<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, 1998
--------------
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)
(440) 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
--- ---
9,904,251 shares of Common Stock, $.01 par value, and 2,148,421 shares of Class
B Common Stock, $.01 par value, were outstanding as of May 4, 1998.
<PAGE> 2
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO FORM 10-Q
------------------
<TABLE>
PAGE
----
PART I. FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Nine Months and Three Months Ended March 31, 1998 and 1997.................... 3
Condensed Consolidated Balance Sheets - March 31, 1998 and June 30, 1997...... 4-5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1998 and 1997.................................... 6
Notes to Condensed Consolidated Financial Statements.......................... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 11-15
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information................................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................. 16
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
</TABLE>
2
<PAGE> 3
PART I. 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, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 79,409 $ 92,999 $ 24,444 $ 28,422
Cost of sales 52,000 62,945 15,900 19,149
-------- -------- -------- --------
Gross profit 27,409 30,054 8,544 9,273
Selling, general and administrative expenses 22,375 24,938 7,520 8,276
Restructuring and non-recurring charges 133 -- -- --
-------- -------- -------- --------
Operating income 4,901 5,116 1,024 997
Equity earnings of Barnett 4,622 4,394 1,454 1,548
Interest expense, net 11,839 12,453 4,088 4,243
-------- -------- -------- --------
Loss before income taxes and extraordinary loss (2,316) (2,943) (1,610) (1,698)
Provision for income taxes 786 625 230 147
-------- -------- -------- --------
Loss before extraordinary loss (3,102) (3,568) (1,840) (1,845)
Extraordinary loss 192 -- -- --
-------- -------- -------- --------
Net loss $ (3,294) $ (3,568) $ (1,840) $ (1,845)
======== ======== ======== ========
Loss per share (basic and diluted):
Loss before extraordinary loss $ (0.25) $ (0.30) $ (0.15) $ (0.15)
Extraordinary loss (0.02) -- -- --
-------- -------- -------- --------
Net loss $ (0.27) $ (0.30) $ (0.15) $ (0.15)
======== ======== ======== ========
Weighted average shares outstanding 12,017 11,893 12,034 11,976
======== ======== ======== ========
</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, 1998 AND JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
(Unaudited) (Audited)
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 727 $ 9,637
Trade receivables, net 15,552 13,617
Other receivables 2,343 2,959
Inventories 27,257 24,411
Prepaid expenses 2,449 2,268
Net assets held for sale -- 3,945
--------- ---------
Total current assets 48,328 56,837
--------- ---------
INVESTMENT IN BARNETT 27,922 22,700
--------- ---------
PROPERTY AND EQUIPMENT:
Land 1,496 1,447
Buildings 7,279 7,182
Equipment 14,481 13,390
--------- ---------
23,256 22,019
Less accumulated depreciation and amortization (11,586) (10,554)
--------- ---------
Property and equipment, net 11,670 11,465
--------- ---------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 8,256 8,771
UNAMORTIZED DEBT ISSUANCE COSTS, NET 3,716 4,470
OTHER ASSETS 4,630 2,989
--------- ---------
$ 104,522 $ 107,232
========= =========
</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, 1998 AND JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
(Unaudited) (Audited)
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 13,148 $ 5,920
Accounts payable 10,056 9,210
Accrued liabilities 7,267 9,213
Accrued income taxes payable 905 46
Accrued interest 387 1,807
--------- ---------
Total current liabilities 31,763 26,196
--------- ---------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 630 307
SENIOR SECURED DEFERRED COUPON NOTES, NET 78,797 71,485
SENIOR NOTES 35,855 47,855
SENIOR SUBORDINATED NOTES 895 895
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 9,904 at March 31, 1998
and 9,849 at June 30, 1997 98 97
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,148 at March 31, 1998
and 2,150 at June 30, 1997 21 22
Paid-in capital 21,723 21,647
Retained deficit (64,225) (60,931)
--------- ---------
(42,383) (39,165)
Cumulative currency translation adjustment (1,035) (341)
--------- ---------
Total stockholders' equity (deficit) (43,418) (39,506)
--------- ---------
$ 104,522 $ 107,232
========= =========
</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, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,294) $ (3,568)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss - write-off of deferred financing costs 192 -
Non-cash interest 7,312 6,483
Equity earnings of Barnett (4,622) (4,394)
Depreciation and amortization 2,181 1,543
Other non-cash charges -- (49)
Changes in assets and liabilities:
Trade receivables, net (1,935) (2,531)
Inventories (2,846) 1,744
Other assets (750) 875
Accounts payable 846 (2,938)
Accrued liabilities (1,946) (2,779)
Accrued interest (1,420) (647)
Accrued taxes 859 (972)
Other, net (694) (35)
-------- --------
Net Cash Used in Operating Activities (6,117) (7,268)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of a business 3,203 -
Capital expenditures, net (1,623) (1,352)
-------- --------
Net Cash Provided by (Used in) Investing Activities 1,580 (1,352)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 80,376 93,485
Payments under credit agreements (73,148) (85,141)
Repurchase of Senior Notes (12,000) -
Borrowings (Repayments) of long-term debt 323 (45)
Issuance of common stock 76 227
-------- --------
Net Cash Provided by (Used in) Financing Activities (4,373) 8,526
-------- --------
NET DECREASE IN CASH (8,910) (94)
BALANCE, BEGINNING OF PERIOD 9,637 2,460
-------- --------
BALANCE, END OF PERIOD $ 727 $ 2,366
======== ========
</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, 1998
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Waxman Industries, Inc. ("Waxman") and its wholly-owned subsidiaries
(collectively, the "Company"). As of March 31, 1998, the Company owned 44.6% of
the Common Stock of Barnett Inc. (the "Barnett Common Stock") and accounts for
Barnett Inc. ("Barnett") under the equity method of accounting. The condensed
consolidated statements of operations for the three months and nine months ended
March 31, 1998 and 1997, the condensed balance sheet as of March 31, 1998 and
the condensed statements of cash flows for the nine months ended March 31, 1998
and 1997 have been prepared by the Company without audit, while the condensed
balance sheet as of June 30, 1997 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, 1998 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. It is suggested that these condensed
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, 1997, filed with the Securities and
Exchange Commission.
NOTE 2 - BUSINESS
The common stock of Waxman trades on the New York Stock Exchange under
the symbol "WAX." The Company believes it is one of the leading suppliers of
specialty plumbing, security hardware and other products to the repair and
remodeling market in the United States. The Company distributes its products to
approximately 6,800 customers, including a wide variety of large national and
regional retailers, professional security installers and independent retail
customers.
The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WOC
Inc. ("WOC") and TWI International, Inc. ("TWI"). WOC is comprised of two
divisions, U.S. Lock ("U.S. Lock"), a distributor of a full line of security
hardware products, and Medal Distributing, a supplier of hardware products. TWI
includes the Company's foreign sourcing operations, including manufacturing,
packaging and sourcing operations in China and Taiwan, and an operation in
Mexico that threads galvanized, black and bronze pipe and imports malleable
fittings. Consumer Products, WOC and Barnett utilize the Company's and
non-affiliated foreign sourcing suppliers.
The Company currently owns 44.6% of Barnett, a direct marketer and
distributor of an extensive line of plumbing, electrical, hardware, HVAC and
other products to approximately 64,000 active customers throughout the United
States. Barnett offers approximately 11,600 name brand and private label
products through its industry recognized Barnett(R) catalogs and telesales
operations. Barnett markets its products through three distinct, comprehensive
catalogs that target professional contractors, independent hardware stores and
maintenance managers. In the three months and nine months ended March 31, 1998,
the Company recognized $1.5 million and $4.6 million in equity income from this
investment, respectively.
7
<PAGE> 8
In April 1996, the Company completed an initial public offering of the
Barnett Common Stock at $14.50 per share, reducing its interest in the former
wholly-owned subsidiary to 49.9% of the outstanding Barnett Common Stock and,
together with certain convertible non-voting preferred stock, approximately a
54% economic interest (the "Barnett Initial Public Offering"). In April 1997,
the Company completed a secondary offering of 1.3 million shares of Barnett
Common Stock at $17.50 per share, reducing its voting and economic interest to
44.5% (the "Barnett Secondary Offering") and, accordingly, began to account for
its interest in Barnett under the equity method of accounting. At June 30, 1997,
the Company owned nearly 7.2 million shares of Barnett's outstanding common
stock. In July 1997, as a result of the sale of a substantial portion of the
business of LeRan Gas Products, one of WOC's operations, to Barnett, the Company
received cash and an additional 24,730 shares of Barnett Common Stock which
increased the Company's ownership to 44.6%. The Barnett Common Stock trades on
the Nasdaq National Market under the symbol "BNTT."
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"). SFAS 109 utilizes an asset and liability approach and
deferred taxes are based on the estimated future effects of differences between
the financial statement and tax bases of assets and liabilities given the
provisions of the enacted tax laws. The Company is currently unable to recognize
any income tax benefit relating to its net loss. The tax provision for the three
months and nine months ended March 31, 1998 represents the provision for state
and various foreign taxes.
At June 30, 1997, the Company had approximately $48.3 million of
available domestic net operating loss carryforwards which will expire between
2009 and 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 allowance is no longer required,
the tax benefits of the remaining net deferred tax assets will be recognized in
the future. The Company also has alternative minimum tax credit carryforwards of
approximately $0.7 million at June 30, 1997, which are available to reduce
future regular income taxes over an indefinite period.
NOTE 4 - BARNETT
The Company owns 7,186,530 shares, or 44.6%, of the Barnett Common
Stock as of March 31, 1998, which is accounted for under the equity method of
accounting. In April 1996, the Company completed the Barnett Initial Public
Offering, receiving net proceeds of $92.6 million, after the underwriters'
discount, and recorded a $65.9 million pre-tax gain. In April 1997, the Company
completed the Barnett Secondary Offering, receiving net proceeds, after the
underwriters' discount, of $21.6 million, and recorded a $16.7 million pre-tax
gain. In April 1997, the Company converted the remaining convertible non-voting
preferred stock of Barnett it owned to Barnett Common Stock. In July 1997, the
Company received 24,730 shares of Barnett as a result of the sale of the gas
products business of LeRan Gas Products ("LeRan") to Barnett (see Note 5). The
market value of the Barnett Common Stock held by the Company at March 31, 1998
was $154.5 million, valued as of the closing sales price on such date of $21.50,
in comparison to the Company's carrying value of $27.9 million.
The following table presents unaudited summary financial data for
Barnett at March 31, 1998 and for the nine months then ended (in thousands of
dollars):
<TABLE>
<CAPTION>
Statement of income data: Balance sheet data:
<S> <C> <C> <C>
Net sales $148,001 Working capital $ 49,223
Operating income 17,022 Total assets 94,597
Net income 10,405 Stockholders' equity 71,822
</TABLE>
8
<PAGE> 9
NOTE 5 - SALE OF DIVISIONS
Effective July 1, 1997, the Company sold the gas products business of
LeRan to Barnett for $3.2 million in cash and 24,730 shares of Barnett Common
Stock, with a value of $0.6 million at the time of the transaction. The
Company's loss on the sale, net of certain costs associated with disposing of
assets not included in the transaction and the closing of certain warehouses is
approximately $0.1 million. The Company owned a 56,000 square foot facility in
Coldwater, Michigan that was previously utilized by LeRan. The Company
consummated the sale of this facility in the fiscal 1998 first quarter, and
received payment in October 1997. Included in the quarter and nine months ended
March 31, 1997 are net sales for LeRan of $2.8 million and $11.1 million and
operating income of $25,000 and $0.6 million, respectively.
In April 1997, the Company sold Madison Equipment Company ("Madison"),
a division of WOC, for $2.0 million in cash. The sale of Madison resulted in a
loss of $0.7 million, which was included as a non-recurring charge in the
quarter ended June 30, 1997. Included in the quarter and nine months ended March
31, 1997 are net sales for Madison of $1.7 million and $5.0 million and
operating income of $49,000 and $0.2 million, respectively.
NOTE 6 - SENIOR NOTE PURCHASE OFFER
In May 1997, the Company commenced an offer to purchase $12.0 million
principal amount of its 11 1/8% Senior Notes due 2001 (the "Senior Notes") at
par (the "Purchase Offer"). The offer expired on July 2, 1997 with $2.5 million
of the notes tendered. On July 3, 1997, the Company called for redemption the
$9.5 million of Senior Notes that had not been tendered in the Purchase Offer,
and on August 4, 1997, the Company completed the note redemption. The Company
used a portion of the net proceeds from the Barnett Secondary Offering to
purchase the Senior Notes. The Company recorded an extraordinary charge of $0.2
million in the quarter ended September 30, 1997 related to the write-off of
unamortized deferred financing costs associated with the purchase and redemption
of these Senior Notes.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended March 31, 1998 and 1997
included interest of $2.3 million and $2.9 million, respectively. Cash payments
during the nine months ended March 31, 1998 and 1997 included interest of $5.4
million and $6.1 million, respectively. The Company made no federal income tax
payment in the three months or nine months ended March 31, 1998 or in the three
months ended March 31, 1997 and paid $0.5 million in federal income tax in the
nine months ended March 31, 1997.
NOTE 8 - CAPITAL STOCK AND EARNINGS PER SHARE
As of March 31, 1998, the Company had 1,544,700 stock options
outstanding, at an average exercise price of $2.38, under its 1992 Non-Qualified
and Incentive Stock Option Plan; 70,000 stock options outstanding, at an average
exercise price of $2.25, under its 1994 Non-Employee Directors Stock Option
Plan; and 2,950,000 warrants outstanding, at an average exercise price of $2.45,
from its issuance of the 12 3/4% Senior Securred Deferred Coupon Notes due June
1, 2004. Since the Company is in a loss position, the impact of these options
and warrants is anti-dilutive, therefore the Company has disclosed basic
earnings per share as basic and diluted, as discussed below.
In February 1997, The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") to be effective for financial statements issued for periods ending
after December 15, 1997. SFAS 128 requires companies to restate earnings per
share data for all periods presented. Under SFAS 128, primary earnings per share
has been replaced by "basic earnings per share", which represents net income
divided by the weighted average number of common shares outstanding. Diluted
earnings per share continues to utilize the weighted average number of shares of
common stock and common stock equivalents, which include outstanding stock
options and warrants.
The Company has granted a total of 500,000 Stock Appreciation Rights
("SAR") to certain members of management at a base price of $3 3/8. Four hundred
thousand SAR's vest in March 1999, with the balance vesting in September 1999.
Upon exercise, the grantee is entitled to an amount equal to the excess of the
fair value per
9
<PAGE> 10
share on the date of exercise over the base price of the SAR. The amount can be
received in either cash or common stock of the Company.
The Company has two classes of common stock. Each share of the
Company's common stock (the "Common Stock) entitles its holder to noe vote,
while each share of Class B common stock entitles its holder to ten votes. Cash
dividends on the Class B common stock may not exceed those on the common Stock.
Due to restricted transferability, there is no trading market for the Class B
common stock. However, the Class B common stock may be converted, at the
stockholders option, into Common Stock on a share-for-share basis at any time
without cost to the stockholder.
The Company is authorized to issue two million shares of preferred
stock in series, with terms fixed by resolution of the Board of Directors. No
preferred shares have been issued as of June 30, 1997.
The number of shares of common stock used to calculate basic earnings
per share are as follows:
<TABLE>
<CAPTION>
Nine Months Three Months
----------- ------------
<S> <C> <C> <C>
March 31, 1998 - 12,017,055 12,033,855
March 31, 1997 - 11,892,909 11,975,805
</TABLE>
NOTE 9 - SEGMENT INFORMATION
The Company classifies its businesses into two business segments: (i)
distribution of plumbing, security hardware and other products, which includes
the operations of Consumer Products and WOC; and (ii) foreign sourcing
operations, which includes the Company's sourcing and packaging operations in
Taiwan and China, and Western American Manufacturing, Inc. ("WAMI"), an
operation in Mexico that provides galvinized and black pipe nipples and
malleable fittings. These products are sold primarily to D-I-Y home centers and
retailers in the United States. Sales outside of the United States are
insignificant. In addition, nearly all of the products from the foreign sourcing
operations are sold to the Company's wholly-owned operations and Barnett. Set
forth below is certain financial data relating to the Company's business
segments (in thousands of dollars).
<TABLE>
<CAPTION>
Nine months and quarter ended Foreign Corporate
March 31, 1998 and 1997 Distribution Sourcing and Other Elimination Total
- ----------------------- ------------ -------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 1998 nine months $ 63,107 $ 30,064 -- $(13,762) $ 79,409
Fiscal 1997 nine months 78,684 26,186 -- (11,871) 92,999
Fiscal 1998 quarter 20,037 8,098 -- (3,691) 24,444
Fiscal 1997 quarter 24,062 12,826 -- (8,466) 28,422
Operating income (loss):
Fiscal 1998 nine months $ 5,027 $ 2,537 $ (2,663) -- $ 4,901
Fiscal 1997 nine months 5,952 1,627 (2,463) -- 5,116
Fiscal 1998 quarter 1,325 697 (998) 1,024
Fiscal 1997 quarter 1,413 397 (813) 997
Identifiable assets:
March 31, 1998 $ 49,912 $ 16,846 $ 37,764 -- $104,522
June 30, 1997 48,836 16,449 41,947 -- 107,232
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
This Quarterly Report contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are based on the beliefs of the Company and its management. When used in this
document, the words "anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "should," and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including, but not limited to, the risk that the
Company may not be able to implement its deleveraging strategy in the intended
manner, risks associated with currently unforeseen competitive pressures and
risks affecting the Company's industry, such as decreased consumer spending,
customer concentration issues and the effects of general economic conditions. In
addition, the Company's business, operations and financial condition are subject
to the risks, uncertainties and assumptions which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission, including this Report. Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein.
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Sales
- ---------
Net sales for the fiscal 1998 third quarter ended March 31, 1998
totaled $24.4 million, a decrease of $4.0 million from the $28.4 million for the
comparable quarter in fiscal 1997. Included in the prior year third fiscal
quarter were net sales of $4.4 million for LeRan and Madison, which were
recently sold by the Company. Excluding the sales from those operations,
comparable net sales increased by $0.4 million, or 1.8%. U.S. Lock recorded a
net sales increase for the fiscal 1998 third quarter, in comparison to the same
period last year, of 22.6%, while the Company's foreign sourcing operations
reported a slight increase during the same period. Sales made by the foreign
sourcing operations to Barnett account for nearly all of their reported sales
and have increased due to the growth of Barnett. U.S. Lock's increase in net
sales is attributable to an increase in the number of monthly catalogs mailed
and the expansion in the number of professional telesales representatives.
During the same comparable periods, Consumer Products Group's net sales
decreased by approximately $0.6 million, or 4.4%, primarily due to the closing
of selected stores by Builders Square and due to lower purchases in certain
product categories by certain retailers, which we believe are attributable to
their inventory management efforts.
Gross Profit
- ------------
Gross profit margin increased to 34.9% from 32.6%, but gross profit
decreased to $8.5 million for the three months ended March 31, 1998 as compared
to $9.3 million the corresponding quarter in the prior fiscal year. The decrease
in gross profit is attributable to the sale of LeRan Gas Products and Madison
Equipment which contributed $1.1 million in gross profit in the quarter ended
March 31, 1997, at an average gross profit margin of 25.1%. Gross profit margins
for the continuing businesses are higher than the margins of the operations sold
and improved for the fiscal 1998 third quarter as compared to the same quarter
last year. The improvement is also due to a combination of product mix, price
increases and lower costs on certain products manufactured in China.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
decreased from $8.3 million for the quarter ended March 31, 1997 to $7.5 million
for the current quarter ended March 31, 1998. As a percentage of sales, SG&A
expenses increased from 29.1% for the fiscal 1997 third quarter to 30.8% for the
fiscal 1998 third quarter. All of the expense reductions relate to LeRan and
Madison's results not being included in the fiscal 1998 third quarter. Excluding
the operations sold, SG&A expenses of $7.5 million for the quarter ended March
31, 1998, compared to $7.2 million for the quarter ended March 31, 1997. As a
percentage of net sales, SG&A
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<PAGE> 12
expenses increased from 30.2% to 30.8% principally due to the net sales
decreases at the Consumer Products operations.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its 44.6% ownership interest in
Barnett of $1.5 million for the quarter ended March 31, 1998. For the comparable
quarter in fiscal 1997, the Company recorded equity earnings from its 49.9%
ownership interest in Barnett of $1.5 million.
Interest Expense
- ----------------
For the quarter ended March 31, 1998, interest expense totaled $4.1
million, a decrease of $0.1 million from the $4.2 million in the comparable
quarter last year. The decrease is primarily due to the repayment of debt with
proceeds from the Barnett Secondary Offering. Average borrowings for the current
year's quarter amounted to $127.5 million, with a weighted average interest rate
of 12.1%, as compared to $139.4 million in the same quarter last year with
weighted average interest rate of 11.5%.
Provision For Income Taxes
- --------------------------
The provision for income taxes amounted to $0.2 million and $0.1
million for the third quarter of fiscal 1998 and 1997, respectively. The
provision for the current quarter primarily represents state and foreign taxes
of the Company's wholly-owned operations. The difference between the effective
and statutory tax rates is primarily due to domestic losses not benefited and
goodwill amortization.
Net Loss
- --------
The Company's net loss for the quarter ended March 31, 1998 amounted to
$1.8 million, or $0.15 per basic and diluted share, as compared to the loss of
$1.8 million, or $0.15 per basic and diluted share, in the fiscal 1997 third
quarter.
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Sales
- ---------
Net sales for the nine months ended March 31, 1998 totaled $79.4
million, a decrease of $13.6 million from the $93.0 million for the comparable
period in fiscal 1997. Included in the prior year nine month period were net
sales of $16.1 million for LeRan and Madison, which were recently sold by the
Company. Excluding the sales from those operations, comparable net sales
increased by $2.5 million, or 3.2%. U.S. Lock and the Company's foreign sourcing
operations recorded net sales increases for the nine month period in fiscal
1998, in comparison to the same period last year, of 22.0% and 13.9%,
respectively. Sales made by the foreign sourcing operations to Barnett account
for nearly all of their reported sales and have increased due to the growth of
Barnett. U.S. Lock's increase in net sales is attributable to an increase in the
number of monthly catalogs mailed and the expansion in the number of
professional telesales representatives. During the same comparable periods,
Consumer Products Group's net sales decreased by approximately $2.0 million, or
4.4%, principally due to the loss of net sales of $1.1 million to Ernst, which
closed its operation in the first quarter of fiscal 1997 and lower sales to
Builders Square due to the closing of selected stores by the retailer.
Gross Profit
- ------------
The gross profit margin for the nine months ended March 31, 1998
increased to 34.5% from 32.3% for the nine months ended March 31, 1997. However,
gross profit decreased to $27.4 million for the current nine month period as
compared to $30.1 million for the nine months ended March 31, 1997. The decrease
in gross
12
<PAGE> 13
profit is attributable to the sale of LeRan Gas Products and Madison
Equipment which contributed $3.9 million in gross profit in the nine months
ended March 31, 1997, at an average gross profit margin of 24.5%. Excluding
those operations, gross profit for the nine months ended March 31, 1998
improved by $1.3 million and the gross profit margin improved from 34.0% to
34.5% in comparison to the same period last year. Gross profit margins for the
continuing businesses are higher than the margins of the operations sold and
improved for the nine months ended March 31, 1998 as compared to the same
period last year. The improvement is also due to a combination of product mix,
price increases and lower costs on certain products manufactured in China.
Selling, General and Administrative Expenses
- --------------------------------------------
SG&A expenses decreased from $24.9 million for the nine months ended
March 31, 1997 to $22.4 million for the nine month period ended March 31, 1998.
As a percentage of sales, SG&A expenses increased from 26.8% for the nine month
period in fiscal 1997 to 28.2% for the nine months ended March 31, 1998. All of
the expense reductions relate to the elimination of LeRan and Madison's results
in the fiscal 1998 period. Excluding the operations sold, SG&A expenses
increased from $21.8 million to $22.4 million for the nine months ended March
31, 1997 and 1998, respectively. However, as a percentage of sales, the ratio
improved from 28.3% to 28.2% due to an increase in net sales at the continuing
businesses.
Restructuring and Non-Recurring Charges
- ---------------------------------------
In the nine months ended March 31, 1998, the Company recorded a
non-recurring charge of $133,000 associated with the sale of the principal
business of LeRan to Barnett and the costs of closing several facilities
utilized by the business and other closing costs.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its 44.6% ownership interest
in Barnett of $4.6 million for the nine months ended March 31, 1998. For the
comparable period in fiscal 1997, the Company recorded equity earnings from its
49.9% ownership interest in Barnett of $4.4 million.
Interest Expense
- ----------------
For the nine months ended March 31, 1998, interest expense totaled
$11.8 million, a decrease of $0.7 million from the $12.5 million in the
comparable period last year. The decrease is primarily due to the repayment of
debt with proceeds from the Barnett Secondary Offering. Average borrowings for
the nine months ended March 31, 1998 amounted to $123.4 million, with a weighted
average interest rate of 12.1%, as compared to $134.1 million in the same period
last year with weighted average interest rate of 11.7%.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.8 million and $0.6
million for the nine months ended March 31, 1998 and 1997, respectively. The
provision for the current period primarily represents state and foreign taxes of
the Company's wholly-owned operations. The difference between the effective and
statutory tax rates is primarily due to domestic losses not benefited and
goodwill amortization.
Extraordinary Loss
- ------------------
In the nine months ended March 31, 1998, the Company incurred an
extraordinary charge of $0.2 million associated with the write-off of deferred
financing costs from the repurchase of $12.0 million of Senior Notes in July and
August 1997. (See Note 6)
13
<PAGE> 14
Net Loss
- --------
The Company's net loss for the nine months ended March 31, 1998
amounted to $3.3 million, or $0.27 per basic and diluted share, as compared to
the loss of $3.6 million, or $0.30 per basic and diluted share, in the same
period last year. Included in the fiscal 1998 results is an extraordinary charge
of $0.2 million, or $0.02 per basic and diluted loss share, from the write-off
of deferred financing costs as discussed above.
B. LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $11.8 million available under the
credit agreement with BankAmerica Business Credit, Inc. (the "Credit
Agreement"). The Credit Agreement 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 and Term
Loans (herein defined) have been classified as a current liability. The Company
was in compliance with all loan covenants at March 31, 1998.
The Company entered into the Credit Agreement in June 1996. The Credit
Agreement provides for, among other things, revolving credit advances of up to
$30.0 million and term loans (the "Term Loans") of up to $5.0 million. At March
31, 1998, there were $5.0 million of Term Loans and $8.1 million of borrowings
under the Credit Agreement outstanding. The Credit Agreement and Term Loans
expire May 31, 1999.
In May 1997, the Company commenced the Purchase Offer for $12.0 million
of Senior Notes, at par. In July 1997, the Purchase Offer expired with $2.5
million principal amount of Senior Notes tendered. Upon the expiration of the
Purchase Offer, the Company called for redemption of the $9.5 million principal
amount of Senior Notes that had not been tendered in the Purchase Offer and
completed the redemption of these notes in August 1997. Pending the application
of these funds, the Company had reinvested the funds in its businesses, thereby
effectively reducing borrowings under its working capital line of credit and, at
June 30, 1997, had $8.9 million invested in short-term liquid investments. The
Company's business strategy includes the reduction of its interest expense and
its leverage by the sale of selected assets and the refinancing of its remaining
indebtedness whenever possible.
Since the consummation of the Barnett Initial Public Offering, the cash
flow generated by Barnett 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 affected 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. Furthermore, one of Consumer Products' largest customers, Kmart,
accounted for approximately 16.5% and 17.6% of net sales for Consumer Products
in fiscal 1997 and fiscal 1996, respectively, and Kmart's former subsidiary,
Builders Square, accounted for approximately 21.9% and 24.7% of Consumer
Products' net sales in fiscal 1997 and fiscal 1996, respectively. During fiscal
1997, the Company was advised by Kmart that, after it had completed a vendor
review, Consumer Products had successfully retained the supply arrangements for
plumbing and hardware products. In July 1997, Kmart agreed to sell its Builders
Square chain to Leonard Green & Partners, a merchant-banking firm. Leonard Green
also acquired another home improvement retailer, Hechinger Co., and has combined
the two outfits into the nation's third largest home improvement chain.
Presently, the supply relationship between Consumer Products and Builders Square
has not changed. Although Consumer Products is a long term supplier to Kmart and
Builders Square, as well as a supplier to Hechingers, there can be no assurance
that any of the foregoing relationships will continue or as to the terms of any
of the relationships that do continue. In the event Consumer Products were to
lose either Kmart or Builders Square / Hechingers as a customer or Kmart or
Builders / Hechingers were to significantly curtail its purchases from Consumer
Products, there would be material adverse effects.
At March 31, 1998, the Company had in excess of $48.3 million of
available domestic net operating loss carryforwards for income tax purposes
which expire 2009 through 2010 and $28.8 million of original issue discount that
has been expensed on the Company's financial statements, which will become
deductible for tax purposes when the debt is repaid.
14
<PAGE> 15
The Company does not have any commitments to make substantial capital
expenditures; however, during fiscal 1998, it has begun to modify its
information technology systems and software to be Year 2000 compatible. The most
significant expenditure will be at Consumer Products, which has budgeted
approximately $1.0 million in total capital expenditures and costs. Of the
expenditures at Consumer Products, it is estimated that approximately $0.7
million will be spent on Year 2000 compliance, which was completed in April
1998. Other operations of the Company are also working toward being Year 2000
compliant and the Company anticipates that all of its operations will complete
the modifications before it impacts its operations.
The Company believes that the funds generated from operations along
with the funds available under the Credit Agreement will be sufficient to
satisfy the Company's liquidity requirements until December 1, 1999 (the date
that cash interest becomes payable by the Company under the Company's 12 3/4%
Senior Secured Deferred Coupon Notes due 2004 (the "Deferred Coupon Notes")).
The Company currently believes that there will not be sufficient cash flow from
operations to make the December 1999 interest payments on the Deferred Coupon
Notes. Accordingly, the Company intends to refinance all or a part of the
Deferred Coupon Notes at or prior to maturity and/or to pursue a sale of assets
or other capital raising transaction to satisfy such cash requirement. However,
there can be no assurance that any such refinancing or capital raising
transaction will be consummated.
At March 31, 1998, the Company had working capital of $16.6 million and
a current ratio of 1.5 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $6.1 million in the nine months ended
March 31, 1998, principally due to an increase in trade receivables and
inventory and a decrease in accrued liabilities and accrued interest. Also
affecting net cash used for operations was $4.6 million in equity earnings of
Barnett. Cash flow provided by investments totaled $1.6 million, primarily
attributable to the proceeds from the sale of LeRan to Barnett for $3.2 million
in cash and $0.6 million in Barnett Common Stock, which was partially offset by
capital expenditures of $1.6 million. Cash flow used for financing activities
totaled $4.4 million, primarily due to the repurchase of $12.0 million of Senior
Notes in July and August 1997.
15
<PAGE> 16
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) See Exhibit 27.
b) Form 8-K
None
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 1998 or 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 6, 1998 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND 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 E
(submitted to the Securities
and Exchange Commission in
Electronic Format)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 727
<SECURITIES> 0
<RECEIVABLES> 16,858
<ALLOWANCES> (1,306)
<INVENTORY> 27,257
<CURRENT-ASSETS> 48,328
<PP&E> 23,256
<DEPRECIATION> (11,586)
<TOTAL-ASSETS> 104,522
<CURRENT-LIABILITIES> 31,763
<BONDS> 115,547
0
0
<COMMON> 119
<OTHER-SE> (43,537)
<TOTAL-LIABILITY-AND-EQUITY> 104,522
<SALES> 79,409
<TOTAL-REVENUES> 79,409
<CGS> 52,000
<TOTAL-COSTS> 22,375
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,839
<INCOME-PRETAX> (2,316)
<INCOME-TAX> 786
<INCOME-CONTINUING> (3,102)
<DISCONTINUED> 0
<EXTRAORDINARY> 192
<CHANGES> 0
<NET-INCOME> (3,294)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
