<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, 1997
--------------
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
--- ---
9,848,876 shares of Common Stock, $.01 par value, and 2,149,771 shares of Class
B Common Stock, $.01 par value, were outstanding as of May 1, 1997.
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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 Operations for the
Nine Months and Three Months Ended March 31, 1997
and 1996............................................... 3
Condensed Consolidated Balance Sheets as of
March 31, 1997 and June 30, 1996.................... 4-5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 1997 and
1996................................................... 6
Notes to Condensed Consolidated Financial
Statements............................................. 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information...................................... 15
Item 6. Exhibits and Reports on Form 8-K....................... 15
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 OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
--------- ---------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $199,616 $175,477 $ 65,628 $58,543
Cost of sales 129,634 119,939 42,417 42,813
------- ------- ------- ------
Gross profit 69,982 55,538 23,211 15,730
Operating expenses 50,468 47,978 17,116 18,198
------- ------- ------- ------
Operating income (loss) 19,514 7,560 6,095 (2,468)
Interest expense, net 12,541 19,934 4,295 6,608
------- ------- ------- ------
Income (loss) before income taxes, minority
interest, discontinued operations and
cumulative effect of change in accounting 6,973 (12,374) 1,800 (9,076)
Provision for income taxes 6,130 295 2,091 107
------- ------- ------- ------
Income (loss) before minority interest,
discontinued operations and cumulative 843 (12,669) (291) (9,183)
effect of change in accounting
Minority interest in consolidated
affiliate 4,411 - 1,554 -
Reversal of loss on disposal of business - (11,000) - (11,000)
Cumulative effect of change in accounting - 8,213 - -
------- ------- ------- -------
Net income (loss) $ (3,568) $( 9,882) $ (1,845) $ 1,817
======= ======= ========= =====
EARNINGS PER SHARE:
Income (loss) before minority interest,
reversal of loss on disposal of business
and cumulative effect of change in
accounting $ .07 $ (1.08) $ (.02) $ ( .78)
Minority interest in consolidated affiliate (.37) - (.13) -
Reversal of loss on disposal of business - .93 - .93
Cumulative effect of change in accounting - (.70) - -
-------- --------- -------- --------
Net income (loss) $ (.30) $ ( .85) $ (.15) $ .15
======= ======= ======= =======
Average shares outstanding 11,893 11,737 11,976 11,737
======== ======= ======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
3
<PAGE> 4
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 1997 AND JUNE 30, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
(Unaudited) (Audited)
----------- ---------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 2,366 $ 2,460
Accounts receivable, net 42,096 37,226
Inventories 64,365 59,883
Prepaid expenses 3,322 4,096
--------- ---------
Total current assets 112,149 103,665
--------- ---------
PROPERTY AND EQUIPMENT:
Land 1,469 1,393
Buildings 12,759 11,842
Equipment 27,059 23,090
--------- ---------
41,287 36,325
Less accumulated depreciation
and amortization (19,595) (18,597)
--------- ---------
Property and equipment, net 21,692 17,728
COST OF BUSINESSES IN EXCESS
OF NET ASSETS ACQUIRED, NET 13,009 13,318
UNAMORTIZED DEBT ISSUANCE COSTS, NET 4,753 5,008
OTHER ASSETS 3,945 2,918
--------- ---------
$ 155,548 $ 142,637
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE> 5
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 1997 AND JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 21,869 $ 10,972
Accounts payable 27,955 28,607
Accrued liabilities 7,861 11,929
Accrued interest 702 1,441
--------- ---------
Total current liabilities 58,387 52,949
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 818 863
SENIOR SECURED DEFERRED COUPON NOTES 69,206 62,723
SENIOR NOTES 47,855 43,026
SENIOR SUBORDINATED NOTES 895 5,724
MINORITY INTEREST IN CONSOLIDATED AFFILIATE 25,018 20,606
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 9,846
at March 31, 1997 and 9,693 at June 30, 1996 97 96
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,151
at March 31, 1997 and 2,153 at June 30, 1996 22 22
Paid-in capital 21,645 21,419
Retained deficit (68,072) (64,503)
--------- ---------
(46,308) (42,966)
Cumulative currency translation adjustments (323) (288)
--------- ---------
Total stockholders' equity (deficit) (46,631) (43,254)
--------- ---------
$ 155,548 $ 142,637
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net loss $ (3,568) $ (9,882)
Adjustments to reconcile net loss to
net cash (used in) provided by operating
activities:
Cumulative effect of change in accounting -- 8,213
Reversal of loss on disposal -- (11,000)
Minority interest in consolidated affiliate 4,411 --
Non-cash interest 6,483 5,751
Depreciation and amortization 4,585 4,075
Changes in assets and liabilities:
Accounts receivable, net (4,870) 1,819
Inventories (5,607) 9,089
Prepaid expenses 774 (239)
Other assets (1,149) (7,865)
Accounts payable (652) 6,979
Accrued liabilities (4,807) 1,094
Other items, net (35) (333)
-------- ---------
Net Cash (Used in) Provided
by Operating Activities (4,435) 7,701
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (6,737) (3,013)
-------- ---------
Net Cash Used in Investing Activities (6,737) (3,013)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements 93,485 175,685
Repayments under credit agreements (82,588) (180,602)
Repayments of long-term debt (45) (241)
Issuance of common stock 226 25
-------- ---------
Net Cash Provided by (Used in)
Financing Activities 11,078 (5,133)
-------- ---------
NET DECREASE IN CASH (94) (445)
BALANCE, BEGINNING OF PERIOD 2,460 2,106
-------- ---------
BALANCE, END OF PERIOD $ 2,366 $ 1,661
======== =========
</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, 1997
NOTE 1 - BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements include the accounts of Waxman
Industries, Inc. ("Waxman"), its wholly owned subsidiaries and its affiliate,
Barnett Inc. (collectively, the "Company"). Waxman USA Inc.("Waxman USA"), a
wholly owned subsidiary of Waxman, owns approximately 49.9% of the voting
capital stock of Barnett Inc. ("Barnett") and, together with non-voting
preferred stock of Barnett Inc. owned by Waxman USA, approximately 54% of the
capital stock of Barnett. The condensed consolidated statements of operations
for the nine and three months ended March 31, 1997 and 1996, the condensed
balance sheet as of March 31, 1997 and the condensed statements of cash flows
for the nine months ended March 31, 1997 and 1996 have been prepared by the
Company without audit, while the condensed balance sheet as of June 30, 1996 was
derived from audited financial statements. In the opinion of management, these
financial statements include all adjustments, all of which are normal and
recurring in nature, necessary to present fairly the financial position, results
of operations and cash flows of the Company as of March 31, 1997 and for all
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the disclosures included herein 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. These
condensed interim financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K, as amended by an amendment thereto on Form 10K/A1,
for the fiscal year ended June 30, 1996 filed with the Securities and Exchange
Commission.
NOTE 2 - BUSINESS
--------
The Company believes that it is a leading supplier to the home repair and
remodeling market in the United States. Primarily through its indirect wholly
owned subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"),
WOC Inc. ("WOC"), and TWI International, Inc. ("TWI") and its affiliate Barnett,
the Company markets and distributes a broad range of plumbing, electrical and
hardware products to over 56,000 customers in the United States, including
do-it-yourself warehouse home centers, home improvement centers, mass
merchandisers, hardware stores, lumberyards and to plumbing and electrical
repair and remodeling contractors, independent hardware stores and maintenance
managers.
NOTE 3 - INCOME TAXES
------------
The Company accounts for 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 and three month
periods ended March 31, 1997 represents Barnett's tax provision and a provision
for state and foreign taxes.
At June 30, 1996, the Company had approximately $56.1 million of available
domestic net operating loss carryforwards which will expire between 2008 and
2011. The benefit of these net operating loss carryforwards has been reduced
7
<PAGE> 8
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 will utilize a portion of the net operating loss
carryforward in connection with the Barnett Secondary Offering. See Note 8. The
Company also has alternative minimum tax carryforwards of approximately $720,000
at June 30, 1996 which are available to reduce future regular income taxes over
an indefinite period.
As a result of the Barnett Public Offering (as defined below), Barnett is no
longer included in the Company's consolidated tax return. Therefore, the
Company's remaining net operating loss carryforwards are not available to offset
Barnett's taxable income.
NOTE 4 - IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
In October 1995, the Financial Accounting Standards Board ("FASB")issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which establishes new
accounting standards for the measurement and recognition of stock-based awards.
SFAS No. 123 permits entities to continue to use the traditional accounting for
stock-based awards prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," however, under this option, the Company will be required
to disclose the pro forma effect of stock-based awards on net income and
earnings per share as if SFAS No. 123 had been adopted. SFAS No. 123 is
effective in fiscal 1997. The Company intends to continue using the provisions
of APB Opinion No. 25 to account for stock-based awards.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128") to be effective beginning with the
Company's quarter ending December 31, 1997. Under SFAS 128, the Company's basic
earnings per share and fully diluted earnings per share will be presented on the
face of the income statement. The denominator for basic earnings per share is
determined using only the weighted average number of outstanding shares during
the period. The computation for fully diluted earnings per share has not changed
materially. For the quarter and nine months ended March 31, 1997, the number of
shares used to compute basic earnings per share is the same as the weighted
average number of shares used to compute primary earnings per share.
NOTE 5 - BARNETT
-------
In April 1996, Barnett completed an initial public offering (the "Barnett Public
Offering") of its common stock (the "Barnett Common Stock"). In the offering,
7,207,200 shares, representing approximately 55.1% of the Barnett Common Stock,
were sold in the aggregate by Barnett and Waxman USA Inc., a direct wholly owned
subsidiary of Waxman, at an initial public offering price per share of $14.00.
Since the consummation of the Barnett Public Offering, the cash flow generated
by Barnett is no longer available to the Company other than the amounts paid to
the Company for services, or the pro rata amounts, if any, distributed by
Barnett in the form of a common stock dividend. Through March 31, 1997, the
Company consolidated Barnett's financial results and recorded a charge on its
statement of operations for the net income related to the outside stockholders'
common stock interest. See Subsequent Events, Note 8.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the nine months ended March 31, 1997 and 1996 included
income taxes of $6.9 million and $0.7 million and interest of $6.1 million and
$12.4 million, respectively. For the three months ended March 31, 1997 and 1996,
cash payments for income taxes amounted to $1.3 million and $0.2 million and
interest of $2.9 million and $3.8 million, respectively.
8
<PAGE> 9
NOTE 7 - EARNINGS PER SHARE
------------------
Earnings per share are calculated by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding.
The number of shares of common stock used to calculate primary and fully diluted
earnings per share are as follows:
<TABLE>
<CAPTION>
Year-to-Date Quarter
------------ -------
<S> <C> <C>
March 31, 1997 - 11,893,000 11,976,000
March 31, 1996 - 11,737,000 11,737,000
</TABLE>
NOTE 8 - SUBSEQUENT EVENTS
-----------------
SECONDARY OFFERING - BARNETT
On April 18, 1997, the Company and Barnett completed a secondary offering of
1,125,000 and 375,000 shares of Barnett Inc. common stock, respectively. The
underwriters' have been granted a 30 day over-allotment option to purchase an
additional 225,000 shares. Net proceeds from the offering amounted to $18.7
million for the Company and $6.2 million for Barnett, after the underwriters'
discount. As a result of the offering, the Company will own 7,337,000 shares, or
45.7 percent of Barnett, and will begin to utilize the equity method to account
for its investment in Barnett.
SALE OF MADISON EQUIPMENT COMPANY
On April 24, 1997, the Company sold Madison Equipment Company ("Madison"), a
division of WOC, to AFC Cable Systems, Inc. for $2.0 million in cash. For the
nine months ended March 31, 1997, Madison's net sales and operating income
amounted to $5.0 million and $0.2 million, respectively, and net assets were
approximately $2.6 million.
These subsequent event transactions should result in a net gain of approximately
$13 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
A. RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THREE MONTHS ENDED
MARCH 31, 1997 AND 1996.
RESULTS OF OPERATIONS
- ---------------------
This Quarterly Report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements regarding the Company's customer base and the
sufficiency of the Company's liquidity and sources of capital. Any statements
contained herein which are not historical facts or which contain the words
expect, believe or anticipate, or words of similar import shall be deemed to be
forward-looking statements. These forward-looking statements are subject to
certain risk, uncertainties and other factors which could cause actual results
to differ materially. Additional information regarding these and other factors
that could potentially affect the Company or its financial results may be
included in the Company's filings with the Securities and Exchange Commission.
Waxman USA owns 49.9% of the common stock of and, together with its preferred
shares, a 54% economic interest in Barnett. Barnett's results are
9
<PAGE> 10
consolidated with the Company's and the Company records a charge in its
statement of operations for the net income related to the outside stockholder's
common stock interest.
NET SALES
- ---------
Consolidated net sales for the nine months and third fiscal quarter ended March
31, 1997 amounted to $199.6 million and $65.6 million, as compared to $175.5
million and $58.5 million for the comparable periods last year, respectively.
The increases of 13.8% for the nine months and 12.1% for the quarter are
primarily attributable to record sales for both periods by Barnett.
Barnett's net sales of $117.1 million and $40.8 million for the nine months and
quarter ended March 31, 1997 represent increases of 25.4% and 23.9% over the
comparable periods last year. The increases are primarily attributable to the
successful implementation of its growth strategies, including continued
expansion of its promotional flyer mailings, accelerated new product offerings
and investments in its infrastructure.
Net sales for the Company's wholly owned operations amounted to $82.5 million
and $24.9 million for the nine months and quarter ended March 31, 1997,
respectively, an increase of $0.4 million or 0.5% for the nine months and a
decrease of $0.8 million or 3% for the three months ended March 31, 1997. The
Company's Consumer Products' operation experienced net sales decreases of 5.4%
for the nine months and 7.6% for the quarter ended March 31, 1997. The reduction
was primarily the result of the discontinuance of the electrical products' line
and certain lower margin products in the fourth quarter of fiscal 1996 and the
loss of a customer due to its bankruptcy early in the first quarter of fiscal
1997. Excluding those items, Consumer Products' net sales would have increased
approximately 1% for the nine months. The Company's U.S. Lock and foreign
operations reported strong sales increases for both the nine month and quarter
ended March 31, 1997, which partially offset the reduction in net sales at
Consumer Products.
GROSS PROFIT
- ------------
For the nine months ended March 31, 1997, gross profit increased $14.5 million
or 26.0% to $70.0 million from $55.5 million for the comparable period last
year. Gross margins increased for the nine months ended March 31, 1997,
improving to 35.1% from 31.6% last year (34.0% before non-recurring
adjustments). The Company's wholly owned operations' gross margin improved to
36.4% for the current nine month period as compared to 29.8% last year (30.8%
before non-recurring adjustments). There was a general improvement at nearly
all of the Company's operations.
Gross profit for the quarter ended March 31, 1997 amounted to $23.2 million, an
increase of $7.5 million or 47.6% over the $15.7 million in the comparable
period last year. The gross margin for the current year's third quarter was
35.4% as compared to 26.9% last year (34.0% before non-recurring adjustments).
The Company's wholly owned operations reported gross margin of 37.3% for the
three months ended March 31, 1997 as compared to 19.0% last year (35.2% before
non-recurring adjustments).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the nine months ended
March 31, 1997 and 1996 amounted to $50.5 million or 25.3% of consolidated net
sales and $48.0 million or 27.3% of consolidated net sales, respectively. For
the Company's wholly owned operations, there was a general decrease of $3.5
million in SG&A expenses, which amounted to $24.9 million. The prior year
expense included $3.5 million related to the non-recurring adjustments. As a
percent of net sales, SG&A expenses for the wholly owned
10
<PAGE> 11
operations amounted to 30.2% and 34.6% for the nine months ended March 31, 1997
and 1996, respectively. Barnett's SG&A expenses increased by $5.9 million to
$25.5 million for the nine months ended March 31, 1997, a 3.8% increase when
expressed as a percentage of net sales. Barnett's increase was attributable to
the expansion of its telesales operations which resulted in increased personnel
expenses and also to increased costs associated with establishing a same day
shipping policy to benefit its customers.
For the quarters ended March 31, 1997 and 1996, SG&A expenses amounted to $17.1
million and $18.2 million, or 26.1% and 31.1% of consolidated net sales,
respectively. SG&A expenses for the Company's wholly owned operations amounted
to $8.3 million, or 33.3% of net sales, for the quarter ended March 31, 1997 as
compared to $11.4 million, or 44.4% of net sales, for the same quarter last
year. Last year's operating expenses, before adjustment for 3.5 million amounted
to $8.6 million, or 33.4% of net sales. The increase in net sales, coupled with
the slight decrease in expenses at the Company's wholly owned operations
resulted in an overall improvement in the ratio of expenses to consolidated net
sales.
INTEREST EXPENSE
- ----------------
Interest expense for the nine months ended March 31, 1997 and 1996 amounted to
$12.5 million and $19.9 million, respectively. Interest expense amounted to $4.3
million for the third quarter of fiscal 1997 as compared to $6.6 million in the
comparable period last year. The reduction of interest is due mainly to the
repayment of indebtedness with the net proceeds from the April 1996 initial
public offering of Barnett. Average borrowings for the current year's nine month
period amounted to $134.1 million, with an weighted average interest rate of
11.7%, as compared to $205.1 million of debt with an weighted average interest
rate of 12.1% last year.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes for the nine months ended March 31, 1997 and 1996
amounted to $6.1 million and $0.3 million, respectively. For the third quarter
of fiscal 1997, the provision for income taxes amounted to $2.1 million as
compared to $0.1 million in the comparable period last year. For the fiscal 1997
nine months and quarter, the provision for taxes primarily represents Barnett's
tax provision and state and foreign taxes of the Company's wholly owned
operations. The difference between the effective and statutory tax rates is
primarily due to the domestic losses not benefited and goodwill amortization.
With the completion of the Barnett public offering, Barnett is no longer
included in the consolidated tax return of the Company and is unable to benefit
from the Company's net operating loss carryforwards. In accordance with the
provisions of SFAS No. 109, the Company is unable to benefit its losses in the
current year.
MINORITY INTEREST IN CONSOLIDATED AFFILIATE
- -------------------------------------------
The Company recorded a charge of $4.4 million and $1.6 million, respectively,
for the nine months and quarter ended March 31, 1997 for the 50.1% of Barnett's
net income associated with the outside stockholders' common stock interest.
REVERSAL OF ESTIMATED LOSS ON DISPOSAL
- --------------------------------------
In the third quarter of fiscal 1996, the Company reversed an $11.0 million
estimated loss on the disposal of its Consumer Product division, which had been
recorded at June 30, 1995. The Company ceased its effort to sell Consumer
Products upon the consummation of the initial public offering of Barnett.
11
<PAGE> 12
As part of its strategic review of Consumer Products, the Company also recorded
certain non-recurring and restructuring charges relating to the carrying value
of operating assets and liabilities. Such charge amounted to $7.7 million,
including $4.2 million in cost of sales and $3.5 million in operating expenses.
The charges included $2.0 million for the write down of inventory, $1.6 million
for certain accounts receivable balances, $2.0 million for costs in developing a
management information system, $0.5 million of abandoned product development
costs and $1.6 million for various liabilities.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
- -----------------------------------------
Effective July 1, 1995, the Company changed its method of accounting for the
cost of obtaining long term business. These costs represent the amount paid in
connection with a customer's commitment to purchase products from the Company
for a specified period. Prior to this change, the Company capitalized the
consideration paid to the new or existing customer (i) for the right to supply
such customer for a specified period and (ii) to purchase competitor's
merchandise that the customer has on hand when it changes suppliers, less the
salvage value received by the Company. These costs were then amortized over the
period deemed to be benefited. The Company's new policy is to amortize these
costs in the fiscal year incurred due to the uncertainty of today's competitive
retail environment. The cumulative effect of this change on prior years of $8.2
million, without tax benefit, is reported as a separate charge in the first
quarter of fiscal 1996.
NET LOSS
- --------
The Company's net loss for the nine months and quarter ended March 31, 1997
amounted to $3.6 million and $1.8 million or $.30 and $.15 per share,
respectively. This compares to a loss of $12.7 million and $9.2 million or $1.08
per share and $.78 per share in the corresponding prior year periods, before the
fiscal 1996 adjustments for a $11.0 million reversal of loss on the disposal of
Consumer Products and the $8.2 million cumulative effect of the change in
accounting in the nine months of fiscal 1996 discussed above. The net loss per
share for the nine months last year amounted to $.85, while net income of $.15
per share was reported for the quarter due to the $.93 per share reversal of the
estimated loss on disposal of Consumer Products.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At March 31, 1997, the Company had $7.1 million available under its credit
agreement with BankAmerica Business Credit, Inc. (the "Credit Agreement"). The
Credit Agreement, which expires in May 1999, contains certain covenants and
restrictions, including a material adverse effect clause and the requirement to
maintain cash collateral accounts. Accordingly, borrowings under the Credit
Agreement have been classified as a current liability. The Company was in
compliance with all loan covenants at March 31, 1997.
At March 31, 1997, the Company had working capital of $53.8 million and a
current ratio of 1.92 to 1.
The Company relies primarily on Consumer Products for cash flow because
Barnett's cash flow is no longer available to the Company since the completion
of the Barnett public offering. Consumer Products' customers include
do-it-yourself warehouse centers, home improvement centers, mass merchandisers,
hardware stores and lumberyards. Consumer Products may be adversely affected by
prolonged economic downturns or significant declines in consumer spending. There
can be no assurances that any such prolonged economic downturns or significant
declines in consumer spending would not have a material adverse impact on the
Consumer Products' business and its ability to generate cash flow. Furthermore,
Consumer Products' largest customer, Kmart and its subsidiary, Builders Square,
historically have accounted for approximately 42%
12
<PAGE> 13
to 44% of Consumer Products' total net sales. Although, Consumer Products
believes it will retain all of its Kmart business, all large merchandisers
review supply arrangements from time to time and there can be no assurance that
this relationship will continue or as to the terms of any relationship that does
continue. Furthermore, Kmart has stated that it intends to sell its Builders
Square business, which accounted for 24.8%, 24.7%, and 23.9% of Consumer
Products' net sales in fiscal 1996, fiscal 1995 and the nine months ended March
31, 1997. Kmart issued a press release in February 1997, stating that it was
negotiating to sell the Builders Square business to Home Base, a leading
regional warehouse home center, which is not and has not been a customer of
Consumer Products. In April 1997, it was announced that the Builders Square
discussions with Home Base were terminated. Although, Kmart recently completed a
review of its and Builders Square's vendor relationships, it is likely that any
purchaser of Builders Square would conduct a similar review. In the event
Consumer Products were to either lose Kmart or Builders Square as a customer or
Kmart or Builders Square were to significantly curtail its purchases from
Consumer Products, there would be material short-term adverse effects until the
Company could modify Consumer Products' cost structure to be more in line with
its reduced revenue base.
The Company does not have any commitments to make substantial capital
expenditures.
In furtherance of the Company's ongoing efforts to increase its liquidity and
improve its capital structure in January 1997, Waxman USA completed a private
exchange offer pursuant to which it exchanged an aggregate of $4.8 million of
Waxman USA's 11 1/8% Senior Notes due 2001 for a like amount of Waxman 13 3/4%
Senior Subordinated Notes June 1999. As a result, there now remains outstanding
$.9 million of Senior Subordinated Notes. The Company is continuing to review
other business strategies for reducing its leverage.
In April 1997, the Company completed a secondary offering of 1,125,000 shares of
Barnett common stock owned by Waxman USA at $17.50 per share and received $18.7
million of net proceeds. The underwriters have been granted a 30 day option to
acquire an additional 175,000 shares owned by Waxman USA, which could result in
an additional $2.9 million in net proceeds to the Company. The Company also sold
one of its smaller divisions for $2.0 million. Pending the application of the
net proceeds of these transactions to reinvestment in the Company's businesses
or the permanent repayment of debt, the proceeds have temporarily been used to
pay down all of the line of credit with BankAmerica, with the excess being
invested in short term liquid investments.
The Company believes that the funds generated from operations, along with the
funds available under the Credit Agreement (and any refinancing thereof), will
be sufficient to satisfy the Company's liquidity requirements until December 1,
1999 (the date that the cash interest becomes payable by the Company under its
12 3/4% Deferred Coupon Notes due 2004). The Company does not anticipate that
available cash flow from operations will be sufficient to pay cash interest on
the Deferred Coupon Notes commencing in December 1999. Therefore, the Company
expects to repay or refinance such debt in or prior to December 1999.
DISCUSSION OF CASH FLOWS
- ------------------------
Net cash used by the Company's operations was $4.4 million for the nine months
ended March 31, 1997, due mainly to increases in inventories and accounts
receivable and a decrease in accruals (principally accrued income tax and
accrued interest payments). Cash flow used for investments totaled $6.7 million,
primarily relating to Barnett's operations, including capital expenditures for
improved management information systems, the buy-out of an operating lease
incurred in prior years and expansion and/or relocation of several of Barnett's
distribution centers to accommodate new product offerings. Cash flow from
financing totaled $11.1 million. Net debt
13
<PAGE> 14
borrowings during the nine months ended March 31, 1997 under the Credit
Agreement totaled $10.9 million.
14
<PAGE> 15
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) See Exhibit 27.
b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on February 27, 1997,
incorporating a press release with respect to the Barnett Secondary
Offering.
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 1997, 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 2, 1997 BY: /s/ MARK W. WESTER
-----------------------------
MARK W. WESTER
CHIEF FINANCIAL OFFICER
AND VICE PRESIDENT-FINANCE
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
15
<PAGE> 16
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,366
<SECURITIES> 0
<RECEIVABLES> 44,506
<ALLOWANCES> 2,410
<INVENTORY> 64,365
<CURRENT-ASSETS> 112,149
<PP&E> 41,287
<DEPRECIATION> 19,595
<TOTAL-ASSETS> 155,548
<CURRENT-LIABILITIES> 58,387
<BONDS> 118,774
<COMMON> 119
0
0
<OTHER-SE> (46,750)
<TOTAL-LIABILITY-AND-EQUITY> 155,548
<SALES> 199,616
<TOTAL-REVENUES> 199,616
<CGS> 129,634
<TOTAL-COSTS> 50,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,541
<INCOME-PRETAX> 6,973
<INCOME-TAX> 6,130
<INCOME-CONTINUING> 843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,568)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
