title
XI of the United States Code (the "Bankruptcy Code"), a secured creditor, such
as the Trustee, is prohibited from disposing of security upon foreclosure in a
bankruptcy case, even though the debtor is in default under the applicable debt
instruments, without bankruptcy court approval. Moreover, in general, the
Bankruptcy Code prohibits the bankruptcy court from giving such permission if
the secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended
in general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional
security, if and at such times as the court in its discretion determines, for
any diminution in the value of the collateral as a result of the stay of
disposition during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how
long payments under the Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could dispose of the pledged
collateral or whether or to what extent holders of the Notes would be
compensated for any delay in payment or loss of value of the pledged collateral
through the requirement of "adequate protection."
If there was an Event of Default (as defined herein) under the Indenture
which resulted in a foreclosure upon the collateral, such foreclosure would
constitute an event of default under the Domestic Credit Facility and the
Domestic Term Loan, which are secured by a pledge of substantially all of the
assets of Barnett, Consumer Products and WOC (collectively, the "Operating
Companies") and 65% of the capital stock of the Company's foreign subsidiaries,
and the indenture governing the Senior Secured Notes (the "Senior Secured
Indenture") which are secured by all of the capital stock of the Operating
Companies. An Event of Default under the Domestic Credit Facility, the
Domestic Term Loan and Indenture governing the Senior Secured Notes includes
customary events of default, including the failure to pay principal, interest
or any premium on such indebtedness, the failure to comply with the governing
debt instrument, a cross acceleration in excess of $5,000,000, certain events
of bankruptcy and judgments in excess of $5,000,000. In addition, the Company
currently intends to undertake a further debt financing at the Waxman USA level
in the near future. It is currently expected that the proceeds of such debt
financing would be utilized to repay, among other things, the Senior Secured
Notes. The Company expects that the performance of Waxman USA's obligations
under the agreements governing such Waxman USA debt financing (the "Waxman USA
Debt Instruments") will be secured by a pledge of the capital stock of the
Operating Companies. The Company also expects that an Event of Default under
the Indenture which resulted in a foreclosure would likely constitute a change
of control or an Event of Default under the Waxman USA Debt Instruments. Upon
an Event of Default under the Domestic Credit Facility, the Domestic Term Loan
or the Waxman USA Debt Instruments or the Senior Secured Indenture, as the case
may be, (which Event of Default could also result in an event of default under
the Indenture), the holders of such debt would be permitted to accelerate such
debt and to enforce their security interest in substantially all of the assets
or the capital stock of the Operating Companies. There can be no
- 2 -
<PAGE> 20
assurance that the assets or capital stock of the Operating Companies would be
sufficient to repay in full borrowings under the Domestic Credit Facility, the
Domestic Term Loan or the Senior Secured Indenture or the Waxman USA Debt
Instruments, as the case may be, if they became due, thereby diminishing or
eliminating the value of the shares of capital stock securing the Notes. In
addition, any enforcement (including foreclosure) of the security interests
securing the Domestic Credit Facility, the Domestic Term Loan or the Senior
Secured Indenture or the Waxman USA Debt Instruments, as the case may be, or
any other indebtedness of Waxman USA or the Operating Companies could have a
material adverse effect on the market price of the capital stock of such
subsidiaries and on the ability of the Trustee to realize value through sales
of the collateral pledged to secure Notes.
If there were an event of default under the Senior Secured Indenture or
the Waxman USA Debt Instruments, as the case may be, and the holders of such
debt instruments were to foreclose upon the collateral, such foreclosure would
constitute an event of default permitting acceleration under the Domestic
Credit Facility and the Domestic Term Loan thereby permitting the holders of
such debt to enforce their security interest in substantially all the assets of
the Operating Companies. There can be no assurance that the assets of the
Operating Companies would be sufficient to repay in full borrowings under the
Domestic Credit Facility and the Domestic Term Loan if they became due, thereby
diminishing or eliminating the value of the shares of capital stock of the
Operating Companies securing the Senior Secured Indenture or the Waxman USA
Debt Instruments, as the case may be. In addition, any enforcement (including
foreclosure) of the security interests securing the Domestic Credit Facility
and the Domestic Term Loan or any other indebtedness of the Operating Companies
could have a material adverse effect on the ability of the holders of the
Senior Secured Indenture or the Waxman USA Debt Instruments, as the case may
be, to realize value through sales of the collateral pledged to secure such
indebtedness.
Reliance on Operations of Subsidiaries; Structural Subordination. The
Company is a holding company whose only material assets are the capital stock
of its subsidiaries, including, indirectly, all of its operating subsidiaries.
The Company conducts no business other than the provision of management
services to its subsidiaries, and is dependent on distributions from its
domestic subsidiaries in order to meet its debt service obligations including
its payment obligations with respect to the Senior Subordinated Notes and the
Notes. The Company has no other sources of funds for repayment of its debt
obligations and operating expenses. There can be no assurance that
distributions from its subsidiaries will be adequate to fund the required
payments under the Company's debt obligations. In addition, certain of the
instruments evidencing the Debt Financing, the Company's other debt obligations
and applicable state laws impose significant restrictions on the payment of
dividends and the making of loans by the Company's subsidiaries to the Company
(other than certain permitted exceptions, including payments made pursuant to
an intercorporate agreement and a tax sharing agreement). If an initial public
offering of the capital stock of any of the Company's subsidiaries is
consummated, the ability of such subsidiaries to pay dividends would be
diminished to the extent of any such capital stock sold to the public and the
ability of the Company's subsidiaries to make loans to the Company would be
limited to the extent that such transactions would have to be fair to the
holders of such capital stock.
The Company derives substantially all of its operating income from
wholly-owned subsidiaries. As a result of this holding company structure, the
creditors of the Company, including the holders of the Senior Subordinated
Notes and Notes, are structurally subordinated to all creditors of such
subsidiaries with respect to the assets and capital stock of such subsidiaries,
including the lenders pursuant to the Debt Financing, the holders of the Senior
Secured Notes or the Waxman USA Debt Instruments, as the case may be, and trade
creditors. Accordingly, in the event of a dissolution, bankruptcy or
reorganization of the Company, the holders of the Senior Subordinated Notes and
the Notes will not be entitled to receive amounts from the Company's
subsidiaries until after payment in full of all creditors of the subsidiaries
of the Company. All of the Debt Financing is at the subsidiary level. In
addition, Waxman USA is guaranteeing the obligations of the Company under the
Senior Secured Notes and the capital stock of Consumer Products and WOC and 65%
of the capital stock of TWI are being pledged to the holders of Senior Secured
Notes. Thus, in effect, the Notes are structurally subordinated to the Senior
Secured Notes. Although the Company expects to refinance the Senior Secured
Notes with the Waxman USA Debt Instruments, there can be no assurance that it
will be able to consummate such refinancing.
Restrictions Imposed by Terms of Indebtedness. The terms and conditions
of the instruments evidencing the Debt Financing, as well as other indebtedness
of the Company impose restrictions that affect, among other things,
- 3 -
<PAGE> 21
the ability of the Company and/or its subsidiaries to incur debt, pay
dividends, make acquisitions, create liens, sell assets, make certain
investments and materially change the nature or conduct of its business. The
breach of any of the foregoing covenants would result in a default under the
applicable debt instrument permitting the holders of indebtedness outstanding
thereunder, subject to applicable grace periods, to accelerate such
indebtedness. Any such acceleration may cause a cross-default under the
instruments evidencing other indebtedness of the Company, and there can be no
assurance that the Company would have sufficient funds to repay or assets to
satisfy such obligations.
Control by Principal Stockholders; Certain Anti-Takeover Effects.
Approximately 16.7% (and 12.7%, assuming the exercise of all of the Warrants)
of the outstanding shares of the Company's common stock, par value $.01 per
share, and 80.1% of the outstanding shares of the Company's Class B common
stock are held by Melvin and Armond Waxman, brothers and respectively, the
Chairman of the Board and Co-Chief Executive Officer and the President and
Co-Chief Executive Officer of the Company (the "Principal Stockholders").
These holdings represent 61.2% (and 60.0%, assuming the exercise of all of the
Warrants) of the outstanding voting power of the Company. Consequently, the
Principal Stockholders have sufficient voting power to elect the entire Board
of Directors of the Company and, in general, to determine the outcome of any
corporate transaction or other matter submitted to the stockholders for
approval, including any merger, consolidation, sale of all or substantially all
of the Company's assets or "going private" transactions, and to prevent or
cause a change in control of the Company. In addition, Messrs. Melvin and
Armond Waxman may have an interest in pursuing transactions, including
transactions with affiliates, that in their judgment could enhance the value of
the Company's capital stock, even though such transactions might involve risks
to the holders of the Notes. In addition, certain provisions in the Company's
Certificate of Incorporation, By-laws and debt instruments, including the
Change of Control provisions in the Indenture, may be deemed to have the effect
of discouraging a third party from pursuing a non-negotiated takeover of the
Company and preventing certain changes in control.
Deficiency of Earnings to Fixed Charges. In fiscal 1993, 1992 and 1991
and the nine months ended March 31, 1994 and 1993, the Company's earnings (as
defined in footnote 2 to Selected Financial Data) were insufficient to cover
its fixed charges by $15.7 million, $5.1 million, $2.8 million, $1.3 million
and $3.0 million, respectively. The Company's business strategy, described
herein, is designed to capitalize on the growth prospects for Barnett and
Consumer Products and thereby increase earnings. The Company believes that the
successful implementation of its business strategy will enable it to reduce or
eliminate the deficiency of earnings to fixed charges. However, there can be
no assurances regarding when such deficiencies will be reduced or eliminated or
that the deficiencies experienced in the past will not reoccur.
Foreign Sourcing. In fiscal 1993, products manufactured outside of the
United States accounted for approximately 21% of the total product purchases
made by the Company's continuing operations. Foreign sourcing involves a
number of risks, including the availability of letters of credit, maintenance
of quality standards, work stoppages, transportation delays and interruptions,
political and economic disruptions, foreign currency fluctuations,
expropriation, nationalization, the imposition of tariffs and import and export
controls and changes in governmental policies (including United States' policy
toward the foreign country where the products are produced), which could have
an adverse effect on the Company's business. The occurrence of certain of
these factors would delay or prevent the delivery of goods ordered by the
Company's customers, and such delay or inability to meet delivery requirements
would have an adverse effect on the Company's results of operations and could
have an adverse effect on the Company's relationships with its customers. In
addition, the loss of a foreign manufacturer could have a short-term adverse
effect on the Company's business until alternative supply arrangements were
secured.
Reliance on Key Customers. During fiscal 1993, Kmart and its
subsidiaries, Consumer Products' largest customer, accounted for approximately
12% of the Company's continuing operations' net sales. During the same period,
Consumer Products' ten largest customers accounted for approximately 23% of the
Company's continuing operations' net sales. The loss of or a substantial
decrease in the business of Consumer Products' largest customers could have a
material adverse effect on the Company's continuing operations.
Lack of Public Market. The New Notes are new securities for which there
currently is no market. Although Citicorp Securities, Inc. and Merrill Lynch
have informed the Company that they currently intend to make a market
- 4 -
<PAGE> 22
in the New Notes, they are not obligated to do so, and any such market making
may be discontinued at any time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
The Company does not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
Original Issue Discount Consequences. Each New Note will be issued at
an original issue discount and holders of New Notes will be required to
recognize the original issue discount as ordinary income in advance of the
receipt of the cash payments to which the income is attributable, regardless of
their method of accounting. The tax basis of each New Note in the hands of the
holder thereof will be increased by the amount of any original issue discount
on the New Note that is included in the Holder's gross income and decreased by
the amount of any payments received by the Holder. See "Certain Federal Income
Tax Consequences--Original Issue Discount."
Under the Indenture, in the event of an acceleration of the maturity of
Notes prior to June 1, 1999, Holders of Notes will be entitled to recover an
amount equal to the Accreted Amount of such Notes, which amount will be less
than the face amount of such Notes. See "Description of the Notes--Events of
Default."
If a bankruptcy case were commenced by or against the Company under the
Bankruptcy Code, the claim of a Holder of Notes with respect to the principal
amount thereof may be limited to an amount equal to the sum of (i) the issue
price of Notes and (ii) the portion of the original issue discount which is not
deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code.
Accordingly, even assuming sufficient funds were available, the claims of
Holders of Notes may entitle them to less than the amount to which they would
otherwise have been entitled under the Indenture. In addition, there can be no
assurance that a bankruptcy court would compute the accrual of interest by the
same method as that used for the calculation of original issue discount under
federal income tax law and, accordingly, a Holder may be required to recognize
gain or loss in the event of a court ordered distribution.
- 5 -
<PAGE> 23
SELECTED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
The selected historical financial data for the fiscal years 1989
through 1993 are derived from the Company's audited consolidated financial
statements. The historical information as of and for the nine month periods
ended March 31, 1993 and 1994 is unaudited, but in the Company's opinion
reflects all adjustments (consisting only of normal recurring adjustments)
which are necessary to present fairly the Company's financial position and
results of operations as of such dates and for such periods. Results for the
nine months ended March 31, 1994 are not necessarily indicative of the results
to be expected for the fiscal year ending June 30, 1994. Effective March 31,
1994, the Company adopted a plan to dispose of its Canadian subsidiary, Ideal.
Accordingly, Ideal is reported as a discontinued operation at March 31, 1994,
and the prior period consolidated financial statements have been reclassified
to conform to the current period presentation.
- 6 -
<PAGE> 24
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------- ---------
1989 1990 1991 1992 1993 1993 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Net sales $ 194,585 $186,315 $186,327 $197,738 $204,778 $153,957 $160,245
Cost of sales 128,038 120,976 121,397 127,115 137,244 102,035 104,180
-------- --------- -------- -------- -------- -------- --------
Gross profit 66,547 65,338 64,930 70,623 67,534 51,922 56,065
Operating expenses 48,479 49,452 50,263 51,824 56,081 39,729 41,769
Restructuring and other
nonrecurring charges -- -- -- 3,900 6,762 -- --
-------- --------- -------- -------- -------- -------- --------
Operating income (loss) 18,068 15,886 14,667 14,899 4,691 12,193 14,296
Interest expense, net 8,136 12,796 17,462 20,025 20,365 15,242 15,635
-------- --------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary charges and
cumulative effect of accounting
change 9,932 3,090 (2,795) (5,126) (15,674) (3,049) (1,339)
Provision (benefit) for income taxes 3,794 958 (680) (768) 216 (1,429) --
-------- --------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary charges
and cumulative effect of
accounting change 6,138 2,132 (2,115) (4,358) (15,890) (1,620) (1,339)
Discontinued Operations - Ideal
Income (loss) from discontinued
operations, net of taxes 1,183 4,656 4,343 1,146 (11,240) 1,300 (3,249)
Loss on disposal, without
tax benefit -- -- -- -- -- -- (38,343)
-------- --------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
charges and cumulative effect of
accounting change 7,321 6,788 2,228 (3,212) (27,130) (320) (42,931)
Extraordinary charges, early
repayment of debt -- (320) -- (1,186) -- -- (6,625)
Cumulative effect of accounting change -- -- -- -- (2,110) (2,110) --
-------- --------- -------- -------- -------- -------- --------
Net income (loss) $ 7,321 $ 6,468 $ 2,228 $ (4,398) $(29,240) $ (2,430) $(49,556)
======== ========= ======== ======== ======== ======== ========
</TABLE>
- 7 -
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Primary earnings per share:
Income (loss) from continuing
operations before extraordinary
charges and cumulative effect
of accounting change $ .67 $ .22 $ (.22) $ (.44) $ (1.36) $ (.14) $ (.11)
Discontinued Operations:
Income (loss) from discontinued
operations .13 .48 .45 .11 (.97) .11 (.28)
Loss on disposal -- -- -- -- -- -- (3.29)
Extraordinary charge -- (.03) -- (.12) -- -- (.57)
Cumulative effect of accounting change -- -- -- -- (.18) (.18) --
------- ------- -------- -------- --------- ------- -------
Net income (loss) $ .80 $ .67 $ .23 $ (.45) $ (2.51) $ (.21) $ (4.25)
======= ======== ======== ======== ========= ======= ========
Cash dividends per share:
Common stock $ .10 $ .12 $ .12 $ .12 $ .08 .06 $ --
Class B common stock .08 .11 .12 .12 .08 .06 --
Ratio of earnings to fixed charges(2) 2.0x 1.2x -- -- -- -- --
OTHER DATA(1):
EBITDA(3) $ 21,581 $ 20,299 $ 19,407 $ 24,523 $ 19,551 $17,242 $19,237
Depreciation and amortization 3,513 4,413 4,740 5,724 8,099 5,049 4,940
Capital expenditures 3,453 2,806 1,110 3,193 1,336 791 2,280
Cash interest expense 8,938 14,303 18,377 20,203 19,536 14,627 15,011
Ratio of EBITDA to cash interest
expense(4) 2.41x 1.42x 1.06x 1.21x 1.00x 1.18x 1.28x
BALANCE SHEET DATA (AT END OF PERIOD)(1):
Working capital $117,777 $136,989 $133,654 $135,886 $119,187 $133,862 $ 79,457
Total assets(5) 235,485 249,892 236,437 237,481 197,051 222,733 174,677
Total debt 178,976 177,118 167,274 151,000 164,403 158,994 175,206
Stockholders' equity (deficit) (5) 26,934 39,242 38,066 40,827 7,496 37,258 (37,949)
</TABLE>
- 8 -
<PAGE> 26
WAXMAN INDUSTRIES
NOTES TO SELECTED FINANCIAL DATA
(1) Data relating to continuing operations reflects the acquisition of
Western American Manufacturing, Inc. in November 1990, which was
accounted for as a purchase. Discontinued operations data relates to
Ideal which was acquired in May 1989 and accounted for as a purchase.
(2) For purposes of calculating this ratio, "earnings" consist of income
(loss) from continuing operations before income taxes, extraordinary
charges and cumulative effect of accounting change and fixed charges,
and "fixed charges" consist of interest expense, including the
interest portion of rental obligations on capitalized and operating
leases (which is deemed by the Company to be one-third of all of its
rental obligations with respect to operating leases). Fiscal 1991
earnings were insufficient to cover fixed charges by $2.8 million.
Fiscal 1992 earnings were insufficient to cover fixed charges by $5.1
million. Fiscal 1993 earnings were insufficient to cover fixed
charges by $15.7 million. Earnings for the nine months ended March
31, 1993 and 1994 were insufficient to cover fixed charges by $3.0
million and $1.3 million, respectively.
(3) EBITDA represents income (loss) from continuing operations before
income taxes, extraordinary charges and cumulative effect of
accounting change plus interest expense, nonrecurring charges (which
were primarily non-cash), depreciation and amortization. The Company
has included EBITDA data (which is not a measure of financial
performance under generally accepted accounting principles) because
such data is used by certain investors to measure the ability to
service debt. EBITDA is not presented herein as an alternative to net
income, as an indicator of the Company's operating performance, or to
cash flows, as a measure of liquidity, but rather to provide
additional information relating to the Company's ability to service
its debt.
(4) For purposes of calculating this ratio, cash interest expense does not
include amortization of deferred financing costs.
(5) Certain March 31, 1993 Balance Sheet Data has been restated for the
cumulative effect of an accounting change.
- 9 -
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General.
The Company operates in a single business segment--the distribution of
plumbing, electrical and hardware products. The Company's business is
conducted in the United States primarily through Barnett and Consumer Products.
The Company's recent operating results have been adversely affected by
restructuring as well as several other nonrecurring charges. In fiscal 1993,
the Company recorded $6.8 million of restructuring and other nonrecurring
charges as well as $1.2 million of charges included in operating expenses which
the Company believes are nonrecurring. In fiscal 1992, the Company recorded
$3.9 million of restructuring and other nonrecurring charges.
The fiscal 1993 restructuring charge consists of $4.6 million related
to the expected losses in connection with the disposal of three small operating
units. The decision to dispose of the three entities was based in part on the
Company's strategy to refocus and build on its core businesses in the U.S.
(i.e., Consumer Products and Barnett). The Company completed the sale of one
of these operating units in October 1993. The Company was unable to come to
terms with the prospective buyer of the other two entities and the consummation
of a sale of these businesses is not expected to occur in the foreseeable
future, if at all. The remainder of the restructuring charge includes $1.6
million of costs incurred to consolidate administrative functions and transfer
two of Consumer Products' domestic packaging facilities to Mexico in order to
take advantage of that country's lower labor costs and $0.6 million related to
the Company's decision not to proceed with the securities offering of Barnett
in fiscal 1993, as it was unlikely that such offering would be consummated in
the near future. In addition, fiscal 1993 operating expenses include $1.2
million of accelerated amortization relating to certain warehouse start-up and
catalog costs to conform with prevailing industry practice. The change to
accelerated amortization was made during the fourth quarter of fiscal 1993 and
applied retroactively to July 1, 1992. The $1.2 million of accelerated
amortization, which is included in selling, general and administrative expense,
is primarily the result of the introduction of a new catalog, and in
management's opinion, is not indicative of the expected impact of accelerated
amortization on future operating results.
The fiscal 1992 restructuring charge consisted of a $3.9 million
capital loss realized upon the sale of the Company's portfolio of debt
securities.
Effective March 31, 1994, the Company adopted a plan to dispose of its
Canadian subsidiary, 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 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
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<PAGE> 28
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. On May 30, 1994, Ideal was declared bankrupt by
the Canadian court and, as a result, the Company's ownership and control of
Ideal effectively ceased on such date. 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 Notes 3 and 12 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.
The following table sets forth certain items reflected in the
Company's Consolidated Statements of Income expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
-------------------- ---------
1993 1992 1991 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross profit 33.0% 35.7% 34.8% 35.0% 33.7%
Operating expenses 27.4 26.2 27.0 26.1 25.8
Restructuring and other
nonrecurring charges 3.3 2.0 -- -- --
Operating income (loss) 2.3 7.5 7.9 8.9 7.9
Interest expense, net 9.9 10.1 9.4 9.7 9.9
Income (loss) from continuing
operations before income
taxes, extraordinary charge
and cumulative effect of
accounting change (7.6) (2.6) (1.5) (0.8) (2.0)
Income (loss) before extraordinary
charge and cumulative effect
of accounting change (13.2) (1.6) 1.2 (26.8) (0.2)
Net income (loss) (14.3) (2.2) 1.2 (30.9) (1.6)
</TABLE>
NINE MONTHS ENDED MARCH 31, 1994 VERSUS MARCH 31, 1993
Net Sales.
Net sales from the Company's continuing operations 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. Belanger's net sales for the 1994 nine
month period totaled $1.5 million as compared to $5.0 million in the 1993 nine
month period. Net sales increased 6.5% for the nine months ended March 31,
1994 after excluding the impact of Belanger. The net sales increases are
primarily the result of the continued growth of Barnett. Barnett's net sales
increased $8.7 million, or 14.2%, from $61.2 million in the 1993 nine month
period to $69.9 million in the 1994 nine month period. Sales of new products
accounted for $5.0 million of the increase for the 1994 nine month period. The
remainder of Barnett's increases were the result of opening additional mail
order warehouses, as well as the growth of Barnett's existing
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<PAGE> 29
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 Consumer
Products. Consumer Product's net sales increased 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 existing product lines to several of its existing customers.
Management believes that the change in the continuing operation's net sales is
primarily the result of changes in volume.
Gross Profit.
The Company's gross margins 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 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 relating to the pricing of new business. Management does not believe
that the decline in margin is a continuing trend as currently expected business
opportunities involve higher margin products. The sale of Belanger had no
significant affect on gross margin. Excluding the impact of Belanger, gross
margin would have been 33.6% in the 1993 nine month period as compared to 35.0%
in the 1994 nine month period.
Operating Expenses.
The Company's operating expenses increased 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. Operating expenses increased 8.3% for the 1994
nine month period from $38.1 million in the 1993 nine month period to $41.2 in
the 1994 nine month period excluding the sale of Belanger. These increases
were due primarily to increases in operating expenses for Barnett. Barnett's
operating expenses increased approximately $2.5 million in the 1994 nine month
period. The majority of the increase in Barnett's operating expenses related
to increased warehouse and selling and advertising costs. The increase in
warehouse and selling and advertising costs was $.5 million and $1.0 million,
respectively. These increases primarily related to the opening of new mail
order warehouses during the 1994 nine month period, and increased promotional
activity.
Operating Income.
The Company's operating income totaled $14.3 million or 8.9% of net
sales and $12.2 million or 7.9% of net sales for the 1994 and 1993 nine months
period, respectively.
The Company's operating income increased 17.3% for the 1994 nine month
period, as compared with the comparable prior year periods. Excluding the
impact of Belanger, which was sold in October 1993, operating income increased
18.8%. 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 $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 $158.1 million in the 1993 nine
month period, to $168.5 million for the same period 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 the 1993 nine month period, to 12.1%
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<PAGE> 30
in the same period in the current fiscal year. As a result of the debt
refinancing, there will be a savings of cash interest expense of $6.9 million
annually for five years. In addition, as a result of the debt refinancing, the
level of the Company's debt increased approximately $11.0 million. The
additional indebtedness will offset, in part, the cash interest savings
discussed above. The Company's weighted average interest is expected to
increase by approximately 0.5% as a result of the completion of the
refinancing.
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.
Loss From Continuing Operations.
The Company's loss from continuing operations 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 nine
month period 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.
Although no specific transaction is currently contemplated, the
Company believes that additional financing transactions will be required during
the next twenty-four months to provide funds to satisfy, or to refinance the
notes requiring, its sinking fund payments. See "-- Liquidity and Capital
Resources." The Company expects that additional extraordinary charges will be
incurred as a result of any such financing transactions. There can, however,
be no assurances with respect to the timing and magnitude of any such
extraordinary changes.
Net Loss.
The Company's net loss (including those relating to Ideal) for the
1994 nine month period 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.
- 13 -
<PAGE> 31
FISCAL 1993 VERSUS FISCAL 1992
Net sales.
The Company's net sales from continuing operations for fiscal 1993
totaled $204.8 million compared with $197.7 million in fiscal 1992, an increase
of 3.6%. Barnett's net sales increased 14.9% from $72.1 million in fiscal 1992
to $82.9 million in fiscal 1993. New product introductions accounted for $5.6
million of this increase. In addition, the new catalog of maintenance products
introduced in January 1992 generated approximately $2.2 million in incremental
sales. The remainder of Barnett's increase was the result of the opening of
additional mail order warehouses, as well as the growth of Barnett's existing
customer base. Barnett opened three additional mail order warehouses during
fiscal 1993, increasing the total number of warehouses to 26. The increase
from Barnett was offset, in part, by lower net sales from Consumer Products.
Consumer Products' net sales totaled $67.5 million in fiscal 1993 compared with
$70.0 million in fiscal 1992, a decrease of 3.6%. Management believes that the
change in the domestic operations' net sales is primarily the result of changes
in volume.
Gross profit.
The Company's gross margin was 33.0% in fiscal 1993 compared with
35.7% in fiscal 1992. Barnett's gross margin declined approximately one-half
of one percentage point and Consumer Products' gross margin declined
approximately four percentage points. The majority of Consumer Products'
decline in margin is attributable to proportionately lower sales of higher
margin packaged products as well as competitive pressures within its markets
relating to the pricing of new business. Management expect Consumer Products'
margin decline to continue in the first part of fiscal 1994.
Operating expenses.
The Company's operating expenses totaled $56.1 million or 27.4% of net
sales, in fiscal 1993 compared with $51.8 million, or 26.2% of net sales, in
fiscal 1992, an increase of $4.3 million, or 8.2%. Approximately $1.2 million
of this increase relates to accelerated amortization of certain warehouse
start-up and catalog costs during fiscal 1993 to conform with prevailing
industry practice. This change was made during the fourth quarter and was
applied retroactively to July 1, 1992. The effect of this change on fiscal
1993 results was to increase amortization expense by $1.2 million. This
increase is primarily the result of the introduction of a new catalog, and in
management's opinion, is not indicative of the expected impact of accelerated
amortization on future operating results. The cumulative effect of this change
on prior years totaled $2.1 million and is reported separately in the income
statement, without tax benefit, as a change in accounting. Excluding the
impact of this item, operating expenses were up 6.7% primarily due to increases
at Barnett. Barnett's operating expenses (excluding the accelerated
amortization) increased approximately $2.1 million or 13.4%, which is less than
Barnett's 14.9% increase in net sales between the years. Approximately $1.3
million of Barnett's increase in operating expenses is related to the opening
of new mail order warehouses. Consumer Products' operating expenses increased
approximately $0.4 million between years.
Restructuring and other non-recurring charges.
As discussed above, the Company recorded several nonrecurring charges
during fiscal 1993 including an $6.8 million restructuring charge. Fiscal 1992
results include a $3.9 million restructuring charge which represented a capital
loss realized upon the sale of the Company's portfolio of debt securities.
- 14 -
<PAGE> 32
Operating income.
The Company's operating income totaled $4.7 million in fiscal 1993
compared with $14.9 million in fiscal 1992, a decrease of 68.5%. Current year
results were negatively impacted by the $4.2 million restructuring charge
described above, and the $1.2 million of accelerated amortization described
above. The remainder of the decrease was primarily attributable to a $2.5
million decline of Consumer Products' gross margin.
Interest expense.
The Company's net interest expense totaled $20.4 million for fiscal
year 1993 compared with $20.0 million for fiscal year 1992, an increase of
1.7%. Average borrowings outstanding totaled $159.1 million in fiscal 1993, as
compared with $159.7 million in fiscal 1992. Weighted average borrowings in
fiscal 1992 included amounts which the Company borrowed under a domestic term
loan which were invested in highly liquid short-term securities and used for
working capital purposes until the Company obtained its revolving credit
facility in September 1991. Excluding the impact of these borrowings, average
borrowings for fiscal 1992 were $156.4 million. The weighted average interest
rate for fiscal year 1993 was 12.9% compared with 13.2% in the prior year.
Loss From Continuing Operations.
The Company's fiscal 1993 loss from continuing operations totaled
$15.9 million compared with a loss of $4.4 million in fiscal 1992.
Discontinued Operations.
The Company's fiscal 1993 net loss from discontinued operations
totaled $11.2 million compared with net income of $1.1 million in fiscal 1992.
Net income (loss).
The Company's fiscal 1993 net loss totaled $29.2 million and includes
a $2.1 million charge for the cumulative effect of the change in accounting
discussed above. The net loss for fiscal 1992 was $4.4 million and included a
$1.2 million extraordinary charge for the early repayment of debt. The Company
has not been able to benefit from any of its current year losses for tax
purposes. As a result, it has available $11.5 million of domestic net
operating loss carryforwards to offset future tax provisions. See "Impact of
New Accounting Standards" for a discussion of the new accounting standard for
income taxes and the impact it will have on the Company.
FISCAL 1992 VERSUS FISCAL 1991
Net sales.
The Company's net sales from continuing operations for fiscal 1992
totaled $197.7 million compared with $186.3 million in fiscal 1991, an increase
of 6.1%. Barnett's net sales increased 15.4% from $62.5 million in fiscal 1991
to $72.1 million in fiscal 1992. New product introductions accounted for $5.9
million of this increase. In addition, the new catalog of maintenance products
introduced in January 1992 generated approximately $1.1 million of net sales in
fiscal 1992. The remainder of Barnett's increase was the result of the opening
of additional mail order warehouses, as well as the growth of Barnett's
existing customer base. During fiscal 1992, Barnett opened four additional
mail order warehouses bringing its total number of warehouses to 23.
- 15 -
<PAGE> 33
Consumer Products' net sales in fiscal 1992 totaled $70.0 million, an increase
of 1.9% over fiscal 1991 sales of $68.7 million.
Gross profit.
The Company's gross margin was 35.7% in fiscal 1992 compared with
34.8% in fiscal 1991. Barnett's gross margin increased approximately one-third
of one percentage point as a result of a more profitable product mix and the
use of more economical sources of purchased materials. Consumer Products'
gross margin remained constant between years.
Operating expenses.
The Company's operating expenses totaled $51.8 million, or 26.2% of
net sales, in fiscal 1992 compared with $50.3 million, or 27.0% of net sales,
in fiscal 1991, an increase of $1.5 million, or 3.1%. Barnett's operating
expenses increased approximately $2.2 million of which approximately $0.7
million is related to the opening of new mail order warehouses.
Restructuring and other nonrecurring charges.
During the fourth quarter of fiscal 1992, the Company's results were
affected by nonrecurring charges totaling $3.9 million, which represents a
capital loss realized upon the sale of the Company's portfolio of debt
securities.
Operating income.
The Company's operating income was $14.9 million in fiscal 1992
compared with $14.7 million in fiscal 1991, an increase of 1.6%. Such increase
was primarily the result of the higher net sales and gross profit levels.
Interest expense.
Net interest expense totaled $20.0 million for fiscal 1992 compared
with $17.5 million for fiscal 1991. Average borrowings outstanding totaled
$159.7 million in fiscal 1992 compared with $153.3 million in the prior year.
The increase in average borrowings relates primarily to borrowings for
short-term working capital needs. In addition, borrowings for fiscal 1992
include amounts borrowed under the Company's domestic term loan which were
invested in highly liquid short-term securities during the first quarter of the
fiscal year. The amounts invested were subsequently used in connection with
the repayment of the domestic term loan. Excluding the impact of these
borrowings, average borrowings for fiscal 1992 were $156.4 million. The
weighted average interest rate for fiscal 1992 increased to 13.2% from 12.3% in
the prior year primarily due to the issuance of the Senior Secured Notes in
September 1991, the proceeds of which were used to retire borrowings under the
Company's then existing credit facilities.
Loss from Continuing Operations.
The Company's fiscal 1992 loss from continuing operations totaled $4.4
million compared with a loss of $2.1 million in fiscal 1991.
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<PAGE> 34
Discontinued Operations.
The Company's fiscal 1992 net income from discontinued operations
totaled $1.1 million compared with net income of $4.3 million in fiscal 1991.
Extraordinary Charge.
During the fourth quarter of fiscal 1992, the Company repurchased
certain debt securities and incurred an extraordinary charge which totaled $1.2
million (net of the applicable income tax benefit). The extraordinary charge
included the market premium paid and the accelerated amortization of
unamortized debt discount and issuance costs.
Net income (loss).
The Company's fiscal 1992 net loss totaled $4.4 million and included a
$1.2 million extraordinary charge for the early repayment of debt. Net income
for fiscal 1991 was $2.2 million.
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 12 to Notes to Consolidated
Financial Statements.
As part of the restructuring, the Company exchanged $50 million of its
Senior Subordinated Notes for $50 million initial accreted value of Deferred
Coupon Notes. Approximately $48.8 million of the Senior 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 Senior Subordinated
Notes 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 the Senior Secured Notes.
As part of the Reorganization, the Operating Companies entered into a
$55 million, four-year, secured credit facility with an affiliate of Citibank,
N.A., as agent for certain financial institutions. 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 is subject to borrowing base formulas. Borrowings under the
Domestic Credit Facility bear interest at (1) 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 reduced by up to
0.5% if Waxman USA achieves certain performance criteria based on the ratio of
EBITDA to fixed charges. The facility includes a letter of credit subfacility
of $20 million. The Domestic Credit Facility is 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 and 100% of the capital stock of another such subsidiary. In
addition, the facility requires the Operating Companies to maintain cash
collateral accounts into which all available funds will be deposited and
applied to service the facility on a daily basis. The Domestic
- 17 -
<PAGE> 35
Credit Facility prohibits dividends and distributions by the Operating
Companies except in certain limited instances. The Domestic Credit Facility
contains customary negative, affirmative and financial covenants and
conditions. On the date hereof, availability under the Domestic Credit
Facility is approximately $__ million.
The Domestic Credit Agreement contains customary events of default,
including the following: (i) any Operating Company shall fail to make any
payment of principal or interest or any other amount due under the agreements
related to the Domestic Credit Facility or fail to perform any covenant (after
the expiration of any applicable grace period) thereunder, or any
representation or warranty made in connection therewith shall prove to have
been incorrect in any material respect when made or deemed made; (ii) the
Company or any of its subsidiaries (other than Ideal Holding Group and its
subsidiaries) shall fail to pay any indebtedness having a principal amount of
$5,000,000 or more; or any other event shall occur or condition shall exist
under any agreement or instrument relating to any such indebtedness, if the
effect of such event or condition is to accelerate, or to permit the
acceleration of (after the expiration of any applicable period of grace), the
maturity of such indebtedness; or any such indebtedness shall become or be
declared to be due and payable, or required to be repaid (other than by a
regularly scheduled required prepayment), or the Company or any of its
subsidiaries (other than Ideal Holding Group and its subsidiaries) shall be
required to repurchase or offer to repurchase such indebtedness, prior to the
stated maturity thereof; (iii) certain events of bankruptcy with respect to the
Company or any of its subsidiaries (other than Ideal Holding Group and its
subsidiaries); (iv) there shall occur any Change of Control (as defined in the
Domestic Credit Facility); (v) there shall occur a Material Adverse Change (as
defined in the Domestic Credit Facility) or an event which would have a
Material Adverse Effect (as defined in the Domestic Credit Agreement).
As part of the Reorganization, the Operating Companies entered into a
$15.0 million three-year term loan with Citibank, N.A., as agent. The Domestic
Term Loan bears interest at a rate per annum equal to 2.0% over the interest
rate under the Domestic Credit Facility and is 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
of 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 contains negative,
affirmative and financial covenants, conditions and events of default
substantially the same as those under the Domestic Credit Facility.
See Note 12 to Notes to Consolidated Financial Statements for a more
complete discussion of the new domestic credit facility and domestic term loan.
On June 17, 1994, the Company purchased $1.875 million of its $2.03
million outstanding 9.5% Convertible Subordinated Debentures due 2007 pursuant
to its offer to purchase made on April 28, 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 cash cost to open a Barnett
warehouse is approximately $0.5 million, including approximately $250,000 for
inventory and approximately $250,000 from fixed assets, leasehold improvements
and startup costs.
The Company expects to incur approximately $0.5 million of costs
relating to the disposition of Ideal.
The Company currently has no significant principal repayment
requirements. Commencing March 1995, the Company will be required to make
quarterly principal payments of $1.0 million under its Domestic Term Loan. In
addition, the Company is required to make mandatory sinking fund payments of
$17.0 million relating
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<PAGE> 36
to its Senior Secured Notes on each of September 1, 1996 and 1997. The Company
is also required to make a mandatory sinking fund payment of $8.75 million
relating to its Senior Subordinated Notes on June 1, 1998.
As a result of the issuance of the Deferred Coupon Notes which reduces
cash interest requirements by approximately $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 (including the
Domestic Term Loan principal payments) for the next twenty-four months. The
Company believes that additional financing transactions will be required to
provide funds to satisfy, or to refinance the notes requiring its, sinking fund
payments.
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.
FIXED CHARGE COVERAGE RATIO
Fiscal 1991 earnings were insufficient to cover fixed charges by $2.8
million. Fiscal 1992 earnings were insufficient to cover fixed charged by $5.1
million. Fiscal 1993 earnings were insufficient to cover fixed charged by $5.1
million. Fiscal 1993 earnings were insufficient to cover fixed charges by
$15.7 million. Earnings for the nine months ended March 31, 1993 and 1994 were
insufficient to cover fixed charges by $3.0 million and $1.3 million,
respectively. The Company's business strategy, described herein, is designed
to capitalize on the growth prospects for Barnett and consumer Products and
thereby increase earnings. The Company believes that the successful
implementation of its business strategy will enable it to reduce or eliminate
the deficiency of earnings to fixed charges. However, there can be no
assurances regarding when such deficiencies will be reduced or eliminated or
that the deficiencies experienced in the past will not reoccur.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1992, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 109, "Accounting for Income Taxes." The Company will adopt SFAS
No. 109 during the first quarter of its fiscal year ending June 30, 1994. SFAS
No. 109 will require the Company to recognize 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.
The Company does not anticipate that a benefit will be recognized upon the
initial adoption of SFAS No. 109 or that its adoption will have a material
effect upon its results of operations or financial position. However, to the
extent that the Company is able to recognize tax benefits in the future, such
recognition will favorably effect future results of operations. The FASB has
also issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions" and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." The Company does not currently maintain any
postretirement or postemployment benefit plans or programs which would be
subject to such accounting standards.
- 19 -
<PAGE> 37
BUSINESS
GENERAL
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 D-I-Y retailers, mass merchandisers, smaller
independent retailers and plumbing, electrical repair and remodeling
contractors.
The Company's business is conducted through its indirect wholly owned
subsidiaries, Barnett, Consumer Products, WOC and TWI. Through their
nationwide network of warehouses and distribution centers, Barnett and Consumer
Products provide their customers with a single source for an extensive line of
competitively priced, quality products. The Company's strategy of being a
low-cost supplier is facilitated by its purchase of a significant portion of
its products from low-cost foreign sources. Barnett's marketing strategy is
directed predominantly to contractors and independent retailers, as compared to
Consumer Products' strategy of focusing on mass merchandisers and larger D-I-Y
retailers. The Company's continuing operations' consolidated net sales were
$204.8 million in fiscal 1993.
BUSINESS STRATEGY
During the 1980's, the Company achieved significant revenue increases
through a combination of internal growth and strategic acquisitions of
businesses that marketed similar or complementary product lines. During the
1990's, the Company has initiated steps and is continuing to focus on
integrating the acquired businesses and improving operating efficiencies. The
Company's current strategy includes the following elements:
o Expansion of Barnett. Since its acquisition in 1984,
Barnett's revenues and operating income have grown at compound
annual rates of 11.3% and 11.1%, respectively, as a result of
(i) the expansion of its warehouse network, (ii) the
introduction of new product offerings and (iii) the
introduction in January 1992 of an additional catalog targeted
at a new customer base. The Company intends to continue to
expand Barnett's national warehouse network and expects to
open as many as four new warehouses during each of the next
several fiscal years. Barnett expects to fund this expansion
using cash flow from operations and/or available borrowings
under the Debt Financing. Barnett also intends to continue
expanding its product offerings, allowing its customers to
utilize its catalogs as a means of one-stop shopping for many
of their needs. In an effort to further increase
profitability, Barnett is also increasing the number of higher
margin product offerings bearing its proprietary trade names
and trademarks.
o Enhance Competitive Position of Consumer Products. During the
past 24 months, Consumer Products has restructured its sales
and marketing functions in order to better serve the needs of
its existing and potential customers. Consumer Products
restructured its sales department by defining formal regions
of the country for which regional sales managers would have
responsibility. Prior to the restructuring, sales managers
had responsibility for specific customers without regard to
location. In addition, as part of the restructuring, in
fiscal 1993 a marketing department was established separate
and apart from the sales department. The marketing department
is staffed with product managers who have the responsibility
of identifying new product programs. The restructuring of the
sales and marketing departments is complete at this time.
Consumer Products' strategy is to achieve consistent growth by
expanding its business with existing customers and by
developing new products and new customers. In order to
increase business with existing customers, Consumer Products
is focusing on developing strategic alliances
- 20 -
<PAGE> 38
with its customers. Consumer Products seeks to (i) introduce
new products within existing categories, as well as new
product categories, (ii) improve customer service, (iii)
introduce full service marketing programs and (iv) achieve
higher profitability for both the retailer and Consumer
Products. Management believes that Consumer Products is well
positioned to benefit from the trend among many large
retailers to consolidate their purchases among fewer vendors.
BARNETT
Barnett markets over 8,000 products to more than 32,000 active
customers through comprehensive quarterly catalogs, supplemented by monthly
promotional flyers and supported by telemarketing operations. Barnett services
its customers, who are primarily plumbing and electrical contractors serving
the repair and remodeling markets and independent retailers, through its
growing, nationwide network of 28 mail order warehouses. Barnett also
distributes a specialized quarterly catalog of maintenance products (also
supplemented by monthly promotional flyers) that is directed only to customers
responsible for the maintenance of hotels, motels, office buildings, healthcare
facilities and apartment complexes. The Company believes that this marketing
strategy effectively positions Barnett to continue to expand its customer base
and increase sales to existing customers. In fiscal 1993, Barnett's largest
customer accounted for less than 2% of Waxman USA's net sales and its top-ten
customers accounted for less than 6% of Waxman USA's net sales. Barnett's
average sale is $350. Barnett's net sales were approximately $83 million in
fiscal 1993.
Barnett was acquired by the Company in 1984. Since the acquisition,
Barnett has increased its number of warehouses from three to 28 and the number
of items in its catalog from 2,000 to 8,000. During this period, the number of
active accounts serviced by Barnett increased from 6,000 to over 32,000.
Barnett has added ten warehouses during the last three full fiscal years and
two warehouses to date in calendar 1994. Barnett plans to open up to four
warehouses annually for the next several years. Barnett has been able to
maintain its overall operating margins throughout its expansion.
Based on management's experience and knowledge of the industry, the
Company believes, in the absence of any applicable statistics, that Barnett is
the only national mail order and telemarketing operation distributing plumbing,
electrical and hardware products in the United States. The Company believes
that Barnett has significant advantages over its regional and national
competitors. Due to its size and volume of purchases, Barnett is able to
obtain purchase terms which are more favorable than those available to its
competition, enabling it to offer prices which are generally lower than those
available from its competitors. In addition to Barnett's competitive pricing
strategy, by offering over 8,000 products, Barnett is able to provide its
customers with a single source of supply for all of their needs.
Marketing and Distribution
Barnett markets its products nationwide principally through regular
catalog and promotional mailings to existing and potential customers, supported
by telemarketing operations providing 24-hour-a-day, toll-free ordering and an
expanding network of 28 warehouses allowing for delivery to customers generally
within one day of the receipt of an order. The telemarketing operations are
utilized to make telephonic sales presentations to certain potential customers
only after these customers have received written promotional materials.
Barnett's telemarketing operations (as well as all other administrative
functions) are centralized at Barnett's Jacksonville, Florida headquarters.
Catalogs
- 21 -
<PAGE> 39
Barnett's in-house art department produces the design and layout for
its catalogs and promotional mailings, including the quarterly catalog, the
monthly promotional flyers and Barnett's catalog of maintenance products.
Barnett's catalogs are indexed and illustrated, provide simplified pricing and
highlight new product offerings.
Barnett mails its principal catalog, containing plumbing, electrical
and hardware products, to over 32,000 active customers, including hardware and
building supply stores, lumberyards and plumbing, electrical repair and
remodeling contractors. The quarterly catalog is supplemented by monthly
promotional flyers mailed to approximately 180,000 active and potential
customers. In 1992, Barnett introduced a new semi-annual catalog of
maintenance products designed to appeal to customers responsible for the
maintenance of hotels, motels, healthcare facilities, office buildings and
apartment complexes. Since the maintenance catalog was introduced in 1992,
Barnett has added approximately 6,000 new maintenance accounts.
Barnett makes its initial contact with potential customers primarily
through promotional flyers. Barnett obtains the names of prospective customers
through the rental of mailing lists from outside marketing information services
and other sources. Barnett uses sophisticated proprietary information systems
to analyze the results of individual catalog and promotional flyer mailings and
uses the information derived from these mailings to target future mailings.
Barnett updates its mailing lists frequently to delete inactive customers.
Telemarketing
Barnett's telemarketing operations have been designed to make ordering
its products as convenient and efficient as possible. Barnett offers its
customers a nationwide toll-free telephone number which accepts orders on a
24-hour-a-day basis. Calls are handled by members of Barnett's well-trained
staff of 42 telemarketers who utilize Barnett's proprietary, on-line order
processing system. This system provides the telemarketing staff with access to
information about products, pricing and promotions which enables them to better
serve the customer. Barnett's telemarketing staff handles approximately 1,600
incoming calls per day.
After an order is received, a computer credit check is performed and
if credit is approved, the order is transmitted to the warehouse located
nearest the customer and is shipped within 24 hours.
In addition to receiving incoming calls, Barnett's telemarketing
operations are also utilized to make telephonic sales presentations to
potential customers who have received promotional flyers from Barnett. Also,
for several months prior to the opening of new mail order warehouses, Barnett
utilizes its telemarketing operations to generate awareness of Barnett, its
product offerings and the upcoming opening of new mail order warehouses located
near the target customers.
Barnett's telemarketing operations and information systems provide its
management with current market information such as customer purchasing patterns
and purchases, competitive pricing data, and potential new products. This
information allows Barnett to quickly react to and capitalize on business
opportunities.
Warehouses
Barnett currently has four warehouses in Texas, three in Florida and
two in each of Pennsylvania, New York and California. The remaining 15
warehouses are dispersed among an equal number of states. Barnett's warehouses
are located in areas meeting certain criteria for overall population and
potential customers. Typical warehouses have approximately 15,000 to 18,000
square feet of space of which up to 600 square feet are devoted to
over-the-counter sales. Barnett has initiated a program to enlarge product
displays in the counter area of the warehouses in order to display the breadth
of its expanding product line.
- 22 -
<PAGE> 40
Barnett's experience indicates that customers prefer to order from
local suppliers and that many local tradespeople prefer to pick up their orders
in person rather than to have them delivered. Therefore, Barnett intends to
continue the expansion of its warehouse network in order to reduce the distance
between it and the customer. For the year ended June 30, 1993, approximately
23% of Barnett's net sales were picked up by Barnett's customers.
The factors considered in site selection include the number of
prospective customers in the local target area, the existing sales volume in
such area and the availability and cost of warehouse space, as well as other
demographic information. From its experience in opening 25 new warehouses
since its acquisition by the Company, Barnett has gained substantial expertise
in warehouse site selection, negotiating leases, reconfiguring space to suit
its needs, and stocking and opening new warehouses. The average investment
required to open a warehouse is approximately $500,000, including approximately
$250,000 for inventory.
Products
Barnett markets an extensive line of over 8,000 plumbing, electrical
and hardware products, many of which are sold under its proprietary trade names
and trademarks. This extensive line of products allows Barnett to serve as a
single source supplier for many of its customers. Since the beginning of the
current fiscal year, Barnett has added approximately 1,100 new products,
including a new line of builders' hardware and light bulbs. Many of these
products are higher margin products bearing Barnett's proprietary trade names
and trademarks. Barnett tracks sales of new products the first year they are
offered and new products that fail to meet specified sales criteria are
discontinued. Barnett believes that its customers respond favorably to the
introduction of new product lines in areas that allow the customers to realize
additional cost savings and to utilize Barnett's catalogs as a means of
one-stop shopping for many of their needs.
In an effort to further increase profitability and to further enhance
Barnett's reputation as a leading supplier of plumbing, electrical and hardware
products, Barnett is presently increasing the number of its higher margin
product offerings bearing its proprietary trade names and trademarks.
Proprietary products offer customers high quality, lower cost alternatives to
the brand name products Barnett sells. Barnett's catalogs and monthly
promotional flyers emphasize the comparative value of such items. Barnett's
products are generally covered by a one year warranty, and returns (which
require prior authorization from Barnett) have historically been immaterial in
amount.
The following is a discussion of Barnett's principal product groups:
Plumbing Products. Barnett's plumbing products include faucets and
faucet parts, sinks, disposals, vanities and cabinets, tub and shower
accessories, and toilets and toilet tank repair items. Barnett's plumbing
products are sold under its proprietary trademarks Premier(TM) and Regent(TM).
Barnett also sells branded products of leading plumbing manufacturers.
Electrical Products. Barnett's electrical products include such items
as light bulbs, light fixtures, circuit panels and breakers, switches and
receptacles, wiring devices, chimes and bells, telephone and audio/video
accessories and various appliance repair items. Certain of Barnett's
electrical products are sold under its own proprietary trademarks, such as
Premier(TM) light bulbs, and the proprietary trademarks of leading manufacturers
of electrical supplies.
Hardware Products. Barnett sells a broad range of hardware products,
including hand tools and power tools, patio and closet door repair accessories,
window hardware, paint supplies, fasteners, safety equipment, cleaning supplies
and garden hoses and sprinklers.
-23-
<PAGE> 41
CONSUMER PRODUCTS
Consumer Products markets and distributes approximately 9,000 products
to a wide variety of retailers, primarily D-I-Y warehouse home centers, home
improvement centers, mass merchandisers, hardware stores and lumberyards.
Representative of Consumer Products' large national retailers are Kmart,
Builders Square and Wal-Mart. Representative of Consumer Products' large
regional D-I-Y retailers are Channel Home Centers and Fred Meyer Inc. According
to rankings of the largest D-I-Y retailers published in National Home Center
News, an industry trade publication, Consumer Products' customers include 16 of
the 25 largest D-I-Y retailers in the United States. Consumer Products works
closely with its customers to develop comprehensive marketing and merchandising
programs designed to improve their profitability, efficiently manage shelf
space, reduce inventory levels and maximize floor stock turnover. Management
believes that Consumer Products is the only supplier to the D-I-Y market that
carries a complete line of plumbing, electrical and floor protective hardware
products, in both packaged and bulk form. Consumer Products also offers
certain of its customers the option of private label programs. The Company
believes that Consumer Products will also benefit from the continued growth of
the D-I-Y market which, according to Do-It-Yourself Retailing, an industry
trade publication, is expected to expand at a compound annual rate of
approximately 6% over the next four years as well as from the expected growth
of existing customers, several of which have announced expansion plans. In
fiscal 1993, Kmart and its subsidiaries accounted for approximately 12% of the
Company's continuing operations' net sales. No other customer was responsible
for more than 2% of the Company's continuing operations' net sales in fiscal
1993. Consumer Products' top ten customers accounted for approximately 24% of
the Company's continuing operations net sales in fiscal 1993.
During the 1980's, Consumer Products significantly expanded its
business through a combination of internal growth and strategic acquisitions.
The Company's acquisition strategy focused on businesses which marketed similar
or complementary product lines to customers or markets not previously served or
through channels not previously utilized by the Company. In recent years,
Consumer Products has integrated the acquired businesses to enhance the
Company's purchasing power, improving operating efficiencies and enabling
Consumer Products to cross-sell a broader range of products to a larger
customer base. These improvements have enabled Consumer Products to withstand
financial downturns suffered by several important regional retailers to whom
Consumer Products sells its products and to significantly increase its sales to
several national retailers. Consumer Products' net sales were approximately
$67.5 million in fiscal 1993.
In recent years, the rapid growth of large mass merchandisers and
D-I-Y retailers has contributed to a significant consolidation of the United
States retail industry and the formation of large, dominant, product specific
and multi-category retailers. These retailers demand suppliers who can offer a
broad range of quality products and can provide strong marketing and
merchandising support. Due to the consolidation in the D-I-Y retail industry,
a substantial portion of Consumer Products' net sales are generated by a small
number of customers. During the past 18 months, Consumer Products has
restructured its sales and marketing functions in order to better position
itself to meet the demands of the retailers. Management believes that its
strategy of developing new products and forming strategic alliances with its
customers will enable Consumer Products to effectively compete and achieve
consistent growth. Consumer Products supplies products to its customers
pursuant to individual purchase orders and has no long-term written contract
with its customers.
Marketing and Distribution
Consumer Products' marketing strategy includes offering mass
merchandisers and D-I-Y retailers a comprehensive merchandising program which
includes design, layout and setup of selling areas. Sales and service
personnel assist the retailer in determining the proper product mix in addition
to designing department layouts to effectively display products and optimally
utilize available floor and shelf space. Consumer Products supplies
- 24 -
<PAGE> 42
point-of-purchase displays for both bulk and packaged products, including
color-coded product category signs and color-coordinated bin labels to help
identify products, and backup tags to signify products that require reordering.
Consumer Products also offers certain of its customers the option of private
label programs for their plumbing and floor care products. In-house design,
assembly and packaging capabilities enable Consumer Products to react quickly
and effectively to service its customers' changing needs. In addition,
Consumer Products' products are packaged and designed for ease of use, with
"how to" instructions included to simplify installation, even for the
uninitiated D-I-Y consumer.
Consumer Products' sales and service representatives visit stores
regularly to take reorders and recommend program improvements. These
representatives also file reports with Consumer Products, enabling it to stay
abreast of changing consumer demand and identify developing trends. In
addition, Consumer Products has identified a growing trend among retailers to
purchase on a "just-in-time" basis in order to reduce their inventory levels
and increase returns on investment. In order to support its customers'
"just-in-time" requirements, Consumer Products has significantly improved its
EDI capabilities.
Consumer Products operates and distributes its products through four
strategically located distribution facilities in Cleveland, Ohio, Lancaster,
Pennsylvania, Dallas, Texas and Reno, Nevada.
Products
The following is a discussion of the principal product groups:
Plumbing Products. Consumer Products' plumbing products include valves
and fittings, rubber products, repair kits and tubular products such as traps
and elbows. Many of Consumer Products' plumbing products are sold under the
proprietary trade names Plumbcraft(R), PlumbKing(R), Plumbline(TM) and KF(R). In
addition, Consumer Products offers certain of its customers the option of
private label programs. Consumer Products also offers proprietary lines of
faucets under the trade name Premier(R), as well as a line of shower and bath
accessories under the proprietary trade name Spray Sensations(TM).
Electrical Products. Consumer Products' electrical products include
items such as plugs, adapters, outlets, wire, circuit breakers and various
tools and test equipment. Consumer Products sells many of its electrical
products under the proprietary trade name Electracraft(R). Consumer Products
also sells a line of outdoor weatherproof electrical products, a full line of
ceiling fan accessories, a line of telephone accessories and connecting
devices, a line of audio and video accessories and lamp and light fixture
replacement parts and replacement glassware.
Floor Protective Hardware Products. Consumer Products' floor
protective hardware products include casters, doorstops and other floor,
furniture and wall protective items. Consumer Products markets a complete line
of floor protective hardware products under the proprietary trade name KF(R) and
also under private labels.
OTHER OPERATIONS
The Company has several other operations which are conducted through
WOC and TWI. These operations in the aggregate generated net sales of $48.0
million in fiscal 1993, which accounted for approximately 23.5% of the net
sales from the Company's continuing operations during the period. The most
significant of these operations are U.S. Lock, a supplier of security hardware
products, and LeRan, a supplier of copper tubing and specialty plumbing
products. U.S. Lock and LeRan, as well as Madison Equipment and Medal
Distributing, are operated as separate divisions of WOC. TWI includes the
foreign sourcing operations which support the Company's continuing operations.
- 25 -
<PAGE> 43
U.S. Lock
U.S. Lock, which was acquired by the Company in 1988, carries a full
line of security hardware products, including locksets, door closers and
locksmith tools. Many of these products are sold under the U.S. Lock(R) and
Legend(TM) trademarks. U.S. Lock markets and distributes its products primarily
to locksmiths through a telemarketing sales team. U.S. Lock's telemarketing
effort is supplemented with a catalog that is mailed annually to 6,000 existing
customers and promotional flyers. Since its acquisition by the Company, U.S.
Lock has increased its number of warehouses from one to four, three of which
are shared with Barnett. Shared facilities allow the Company to realize
additional efficiencies by consolidating space requirements and reducing
personnel costs.
LeRan
LeRan, which was acquired by the Company in 1985, is a supplier of
copper tubing and fittings, brass valves and fittings, malleable fittings and
related products. Its customers include liquid petroleum gas dealers,
lumberyards, plumbing and mechanical contractors and D-I-Y retailers. LeRan
markets its products primarily through salesmen and outside service
representative organizations. These efforts are supported by a catalog, which
is mailed semiannually to 7,000 existing customers, monthly promotional flyers
and a telemarketing program. LeRan currently services its customers from four
regional warehouses, two of which are shared with Barnett.
Other Operations
WOC's other operations also include its Madison Equipment division, a
supplier of electrical products, and its Medal Distributing division, a
supplier of hardware products.
Purchasing, Packaging and Assembly
Products bearing the Company's proprietary trade names and trademarks
are assembled and packaged in its Taiwan, Mainland China and Mexico facilities.
The products packaged in Taiwan and China are purchased locally in bulk and,
after assembly and packaging, are shipped to the Company's various distribution
centers in the United States. The Company also outsources the packaging of
certain products. For the year ended June 30, 1993, products purchased
overseas, primarily from Taiwan, accounted for approximately 22.9% of the total
product purchases made by the Company's continuing operations.
TWI, through its subsidiaries, operates the Taiwan and Mainland China
facilities, which assemble and package plumbing and electrical products. In
addition, the facility in Mainland China manufactures and packages plastic
floor protective hardware. The Company believes that these facilities give it
competitive advantages, in terms of cost and flexibility in sourcing. Both
labor and physical plant costs are significantly below those in the United
States.
During fiscal 1991, the Company purchased WAMI, a small manufacturer
of plumbing pipe nipples in Tijuana, Mexico. Pipe nipples are short lengths of
pipe from 1/2 of an inch to 6 feet long, threaded at each end. As a result of
this acquisition, the Company is now vertically integrated in the manufacture
and distribution of pipe nipples. Since the acquisition, in order to take
advantage of lower labor costs, the Company has relocated certain of its United
States packaging operations to TWI's WAMI subsidiary in Mexico.
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<PAGE> 44
Substantially all of the other products purchased by Waxman USA are
manufactured for it by third parties. Waxman USA estimates that it purchases
products and materials from over approximately 1,300 suppliers and is not
dependent on any single unaffiliated supplier for any of its requirements.
The following table sets forth the approximate percentage of net sales
attributable to the Company's principal product groups:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Plumbing 74% 73% 71%
Electrical 10 9 10
Hardware 16 18 19
--- --- ---
Total Net Sales 100% 100% 100%
=== === ===
</TABLE>
IMPORT RESTRICTIONS
Under current United States government regulations all products
manufactured offshore are subject to import restrictions. The Company
currently imports goods from Mexico under the preferential import regulations
commonly known as "807' and as direct imports from China and Taiwan. The "807'
arrangement permits an importer who purchases raw materials in the United
States and then ships the raw materials to an offshore factory for assembly, to
reimport the goods, without quota restriction and to pay a duty only on the
value added in the offshore factory.
Where the Company chooses to directly import goods purchased outside of
the United States, the Company may be subject to import quota restrictions,
depending on the country in which assembly takes place. These restrictions may
limit the amount of goods of a particular category that a country may export to
the United States. If the Company cannot obtain the necessary quota, the
Company will not be able to import the goods into the United States. Export
visas for the goods purchased offshore by the Company are readily available.
The above arrangements, both 807 and quota restrictions, may be superseded
by more favorable regulations with respect to Mexico under the North American
Free Trade Agreement ("NAFTA"), or may be limited by revision or cancelled at
any time by the United States government. The Company does not believe that
its relative competitive position will be adversely affected by NAFTA. As a
result of the passage of NAFTA, importation from Mexico will become more
competitive in the near future relative to importation from other exporting
countries.
COMPETITION
Waxman USA faces significant competition from different competitors within
each of its product lines, although it has no competitor offering the range of
products in all of the product lines that Waxman USA offers. Waxman USA
believes that its buying power, extensive inventory, emphasis on customer
service and merchandising programs have contributed to its ability to compete
successfully in its various markets. In the areas of electrical and hardware
supplies, Waxman USA faces significant competition from smaller companies which
specialize in particular types of products and larger companies which
manufacture their own products and have greater financial resources than Waxman
USA. Barnett's mail order business competes principally with local
distributors of plumbing, electrical and hardware products. Waxman USA
believes that competition in sales to both mail order customers and retailers
is primarily based on price, product quality and selection, as well as
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<PAGE> 45
customer service, which includes speed of responses for mail order customers
and packaging and merchandising for retailers.
EMPLOYEES
As of March 31, 1994, the Company's continuing operations employed 1,245
persons, 300 of whom were clerical and administrative personnel, 145 of whom
were sales service representatives and 800 of whom were either production or
warehouse personnel. Approximately 8% of the employees of the Company's
continuing operations are represented by collective bargaining units. The
Company considers its relations with its employees, including those represented
by collective bargaining units, to be satisfactory.
TRADEMARKS
Several of the trademarks and trade names used by the Company are
considered to have significant value in its business. See "Business--
Barnett--Products," "--Consumer Products--Products" and "--Other Operations."
PROPERTIES
The following table sets forth, as of March 31, 1994, certain information
with respect to the Company's principal physical properties:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
SQUARE EXPIRATION
LOCATION FEET PURPOSE DATE
-------- ---- ------- ----
<S> <C> <C> <C>
24460 Aurora Road 21,000 Corporate Office Owned
Bedford Hts., OH
24455 Aurora Road 125,000 Consumer Products Corporate Office and Warehouse 6/30/02
Bedford Hts., OH(1)
330 Vine Street 80,000 Consumer Products Office and Warehouse 2/28/96
Sharon, PA
2029 McKenzie Drive 60,000 Consumer Products Office and Warehouse 5/31/94
Dallas, TX(2)
945 Spice Island Drive 71,000 Consumer Products Office and Warehouse 7/31/98
Sparks, NV(3)
1842 Colonial Village Lane 72,000 Consumer Products Office and Warehouse 5/31/00
Lancaster, PA
3333 Lenox Avenue 60,000 Barnett Corporate Office and Warehouse 10/31/03
Jacksonville, FL
300 Jay Street 56,000 LeRan Corporate Office and Warehouse Owned
Coldwater, MI
</TABLE>
- 28 -
<PAGE> 46
<TABLE>
<S> <C> <C> <C>
No. 10, 7th Road 56,000 Office, Packaging, and Warehouse Owned
Industrial Park
Taichung, Taiwan
Republic of China
</TABLE>
(1) Aurora Investment Co., a partnership owned by Melvin and Armond Waxman
together with certain other members of their families, is the owner
and lessor of this property. The Company has the option to renew the
leases for a five-year term at the market rate at the time of renewal.
(2) The Company has the option to renew the lease for a two-year term.
In addition to the properties shown in the table, the Company owns 15
warehouses and leases 55 warehouses ranging in size from 6,000 to 50,000 square
feet (of these properties, Barnett leases 27 warehouses and Consumer Products
leases six warehouses).
The Company believes that its facilities are suitable for its
operations and provide the Company with adequate capacity.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims
that arise in the ordinary course of business. In the opinion of
management, the amount of any ultimate liability with respect to these
actions will not affect materially the financial position of the
Company.
ENVIRONMENTAL REGULATIONS
The Company is subject to certain federal, state and local
environmental laws and regulations. The Company believes that it is
in material compliance with such laws and regulations applicable to
it. To the extent any subsidiaries of Waxman Industries are not in
compliance with such laws and regulations, Waxman Industries, as well
as such subsidiaries, may be liable for such non-compliance. However,
in any event, the Company is not aware of any such liabilities which
could have a material adverse effect on it or any of its subsidiaries.
RECENT DEVELOPMENTS
Belanger Sale. In October 1993, the Company completed the sale
of all of the capital stock of one of its Canadian operations, H.
Belanger Plumbing Accessories, Ltd. ("Belanger") to a group led by the
management of Belanger in exchange for cash and a promissory note.
Belanger, based in Montreal, is engaged in the distribution of
plumbing specialty products, including bulk and packaged products to
plumbing and hardware wholesalers and retailers. During fiscal 1993,
Belanger had net sales of U.S. $6.3 million.
Discontinued Operations. Effective March 31, 1994, the Company
adopted a plan to dispose of its Canadian subsidiary, Ideal Plumbing
Group, Inc. ("Ideal"). Unlike the Company's United States operations
which supply products to customers in the home repair and remodeling
market through mass retailers, Ideal primarily served 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 and financial
information contained herein as of such date have been reclassified to
report separately Ideal's net assets and results of operations. Prior
period consolidated financial statements and financial information
have been reclassified to conform to the current period presentation.
Ideal determined in April 1994 that, as of March 31, 1994, it
was in violation of several financial covenants included in its
Canadian bank credit agreements, including those related to the
maintenance of a specified working capital ratio, interest coverage
ratio and borrowing base formulas. In addition, on April 15, 1994,
Ideal failed to make a Cdn. $150,000 payment on the term loan portion
of such credit agreements.
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 the
lenders under Ideal's Canadian bank credit agreements as borrowings
under such 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 agreements (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. On May 30, 1994, Ideal was declared bankrupt by the Canadian
courts and, as a result, the Company's ownership and control of Ideal
effectively ceased on such date. Upon the petition of Ideal's
Canadian lenders, Coopers & Lybrand Ltd. was appointed as trustee to
liquidate the assets of Ideal. As of the date of this Prospectus, the
Company has been advised that Ideal is no longer operating and that
certain of Ideal's branch operations have been sold but that the
trustee has not yet liquidated the remaining inventory, accounts
receivable and fixed assets of Ideal.
Ideal's defaults under its Canadian bank credit agreements and
subsequent bankruptcy do not trigger a "cross-default" under, or
result in any violation of the debt covenants contained in, the
Company's or its subsidiaries' outstanding debt obligations other than
under the Company's $155,000 principal amount outstanding of
Convertible Debentures. In addition, neither the Company nor any of
its subsidiaries has any liability to creditors of Ideal as a result
of Idea's bankruptcy.
- 29 -
<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors, executive officers and key
employees of the Company and their respective ages and positions are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Melvin Waxman 59 Chairman of the Board and Co-Chief Executive
Officer
Armond Waxman 55 President, Co-Chief Executive Officer, Treasurer
and Director
John S. Peters 45 Senior Vice President, Operations
William R. Pray 46 Senior Vice President
Laurence S. Waxman 37 Senior Vice President
Neal R. Restivo 34 Vice President, Finance and Chief Financial
Officer
Irving Z. Friedman 61 Director
Samuel J. Krasney 68 Director
Judy Robins 45 Director
</TABLE>
Set forth below is a biographical description of each director,
executive officer and key employee of the Company mentioned above.
Mr. Melvin Waxman was elected Co-Chief Executive Officer of the
Company in May 1988. Mr. Waxman has been a Chief Executive Officer of the
Company for over 20 years and has been a director of the Company since 1962.
Mr. Waxman has been Chairman of the Board of the Company since August 1976.
Melvin Waxman and Armond Waxman are brothers.
Mr. Armond Waxman was elected Co-Chief Executive Officer of the
Company in May 1988. Mr. Waxman has been the President and Treasurer of the
Company since August 1976. Mr. Waxman has been a director of the Company since
1962 and was Chief Operating Officer of the Company from August 1976 to May
1988. Armond Waxman and Melvin Waxman are brothers.
Mr. Peters was elected to the position of Senior Vice President,
Operations of the Company in April 1988, after serving as Vice President,
Operations of the Company since February 1985. Prior to that Mr. Peters had
been Vice President, Personnel/Administration of the Company since February
1979.
Mr. Pray was elected Senior Vice President of the Company in February
1991 and is also President of Barnett, a position he has held since 1987. Mr.
Pray joined Barnett in 1979 as Vice President of Sales and Marketing.
Mr. Laurence Waxman was elected Senior Vice President of the Company
in November 1993 and is also President of the Consumer Group Division, a
position he has held since 1988. Mr. Waxman joined the Company in 1981. Mr.
Laurence Waxman is the son of Melvin Waxman.
- 31 -
<PAGE> 48
Mr. Restivo was elected Vice President, Finance and Chief Financial
Officer of the Company in November 1993, after serving as Vice President,
Corporate Controller since November 1990, and as Corporate Controller of the
Company since November 1989. From August 1982 until November 1989, Mr. Restivo
was employed by the public accounting firm of Arthur Andersen & Co., where he
was an audit manager since 1988.
Mr. Friedman has been a director of the Company since 1989. Mr.
Friedman has been a certified public accountant with the firm of Krasney Polk
Friedman & Fishman for more than five years.
Mr. Krasney has been a director of the Company since 1977. In
September 1993, Mr. Krasney retired from his position of Chairman of the Board,
President and Chief Executive Officer of Banner Aerospace, Inc., a distributor
of parts in the aviation aftermarket, a position he had held since June 1990.
In September 1993, Mr. Krasney also retired from The Fairchild Corporation
(formerly Banner Industries, Inc.) where he had been Vice Chairman of the Board
since 1985. Fairchild is a manufacturer and distributor of fasteners to the
aerospace industry and industrial products for the plastic injection molding
industry and other industrial markets and is a furnisher of telecommunication
services to office buildings. Mr. Krasney is also a director of FabriCenters
of America, Inc.
Mrs. Robins has been a director of the Company since 1980. Mrs.
Robins has owned and operated an interior design business for more than five
years. Mrs. Robins is the sister of Melvin and Armond Waxman. Mrs. Robins'
husband is the Secretary of the Company.
Board of Directors
The number of directors on the Board of the Company is presently fixed
at five. Directors are elected at the annual meeting of stockholders and hold
office for one year and until their successors are elected. the Company has an
Executive Committee, Audit Committee, Compensation Committee and Stock Option
Committee. Messrs. Melvin and Armond Waxman and Krasney serve on the Executive
Committee, Messrs. Friedman and Krasney serve on the Audit Committee and the
Stock Option Committee and Mrs. Robins and Messrs. Krasney and Friedman serve
on the Compensation Committee.
Director Remuneration
Each director who is not an employee of the Company received a fee of
$3,000 per fiscal quarter for services as a director during fiscal 1993 plus a
fee of $1,000 plus traveling expenses for each Board meeting he or she
attended. In addition to the foregoing compensation, each director who is not
an employee of the Company received options during fiscal 1993 to purchase
10,000 shares of the Company's Common Stock at a price of $4.25 per share.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid for services
rendered during fiscal 1993 to the Co-Chief Executive Officers and the three
other most highly compensated executive officers of the Company in the fiscal
years indicated:
- 32 -
<PAGE> 49
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
All Other
Awards Payouts Compensation
------ -------
Annual Compensation(1) Restricted LTIP
Year Salary($) Bonus($)(2) Stock($) Options(#) Payouts($) ($)(3)(4)
---- --------- ----------- -------- ---------- ---------- ---------
Name and Principal
- ------------------
Position
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Melvin Waxman 1993 365,000 100,000 __ 250,000 __ 65,293
Chairman of the Board 1992 400,000 125,000 __ __ __ __
and Co-Chief Executive 1991 400,000 125,000 __ __ __ __
Officer
Armond Waxman 1993 378,942 100,000 __ 250,000 __ 50,464
President and Co-Chief 1992 400,000 125,000 __ __ __ __
Executive Officer 1991 400,000 125,000 __ __ __ __
Jerome C. Jacques(5) 1993 192,067 45,000 __ 50,000 __ 16,175
Senior Vice 1992 200,000 50,000 __ 12,500 __ __
President -- Finance 1991 200,000 50,000 __ __ __ __
and Chief Financial
Officer
William R. Pray 1993 200,000 45,000 __ 25,000 __ 14,789
Senior Vice President 1992 173,000 50,000 __ 7,500 __ __
1991 171,000 38,000 __ 10,000 __ __
John S. Peters 1993 132,644 25,000 __ 45,000 __ 14,137
Senior Vice 1992 125,000 25,000 __ 7,500 __ __
President -- 1991 125,000 25,000 __ __ __ __
Operations
</TABLE>
(1) Certain executive officers received compensation in fiscal 1991, 1992
and 1993 in the form of perquisites, the amount of which does not
exceed reporting thresholds.
(2) Messrs. Pray and Peters received their bonuses under the Company's
Profit Incentive Plan.
(3) In accordance with the transitional provisions applicable to the rules
of the Securities and Exchange Commission, disclosure of All Other
Compensation is not required for 1991 and 1992.
(4) Includes Company contributions to the Company's Profit-Sharing
Retirement Plan and premiums on split-dollar life insurance policies.
Profit Sharing Plan contributions were as follows: $2,289 each for
Messrs. Melvin and Armond Waxman, and Pray, $1,637 for Mr. Peters and
$2,289 for Mr. Jacques. Premiums on split-dollar life insurance
policies were as follows: $63,004 for Melvin Waxman, $48,175 for
Armond Waxman, $12,500 each for Messrs. Pray and Peters and $13,886
for Mr. Jacques.
(5) Mr. Jacques' employment with the Company was terminated in November
1993.
- 33 -
<PAGE> 50
EMPLOYMENT AGREEMENTS
Mr. Peters entered into an employment agreement with the Company which
became effective as of January 1, 1992 and terminates on December 31, 1995.
Pursuant to such employment agreement, Mr. Peters is to serve as Senior Vice
President, Operations of the Company, and is also to serve in such substitute
or further offices or positions with the Company or any subsidiary or affiliate
of the Company as shall, from time to time, be assigned by the Board of
Directors of the Company. Mr. Peters' employment agreement provides for a
minimum annual salary of $125,000, which salary will be reviewed annually by
the Company. Increases in salary and the granting of bonuses to Mr. Peters
will be determined by the Company, in its sole discretion, based on such
individual's performance and contributions to the success of the Company, his
responsibilities and duties and the salaries of other senior executives of the
Company. The employment agreement also contains provisions which restrict Mr.
Peters from competing with the Company during the term of the agreement and for
two years following the termination thereof.
Mr. Pray has an employment agreement with Barnett and the Company
which became effective as of July 1, 1990 and which terminates on June 30,
2000. Pursuant to this employment agreement, Mr. Pray is to serve as President
of Barnett and provide services to Barnett in such managerial areas as Mr. Pray
served in the past and such additional duties as shall be assigned to Mr. Pray
by the Co-Chief Executive Officers of the Company. Mr. Pray's employment
agreement provides for a minimum annual salary of $165,000 for the first year
of the employment agreement and provides that for each year thereafter the
minimum annual salary will be increased by eight percent of the prior year's
salary or any salary amount separately agreed to in writing by Mr. Pray,
Barnett and the Company. Mr. Pray is also eligible to receive additional
discretionary bonuses as may from time to time be determined in the sole
discretion of the Board of Directors of the Company. The employment agreement
also contains provisions which restrict Mr. Pray from competing with the
Company during the term of the agreement and for two years following the
termination thereof.
- 34 -
<PAGE> 51
STOCK OPTION AND SAR GRANTS
The following table sets forth the information noted for all grants of
stock options made by the Company during fiscal 1993 to each of the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
OPTIONS/SAR(1) GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION --------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- --- ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Melvin Waxman 100,000 9.6 5.00 Sept 1997 138,000 305,500
150,000 14.4 4.25 Feb 2003 400,988 1,016,175
Armond Waxman 100,000 9.6 5.00 Sept 1997 138,000 305,500
150,000 14.4 4.25 Feb 2003 400,988 1,016,175
Jerome C. Jacques(3) 25,000 2.4 5.00 Sept 1997 34,500 76,375
25,000 2.4 4.25 Feb 2003 66,831 169,362
William R. Pray 25,000 2.4 5.00 Sept 1997 34,500 76,375
John S. Peters 20,000 1.9 5.00 Sept 1997 27,600 61,100
25,000 2.4 4.25 Feb 2003 66,831 169,362
</TABLE>
(1) There were no SARs granted to any of the executive officers named in
this table in fiscal 1993.
(2) The potential realizable values represent future opportunity and have
not been reduced to present value in 1993 dollars. The dollar amounts
included in these columns are the result of calculations at assumed
rates set by the Securities and Exchange Commission for illustration
purposes, and these rates are not intended to be a forecast of the
Common Stock price and are not necessarily indicative of the values
that may be realized by the named executive officer.
(3) All of the options granted to Mr. Jacques have terminated as a result
of the termination of his employment with the Company.
- 35 -
<PAGE> 52
STOCK OPTION AND SAR EXERCISES
The following table sets forth the information noted for all exercises
of stock options and SARs during fiscal 1993 by each of the executive officers
named in the Summary Compensation Table:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION> NUMBER OF UNEXERCISED VALUE OF
SHARES OPTIONS AT FISCAL UNEXERCISED
ACQUIRED YEAR-END(#) IN-THE-MONEY
ON VALUE EXERCISABLE/ OPTIONS AT
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE YEAR-END($)
---- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Melvin Waxman -- -- 30,000/270,000 --
Armond Waxman -- -- 30,000/270,000 --
Jerome C. Jacques(1) -- -- 29,500/63,000 --
William R. Pray -- -- 13,000/37,000 --
John S. Peters -- -- 9,000/51,000 --
</TABLE>
(1) All of the options granted to Mr. Jacques have terminated as a result
of the termination of his employment with the Company.
- 36 -
<PAGE> 53
PRINCIPAL STOCKHOLDERS
CAPITAL STOCK
The following table sets forth, as of June 1, 1994 (except as noted in
footnote 7 below), the number of shares beneficially owned by each director, by
the directors and executive officers of the Company as a group and by each
holder of at least five percent of Common Stock, and the respective percentage
ownership of the outstanding Common Stock and Class B Common Stock and voting
power held by each such holder and group. The mailing address for Messrs.
Melvin and Armond Waxman is the executive office of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OWNED OWNERSHIP PERCENTAGE
------------------ --------- OF
CLASS B CLASS B AGGREGATE
NAME OF COMMON COMMON COMMON COMMON VOTING
BENEFICIAL OWNER STOCK STOCK STOCK STOCK POWER
- ---------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Melvin Waxman(1) 970,782 1,011,932 10.2% 45.4% 34.9%
Armond Waxman(2) 862,607 826,082 9.1 37.1 28.7
Samuel J. Krasney(3) 17,250 6,750 * * *
Judy Robins(4) 77,250 78,750 * 3.5 2.7
Irving Z. Friedman(5) 10,500 -- * -- *
Directors and officers
as a group (10
individuals)(6) 2,052,914 1,978,766 21.2 88.8 68.3
Weiss, Peck & Greer(7) 1,182,500 -- 12.5 -- 3.7
One New York Plaza
New York, NY 10004
</TABLE>
* less than 1%
(1) Includes (i) 100 shares of Common Stock owned by a member of Mr.
Melvin Waxman's immediate family, as to which shares Mr. Waxman
disclaims beneficial interest and (ii) 97,500 shares of Common Stock
which Mr. Waxman has the right to acquire within 60 days upon the
exercise of stock options.
(2) Includes (i) 55,825 shares of Common Stock and 55,800 shares of the
Class B Common Stock owned by members of Mr. Armond Waxman's immediate
family, as to which shares Mr. Waxman disclaims beneficial interest
and (ii) 97,500 shares of Common Stock which Mr. Waxman has the right
to acquire within 60 days upon the exercise of stock options.
(3) Includes (i) 4,500 shares of Common Stock and 4,500 shares of the
Class B Common Stock owned by Mr. Krasney's wife, as to which shares
Mr. Krasney disclaims beneficial interest and (ii) 10,500 shares of
Common Stock which Mr. Krasney has the right to acquire within 60 days
upon the exercise of stock options.
- 37 -
<PAGE> 54
(4) Includes 10,500 shares of Common Stock which Mrs. Robins has the
right to acquire within 60 days upon the exercise of stock options.
(5) Consists of 10,500 shares of Common Stock which Mr. Friedman has the
right to acquire within 60 days upon the exercise of stock options.
(6) Includes 278,500 shares of Common Stock which the directors and
officers of the Company have the right to acquire within 60 days upon
the exercise of stock options.
(7) The information set forth in the table with respect to Weiss, Peck &
Greer was obtained from Amendment No. 2 to a Statement on Schedule
13G, dated February 11, 1994, filed with the Commission. Such
statement reflects Weiss, Peck & Greer's beneficial ownership as of
December 31, 1993.
RECENT SECURITIES OFFERING AND RELATED MATTERS
The Reorganization
On May 20, 1994, as part of the Reorganization, the Company issued the
Old Notes together with the Warrants in exchange for $50,000,000 aggregate
principal amount of the Company's outstanding Senior Subordinated Notes
pursuant to the Private Exchange Offer. In addition to the Private Exchange
Offer, the components of the Reorganization included (i) the Senior
Subordinated Consent Solicitation, (ii) the Debt Financing, (iii) the 12 1/4%
Consent Solicitation and (iv) the repayment of the borrowings under the
Company's then existing domestic revolving credit facilities (including $27.7
under the Company's then existing working capital credit facility and $2.5
million under the $5.0 million revolving credit facility of Barnett (the
"Barnett Financing")). No component of the Reorganization is dependent on the
successful completion of the Exchange Offer.
In connection with the Reorganization, the Company completed the
Corporate Restructuring. As part of the Corporate Restructuring, the Company
formed (a) Waxman USA, as a holding company for the subsidiaries that comprise
and support the Company's domestic operations, (b) Consumer Products, a wholly
owned subsidiary of Waxman USA, to own and operate the Consumer Products
Division, and (c) 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 operations 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 and LeRan, each a wholly owned
subsidiary of the Company, into WOC, (vi) contributing the capital stock of TWI
to Waxman USA and (vii) contributing the capital stock of WAMI to TWI.
Registration Rights Agreements
Pursuant to the Debt Registration Rights Agreement, the Company has
agreed to use its best efforts to register the Exchange Offer under the Act,
and pursuant to a Registration Rights Agreement dated May 20, 1994, among the
Company and the Exchange Agent, on behalf of the original purchasers
- 38 -
<PAGE> 55
of the Warrants (the "Equity Registration Rights Agreement"), the Company has
agreed to use its best efforts to register the offer and sale of the Warrants
and shares of Common Stock underlying the Warrants under the Act.
Pursuant to the Debt Registration Rights Agreement, the Company has
agreed to use its best efforts (i) to file, within 30 days of the issuance of
the Old Notes, a registration statement under the Act with respect to an
exchange offer whereby securities substantially identical to the Old Notes
would be offered for exchange with the Old Notes in order to permit the
original purchasers of the Old Notes to offer and sell the New Notes under the
Act and (ii) to cause such registration statement to become effective within
120 days of the date of issuance of the Old Notes. Upon the registration
statement being declared effective, the Company will offer the New Notes in
exchange for surrender of the Old Notes. The Company has agreed to keep the
Exchange Offer pursuant to the registration statement open for not less than 30
days (or longer if required by applicable law) after the date notice of such
offer is mailed to the holders of the Old Notes. In the event that the Company
or the holders of 25% in aggregate principal amount of the Old Notes reasonably
determine in good faith that because of any change in law or applicable
interpretations of the Staff of the Commission the Company is not permitted to
effect the Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 180 days of the date of the Debt Registration Rights
Agreement or if a holder of the Old Notes is not permitted, because of a change
in law or interpretations of the Staff of the Commission, to participate in the
Exchange Offer, the Company will, at its cost, (a) as promptly as practicable,
file a shelf registration statement covering resales of the Old Notes, (b) use
its best efforts to cause such shelf registration statement to be declared
effective under the Securities Act and (c) use its best efforts to keep
continuously effective such shelf registration statement until three years
after the issuance of the Old Notes or such shorter period ending when all of
the Old Notes eligible for sale thereunder have been sold thereunder. In the
event that the registration statement is not filed or effective by, or
continuously effective through, the dates referred to above or the Commission
shall have issued a stop order suspending the effectiveness of the registration
statement or any shelf registration statement with respect to the Old Notes at
a time when such registration statement or shelf registration statement, as the
case may be, is required to be kept effective by the Company or the prospectus
contained in any such registration statement or shelf registration statement,
as amended or supplemented, shall (x) not contain current information required
by the Securities Act and the rules and regulations promulgated thereunder or
(y) contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, the Company has agreed to pay, or cause to be paid, as liquidated
damages and not as a penalty to each holder of Old Notes, an amount equal to
$0.05 per week per $1,000 of Accreted Value of Old Notes held by such holder,
for each week during the 90-day period beginning on the date referred to above
or the date of the order suspending effectiveness or the date on which the
prospectus shall not contain such current information or shall contain any such
untrue statement or omit to state any such material fact. Such liquidated
damages shall be increased by $0.05 per week per $1,000 of Accreted Value of
Old Notes at the beginning of each subsequent 90-day period up to a maximum
aggregate amount of $0.20 per week per $1,000 of Accreted Value of Old Notes.
The Company has agreed to pay all expenses incident to the Company's
performance of or compliance with the Debt Registration Rights Agreement,
including the reasonable fees and expenses of counsel to the original
purchasers of the Old Notes but excluding any underwriting fees, discounts or
commissions attributable to the sale of the Notes. Each of the Company and the
Trustee, on behalf of the original purchasers of the Old Notes, pursuant to the
Debt Registration Rights Agreement, have
- 39 -
<PAGE> 56
agreed to indemnify the other party, its officers, directors and controlling
persons in respect of certain liabilities and expenses arising, under certain
circumstances, out of any registration of the Old Notes pursuant to the Debt
Registration Rights Agreement. The Company has prepared and filed the
Registration Statement of which this Prospectus forms a part pursuant to the
Debt Registration Rights Agreement.
Pursuant to the Equity Registration Rights Agreement, the Company has
agreed to use its best efforts (i) to file, within 30 days of the issuance of
the Warrants, a registration statement (the "Equity Registration Statement")
under the Act to permit the original purchasers of the Warrants to offer and
sell under the Act the Warrants and shares of Common Stock underlying the
Warrants ("Warrant Shares"), (ii) to cause such Equity Registration Statement
to become effective within 120 days of the date of issuance of the Warrants and
(iii) to maintain such effectiveness for a period of three years or such
shorter period ending when all of the Warrants and Warrant Shares have been
sold pursuant to the Equity Registration Statement or the date three years
after all Warrants have been exercised. The period beginning on the date the
Equity Registration Statement is first declared effective by the Commission and
ending on the date which is three years after the expiration of the Warrants
or, if earlier, the date on which all Warrants and Warrant Shares have been
sold pursuant to the Equity Registration Statement or the date three years
after all Warrants have been exercised, is referred to herein as the
"Effectiveness Period." In the event that the Equity Registration Statement is
not filed or effective by, or continuously effective through, the dates
referred to above or prior to the end of the Effectiveness Period, the
Commission shall have issued a stop order suspending the effectiveness of the
Equity Registration Statement or the prospectus contained in the Equity
Registration Statement, as amended or supplemented, shall (x) not contain
current information required by the Securities Act and the rules and
regulations promulgated thereunder or (y) contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they are made, not misleading, the Company has agreed to pay, or
cause to be paid, as liquidated damages and not as a penalty, to each holder of
a Warrant or Warrant Share, an amount equal to $0.0025 per week per Warrant or
Warrant Share, as the case my be, for each week beginning on such date and
ending 90 days thereafter. Such liquidated damages shall be increased by
$0.0025 per week per Warrant or Warrant Share, as the case may be, at the
beginning of each subsequent 90-day period up to a maximum aggregate amount of
$0.01 per week per Warrant or Warrant Share, as the case may be. The Company
has agreed to pay all expenses incident to the Company's performance of or
compliance with the Equity Registration Rights Agreement, including the
reasonable fees and expenses of counsel to the original purchasers of the
Warrants but excluding any underwriting fees, discounts or commissions
attributable to the sale of the Warrants or Warrant Shares. Each of the
Company and the Warrant Agent, on behalf of the original purchasers of the
Warrants, pursuant to the Equity Registration Rights Agreement, have agreed to
indemnify the other party, its officers, directors and controlling persons in
respect of certain liabilities and expenses arising, under certain
circumstances, out of any registration of the Warrants and Warrant Shares
pursuant to the Equity Registration Rights Agreement. The Company has prepared
and filed the Equity Registration Statement with the Commission pursuant to the
Equity Registration Rights Agreement.
- 40 -
<PAGE> 57
THE EXCHANGE OFFER
PURPOSE OF EXCHANGE OFFER
The outstanding Old Notes in the aggregate principal amount at
maturity of $92,797,000 were originally issued on May 20, 1994. The offer and
sale of the Old Notes was not registered under the Act in reliance upon the
exemption therefrom provided by Section 4(2) of the Act. The Old Notes may not
be reoffered, resold, or transferred other than pursuant to an effective
registration statement filed pursuant to the Act or unless an exemption from
the registration requirements of the Act is available.
Pursuant to Rule 144 promulgated under Act, the Old Notes may
generally be resold, subject to certain conditions specified in the Rule, (a)
commencing two years after the date of original issuance, in an amount up to,
for any three-month period, the greater of 1% of the principal amount at
maturity of the Old Notes then outstanding or the average weekly trading volume
of the Old Notes during the four calendar weeks immediately preceding the
filing of the required notice of sale with the Commission, and (b) commencing
three years after the date of original issuance, in any amount and otherwise
without restriction by a Holder who is not, and has not been for the preceding
three months, an affiliate of the Company. Following the Exchange Offer, the
calculation of the amount of permissible sales under Rule 144 may depend on the
combined amount of outstanding Old Notes and New Notes, and the trading volume
of the Old Notes and the New Notes together. Additionally, under certain
circumstances, an exemption from the registration requirements of the Act may
be available for the resale of the Old Notes to "Qualified Institutional
Buyers" under Rule 144A promulgated thereunder. Certain other exemptions may
also be available under other provisions of the federal securities laws for the
resale of the Old Notes.
In connection with the original sale of the Old Notes, the Company
entered into the Debt Registration Rights Agreement, pursuant to which the
Company agreed to file with the Commission a registration statement covering
the exchange by the Company of the New Notes for the Old Notes in a transaction
designed to provide certain Holders of Old Notes with an opportunity to acquire
New Notes which, unlike the Old Notes, may be offered for resale, resold and
otherwise transferred without compliance with the registration and prospectus
delivery requirements of the Act. Holders who are unable or choose not to
exchange their Old Notes pursuant to this Exchange Offer will continue to hold
securities that are subject to restrictions on transfer pursuant to the Act.
The Company has no obligation to provide for the registration under the Act of
Old Notes outstanding after the expiration of the Exchange Offer. Such Holders
should consult their own legal counsel for advice as to any restrictions that
might apply to the resale of their Old Notes. The New Notes otherwise will be
identical in all material respects (including interest rate, maturity and
restrictive covenants) to the Old Notes for which they may be exchanged
pursuant to this Exchange Offer.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), the Company will accept for exchange Old Notes
which are properly tendered on or prior to the Expiration Date and not
withdrawn as permitted below. As used herein, the term "Expiration Date" means
Midnight, New York City time, on September __, 1994; provided, however, that if
the Company, in its sole discretion, has
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extended the period of time during which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer is
extended.
As of the date of this Prospectus, $92,797,000 aggregate principal
amount at maturity of Old Notes were outstanding. This Prospectus, together
with the Letter of Transmittal, is first being sent on or about September __,
1994, to all Holders of Old Notes known to the Company. The Company's
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth under "-- Certain Conditions to the
Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to
time, to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof. During any such
extension, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering Holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "-- Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Old Notes as
promptly as practicable, such notice in the case of any extension to be issued
by means of a press release or other public announcement no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in the Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to
tender Old Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to The Huntington National
Bank (the "Exchange Agent") at one of the addresses set forth below under
"Exchange Agent" on or prior to the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the Holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
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<PAGE> 59
Signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered Holder of the Old
Notes who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm which
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Old
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory form
as determined by the Company in its sole discretion, duly executed by the
registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur
any liability for failure to give such notification.
If the New Notes are to be issued, or untendered Old Notes are to be
reissued, to a person other than the Holder thereof, the Old Notes surrendered
for exchange must be properly endorsed or accompanied by appropriate bond
powers in satisfactory form as determined by the Exchange Agent in its sole
discretion. If Old Notes are registered in the name of the person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange
must be properly endorsed or accompanied by appropriate bond powers in
satisfactory form as determined by the Exchange Agent in its sole discretion,
duly executed by the registered Holder with the signature thereon guaranteed by
an Eligible Institution.
If the Letter of Transmittal or any Old Notes or powers of attorney
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Exchange
Agent of their authority to so act must be submitted.
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<PAGE> 60
Tenders must be made in round number multiples of the principal amount
of $1,000. Subject to the foregoing, tendering Holders of Old Notes may tender
less than the aggregate principal amounts represented by the Old Notes
deposited with the Company provided they appropriately indicate this fact on
the Letter of Transmittal accompanying the tendered Old Notes. If less than
all of the Old Notes evidenced by a submitted certificate are to be tendered, a
reissued certificate representing the untendered Old Notes, together with a
certificate representing the New Notes, will be sent to such tendering Holder,
unless otherwise provided in the appropriate box on the Letter of Transmittal.
By tendering, each Holder will represent to the Company that, among
other things, the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, that neither the Holder nor
any such other person has an intention to, or an arrangement or understanding
with any person, to participate in the distribution of such New Notes and that
neither the Holder nor any such other person is an "affiliate," as defined
under Rule 405 of the Act, of the Company. A broker-dealer holding Old Notes
may participate in the Exchange Offer provided that it acquired the Old Notes
for its own account as a result of market-making or other trading activities.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning the Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Old
Notes properly tendered and will issue the New Notes promptly after acceptance
of the Old Notes. See "-- Certain Conditions to the Exchange Offer" below.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted properly tendered Old Notes for exchange when, as and if the Company
has given oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note
will receive a New Note having a principal amount at maturity equal to that of
the surrendered Old Note. Original Issue Discount on the New Notes will accrue
from May 20, 1994, the date of original issuance of the Old Notes. The New
Notes will not bear interest prior to June 1, 1999.
In all cases, issuance of New Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility, a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer (including, without limitation, the determination that the
tendering Holder is an affiliate of the Company or is not acquiring the New
Notes in the ordinary course of business with no arrangement or understanding
with any person to participate in the distribution of the New Notes) or if Old
Notes are submitted for a greater principal amount than the Holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering Holder thereof (or, in the case of Old Notes tendered
by book-entry transfer
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<PAGE> 61
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described below, such non-exchanged Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration or termination of the
Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent, if requested by the Company, will make a request
to establish an account with respect to the Old Notes at the Book-Entry
Transfer Facility for purposes of the Exchange Offer within two business days
after the date of this Prospectus, and any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of Old Notes by causing the Book-Entry Transfer Facility to transfer
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedures for
transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
by the Exchange Agent at one of the addresses set forth below under "Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old
Notes and the Old Notes are not immediately available, or time will not permit
such holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent received from such Eligible Institution a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the Holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must
be received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of
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<PAGE> 62
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing Holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing Holder must also submit
the serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such Holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice
of withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the Holder thereof without cost to such Holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "-- Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer, if at any
time before the acceptance of such Old Notes for exchange or the exchange of
the New Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to
restrain or prohibit the making or consummation of the Exchange Offer
or any other transaction contemplated by the Exchange Offer, or
assessing or seeking any damages as a result thereof or in connection
therewith, or (ii) resulting in a material delay in the ability of the
Company to accept for exchange or exchange some or all of the Old
Notes pursuant to the Exchange Offer, or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any
of the transactions contemplated by the Exchange Offer by any
government or governmental authority, domestic or foreign, or any
action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or
foreign, that in the sole judgment of the Company might directly or
indirectly result in any of the consequences referred to in clauses
(i) or (ii) above or, in the sole judgment of the Company, might
result in the holders of New Notes having obligations with respect to
resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the
cover page of
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<PAGE> 63
this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or
general limitation on prices for, or trading in, securities on any
national securities exchange or in the over-the-counter market, (ii)
any limitation by any governmental agency or authority which may
adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration
of a banking moratorium or any suspension of payments in respect of
banks in the United States or any limitation by any governmental
agency or authority which adversely affects the extension of credit or
(iv) a commencement of war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time
of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties,
assets, liabilities, financial condition, operations, results of
operations or prospects of the Company and its subsidiaries taken as a
whole that, in the sole judgment of the Company, is or may be adverse
to the Company, or the Company shall have become aware of facts that,
in the sole judgment of the Company, have or may have adverse
significance with respect to the value of the Old Notes or the New
Notes;
which, in the sole judgment of the Company in any case, and regardless of the
circumstances (including any action by the Company) giving rise to any such
condition, makes it inadvisable to proceed with the Exchange Offer and/or with
such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect to
the Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
EXCHANGE AGENT
The Huntington National Bank has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
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<PAGE> 64
THE HUNTINGTON NATIONAL BANK
<TABLE>
<S> <C> <C>
By Mail/Overnight Courier: By Facsimile Transmission: By Hand:
(216) 344-6584 In Cleveland, Ohio:
The Huntington National Bank Confirm by Telephone: The Huntington National Bank
917 Euclid Avenue (216) 344-6662 917 Euclid Avenue
Cleveland, Ohio 44115 Cleveland, Ohio 44115
Attention: Corporate Trust CM23 Attention: Corporate Trust CM23
In New York, New York:
The Huntington National Bank
In care of The Bank of New York
Drop Window Services
101 Barclay Street
New York, New York 10286
</TABLE>
DELIVERY OF LETTERS OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer, and will not make any payment to brokers,
dealers, or others soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the
Exchange Offer will be paid by the Company and are estimated in the aggregate
to be $240,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Act and
applicable state securities laws. In general, the Old Notes may not be offered
or sold, unless registered under the Act, except pursuant to an exemption from,
or in a transaction not subject to, the Act and applicable state securities
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<PAGE> 65
laws. The Company has no obligation to, and does not currently anticipate that
it will, register the offer and sale of the Old Notes under the Act. Based on
interpretations by the Staff of the Commission, set forth in certain
"no-action" letters issued to third parties and unrelated to the Company and
the Exchange Offer, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the Act)
without compliance with the registration and prospectus delivery provisions of
the Act provided that such New Notes are acquired in the ordinary course of
such Holders' business and such Holders have no intention, nor any arrangement
with any person, to participate in the distribution of such New Notes. If any
Holder has any arrangement or understanding with respect to the distribution of
the New Notes to be acquired pursuant to the Exchange Offer, such Holder (i)
could not rely on the applicable interpretations of the Staff of the Commission
enunciated in Exxon Capital Holdings Corporation (available April 13, 1989) or
similar letters and (ii) must comply with the registration and prospectus
delivery requirements of the Act in connection with any resale transaction. A
broker-dealer holding Old Notes may participate in the Exchange Offer provided
that it acquired the Old Notes for its own account as a result of
market-making or other trading activities. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
meeting the requirements of the Act in connection with any resale of such New
Notes since such broker-dealer may be considered a statutory underwriter. Such
prospectus may be the prospectus relating to the Exchange Offer only if it
contains a plan of distribution with respect to such resale transactions (but
need not name the broker-dealer or disclose the amount of New Notes held by the
broker-dealer). See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company does not currently intend to
register or qualify the sale of the New Notes in any such jurisdictions.
DESCRIPTION OF THE NOTES
The Old Notes have been, and the New Notes will be, issued under the
indenture dated as of May 20, 1994 (the "Indenture") between the Company and
the Trustee. The following summary of certain provisions of the Indenture does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
GENERAL
The New Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. Principal of,
premium, if any, and interest on the Notes will be payable, and the Notes will
be transferable, at the corporate trust office or agency of the Trustee in the
City of New York maintained for such purposes at the offices of its agent, Bank
of New York, 101 Barclay Street, New York, New York 10286. No service charge
will be made for any registration of
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transfer or exchange of the Notes, except for any tax or other governmental
charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The New Notes will be issued at a discount to their aggregate principal
amount. Interest will not accrue on the Notes prior to June 1, 1999.
Thereafter interest on the Notes will accrue at the rate of 12 3/4% per annum
and will be payable in cash semi-annually on June 1 and December 1, commencing
on December 1, 1999 to holders of record on the immediately preceding May 15
and November 15. Interest on the Notes will accrue from the most recent date
to which interest has been paid or, if no interest has been paid, from June 1,
1999. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Interest on overdue principal and (to the extent
permitted by law) on overdue installments of interest will accrue at the rate
of interest borne by the Notes.
REDEMPTION
Optional Redemption. The Notes will be redeemable, in whole or in part, at
the option of the Company, at any time on or after June 1, 1999, at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest to the redemption date, if redeemed
during the 12-month period beginning on June 1 of the years indicated below:
YEAR PERCENTAGE
---- ----------
1999 106.375%
2000 104.250
2001 102.125
2002 and thereafter 100.000%
In addition, at any time prior to June 1, 1997, the Company may use
all or any portion of the net cash proceeds of one or more Public Equity
Offerings to redeem Notes in an aggregate principal amount at maturity not to
exceed $25,000,000 at a redemption price equal to 112.75% of the Accreted
Value; provided that not less than $65,000,000 aggregate principal amount at
maturity of the Notes remains outstanding upon the completion of such
redemption. Any such redemption will be required to occur on or prior to 60
days after the receipt of the proceeds of any such Public Equity Offering.
Selection and Notice. In the event that less than all of the Notes
are to be redeemed at any time, selection of Notes for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not listed on a national securities exchange, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate, provided, however,
that no Notes of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal
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amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and
after the redemption date, any interest will cease to accrue on Notes or
portions thereof called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (the date of such occurrence being
the "Change of Control Date"), the Company shall notify the holders in writing
of such occurrence and shall make an offer to purchase (the "Change of Control
Offer"), on a business day (the "Change of Control Purchase Date") not later
than 60 days following the Change of Control Date, all Notes then outstanding
at a purchase price equal to 101% of the Accreted Value thereof plus accrued
and unpaid interest, if any. Notice of a Change of Control Offer shall be
mailed by the Company to the holders not less than 25 days nor more than 45
days before the Change of Control Purchase Date. The Change of Control Offer
is required to remain open for at least 20 business days and until the close of
business on the business day next preceding the Change of Control Purchase
Date.
The Company will comply with any tender offer rules under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which may
then be applicable, including, but not limited to, Section 14(e) under the
Exchange Act and the rules thereunder, in connection with any Change of Control
Offer required to be made by the Company to repurchase the Notes as a result of
a Change of Control.
RANKING
The indebtedness of the Company evidenced by the Notes will rank
senior in right of payment to all subordinated indebtedness of the Company,
including the Senior Subordinated Notes and the Convertible Debentures, and
will rank pari passu in right of payment with all other existing or future
unsubordinated indebtedness of the Company.
SECURITY
The Company will pledge to the Trustee for the benefit of the holders
of the Notes the Capital Stock of all its current and future directly owned
domestic Subsidiaries, other than Ideal Holding Group or any other Subsidiary
that relates to the business conducted by Ideal and 65% of the Capital Stock of
all its future directly owned foreign Subsidiaries and the domestic holding
companies of such foreign Subsidiaries, other than any Subsidiary that relates
to the business conducted by Ideal. Such pledge will secure the payment and
performance when due of all of the obligations of the Company under the
Indenture and the Notes.
So long as no Event of Default shall have occurred and be continuing,
and subject to certain terms and conditions in the Indenture, the Company will
be entitled to receive all cash dividends, interest and other payments made
upon or with respect to the collateral pledged by it and to exercise any voting
and other consensual rights pertaining to the collateral pledged by it. Upon
the occurrence and during the continuance of an Event of Default, (a) all
rights of the Company to exercise such voting or other consensual rights will
cease, and all such rights will become vested in the Trustee, which shall have
the sole right to exercise such voting and other consensual rights, and (b) all
rights of the
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Company to receive all dividends made upon or with respect to the
pledged collateral will cease and such dividends shall be paid to the Trustee.
Upon the occurrence and during the continuance of an Event of Default,
the Trustee shall foreclose upon the pledged collateral in accordance with
instructions received from holders of a majority of the aggregate principal
amount of outstanding Notes, or in the absence of such instructions, in such
manner as the Trustee deems appropriate, in each case, as provided in the
Indenture. All funds received by the Trustee upon any foreclosure shall be
distributed by the Trustee in accordance with the provisions of the Indenture.
Upon the full and final payment and performance of all obligations of the
Company under the Indenture and the Notes, the pledged collateral shall be
released. In addition, in the event that the Capital Stock of any Subsidiary
of the Company is sold and the Net Cash Proceeds from any such sale are applied
in accordance with the terms of the Indenture, any Lien in favor of the Trustee
on the assets sold shall be released; provided, that the Trustee shall have
received from the Company an Officers' Certificate that such Net Cash Proceeds
have been so applied.
The rights of the Trustee to foreclose upon and dispose of the pledged
collateral is likely to be significantly impaired by applicable bankruptcy law
if a bankruptcy proceeding were to be commenced by or against the Company prior
to the Trustee's having disposed of the pledged collateral. Under Title XI of
the United States Code (the "Bankruptcy Code"), a secured creditor such as the
Trustee is prohibited from disposing of security upon foreclosure in a
bankruptcy case, even though the debtor is in default under the applicable debt
instruments, without bankruptcy court approval. Moreover, in general, the
Bankruptcy Code prohibits the bankruptcy court from giving such approval if the
secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended
in general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional
security, if and at such times as the court in its discretion determines, for
any diminution in the value of the collateral as a result of the stay of
disposition during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how
long payments under the Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could dispose of the pledged
collateral or whether or to what extent holders of the Notes would be
compensated for any delay in payment or loss of value of the pledged collateral
through the requirement of "adequate protection."
PROVISION OF FINANCIAL INFORMATION
Pursuant to the Indenture, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will submit for filing with the Commission such annual reports,
quarterly reports and other documents and distribute or cause to be distributed
to holders of the Notes copies of such annual reports, quarterly reports and
other documents that the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were so subject. Such annual reports will contain consolidated financial
statements and notes thereto, together with an opinion thereon expressed by an
independent public accounting firm, and management's discussion and analysis of
financial condition and results of operations and such quarterly reports will
contain unaudited condensed consolidated financial statements for the first
three quarters of each fiscal year.
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CERTAIN COVENANTS
Set forth below are certain covenants which are contained in the
Indenture.
Limitation on Additional Indebtedness. The Indenture will provide
that the Company shall not, and shall not cause or permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume, issue,
guarantee or in any manner become liable for or with respect to the payment of,
any Attributable Indebtedness or Indebtedness (including any Acquired
Indebtedness) except for (each of which shall be given independent effect):
(a) Indebtedness of the Company under the Notes and the
Indenture;
(b) Indebtedness of Subsidiaries of Waxman USA outstanding
from time to time pursuant to the Domestic Credit Facility and/or any
other credit arrangement not to exceed at any one time an amount (the
"Permitted Amount") equal to, when added to the principal amount of
Indebtedness of Subsidiaries of Waxman USA outstanding pursuant to
clause (k) below, (A) the sum of 85% of the net book value of the
accounts receivable and 50% of the net book value of the inventory of
the Subsidiaries of Waxman USA, in each case calculated on a
consolidated basis in accordance with GAAP minus (B) the amount of
Indebtedness pursuant to the Domestic Credit Facility and/or such
other credit arrangement prepaid with the Net Cash Proceeds from an
Asset Sale pursuant to the provisions described below under
"Disposition of Proceeds of Asset Sales";
(c) Indebtedness of the Company and those Subsidiaries of the
Company which are in existence on the Issue Date, which Indebtedness
is outstanding on the Issue Date;
(d) Indebtedness of Waxman USA if, immediately after giving
pro forma effect to the incurrence thereof, the Consolidated Interest
Coverage Ratio of Waxman USA would be equal to or greater than 2.00:1
if such Indebtedness is incurred on or prior to June 1, 1996 or equal
to or greater than 2.25:1 if such Indebtedness is incurred thereafter;
(e) Indebtedness of the Company if, immediately after giving
pro forma effect to the incurrence thereof, the Consolidated Interest
Coverage Ratio of the Company would be equal to or greater than 2.00:1
if such Indebtedness is incurred on or prior to June 1, 1996 or equal
to or greater than 2.25:1 if such Indebtedness is incurred thereafter;
(f) Indebtedness of a Subsidiary of the Company (other than
Ideal Holding Group and its Subsidiaries) issued to and held by the
Company or a Wholly-Owned Subsidiary of the Company or Indebtedness of
the Company to a Wholly-Owned Subsidiary of the Company in respect of
intercompany advances or transactions;
(g) Indebtedness represented by Interest Rate Protection
Obligations and Currency Hedging Agreements of Ideal Holding Group and
Subsidiaries of Waxman USA or Ideal Holding Group with respect to
Indebtedness of Ideal Holding Group and Subsidiaries of Waxman USA or
Ideal Holding Group (which Indebtedness is otherwise permitted to be
incurred under this covenant) to the extent the notional principal
amount of such Interest Rate
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Protection Obligations or Currency Hedging Agreements, as the case may
be, does not exceed the principal amount of the Indebtedness to which
such Interest Rate Protection Obligations or Currency Hedging
Agreements, as the case may be, relate;
(h) working capital Indebtedness of Ideal Holding Group or
its Subsidiaries outstanding from time to time pursuant to the
Canadian Credit Agreement not to exceed at any one time an amount
equal to the sum of 85% of the net book value of the accounts
receivable and 50% of the net book value of the inventory of Ideal, in
each case calculated on a consolidated basis in accordance with GAAP
minus the amount of Indebtedness pursuant to the Canadian Credit
Agreement prepaid with the Net Cash Proceeds from a Company Asset Sale
pursuant to the provisions described under "Disposition of Proceeds of
Asset Sales"; term loan Indebtedness of Ideal Holding Group or its
Subsidiaries outstanding pursuant to the Canadian Credit Agreement,
not to exceed Cdn.$24.5 million outstanding at any one time; and other
Permitted Ideal Indebtedness of Ideal Holding Group or its
Subsidiaries not to exceed $10,000,000 outstanding at any one time;
(i) Indebtedness of Subsidiaries of Waxman USA pursuant to
the Domestic Term Loan not to exceed $15,000,000 principal amount
outstanding at any one time;
(j) any replacements, renewals, refinancings and extensions
of Indebtedness incurred under clauses (a), (c), (d) and (e) above,
provided that (i) except with respect to Permitted Waxman USA
Indebtedness, any such replacement, renewal, refinancing and extension
(w) shall not provide for any mandatory redemption, amortization or
sinking fund requirement in an amount greater than or at a time prior
to the amounts and times specified in the Indebtedness being replaced,
renewed, refinanced or extended, and (x) shall be contractually
subordinated to the Notes at least to the extent, if at all, that the
Indebtedness being replaced, renewed, refinanced or extended is
subordinated to the Notes, (ii) except with respect to Permitted
Waxman USA Indebtedness, any such Indebtedness of any Person must be
replaced, renewed, refinanced or extended with Indebtedness incurred
by such Person or, except with respect to any such Indebtedness of
Ideal Holding Group or a Subsidiary of Ideal Holding Group, by the
Company and (iii) the principal amount of Indebtedness incurred
pursuant to this clause (j) (or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness) shall not exceed the sum of
the principal amount (or, with respect to Indebtedness which provides
for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration of the maturity thereof,
the accreted value thereof) of Indebtedness so replaced, renewed,
refinanced or extended, plus accrued interest, the amount of any
premium required to be paid in connection with such replacement,
renewal, refinancing or extension pursuant to the terms of such
Indebtedness or the amount of any premium reasonably determined by the
Company as necessary to accomplish such replacement, renewal,
refinancing or extension by means of a tender offer or privately
negotiated purchase and the amount of fees and expenses incurred in
connection therewith; and
(k) in addition to the items referred to in clauses (a)
through (j) above, (x) Indebtedness and Attributable Indebtedness of
Waxman USA, the Company or Subsidiaries of Waxman USA in an aggregate
principal amount not to exceed $5,000,000 at any one time outstanding,
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provided that Indebtedness of Subsidiaries of Waxman USA shall not
exceed at any one time, when added to the principal amount of
Indebtedness outstanding pursuant to the preceding clause (b), the
Permitted Amount and (y) additional Indebtedness and Attributable
Indebtedness of Waxman USA or the Company in an aggregate principal
amount not to exceed $10,000,000 at any one time outstanding.
Limitation on Investments, Loans and Advances. The Indenture will
provide that the Company shall not make and shall not permit any of its
Subsidiaries to make any direct or indirect advance, loan, or other extension
of credit to (including any guarantee of a loan or other extension of credit)
or investment in, capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others or otherwise), or purchase of Capital Stock, bonds,
notes, debentures or other similar instruments issued by, any other Person
(collectively, "Investments"), except: (i) Investments by the Company or a
Subsidiary of the Company in any Wholly-Owned Subsidiary of the Company other
than Ideal Holding Group or a Subsidiary of Ideal Holding Group (including any
such Investment pursuant to which a Person becomes a Wholly-Owned Subsidiary of
the Company); (ii) Investments in the Company or a Wholly-Owned Subsidiary of
the Company by any Subsidiary of the Company; (iii) Investments represented by
receivables created or acquired in the ordinary course of business or the
settlement of such receivables in the ordinary course of business; (iv)
Investments permitted to be made pursuant to the "Limitation on Restricted
Payments" covenant below; (v) Investments represented by advances to employees
of the Company or its Subsidiaries made in the ordinary course of business and
consistent with past business practices; and (vi) Permitted Investments.
Limitation on Restricted Payments. The Indenture will provide that
the Company shall not make, and shall not permit any of its Subsidiaries to
make, directly or indirectly, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Restricted
Payment;
(b) at the time of and after giving effect to such Restricted
Payment, the Company could incur at least $1.00 of Indebtedness
pursuant to clause (e) of the "Limitation on Additional Indebtedness"
covenant above; and
(c) immediately after giving effect to such Restricted
Payment, the aggregate of all Restricted Payments declared or
made after the Issue Date through and including the date of such
Restricted Payment does not exceed the sum of (1) 50% of the Company'
Consolidated Net Income (or in the event such Consolidated Net Income
shall be a deficit, minus 100% of such deficit) from and including
April 1, 1994 to and including the last day of the fiscal quarter
immediately preceding the date of such Restricted Payment (the "Base
Period"), (2) 100% of the aggregate Net Proceeds received by the
Company from the issue or sale, during the Base Period, of Capital
Stock (other than Disqualified Stock) of the Company or any
Indebtedness or other securities of the Company convertible into or
exercisable or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company which has been so converted, exercised or
exchanged, as the case may be and (3) in the case of the disposition
of any Investment (other than an Investment which is a loan) made
after the Issue Date or the repayment or disposition
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of any loan made after the Issue Date (other than any such
Investment or loan made pursuant to clauses (i), (ii), (iii), (v) and
(vi) of the "Limitation on Investments, Loans and Advances" covenant
above) an amount equal to, with respect to any such Investment (other
than an Investment which is a loan) the lesser of the net cash
proceeds received on disposition with respect to such Investment or
the initial amount of such Investment, in either case, less the cost
of disposition of such Investment and with respect to any such loan,
an amount equal to any cash received on account of (x) the repayment
of principal on such loan or (y) the disposition of such loan, less
the cost of such disposition and not to exceed the principal amount of
such disposed of loan. For purposes of determining the amount
expended for Restricted Payments, cash distributed shall be valued at
the face amount thereof and property other than cash shall be valued
at its Fair Market Value.
The provisions of this covenant shall not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if such
payment would comply with the provisions of the Indenture at the date of the
declaration of such payment and, other than with respect to this "Limitation on
Restricted Payments" covenant, at the date of such payment, (ii) the retirement
of any shares of Capital Stock of the Company or subordinated Indebtedness of
the Company by conversion into, or by an exchange for, shares of Capital Stock
of the Company that are not Disqualified Stock or out of the Net Proceeds of
the substantially concurrent sale (other than to a Subsidiary of the Company)
of other shares of Capital Stock (other than Disqualified Stock) of the
Company, (iii) the redemption or retirement of subordinated Indebtedness of the
Company in exchange for, by conversion into, or out of the Net Proceeds of, a
substantially concurrent sale of subordinated Indebtedness of the Company (other
than to a Subsidiary of the Company) that (x) is contractually subordinated in
right of payment to the Notes at least to the same extent that the Indebtedness
being redeemed or retired is subordinated to the Notes and (y) is permitted to
be incurred in accordance with the covenant described under "Limitation on
Additional Indebtedness" above, (iv) the redemption, repurchase, retirement or
other acquisition of any Senior Subordinated Notes (A) on the Issue Date in
exchange for the Notes and (B) after the Issue Date, out of the proceeds of
Permitted Waxman USA Indebtedness at a purchase price not in excess of the
percentage of principal amount thereof set forth in the indenture related
thereto, plus accrued interest, if any, to the date of redemption and (v) the
purchase or redemption of the Convertible Debentures at a purchase price not in
excess of 101.875% of the principal amount thereof, plus accrued interest, if
any, to the date of redemption.
In determining the amount of Restricted Payments permissible under
clause (c) above, amounts expended pursuant to clauses (i) and (ii) above shall
be included as Restricted Payments.
Limitation on Liens. In addition to the restrictions described below
under "Impairment of Security Interest," the Indenture will provide that the
Company shall not, and shall not permit, cause or suffer any of its
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind
upon any of its property or assets now owned or hereafter acquired by it,
unless the Notes are equally and ratably secured by such Lien simultaneously
with or prior to the creation, incurrence or assumption of such Lien, except
for:
(a) Liens existing as of the Issue Date;
(b) Permitted Liens;
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(c) Liens on the assets and property of the Company and
Waxman USA to secure the payment of all or a part of the purchase
price of assets or property acquired in the ordinary course of
business after the Issue Date, provided that (i) the aggregate
principal amount of Indebtedness secured by such Liens shall not
exceed the lesser of cost or Fair Market Value of the assets or
property so acquired and shall not, in any event, when added to the
amount of Capitalized Lease Obligations and Attributable Indebtedness
permitted to be secured by clause (f) below, exceed $5,000,000, and
(ii) such Liens shall not encumber any assets or property of the
Company or its Subsidiaries other than the assets or property so
acquired and shall attach to such assets or property within 60 days of
the acquisition of such assets or property;
(d) Liens on the assets of Subsidiaries of Waxman USA
securing Indebtedness of Subsidiaries of Waxman USA;
(e) Liens on the assets and Capital Stock of Ideal Holding
Group and its Subsidiaries securing Indebtedness under the Canadian
Credit Agreement;
(f) Liens on the assets and property of the Company and
Waxman USA to secure Capitalized Lease Obligations and Attributable
Indebtedness, provided (i) such Liens do not extend to or cover any
property or assets of the Company or its Subsidiaries other than the
property or assets subject to such Capitalized Lease Obligations and
Attributable Indebtedness, and (ii) the amount of Capitalized Lease
Obligations and Attributable Indebtedness secured by such Liens shall
not, when added to the principal amount of Indebtedness permitted to
be secured by clause (c) above, exceed $5,000,000;
(g) leases and subleases of real property which do not
interfere with the ordinary conduct of the business of the Company or
any of its Subsidiaries, and which are made on customary and usual
terms applicable to similar properties;
(h) Liens securing Indebtedness which is incurred to
refinance Indebtedness which has been secured by a Lien permitted
under the Indenture and is permitted to be refinanced under the
Indenture, provided that such Liens do not extend to or cover any
property or assets of the Company or any of its Subsidiaries not
securing the Indebtedness so refinanced;
(i) Liens on (x) the assets or property of a Subsidiary of
Waxman USA existing at the time such Subsidiary became a Subsidiary of
Waxman USA and not incurred as a result of (or in connection with or
anticipation of) such Subsidiary becoming a Subsidiary of Waxman USA,
provided that such Liens do not extend to or cover any property or
assets of the Company or any of its Subsidiaries (other than the
property or assets of the Subsidiary so acquired that are subject to
such Lien) and (y) assets existing at the time such assets were
acquired by the Company, Waxman USA or a Subsidiary of Waxman USA and
not incurred as a result of (or in connection with or anticipation of)
the acquisition of such assets, provided that such Liens do not extend
to or cover any property or assets of the Company or any of its
Subsidiaries (other than the assets so acquired); and
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(j) Liens on the Capital Stock of Subsidiaries of Waxman USA
to secure the Permitted Waxman USA Indebtedness and/or the Senior
Secured Notes.
Notwithstanding the foregoing, Liens shall be permitted by the
previous clauses (a) through (j) only to the extent that any Indebtedness
secured by such Liens is incurred pursuant to and in accordance with the
provisions of the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture will provide that the Company shall not, and shall
not permit any Subsidiary of the Company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective or enter into any
agreement with any Person that would cause any consensual encumbrance or
restriction of any kind on the ability of any Subsidiary of the Company to (a)
pay dividends, in cash or otherwise, or make any other distributions on its
Capital Stock or any other interest or participation in, or measured by, its
profits owned by, or pay any Indebtedness owed to, the Company or a Subsidiary
of the Company, (b) make any loans or advances to the Company or any Subsidiary
of the Company or (c) transfer any of its properties or assets to the Company
or to any Subsidiary of the Company, except, in each case, for such
encumbrances or restrictions existing under or contemplated by or by reason of
(i) any restrictions existing under the Domestic Credit Facility, the Domestic
Term Loan, the Canadian Credit Agreement and the Senior Secured Indenture as in
effect on the Issue Date, (ii) any restrictions existing under the instruments
evidencing Permitted Waxman USA Indebtedness provided that any such
restrictions permit dividends or distributions up to the Company to satisfy
interest payments on the Notes so long as and to the extent that no default or
event of default occurs thereunder before or after the payment of any such
dividend or distribution, (iii) instruments evidencing indebtedness outstanding
on the Issue Date, (iv) any restrictions existing under any agreement that
refinances, replaces, amends or extends an agreement containing a restriction
permitted by clause (i), (ii) or (iii) above; provided that the terms and
conditions of any such restrictions are not materially less favorable to the
holders of the Notes than those under or pursuant to the agreement being
replaced, amended or extended or the agreement evidencing the Indebtedness
refinanced, and (v) customary non-assignment or sublease provisions of any
agreement of the Company or its Subsidiaries.
Disposition of Proceeds of Asset Sales. The Indenture will provide
that the Company shall not, and shall not permit any of its Subsidiaries to,
make any Asset Sale unless (i) such Asset Sale is for Fair Market Value and
(ii) the net proceeds therefrom consist of at least 75% cash or Cash
Equivalents (with Indebtedness of the Company or its Subsidiaries assumed by
the purchaser being counted as cash for such purposes if the Company and its
Subsidiaries are permanently released from all liability therefor).
The Company shall or shall cause its Subsidiaries to, within five days
of receipt of any Net Cash Proceeds received from an Asset Sale involving the
sale, transfer or other disposition of the Capital Stock of any Person which is
pledged or required to be pledged pursuant to the provisions of the Indenture
to the Trustee for the benefit of the holders of the Notes ("Pledged Collateral
Net Cash Proceeds"), to the extent such Pledged Collateral Net Cash Proceeds
are not to be used to redeem Notes pursuant to and in accordance with the
provisions set forth above in the second paragraph under "Redemption--Optional
Redemption," designate such Pledged Collateral Net Cash Proceeds as Excess
Proceeds subject to disposition as provided below.
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The Company shall or shall cause its Subsidiaries to, within 360 days
of receipt of any Net Cash Proceeds from an Asset Sale (other than any Pledged
Collateral Net Cash Proceeds which shall be disposed of as provided in the
previous paragraph), (x) with respect to any such Net Cash Proceeds from an
Asset Sale involving property or assets of Ideal Holding Group or a Subsidiary
of Ideal Holding Group or the Capital Stock of Ideal Holding Group or a
Subsidiary of Ideal Holding Group, apply such Net Cash Proceeds to reduce
amounts owing under the Canadian Credit Agreement and with respect to any other
Net Cash Proceeds, apply such Net Cash Proceeds to permanently prepay
Indebtedness of the Company which ranks pari passu with the Notes (including
any repurchase of Notes through open market purchases or otherwise) or
Indebtedness of a Subsidiary of the Company, other than Ideal Holding Group and
its Subsidiaries (including any repurchase of Permitted Waxman USA Indebtedness
through open market purchases or otherwise), (y) apply such Net Cash Proceeds
to acquire or construct assets in lines of business related to the Company and
its Subsidiaries' businesses as in existence on the Issue Date, provided that
only Net Cash Proceeds from an Asset Sale involving property or assets of Ideal
Holding Group or a Subsidiary of Ideal Holding Group may be applied to acquire
or construct assets of Ideal Holding Group or a Subsidiary of Ideal Holding
Group or (z) to the extent such Net Cash Proceeds are not applied as provided
in the previous clauses (x) and (y), designate such Net Cash Proceeds as
"Excess Proceeds" subject to disposition as provided below.
When the aggregate amount of unutilized Excess Proceeds equals or
exceeds $5.0 million, the Company shall make an offer to repurchase ("the Asset
Sale Offer") an aggregate principal amount of Notes equal to such Excess
Proceeds at a price in cash equal to 100% of the Accreted Value thereof, plus
accrued and unpaid interest, if any. Upon completion of such offer to
repurchase, the amount of Excess Proceeds shall be reset to zero and any
unutilized Excess Proceeds may be utilized by the Company for any purpose. If
the aggregate principal amount of Notes tendered exceeds the amount of Excess
Proceeds, the Notes tendered will be purchased on a pro rata basis.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that an Asset Sale occurs and the
Company is required to repurchase Notes as described above. The Company shall,
subject to the provisions described herein, be required to repurchase all Notes
validly tendered into any Asset Sale Offer and not withdrawn. Any Asset Sale
Offer is required to remain open for at least 20 business days.
Impairment of Security Interest. The Indenture will provide that the
Company shall not, and shall not permit any of its Subsidiaries to, take or
omit to take any action which action or omission might or would have the result
of affecting or impairing the security interest in favor of the Trustee, on
behalf of itself and the holders of the Notes, with respect to the collateral
required to be pledged under the Indenture, and the Company shall not create,
otherwise incur or suffer to exist, in favor of any Person (other than the
Trustee on behalf of itself and the holders of the Notes), any interest
whatsoever in such collateral.
Limitation on Transactions with Affiliates. The Indenture will
provide that the Company shall not, and shall not permit, cause, or suffer any
Subsidiary of the Company to, conduct any business or enter into any
transaction or series of transactions with or for the benefit of any of their
respective Affiliates (each an "Affiliate Transaction"), except in good faith
and on terms that are no less favorable to the Company or such Subsidiary, as
the case may be, than those that could have been obtained in
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a comparable transaction on an arm's length basis from a Person not an
Affiliate of the Company or such Subsidiary. With respect to any Affiliate
Transaction (and each series of related Affiliate Transactions which are
similar or part of a common plan) involving aggregate payments or other market
value in excess of $1,000,000, the Company shall deliver an officer's
certificate to the Trustee certifying that such Affiliate Transaction (or
series of related Affiliate Transactions) complies with the foregoing
provisions and that such Affiliate Transaction (or series of Affiliate
Transactions) was approved by a majority of the Independent Directors of the
Company and the Board of Directors of the Company as a whole. Notwithstanding
the foregoing, the restrictions set forth in this covenant shall not apply to
(x) customary directors' fees and consulting fees, (y) transactions with or
among the Company and its Wholly-Owned Subsidiaries (other than Ideal Holding
Group and its Subsidiaries) or (z) loans or advances by the Company to Ideal
Holding Group, Inc. or its subsidiaries not to exceed Cdn. $450,000 aggregate
principal amount outstanding at any one time.
Limitation on Sale and Leaseback Transactions. The Indenture will
provide that the Company will not, and will not permit any of its Subsidiaries
to, enter into any arrangement with any Person providing for the leasing to the
Company or any such Subsidiary of any real or tangible personal property
(except for leases between or among the Company and any of its Subsidiaries)
which property or similar property has been or is to be sold or transferred by
the Company or such Subsidiary to such Person in contemplation of such leasing
(a "Sale/Leaseback Transaction"). The foregoing will not prohibit
Sale/Leaseback Transactions entered into by the Company, Waxman USA or
Subsidiaries of Waxman USA if (a) the Company, Waxman USA or such Subsidiary of
Waxman USA, as the case may be, would be entitled to incur Indebtedness in an
amount equal to the Attributable Indebtedness with respect to such arrangement
pursuant to the "Limitation on Additional Indebtedness" covenant, (b) the
Company, Waxman USA or such Subsidiary of Waxman USA, as the case may be, could
incur a Lien on the assets subject to such Sale/Leaseback Transaction pursuant
to the "Limitation on Liens" covenant if such Sale/Leaseback Transaction had
been a mortgage and (c) such net proceeds are deemed to be Net Cash Proceeds
for purposes of, and the Company, Waxman USA or such Subsidiary of Waxman USA,
as the case may be, otherwise complies with the provisions of, the "Disposition
of Proceeds of Asset Sales" covenant.
Limitation on Issuances and Sales of Preferred Stock by Subsidiaries.
The Indenture will provide that the Company (i) will not permit any of its
Subsidiaries to issue any Preferred Stock (other than to the Company or a
Wholly-Owned Subsidiary of the Company) and (ii) will not permit any Person
(other than the Company or a Wholly-Owned Subsidiary of the Company) to own any
Preferred Stock of any Subsidiary of the Company. Notwithstanding the
foregoing, Ideal Holding Group and its Subsidiaries may issue Preferred Stock
to Persons other than the Company or a Wholly-Owned Subsidiary of the Company
to the extent that Ideal Holding Group or such Subsidiary of Ideal Holding
Group, as the case may be, could incur Indebtedness in a principal amount equal
to the liquidation preference of such Preferred Stock pursuant to clause (h) of
"Limitation on Additional Indebtedness" above.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Indenture will provide that the Company shall not consolidate with
or merge with or into or sell, assign, convey, lease, transfer or otherwise
dispose of all or substantially all of its properties and assets to any Person
or Persons in a single transaction or through a series of related transactions
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or permit any of its Subsidiaries to do any of the foregoing, unless: (a) the
Company shall be the continuing Person or the Person formed by or surviving
such consolidation or merger or the Person to which such sale, lease,
conveyance, lease, transfer or other disposition is made (the "surviving
entity") shall be a corporation organized and validly existing under the laws
of the United States or any State thereof or the District of Columbia; (b) the
surviving entity shall expressly assume, by a supplemental indenture executed
and delivered to the Trustee, in form and substance reasonably satisfactory to
the Trustee, all of the obligations of the Company under the Notes and the
Indenture; (c) immediately before and immediately after giving effect to such
transaction, or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default or Event of
Default shall have occurred and be continuing; (d) the Company or the surviving
entity (in the case of a merger or consolidation involving the Company or any
sale, assignment, conveyance, lease, transfer or other disposition of all or
substantially all of the Company's properties and assets) shall immediately
after giving effect to such transaction or series of transactions (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions)
have a Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of the Company immediately prior to such transaction or series of
transactions; (e) immediately after giving effect to such transaction or series
of transactions, the Company or the surviving entity (in the case of a merger
or consolidation involving the Company or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the
Company's properties and assets) could incur $1.00 of Indebtedness pursuant to
clause (e) of the "Limitation on Additional Indebtedness" covenant described
above; and (f) the Company or the surviving entity shall have delivered to the
Trustee an Officer's Certificate stating that such consolidation, merger, sale,
assignment, conveyance, lease, or transfer or other disposition and, if a
supplemental indenture is required in connection with such transaction or
series of transactions, such supplemental indenture complies with this covenant
and that all conditions precedent in the Indenture relating to the transaction
or series of transactions have been satisfied.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) default in the payment of any interest on the Notes when
it becomes due and payable and continuance of any such default for a
period of 30 days; or
(ii) default in the payment of the principal of, or premium,
if any, on the Notes when due (including a default in payment upon an
offer to purchase required to be made by the Indenture); or
(iii) default in the performance, or breach, of any covenant
in the Indenture (other than defaults specified in clause (i) or (ii)
above), and continuance of such default or breach for a period of 30
days after written notice to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes; or
(iv) failure by the Company or any Subsidiary (a) to make
any payment when due with respect to any other Indebtedness under one
or more classes or issues of Indebtedness which
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one or more classes or issues of Indebtedness are in an
aggregate principal amount of $5,000,000 or more (other than any such
failure to make a payment with respect to the Canadian Credit
Agreement or any Permitted Ideal Indebtedness) or (b) to perform any
term, covenant, condition, or provision of one or more classes or
issues of Indebtedness which one or more classes or issues of
Indebtedness are in an aggregate principal amount of $5,000,000 or
more, which failure, in the case of this clause (b), results in an
acceleration of the maturity thereof (other than any such failure
which results in the acceleration of the maturity of the Canadian
Credit Agreement or any Permitted Ideal Indebtedness); or
(v) one or more judgments, orders or decrees for the payment
of money in excess of $5,000,000, either individually or in an
aggregate amount, shall be entered against the Company or any of its
Subsidiaries (other than Ideal Holding Group and its Subsidiaries (but
only as long as the Canadian Credit Agreement and any Permitted Ideal
Indebtedness is non-recourse to, and credit support (other than
Permitted Credit Support) is not otherwise required to be provided by,
the Company or its Subsidiaries (other than Ideal Holding Group and
its Subsidiaries))) or any of their respective properties and shall
not be discharged and there shall have been a period of 60 days during
which a stay of enforcement of such judgment or order, by reason of
pending appeal or otherwise, shall not be in effect; or
(vi) certain events of bankruptcy or insolvency with respect
to the Company or any Material Subsidiary (other than Ideal Holding
Group and its Subsidiaries (but only as long as the Canadian Credit
Agreement and any Permitted Ideal Indebtedness is non-recourse to, and
credit support (other than Permitted Credit Support) is not otherwise
required to be provided by, the Company or its Subsidiaries (other
than Ideal Holding Group and its Subsidiaries))) shall have occurred;
or
(vii) the Indenture ceases to be in full force and effect or
ceases to give the Trustee, in any material respect, the Liens,
rights, powers and privileges purported to be created thereby.
If an Event of Default (other than an Event of Default specified in
clause (vi) above with respect to the Company) occurs and is continuing, then
the Trustee or the holders of at least 25% in aggregate principal amount of the
outstanding Notes may, by written notice, and the Trustee upon the request of
the holders of not less than 25% in aggregate principal amount of the
outstanding Notes shall, declare the Accreted Value plus accrued interest (if
any) on all Notes on the date of such declaration to be due and payable
immediately (the "Default Amount"). Upon any such declaration, the Default
Amount shall become due and payable immediately. If an Event of Default
specified in clause (vi) above with respect to the Company occurs and is
continuing, then the Default Amount shall ipso facto become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holder.
After a declaration of acceleration, the holders of a majority in
aggregate principal amount of outstanding Notes may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default have
been cured or waived, other than nonpayment of the Default Amount that has
become due solely as a result of such acceleration and if the rescission of
acceleration would not conflict with any judgment or decree. The holders of a
majority in aggregate principal amount of the
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outstanding Notes also have the right to waive past defaults under the
Indenture except a default in the payment of the principal of, premium, if any,
or interest on any Note, or in respect of a covenant or a provision which
cannot be modified or amended without the consent of all holders.
No holder of any of the Notes has any right to institute any
proceeding with respect to the Indenture or any remedy thereunder, unless the
holders of at least 25% in aggregate principal amount of the outstanding Notes
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding, the Trustee has failed to institute such proceeding
within 15 days after receipt of such notice and the Trustee has not within such
15-day period received directions inconsistent with such written request by
holders of a majority in aggregate principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a holder of a
Note for the enforcement of the payment of the principal of, premium, if any,
or accrued interest on, such Note on or after the respective due dates
expressed in such Note.
During the existence of an Event of Default, the Trustee is required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable indemnity. Subject to certain
provisions concerning the rights of the Trustee, the holders of a majority in
aggregate principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
DEFEASANCE
The Company may at any time terminate all of its obligations with
respect to the Notes ("defeasance"), except for certain obligations, including
those regarding any trust established for a defeasance and obligations to
register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain agencies in respect of Notes.
The Company may at any time terminate its obligations under certain covenants
set forth in the Indenture, some of which are described under "Certain
Covenants" above, and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes issued
under the Indenture ("covenant defeasance"). In order to exercise either
defeasance or covenant defeasance, the Company must irrevocably deposit in
trust with the Trustee, for the benefit of the holders of the Notes, money or
U.S. government obligations, or a combination thereof, in such amounts as will
be sufficient to pay the principal of, and premium, if any, and accrued
interest on the Notes to redemption or maturity, as the case may be, and comply
with certain other conditions, including the delivery of opinions as to certain
tax and bankruptcy matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange
of Notes) as to all outstanding Notes when either (a) all such Notes
theretofore authenticated and delivered (except lost, stolen or destroyed Notes
which have
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been replaced or paid and Notes for the payment of which money has
theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust)
have been delivered to the Trustee for cancellation and the Company has paid
all sums payable by it under the Indenture; or (b)(i) all such Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable or have been called for redemption and the Company has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust
for the purpose an amount of money sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal, premium, if any, and accrued interest to the date
of such deposit or redemption, as the case may be; (ii) the Company has paid
all sums payable by it under the Indenture; and (iii) the Company has delivered
irrevocable instructions to the Trustee to apply the deposited money toward the
payment of the Notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an Officers' Certificate and an Opinion
of Counsel stating that all conditions precedent to satisfaction and discharge
have been complied with.
AMENDMENTS AND WAIVERS
From time to time the Company, when authorized by resolution of its
Board of Directors, and the Trustee may, without the consent of the holders of
the Notes, amend, waive or supplement the Indenture or the Notes for certain
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the Indenture under the
Trust Indenture Act, making any change that does not adversely affect the
rights of any holder or mortgaging, pledging, hypothecating or granting a
security interest in favor of the Trustee as additional security for the
payment and performance of the obligations under the Indenture, in any property
or assets, including any which is required to be mortgaged, pledged or
hypothecated, or in which a security interest is required to be granted, to the
Trustee. Other amendments and modifications of the Indenture or the Notes may
be made by the Company and the Trustee with the consent of the holders of not
less than a majority of the aggregate principal amount of the outstanding
Notes; provided, however, that no such modification or amendment may, without
the consent of the holder of each outstanding Note affected thereby, (i) reduce
the principal amount outstanding of, extend the fixed maturity of, or alter the
redemption provisions of, the Notes, (ii) change the currency in which any
Notes or any principal, premium or the accrued interest thereon is payable,
(iii) reduce the percentage in principal amount outstanding of Notes, holders
of which must consent to an amendment, supplement or waiver or consent to take
any action under the Indenture or the Notes, (iv) impair the right to institute
suit for the enforcement of any payment on or with respect to the Notes, (v)
waive a default in payment with respect to the Notes, (vi) reduce the rate or
extend the time for payment of interest on the Notes, (vii) affect the ranking
or security of the Notes, (viii) following the mailing of a Change of Control
Offer, modify the provisions of the Indenture with respect to such a Change of
Control Offer in a manner adverse to any holder or (ix) release any collateral,
except in compliance with the terms of the Indenture.
REGARDING THE TRUSTEE
The Huntington National Bank will serve as Trustee under the Indenture.
CERTAIN DEFINITIONS
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Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Accreted Value" means as of any date prior to June 1, 1999, an amount
per $1,000 principal amount of Notes that is equal to the sum of (a) the
initial offering price ($539.02 per $1,000 principal amount of Notes) of such
Notes and (b) the portion of the excess of the principal amount of such Notes
over such initial offering price which shall have been amortized through such
date, such amount to be so amortized on a daily basis and compounded
semi-annually on each June 1 and December 1, at the rate of 12 3/4% per annum
from June 1, 1994 through the date of determination computed on the basis of a
360-day year of twelve 30-day months and as of any date on or after June 1,
1999, the principal amount of each Note.
"Acquired Indebtedness" means with respect to any Person, Indebtedness
of another Person existing at the time such other Person becomes a Subsidiary
of such Person or is merged with or into such Person or a Subsidiary of or
assumed in connection with an Asset Acquisition by such Person or a Subsidiary
of such Person, including, without limitation, Indebtedness incurred in
connection with, or in anticipation of, such other Person becoming a Subsidiary
of such Person, the acquisition of such other Person or the merger with or into
such other Person.
"Affiliate" of any specified Person means any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfer of cash or other property to others or payment for property or
services for the account or use of others, or otherwise) to, or purchase or
acquisition of Capital Stock in, any other Person by the Company or any of its
Subsidiaries, in either case pursuant to which such Person shall become a
Subsidiary of the Company or any of its Subsidiaries or shall be merged with or
into the Company or any of its Subsidiaries or (ii) any acquisition by the
Company or any of its Subsidiaries of the assets of any Person which constitute
substantially all of the assets of an operating unit or business of such
Person.
"Asset Sale" means with respect to any Person, any direct or indirect
sale, conveyance, transfer, lease or other disposition to any other Person
other than a Subsidiary of such Person (other than, with respect to any Asset
Sale by the Company, Ideal Holding Group or a Subsidiary of Ideal Holding
Group), in one transaction or a series of related transactions, of (i) any
Capital Stock of any Subsidiary of such Person (whether structured as a sale,
issuance or other disposition by such Person or a Subsidiary of such Person) or
(ii) any other property or asset of such Person or any Subsidiary of such
Person (other than cash or Cash Equivalents), in each case other than inventory
in the ordinary course of business and other than isolated transactions which
do not exceed $1,000,000 individually. With respect to the Company and its
Subsidiaries, the term "Asset Sale" shall not include (x) any disposition of
properties and assets of the Company or any Subsidiary that is governed under
and complies with
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the requirements set forth in "Consolidation, Merger, Conveyance,
Transfer or Lease" above, or (y) any sale by the Company of its Capital Stock.
"Attributable Indebtedness" means, in respect of a Sale/Leaseback
Transaction, as at the time of determination, the present value (discounted at
the interest rate borne, or to be borne, as the case may be, by the Notes,
compounded annually) of the total obligations of the lessee for rental payments
during the remaining term of the lease included in such Sale/Leaseback
Transaction (including any period for which such lease has been extended).
"Board Resolution" means with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person,
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Canadian Credit Agreement" means the credit agreement, dated as of
April 20, 1989, between Ideal and Bank of Montreal providing for working
capital and other financing, as the same may at any time be amended, amended
and restated, supplemented or otherwise modified, including any refinancing,
refunding, replacement or extension thereof which provides for working capital
and other financing, whether by the same or any other lender or group of
lenders provided that the Indebtedness represented by such Credit Agreement or
any such amendment, amendment and restatement, supplement or other modification
is non-recourse to, and credit support (other than Permitted Credit Support) is
not otherwise required to be provided by, the Company or its Subsidiaries
(other than Ideal Holding Group and its Subsidiaries).
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of such Person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights, warrants or options exchangeable for or convertible into such capital
stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required to be
classified and accounted for as a capital lease obligation under GAAP, and, for
the purpose of the Indenture, the amount of such obligation at any date shall
be the capitalized amount thereof at such date, determined in accordance with
GAAP.
"Cash Equivalents" means, at any time (i) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500,000,000; (iii) commercial
paper with a maturity of 180 days or less issued by a corporation (except an
Affiliate of the Company) organized under the laws of any state of the United
States or the District of Columbia and rated at least A-1 by Standard & Poor's
Corporation or at least P-1 by Moody's Investors Service, Inc.; and (iv)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States
Government or issued by any agency thereof and
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backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition; provided, however, that
the terms of such agreements comply with the guidelines set forth in the
Federal Financial Agreements of Depository Institutions with Securities Dealers
and Others, as adopted by the Comptroller of the Currency.
"Change of Control" means (i) the direct or indirect, sale, lease,
exchange or other transfer of all or substantially all of the assets of the
Company to any Person or entity or group of Persons or entities acting in
concert as a partnership or other group (a "Group of Persons") other than
Permitted Holders, (ii) the merger or consolidation of the Company with or into
another corporation with the effect that the then existing shareholders of the
Company or their Affiliates, together with the Permitted Holders, hold less
than 50% of the Voting Power of the surviving corporation of such merger or the
corporation resulting from such consolidation and do not otherwise have the
right or ability by contract or otherwise to elect a majority of the Board of
Directors of such surviving corporation, (iii) the replacement of a majority of
the Board of Directors of the Company from the directors who constituted the
Board of Directors on the Issue Date, and such replacement shall not have been
approved by a majority of the Board of Directors of the Company then still in
office who either were (x) members of the Board of Directors on the Issue Date
or (y) whose election as a member of the Board of Directors was approved in the
manner provided in this clause (iii) or (iv) a Person or Group of Persons
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of the
Company representing 35% or more of the Voting Power of the Company and, at
such time Permitted Holders are not the beneficial owners (as so defined) of a
greater percentage of such Voting Power and do not otherwise have the right or
ability by contract or otherwise to elect a majority of the Board of Directors
of the Company.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period increased
(to the extent deducted in determining Consolidated Net Income) by the sum of
the following for such period: (i) all income taxes paid or accrued according
to GAAP for such period (other than income taxes attributable to extraordinary,
unusual or non-recurring gains); (ii) Consolidated Interest Expense; (iii)
depreciation; (iv) amortization including, without limitation, amortization of
capitalized debt issuance costs; and (v) any other non-cash charges (excluding
any non-cash charge to the extent that it requires an accrual of or a reserve
for cash disbursements for any future period).
"Consolidated Interest Coverage Ratio" means, with respect to any
Person, the ratio of (i) Consolidated Cash Flow of such Person for the four
full fiscal quarters for which financial statements are available that
immediately precede the date of the transaction or other circumstances giving
rise to the need to calculate the Consolidated Interest Coverage Ratio (the
"Transaction Date") to (ii) Consolidated Interest Expense of such Person and
the aggregate amount of dividends or other distributions declared or paid on
Capital Stock (other than Common Stock) of such Person and its Subsidiaries, in
each case for such four full fiscal quarter period. For purposes of this
definition, if the Transaction Date occurs prior to the date on which such
Person's consolidated financial statements for the four full fiscal quarters
subsequent to the Issue Date are first available, "Consolidated Cash Flow" and
the items referred to in the preceding clause (ii) shall be calculated on a pro
forma basis as if the Reorganization had taken place on the first day of such
four full fiscal quarter period for which financial statements are available
that immediately precede the Transaction Date. In addition to and
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without limitation of the foregoing, for purposes of this definition,
"Consolidated Cash Flow" and the items referred to in the preceding clause (ii)
shall be calculated after giving effect on a pro forma basis for the period of
such calculation to (i) the incurrence or retirement of any Indebtedness of
such Person or any of its Subsidiaries at any time during the period (the
"Reference Period") (A) commencing on the first day of the four full fiscal
quarter period for which financial statements are available that precedes the
Transaction Date and (B) ending on and including the Transaction Date,
including, without limitation, the incurrence of the Indebtedness giving rise
to the need to make such calculation, as if such incurrence or retirement
occurred on the first day of the Reference Period; provided, that if such
Person or any of its Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the above clause shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or Subsidiary had
directly incurred such guaranteed Indebtedness and (ii) any Asset Sales or
Asset Acquisitions (including, without limitation, any Asset Acquisition giving
rise to the need to make such calculation as a result of such Person or any of
its Subsidiaries (including any Person who becomes a Subsidiary as a result of
the Asset Acquisition) incurring Acquired Indebtedness) occurring during the
Reference Period and any retirement of Indebtedness in connection with such
Asset Sales, as if such Asset Sale or Asset Acquisition and/or retirement
occurred on the first day of the Reference Period. Furthermore, in calculating
the denominator (but not the numerator) of this "Consolidated Interest Coverage
Ratio," (1) interest on Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined thereafter
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date; (2) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate based upon a factor of a prime or similar rate shall be deemed to
have been in effect; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Rate Protection Obligations, shall
be deemed to have accrued at the rate per annum resulting after giving effect
to the operation of such agreements.
"Consolidated Interest Expense" means, with respect to any Person for
any period, without duplication, the sum of (a) the cash and non-cash interest
expense of such Person and its Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP consistently applied (net of any
interest income), including, without limitation, (w) any amortization of debt
discount, (x) the net cost under Interest Rate Protection Obligations and
Currency Hedging Agreements insofar as they relate to interest, (y) the
interest portion of any deferred payment obligation and (z) all accrued
interest, and (b) the aggregate amount of the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such
Person and its Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person")
in which the Person in question or one of its Subsidiaries has a joint interest
with a third party (which interest does not cause the Net Income of such other
Person to be consolidated into the Net Income of the Person in question in
accordance with GAAP) shall be included only to the extent of the amount of
dividends or distributions paid to the Person in question or the Subsidiary,
(b) the Net Income of any Subsidiary of the Person in question that is subject
to any restriction or limitation on the
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payment of dividends or the making of other distributions shall be
excluded to the extent of such restriction of limitation, (c)(i) the Net Income
(or loss) of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition and (ii) any net gain or loss
resulting from an Asset Sale by the Person in question or any of its
Subsidiaries shall be excluded, and (d) extraordinary gains and losses and any
one-time increase or decrease to Net Income recorded because of the adoption of
new accounting policies, practices or standards required or permitted by
generally accepted accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person at any date
of determination, the consolidated equity represented by the shares of such
Person's Capital Stock (other than Disqualified Stock) at such date, as
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"Consumer Products" means Waxman Consumer Products Group Inc., a
Delaware corporation.
"Convertible Debentures" means the 9 1/2% Convertible Subordinated
Debentures of the Company.
"Currency Hedging Obligations" means with respect to any Person, the
obligations and/or rights of such Person under currency hedging arrangements
designed to protect such Person against currency fluctuations.
"Default Amount" shall have the meaning set forth under "Events of
Default."
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes.
"Domestic Credit Facility" means the credit agreement to be entered
into between Waxman USA, certain of the Subsidiaries of Waxman USA, the lenders
listed therein and Citicorp USA, Inc., as agent, providing for working capital
and other financing, as the same may at any time be amended, amended and
restated, supplemented or otherwise modified, including any refinancing,
refunding, replacement or extension thereof which provides for working capital
and other financings, whether by the same or any other lender or group of
lenders.
"Domestic Term Loan" means the term loan agreement to be entered into
between Waxman USA, certain of the Subsidiaries of Waxman USA and Citicorp USA
as the same may at any time be amended, amended and restated, supplemented or
otherwise modified, including any refinancing, refunding, replacement or
extension thereof whether by the same or any other lender or group of lenders
(including any Permitted Waxman USA Indebtedness).
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"Fair Market Value" or "fair value" means, with respect to any asset
or property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under undue pressure or compulsion to complete the transaction. With
respect to any Person Fair Market Value shall be determined by the Board of
Directors of such Person (and with respect to the Company or a Subsidiary of
the Company, a majority of the Independent Directors of the Company) acting in
good faith and shall be evidenced by a Board Resolution delivered to the
Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the date of
determination.
"Ideal" means Ideal Plumbing Group Inc., a corporation organized and
existing under the laws of Quebec.
"Ideal Holding Group" means Ideal Holding Group, Inc., a Delaware
corporation.
"Indebtedness" means, with respect to any Person, without duplication,
(i) any liability, contingent or otherwise, of such Person (A) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (B) evidenced by a note,
debenture or similar instrument or letter of credit (including purchase money
obligations but excluding undrawn documentary letters of credit for trade
payables arising in the ordinary course of business) or (C) for the payment of
money relating to a Capitalized Lease Obligation or other obligation relating
to the deferred purchase price of property (other than trade payables or
accrued liabilities arising in the ordinary course of business); (ii) any
liability of others of the kind described in the preceding clause (i) which the
Person has guaranteed or which is otherwise its legal liability; (iii) any
obligation secured by a lien to which the property or assets of such Person are
subject, whether or not the obligations secured thereby shall have been assumed
by or shall otherwise be such Person's legal liability (the amount of such
obligation being deemed to be the lesser of the fair value of such property or
asset or the amount of the obligation so secured); and (iv) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii) or (iii).
"Independent Director" means any director that (i) is not and has not
been an officer or employee of the Company or any of its Affiliates, (ii) does
not have any relationship that, in the opinion of the Board of Directors of the
Company (exclusive of any such Independent Director), would interfere with
his/her exercise of independent judgment in carrying out the responsibilities
of director and (iii) with respect to any transaction or series of related
transactions, does not have any material direct or indirect financial interest
in or with respect to such transaction or series of related transactions.
"Interest Rate Protection Obligations" means the obligations and/or
rights of any Person pursuant to any arrangement with any other Person,
designed to protect such Person against fluctuations in interest rates,
whereby, directly or indirectly, such Person is entitled to receive from time
to time periodic payments calculated by applying either a floating or a fixed
rate of interest on a stated notional
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amount in exchange for periodic payments made by such Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, claim, hypothecation, assignment for security, deposit
arrangement or preference or other security agreement of any kind or nature
whatsoever. For purposes of the Indenture, a Person shall be deemed to own
subject to a Lien any property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Material Subsidiary" means, with respect to any Person, any
Subsidiary of such Person which would be a "significant subsidiary" pursuant to
Article 1-02 of Regulation S-X.
"Net Cash Proceeds" means, with respect to any Asset Sale the proceeds
thereof in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale; (ii) provisions for all taxes payable within one
year as a result of such Asset Sale; (iii) payments made to retire Indebtedness
secured by the assets subject to such Asset Sale to the extent required
pursuant to the terms of such Indebtedness; (iv) appropriate amounts to be
provided by the Company or any Subsidiary of the Company, as the case may be,
as a reserve, in accordance with GAAP, against any liabilities associated with
such Asset Sale and retained by the Company or any of its Subsidiaries, as the
case may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, provided, however, that the amount of any such reserve at such
time that such amount is no longer required to be provided as a reserve in
accordance with GAAP and is not applied to the liability for which such reserve
was established shall be deemed Net Cash Proceeds; and (v) any amount required
to be paid to any Person owning a beneficial interest in the property or assets
sold in an amount proportionate to such beneficial interest.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by
the Company, the aggregate net cash proceeds received by the Company after
payment of expenses, commissions and the like incurred in connection therewith,
(b) in the case of the issuance of any Indebtedness by the Company, the
aggregate net cash proceeds received by the Company, after payment of expenses,
commissions and the like incurred in connection therewith or (c) in the case of
any exchange, exercise, conversion or surrender of outstanding securities of
any kind of the Company for or into shares of Capital Stock of the Company
which is not Disqualified Stock, the net cash proceeds received by the Company
upon such exchange, exercise, conversion or surrender (plus, with respect to
the issuance of any such securities after the Issue Date, the net cash proceeds
received by such Person upon the issuance of such securities), less any and all
payments made to the holders, e.g., on account of
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fractional shares, and less all expenses, commissions and the like incurred by
the Company in connection therewith).
"Permitted Credit Support" means (x) any pledge of the Capital Stock
of Ideal Holding Group or a Subsidiary of Ideal Holding Group or (y) loans or
advances by the Company to Ideal Holding Group or its Subsidiaries not to
exceed Cdn.$450,000 aggregate principal amount outstanding at any one time.
"Permitted Holders" means Armond Waxman, Melvin Waxman, trusts for the
benefit of any of Armond Waxman, Melvin Waxman or members of their families,
the heirs of or administrators or executors for the respective estates of,
Armond Waxman or Melvin Waxman or any Person, entity or group of Persons
controlled by any of the foregoing.
"Permitted Ideal Indebtedness" means indebtedness which is
non-recourse to and for which credit support (other than Permitted Credit
Support) is not otherwise provided by the Company or its Subsidiaries (other
than Ideal Holding Group or any of its Subsidiaries).
"Permitted Investments" means (i) obligations of the United States
government due within one year; (ii) certificates of deposit or Eurodollar
deposits due within one year with a commercial bank having capital funds of at
least $500,000,000 or more; (iii) commercial paper rated at least A-1 by
Standard & Poor's Corporation or at least P-1 by Moody's Investors Service,
Inc.; (iv) debt of any state or political subdivision that is rated among the
two highest rating categories obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc. and is due within one year; (v)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States
Government or issued by any agency thereof and backed by the full faith and
credit of the United States, in each case maturing within one year from the
date of acquisition; provided, however, that the terms of such agreements
comply with the guidelines set forth in the Federal Financial Agreements of
Depository Institutions with Securities Dealers and Others, as adopted by the
Comptroller of the Currency; (vi) Investments represented by Interest Rate
Protection Obligations and Currency Hedging Agreements; and (vii) Investments
by the Company in Ideal Holding Group or a Subsidiary of Ideal Holding Group
not to exceed an aggregate of Cdn. $450,000 outstanding at any one time.
"Permitted Liens" means, with respect to any Person, any Lien arising
by reason of (a) any judgment, decree or order of any court, so long as such
Lien is being contested in good faith and is adequately bonded, and any
appropriate legal proceedings which may have been duly initiated for the review
of such judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have expired;
(b) taxes, assessments, governmental charges or claims not yet delinquent or
which are being contested in good faith; (c) security for payment of workers'
compensation or other insurance or social security legislation; (d) security
for the performance of tenders, contracts (other than contracts for the payment
of money) or leases (excluding any Capitalized Lease Obligations); (e) deposits
to secure public or statutory obligations, or in lieu of surety, performance or
appeal bonds, entered into in the ordinary course of business; (f) Liens
arising by operation of law in favor of carriers, warehousemen, landlords,
mechanics, materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business for sums which are not yet delinquent or are being
contested in good faith by negotiations or by appropriate proceedings which
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suspend the collection thereof; (g) easements, rights-of-way, zoning and
similar covenants and restrictions and other similar encumbrances or title
defects which, in the aggregate, are not substantial in amount, and which do
not in any case materially detract from the value of the property subject
thereto or materially interfere with the ordinary conduct of the business of
the Company or any of its Subsidiaries and (h) Liens arising in the ordinary
course of business in favor of custom and revenue authorities to secure payment
of custom duties.
"Permitted Waxman USA Indebtedness" means Indebtedness of Waxman USA
the proceeds of which are used to refinance Senior Secured Notes, Senior
Subordinated Notes or the Domestic Term Loan (including the payment of any
related fees and expenses and the amount of accrued interest on such
Indebtedness refinanced and the amount of any premium required to be paid in
connection with the refinancing of such Indebtedness).
"Person" means any individual, corporation, partnership, joint stock
company, trust, unincorporated organization or government or agency or
political subdivision thereof.
"Public Equity Offering" means the offer and sale to the public of
shares of any class of the Capital Stock (other than Disqualified Stock) of the
Company or any Subsidiary of the Company pursuant to a registration statement
declared effective by the Commission after the Issue Date (or with respect to
the Capital Stock (other than Disqualified Stock) of Ideal Holding Group or a
Subsidiary of Ideal Holding Group, pursuant to a prospectus or other comparable
document declared effective or otherwise approved by comparable Canadian
provincial security authorities after the Issue Date) and pursuant to which the
Company or such Subsidiary, as the case may be, receives net cash proceeds of
not less than $15,000,000.
"Restricted Payment" means any of the following: (i) the declaration
or payment of any dividend or any other distribution on Capital Stock of the
Company or any Subsidiary of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Subsidiary of the Company (other than (x) dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase Capital Stock (other than Disqualified
Stock), and (y) in the case of Subsidiaries of the Company, dividends or
distributions payable to the Company or to a Wholly-Owned Subsidiary of the
Company), (ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Subsidiaries, (iii) the
making of any principal payment on, or the purchase, defeasance, repurchase,
redemption or other acquisition or retirement for value, prior to any scheduled
maturity, scheduled repayment or scheduled sinking fund payment, of any
Indebtedness of the Company which is subordinated in right of payment to the
Notes (other than Indebtedness of the Company acquired in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) and (iv) the
making of any Investment other than pursuant to clause (i), (ii), (iii), (v) or
(vi) of the "Limitation on Investments, Loans and Advances" covenant above.
"Senior Secured Notes" means the Company's 12 1/4% Fixed Rate Senior
Secured Notes due September 1, 1998 and Floating Rate Senior Secured Notes due
September 1, 1998.
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"Senior Subordinated Notes" means the 13 3/4% Senior Subordinated
Notes due June 1, 1999 of the Company.
"Subsidiary" means with respect to any Person (i) a corporation a
majority of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by one or more Subsidiaries of such Person or by such Person
and one or more Subsidiaries of such Person or (ii) any other Person (other
than a corporation) in which such Person, one or more Subsidiaries of such
Person or such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has at least a majority
ownership interest.
"Voting Power" means with respect to any Person, the power under
ordinary circumstances, pursuant to the ownership of shares of any class or
classes of Capital Stock, to elect at least a majority of the board of
directors, managers or trustee of such Person (irrespective of whether or not,
at the time, stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency).
"Waxman USA" means Waxman USA Inc., a Delaware corporation.
"Wholly-Owned Subsidiary" means with respect to any Person any
Subsidiary of such Person, 100% of the Capital Stock of which (other than
shares of Capital Stock representing any director's qualifying shares or
investments by foreign nationals mandated by applicable law) is owned by such
Person, by a Wholly-Owned Subsidiary of such Person or by such Person and one
or more Wholly-Owned Subsidiaries of such Person.
"WOC" means WOC Inc., a Delaware corporation.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain income tax consequences is based
on laws, regulations (including Treasury Regulations published in the Federal
Register on February 2, 1994 interpreting the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), that govern the inclusion of
original issue discount ("OID") in income), rulings and decisions now in
effect, all of which are subject to change, possibly on a retroactive basis.
The discussion does not cover all aspects of federal taxation that may be
relevant to, or the actual tax effect that any of the matters described herein
will have on, particular holders, and does not address state, local, foreign or
other tax laws. Certain Holders (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations,
nonresident aliens, taxpayers subject to the alternative minimum tax and
persons in special situations such as those that hold the Old Notes or New
Notes as part of a straddle) may be subject to special rules not discussed
below. The description assumes that Holders of the New Notes will hold the New
Notes as "capital assets" (generally, property held for investment purposes)
within the meaning of Section 1221 of the Code. EACH HOLDER SHOULD CONSULT ITS
OWN TAX ADVISOR IN DETERMINING THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX
CONSEQUENCES TO THE PARTICULAR HOLDER OF THE EXCHANGE OF OLD NOTES FOR NEW
NOTES AND THE OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
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EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an exchange or other taxable event for federal income
tax purposes because, under regulations proposed by the United States Treasury,
the New Notes should not be considered to differ materially in kind or extent
from the Old Notes. Rather, the New Notes received by a Holder should be
treated as a continuation of the Old Notes in the hands of such Holder. As a
result, there should be no federal income tax consequences to Holders who
exchange Old Notes for New Notes pursuant to the Exchange Offer and any such
Holder should have the same adjusted basis and holding period in the New Notes
as it had in the Old Notes immediately before the exchange.
HOLDING AND DISPOSITION OF NOTES
Original Issue Discount
The Old Notes were issued on May 20, 1994 and have OID for U.S.
federal income tax purposes. Because the New Notes will be treated as a
continuation of the Old Notes, which were issued with OID, the New Notes will
have OID for U.S. federal income tax purposes, and Holders of the New Notes
will be required to recognize such OID as ordinary income in advance of the
receipt of the cash payments to which such income is attributable.
The total amount of OID with respect to a New Note will be equal to
the excess of the "stated redemption price at maturity" of such Note over its
"issue price." The "stated redemption price at maturity" of a New Note will be
equal to the sum of all payments required to be made thereunder. The Old Notes
and Warrants were issued in units consisting of $1,000 principal amount of Old
Notes and 59 Warrants. Although not free from doubt, it appears likely that
the Old Notes (and accordingly, the New Notes) will be treated as publicly
traded. As a result, the issue price of a unit will be the fair market value
of the unit on the first date that a substantial amount of the units were
issued. The "issue price" and initial tax basis of the New Notes will be equal
to the portion of the issue price of the unit allocated to the Old Note. The
issue price of each unit was allocated between the Warrants and the Old Notes.
The amounts so allocated represent the Company's belief as to the relative fair
market value of the Old Notes and the Warrants on the date such allocation was
made ($512.07 per $1,000 principal amount at maturity of the Old Notes and
$0.8475 per Warrant). This allocation generally is binding on holders of the
Old Notes and/or the New Notes, although the Internal Revenue Service may take
the position that these amounts do not accurately reflect the fair market
values of the Old Notes and Warrants. In such case, the total amount of OID on
the New Notes may be greater or less than the amount of OID thereon based on
the Company's allocation.
Each Holder of a New Note will be required to include in gross income
for any taxable year the sum of the daily portions of OID attributable to each
day during the taxable year on which such holder holds the New Note, including
the purchase date and excluding the disposition date. A daily portion is
determined by allocating to each day a ratable portion of the OID allocable to
the accrual period in which such day is included. The amount of OID allocable
to each full accrual period is the product of the adjusted issue price of the
New Note at the beginning of such accrual period and the yield to maturity of
the New Note (as determined by semi-annual compounding). The adjusted issue
price of a New Note at the beginning of an accrual period is equal to the issue
price of the New Note,
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increased by any OID accrued in prior accrual periods and decreased by any cash
payment received with respect to the New Note on or before the first day of the
accrual period.
A subsequent purchaser of a New Note also will be required to include
annual accruals of OID in gross income for federal income tax purposes in
accordance with the rules described above, but the amount of the OID or
ordinary income required to be reported may vary depending upon the amount paid
for the debt instrument by the subsequent purchaser. See "Market Discount" and
"Acquisition Premium" below.
Disposition of New Notes. A Holder's tax basis in a New Note will be
increased by the amount of OID that is includible in such Holder's income. If
a New Note is redeemed, sold or otherwise disposed of, a Holder thereof
generally will recognize gain or loss equal to the difference between the
amount realized on the redemption, sale or other disposition of such New Note
and such Holder's adjusted basis in the New Note. Subject to the market
discount rules discussed below, such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if, on the date of the sale, the
Holder has a holding period for the New Notes (which would include the holding
period of the Old Notes) of more than one year.
Market Discount. Under the market discount rules of the Code, an
exchanging Holder (other than a Holder who made the election described below)
who purchased an Old Note with "market discount" (generally defined as the
amount by which the adjusted issue price of the Old Note on the Holder's date
of purchase exceeds the Holder's purchase price) will be required to treat any
gain recognized on the redemption, sale or other disposition of the New Note
received in the exchange as ordinary income to the extent of the market
discount that accrued during the holding period of such New Note (which would
include the holding period of the Old Note). Further, the Code requires that
partial principal payments on a market discount bond be included in gross
income to the extent that such payments do not exceed the accrued market
discount on such bond. A Holder who has elected under applicable Code
provisions to include market discount in income annually as such discount
accrues will not, however, be required to treat any gain recognized as ordinary
income under these rules. Holders should consult their tax advisors as to the
portion of any gain that would be taxable as ordinary income under these
provisions. Subsequent holders who acquire New Notes at a market discount also
will be subject to these rules.
Acquisition Premium. An exchanging Holder who acquired an Old Note
(or a subsequent Holder of a New Note who acquires such New Note) at a cost in
excess of its adjusted issue price (i.e., its original issue price increased by
the portion of OID previously includable in the gross income of all prior
holders, determined without regard to any reduction of OID attributable to any
acquisition premium paid by prior holders, and decreased by all payments
previously made thereon) immediately after such acquisition, but less than or
equal to its stated redemption price at maturity, will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules contained in the Code, such Holder generally would be entitled to a
reduction in the amount of interest otherwise includable in income with respect
to such Note.
High Yield Discount Obligations
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The deduction by the Company of OID with respect to the New Notes will
be limited by Section 163(e)(5) of the Code if the New Notes are "high yield
discount obligation," as defined in Section 163(i) of the Code. The New Notes
will be characterized as high yield discount obligations if the yield to
maturity on the New Notes equals or exceeds the sum of the AFR (a rate
published by the IRS each month for application during the following calendar
month) in effect at the time of issuance of the Old Notes, plus five percentage
points. For debt instruments issued in May 1994, the AFR was equal to 7.04%.
If the New Notes are characterized as high yield discount obligations, then (i)
if the yield to maturity of the New Notes exceeds the sum of the AFR plus six
percentage points, the product of the total original issue discount under the
New Notes and the ratio of (x) the excess of the yield to maturity of the New
Notes over the sum of the AFR plus six percentage points to (y) the yield to
maturity of the New Notes will not be deductible by Waxman and generally will
be treated as a dividend distribution solely for purposes of the dividends
received deduction pursuant to Section 243 of the Code with respect to holders
that are United States corporations and (ii) the remainder of the original
issue discount on the New Notes will not be deductible by the Company until
paid.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of principal (including amounts in respect of
OID), premium, and any accrued interest with respect to a New Note, and the
proceeds of a sale of a New Note within the United States will be subject to
information reporting, and possibly to "backup withholding" at a rate of 31% if
the Holder fails to provide its taxpayer identification number on Service Form
W-9, or otherwise fails to establish an exemption from backup withholding.
Each New Note will contain a legend stating that it has Original Issue
Discount and setting forth the issue date, the issue price, the amount of
Original Issue Discount and the yield to maturity thereon. The Company will
report annually to the Service and to each Holder (other than Holders not
subject to the information reporting requirements), the amount of Original
Issue Discount accrued with respect to such New Note and any interest paid with
respect to the Old Notes.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to
the Exchange Offer.
PLAN OF DISTRIBUTION
A broker-dealer holding Old Notes may participate in the Exchange
Offer provided that it acquired the Old Notes for its own account as a result
of market-making or other trading activities. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. For a period
of 180 days after the Expiration Date, the Company will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale.
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The Company will not receive any proceeds from any sale of New Notes
by broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of
the Act and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Act.
LEGAL MATTERS
The legality of the Securities covered by this Prospectus has been
passed upon by Shereff, Friedman, Hoffman & Goodman, New York, New York,
counsel to the Company.
EXPERTS
The audited consolidated financial statements of the Company as of
June 30, 1992 and 1993 and for each of the three years in the period ended June
30, 1993 appearing in this Prospectus and elsewhere in this Registration
Statement have been audited by Arthur Andersen & Co., independent certified
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
Reference is made to said report which includes an explanatory
paragraph with respect to the change in method of accounting for certain
warehousing and catalog costs as discussed in Note 3 to the consolidated
financial statements.
-78-
<PAGE> 95
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Page
----
<S> <C>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
Unaudited Financial Statements:
Consolidated Balance Sheets as of March 31, 1994 and June 30, 1993 . . . . . . . . . . . F-2
Consolidated Statements of Income for the Nine and Three Months
Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . F-7
Audited Financial Statements:
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . F-14
Consolidated Balance Sheets as of June 30, 1993 and 1992 . . . . . . . . . . . . . . . . F-15
Consolidated Statements of Income for the Years Ended
June 30, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . F-18
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-20
Unaudited Supplementary Financial Information . . . . . . . . . . . . . . . . . . . . . . F-32
</TABLE>
F-1
<PAGE> 96
<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 Statments
are an integral part of these balance sheets.
</TABLE>
F-2
<PAGE> 97
<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:
Preferrrred 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>
F-3
<PAGE> 98
<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..
F-4
<PAGE> 99
<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)
====== ====== ====== ======
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
F-5
<PAGE> 100
<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:
Changes in assets and liabilities:
Depreciation and Amortization 5,573 5,696
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>
F-6
<PAGE> 101
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.
F-7
<PAGE> 102
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 which included members of Ideal's management. Such
transaction would have required the consent of Ideal's Canadian bank as
borrowings under its bank credit agreements were collateralized by all of
the assets and capital stock of Ideal. The bank reviewed 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 agreements. (Borrowings under these agreements are
non-recourse to Waxman Industries, Inc.) As a result of this action, the
Company's control and ownership of Ideal is likely to be lost prior to
June 30, 1994.
The estimated loss on disposal totals $38.2 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 and provisions for other
estimated costs to be incurred in connection with the disposal, as well
as 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 assets 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.
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
F-8
<PAGE> 103
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%.
F-9
<PAGE> 104
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.
F-10
<PAGE> 105
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.
F-11
<PAGE> 106
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.
The Company evaluated the net realizable value of the carrying value
of the net assets previously held in accordance with its normal,
ongoing policy regarding impairment and concluded that no further
write-down of the net carrying value of these assets was required in
excess of the reserve previously established. The Company incurred
approximately $.2 million of fees and expenses relating to the
transaction which was applied against the reserve.
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 decreased 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
F-12
<PAGE> 107
and the domestic term loan. The domestic term loan will contain
negative, affirmative and financial covenants, 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
fees paid included an exchange fee to the holders of the Subordinated
Notes as well as legal, accounting and printing expenses directly
relating the Exchange. The payment of these fees facilitated the
early retirement of the Subordinated Notes. 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.
F-13
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Waxman Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Waxman
Industries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
June 30, 1993 and 1992, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Waxman Industries, Inc. and
Subsidiaries as of June 30, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1993, in conformity with generally accepted accounting principles.
As explained in Note 3 to the consolidated financial statements, effective July
1, 1992, the Company changed its method of accounting for certain warehousing
and catalog costs.
Arthur Andersen & Co.
Cleveland, Ohio,
May 20, 1994.
F-14
<PAGE> 109
<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1993 AND 1992
ASSETS
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 406,000 $ 194,000
Accounts receivable, net 32,432,000 36,235,000
Inventories 69,728,000 80,326,000
Prepaid expenses 4,844,000 7,810,000
Net assets of discontinued operations 29,156,000 50,632,000
Net assets held for sale 10,266,000 --
------------ ------------
Total current assets 146,832,000 175,197,000
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,420,000 1,441,000
Buildings 11,172,000 10,808,000
Equipment 18,229,000 19,848,000
------------ ------------
30,821,000 32,097,000
Less accumulated depreciation and amortization (14,361,000) (13,321,000)
------------ ------------
Property and equipment, net 16,460,000 18,776,000
------------ ------------
COST OF BUSINESSES IN EXCESS OF
NET ASSETS ACQUIRED, NET 24,448,000 28,199,000
OTHER ASSETS 9,311,000 15,309,000
----------- ------------
$197,051,000 $237,481,000
============ ============
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
F-15
<PAGE> 110
<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1993 AND 1992
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,493,000 $ 2,107,000
Accounts payable 18,604,000 28,912,000
Accrued liabilities 6,548,000 8,292,000
------------- ------------
Total current liabilities 27,645,000 39,311,000
------------- ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 22,567,000 9,663,000
SENIOR SECURED NOTES 38,563,000 38,451,000
SUBORDINATED DEBT 100,780,000 100,780,000
NET LONG-TERM LIABILITIES OF
DISCONTINUED OPERATIONS -- 8,449,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 2,000,000 shares -- --
Common stock, $.01 par value per share:
Authorized 22,000,000 shares;
Issued 9,424,000 in 1993 and 9,411,000 in 1992 94,000 94,000
Class B common stock, $.01 par value per share:
Authorized 6,000,000 shares;
Issued 2,238,000 in 1993 and 2,251,000 in 1992 23,000 23,000
Paid-in capital 18,467,000 18,467,000
Retained earnings (deficit) (6,437,000) 23,735,000
------------ ------------
12,147,000 42,319,000
Cumulative currency translation adjustments (4,651,000) (1,492,000)
------------ ------------
Total stockholders' equity 7,496,000 40,827,000
------------ ------------
$197,051,000 $237,481,000
============ ============
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
F-16
<PAGE> 111
<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1993, 1992 AND 1991
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Net sales $ 204,778,000 $197,738,000 $186,327,000
Cost of sales 137,244,000 127,115,000 121,397,000
------------ ------------ ------------
Gross profit 67,534,000 70,623,000 64,930,000
Selling, general and administrative expenses 56,081,000 51,824,000 50,263,000
Restructuring and other nonrecurring charges 6,762,000 3,900,000 --
------------ ------------ ------------
Operating income 4,691,000 14,899,000 14,667,000
Interest expense (net of interest income
of $5,000, $978,000 and $1,335,000) 20,365,000 20,025,000 17,462,000
------------ ------------ ------------
Loss from continuing operations before
income taxes, extraordinary charge and
cumulative effect of accounting change (15,674,000) (5,126,000) (2,795,000)
Provision (benefit) for income taxes 216,000 (768,000) (680,000)
----------- ------------ -----------
Loss from continuing operations before
extraordinary charge and cumulative
effect of accounting change (15,890,000) (4,358,000) (2,115,000)
Income (loss) from discontinued
operations of Ideal, net of taxes (11,240,000) 1,146,000 4,343,000
----------- --------- ----------
Income (loss) before extraordinary charge and
cumulative effect of accounting change (27,130,000) (3,212,000) 2,228,000
Extraordinary charge, early retirement
of debt, net of tax benefit -- (1,186,000) --
Cumulative effect of change in accounting
for warehouse and catalog costs,
without tax benefit (2,110,000) -- --
----------- --------- ---------
Net income (loss) $(29,240,000) $(4,398,000) $2,228,000
=========== ========= =========
Primary and fully diluted earnings
(loss) per share:
From continuing operations (1.36) (.44) (.22)
Income (loss) from discontinued operations (.97) .11 .45
Extraordinary charge -- (.12) --
Cumulative effect of accounting change (.18) -- --
---------- --------- -------
Net income (loss) $ (2.51) $ (.45) $ .23
========== ========= =======
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
</TABLE>
F-17
<PAGE> 112
<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1993, 1992 AND 1991
<CAPTION>
CUMULATIVE
CLASS B CURRENCY
COMMON COMMON PAID-IN RETAINED TRANSLATION
STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS
----- ----- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1990 $ 76,000 $ 23,000 $ 9,590,000 $28,255,000 $ 1,298,000
Net income 2,228,000
Cash dividends:
-- $.12 per common share
and Class B share (1,149,000)
Common stock repurchase (4,000) (1,906,000)
Currency translation
adjustments (345,000)
--------- -------- ----------- ----------- -----------
BALANCE, JUNE 30, 1991 $ 72,000 $ 23,000 $ 7,684,000 $29,334,000 $ 953,000
Net loss (4,398,000)
Cash dividends:
-- $.12 per common share
and Class B share (1,201,000)
Issuance of common stock 22,000 9,763,000
Stock options exercised 20,000
Stock warrants issued 1,000,000
Currency translation
adjustments (2,445,000)
--------- -------- ----------- ----------- -----------
BALANCE, JUNE 30, 1992 $ 94,000 $ 23,000 $18,467,000 $23,735,000 $(1,492,000)
Net loss (29,240,000)
Cash dividends:
-- $.08 per common share
and Class B share (932,000)
Currency translation
adjustments (3,159,000)
--------- -------- ----------- ----------- -----------
BALANCE, JUNE 30, 1993 $ 94,000 $ 23,000 $18,467,000 $(6,437,000) $(4,651,000)
========= ======== =========== =========== ===========
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
F-18
<PAGE> 113
<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1993, 1992 AND 1991
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
CASH FROM (USED FOR):
OPERATIONS:
Loss from continuing operations $(15,890,000) $ (4,358,000) $ (2,115,000)
Adjustments to reconcile loss
from continuing operations to
net cash used for continuing operations:
Restructuring costs 6,762,000 -- --
Loss on sale of investments -- 3,900,000 --
Depreciation and amortization 8,932,000 6,525,000 5,160,000
Changes in assets and liabilities:
Accounts receivable (1,666,000) (1,841,000) (1,651,000)
Inventories 82,000 (15,664,000) 5,305,000
Prepaid expenses 2,276,000 (2,285,000) (1,754,000)
Accounts payable (8,337,000) 11,050,000 (6,503,000)
Accrued liabilities (1,691,000) (878,000) (1,250,000)
---------- ---------- ----------
Net cash used for continuing
operations (9,532,000) (3,551,000) (2,808,000)
Earnings (loss) from
discontinued operations (11,240,000) 1,146,000 4,343,000
Other, net (3,159,000) (2,444,000) (346,000)
Change in net assets of
discontinued operations 13,027,000 6,646,000 21,885,000
---------- --------- ----------
Net cash provided by (used for)
operating activities (10,904,000) 1,797,000 23,074,000
----------- --------- ----------
INVESTMENTS:
Capital expenditures (1,336,000) (3,193,000) (1,110,000)
Change in other assets (1,826,000) (5,922,000) (1,886,000)
Proceeds from sale of investments -- 4,386,000 4,500,000
Business acquisitions -- -- (1,773,000)
----------- ----------- ----------
Net cash used for investments (3,162,000) (4,729,000) (269,000)
----------- ----------- ----------
FINANCING:
Net borrowings (repayments) under
credit agreements 15,770,000 6,393,000 (9,311,000)
Repayments of long-term debt (560,000) (508,000) (537,000)
Repayment of domestic term loan -- (60,000,000) --
Proceeds from issuance of debt, net -- 48,500,000 --
Repurchase of debt -- (12,878,000) --
Proceeds from issuance of stock -- 9,805,000 --
Dividends paid (932,000) (1,201,000) (1,149,000)
Common stock repurchase -- -- (1,910,000)
------------ ------------ ------------
Net cash provided by
(used for) financing 14,278,000 (9,889,000) (12,907,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 212,000 (12,821,000) 9,898,000
BALANCE, BEGINNING OF PERIOD 194,000 13,015,000 3,117,000
------------ ------------ ------------
BALANCE, END OF PERIOD $ 406,000 $ 194,000 $ 13,015,000
============ ============ ============
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
F-19
<PAGE> 114
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1993, 1992 AND 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. CONSOLIDATION AND BASIS OF PRESENTATION
The 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.
Certain 1992 and 1991 amounts have been reclassified to conform with the 1993
presentation.
The financial statements have been restated to reflect the
discontinued operations discussed in Note 12.
The Company operates in a single business segment - the distribution
of plumbing, electrical and hardware products. Substantially all of the
Company's business is conducted in the United States.
B. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowances for doubtful
accounts of $1,124,000 and $1,112,000 at June 30, 1993 and 1992, respectively.
Bad debt expense totaled $695,000 in 1993, $562,000 in 1992 and $441,000 in
1991.
The Company sells plumbing, electrical and hardware products
throughout the United States to do-it-yourself retailers, mass merchandisers,
smaller independent retailers and plumbing, electrical repair and remodeling
contractors. The Company performs ongoing credit evaluations of its customers'
financial condition. In fiscal years 1993, 1992 and 1991, the Company's
largest customer accounted for approximately 12%, 11% and 8% of its net sales,
respectively. The Company's ten largest customers accounted for approximately
23% of net sales in 1993, 22% in 1992 and 21% in 1991 and approximately 26% and
22% of accounts receivable at June 30, 1993 and 1992, respectively.
C. INVENTORIES
At June 30, 1993 and 1992, inventories, consisting primarily of
finished goods, are carried at the lower of first-in, first-out (FIFO) cost or
market. The Company regularly evaluates its inventory carrying value, with
appropriate consideration given to any excess, slow-moving and/or nonsalable
inventories.
D. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. For financial reporting
purposes, buildings and equipment are depreciated on a straight-line basis over
their estimated useful lives at annual depreciation rates ranging from 2 1/2%
to 30%. For income tax purposes, accelerated methods generally are used.
Depreciation expense totaled $2,690,000 in 1993, $2,665,000 in 1992 and
$2,524,000 in 1991.
E. COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED
Cost of businesses in excess of the fair market value of net assets
acquired is being amortized primarily over 40 years, using the straight-line
method. Management has evaluated its accounting for goodwill, considering such
factors as historical profitability and current operating cash flows and
believes that the asset is realizable and the amortization period is
appropriate. Goodwill amortization expense totaled $725,000 in 1993, $756,000
in 1992 and $680,000 in 1991. The accumulated amortization of excess cost at
June 30, 1993 and 1992 was $3,572,000 and $3,255,000, respectively.
F. PER SHARE DATA
Primary earnings per share have been computed based on the weighted
average number of shares and share equivalents outstanding which totaled
11,662,000 in 1993,
F-20
<PAGE> 115
9,794,000 in 1992 and 9,570,000 in 1991. Share equivalents include the
Company's common stock purchase warrants (see Note 6). Fully diluted earnings
per share have been computed assuming the conversion of the 6 1/4% Convertible
Subordinated Debentures (the Debentures) into approximately 293,000 shares of
common stock in 1991 (after elimination of related interest expense, net of
income tax effect, which totaled $108,000 in 1991). The conversion of the
Debentures was not assumed in computing fully diluted earnings per share for
1993 and 1992 as the effect would be anti-dilutive.
G. FOREIGN CURRENCY TRANSLATION
All balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate as of the end of the fiscal year. Income statement
items are translated at the average currency exchange rates during the year.
The resulting translation adjustment is recorded as a component of
stockholders' equity. Foreign currency transaction gains or losses are
included in the income statement as incurred and totaled $80,000 in 1993,
$73,000 in 1992 and $305,000 in 1991.
H. IMPACT OF NEW ACCOUNTING STANDARDS
In February 1992, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 109, "Accounting for Income Taxes." The Company adopted SFAS
No. 109 during the first quarter of its fiscal year ending June 30, 1994. SFAS
No. 109 requires the Company to recognize 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.
The Company did not recognize a benefit and such adoption did not have a
material impact on results of operations or financial position. However, to
the extent that the Company is able to recognize tax benefits in the future,
such recognition will favorably effect future results of operations. The FASB
has also issued SFAS No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions" and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." The Company does not currently maintain any
postretirement or postemployment benefit plans or programs which would be
subject to such accounting standards.
2. RESULTS OF OPERATIONS:
As a result of the 1993 operating results, the Company was not in
compliance as of June 30, 1993, with certain financial covenants contained in
its domestic bank credit agreements and in the indentures governing its Senior
Subordinated Notes and Senior Secured Notes. In addition, the Company's
consolidated net worth decreased to a level that is expected to obligate the
Company to offer to repurchase a portion of its Senior Subordinated Notes
commencing December 31, 1993 and its Senior Secured Notes commencing May 30,
1994. On October 1, 1993, the Company entered into an amendment to its
domestic bank credit agreement which waived all covenant violations as of June
30, 1993, and amended certain of the financial covenants to provide that future
compliance will not be negatively impacted by the Company's fiscal 1993
operating results. During November, 1993, the Company obtained consents from
the holders of its Senior Subordinated Notes and Senior Secured Notes which
cured the financial covenant violations and relieved the Company of its
repurchase obligations with respect to such indebtedness. Each of these
situations is discussed in more detail in Notes 6 and 12.
Reference should be made to Note 12 which discusses the subsequent
disposition of the Canadian subsidiary, debt restructuring, corporate
restructuring and the sale of a business.
3. CHANGE IN ACCOUNTING:
During 1993, the Company accelerated its amortization of certain
warehouse start-up costs and catalog costs. This change was made during the
fourth quarter and was applied retroactively to July 1, 1992. The Company had
historically amortized such costs over a period not to exceed five years which,
in management's opinion, represented the period over which economic benefits
were received. The acceleration of amortization was made to conform with
prevailing industry practice. By accelerating amortization, certain costs
associated with the opening of new warehouse operations are amortized over a
period of twelve months commencing the month in which the warehouse opens.
Costs associated with the development and introduction of new catalogs are
amortized over the life of the catalog, not to exceed a period of one year.
F-21
<PAGE> 116
The cumulative effect of this change on prior years totaled
$2,110,000, or $.18 per share, and is reported separately in the 1993
consolidated income statement, without tax benefit. The effect of the change
in 1993 was to increase both the loss from continuing operations before
extraordinary charge and cumulative effect of accounting change and the net
loss by $1,191,000. This is primarily the result of the introduction of a new
catalog and, in management's opinion, is not necessarily indicative of the
expected impact of accelerated amortization on future years.
The following pro forma information reflects the Company's results for
fiscal years 1992 and 1991 as if the change had been retroactively applied:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Income (loss) from continuing operations
before extraordinary charge $(4,461,000) $ (2,249,000)
Net income (loss) (4,532,000) 2,125,000
Earnings (loss) per share:
Loss from continuing operations
before extraordinary charge $ (.45) $ (.24)
Net income (loss) (.46) .22
</TABLE>
4. RESTRUCTURING, NONRECURRING AND EXTRAORDINARY CHARGES:
During the fourth quarter of 1993, as a result of certain actions
taken as part of its strategy to refocus and build on its existing core
businesses in the U.S. the Company recorded an $6,762,000 restructuring charge.
The provision for restructuring charge consists of an estimate of the loss to
be incurred upon the sale of certain businesses, including anticipated
operating results through the projected disposal dates, and the write-off of
intangible assets. Below is a summary of components comprising the
restructuring charges as of June 30, 1993:
<TABLE>
<S> <C>
Estimated loss on disposal of businesses $4,600,000
Relocation and consolidation costs 1,544,000
Other 618,000
---------
$6,762,000
=========
</TABLE>
The disposal of businesses includes three operating entities in which
the Company has entered into letters of intent with prospective buyers. The
components of net assets held for sale included in the accompanying
consolidated balance sheets is comprised primarily of working capital items and
fixed assets, net of the reserve for the estimated loss on the disposals. All
amounts are included at net realizable value. (See Note 12).
During the fourth quarter of 1992, the Company recorded a $3,900,000
nonrecurring charge which represents a capital loss realized upon the sale of
the Company's portfolio of debt securities.
During 1992, the Company repurchased certain debt securities in open
market purchases (see Note 6). As a result, the Company incurred an
extraordinary charge which totaled $1,186,000 (net of applicable income tax
benefit of $611,000) and included the market premium paid along with the
accelerated amortization of unamortized debt discount and issuance costs.
F-22
<PAGE> 117
5. INCOME TAXES:
The components of income (loss) from continuing operations before
income taxes, extraordinary charges and cumulative effect of change in
accounting are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Domestic $(13,442) $(6,179) $(3,581)
Foreign (2,232) 1,053 786
------- ------- ------
Total $(15,674) $(5,126) $ (2,795)
======== ======= ========
</TABLE>
The components of the provision (benefit) for income taxes are (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $ -- $(2,404) $ (1,138)
Foreign and other 216 572 404
---- ------ -----
Total current 216 (1,832) (734)
---- ------ ------
Deferred: Federal -- 1,064 54
---- ------ ------
Total provision $216 $ (768) $ (680)
==== ====== ======
</TABLE>
Deferred income taxes relate to the following (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Depreciation $-- $ 68 $ 45
Inventory valuation -- (84) (279)
Bad debt expense -- 425 (86)
Deferred costs -- 800 240
Other, net -- (145) 134
--- ----- ------
Total $-- $1,064 $ 54
=== ====== ======
</TABLE>
The following table reconciles the U.S. statutory rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate 34.0% 34.0% 34.0%
Domestic losses not benefited (24.4) -- --
Capital losses not benefited (10.0) (18.1) --
State taxes, net (0.8) (2.3) (3.0)
Goodwill amortization (1.6) (4.5) (4.3)
Effect of prior year purchase
accounting adjustments -- 2.7 --
Other, net 1.4 3.2 (2.4)
---- ----- -----
Effective tax rate (1.4)% 15.0% 24.3%
==== ===== =====
</TABLE>
In 1992, the Company was able to carryback domestic net operating
losses to prior years which resulted in refunds of previously paid taxes. Such
refunds totaled $2,462,000 and were received in 1993. Tax benefits for 1992
domestic net operating losses which could not be carried back to prior years
were recognized by reducing previously recorded deferred income taxes. At June
30, 1993, the Company had $11,547,000 of available domestic net operating loss
carryforwards for financial reporting and income tax purposes which expire in
2008.
The Company made income tax payments of $926,000 in 1993, $1,358,000
in 1992 and $1,599,000 in 1991.
F-23
<PAGE> 118
6. DEBT:
Total debt at June 30, 1993 and 1992 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1993
-------------
<S> <C>
Domestic revolving credit agreement $ 20,400
Other notes payable, maturing at various dates through 2000 and
bearing interest at rates varying from 5.25% to 11.75% 4,660
--------
Subtotal -- Long-term debt 25,060
Less: current portion (2,493)
--------
Long-term debt, net 22,567
Senior Secured Notes 38,563
Senior Subordinated Notes 98,750
Convertible Subordinated Debentures 2,030
--------
Total long-term debt, net of current portion $161,910
========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1992
-------------
<S> <C>
Domestic revolving credit agreement $ 5,000
Other notes payable, maturing at various dates through 2000 and
bearing interest at rates varying from 5.25% to 11.75% 6,770
--------
Subtotal -- Long-term debt 11,770
Less: current-portion (2,107)
-------
Long-term debt, net 9,663
Senior Secured Notes 38,451
Senior Subordinated Notes 98,750
Convertible Subordinated Debentures 2,030
--------
Total long-term debt, net of current portion $148,894
========
</TABLE>
A. BANK DEBT
In September 1991, the Company entered into a secured revolving credit
facility with a domestic bank. The credit facility, which was amended and
restated effective April 1, 1993, provides for availability up to $30 million
and expires on December 31, 1995. Borrowings under this agreement are secured
by the inventories and accounts receivable of Waxman Industries, Inc. and
certain of its domestic subsidiaries. Interest is based, at the Company's
option, on either the bank's reference rate plus 1.5% or LIBOR plus 2.5%. The
weighted average interest rate on borrowings outstanding under the credit
facility was 6.34% during 1993. The Company is required to pay a commitment
fee of 1/2% per annum on the unused commitment. The agreement also requires
the Company to, among other things, maintain certain net worth and working
capital levels and debt service ratios.
As a result of the 1993 operating results, the Company was not in
compliance with several financial covenants contained in this agreement as of
June 30, 1993. On October 1, 1993, the Company entered into an amendment to
this agreement which waived all covenant violations as of June 30, 1993 and
amended certain of the financial covenants to provide that future compliance
will not be negatively impacted by the Company's fiscal 1993 operating results.
Under the agreement, as amended, interest is based, at the Company's option, on
either the bank's reference rate plus 1.5% or LIBOR plus 3.0%.
In May 1994, the domestic revolving credit facility was terminated by
the Company, and borrowings thereunder were refinanced as part of the Company's
debt restructuring. See Note 12.
B. SENIOR SECURED NOTES
In September 1991, the Company completed a private placement of $50
million of 7-year Senior Secured Notes (the Senior Notes), including detachable
warrants to purchase 1 million shares of the Company's common stock (the
Warrants). At the time of issuance, the Senior Notes included $42.5 million of
12.25% fixed rate notes and
F-24
<PAGE> 119
$7.5 million of floating rate notes with interest at 300 basis points over the
90 day LIBOR rate. The Senior Notes are redeemable in whole or in part, at the
option of the Company, after September 1, 1993 at a price of 107.35% for the
fixed rate notes and 103% for the floating rate notes. The redemption prices
decrease annually to 100% of the principal amounts at September 1, 1996.
Annual mandatory redemption payments of $14.45 million for the fixed rate
notes, and $2.55 million for the floating rate notes commence on September 1,
1996 and are calculated to retire 68% of the principal amount of the Senior
Notes prior to maturity. The Senior Notes, which are secured by a pledge of
all of the outstanding stock of the Company's wholly-owned subsidiary, Barnett
Inc., are senior in right of payment to all subordinated indebtedness and pari
passu with all other senior indebtedness of the Company.
The Warrants are exercisable through September 1, 1996, at a price of
$4.60 per share. A portion of the proceeds of the private placement was
allocated to the Warrants and, as a result, paid-in capital increased by $1
million in fiscal year 1992. The related $1 million reduction in the recorded
principal amount of the Senior Notes is being amortized as interest expense
over the life of the Senior Notes.
During June 1992, the Company repurchased $10,850,000 principal amount
of the fixed rate notes in open market purchases.
The Senior Note indenture contains various covenants, including
dividend restrictions and minimum operating cash flow requirements. As a
result of its 1993 operating results, the Company was not in compliance with
the operating cash flow covenant contained in the Senior Note Indenture as of
June 30, 1993. The operating cash flow covenant requires a minimum ratio of
operating cash flow to interest expense of 1.1 to 1.0 (the Company's actual
ratio for fiscal 1993 was approximately 0.4 to 1.0). Under the terms of the
indenture, the trustee or the holders of 25% of the Senior Notes may, at their
discretion, declare the Company to be in default under the indenture as a
result of the noncompliance and, after applicable grace periods, cause the
amounts due under the Senior Notes to be subject to acceleration.
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 was below the minimum net worth requirement under the Senior Note
indenture. Minimum net worth of $35 million, adjusted for cumulative earnings
as defined in the indenture, is required to be maintained (the Company's actual
consolidated net worth at June 30, 1993 was $7.5 million). Under the terms of
the Senior Note indenture, the Company would be required to offer to purchase
$5 million of the Senior Notes at a price of 102% every six months if the
Company's net worth falls below the minimum net worth requirement for two
consecutive quarters. Such offers to purchase must continue until the
Company's net worth exceeds the minimum net worth requirement. The Company's
net worth continued to be below the minimum requirement at September 30, 1993,
which obligated the Company to offer to purchase $5.0 million of the Senior
Notes at May 30, 1994.
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 and eliminate any prospective
defaults resulting from the adverse results and events relating to the
Company's discontinued Canadian operations. See Note 12.
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<PAGE> 120
C. SENIOR SUBORDINATED NOTES
In June 1989, the Company issued $100 million principal amount of 13
3/4% Senior Subordinated Notes (Subordinated Notes) due June 1, 1999. The
Subordinated Notes are redeemable in whole or in part, at the option of the
Company, after June 1, 1994 at a price of 105.156% which decreases annually to
100% of the principal amount at the maturity date. Annual mandatory redemption
payments of $20 million commencing June 1, 1996 are calculated to retire 60% of
the issue prior to maturity. In case of a change in control, the noteholders
have the right to require the Company to repurchase the Notes at established
redemption prices. The Subordinated Notes, which are unsecured, are
subordinate in right of payment to all senior debt and are senior in right of
payment to the Company's 6 1/4% Convertible Subordinated Debentures. Under the
terms of the indenture, the Company may not incur additional indebtedness which
is subordinate to senior debt and senior to the Subordinated Notes.
Additionally, the indenture agreement contains various other covenants,
including dividend restrictions and minimum net worth requirements.
During 1992, the Company repurchased $1,250,000 principal amount of
the Notes in an open market purchase.
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 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 at a price of 100% every six months
if the Company's net worth falls below the minimum net worth requirement for
two consecutive quarters. Such offers to purchase must continue until the
Company's net worth exceeds the minimum net worth requirement. The Company may
credit against its purchase obligation the principal amount of any notes
previously acquired by the Company. The Company's net worth continued to be
below the minimum requirement at September 30, 1993, which obligated the
Company to offer to purchase $8.8 million of Notes at December 31, 1993 and
$10.0 million of Notes at June 30, 1994.
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
Notes 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 12.
D. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1987, the Company issued $25 million principal amount of 6
1/4% Convertible Subordinated Debentures (the Debentures) due March 15, 2007.
The Debentures, which are unsecured, may be converted at any time prior to
maturity, unless previously redeemed, into shares of the Company's common stock
at a conversion price of $9.58 per share. The indenture agreement contains
various covenants, including dividend restrictions and minimum net worth
requirements.
During fiscal 1990, the Company called $12.5 million principal amount
of the Debentures for redemption and subsequently $6.5 million principal amount
was converted into 683,000 shares of common stock and the remaining $6.0
million principal amount was redeemed at the call price of 105%.
F-26
<PAGE> 121
During fiscal years 1990 and 1992, the Company also purchased $9.7
million and $.8 million, respectively, of the principal amount of the
Debentures in open market purchases at prices which approximated the par value
of the Debentures.
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 was $7.5 million, below the $8.0 million minimum net worth requirement
under the Debenture indenture. Under the terms of the Debenture indenture, if
the Company's net worth falls below the minimum net worth requirement for two
consecutive quarters, the Company is required to make a purchase offer for the
Debentures. The Company's consolidated stockholders' equity continued to be
below the minimum net worth requirement as of September 30, 1993, which
obligated the Company to make a purchase offer at December 31, 1993 for
substantially all of the $2.0 million principal amount of 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.
E. MISCELLANEOUS
The Company made interest payments of $19,540,000 in 1993, $18,858,000
in 1992 and $18,622,000 in 1991. Accrued liabilities in the accompanying
consolidated balance sheets include accrued interest of $2,609,000 and
$2,600,000 at June 30, 1993 and 1992, respectively.
No quoted market prices are available for any of the Company's debt as
the debt is not actively traded. Management, however, believes the carrying
values of its bank loans approximate their fair values as they bear interest
based upon the banks' prime lending rates. It was not practical to estimate
the fair value of the Company's Senior Secured Notes and subordinated debt
because of the inability to estimate fair value without incurring excessive
costs.
7. STOCKHOLDERS' EQUITY:
In May 1992, the Company completed a public offering of 2,199,000
shares of common stock at a price of $5.00 per share. The net proceeds from
the offering, after deducting all associated costs, were $9,785,000.
During fiscal 1991, the Company purchased approximately 452,000 shares
of its common stock at an aggregate cost of approximately $1,910,000 through
open market purchases. There were no common stock repurchases in 1993 or 1992.
Each share of common stock entitles the holder to one vote, while each
share of Class B common stock entitles the holder to ten votes. Cash dividends
on the Class B common stock may not exceed those on the common stock. Due to
restricted transferability there is no trading market for the Class B common
stock. However, the Class B common stock may be converted, at the
stockholder's option, into common stock on a share-for-share basis at any time
without cost to the stockholder.
Stockholders' equity includes cumulative currency translation
adjustments of ($4,651,000) and ($1,492,000) at June 30, 1993 and 1992,
respectively.
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<PAGE> 122
8. STOCK OPTIONS:
STOCK OPTION PLAN
Effective July 1, 1992, the Company's stockholders approved the 1992
Non-Qualified and Incentive Stock Option Plan (the 1992 Stock Option Plan)
which replaced the existing stock option plan (the 1982 Plan) which terminated
by its terms on April 30, 1992. The 1992 Stock Option Plan authorized the
issuance of an aggregate of 1.1 million shares of common stock as incentive
stock options to officers and key employees of the Company or its subsidiaries.
Under the terms of the 1992 Stock Option Plan, all options granted are at an
option price not less than the market value at the date of grant and may be
exercised for a period not exceeding 10 years from the date of grant.
During fiscal year 1993, options were issued under the 1992 Stock
Option Plan for 1,045,000 shares at option prices ranging from $4.25 to $5.00
per share, and options for 55,000 shares with an exercise price of $5.00 per
share were cancelled. At June 30, 1993, options for 990,000 shares were
outstanding, of which none were exercisable.
At June 30, 1992, there were options for 773,500 shares outstanding
under the 1982 Plan. During fiscal year 1993, options for 462,750 shares with
exercise prices of $4.75 to $7.29 per share were cancelled. At June 30, 1993,
options for 270,750 shares remained outstanding at option prices of $4.75 to
$6.00 per share, of which 153,710 options were exercisable.
OTHER STOCK OPTIONS
The Company has granted non-qualified stock options not under the Plan
to its Co-Chief Executive Officers, outside directors and to a consultant. At
June 30, 1993, a total of 170,000 shares, with exercise prices ranging from
$4.25 to $6.00, were outstanding under the non-qualified options, 88,000 of
which were exercisable. At June 30, 1992, options for 140,000 shares were
outstanding. During fiscal year 1993, options for 30,000 shares with an
exercise price of $4.25 per share were issued and no options were cancelled.
9. LEASE COMMITMENTS:
The Company leases certain of its warehouse and office facilities and
equipment under operating lease agreements which expire at various dates
through 2003.
Future minimum rental payments are as follows: $3,458,000 in 1994,
$3,055,000 in 1995, $2,665,000 in 1996, $2,342,000 in 1997, $1,880,000 in 1998
and $3,789,000 after 1998, with a cumulative total of $17,189,000.
Total rent expense charged to operations was $3,758,000 in 1993,
$3,398,000 in 1992 and $2,909,000 in 1991.
10. PROFIT SHARING PLAN:
The Company has a trusteed profit sharing retirement plan for
employees of certain of its divisions and subsidiaries. In fiscal 1989, the
plan was amended to qualify under Section 401(K) of the Internal Revenue Code.
Company contributions are determined by the Board of Directors. The charges to
operations for Company contributions totaled $132,000 in 1993, $123,000 in 1992
and $108,000 in 1991.
11. CONTINGENCIES:
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these actions will not
materially affect the Company's financial statements.
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<PAGE> 123
12. SUBSEQUENT EVENTS - DISCONTINUED OPERATIONS, DEBT RESTRUCTURING AND
SALE OF A BUSINESS
A. 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 and the consolidated
financial statements have been reclassified to report separately Ideal's net
assets and results of 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 which included members of Ideal's management. Such transaction would
have required the consent of Ideal's Canadian bank as borrowings under its bank
credit agreements were collateralized by all of the assets and capital stock of
Ideal. The bank reviewed 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 agreements. (Borrowings under these agreements
are non-recourse to Waxman Industries, Inc.) As a result of this action, the
Company's control and ownership of Ideal is likely to cease prior to June 30,
1994.
The estimated loss on disposal, which was recorded by the Company in
its consolidated financial statements as of March 31, 1994, totals $38.2
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 and
provisions for other estimated costs to be incurred in connection with the
disposal, as well as 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 assets of the discontinued operation at June 30, 1993 consisted of
working capital of $29,878,000, net plant, property and equipment of
$15,171,000, other assets of $40,561,000 and bank debt of $56,455,000 without
any allowance for the estimated loss on disposal.
Summary operating results of the discontinued operation for the periods
presented are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Net sales $153,875 $181,305 $197,968
Costs and expenses 164,684 178,540 191,551
------- ------- -------
Income (loss) before
income taxes (10,809) 2,765 6,417
Income taxes 431 1,619 2,074
------- ------- -------
Net income (loss) $(11,240) $ 1,146 $ 4,343
------- ======= =======
</TABLE>
F-29
<PAGE> 124
B. 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 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 reduced by
0.5% if Waxman USA (as defined below) achieves certain performance criteria
based on the ratio of EBITDA to fixed charges. 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
1.5% 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 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.
C. 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.(Consumer
Products), 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 Group 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.
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<PAGE> 125
D. SALE OF A BUSINESS
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.
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. At June 30, 1993, assets and liabilities
included in net assets held for sale of these entities are as follows:
<TABLE>
<S> <C>
Accounts receivable, net $3,840,000
Inventory 3,214,000
Prepaids 143,000
Property and equipment, net 214,000
Cost of business in excess of
net assets acquired, net 1,050,000
Other assets 195,000
Accounts payable (1,331,000)
Accrued liabilities (144,000)
----------
$7,181,000
==========
</TABLE>
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<PAGE> 126
<TABLE>
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS:
The following is a summary of the unaudited quarterly results of
operations for the years ended June 30, 1993 and 1992 (in thousands, except per
share amounts):
<CAPTION>
FISCAL 1993 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
- ----------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Net sales $54,405 $50,969 $48,583 $ 50,821 $204,778
Gross profit 18,197 16,952 16,773 15,612 67,534
Operating income (loss) 4,303 3,985 3,905 (7,502) 4,691
Loss from continuing operations
before cumulative effect of
accounting change (363) (547) (710) (14,270) (15,890)
Income (loss) from discontinued
operations 785 733 (218) (12,540) (11,240)
Cumulative effect of accounting
change (2,110) -- -- -- (2,110)
Net income (loss) (1,688) 186 (928) (26,810) (29,240)
Primary and fully diluted
earnings per share:
Loss from continuing
operations before cumulative
effect of accounting change (.03) (.05) (.06) (1.22) (1.36)
Income (loss) from discontinued
operations .07 .07 (.02) (1.08) (.97)
Net income (loss) (.14) .02 (.08) (2.30) (2.51)
As Previously Reported (1):
Net Income 422
Earnings per share .04
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1992 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
- ----------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Net sales $48,669 $47,269 $47,628 $54,172 $197,738
Gross profit 16,980 16,585 17,179 19,879 70,623
Operating income 3,789 4,289 5,374 1,447 14,899
Income (loss) from continuing
operations before
extraordinary charge (356) (335) 165 (3,832) (4,358)
Income (loss) from discontinued
operations 980 805 96 (735) 1,146
Net income (loss) 625 470 261 (5,754) (4,398)
Primary and fully diluted
earnings per share:
Income (loss) from continuing
operations before extraordinary
charge (.04) (.03) .02 (.36) (.44)
Income (loss) from discontinued
operations .11 .08 .01 (.07) .11
Net income (loss) .07 .05 .03 (.54) (.45)
<FN>
(1) First quarter results of fiscal 1993 have been restated for the
cumulative effect of the accounting change for warehouse and catalog
costs. The effect of the change on 1993 operating income has been
included in results for the fourth quarter.
</TABLE>
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<PAGE> 127
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of Waxman Industries, Inc. provides
that each person who is a party to or involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she was a director or officer of Waxman Industries,
shall be indemnified and held harmless by Waxman Industries to the fullest
extent authorized by the Delaware General Corporation Law against all expense,
liability and loss reasonably incurred by such person in connection therewith.
The Certificate of Incorporation provides that the right to indemnification
contained therein is a contract right and includes the right to be paid by
Waxman Industries the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that if the Delaware
General Corporation Law requires, the payment of such expenses incurred in
advance of the final disposition of a proceeding shall be made only upon
delivery to Waxman Industries of an undertaking to repay all amounts so
advanced if it shall ultimately be determined that such director or officer is
not entitled to be indemnified. Waxman Industries maintains directors' and
officers' liability insurance covering certain liabilities incurred by the
directors and officers of Waxman Industries in connection with the performance
of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
3.1** Certificate of Incorporation of Waxman Industries, Inc. (Exhibit
3(a) to Waxman Industries, Inc.'s Form S-8 filed December 4, 1989,
File No. 0-5888, incorporated herein by reference).
3.2** By-laws of Waxman Industries, Inc. (Exhibit 3.2 to Waxman
Industries, Inc.'s Annual Report on Form 10-K for the year ended
June 30, 1990, File No. 0-5888, incorporated herein by reference).
4.1*** Indenture, dated as of May 20, 1994, by and between Waxman
Industries, Inc. and The Huntington National Bank, as Trustee, with
respect to the Senior Secured Deferred Coupon Notes, including the
form of Senior Secured Deferred Coupon Notes.
4.2*** Warrant Agreement, dated as of May 20, 1994, by and between Waxman
Industries, Inc. and The Huntington National Bank, as Warrant
Agent.
4.3*** Warrant Certificate.
5.1* Opinion of Shereff, Friedman, Hoffman & Goodman regarding
legality.
8.1 Form of Opinion of Shereff, Friedman, Hoffman & Goodman as to tax
matters.
10.1** Lease between Waxman Industries, Inc. as Lessee and Aurora
Investment Co. as Lessor dated June 30, 1992 (Exhibit 10.1 to
Waxman Industries, Inc.'s Annual Report on Form 10-K for the year
ended June 30, 1992, File No. 0-5888, incorporated herein by
reference).
10.2** Policy Statement (revised as of June 1, 1980) regarding Waxman
Industries, Inc.'s Profit Incentive Plan (Exhibit 10(c)-1 to
Waxman Industries, Inc.'s Annual Report on Form
II-1
<PAGE> 128
10-K for the year ended June 30, 1984, File No. 0-5888,
incorporated herein by reference).
10.3** Employment Contract dated June 18, 1990 between Barnett Inc. and
William R. Pray (Exhibit 10.4 to Waxman Industries, Inc.'s Annual
Report on Form 10-K for the year ended June 30, 1991, File No.
0-5888, incorporated herein by reference).
10.4** Form of Stock Option Agreement between Waxman Industries, Inc.
and its Directors (Exhibit 10.5 to Waxman Industries, Inc.'s
Annual Report on Form 10-K for the year ended June 30, 1991, File
No. 0-5888, incorporated herein by reference).
10.5** Employment Contract dated January 1, 1992 between Waxman
Industries, Inc. and John S. Peters (Exhibit 10.6 to Waxman
Industries, Inc.'s Annual Report on Form 10-K for the year ended
June 30, 1992, File No. 0-5888, incorporated herein by
reference).
10.6*** Tax Sharing Agreement dated May 20, 1994 among Waxman Industries,
Inc., Waxman USA, Barnett Inc., Waxman Consumer Products Group
Inc., WOC Inc. and Western American Manufacturing, Inc.
10.7*** Intercorporate Agreement dated May 20, 1994 among Waxman
Industries, Inc., Waxman USA, Barnett Inc., Waxman Consumer
Products Group Inc., WOC Inc. and Western American Manufacturing,
Inc.
10.8*** Credit Agreement dated as of May 20, 1994 among Waxman USA, Inc.,
Barnett Inc., Waxman Consumer Products Group Inc. and WOC Inc., the
Lenders and Issuers party thereto and Citicorp USA, Inc. as Agent,
and certain exhibits thereto.
10.9*** Term Loan Credit Agreement dated as of May 20, 1994 among Waxman
USA, Inc., Barnett Inc., Waxman Consumer Products Group Inc. and
WOC Inc., the Lenders and Issuers party thereto and Citibank, N.A.,
as Agent.
12.1*** Statement re: computation of ratios.
21.1*** List of Subsidiaries of the Company.
23.1 Consent of Arthur Andersen & Co.
23.2* Consent of Shereff, Friedman, Hoffman & Goodman (contained in its
opinion filed as Exhibit 5.1 to this Registration Statement).
24.1 Power of Attorney (included in Part II of Registration
Statement).
25.1* Statement of eligibility and qualification on Form T-1 of The
Huntington National Bank, as Deferred Coupon Note Trustee (bound
separately).
99* (a) Form of Letter of Transmittal with respect to the Exchange
Offer
(b) Form of Notice of Guaranteed Delivery
(c) Substitute Form W-9 and Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9
- ---------------
* To be filed by amendment.
II-2
<PAGE> 129
** Incorporated herein by reference as indicated.
*** Filed as exhibits to the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on June 20,
1994.
(B) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
persons of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Waxman
Industries, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cleveland, State of Ohio on the 16th day of
August, 1994.
WAXMAN INDUSTRIES, INC.
By:/s/Neal R. Restivo
Neal R. Restivo,
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* Chairman of the Board, August 16, 1994
- ---------------------------------- Co-Chief Executive Officer
Melvin Waxman and Director
* President, Co-Chief Executive August 16, 1994
- ----------------------------------- Officer, Treasurer and Director
Armond Waxman
/s/ Neal R. Restivo Vice President and Chief Financial August 16, 1994
- ----------------------------------- Officer (principal financial and
Neal R. Restivo accounting officer)
* Director August 16, 1994
- ------------------------------------
Samuel J. Krasney
* Director August 16, 1994
- ------------------------------------
Irving Z. Friedman
* Director August 16, 1994
- ------------------------------------
Judy Robins
*By:/s/ Neal R. Restivo
----------------------------
Neal R. Restivo
As Attorney-in-Fact
</TABLE>
II-4
<PAGE> 131
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Description Sequential Page Number
-------------- ------------------------------------------ ----------------------
<S> <C> <C>
3.1** Certificate of Incorporation of Waxman
Industries, Inc. (Exhibit 3(a) to Waxman
Industries, Inc.'s Form S-8 filed
December 4, 1989, File No. 0-5888,
incorporated herein by reference).
3.2** By-laws of Waxman Industries, Inc.
(Exhibit 3.2 to Waxman Industries, Inc.'s
Annual Report on Form 10-K for the year
ended June 30, 1990, File No. 0-5888,
incorporated herein by reference).
4.1*** Indenture, dated as of May 20, 1994, by
and between Waxman Industries, Inc. and
The Huntington National Bank, as Trustee,
with respect to the Senior Secured
Deferred Coupon Notes, including the form
of Senior Secured Deferred Coupon Notes.
4.2*** Warrant Agreement, dated as of May 20,
1994, by and between Waxman Industries,
Inc. and The Huntington National Bank, as
Warrant Agent.
4.3*** Warrant Certificate.
5.1* Opinion of Shereff, Friedman, Hoffman &
Goodman regarding legality.
8.1 Form of Opinion of Shereff, Friedman,
Hoffman & Goodman as to tax matters.
10.1** Lease between Waxman Industries, Inc. as
Lessee and Aurora Investment Co. as
Lessor dated June 30, 1992 (Exhibit 10.1
to Waxman Industries, Inc.'s Annual Report
on Form 10-K for the year ended June 30,
1992, File No. 0-5888, incorporated
herein by reference).
10.2** Policy Statement (revised as of June 1,
1980) regarding Waxman Industries,
</TABLE>
II-5
<PAGE> 132
<TABLE>
<CAPTION>
Exhibit Number Exhibit Index Sequential Page Number
- -------------- ----------------------------------------- ----------------------
<S> <C> <C>
Inc.'s Profit Incentive Plan (Exhibit
10(c)-1 to Waxman Industries, Inc.'s
Annual Report on Form 10-K for the year
ended June 30, 1984, File No. 0-5888,
incorporated herein by reference).
10.3** Employment Contract dated June 18, 1990
between Barnett Inc. and William R. Pray
(Exhibit 10.4 to Waxman Industries, Inc.'s
Annual Report on Form 10-K for the year
ended June 30, 1991, File No. 0-5888,
incorporated herein by reference).
10.4** Form of Stock Option Agreement between
Waxman Industries, Inc. and its Directors
(Exhibit 10.5 to Waxman Industries, Inc.'s
Annual Report on Form 10-K for the year
ended June 30, 1991, File No. 0-5888,
incorporated herein by reference).
10.5** Employment Contract dated January 1, 1992
between Waxman Industries, Inc. and John
S. Peters (Exhibit 10.6 to Waxman
Industries, Inc.'s Annual Report on Form
10-K for the year ended June 30, 1992,
File No. 0-5888, incorporated herein by
reference).
10.6*** Tax Sharing Agreement dated May 20, 1994
among Waxman Industries, Waxman USA,
Barnett Inc., Waxman Consumer Products
Group Inc., WOC Inc. and Western American
Manufacturing, Inc.
10.7*** Intercorporate Agreement dated May 20,
1994 among Waxman Industries, Waxman USA,
Barnett Inc., Waxman Consumer Products
Group Inc., WOC Inc. and Western American
Manufacturing, Inc.
10.8*** Credit Agreement dated as of May 20, 1994
among Waxman USA, Inc., Barnett Inc.,
Waxman Consumer
</TABLE>
II-6
<PAGE> 133
<TABLE>
<CAPTION>
Exhibit Number Exhibit Index Sequential Page Number
- -------------- ----------------------------------------- ----------------------
<S> <C> <C>
Products Group Inc. and WOC Inc., the
Lenders and Issuers party thereto and
Citicorp USA, Inc., as Agent, and certain
exhibits thereto.
10.9*** Term Loan Credit Agreement dated as of May
20, 1994 among Waxman USA, Inc., Barnett
Inc., Waxman Consumer Products Group, Inc.
and WOC Inc., the Lenders and Issuers
party thereto and Citibank, N.A., as
Agent.
12.1*** Statement re: computation of ratios.
21.1*** List of Subsidiaries of the Company.
23.1 Consent of Arthur Andersen & Co.
23.2* Consent of Shereff, Friedman, Hoffman &
Goodman (contained in its opinion filed as
Exhibit 5.1 to this Registration
Statement).
24.1 Power of Attorney (included in Part II of
Registration Statement).
25.1* Statement of eligibility and qualification
on Form T-1 of The Huntington National
Bank, as Deferred Coupon Note Trustee
(bound separately).
99* (a) Form of Letter of Transmittal with
respect to the Exchange Offer
(b) Form of Notice of Guaranteed Delivery
(c) Substitute Form W-9 and Guidelines for
Certification of Taxpayer Identification
Number on Substitute Form W-9
</TABLE>
_________________
* To be filed by amendment.
** Incorporated herein by reference as indicated.
*** Filed as exhibits to the Company's Registration Statement on Form S-4
filed with the Securities and Exchange Commission on June 20, 1994.
II-7
<PAGE> 1
EXHIBIT 8.1
August 16, 1994
Board of Directors
Waxman Industries, Inc.
24460 Aurora Road
Bedford Heights, OH 44146
Gentlemen:
We have acted as counsel for Waxman Industries, Inc., a
Delaware corporation (the "Company"), in connection with the filing by the
Company of a Registration Statement on Form S-4, pursuant to the Securities Act
of 1933 (the "Registration Statement"), with respect to $92,800,000 aggregate
principal amount at maturity of the Company's Series B 12 3/4% Senior Secured
Deferred Coupon Notes due June 1, 2004 (the "Notes").
You have requested our opinion with respect to certain tax
disclosure in connection with the Company's filing of the Registration
Statement. In this connection, we have examined and relied upon originals or
copies, certified or otherwise identified to our satisfaction as being true
copies of all such records of the Company, all such agreements, certificates of
officers of the Company and others, and such other documents, certificates and
corporate or other records as we have deemed necessary as a basis for the
opinion expressed in this letter, including, without limitation, the Indenture,
the Registration Statement, the related prospectus which forms a part of the
Registration Statement (the "Prospectus"), the Company's Offer to Exchange and
Consent Solicitation dated April 21, 1994, as supplemented on May 6, 1994 and
May 13, 1994 and the Company's Certificate of Incorporation and By-laws.
We note that we are members of the Bar of the State of New
York and are not members of the Bar of, or authorized to practice law in, any
other jurisdiction. We express no opinion as to the laws of any jurisdiction
other than the laws of the State of New York and the federal laws of the United
States. To the extent that any opinion expressed herein involves the law of
the State of Delaware, such opinion should be understood to be based solely
upon our review of the published statutes of such state and, where
<PAGE> 2
applicable, published cases of the courts and rules or regulations of
regulatory bodies of such state.
We have reviewed the relevant federal and state statutes and
regulations and judicial and administrative opinions, and, subject to the
limitations set forth above, we are of the opinion that the discussion in the
Prospectus under the heading "Certain Federal Income Tax Consequences" sets
forth the material federal income tax consequences expected to result from the
acquisition, ownership and disposition of the Notes by individuals and
corporations, other than those individuals and corporations excepted in the
discussion.
The opinion set forth herein in expressed as of the date
hereof. We disclaim any undertaking to advise you of any changes which may
hereafter be brought to our attention. Except as otherwise required by law,
this letter is not to be referred to, used or quoted (with or without specific
reference to our firm) in any documents, reports, or financial statements or
otherwise, without our prior written consent. Notwithstanding the preceding
sentence, we specifically authorize the Company to include a copy of this
letter as an exhibit to the Registration Statement to be filed with the
Securities Exchange Commission.
Very truly yours,
Shereff, Friedman, Hoffman & Goodman
<PAGE> 1
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
Registration Statement (File No. 33-54209).
Cleveland, Ohio
August 16, 1994
