<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 SEPTEMBER 30, 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
--- ---
9,909,026 shares of Common Stock, $.01 par value, and 2,148,271 shares of Class
B Common Stock, $.01 par value, were outstanding as of November 3, 1998.
1
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
PART 1. FINANCIAL INFORMATION
- ------- ---------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1998 and 1997.................................. 3
Condensed Consolidated Balance Sheets - September 30, 1998 and June 30, 1998.... 4-5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 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 1. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 28,229 $ 28,157
Cost of sales 19,141 18,656
-------- --------
Gross profit 9,088 9,501
Selling, general and administrative expenses 8,247 7,363
Restructuring and non-recurring charges 1,350 133
-------- --------
Operating (loss) income (509) 2,005
Equity earnings of Barnett 1,527 1,464
Interest expense, net 4,310 3,852
-------- --------
Loss before income taxes and extraordinary loss (3,292) (383)
Provision for income taxes 186 244
-------- --------
Loss before extraordinary loss (3,478) (627)
Extraordinary loss -- 192
-------- --------
Net loss $ (3,478) $ (819)
======== ========
Loss per share (basic and diluted):
Loss before extraordinary loss $ (0.29) $ (0.05)
Extraordinary loss -- (0.02)
-------- --------
Net loss $ (0.29) $ (0.07)
======== ========
Weighted average shares and equivalents 12,057 12,004
======== ========
COMPREHENSIVE INCOME:
Net loss before comprehensive income (loss) $ (3,478) $ (819)
Foreign currency translation adjustments 26 (86)
-------- --------
Comprehensive loss $ (3,452) $ (905)
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1998 AND JUNE 30, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 263 $ 72
Trade receivables, net 16,542 15,503
Other receivables 2,546 3,152
Inventories 24,099 26,162
Prepaid expenses 3,495 3,060
--------- ---------
Total current assets 46,945 47,949
--------- ---------
INVESTMENT IN BARNETT 31,168 29,641
--------- ---------
PROPERTY AND EQUIPMENT:
Land 1,379 1,379
Buildings 7,654 7,397
Equipment 14,606 13,541
--------- ---------
23,639 22,317
Less accumulated depreciation and amortization (9,732) (9,346)
--------- ---------
Property and equipment, net 13,907 12,971
--------- ---------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 8,122 8,189
UNAMORTIZED DEBT ISSUANCE COSTS, NET 3,333 3,524
OTHER ASSETS 4,484 3,469
--------- ---------
$ 107,959 $ 105,743
========= =========
</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
-------------------------------------
SEPTEMBER 30, 1998 AND JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1998 1998
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 18,557 $ 15,864
Accounts payable 9,539 8,473
Accrued liabilities 6,770 6,500
Accrued income taxes payable 227 250
Accrued interest 368 1,339
--------- ---------
Total current liabilities 35,461 32,426
--------- ---------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 796 838
SENIOR SECURED DEFERRED COUPON NOTES, NET 84,043 81,368
SENIOR NOTES 35,855 35,855
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 9,908 at September 30, 1998
and 9,908 at June 30, 1998 98 98
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,148 at September 30, 1998
and 2,148 at June 30, 1998 21 21
Paid-in capital 21,731 21,731
Retained deficit (68,909) (65,431)
--------- ---------
(47,059) (43,581)
Cumulative currency translation adjustment (1,137) (1,163)
--------- ---------
Total stockholders' equity (deficit) (48,196) (44,744)
--------- ---------
$ 107,959 $ 105,743
========= =========
</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 THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net loss $ (3,478) $ (819)
Adjustments to reconcile net loss to
net cash used in operating activities:
Restructuring and non-recurring charges 1,350 133
Extraordinary loss - write-off of deferred financing costs -- 192
Non-cash interest 2,675 2,372
Equity earnings of Barnett (1,527) (1,464)
Depreciation and amortization 644 975
Changes in assets and liabilities:
Trade receivables, net (1,039) (921)
Inventories 2,063 (159)
Other assets (844) 37
Accounts payable 1,066 387
Accrued liabilities (1,080) (2,236)
Accrued interest (971) (1,435)
Accrued taxes (23) 395
Other, net 26 (86)
-------- --------
Net Cash Used in Operating Activities (1,138) (2,629)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Net proceeds from sale of business -- 3,203
Capital expenditures, net (1,322) (480)
-------- --------
Net Cash (Used in) Provided by Investing Activities (1,322) 2,723
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements 23,705 33,288
Payments under credit agreements (21,012) (30,501)
Retirement of Senior Notes -- (12,000)
(Repayments) Borrowings of long-term debt (42) 66
-------- --------
Net Cash Provided by
(Used in) Financing Activities 2,651 (9,147)
-------- --------
NET INCREASE (DECREASE) IN CASH 191 (9,053)
BALANCE, BEGINNING OF PERIOD 72 9,637
-------- --------
BALANCE, END OF PERIOD $ 263 $ 584
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 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 September 30, 1998, the Company owned 44.4%
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 ended
September 30, 1998 and 1997, the condensed balance sheet as of September 30,
1998 and the condensed statements of cash flows for the three months ended
September 30, 1998 and 1997 have been prepared by the Company without audit,
while the condensed balance sheet as of June 30, 1998 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 September 30, 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,
1998, filed with the Securities and Exchange Commission.
The Company's Senior Subordinated Notes mature on June 1, 1999 and the
BankAmerica Credit Agreement will expire on July 15, 1999. In addition, cash
interest on the Senior Secured Deferred Coupon Notes becomes payable in
semi-annual installments beginning on December 1, 1999. Management's current
projections indicate that there will not be sufficient cash flow from operations
to fund these obligations. Management is currently developing a plan to enable
the Company to continue to meet its obligations as they become due. The Company
believes that a replacement facility or modification of the Credit Agreement
will be arranged prior to July 15, 1999. The Company also 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. Accordingly, the
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern and, as such, adjustments, if any, that
may be required for presentation on another basis have not been considered.
NOTE 2 - BUSINESS
--------
The common stock of Waxman trades on the New York Stock Exchange under
the symbol "WAX." The Company is a supplier 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 7,600 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, brass, and chrome pipe nipples and
imports malleable fittings. Consumer Products, WOC and Barnett utilize the
Company's and non-affiliated foreign sourcing suppliers.
The Company currently owns 44.4% of Barnett, a direct marketer and
distributor of an extensive line of plumbing, electrical and hardware products
to approximately 65,000 active customers throughout the United States.
7
<PAGE> 8
Barnett offers and promotes approximately 11,900 name brand and private label
products through its industry-recognized Barnett(R) catalogs and telesales
operations. Barnett markets its products through five distinct, comprehensive
catalogs that target professional contractors, independent hardware stores,
maintenance managers and liquid propane gas dealers. For each of the three
months ended September 30, 1998 and 1997, the Company recognized $1.5 million in
equity income from this investment.
In April 1996, the Company completed an initial public offering of the
Barnett Common Stock at $14.00 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 owned,
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. In
July 1997, as a result of the sale to Barnett of a substantial portion of the
business of LeRan Gas Products, one of WOC's operations, the Company received
cash and an additional 24,730 shares of Barnett Common Stock. At June 30, 1998,
the Company owned nearly 7.2 million shares, or 44.4%, of Barnett's outstanding
common stock. 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 ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires the Company to recognize income tax
benefits for loss carryforwards, which have not previously been recorded. The
tax benefits recognized must be reduced by a valuation allowance in certain
circumstances. The benefit of the Company's net operating loss carryforwards
have been reduced 100% by a valuation allowance.
At June 30, 1998, the Company had approximately $52.7 million of
available domestic net operating loss carryforwards for income tax purposes,
which expire 2008 through 2013. The Company also had alternative minimum tax
credit carryforwards of approximately $0.9 million at June 30, 1998, which are
available to reduce future regular income taxes over an indefinite period. The
Company will continue to assess the valuation allowance and to the extent it is
determined that such allowance is no longer required, the tax benefit of the
remaining net deferred tax assets will be recognized in the future. The tax
provision for the three months ended September 30, 1998 represents the provision
for various state and foreign taxes.
NOTE 4 - BARNETT
-------
The Company owns 7,186,530 shares, or 44.4%, of the Barnett Common
Stock as of September 30, 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 of $21.6
million, after the underwriters' discount 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 following table presents unaudited summary financial data for
Barnett at September 30, 1998 and for the three months then ended (in thousands
of dollars):
<TABLE>
<CAPTION>
Statement of income data: Balance sheet data:
<S> <C> <C> <C>
Net sales $ 52,391 Working capital $ 55,703
Operating income 5,598 Total assets 102,263
Net income 3,441 Stockholders' equity 79,680
</TABLE>
8
<PAGE> 9
NOTE 5 - SALE OF LERAN GAS PRODUCTS
---------------------------
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. In the first
quarter of fiscal 1998, the Company recorded an estimated loss on the sale of
LeRan of $133,000, including certain costs associated with disposing of assets
not included in the transaction and the sale and closing of certain warehouses.
The estimated loss was adjusted in the fourth quarter of fiscal 1998 to an
actual loss of $24,000.
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 September 1, 2001 (the "Senior
Notes") at par (the "Purchase Offer"). The offer expired on July 2, 1997 with
$2.5 million of the notes being purchased. 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 - NON-RECURRING CHARGE
--------------------
In the first quarter of fiscal 1999, Consumer Products recorded a
non-recurring charge of $1,350,000 relating to the move of its Bedford Heights,
Ohio warehouse to Groveport, Ohio. Included in the charge are severance benefits
for personnel and the loss on the write-off of tangible assets at the Bedford
Heights warehouse. The Company believes that the relocation to a more modern and
efficient facility, which will be complete in November 1998, would allow
Consumer Products to provide more sophisticated distribution services to its
customers and help them remain competitive through significant annual savings.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1998 and 1997
included interest of $2.4 million and $2.8 million, respectively. The Company
made no federal income tax payment in the first quarter of fiscal 1999 or fiscal
1998.
NOTE 9 - EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share" to be effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
requires companies to restate earnings per share data for all periods presented.
Under SFAS No. 128, primary earnings per share have 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 common stock and common stock
equivalents, which include stock options and warrants. 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 for the quarters ended September 30, 1998 and 1997.
The number of common shares used to calculate basic and diluted
earnings per share are as follows (in thousands):
<TABLE>
<CAPTION>
Period ended September 30, 1998 1997
---- ----
<S> <C> <C>
Basic 12,057 12,004
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C>
Diluted 12,057 12,004
</TABLE>
A reconciliation of basic shares to diluted shares is as follows:
<TABLE>
<CAPTION>
Period ended September 30, 1998 1997
---- ----
<S> <C> <C>
Basic 12,057 12,004
Dilutive effect of:
Stock options -- --
Warrants -- --
------ ------
Diluted 12,057 12,004
</TABLE>
NOTE 10 - 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 galvanized, black, brass and chrome pipe
nipples and imports 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>
Three months ended September 30,
- -------------------------------- Foreign Corporate and
1998 and 1997 Distribution Sourcing Other Elimination Total
- ------------- ------------ -------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 1999 three months $ 21,754 $ 9,917 -- $ (3,442) $ 28,229
Fiscal 1998 three months 21,905 10,768 -- (4,516) 28,157
Operating income (loss):
Fiscal 1999 three months $ 46 $ 371 $ (926) -- $ (509)
Fiscal 1998 three months 2,104 728 (827) -- 2,005
Identifiable assets:
September 30, 1998 $ 49,134 $ 18,142 $ 40,683 -- $ 107,959
June 30, 1998 48,489 18,042 39,212 -- 105,743
</TABLE>
NOTE 11 - COMPREHENSIVE INCOME
--------------------
In June 1997, The FASB issued SFAS No. 130, "Reporting Comprehensive
Income" to be effective for financial statements issued for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires companies to report
components of comprehensive income in the financial statement as prominently as
the other financial statements. Comprehensive income is defined as the change in
equity of a business during a period from transactions and other events and
circumstances that are not included in net income. Accordingly, the Company has
identified its foreign currency translation adjustments as a component of
comprehensive income on the face of the consolidated statements of operations.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND 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 and the
refinancing of its bank credit facility 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.
A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------
AND 1997
--------
Net Sales
- ---------
Net sales for the fiscal 1999 first quarter ended September 30, 1998
totaled $28.2 million, approximately the same as the comparable first quarter in
fiscal 1998. U.S. Lock reported an increase in net sales of $1.2 million, or
23.2%, in comparison to the same period last year. U.S. Lock's increase in net
sales is attributable to an increase in the number of monthly promotional flyers
mailed and the expansion in the number of its professional telesales
representatives. Net sales of the Asian operations increased by $0.2 million,
primarily due to an increase in sales to Barnett. Consumer Products reported a
net sales decrease of approximately $1.2 million, or 7.6%, primarily due to
reduced sales to Hechinger/Builders Square. The reduction in Consumer
Products' net sales is the result of a reduction in the number of Builders
Square stores and their aggressive inventory management program. As previously
disclosed by the Company, Consumer Products was informed that the
Hechinger/Builders Square operations were consolidating their supplier
relationships and Consumer Products would retain only the bulk plumbing
business of approximately $2.3 million annually beginning late in the second
quarter of fiscal 1999.
Gross Profit
- ------------
Gross profit margin decreased to 32.2% from 33.7%, and gross profit
decreased to $9.1 million from $9.5 million for the three months ended
September 30, 1998, as compared to the corresponding quarter in the prior
fiscal year. The decrease in gross profit is primarily attributable to the
Consumer Products' business, due to a reduction in the sales volume that covers
certain costs and a higher margin in the prior year on the initial rollout of
certain product lines to customers.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
increased from $7.4 million for the quarter ended September 30, 1997 to $8.2
million for the quarter ended September 30, 1998. As a percentage of net sales,
SG&A expenses increased from 26.1% for the fiscal 1998 first quarter to 29.2%
for the fiscal 1999 first quarter. The increase in the SG&A expense is
attributable to an increase at nearly all of the operations. Consumer Products
reported an increase in costs due to the addition of several key members of its
sales and marketing team and costs associated with the roll out of the new,
comprehensive packaging and merchandising system for packaged plumbing products.
This new program is being introduced under the name "The Plumbing Solution
Center". The Company believes the addition of the sales and marketing management
personnel and new products and programs is important to the long term growth
opportunities of the Consumer Products' business. SG&A expenses at Consumer
Products also increased as a percentage of sales due to the decrease in the
sales base. U.S. Lock reported an increase
11
<PAGE> 12
of $0.2 million in SG&A expenses but had a reduction in SG&A expenses as a
percentage of net sales from 21.6% in the first quarter of fiscal 1998 to 20.3%
in the fiscal 1999 first quarter.
Restructuring and Non-Recurring Charges
- ---------------------------------------
In the fiscal 1999 first quarter ended September 30, 1998, Consumer
Products recorded a non-recurring charge of $1,350,000 relating to the move of
its Bedford Heights, Ohio warehouse to Groveport, Ohio. Included in the charge
are severance benefits for personnel and the loss on the write-off of tangible
assets at the Bedford Heights warehouse. The Company believes that the
relocation to a more modern and efficient facility, which will be complete in
November 1998, would allow Consumer Products to provide more sophisticated
distribution services to its customers and help them remain competitive through
significant annual savings.
In the quarter ended September 30, 1997, the Company recorded an
estimated 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. The estimated loss was adjusted in the
fourth quarter of fiscal 1998 to an actual loss of $24,000.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its ownership interest in
Barnett of $1.5 million for each of the quarters ended September 30, 1998 and
1997.
Interest Expense
- ----------------
For the quarter ended September 30, 1998, interest expense totaled $4.3
million, an increase of $0.4 million from the $3.9 million in the comparable
quarter last year. The increase is primarily due to an increase in the accretion
of interest on the Company's 12 3/4% Senior Secured Deferred Coupon Notes
("Deferred Coupon Notes") and additional borrowings by the Company. Average
borrowings for the current year's quarter amounted to $136.7 million, with a
weighted average interest rate of 11.9%, as compared to $121.6 million in the
same quarter last year, with a weighted average interest rate of 12.0%.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.2 million for both of the
first quarters of fiscal 1999 and 1998. The provision for the current quarter
primarily represents various 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 operating losses not benefited and goodwill
amortization.
Extraordinary Loss
- ------------------
In the first quarter of fiscal 1998, the Company incurred an
extraordinary charge of $0.2 million associated with the write-off of deferred
financing costs due to the retirement of $12.0 million of Senior Notes in July
and August 1997.
Net Loss
- --------
The Company's net loss for the fiscal 1999 first quarter ended
September 30, 1998 amounted to $3.5 million, or $0.29 per share, as compared to
the loss of $0.8 million, or $0.07 per share, in the fiscal 1998 first quarter.
The first quarter of fiscal 1999 was affected by the $1,350,000 non-recurring
charge associated with the relocation of a warehouse. Included in the fiscal
1998 first quarter is an extraordinary charge of $0.2 million from the write-off
of deferred financing costs due to the retirement of $12 million of the
Company's Senior Notes.
12
<PAGE> 13
Year 2000
- ---------
The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its businesses.
During fiscal 1998, the Company began to implement plans at certain of its
operations to ensure those systems continue to meet its internal and external
requirements. During fiscal 1998, the Company's largest division, Consumer
Products, completed the modifications and testing of its information systems and
is Year 2000 compliant. Consumer Products utilizes an IBM AS400 system, along
with the latest version of Year 2000 compliant J.D. Edwards software. The
Company's corporate office is in the process of converting to this J.D. Edwards
package and should complete the conversion in the fourth quarter of calendar
1998. Currently, U.S. Lock contracts with Barnett for its information system,
accounting and certain other administrative functions. In July 1998, U.S. Lock
hired a Vice President of MIS and engaged third party vendors to customize a
Year 2000 compliant software package designed for distributors. The system,
which will operate on a Windows NT platform, will be operational before June 30,
1999. The cost of the hardware, software and customization of approximately
$650,000 is expected to be financed through a lease. In August 1998, WAMI's
PC-based Year 2000 software upgrade was installed and is being tested. Based on
information from software vendors, the PC-based information systems at TWI and
CWI will require the installation of a minor upgrade to be Year 2000 compliant.
These modifications are expected to be complete in fiscal 1999 and financed
through working capital with minimal cost. The Company's operations have
developed questionnaires and contacted key suppliers and customers regarding
their Year 2000 compliance to determine any impact on its operations. In
general, the suppliers and customers have developed or are in the process of
developing plans to address Year 2000 issues. The Company will continue to
monitor and evaluate the progress of its suppliers and customers on this
critical matter. The Company is also reviewing its non-information technology
systems to determine the extent of any changes that may be necessary and
believes that there will be minimal changes necessary for compliance.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In April 1997, the Company completed a secondary public offering of 1.3
million shares of Barnett Common Stock, including shares sold pursuant to the
underwriters' overallotment option, raising $21.6 million, net of underwriters'
fees and expenses. 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 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. 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. To that end, the Company sold Madison for $2.0
million in April 1997 and LeRan for $3.8 million in July 1997.
In June 1996, the Company entered into a credit agreement provided by
BankAmerica Business Credit, Inc. (the "Credit Agreement"). The Credit Agreement
provides for, among other things, revolving credit advances of up to $30.0
million and term loans of up to $5.0 million (the "Term Loans"). As of September
30, 1998, the Company had $11.6 million in borrowings under the revolving credit
line of the credit facility and had approximately $8.8 million available under
such facility. At September 30, 1998, there were $5.0 million of Term Loans
outstanding. The Credit Agreement expires on July 15, 1999. The Company is
discussing the Credit Agreement with its bank and other credit institutions with
the view of extending the term and increasing the availability of capital under
its credit facilities.
The Credit Agreement provides for revolving credit advances of (a) up
to 85.0% of the amount of eligible accounts receivable and (b) up to the lesser
of (i) $16.0 million or (ii) 60% of the amount of eligible raw and finished
goods inventory. Revolving credit advances bear interest at a rate equal to (a)
BankAmerica's reference rate plus 1.0% or (b) LIBOR plus 2.75%. The Credit
Agreement includes a letter of credit subfacility of $2.0 million, of which $0.3
million was outstanding at September 30, 1998. The Term Loans bear interest at a
rate per
13
<PAGE> 14
annum equal to .25% over the interest rate applicable to revolving credit
advances under the Credit Agreement. Borrowings under the Credit Agreement are
secured by the accounts receivable, inventories, certain general intangibles and
unencumbered fixed assets of Consumer Products and WOC (the "Borrowers"). In
addition, the Term Loans are also secured by a pledge of 500,000 shares of
Barnett Common Stock owned by the Company (constituting approximately 3.1% of
all outstanding Barnett Common Stock). The Credit Agreement requires the
Borrowers to maintain cash collateral accounts into which all available funds
are deposited and applied to service the facility on a daily basis. The Credit
Agreement prevents dividends and distributions by the Borrowers except in
certain limited instances including, so long as there is no default or event of
default and the Borrowers are in compliance with certain financial covenants,
the payment of interest on the Senior Subordinated Notes and the Company's 12
3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred Coupon
Notes"), and contains customary negative, affirmative and financial covenants
and conditions. The Company was in compliance with or had obtained a waiver for
all loan covenants at September 30, 1998. As a result of the inclusion of a
material adverse effect clause as an event of default and the requirement to
maintain cash collateral accounts, the borrowings under the Credit Agreement
have been classified as current liabilities.
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 and U.S. Lock for cash flow. Consumer
Products' customers include D-I-Y warehouse home centers, home improvement
centers, mass merchandisers and hardware stores. 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, Consumer Products has a high proportion of its sales
with a concentrated number of customers. One of Consumer Products' largest
customers, Kmart, accounted for approximately 18.2% of net sales for Consumer
Products in fiscal 1998. 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 companies to form the nation's third largest home improvement chain. In
fiscal 1997, Builders Square accounted for 21.9% of Consumer Products' net
sales. The combined operations of Hechinger/Builders Square is Consumer
Products' largest customer, accounting for approximately $11.7 million, or
21.1%, of its net sales in fiscal 1998. Net sales to the combined operations
declined during fiscal 1998, with $5.1 million being sold in the last six
months. In August 1998, Consumer Products was informed that the
Hechinger/Builders Square operations were consolidating their supplier
relationships and Consumer Products would retain only the bulk plumbing
business of approximately $2.3 million annually. The supplier relationship is
expected to change late in the second quarter of fiscal 1999, however, sales to
Builders Square were significantly lower in the quarter ended September 30,
1998 due to a reduction in the number of Builders Square stores and their
aggressive inventory management program. Due to the loss of this revenue base,
Consumer Products has developed plans to reduce its cost structure to be more
in line with its revenue base. The Company expects the impact to operating
income to be approximately $0.8 million lower in fiscal 1999, in comparison to
fiscal 1998. In the event Consumer Products were to lose any additional large
retail accounts as a customer or one of its largest accounts were to
significantly curtail its purchases from Consumer Products, there would be
additional material short-term adverse effects until the Company could further
modify Consumer Products' cost structure to be more in line with its
anticipated revenue base. Consumer Products would likely incur significant
charges if additional materially adverse changes in its customer relationships
were to occur.
The Company paid no Federal taxes in the first quarter of fiscal 1999.
At June 30, 1998, the Company had $52.7 million of available domestic net
operating loss carryforwards for income tax purposes, which expire 2008 through
2013, and $34.0 million of original issue discount, as of September 30, 1998,
that has been expensed on the Company's financial statements and will become
deductible for tax purposes when the Deferred Coupon Notes are paid.
The Company does not have any commitments to make substantial capital
expenditures; however, it plans to spend approximately $2.0 million in capital
expenditures in fiscal 1999. The Company utilizes management information systems
and software technology that may be affected by Year 2000 issues throughout its
businesses. During fiscal 1998, the Company began to implement plans at certain
of its operations to ensure those systems continue to meet its internal and
external requirements. During fiscal 1998, the Company's largest division,
Consumer Products, completed the modifications and testing of its information
systems and is Year 2000 compliant. Consumer Products utilizes an IBM AS400
system, along with the latest version of Year 2000 compliant J.D. Edwards
software. The Company's corporate office is in the process of converting to this
J.D. Edwards package and
14
<PAGE> 15
should complete the conversion in the fourth quarter of calendar 1998.
Currently, U.S. Lock contracts with Barnett for its information system,
accounting and certain other administrative functions. In July 1998, U.S. Lock
hired a Vice President of MIS and engaged third party vendors to customize a
Year 2000 compliant software package designed for distributors. The system,
which will operate on a Windows NT platform, will be operational before June 30,
1999. The cost of the hardware, software and customization of approximately
$650,000 is expected to be financed through a lease. In August 1998, WAMI's
PC-based Year 2000 software upgrade was installed and is being tested. Based on
information from software vendors, the PC-based information systems at TWI and
CWI will require the installation of a minor upgrade to be Year 2000 compliant.
These modifications are expected to be completed in fiscal 1999 and financed
through working capital with minimal cost.
In addition to the above mentioned capital expenditure at U.S. Lock for
an information system, U.S. Lock also expects to open an additional distribution
facility and expand and improve its existing headquarters, warehouse and office.
Fiscal 1999 capital expenditures for Consumer Products include expenditures to
improve the efficiencies of its operations, provide new data technology and to
move to a more efficient and modern facility. Also included in the capital
expenditure budget are certain expansion plans for the Company's foreign
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 the maturity of the Credit
Agreement on July 15, 1999, or in the event the Company is able to negotiate an
extension or replacement facility for its Credit Agreement, December 1, 1999
(the date the first semi-annual cash interest payment of approximately
$6 million becomes payable by the Company under the Deferred Coupon Notes).
Management's current projections indicate that there will not be sufficient cash
flow from operations to make the above payment. The Company believes that a
replacement facility or modification of the Credit Agreement will be arranged
prior to July 15, 1999. The Company also 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. Accordingly, the accompanying consolidated
financial statements have been prepared assuming the Company will continue as a
going concern and, as such, adjustments, if any, that may be required for
presentation on another basis have not been considered.
At September 30, 1998, the Company had working capital of $11.5 million
and a current ratio of 1.3 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $1.1 million in the fiscal 1999 first
quarter principally due to an increase in trade receivables and other assets and
a decrease in accrued liabilities and accrued interest, offset by a decrease in
inventories and an increase in accounts payable. Also affecting net cash used
for operations was $1.5 million in equity earnings of Barnett. Excluding this
item, the net cash provided by operations was $0.4 million. Cash flow used in
investments totaled $1.3 million, primarily attributable to capital
expenditures. Cash flow provided by financing activities, and net borrowings
under the Company's credit facilities totaled $2.7 million.
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 September 30, 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: NOVEMBER 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
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<CIK> 0000105096
<NAME> WAXMAN INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 263
<SECURITIES> 0
<RECEIVABLES> 17,648
<ALLOWANCES> (1,106)
<INVENTORY> 24,099
<CURRENT-ASSETS> 46,945
<PP&E> 23,639
<DEPRECIATION> (9,732)
<TOTAL-ASSETS> 107,959
<CURRENT-LIABILITIES> 35,461
<BONDS> 120,694
0
0
<COMMON> 119
<OTHER-SE> (48,315)
<TOTAL-LIABILITY-AND-EQUITY> 107,959
<SALES> 28,229
<TOTAL-REVENUES> 28,229
<CGS> 9,088
<TOTAL-COSTS> 8,247
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<INTEREST-EXPENSE> 4,310
<INCOME-PRETAX> (3,292)
<INCOME-TAX> 186
<INCOME-CONTINUING> (3,478)
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