<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 DECEMBER 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)
(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
---- ----
9,869,902 shares of Common Stock, $.01 par value, and 2,146,295 shares of Class
B Common Stock, $.01 par value, were outstanding as of February 4, 1998.
<PAGE> 2
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Six Months and Three Months Ended December 31, 1997 and 1996 ..................................... 3
Condensed Consolidated Balance Sheets - December 31, 1997 and June 30, 1997 ...................... 4-5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 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 ....................................................................................10-14
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information .................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K ..................................................................... 15
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
------------ ------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 54,965 $ 64,577 $ 26,808 $ 31,311
Cost of sales 36,100 43,796 17,444 21,060
-------- -------- -------- --------
Gross profit 18,865 20,781 9,364 10,251
Selling, general and administrative expenses 14,855 16,662 7,492 8,306
Restructuring and non-recurring charges 133 -- -- --
-------- -------- -------- --------
Operating income 3,877 4,119 1,872 1,945
Equity earnings of Barnett 3,168 2,846 1,704 1,500
Interest expense, net 7,751 8,210 3,899 4,145
-------- -------- -------- --------
Loss before income taxes and extraordinary loss (706) (1,245) (323) (700)
Provision for income taxes 556 478 312 226
-------- -------- -------- --------
Loss before extraordinary loss (1,262) (1,723) (635) (926)
Extraordinary loss 192 -- -- --
-------- -------- -------- --------
Net loss $ (1,454) $ (1,723) $ (635) $ (926)
======== ======== ======== ========
Loss per share (basic and diluted):
Loss before extraordinary loss $ (0.10) $ (0.15) $ (0.05) $ (0.08)
Extraordinary loss (0.02) -- -- --
-------- -------- -------- --------
Net loss $ (0.12) $ (0.15) $ (0.05) $ (0.08)
======== ======== ======== ========
Weighted average shares outstanding 12,009 11,851 12,013 11,857
======== ======== ======== ========
</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
-------------------------------------
DECEMBER 31, 1997 AND JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 943 $ 9,637
Trade receivables, net 15,941 13,617
Other receivables 2,647 2,959
Inventories 25,950 24,411
Prepaid expenses 2,228 2,268
Net assets held for sale -- 3,945
--------- ---------
Total current assets 47,709 56,837
--------- ---------
INVESTMENT IN BARNETT 26,467 22,700
--------- ---------
PROPERTY AND EQUIPMENT:
Land 1,471 1,447
Buildings 7,257 7,182
Equipment 13,992 13,390
--------- ---------
22,720 22,019
Less accumulated depreciation and amortization (11,196) (10,554)
--------- ---------
Property and equipment, net 11,524 11,465
--------- ---------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 8,323 8,771
UNAMORTIZED DEBT ISSUANCE COSTS, NET 3,908 4,470
OTHER ASSETS 3,556 2,989
--------- ---------
$ 101,487 $ 107,232
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE> 5
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
DECEMBER 31, 1997 AND JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,854 $ 5,920
Accounts payable 11,402 9,210
Accrued liabilities 7,429 9,213
Accrued income taxes payable 714 46
Accrued interest 1,329 1,807
--------- ---------
Total current liabilities 29,728 26,196
--------- ---------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 288 307
SENIOR SECURED DEFERRED COUPON NOTES, NET 76,278 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 9,865 at December 31, 1997
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 December 31, 1997
and 2,150 at June 30, 1997 21 22
Paid-in capital 21,665 21,647
Retained deficit (62,385) (60,931)
--------- ---------
(40,601) (39,165)
Cumulative currency translation adjustment (956) (341)
--------- ---------
Total stockholders' equity (deficit) (41,557) (39,506)
--------- ---------
$ 101,487 $ 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 SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net loss $ (1,454) $ (1,723)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss - write-off of deferred financing costs 192 --
Non-cash interest 4,793 4,250
Equity earnings of Barnett (3,168) (2,846)
Depreciation and amortization 1,535 1,135
Other non-cash charges -- (495)
Changes in assets and liabilities:
Trade receivables, net (2,324) 274
Inventories (1,539) (1,440)
Other assets 241 1,167
Accounts payable 2,192 (1,930)
Accrued liabilities (1,784) (1,832)
Accrued interest (478) 420
Accrued taxes 668 (972)
Other, net (615) (32)
-------- --------
Net Cash Used in Operating Activities (1,741) (4,024)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Proceeds from the sale of a business 3,203 --
Capital expenditures, net (1,071) (652)
-------- --------
Net Cash Provided by (Used in) Investing Activities 2,132 (652)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements 56,091 61,478
Payments under credit agreements (53,157) (57,027)
Repurchase of Senior Notes (12,000) --
Borrowings (Repayments) of long-term debt (19) (82)
Issuance of common stock -- 1
-------- --------
Net Cash Provided by (Used in) Financing Activities (9,085) 4,370
-------- --------
NET DECREASE IN CASH (8,694) (306)
BALANCE, BEGINNING OF PERIOD 9,637 2,460
-------- --------
BALANCE, END OF PERIOD $ 943 $ 2,154
======== ========
</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)
DECEMBER 31, 1997
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 December 31, 1997, 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 six
months ended December 31, 1997 and 1996, the condensed balance sheet as of
December 31, 1997 and the condensed statements of cash flows for the six months
ended December 31, 1997 and 1996 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 December 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. 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 and black 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 62,000 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 six months ended December 31,
1997, the Company recognized $1.7 million and $3.2 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 six months ended December 31, 1997 represents the provision for state
and various foreign taxes.
At June 30, 1997, the Company had approximately $46.7 million of
available domestic net operating loss carryforwards which will expire between
2008 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 carryforwards of
approximately $0.9 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 December 31, 1997, 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 December 31,
1997 was $158.1 million, valued as of the closing sales price on such date of
$22.00, in comparison to the Company's carrying value of $26.5 million.
The following table presents unaudited summary financial data for
Barnett at December 31, 1997 and for the six months then ended (in thousands of
dollars):
<TABLE>
<CAPTION>
Statement of income data: Balance sheet data:
<S> <C> <C> <C>
Net sales $ 98,536 Working capital $ 47,301
Operating income 11,563 Total assets 97,269
Net income 7,104 Stockholders' equity 68,426
</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 six months ended
December 31, 1996 are net sales for LeRan of $4.5 million and $8.3 million and
operating income of $0.4 million 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 six months ended
December 31, 1996 are net sales for Madison of $1.6 million and $3.3 million and
operating income of $0.1 million and $0.1 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 December 31, 1997 and 1996
included interest of $.3 million and $.8 million, respectively. Cash payments
during the six months ended December 31, 1997 and 1996 included interest of $3.1
million and $3.1 million, respectively. The Company made no federal income tax
paid in the three months or six months ended December 31, 1997, as compared to
no federal income tax paid in the three months ended December 31, 1996 and $.5
million in the six months ended December 31, 1996.
NOTE 8 - EARNINGS PER SHARE
------------------
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. Since the Company is in a loss position, basic earnings
per share is more dilutive than diluted earnings per share. As a result, the
Company has disclosed basic earnings per share as basic and diluted.
The number of shares of common stock used to calculate basic earnings
per share are as follows:
<TABLE>
<CAPTION>
Six Months Three Months
---------- ------------
<S> <C> <C>
December 31, 1997 - 12,008,655 12,013,072
December 31, 1996 - 11,851,462 11,856,774
</TABLE>
9
<PAGE> 10
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 DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------
Net Sales
- ---------
Net sales for the fiscal 1998 second quarter ended December 31, 1997
totaled $26.8 million, a decrease of $4.5 million from the $31.3 million for the
comparable quarter in fiscal 1997. Included in the prior year second fiscal
quarter were net sales of $6.2 million for LeRan and Madison, which were
recently sold by the Company. Excluding the sales from those operations,
comparable net sales increased by $1.7 million, or 6.7%. U.S. Lock and the
Company's foreign sourcing operations recorded net sales increases for the
fiscal 1998 second quarter, in comparison to the same period last year, of 21.9%
and 30.2%, 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 $0.4
million, or 2.6%, primarily due to the closing of select stores by Builders
Square.
Gross Profit
- ------------
Gross profit margin increased to 34.9% from 32.7%, but gross profit
decreased to $9.4 million from $10.3 million, for the three months ended
December 31, 1997 as compared to 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 $1.5 million in gross profit in
the quarter ended December 31, 1996, at an average gross profit margin of 24.8%.
Gross profit margins for the continuing businesses are higher than the margins
of the operations sold and improved for the fiscal 1998 second quarter as
compared to the same quarter last year. The improvement is 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 December 31, 1996 to $7.5
million for the current quarter ended December 31, 1997. As a percentage of
sales, SG&A expenses increased from 26.5% for the fiscal 1997 second quarter to
27.9% for the fiscal 1998 second quarter. All of the expense reductions relate
to the elimination of LeRan and Madison's results in the fiscal 1998 second
quarter. Excluding the operations sold, SG&A expenses were $7.5 million for the
quarter ended December 31, 1997, as compared to $7.2 million for the quarter
ended December 31, 1996. However, as a percentage of net sales, SG&A expenses
improved from 28.7% to 28.0% due to the net sales increases at the continuing
operations.
10
<PAGE> 11
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its 44.6% ownership interest in
Barnett of $1.7 million for the quarter ended December 31, 1997. For the
comparable quarter in fiscal 1997, the Company recorded equity earnings from its
49.9% ownership interest in Barnett of $1.5 million. The increase is
attributable to Barnett's net earnings increase.
Interest Expense
- ----------------
For the quarter ended December 31, 1997, interest expense totaled $3.9
million, a decrease of $0.2 million from the $4.1 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 $121.4 million, with a weighted average interest rate
of 12.0%, as compared to $131.6 million in the same quarter last year with
weighted average interest rate of 11.7%.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.3 million and $0.2
million for the second 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 December 31, 1997 amounted
to $0.6 million, or $0.05 per basic and diluted share, as compared to the loss
of $0.9 million, or $0.08 per basic and diluted share, in the fiscal 1997 second
quarter.
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
- ---------------------------------------------------
Net Sales
- ---------
Net sales for the six months ended December 31, 1997 totaled $55.0
million, a decrease of $9.6 million from the $64.6 million for the comparable
period in fiscal 1997. Included in the prior year six month period were net
sales of $11.7 million for LeRan and Madison, which were recently sold by the
Company. Excluding the sales from those operations, comparable net sales
increased by $2.0 million, or 3.9%. U.S. Lock and the Company's foreign sourcing
operations recorded net sales increases for the six month period in fiscal 1998,
in comparison to the same period last year, of 21.7% and 19.5%, 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 $1.4 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.
Gross Profit
- ------------
The gross profit margin for the six months ended December 31, 1997
increased to 34.3% from 32.2% for the six months ended December 31, 1996.
However, gross profit decreased to $18.9 million for the current six month
period as compared to $20.8 million for the six months ended December 31, 1996.
The decrease in gross profit is attributable to the sale of LeRan Gas Products
and Madison Equipment which contributed $2.8 million in gross profit in the six
months ended December 31, 1996, at an average gross profit margin of 24.2%.
Excluding
11
<PAGE> 12
those operations, gross profit for the six months ended December 31, 1997
improved by $0.9 million and the gross profit margin improved from 33.9% to
34.3% 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 six months ended December 31, 1997 as compared to the same
period last year. The improvement is 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 $16.7 million for the six months ended
December 31, 1996 to $14.9 million for the six month period ended December 31,
1997. As a percentage of sales, SG&A expenses increased from 25.8% for the six
month period in fiscal 1997 to 27.0% for the six months ended December 31, 1997.
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 $14.5 million to $14.9 million for the six months ended December
31, 1996 and 1997, respectively. However, as a percentage of sales, the ratio
improved from 27.5% to 27.0% due to an increase in net sales at the continuing
businesses.
Restructuring and Non-recurring Charges
- ---------------------------------------
In the six months ended December 31, 1997, 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 $3.2 million for the six months ended December 31, 1997. For the
comparable period in fiscal 1997, the Company recorded equity earnings from its
49.9% ownership interest in Barnett of $2.8 million.
Interest Expense
- ----------------
For the six months ended December 31, 1997, interest expense totaled
$7.8 million, a decrease of $0.4 million from the $8.2 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 six
months ended December 31, 1997 amounted to $121.5 million, with a weighted
average interest rate of 12.0%, as compared to $129.7 million in the same period
last year with weighted average interest rate of 11.8%.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.6 million and $0.5
million for the six months ended December 31, 1997 and 1996, 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 six months ended December 31, 1997, 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)
12
<PAGE> 13
Net Loss
- --------
The Company's net loss for the six months ended December 31, 1997
amounted to $1.5 million, or $0.12 per basic and diluted share, as compared to
the loss of $1.7 million, or $0.15 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 December 31, 1997, the Company had $14.9 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 December 31, 1997.
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
December 31, 1997, there were $5.0 million of Term Loans and $3.2 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 December 31, 1997, the Company had in excess of $46 million of
available domestic net operating loss carryforwards for income tax purposes
which expire 2008 through 2010 and $26.3 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.
The Company does not have any commitments to make substantial capital
expenditures; however, during
13
<PAGE> 14
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 is expected to be completed by June 30, 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 December 31, 1997, the Company had working capital of $18.0 million
and a current ratio of 1.6 to 1.0.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $1.7 million in the six months ended
December 31, 1997, principally due to an increase in trade receivables and
inventory and a decrease in accrued liabilities. Also affecting net cash used
for operations was $3.2 million in equity earnings of Barnett. Cash flow
provided by investments totaled $2.1 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 $1.1 million. Cash flow used for financing activities totaled
$9.1 million, primarily due to the repurchase of $12.0 million of Senior Notes
in July and August 1997.
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) Form 8-K
None
All other items in Part II are either inapplicable to the Company during the
quarter ended December 31, 1997 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: FEBRUARY 4, 1998 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
15
<PAGE> 16
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT PAPER (P) OR
- ------- ------------
NUMBER DESCRIPTION ELECTRONIC (E)
- ------ ----------- --------------
<S> <C> <C>
(27) Financial Data Schedule E
(submitted to the Securities
and Exchange Commission in
Electronic Format)
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000105096
<NAME> WAXMAN INDUSTRIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 943
<SECURITIES> 0
<RECEIVABLES> 17,228
<ALLOWANCES> (1,287)
<INVENTORY> 25,950
<CURRENT-ASSETS> 47,709
<PP&E> 22,720
<DEPRECIATION> (11,196)
<TOTAL-ASSETS> 101,487
<CURRENT-LIABILITIES> 29,728
<BONDS> 113,316
0
0
<COMMON> 119
<OTHER-SE> (41,676)
<TOTAL-LIABILITY-AND-EQUITY> 101,487
<SALES> 54,965
<TOTAL-REVENUES> 54,965
<CGS> 36,100
<TOTAL-COSTS> 14,855
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,751
<INCOME-PRETAX> (706)
<INCOME-TAX> 556
<INCOME-CONTINUING> (1,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 192
<CHANGES> 0
<NET-INCOME> (1,454)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
