<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED DECEMBER 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
COMMISSION FILE NUMBER 0-5888
WAXMAN INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
34-0899894
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
44146
(ZIP CODE)
(216) 439-1830
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past (90) days.
Yes X No
---- ----
9,433,520 shares of Common Stock, $.01 par value, and 2,228,356 shares of Class
B Common Stock, $.01 par value, were issued and outstanding as of February 4,
1994.
<PAGE> 2
INDEX
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -- Six Months and Three Months Ended
December 31, 1993 and 1992.............................................. 3
Consolidated Balance Sheets -- December 31, 1993 and June 30, 1993........ 4-5
Consolidated Statements of Cash Flows -- Six Months Ended December 31,
1993 and 1992........................................................... 6
Notes to Consolidated Financial Statements -- December 31, 1993 and
1992.................................................................... 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 10-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................... 15
SIGNATURES........................................................................... 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
For the Six Months and Three Months Ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31 December 31,
--------------------- ---------------------
1993 1992 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................... $176,750 $192,457 $ 85,350 $ 91,134
Cost of sales................................ 122,642 135,450 58,958 63,957
-------- -------- -------- --------
Gross profit................................. 54,108 57,007 26,392 27,177
Operating expenses........................... 41,334 43,186 20,273 20,415
-------- -------- -------- --------
Operating income............................. 12,774 13,821 6,119 6,762
Interest expense, net........................ 12,081 12,768 6,005 6,441
-------- -------- -------- --------
Income before income taxes and cumulative
effect of accounting change................ 693 1,053 114 321
Provision for income taxes................... 90 445 40 135
-------- -------- -------- --------
Income before cumulative effect of accounting
change..................................... 603 608 74 186
Cumulative effect of change in accounting for
warehouse and catalog costs, without tax
benefit.................................... -- (2,110) -- --
-------- -------- -------- --------
Net income (loss)............................ $ 603 $ (1,502) $ 74 $ 186
======== ======== ======== ========
Primary and fully diluted earnings (loss) per
share:
Income before cumulative effect of
accounting change....................... $ .05 $ .05 $ .01 $ .02
Cumulative effect of accounting change..... -- (.18) -- --
-------- -------- -------- --------
Net income (loss).......................... $ .05 $ (.13) $ .01 $ .02
======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE> 4
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, 1993 and June 30, 1993
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1993 1993
------------ --------
(in thousands)
<S> <C> <C>
Current Assets:
Cash.......................................................... $ 2,340 $ 2,001
Accounts receivable, net...................................... 58,933 58,435
Inventories................................................... 100,353 96,941
Prepaid expenses.............................................. 7,185 7,089
Net assets held for sale...................................... -- 10,266
-------- --------
Total current assets....................................... 168,811 174,732
-------- --------
Property and Equipment:
Land.......................................................... 5,139 4,896
Buildings..................................................... 18,127 17,920
Equipment..................................................... 26,650 25,880
-------- -------
49,916 48,696
Less accumulated depreciation and amortization................ (18,659) (17,065)
-------- --------
Property and equipment, net................................... 31,257 31,631
-------- --------
Cost of Businesses in Excess of Net Assets Acquired, net........ 63,312 64,247
Other Assets.................................................... 12,105 10,073
-------- --------
$275,485 $280,683
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
4
<PAGE> 5
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, 1993 and June 30, 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1993 1993
------------ --------
(in thousands, except
per share amounts)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt............................. $ 7,081 $ 5,071
Accounts payable.............................................. 40,918 40,277
Accrued liabilities........................................... 7,737 9,478
-------- --------
Total current liabilities................................ 55,736 54,826
-------- --------
Long-Term Debt, net of current portion.......................... 73,157 79,018
Senior Secured Notes............................................ 38,618 38,563
Subordinated Debt............................................... 100,780 100,780
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value per share:
Authorized and unissued 2,000 shares....................... -- --
Common stock, $.01 par value per share:
Authorized 22,000 shares;
Issued 9,433 at December 31, 1993 and 9,424 at June 30,
1993..................................................... 94 94
Class B common stock, $.01 par value per share:
Authorized 6,000 shares;
Issued 2,229 at December 31, 1993 and 2,238 at June 30,
1993..................................................... 23 23
Paid-in capital............................................... 18,467 18,467
Retained deficit.............................................. (5,834) (6,437)
-------- --------
12,750 12,147
Cumulative currency translation adjustments................... (5,556) (4,651)
-------- --------
Total stockholders' equity............................... 7,194 7,496
-------- --------
$275,485 $280,683
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
5
<PAGE> 6
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
1993 1992
------- -------
(in thousands)
<S> <C> <C>
Cash From (Used For):
Operations:
Net income (loss)..................................... $ 603 $(1,502)
Adjustments to reconcile net income (loss) to net cash
from (used for) operations:
Cumulative effect of accounting change........... -- 2,110
Depreciation and amortization.................... 4,724 5,066
Changes in assets and liabilities:
Accounts receivable.............................. 3,341 4,881
Inventories...................................... (1,221) 9,715
Prepaid expenses................................. 46 715
Accounts payable................................. (692) (17,953)
Accrued liabilities.............................. (1,886) (2,485)
Other, net....................................... (905) (2,855)
------- -------
Net cash from (used for) operations......... 4,010 (2,308)
------- -------
Investments:
Proceeds from sale of business............................. 3,006 --
Capital expenditures....................................... (1,241) (289)
Change in other assets..................................... (461) 484
------- -------
Net cash from investments................... 1,304 195
------- -------
Financing:
Net borrowings (repayments) under credit agreements........ (4,603) 1,809
Repayments of long-term debt............................... (372) (1,735)
Dividends paid............................................. -- (467)
------- -------
Net cash used for financing................. (4,975) (393)
------- -------
Net increase (decrease) in cash................................. 339 (2,506)
Balance, beginning of period.................................... 2,001 3,841
------- -------
Balance, end of period.......................................... $ 2,340 $ 1,335
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 7
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(in thousands, except per share amounts)
Management believes that the information furnished in the accompanying
consolidated financial statements reflects all adjustments (consisting only of
normal 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 six months and three months ended
December 31, 1993 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1994 or any other period. The
information reported in the consolidated financial statements and the notes
below should be read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993.
1. BUSINESS
The Company is one of the leading suppliers of plumbing products to the
home repair and remodeling market in the United States and Canada and to the
residential and commercial construction markets in Canada. 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. In Canada, the Company is one of only three national
distributors of plumbing and heating products, distributing such products to a
variety of contractors including those serving the new construction, repair and
renovation markets.
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 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 5.
3. EARNINGS PER SHARE
Primary earnings per share have been computed based on the weighted average
number of shares and share equivalents outstanding, which totaled 11,662 for
both the six months and three months ended December 31, 1993 and 1992. Share
equivalents include the Company's common stock purchase warrants. The conversion
of the Company's Convertible Subordinated Debentures due March 15, 2007 into
shares of common stock was not assumed in computing fully diluted earnings per
share in either 1993 or 1992, as the effect would be antidilutive.
4. INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
adoption of SFAS 109 had no effect on the Company's financial position or
results of operations.
The Company currently has $11,547 of available domestic net operating loss
carryforwards which expire in 2008. A foreign subsidiary of the Company has
foreign tax net operating loss carryforwards of Cdn. $12,277 (approximately U.S.
$9,274) which expire over the period from 1997 to 2000.
SFAS 109 requires the recognition of income tax benefits for loss
carryforwards which have not previously been recorded. The tax benefits
recognized must be reduced by a valuation allowance in certain
7
<PAGE> 8
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
circumstances. Upon adoption of SFAS 109, the benefit of the Company's net
operating loss carryforwards was reduced 100% by a valuation allowance. The
Company will continue to evaluate the valuation allowance and to the extent that
the Company is able to recognize tax benefits in the future, such recognition
will favorably affect future results of operations.
The Company's provision for income taxes for the six and three months ended
December 31, 1993 was favorably affected by the utilization of net operating
loss carryforwards.
5. DEBT:
A. LONG-TERM DEBT
Long-term debt at December 31, 1993 consisted of the following:
<TABLE>
<S> <C>
Domestic revolving credit agreement.......................... 25,200
Canadian operating credit agreement.......................... 31,152
Canadian term loan........................................... 18,507
Other notes payable.......................................... 5,379
------
Subtotal - long-term debt.................................. 80,238
Less: current portion........................................ (7,081)
------
Long-term debt, net........................................ 73,157
------
</TABLE>
The Company has a secured revolving credit facility with a bank which
provides for availability up to $30 million and expires on December 31, 1995. 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 connection with the 1989 acquisition of The Ideal Group of Companies,
Inc. (Ideal), a subsidiary of the Company entered into an operating credit
agreement and a term loan agreement with two Canadian banks. Ideal was not in
compliance with several financial covenants contained in the operating credit
and term loan agreements as of June 30, 1993. Such covenant violations were
waived as of June 30, 1993. In addition, in February 1994 the terms of the
operating credit and term loan agreements were further modified to, among other
things, (i) extend the maturity of amounts borrowed under the operating credit
facility from June 30, 1994 to, at the earliest, June 30, 1995, with
availability expiring June 30, 1994, subject to an annual extension at the
banks' option (ii) amend certain covenants to reflect Ideal's current operating
results, (iii) defer the Cdn. $2 million term loan repayment which was due
December 31, 1993, of which Cdn. $0.8 million is now payable prior to June 30,
1994, (iv) reduce maximum borrowings available under the operating credit
facility from Cdn. $60 million to Cdn. $50 million and (v) provide a temporary
loan of Cdn. $2.5 million repayable by June 30, 1994. Under the terms of the
amended agreements, Ideal is required to test its compliance with the various
financial covenants contained therein on a quarterly basis, with March 31, 1994
as the next testing date. If additional covenant violations do occur and are
continuing and not waived or cured,the bank may, at its sole discretion after
the giving of notice and the expiration of applicable grace periods, take
various actions including acceleration of the amounts due thereunder. The
Canadian loan agreements are non-recourse to the Company. However, acceleration
of the loans would trigger a default under the "cross-default" provisions of
substantially all the Company's other debt instruments.
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 up to $5 million and expires on
May 31, 1994. Borrowings under this facility are secured by substantially all of
Barnett's
8
<PAGE> 9
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
assets. Interest on the unpaid principal is based on the bank's prime rate plus
1.5% or LIBOR plus 3%. There were no borrowings outstanding under the credit
agreement at December 31, 1993.
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 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 commenced a solicitation of consents from
the holders of the Senior Secured Notes to waive noncompliance with the
operating cash flow covenant and amend certain provisions of the Senior Secured
Note indenture. Effectiveness of the waiver and amendments required the consent
of holders of at least 66 2/3% of the outstanding principal amount of the
securities. On November 10, 1993, the Company successfully completed the consent
solicitation. 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.
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.
During November 1993, the Company commenced 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. On November 10, 1993, the Company successfully completed the
consent solicitation. The effect of the consent was to relieve the Company of
its obligation to offer to purchase $10 million of 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.
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
9
<PAGE> 10
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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. In the event that
the Company does not make such purchase offer by April 30, 1994, the conversion
price of $3.25 will be adjusted to reflect the current market price at such
date, if lower than $3.25 per share.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the six months ended December 31, 1993 and 1992
included income taxes of $271 and $745, and interest of $11,728 and $12,481,
respectively.
7. 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.
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 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
December 31, 1993.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. RESULTS OF OPERATIONS
Net Sales
The Company's net sales for the quarter ended December 31, 1993 (the "1994
second quarter") totaled $85.4 million, compared with $91.1 million for the
quarter ended December 31, 1992 (the "1993 second quarter"), a decline of 6.3%.
Net sales for the six months ended December 31, 1993 (the "1994 six month
period") totaled $176.8 million, compared with $192.5 million for the six months
ended December 31, 1992 (the "1993 six month period"), a decline of 8.2%. Net
sales from the Company's U.S. operations represented approximately 62% and 60%
of consolidated net sales for the 1994 second quarter and six month period,
respectively, compared with 54% and 53% for the 1993 second quarter and six
month period, respectively. The declines in consolidated net sales are primarily
attributable to the $9.6 million and $19.9 million declines in the Canadian
operations' net sales for the 1994 second quarter and six month period,
respectively, partially offset by increases in the U.S. operations' net sales.
Net sales from the Company's U.S. operations for the 1994 second quarter
totaled $53.3 million, compared with $49.4 million in the 1993 second quarter,
an increase of 7.8%. Net sales from U.S. operations for the 1994 six month
period increased 4.2%, from $102.1 million to $106.4 million. The net sales
increases are primarily the result of the continued growth of the Company's
Barnett Inc. subsidiary (Barnett). Barnett's net sales increased 14.8% from
$20.1 million in the 1993 second quarter to $23.1 million in the 1994 second
quarter and 13.0% from $40.6 million in the 1993 six month period to $45.8
million in the 1994 six month
10
<PAGE> 11
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
period. New product introductions accounted for $1.6 million and $2.8 million of
the increases for the 1994 second quarter and six month period, respectively.
The remainder of Barnett's increases were the result of opening additional mail
order warehouses, as well as the growth of Barnett's existing customer base.
Barnett opened two additional warehouses during the 1994 six month period,
increasing the total number of warehouses to 28. Also contributing to the
increases in U.S. operations' net sales were higher net sales from the Company's
Consumer Products division (Consumer Products). Consumer Product's net sales
increased 6.9% from $16.8 million in the 1993 second quarter to $17.9 million in
the 1994 second quarter and 2.1% from $35.2 million in the 1993 six month period
to $35.9 million in the 1994 six month period.
The Canadian operations' net sales for the 1994 second quarter totaled
$32.1 million, compared with $41.7 million in the 1993 second quarter, a
decrease of 23.1%. Net sales from Canadian operations for the 1994 six month
period decreased 22.1%, from $90.4 million to $70.4 million. Ideal's net sales
continued to be adversely affected by the weak new construction market in
Canada, specifically in the residential and commercial construction markets
which have been negatively impacted by declines in housing starts and building
permits since 1990. The Canadian operations' net sales were also adversely
affected by a 6.4% decrease in the average currency exchange rate used to
translate the Canadian operations' income statements into U.S. dollars during
the 1994 six month period.
The Canadian operations' net sales were also affected by the closing of a
large branch operation during the first quarter of fiscal 1994 and the sale of
H. Belanger Plumbing Accessories (Belanger) in October 1993. Net sales declined
9.7% and 10.6% for the six months and three months ended December 31, 1993,
respectively, when stated in Canadian dollars after excluding the impact from
the closed branch and the sale of Belanger.
Gross Profit
The Company's gross margin was 30.9% in the 1994 second quarter, compared
with 29.8% in the 1993 second quarter. Gross margin for the 1994 six month
period was 30.6%, compared with 29.6% in the prior year period. The increases in
gross margins are attributable to higher margins from the Company's U.S.
operations and proportionately lower net sales from the Canadian operations,
where margins have historically been lower than those from U.S. operations.
The Company's U.S. operations' gross margins increased from 33.1% for the
1993 second quarter to 35.2% for the 1994 second quarter and increased from
33.2% in the 1993 six month period to 34.7% in the 1994 six month period. The
increase in the Company's U.S. operations' 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 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.
The Canadian operations' gross margin was 23.7% in the 1994 second quarter
compared with 25.9% in the 1993 second quarter. The gross margin was 24.4% in
the 1994 six month period and 25.6% in the 1993 six month period. The decline in
gross margin was primarily due to lower pricing in certain regional markets as a
result of competitive pressures.
Operating Expenses
The Company's operating expenses for the 1994 second quarter totaled $20.3
million or 23.8% of net sales, compared with $20.4 million or 22.4% of net sales
in the 1993 second quarter. For the 1994 six month period, operating expenses
totaled $41.3 million or 23.4% of net sales versus $43.2 million or 22.4% of net
sales in the 1993 six month period.
Operating expenses from the Company's U.S. operations increased 9.2% for
the 1994 second quarter from $12.4 million in the 1993 second quarter to $13.6
million in the 1994 second quarter and 5.3% for the 1994 six
11
<PAGE> 12
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
month period from $25.8 million in the 1993 six month period to $27.1 million in
the 1994 six month period. These increases were due primarily to increases in
operating expenses for Barnett. Barnett's operating expenses, increased
approximately $1.0 million in the 1994 second quarter and $1.6 million in the
1994 six month period. These increases primarily related to the opening of new
mail order warehouses during the 1994 six month period.
The Canadian operations' operating expenses for the 1994 second quarter
totaled $6.6 million or 20.6% of net sales compared with $8.0 million or 19.1%
of net sales in the 1993 second quarter, a 16.9% decrease. The Canadian
operations' operating expenses for the 1994 six month period totaled $14.2
million or 20.2% of net sales, compared with $17.4 million or 19.3% of net sales
in the 1993 six month period, a decrease of 18.4%. The lower expense levels were
the result of cost reduction measures undertaken in response to lower net sales
levels, as well as the impact of the branch closing and the Belanger sale in the
1994 second quarter. Ideal's headcount for the 1994 six month period was reduced
11% as compared to the 1993 six month period. Management believes that
additional branch closings and significant headcount reductions cannot be
implemented without impairing the structure necessary to support Ideal's
continued operations.
Operating Income
The Company's operating income totaled $6.1 million or 7.2% of net sales
and $6.8 million or 7.4% of net sales for the 1994 and 1993 second quarters,
respectively.
For the 1994 and 1993 six month periods, operating income totaled $12.8
million or 7.2% of net sales and $13.8 million or 7.2% of net sales,
respectively.
The Company's U.S. operations' operating income increased 30.8% and 21.2%
for the 1994 second quarter and six month period, respectively, as compared with
the prior year periods. The improved operating margin was the result of higher
gross margins offset, in part, by increased operating expenses.
Operating income from the Canadian operations declined 65.1% and 48.5%,
respectively, for the same periods. The decline in operating income is the
result of the decrease in sales combined with the decline in gross margins.
Interest Expense
The Company's interest expense totaled $6.0 million for the 1994 second
quarter, compared with $6.4 million for the 1993 second quarter. Interest
expense totaled $12.1 million for the 1994 six month period, compared with $12.8
million for the 1993 six month period. Average borrowings outstanding decreased
from $225.4 million and $226.4 million in the 1993 second quarter and six month
periods, respectively, to $220.4 million and $221.8 million for the same periods
in the current year. The weighted average interest rate also decreased from
11.3% and 11.1% in the 1993 second quarter and six month period, respectively,
to 10.7% in each of the same periods in the current fiscal year. The decrease in
the weighted average interest rate is primarily the result of reductions in the
Canadian prime lending rate, which averaged 5.7% in the 1994 six month period
compared with 7.3% in the 1993 six month period.
Net Income
The Company's net income for the 1994 second quarter totaled $0.07 million,
compared with $0.2 million in the 1993 second quarter. For the 1994 six month
period, net income totaled $0.6 million compared with a net loss of $1.5 million
in the 1993 six month period. The 1993 six month period includes a $2.1 million
charge for the cumulative effect of a change in accounting for warehouse and
catalog costs, which was made during the fourth quarter of fiscal 1993 and was
applied retroactively to July 1, 1992.
B. LIQUIDITY AND CAPITAL RESOURCES
During the 1994 second quarter, the Company successfully completed the
solicitation of consents from holders of its Senior Secured Notes, Subordinated
Notes and Debentures. The effect of the consents was to
12
<PAGE> 13
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
cure the Company's noncompliance with the operating cash flow covenant under the
Senior Secured Note indenture and amend certain covenants and provisions in each
of the Senior Secured Note indenture, the Subordinated Note indenture and the
Debenture indenture. The consents also relieved the Company of its obligation to
offer to purchase $10 million of Subordinated Notes on December 31, 1993 and
deferred the Company's obligation to purchase $1.875 million of Debentures until
April 30, 1994. In the event that the Company does not make such purchase offer
by April 30, the conversion price will be adjusted to reflect the current market
price at such date if lower than $3.25.
As previously disclosed in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993, the Company intends to undertake a financial
restructuring to create a capital structure which will support the long-term
growth of the Company's domestic businesses, reduce cash interest expense and
generally provide the Company with greater operating and financial flexibility.
The Company has engaged Citicorp Securities, Inc. and Merrill Lynch & Co. as
financial advisors in connection with the refinancing of its domestic debt. The
proceeds from such refinancing will be used to refinance the Company's
outstanding Senior Subordinated Notes, Senior Secured Notes, Convertible
Debentures and borrowings under its existing domestic bank credit facilities.
The Company expects the refinancing to be completed around March 31, 1994.
The Company's Canadian subsidiary, Ideal, has a revolving credit facility
(the "Ideal Operating Credit Agreement") and term loan agreement with two
Canadian banks (the "Ideal Term Loan Agreement"; together, the "Canadian Credit
Agreements"). The Ideal Operating Credit Agreement provides for borrowings up to
Cdn. $50 million subject to borrowing base formulas. Borrowings under the Ideal
Credit Agreement, which are non-recourse to Waxman Industries, Inc., totaled
Cdn. $41.2 million (approximately U.S. $31.2 million) at December 31, 1993.
Availability under this credit agreement totaled $0 at December 31, 1993 and has
ranged from $0 to $2.1 million during the last four fiscal quarters. Ideal's
ability to borrow under the Ideal Operating Credit Agreement is subject to
renewal at the lenders' option in June 1994. In the event that the Ideal
Operating Credit Agreement is not renewed, amounts due thereunder would not
mature until June, 1995. At December 31, 1993, Cdn. $24.5 million (approximately
U.S. $18.5 million) was outstanding under the Ideal Term Loan Agreement.
Borrowings under the Ideal Term Loan Agreement are payable in semi-annual
installments through December 1996. The Company's Canadian operation has been
able to meet its operating obligations using cash flow from operations along
with the availability under the Ideal Operating Credit Agreement during the last
four quarters.
As of June 30, 1993, Ideal was not in compliance with certain financial
covenants contained in the Canadian Credit Agreements. Such covenant violations
were waived as of June 30, 1993. In addition, in February 1994, the terms of the
Canadian Credit Agreements were modified to (i) extend the maturity of amounts
due under the Ideal Operating Credit Agreement to, at the earliest, June 30,
1995 (ii) amend certain covenants to reflect Ideal's current operating results,
(iii) defer the Cdn. $2.0 million term loan repayment which was due December 31,
1993, of which Cdn. $0.8 million is payable prior to June 30, 1994, (iv) reduce
maximum availability under the Ideal Operating Credit Agreement from Cdn. $60.0
million to Cdn. $50.0 million and (v) provide a temporary loan of Cdn. $2.5
million repayable by June 30, 1994. However, in the absence of additional
waivers or an amendment to the Canadian Credit Agreements, additional covenant
violations could occur during fiscal 1994. Under the terms of amended
agreements, compliance with the various financial covenants contained therein
will be next tested as of March 31, 1994. If at that date, additional covenant
violations due occur and are continuing and not waived or cured, the Canadian
bank may, at its sole discretion after the giving of notice and the expiration
of applicable grace periods, take various actions including acceleration of the
amounts due under the agreements. Although such debt is non-recourse to the
Company, acceleration of amounts due under these agreements would trigger a
default under the "crossdefault" provisions of substantially all the Company's
other debt instruments.
Ideal has been subject to a number of factors which have adversely
affected, and may continue to adversely affect, its liquidity and ability to
continue conducting its operations. The prolonged Canadian recession, which has
particularly affected the new residential and commercial construction markets
and has been the most severe in certain areas in which Ideal's business is
concentrated, e.g. Ontario, has significantly
13
<PAGE> 14
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
adversely affected Ideal's business. As a result of these factors, together with
a decline in the Canadian dollar and the closing of certain unprofitable
branches, Ideal's net sales decreased from $247.1 million in fiscal 1990 to
$153.9 million in fiscal 1993. If the Ideal Operating Credit Agreement is not
renewed by the lenders thereunder in June 1994, it would have a material adverse
effect on Ideal's liquidity. Also during the latter part of the 1994 second
quarter, Ideal's business and liquidity was adversely affected by uncertainties
surrounding its relationship with its lenders. Although, as discussed above,
Ideal has reached an agreement with its banks, such agreement took much longer
to finalize than expected. Such delay caused concern among Ideal's vendors and
resulted in some tightening of purchase terms. This led to cash flow problems, a
slowdown of payments to vendors and some inventory stock out situations. These
stock out situations started to negatively impact Ideal's net sales during
December and are continuing to negatively impact Ideal's net sales during its
fiscal third quarter. Although management believes that Ideal's vendor situation
will be improved as a result of the agreement reached with the Canadian banks,
there can be no assurances that this will occur or that the inventory stock out
situation will improve.
In addition to the Ideal Operating Credit Agreement, the Company has
several credit facilities which provide availability for working capital needs.
The Company's domestic secured credit agreement provides for availability up to
$30 million subject to borrowing base formulas. Borrowings under this domestic
credit facility, which expires on December 31, 1995, totaled $25.2 million at
December 31, 1993. Availability at December 31, 1993 totaled $3.0 million. In
addition, during December 1993, Barnett entered into a secured revolving credit
facility which provides for availability of $5 million. There were no borrowings
outstanding under this credit facility at December 31, 1993. The Barnett credit
facility expires on May 31, 1994. It is expected that any amounts outstanding
thereunder will be refinanced as part of the Company's anticipated financial
restructuring.
Although there can be no assurances, the Company believes that it will be
able to complete a financial restructuring of its domestic debt prior to June
30, 1994. Such restructuring is expected to provide the Company's U.S.
operations with sufficient liquidity to meet their liquidity requirements for
the foreseeable future. The Company believes that amounts available under its
domestic credit agreement and under the Barnett credit facility together with
cash from operations will be sufficient to satisfy the liquidity requirements of
the Company's U.S. operations until such time as the financial restructuring
contemplated above has been completed. In the event that the financial
restructuring is not completed during calendar 1994, the ability of the
Company's domestic operations to meet their liquidity requirements will be
dependent on their ability to generate sufficient cash flow from operations and,
if necessary, the ability to extend or replace the Barnett Credit Facility. The
ability of the Company's Canadian operation to meets its liquidity requirements
is dependent upon its ability to successfully renew the Operating Credit
Agreement, the continued support of its vendors and its ability to maximize its
cash flows. If the Canadian operation finds that it is unable to meet its
liquidity requirements it will be necessary for it to undertake such other
actions as may be appropriate under the circumstances. Although the debt is
non-recourse to Waxman, if such actions results in an acceleration of amounts
due under the Canadian Credit Agreements, "cross-default" provisions under
substantially all of the Company's other debt instruments would be triggered
which could impact the liquidity of the Company's domestic operations.
Discussion of Cash Flows
At December 31, 1993, the Company's working capital was $113.1 million. For
the 1994 six month period, the Company generated $4.0 million of cash flow from
operations of which approximately $1.3 million was used relating to changes in
assets and liabilities. Cash flow from investments totaled $1.3 million. During
October 1993, the Company generated approximately $3.0 million of cash from the
sale of a small Canadian operation. Capital expenditures totaled approximately
$1.2 million in the 1994 six month period. Financing activities used
approximately $5.0 million of cash flow as the Company reduced amounts
outstanding under its revolving credit facilities using cash generated from
operations.
14
<PAGE> 15
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
The Company does not have any commitments to make substantial capital
expenditures. However, the Company expects to open two additional Barnett
warehouses during the remainder of fiscal 1994, subject to the adequacy of cash
flows generated from operations and funds available under the Company's credit
facility. The average cost to open a Barnett warehouse is approximately $0.5
million. In addition, future cash outlays to be made in connection with the
fiscal 1993 restructuring charges made by the Company will not be material.
Seasonality
The Company's sales during the third quarter of each fiscal year (i.e.
January through March) are typically lower than sales during each of the other
three quarters. This is primarily due to reduced construction activity during
that period, particularly in the Canadian new construction market served by
Ideal.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Two proposals were voted upon by the Company's stockholders at the Annual
Meeting of Stockholders of the Company held on November 29, 1993. A brief
description of each proposal voted upon at the Annual Meeting and the number of
votes cast for, against and withheld, as well as the number of abstentions and
brokers non-votes as to each such proposal, are set forth below.
A vote by ballot was taken at the Annual Meeting for the election of five
directors of the Company to hold office until the next Annual Meeting of
Stockholders of the Company and until their respective successors are elected
and qualified. The aggregate numbers of shares of Common Stock (a) voted in
person or by proxy for each nominee or (b) with respect to which proxies were
withheld for each nominee, were as follows:
<TABLE>
<CAPTION>
BROKER
NOMINEE FOR WITHHELD NON-VOTES
- ------------------------- --------- ------- ---------
<S> <C> <C> <C>
Melvin Waxman 9,022,393 297,305 2,342,178
Armond Waxman 9,021,655 298,043 2,342,178
Samuel J. Krasney 9,030,523 289,175 2,342,178
Judy Robins 9,026,393 293,305 2,342,178
Irving Z. Friedman 9,027,543 292,155 2,342,178
</TABLE>
A vote by ballot was taken at the Annual Meeting on the proposal to ratify
the appointment of Arthur Andersen & Co. as auditors for the Company for the
fiscal year ending June 30, 1994. The aggregate numbers of shares of Common
Stock in person or by proxy (a) voted for, (b) voted against or (c) abstaining
from the vote on such proposal, were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- ---------- --------- ------- ---------
<S> <C> <C> <C>
9,003,798 281,893 34,007 2,342,178
</TABLE>
The foregoing proposals are described more fully in the Company's
definitive proxy statement dated November 2, 1993, filed with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. No exhibits required.
b. There were no reports on Form 8-K filed during the quarter.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
----------------------------------
Registrant
Date: March 8, 1994 By: /s/ NEAL R. RESTIVO
-------------------------------
Neal R. Restivo
Vice President, Finance and
Chief Financial Officer
16
