<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
--------------
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 34-0899894
(State of Incorporation) (I.R.S. Employer
Identification Number)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
(Address of Principal Executive Offices) (Zip Code)
(216) 439-1830
--------------
(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
------- -------
9,559,586 shares of Common Stock, $.01 par value, and 2,205,138 shares of Class
B Common Stock, $.01 par value, were outstanding as of May 8, 1996.
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO FORM 10-Q
------------------
PAGE
----
PART 1. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the
Nine Months and Three Months Ended March 31, 1996
and 1995............................................... 3
Condensed Consolidated Balance Sheets as of
March 31, 1996 and June 30, 1995....................... 4-5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 1996 and
1995................................................... 6
Notes to Condensed Consolidated Financial
Statements............................................. 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................... 16
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
2
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PART 1. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended March
March 31, 31,
--------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $175,477 $177,162 $ 58,542 $ 58,767
Cost of sales 123,239 115,412 46,113 38,486
------- ------- ------- -------
Gross profit 52,238 61,750 12,429 20,281
Operating expenses 48,728 45,908 18,448 15,562
------- ------- ------- -------
Operating income (loss) 3,510 15,842 (6,019) 4,719
Interest expense, net 19,934 19,096 6,608 6,538
------- ------- ------- -------
Loss before income taxes and reversal of
loss on disposal of discontinued
operations (16,424) (3,254) (12,627) (1,819)
Provision for income taxes 296 150 108 50
------- ------- ------- -------
Loss before reversal of loss on disposal
of discontinued operations (16,720) (3,404) (12,735) (1,869)
Reversal of loss on disposal of
discontinued operations 11,000 - 11,000 -
------- ------- ------ -----
Net loss $ (5,720) $ (3,404) $ (1,735) $ (1,869)
======= ======= ======= =======
Per common share:
Loss before reversal of loss on disposal
of discontinued operations $ (1.42) $ (0.29) (1.08) $ (0.16)
Reversal of loss on disposal of
discontinued operations 0.93 - 0.93 -
-------- ------- -------- -----
Net loss $ (0.49) $ (0.29) $ (0.15) $ (0.16)
======== ======== ======== ========
Average shares outstanding 11,737 11,712 11,737 11,712
======= ======= ======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 1996 AND JUNE 30, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(Unaudited) (Audited)
----------- ---------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,661 $ 2,106
Accounts receivable, net 36,378 34,989
Inventories 67,003 73,462
Prepaid expenses 5,187 4,948
------- -------
Total current assets 110,229 115,505
------- -------
PROPERTY AND EQUIPMENT:
Land 1,589 1,520
Buildings 13,936 13,573
Equipment 20,867 19,431
------- -------
36,392 34,524
Less accumulated depreciation
and amortization (18,780) (16,364)
------- -------
Property and equipment, net 17,612 18,160
COST OF BUSINESSES IN EXCESS
OF NET ASSETS ACQUIRED, NET 23,472 24,010
OTHER ASSETS 16,507 14,369
------- -------
$167,820 $172,044
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 1996 AND JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(Unaudited) (Audited)
----------- ---------
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 5,861 $ 6,128
Senior Secured Notes 38,871 38,786
Accounts payable 24,271 21,892
Accrued liabilities 5,767 6,935
-------- --------
Total current liabilities 74,770 73,741
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 50,099 55,075
SENIOR SECURED DEFERRED COUPON NOTES 60,626 54,875
SENIOR SUBORDINATED NOTES 48,750 48,750
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 9,532
at March 31, 1996 and 9,495 at June 30, 1995 95 95
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,374
at March 31, 1996 and 2,386 at June 30, 1995 23 23
Paid-in capital 21,123 21,098
Retained deficit (87,118) (81,398)
------- -------
(65,877) (60,182)
Cumulative currency translation adjustments (548) (215)
------- -------
Total stockholders' equity (deficit) (66,425) (60,397)
------- -------
$167,820 $172,044
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 6
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
<S> <C> <C>
Net loss $ (5,720) $ (3,404)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Non-cash interest 5,563 4,916
Depreciation and amortization 7,054 6,454
Changes in assets and liabilities:
(Increase) in accounts receivable, net (1,389) (999)
Decrease (Increase) in inventories 3,345 (3,572)
(Increase) in prepaid expenses (239) (317)
Increase (Decrease) in accounts payable 2,379 (888)
(Decrease) Increase in accrued liabilities (1,168) 333
Other items, net (333) (258)
------- --------
Net Cash Provided by Operating Activities 9,492 2,265
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (1,918) (2,441)
Change in other assets (2,793) (1,338)
------- -------
Net Cash (Used in) Investing Activities (4,711) (3,779)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Issuance of common stock 25 -
Net (repayments) borrowings under credit agreements (1,825) 3,487
Repayments of long-term debt (426) (818)
Repayments of term loan (3,000) (1,000)
------- --------
Net Cash (Used in) Provided
by Financing Activities (5,226) 1,669
------- -------
NET (DECREASE) INCREASE IN CASH (445) 155
BALANCE, BEGINNING OF PERIOD 2,106 2,026
------- -------
BALANCE, END OF PERIOD $ 1,661 $ 2,181
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 7
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
MARCH 31, 1996
NOTE 1 - BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements include the accounts of Waxman
Industries, Inc. and its wholly-owned subsidiaries (the "Company"). The
condensed consolidated statements of income for the nine months and three months
ended March 31, 1996 and 1995, the condensed consolidated balance sheet as of
March 31, 1996 and the condensed consolidated statements of cash flows for the
nine months ended March 31, 1996 and 1995 have been prepared by the Company
without audit. In the opinion of management, these financial statements include
all adjustments necessary to present fairly the financial position, results of
operations and cash flows as of March 31, 1996 and for all periods presented.
All adjustments made have been of a normal recurring nature excluding an $11.0
million charge recorded by the Consumer Products business described further in
"Management's Discussion and Analysis". Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures included are adequate and provide a
fair presentation of interim period results. Interim financial statements are
not necessarily indicative of financial position or operating results for an
entire year. It is suggested that these interim financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1995 as amended on Form 10-K/A and 10-K/A-1 filed with the Securities and
Exchange Commission on October 11 and November 2, 1995, respectively.
Certain previously reported amounts have been reclassified to conform with the
current period presentation, including the restatement of Consumer Products as a
continuing operation as described in Note 6.
NOTE 2 - BUSINESS
--------
The Company believes that it is one of the leading suppliers of plumbing
products to the repair and remodeling market in the United States. Primarily
through its Waxman Consumer Products Group Inc. ("Consumer Products") and
Barnett Inc. ("Barnett") operations, the Company distributes plumbing,
electrical and hardware products to over 50,000 customers in the United States,
including plumbing and electrical repair and remodeling contractors, independent
retailers and do-it-yourself (D-I-Y) retailers.
NOTE 3 - INCOME TAXES
------------
In accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109), the Company is currently
unable to recognize any income tax benefit relating to its net loss. The tax
provision for the nine months and three months ended March 31, 1996 represents a
provision for state and foreign taxes.
At June 30, 1995, the Company had approximately $75.0 million of available
domestic net operating loss carryforwards which will expire through 2010. The
benefit of these net operating loss carryforwards 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.
7
<PAGE> 8
The Company expects to recognize taxable income for the year ending June 30,
1996 as a result of the gain from the Barnett Public Offering as defined in Note
6. Any taxable income recognized in the fourth quarter will be offset by the
current net operating loss carryforwards. Also as a result of the Barnett Public
Offering, Barnett will no longer be included in the Company's consolidated tax
return. Therefore, the Company's remaining net operating loss carryforwards will
not be available to offset Barnett's taxable income after April 3, 1996, the
consummation date of the Barnett Public Offering.
NOTE 4 - IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," and SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
will recognize a charge in the fourth quarter for the impairment of long-lived
assets at Consumer Products and other certain smaller divisions. Management is
currently evaluating the impact, if any, the adoption of SFAS No. 123 will have
on the financial statements. Management expects to adopt SFAS No. 121 by June
30, 1996 and SFAS No. 123 when practicable, but no later than the first quarter
of fiscal 1997.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the nine months ended March 31, 1996 and 1995 included
income taxes of $0.7 million and $0.5 million and interest of $12.4 million and
$12.3 million, respectively.
NOTE 6 - SUBSEQUENT EVENTS AND RELATED MATTERS
-------------------------------------
In August 1995, the Company announced that it had decided to sell its Consumer
Products business and entered into a letter of intent, which subsequently
expired, which contemplated the sale of the Consumer Products business, together
with certain supporting operations and certain home center accounts now serviced
by Barnett, to a group consisting of HIG Capital Management of Miami, Florida
along with certain members of Consumer Products' existing management team for an
aggregate cash purchase price of $50 million plus other consideration which
would have given the Company an approximate 25% economic interest in Consumer
Products on a going-forward basis. As a result, Consumer Products was reported
by the Company as a discontinued operation at June 30, 1995. Since the
consummation of the Barnett Public Offering, described later in this note, the
Company has ceased its efforts to sell Consumer Products and instead retains and
continues to operate Consumer Products. Consequently, the Company reported
Consumer Products' results as a continuing operation for the nine month period
ended March 31, 1996. Prior periods have been restated to conform to the current
period presentation.
On February 1, 1996, Barnett filed a registration statement with the Securities
and Exchange Commission with respect to an initial public offering (the "Barnett
Public Offering") of its common stock (the "Barnett Common Stock"). On March 28,
1996, the registration statement with respect to the Barnett Public Offering was
declared effective and on April 3, 1996, the Barnett Public Offering was
consummated. In such offering, 7,207,200 shares, representing approximately
55.1% of the Barnett Common Stock, were sold in the aggregate by Barnett and the
Company at an initial public offering price per share of $14.00, resulting in
aggregate net proceeds of $93.4 million. As of May 8, 1996, as a result of the
Company's ownership of certain convertible non-voting preferred stock of
Barnett, the Company beneficially owns approximately 49.9% of the Barnett Common
Stock and approximately a 54% economic interest of the capital stock of Barnett.
Of the $48.5 million of net proceeds received by Barnett in the Barnett Public
Offering, Barnett used (i) approximately $23.0 million to repay all of the
8
<PAGE> 9
outstanding indebtedness borrowed by it under the secured credit facility (the
"Operating Companies Revolving Credit Facility") among Citicorp USA, Inc. as
agent, and Barnett, Consumer Products and WOC Inc. ("WOC"), each a wholly-owned
subsidiary of Waxman USA Inc. ("Waxman USA"), (ii) $22.0 million to pay a
dividend evidenced by a note payable to Waxman USA, which funds were in turn
distributed to the Company, and (iii) $3.5 million for working capital. The
$44.9 million of net proceeds received by the Company from the Barnett Public
Offering, together with payment from Barnett of the $22.0 million note payable
described above, were, or will be, applied primarily to repay debt including (i)
all of the $39.2 million principal amount of Waxman Industries' 12 1/4% Senior
Secured Notes due 1998 and Floating Rate Senior Secured Notes due 1998
(collectively, the "Senior Secured Notes") plus accrued interest and redemption
premium of approximately $1.7 million, thereby eliminating the mandatory sinking
fund requirements relating to the Senior Secured Notes which were scheduled to
commence in September 1996, and (ii) approximately $5.0 million of the $10.0
million outstanding indebtedness and accrued interest under the secured term
loan (the "Term Loan") among Citibank, N.A., as agent, and Barnett, Consumer
Products and WOC. The remaining net proceeds received by the Company
(approximately $21.0 million) are intended to be used to (i) reduce additional
outstanding indebtedness borrowed by Consumer Products or WOC under the Restated
Credit Agreement, described later in this note, and/or (ii) retire the Company's
12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred Coupon
Notes") and/or Waxman USA's 11 1/8% Senior Notes due 2001 (the "Exchange Notes")
and/or (iii) reinvest in Consumer Products' and/or WOC's businesses.
On April 3, 1996, the Company, through its wholly-owned subsidiary Waxman USA
consummated the previously announced offer to exchange $48.75 million principal
amount of Exchange Notes for a like amount of the Company's outstanding 13 3/4%
Senior Subordinated Notes ("Subordinated Notes") due 1999 and in connection
therewith solicited consents to certain amendments to the indenture pursuant to
which the Subordinated Notes were issued. Approximately $43.03 million of
Subordinated Notes were exchanged. The Exchange Notes were not registered under
the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from such
registration requirements.
In connection with the Barnett Public Offering, Waxman USA entered into an
amendment and restatement of the Operating Companies Revolving Credit Facility
and Term Loan (the "Restated Credit Agreement") to provide for, among other
things, an approximate one-year secured credit facility providing for revolving
credit advances of up to $25.0 million and term loans of up to $5.0 million
("Restated Term Loans") and a release of Barnett from such lending arrangements.
As a result of the limited duration of the Restated Credit Agreement, the
Company is currently negotiating with respect to a refinancing of such credit
facility. Although the Company believes, based on discussions to date, that it
will be able to refinance the Restated Credit Agreement before its expiration,
there can be no assurance that it will be able to do so or as to the terms of
any such refinancing it will be able to obtain.
Under current accounting pronouncements, the Company would account for its
remaining interest in Barnett under the equity method of accounting, as the
Company's voting interest will be less than 50%. However, the Financial
Accounting Standards Board has issued an exposure draft (the "FASB Exposure
Draft") on "Consolidated Financial Statements: Policy and Procedures," which, if
adopted in substantially the same form as the FASB Exposure Draft, would require
the Company to consolidate Barnett in the Company's consolidated financial
statements.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The Company has decided to retain the Consumer Products business, as described
in Note 6, which was previously reported as a discontinued operation. As a
result of this decision, the $11.0 million loss on disposal recorded at June 30,
1995 has been reversed for the nine months and three months ended March 31,
1996. Also, as a result of management's review of Consumer Products as a
continuing operation, an $11.0 million charge, primarily for the carrying value
of certain inventories and other capitalized assets, has been recorded by
Consumer Products for the nine months and three months ended March 31, 1996 and
is included in consolidated operating results. Additional charges may be
recorded in the fourth quarter as further discussed in "Liquidity and Capital
Resources".
NINE MONTHS ENDED MARCH 31, 1996 COMPARED WITH
----------------------------------------------
NINE MONTHS ENDED MARCH 31, 1995
--------------------------------
RESULTS OF OPERATIONS
- ---------------------
Consolidated net sales for the first nine months of fiscal 1996 were $175.5
million, which reflects a slight decrease from the $177.2 million for the first
nine months of fiscal 1995. Barnett's net sales increased 15.2% to $93.4 million
for the current nine month period from $81.1 million for the nine month period
of fiscal 1995. Included in Barnett's results are $2.1 million of direct
shipments accounted for in previous periods as contributed margin products. On a
comparable period to period basis, Barnett's net sales increase is approximately
13.6%. Most of Barnett's growth can be attributed to increased sales by existing
telesalespersons, as well as the addition of telesalespersons compared to the
prior year period. Also contributing to Barnett's sales increase is an increase
in the total number of products offered by Barnett compared to the prior year.
Barnett's net sales increases were more than offset by net sales decreases of
the Consumer Products business, as well as decreases in the Company's other
operations. Consumer Products' net sales decreased 17.4% to $47.1 million for
the current nine month period from $57.0 million for the nine month period of
fiscal 1995. The decrease in net sales is primarily attributable to the prior
year results being positively impacted by the expansion of the business with
several of its large customers while the current results have been negatively
impacted by a weak retail environment. Net sales decreases in the Company's
other operations were mainly driven by a sales reduction of low margin
commodity-based items at one division.
Consolidated gross profit margin decreased to 29.8% of net sales for the nine
months ended March 31, 1996 from 34.9% of net sales in the prior year. The
decrease is primarily attributable to the Consumer Products business as a result
of additional cost of goods sold charges of $7.5 million recorded in the current
period related to certain inventory carrying costs, which are included in the
$11.0 million charge described above. Also affecting the gross profit margin
decreases for Consumer Products was a strong sales mix from the expansion of the
business in fiscal 1995 and to a lesser extent, increased supplier costs in the
current period. Barnett's gross profit decreased to 33.3% for the nine months
ended March 31, 1996 from 34.1% for the same period last year as a result of the
increased revenues from the above mentioned direct ship programs. Excluding the
affect of the direct shipments, Barnett's gross profit margin decreased to 33.3%
from 33.6% in the prior year period. The Company's other operations also
experienced small decreases in gross profit margin partially offset by continued
improved margins at a Mexican subsidiary.
Consolidated operating expenses for the first nine months of fiscal 1996 were
$48.7 million, an increase of $2.8 million, or 6.1% over fiscal 1995. Operating
expenses as a percentage of sales increased to 27.8% in fiscal 1996
10
<PAGE> 11
from 25.9% for the same period last year. The increase in operating expenses is
primarily a result of the current period charges recorded at the Consumer
Products business of $3.0 million, which is included in the $11.0 million charge
described above, partially offset by decreases in the Company's other
operations. Barnett's operating expenses increased by $2.1 million to $19.6
million for the nine months ended March 31, 1996 from $17.5 million for the same
period last year. Barnett's operating expenses as a percentage of sales
decreased, however, to 21.0% in fiscal 1996 from 21.6% in fiscal 1995. This
decrease is primarily due to the inclusion of direct ship sales in net sales
this period and the leveraging of fixed costs over a larger sales base.
INTEREST EXPENSE AND INCOME TAXES
- ---------------------------------
The Company's total interest expense of $19.9 million for the first nine months
of fiscal 1996 increased from the $19.1 million recorded last year. Average
borrowings outstanding increased to $205.7 million for the nine months ended
March 31, 1996 from $198.4 million for the same period last year. The increase
in average borrowings outstanding is primarily due to additional borrowings to
fund debt service requirements which include interest payments and the accretion
of the Company's Deferred Coupon Notes.
In accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109), the Company is currently
unable to recognize any income tax benefit relating to its net loss. The tax
provision for the nine months and three months ended March 31, 1996 represents a
provision for state and foreign taxes. At June 30, 1995, the Company had
approximately $75.0 million of available domestic net operating loss
carryforwards which will expire through 2010. The benefit of these net operating
loss carryforwards 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.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH
-----------------------------------------------
THREE MONTHS ENDED MARCH 31, 1995
---------------------------------
RESULTS OF OPERATIONS
- ---------------------
Consolidated net sales for the third quarter of fiscal 1996 were $58.5 million
which were relatively flat compared to the $58.8 million for the third quarter
of fiscal 1995. Barnett's net sales increased 14.0% to $32.9 million for the
third quarter of fiscal 1996 from $28.9 million for the third quarter of fiscal
1995. Included in Barnett's results are $0.9 million of direct shipments
accounted for in previous periods as contributed margin products. On a
comparable period to period basis, Barnett's net sales increase for the quarter
is approximately 12.1%. Most of Barnett's growth can be attributed to increased
sales by existing telesalespersons, as well as the addition of telesalespersons
compared to the prior year period. Also contributing to Barnett's sales increase
is an increase in the total number of products offered by Barnett compared to
the prior year. Barnett's net sales increases for the quarter were offset by net
sales decreases of the Consumer Products business, as well as decreases in the
Company's other operations. Consumer Products' net sales decreased 13.7% to
$14.8 million for the third quarter from $17.1 million for the same period last
year. The decrease in net sales is primarily attributable to a weak retail
environment. Net sales decreases in the Company's other operations were mainly
driven by a sales reduction of low margin commodity-based items at one division.
Consolidated gross profit margin decreased to 21.2% of net sales for the quarter
ended March 31, 1996 from 34.5% of net sales for the same period last year. The
decrease is primarily attributable to the Consumer Products business as a result
of additional cost of goods sold charges of $7.5 million recorded in the current
period related to certain inventory carrying costs,
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<PAGE> 12
which are included in the $11.0 million charge described earlier. Also affecting
the gross profit margin decreases for Consumer Products, to a lesser extent, was
increased supplier costs. Barnett's gross profit decreased to 33.0% for the
quarter ended March 31, 1996 from 34.2% for the same period last year as a
result of the increased revenues from the above mentioned direct ship programs.
Excluding the effect of the direct shipments, Barnett's gross profit margin
decreased to 33.0% of net sales for the quarter from 33.6% of net sales in the
prior year period resulting from unfavorable product mix due to inclement
weather conditions in the Northeastern United States in January 1996. The
Company's other operations also experienced small decreases in gross profit
margins.
Consolidated operating expenses for the third quarter of fiscal 1996 were $18.4
million, an increase of $2.9 million, or 18.6%, over fiscal 1995. Operating
expenses as a percentage of sales increased to 31.5% in fiscal 1996 from 26.5%
for the same period last year. The increase in operating expenses is primarily a
result of the current period charges recorded at the Consumer Products business
of $3.0 million, which is included in the $11.0 million charge described
earlier, partially offset by decreases in the Company's other operations.
Barnett's operating expenses increased to $6.8 million for the quarter ended
March 31, 1996 from $6.2 million for the same period last year. Barnett's
operating expenses as a percentage of sales decreased, however, to 20.8% in
fiscal 1996 from 21.6% in fiscal 1995. This decrease is primarily due to the
inclusion of direct ship sales in net sales this period and the leveraging of
fixed costs over a larger sales base.
INTEREST EXPENSE
- ----------------
The Company's total interest expense of $6.6 million for the third quarter of
fiscal 1996 increased slightly from the $6.5 million recorded last year. Average
borrowings outstanding increased to $205.1 million for the fiscal 1996 third
quarter from $200.2 million for the same period last year. The increase in
average borrowings outstanding is primarily due to additional borrowings to fund
debt service requirements which include interest payments and the accretion of
the Company's Deferred Coupon Notes.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
On February 1, 1996, Barnett filed a registration statement with the Securities
and Exchange Commission with respect to an initial public offering of its common
stock. On March 28, 1996, the registration statement with respect to the Barnett
Public Offering was declared effective and on April 3, 1996, the Barnett Public
Offering was consummated. In such offering, 7,207,200 shares, representing
approximately 55.1% of the Barnett Common Stock, were sold in the aggregate by
Barnett and the Company at an initial public offering price per share of $14.00,
resulting in aggregate net proceeds of $93.4 million. As of May 8, 1996, as a
result of the Company's ownership of certain convertible non-voting preferred
stock of Barnett, the Company beneficially owns approximately 49.9% of the
Barnett Common Stock and approximately a 54% economic interest of the capital
stock of Barnett.
Of the $48.5 million of net proceeds received by Barnett in the Barnett Public
Offering, Barnett used (i) approximately $23.0 million to repay all of the
outstanding indebtedness borrowed by it under the Operating Companies Revolving
Credit Facility, (ii) $22.0 million to pay a dividend evidenced by a note
payable to Waxman USA, which funds were in turn distributed to the Company and
(iii) $3.5 million for working capital. The $44.9 million of net proceeds
received by the Company from the Barnett Public Offering, together with payment
from Barnett of the $22.0 million note payable described above, were, or will
be, applied primarily to repay debt including (i) all of the $39.2 million
principal amount of the Company's Senior Secured Notes plus accrued interest and
redemption premium of approximately $1.7 million, thereby
12
<PAGE> 13
eliminating the mandatory sinking fund requirements relating to the Senior
Secured Notes which were scheduled to commence in September 1996 and (ii)
approximately $5.0 million of the $10.0 million outstanding indebtedness and
accrued interest under the Term Loan. The remaining net proceeds received by the
Company (approximately $21.0 million) are intended to be used to (i) reduce
additional outstanding indebtedness borrowed by Consumer Products or WOC under
the Restated Credit Agreement and/or (ii) retire the Company's Deferred Coupon
Notes and/or Exchange Notes and/or (iii) reinvest in Consumer Products' and/or
WOC's businesses.
The Company's business strategy includes reducing its leverage by the sale of
selected assets and to refinance its remaining indebtedness whenever possible.
In addition, the Company believes that the Barnett Public Offering will be
beneficial to the growth and earnings potential of Barnett. In connection with
the Barnett Public Offering and pursuant to the requirements of certain debt
agreements, if the Company does not utilize the proceeds from the Barnett Public
Offering pursuant to the terms described above, the Company will be required to
repay its outstanding obligations under the Restated Credit Agreement.
On April 3, 1996, the Company, through its wholly-owned subsidiary Waxman USA
consummated the previously announced offer to exchange $48.75 million principal
amount of Exchange Notes for a like amount of the Company's outstanding
Subordinated Notes and in connection therewith solicited consents to certain
amendments to the indenture pursuant to which the Subordinated Notes were
issued. Approximately $43.03 million of Subordinated Notes were exchanged. The
Exchange Notes were not registered under the Securities Act of 1933, as amended,
and may not be offered or sold in the United States absent registration or an
applicable exemption from such registration requirements. The amendments to the
Subordinated Note indenture eliminated virtually all of the restrictive
covenants and events of defaults previously contained in such indenture. The
Exchange Offer decreased the Company's cash interest burden and extended the
maturity of the Subordinated Notes exchanged by several years.
In connection with the Barnett Public Offering, Waxman USA entered into the
Restated Credit Agreement to provide for, among other things, the Restated Term
Loans and a release of Barnett from such lending arrangements. As a result of
the limited duration of the Restated Credit Agreement, the Company is currently
negotiating with respect to a refinancing of such credit facility. Although the
Company believes, based on discussions to date, that it will be able to
refinance the Restated Credit Agreement before its expiration, there can be no
assurance that it will be able to do so or as to the terms of any such
refinancing it will be able to obtain.
Revolving credit advances under the Restated Credit Agreement are subject to
borrowing base formulas and bear interest at (i) the per annum rate of 1.5% plus
the highest of (a) the prime rate of Citibank, N.A. or (b) the federal funds
rate plus 0.5% and a formula with respect to three month certificates of deposit
of major United States money market banks or (ii) LIBOR plus 3.0%. The Restated
Credit Agreement includes a letter of credit subfacility of $4.0 million.
Restated Term Loans bear interest at a rate per annum equal to 2.0% over the
interest rate applicable to revolving credit advances under the Restated Credit
Agreement (including the LIBOR option). Borrowings under the Restated Credit
Agreement are secured by the accounts receivable, inventory, certain general
intangibles and unencumbered fixed assets of Consumer Products and WOC (the
"Borrowers") and 65% of the capital stock of one subsidiary of TWI and 100% of
the capital stock of another such subsidiary. In addition, Restated Term Loans
are also secured by a pledge of 500,000 shares of Barnett Common Stock owned by
the Company. The Restated Credit Agreement requires the Borrowers to maintain
cash collateral accounts into which all available funds are deposited and
applied to service the facility on a daily basis. The Restated Credit Agreement
prevents dividends and distributions by the Borrowers except in certain limited
instances including, so long as there is
13
<PAGE> 14
no Default or Event of Default, and the Company is in compliance with certain
financial covenants, the payment of interest on the Subordinated Notes
and Exchange Notes, and will contain customary negative, affirmative and
financial covenants and conditions.
The Restated Credit Agreement contains the events of default contained in the
Operating Companies Revolving Credit Facility, which include the following: (i)
any Borrower shall fail to make any payment of principal or interest or any
other amount due under the agreements related to the Restated Credit Agreement
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 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 grace period), 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 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; (iv) there shall occur any Change of Control (as defined in the
Restated Credit Agreement); and (v) there shall occur a Material Adverse Effect
(as defined in the Restated Credit Agreement) or an event which would have a
Material Adverse Effect (as defined in the Restated Credit Agreement).
As of April 3, 1996 availability under the Restated Credit Agreement totaled
approximately $20.9 million.
Since the consummation of the Barnett Public Offering, the cash flow generated
by such operations is no longer available to the Company. The Company relies
primarily on Consumer Products for cash flow. Consumer Products' customers
include D-I-Y warehouse home centers, home improvement centers, mass
merchandisers, hardware stores and lumberyards. Consumer Products may be
adversely effected by prolonged economic downturns or significant declines in
consumer spending. There can be no assurance that any such prolonged economic
downturn or significant decline in consumer spending will not have a material
adverse impact on the Consumer Products' business and its ability to generate
cash flow.
The Company is currently continuing its review of the strategic direction of the
Consumer Products business as a continuing operation and charges may be recorded
in the fourth quarter to restructure the business, including eliminating certain
product lines, optimizing product offerings and reexamining certain warehousing
costs. The Company is also assessing certain accounting policies for capitalized
costs at Consumer Products. The Company will recognize a charge in the fourth
quarter for the impairment of long-lived assets at Consumer Products and other
certain smaller divisions. Although the Company believes that the reevaluation
of Consumer Products' strategic direction will improve its earnings potential,
there can be no assurance that Consumer Products' results of operations will
improve over time.
The Company will also record an extraordinary charge in the fourth quarter
related to the deferred financing costs attributed to indebtedness repaid from
the net proceeds of the Barnett Public Offering, as well as a substantial gain
from the Barnett Public Offering.
The Company expects to recognize taxable income for the year ending June 30,
1996 as a result of the gain from the Barnett Public Offering. Any taxable
income recognized in the fourth quarter will be substantially offset by the
current net operating loss carryforwards. Also as a result of the Barnett
14
<PAGE> 15
Public Offering, Barnett will no longer be included in the Company's
consolidated tax return. Therefore, the Company's remaining net operating loss
carryforwards will not be available to offset Barnett's taxable income after
April 3, 1996, the consummation date of the Barnett Public Offering.
The Company's common stock price has recently been trading at levels above the
$4.60 exercise price of one million common stock warrants that expire on
September 1, 1996. There can be no assurances that these warrants will be
exercised. If the warrants were exercised, proceeds would be utilized by the
Company for general corporate purposes including repayment of debt.
The Company does not have any commitments to make substantial capital
expenditures.
Assuming the Company refinances the Restated Credit Agreement, the Company
believes that the funds generated from operations along with the funds available
under the Restated Credit Agreement will be sufficient to satisfy the Company's
liquidity requirements until June 1, 1999 (the date that the $5.7 million
principal payment is due on the Company's Subordinated Notes) or December 1,
1999 (the date that the cash interest becomes payable by the Company under the
Deferred Coupon Notes). There can be no assurance that the Company will be able
to pay cash interest on the Deferred Coupon Notes commencing in December 1999 or
that the Company will be able to refinance the Subordinated Notes or the
Deferred Coupon Notes.
DISCUSSION OF CASH FLOWS
- ------------------------
Net cash provided by operating activities was $9.5 million and $2.3 million for
the nine months ended March 31, 1996 and 1995, respectively. The increase
between years results mainly from the Company's initiatives to optimize
inventory levels and decrease carrying costs. Cash flows used in investing
activities totaled $4.7 million of which $1.9 million related to capital
expenditures. Financing activities used $5.2 million of cash flows as the
Company decreased amounts outstanding under its credit agreements by $1.8
million and paid $3.0 million of principal payments under its term loan.
15
<PAGE> 16
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
-----------------
Amended and Restated Credit Agreement Dated as of May 20, 1994, Amended and
Restated as of April 3, 1996, among Waxman USA Inc., as the Company and Waxman
Consumer Products Group Inc. and WOC Inc. as Borrowers and the lenders and
issuers party hereto and Citicorp USA, Inc. as Agent. (Exhibit 10.12 to Waxman
Industries Inc. Amendment No. 9 to Registration Statement on Form S-2,
Registration No. 33-54211, incorporated by reference herein).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) See Exhibit 27.
b) Form 8-K
Report filed February 28, 1996
Report filed April 12, 1996
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 1996, the answer is negative or a response has been
previously reported and an additional report of the information need not be
made, pursuant to the instructions to Part II.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
REGISTRANT
DATE: MAY 9, 1996 BY: _____________________
MICHAEL J. VANTUSKO
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16
<PAGE> 17
EXHIBIT INDEX
-------------
EXHIBIT PAPER (P) OR
- ------- ------------
NUMBER DESCRIPTION ELECTRONIC (E)
- ------ ----------- --------------
(27) Financial Data Schedule
(submitted to the Securities
and Exchange Commission in
Electronic Format) E
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK>
<NAME> WAXMAN INDUSTRIES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 1,661
<SECURITIES> 0
<RECEIVABLES> 40,515
<ALLOWANCES> 4,137
<INVENTORY> 67,003
<CURRENT-ASSETS> 110,229
<PP&E> 36,392
<DEPRECIATION> 18,780
<TOTAL-ASSETS> 167,820
<CURRENT-LIABILITIES> 74,770
<BONDS> 159,475
<COMMON> 118
0
0
<OTHER-SE> (66,543)
<TOTAL-LIABILITY-AND-EQUITY> 167,820
<SALES> 175,477
<TOTAL-REVENUES> 175,477
<CGS> 123,239
<TOTAL-COSTS> 48,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,934
<INCOME-PRETAX> (16,424)
<INCOME-TAX> 296
<INCOME-CONTINUING> (16,720)
<DISCONTINUED> 11,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,720)
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
