<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(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
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WAXMAN INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 34-0899894
------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
24460 Aurora Road, Bedford Heights, Ohio 44146
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(Address of Principal Executive Offices) (Zip Code)
(216) 439-1830
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(Registrant's Telephone Number Including Area Code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
Yes X No
--- ---
9,433,520 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.
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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.................................. 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 12-18
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders.. 18
Item 6. Exhibits and Reports on Form 8-K..................... 18
SIGNATURES.................................................... 19
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</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
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
<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
======== ======== ======== ========
The accompanying notes to Condolidated Financial Statements
are an integral part of these statements.
</TABLE>
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<TABLE>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, 1993 and June 30, 1993
ASSETS
<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
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
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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
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
</TABLE>
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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 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
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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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 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
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A. Long-Term Debt
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 agreement
with a domestic bank. The credit agreement provides for
availability up to $5 million and expires on May 31, 1994.
Borrowings under this agreement 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%. 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 adjustments, the Company's
consolidated
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B. Senior Secured Notes (continued)
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 adjustment, the Company's
consolidated stockholders' equity at June 30, 1993 and September
30, 1993 was below the $15 million minimum net worth requirement
under the 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.
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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 adjustment, 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. 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.
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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 53% and 54% 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 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 6.7% 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, as well as 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.
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A. Results of Operations (continued)
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 Profi
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 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 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.
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Operating Expenses(continued)
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.
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
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<PAGE> 15
Net Income (continued)
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 were 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
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 Senior 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'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 the Company, 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.
Page 15
<PAGE> 16
B. Liquidity and Capital Resources (continued)
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 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 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 "cross- default" provisions of 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 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
adversly 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 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.
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B. Liquidity and Capital Resources (continuation)
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 Flow
For the 1994 six month period, the Company generated $4.0 million of
cash flow from operations of which approximately ($1.3) million
resulted from 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.
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<PAGE> 18
B. Liquidity and Capital Resources (continued)
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.
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Item 6. Exhibits and Reports on Form 8-K
a. No exhibits required.
b. There were no reports on Form 8-K filed during the
quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
Registrant
Date: February 14, 1994
By:___________________________
Neal R. Restivo
Vice President, Finance and
Chief Financial Officer
Date: February 14, 1994
By:___________________________
Richard T. Marabito
Corporate Controller and
Chief Accounting Officer
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