<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, 1999
--------------
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
--- ---
9,913,751 shares of Common Stock, $.01 par value, and 2,143,546 shares of
Class B Common Stock, $.01 par value, were outstanding as of May 7, 1999.
1
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO FORM 10-Q
------------------
PAGE
----
PART 1. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
For the Nine and Three Months Ended March 31, 1999 and 1998.. 3
Condensed Consolidated Balance Sheets - March 31, 1999 and
June 30, 1998................................................ 4-5
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended March 31, 1999 and 1998............ 6
Notes to Condensed Consolidated Financial Statements......... 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 12-19
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information............................................... 20
Item 6. Exhibits and Reports on Form 8-K................................ 20
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
2
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PART 1. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 79,613 $ 79,409 $ 22,186 $ 24,444
Cost of sales 55,617 52,000 15,939 15,900
-------- -------- -------- --------
Gross profit 23,996 27,409 6,247 8,544
Selling, general and administrative expenses 23,365 22,375 6,675 7,520
Non-recurring and procurement charges 4,250 133 2,900 --
-------- -------- -------- --------
Operating (loss) income (3,619) 4,901 (3,328) 1,024
Gain on sale of U.S. Lock, net 10,196 -- 10,196 --
Equity earnings of Barnett 5,024 4,622 1,693 1,454
Interest expense, net 12,919 11,839 4,187 4,088
-------- -------- -------- --------
(Loss) income before income taxes and extraordinary loss (1,318) (2,316) 4,374 (1,610)
Provision for income taxes 1,139 786 899 230
-------- -------- -------- --------
(Loss) income before extraordinary loss (2,457) (3,102) 3,475 (1,840)
Extraordinary loss -- 192 -- --
-------- -------- -------- --------
Net (loss) income $ (2,457) $ (3,294) $ 3,475 $ (1,840)
======== ======== ======== ========
Basic and diluted (loss) income per share:
(Loss) income before extraordinary loss $ (0.20) $ (0.25) $ 0.29 $ (0.15)
Extraordinary loss -- (0.02) -- --
-------- -------- -------- --------
Net (loss) income $ (0.20) $ (0.27) $ 0.29 $ (0.15)
======== ======== ======== ========
Weighted average shares outstanding 12,057 12,017 12,057 12,034
======== ======== ======== ========
Comprehensive income:
Net (loss) income before comprehensive income (loss) $ (2,457) $ (3,294) $ 3,475 $ (1,840)
Foreign currency translation adjustment 130 (694) (288) (79)
-------- -------- -------- --------
Comprehensive (loss) income $ (2,327) $ (3,988) $ 3,187 $ (1,919)
======== ======== ======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 1999 AND JUNE 30, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,388 $ 72
Trade receivables, net 12,314 15,503
Other receivables 2,350 3,152
Inventories 20,137 26,162
Prepaid expenses 4,547 3,060
--------- ---------
Total current assets 47,736 47,949
--------- ---------
INVESTMENT IN BARNETT 34,665 29,641
--------- ---------
PROPERTY AND EQUIPMENT:
Land 569 1,379
Buildings 4,409 7,397
Equipment 12,056 13,541
--------- ---------
17,034 22,317
Less accumulated depreciation and amortization (6,707) (9,346)
--------- ---------
Property and equipment, net 10,327 12,971
--------- ---------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 7,987 8,189
UNAMORTIZED DEBT ISSUANCE COSTS, NET 2,949 3,524
OTHER ASSETS 5,149 3,469
--------- ---------
$ 108,813 $ 105,743
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 1999 AND JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,350 $ 15,864
Accounts payable 7,727 7,741
Accrued liabilities 5,468 6,500
Accrued income taxes payable 1,046 250
Accrued interest 370 1,339
--------- ---------
Total current liabilities 20,961 31,694
--------- ---------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 1,308 1,570
SENIOR SECURED DEFERRED COUPON NOTES, NET 89,640 81,368
SENIOR NOTES 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK 8,119 --
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 9,914 at March 31, 1999
and 9,908 at June 30, 1998 98 98
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,143 at March 31, 1999
and 2,148 at June 30, 1998 21 21
Paid-in capital 21,732 21,731
Retained deficit (67,888) (65,431)
--------- ---------
(46,037) (43,581)
Cumulative currency translation adjustment (1,033) (1,163)
--------- ---------
Total stockholders' equity (deficit) (47,070) (44,744)
--------- ---------
$ 108,813 $ 105,743
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,457) $ (3,294)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss - write-off of deferred financing costs -- 192
Gain on sale of U.S. Lock, net (10,196) --
Non-cash interest 8,272 7,312
Equity earnings of Barnett (5,024) (4,622)
Depreciation and amortization 2,093 2,181
Changes in assets and liabilities:
Trade receivables, net 711 (1,935)
Inventories 370 (2,846)
Other assets (2,641) (750)
Accounts payable 1,576 846
Accrued liabilities (307) (1,946)
Accrued interest (969) (1,420)
Accrued taxes 796 859
Net change in operating assets and liabilities of U.S. Lock (1,109) --
Other, net 130 (694)
-------- --------
Net Cash Used in Operating Activities (8,755) (6,117)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of business 28,249 3,203
Capital expenditures, net (1,403) (1,623)
-------- --------
Net Cash Provided by Investing Activities 26,846 1,580
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 49,290 80,376
Payments under credit agreements (58,804) (73,148)
Retirement of Senior Notes -- (12,000)
Borrowings of long-term debt (262) 323
Issuance of common stock 1 76
-------- --------
Net Cash Used in Financing Activities (9,775) (4,373)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,316 (8,910)
BALANCE, BEGINNING OF PERIOD 72 9,637
-------- --------
BALANCE, END OF PERIOD $ 8,388 $ 727
======== ========
</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)
MARCH 31, 1999
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, 1999, the Company owned 44.3% 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 nine months and three months ended
March 31, 1999 and 1998, the condensed consolidated balance sheet as of March
31, 1999 and the condensed consolidated statements of cash flows for the nine
months ended March 31, 1999 and 1998 have been prepared by the Company without
audit, while the condensed consolidated 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 March 31, 1999 and for all
periods presented. Certain reclassifications have been made to the prior period
statements in order to conform to the current period presentation. 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
Company's credit facility with BankAmerica Business Credit, Inc. (the "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 continues to develop and
implement plans to enable the Company to continue to meet all of its
obligations as they become due. As part of that process, on January 7, 1999,
the Company completed the sale of certain assets and liabilities of an indirect
wholly-owned operation, U.S. Lock, for approximately $33.0 million (the "U.S.
Lock Sale"). The Company believes that a replacement facility will be arranged
prior to July 15, 1999. The Company also believes its operating cash flow, the
remaining net proceeds from the U.s. Lock Sale and its borrowing availability
under a working capital facility will be sufficient in the short term to fund
its liquidity and working capital requirements, capital expenditures and the
first few interest payments on the Deferred Coupon Notes. In addition, 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 requirements. 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
--------
Until being suspended from trading by the New York Stock Exchange on
March 22, 1999, the common stock of Waxman traded on the New York Stock Exchange
under the symbol "WAX." On March 26, 1999, the Company began trading on the
Over-The-Counter Bulletin Board under the symbol "WAXX." The Company is a
supplier of specialty plumbing and other products to the repair and remodeling
market in the United States. The Company distributes its products to a wide
variety of large national and regional retailers, other independent retailers
and wholesalers. U.S. Lock, which was sold by the Company effective January 1,
1999, is a distributor of security hardware to locksmiths and security hardware
installers.
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"). Prior to January 1, 1999, WOC
was comprised of two divisions, U.S. Lock ("U.S. Lock"), a distributor of a full
line of
7
<PAGE> 8
security hardware products (see "U.S. Lock Sale" above), 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 7.2 million shares, or 44.3%, of Barnett, a
direct marketer and distributor of an extensive line of plumbing, electrical and
hardware products to approximately 72,700 active customers throughout the United
States. Barnett offers and promotes approximately 11,400 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 the
three months and nine months ended March 31, 1999, the Company recognized $1.7
million and $5.0 million in equity income from this investment, respectively, as
compared to $1.5 million and $4.6 million for the same periods last year.
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 in Barnett to 44.5% (the "Barnett Secondary Offering") and,
accordingly, began to account for its interest 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.
In January 1999, the Company completed the U.S. Lock Sale to Barnett (see Note
5). 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 $52.1 million of
available domestic net operating loss carryforwards for income tax purposes,
which expire 2009 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 and nine months ended March 31, 1999 represents the
provision for the alternative minimum tax due on the sale of U.S. Lock and
various state and foreign taxes.
In January 1999, the Company utilized a portion of the net operating
loss carryforwards to offset a portion of the tax on the net gain recognized for
financial statement purposes of $10.2 million from the U.S. Lock Sale. The
Company has a deferred gain of $8.1 million on its balance sheet associated with
the sale of U.S. Lock due to the Company's ownership of 44.3% of Barnett
(see Note 5).
NOTE 4 - BARNETT
-------
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common
Stock as of March 31, 1999, 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
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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). In January 1999, the Company completed the U.S. Lock Sale
to Barnett (see Note 5).
The following table presents unaudited summary financial data for
Barnett at March 31, 1999 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 $ 174,390 Working capital $ 67,006
Operating income 19,270 Total assets 147,833
Net income 11,333 Stockholders' equity 87,572
</TABLE>
NOTE 5 - SALE OF DIVISIONS
------------------
U.S. LOCK:
In December 1998, the Company announced it had entered into an
agreement to sell certain of the assets and liabilities of U.S. Lock, a division
of WOC, to Barnett for approximately $33.0 million in cash, less certain post
closing adjustments. The U.S. Lock Sale was completed effective January 1, 1999,
resulting in an estimated net pretax gain of $18.3 million, of which
approximately $8.1 million has been reported as a deferred gain for financial
statement purposes due to the Company's continued ownership of 44.3% of Barnett,
the acquirer of U.S. Lock. The remaining gain of $10.2 million has been
recognized in the quarter ended March 31, 1999. The Company will recognize the
deferred gain as the goodwill generated by the purchase of U.S. Lock is
amortized by Barnett, or as the Company reduces its ownership interest in
Barnett. The Company will utilize a portion of its net operating loss
carryforwards to offset a portion of the tax on the net gain from the U.S. Lock
Sale.
The Company consolidated U.S. Lock's financial information in its
results through December 31, 1998. Therefore, there is no impact on the
Company's net sales or earnings from U.S. Lock's operating results in the
quarter ended March 31, 1999. The impact of not consolidating U.S. Lock's
results would have reduced the consolidated net sales and resulted in a larger
net loss for the Company as follows:
<TABLE>
<CAPTION>
Nine months Nine months Three months Three months
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $13,361 $16,633 -- $ 5,800
Net (loss) income $ 1,000 $ 1,112 -- $ 388
Basic and diluted (loss)
income per share $ 0.08 $ 0.09 -- $ 0.03
</TABLE>
LERAN GAS PRODUCTS:
Effective July 1, 1997, the Company sold the gas products business of
LeRan, a division of WOC, 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 Senior 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
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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 AND PROCUREMENT CHARGES
-------------------------------------
The Company's Consumer Products Group recorded non-recurring charges
relating to the move of its Bedford Heights, Ohio warehouse to Groveport, Ohio.
In the fiscal 1999 first quarter, a non-recurring charge of $1.35 million for
severance benefits for personnel and the loss on the write-off of tangible
assets at the Bedford Heights warehouse was reported. In the third quarter of
fiscal 1999, Consumer Products recorded an additional non-recurring charge of
$0.45 million for additional costs involved in the move, the training of
personnel and the future shortfall on subleasing the warehouse in Bedford
Heights. The cash costs of this move have been paid as of March 31, 1999. The
Company believes that the relocation to a more modern and efficient facility
will allow Consumer Products to provide more sophisticated distribution services
to its customers and help it remain competitive through significant annual
savings.
In addition to the fiscal 1999 third quarter non-recurring charge for
the move of its warehouse, Consumer Products also recorded a $2.45 million for
business procurement costs.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
At March 31, 1999, the Company had cash and cash equivalents of $8.4
million, principally from the net proceeds from the sale of U.S. Lock. Cash
equivalents include various overnight hi-grade commercial paper instruments.
Cash payments during the three months ended March 31, 1999 and 1998
included interest of $2.2 million and $2.3 million, respectively. For the nine
months ended March 31, 1999 and 1998, cash interest payments were $5.1 million
and $5.4 million, respectively. The Company made no federal income tax payments
in the quarter or nine-month periods ended March 31, 1999 or 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 March 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 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 stock options and warrants. Because the Company is in
a loss position for the nine month periods ended March 31, 1999 and 1998 and for
the three month period ended March 31, 1998, 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 quarter ended March 31, 1999, the impact
of the options and warrants is anti-dilutive as the price of the Company's stock
was below the exercise prices of those instruments.
The number of common shares used to calculate basic and diluted
earnings per share are as follows (in thousands):
<TABLE>
<CAPTION>
Nine months Nine months Three months Three months
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic and diluted 12,057 12,017 12,057 12,034
</TABLE>
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NOTE 10 - SEGMENT INFORMATION
-------------------
The Company's businesses distribute specialty plumbing products,
galvanized, black, brass and chrome pipe nipples, imported malleable fittings
and other products. Since the foreign sourcing and manufacturing operations sell
a significant portion of their products through the Company's wholly-owned
operations and Barnett, the Company has classified its business segments into
retail and non-retail categories. Products are sold to (i) retail operations,
including large national and regional retailers, D-I-Y home centers and smaller
independent retailers in the United States, and (ii) non-retail operations,
including wholesale and industrial supply distributors in the United States.
Sales outside of the United States are insignificant. Until the January 1, 1999
sale of U.S. Lock (see Note 5), the Company also distributed security hardware
to non-retail operations, including security hardware installers and locksmiths.
Set forth below is certain financial data relating to the Company's business
segments (in thousands of dollars).
<TABLE>
<CAPTION>
Three and nine months ended
- --------------------------- Corporate and
March 31, 1999 and 1998 Retail Non-Retail Other Elimination Total
- ----------------------- ------ ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 1999 three months $16,327 $5,859 -- $ -- $22,186
Fiscal 1998 three months 14,472 9,972 -- -- 24,444
Fiscal 1999 nine months 45,264 34,349 -- -- 79,613
Fiscal 1998 nine months 47,571 31,838 -- -- 79,409
Operating income (loss):
Fiscal 1999 three months $(1,443) $(970) $(915) -- $(3,328)
Fiscal 1998 three months 759 1,263 (998) -- 1,024
Fiscal 1999 nine months (1,843) 990 (2,766) -- (3,619)
Fiscal 1998 nine months 3,930 3,634 (2,663) -- 4,901
Identifiable assets:
March 31, 1999 $46,746 $15,376 $46,691 -- $108,813
June 30, 1998 46,109 23,041 36,593 -- 105,743
</TABLE>
The Company's foreign operations manufacture, assemble, source and
package products that are distributed by the Company's wholly-owned operations,
Barnett, retailers and other non-retail customers. Gross sales for those foreign
operations, including intercompany sales, amounted to $36.0 million and $30.1
million for the nine months ended March 31, 1999 and 1998, and $12.7 million and
$8.1 million for the three months ended March 31, 1999 and 1998, respectively.
Intercompany sales from the Company's foreign operations amounted to $10.3
million and $13.4 million for the nine months ended March 31, 1999 and 1998, and
$3.0 million and $3.7 million for the three months ended March 31, 1999 and
1998, respectively. Identifiable assets for the foreign operations were $17.2
million and $18.0 million at March 31, 1999 and June 30, 1998, respectively.
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 statements 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.
11
<PAGE> 12
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 MARCH 31, 1999 AND 1998
- --------------------------------------------------
Net Sales
- ---------
Net sales for the fiscal 1999 third quarter ended March 31, 1998
totaled $22.2 million, as compared to $24.4 million for the fiscal 1998 third
quarter. Excluding the results of U.S. Lock, which was sold effective January 1,
1999, comparable net sales for the remaining businesses increased 19.0 percent
from the recasted net sales of $18.6 million for the fiscal 1998 third quarter.
As we have discussed previously, net sales originating from our Asian operations
continue to increase due to the increase in a direct import program to
retailers, which is managed by Consumer Products, and due to additional sales to
Barnett. The direct import program for certain retailers requires coordination
between the customers, who receive the direct shipment into their warehouses,
the billing and collection services from our Asian operations, and selling,
administrative and customer services from Consumer Products. We anticipate that
this program will continue to play an important part in the Company's results
and have begun presenting the Company's operating segment results based on
business with retailers and non-retailers.
Net sales to retailers amounted to $16.3 million for the third quarter
ended March 31, 1999, an increase over the $14.5 million for the same period
last year. Sales to Hechinger / Builders Square decreased to $0.4 million in the
fiscal 1999 third quarter, as compared to $3.3 million in the same period last
year, while sales to Kmart and certain other retailers increased. 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 beginning in
January 1999. During the fiscal 1999 third quarter, the Company signed a
three-year agreement with Kmart, which the Company expects will result in
additional annual net sales of $4 to $5 million. The Company believes that
discussions with several other major retailers should result in new and expanded
business opportunities for its Consumer Products and Asian operations in the
next fiscal year. A portion of this additional business, which includes
showerheads, faucets, floor care and packaged plumbing, will be shipped under
the direct import program from the Company's Asian facilities.
Non-retail net sales amounted to $5.9 million for the fiscal 1999 third
quarter, a decrease from $9.9 million for the same period in fiscal 1998.
Excluding the net sales of U.S. Lock, which amount to $5.8 million in the fiscal
1998 third quarter, non-retail net sales would have increased by $1.7 million.
This increase is primarily due to an increase in sales to Barnett.
Gross Profit
- ------------
12
<PAGE> 13
Gross profit for the fiscal 1999 third quarter was $6.2 million, with a
gross profit margin of 28.2 percent, as compared to gross profit of $8.5 million
and a gross profit margin of 34.9 percent for the three months ended March 31,
1998. Excluding U.S. Lock from the prior year results, gross profit decreased by
$0.4 million from the recasted fiscal 1998 third quarter gross profit of $6.7
million, while the gross profit margin would have increased to 35.8 percent. The
decrease in the gross margin is primarily attributable to a higher proportion of
sales from the direct import sales program, which has a lower gross margin as
well as lower selling, general and administrative expenses. The termination of
the packaged plumbing program sales to Hechinger / Builders Square reduced the
Company's gross profit and offset the increased gross profit from sales to other
retailers. In addition, competitive pricing pressure from overseas suppliers of
pipe nipples and valves has reduced the Company's sales and gross margins for
those products. In the third quarter of fiscal 1999, the Company's pipe nipple
operations also recorded adjustments of approximately $0.7 million relating to
the carrying value of inventory and other related items. This adjustment
impacted the gross profit and gross margin for the current period.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
decreased from $7.5 million for the quarter ended March 31, 1998 to $6.7 million
for the quarter ended March 31, 1999. Included in the prior year's results are
$1.2 million in SG&A expenses related to U.S. Lock. As a percentage of net
sales, SG&A expenses decreased from 30.8% for the fiscal 1998 third quarter to
30.1% for the fiscal 1999 third quarter. The decreased percentage of expenses to
net sales is due to a higher proportion of sales from the Asian operations and
an increase in sales through the direct import program, which have a lower
percentage of SG&A expenses to net sales.
Non-Recurring and Procurement Charges
- -------------------------------------
In the fiscal 1999 third quarter, the Company recorded $0.45 million in
non-recurring charges related to additional costs involved in the relocation of
the Consumer Products' Bedford Heights warehouse to Groveport, Ohio, the
training of personnel and the future shortfall on subleasing the warehouse in
Bedford Heights, Ohio. In addition to the non-recurring charge for the move of
its warehouse, Consumer Products also recorded a business procurement charge of
$2.45 million.
Gain on Sale of U.S. Lock
- -------------------------
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million of such gain being recognized in the fiscal 1999 third quarter. The
remaining $8.1 million has been reported as a deferred gain in the Company's
balance sheet due to the Company's continued ownership of 44.3% of Barnett, the
acquirer of U.S. Lock. The Company will recognize the deferred gain as the
goodwill generated by the purchase of U.S. Lock is amortized by Barnett, or as
the Company reduces its ownership interest in Barnett.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its ownership interest in
Barnett of $1.7 million for the quarter ended March 31, 1999, as compared to
$1.5 million for the same quarter in fiscal 1998.
Interest Expense
- ----------------
For the quarter ended March 31, 1999, net interest expense totaled $4.2
million, an increase of $0.1 million, from the $4.1 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"). Average borrowings for the current year's quarter
amounted to $134.2 million, with a weighted average interest rate of 12.3%, as
compared to $127.5 million in the same quarter last year, with a weighted
average interest rate of 12.1%. Pending the reinvestment of funds in its
businesses, the Company also had an average short term cash investment from the
proceeds of the sale of U.S. Lock of $13.9 million during the fiscal 1999 third
quarter, resulting in approximately $0.1 million in interest income.
Provision for Income Taxes
- --------------------------
13
<PAGE> 14
The provision for income taxes amounted to $0.9 million for the third
quarter of fiscal 1999, as compared to $0.2 million for the same quarter last
year. The provision for the current quarter primarily represents the alternative
minimum tax due on the gain on the sale of U.S. Lock and various state and
foreign taxes of the Company's wholly-owned operations. For the fiscal 1999
third quarter, the difference between the effective and statutory tax rates is
primarily due to the utilization of a net operating loss carryforward not
previously benefited. For the fiscal 1998 third quarter, the difference between
the effective and statutory tax rates is primarily due to domestic operating
losses not benefited.
Net Income (Loss)
- -----------------
The Company's net income for the quarter ended March 31, 1999 amounted
to $3.5 million, or $0.29 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 1998 third
quarter. The net income for the fiscal 1999 third quarter is due to the gain on
the sale of U.S. Lock, which was partially offset by certain non-recurring
charges associated with the relocation of a warehouse and business procurement
costs.
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
- -------------------------------------------------
Net Sales
- ---------
Net sales for the nine months ended March 31, 1999 totaled $79.6
million, an increase of $0.2 million from the $79.4 million for the comparable
period in fiscal 1998. With the sale of U.S. Lock effective January 1, 1999, the
fiscal 1999 nine-month results only include six months of U.S. Lock net sales,
or $13.4 million, as compared to $16.6 million for the nine months ended March
31, 1998. Excluding U.S. Lock for both periods, net sales for the fiscal 1999
nine-month period amounted to $66.3 million, an increase of $3.5 million over
the $62.8 million for the comparable period last year. Net sales to retailers
amounted to $45.3 million for the nine months ended March 31, 1999, a decrease
compared to the $47.6 million for the same period last year. Sales to Hechinger
/ Builders Square decreased by $5.3 million to $3.5 million in the fiscal 1999
nine month period, as compared to $8.8 million in the same period last year,
offsetting the increase in sales to other retailers. 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 beginning in January 1999. During
the fiscal 1999 third quarter, the Company signed a three-year agreement with
Kmart, which the Company expects will result in additional annual net sales of
$4 to $5 million. A portion of these sales, which includes showerheads, faucets,
floor care and packaged plumbing, will be shipped under the direct import
program from the Company's Asian facilities.
Non-retail net sales amounted to $34.3 million for the fiscal 1999 nine
month period, an increase from the $31.8 million for the same period in fiscal
1998. Excluding the results of U.S. Lock, non-retail net sales increased by $5.8
million for the fiscal 1999 nine month period, as compared to the same period
last year, primarily due to an increase in sales to Barnett.
Gross Profit
- ------------
The gross profit margin for the nine months ended March 31, 1999
decreased to 30.1% from 34.5% for the nine months ended March 31, 1998. The
reduction in the gross margin is attributable to a higher proportion of sales
from the lower gross margin direct import sales program and competitive pricing
pressure at our Mexican pipe nipple operation. Gross profit decreased to $24.0
million for the current nine-month period, as compared to $27.4 million for the
nine months ended March 31, 1998. Excluding U.S. Lock for both periods, the
gross profit for the current year nine-month period would have been $19.6
million, as compared to $22.0 million in the same period last year. The decrease
in gross profit is attributable to the reduction in sales to Hechinger /
Builders Square, competitive pricing issues associated with the Mexican pipe
nipple operation and the sales increase for the lower margin direct import
program.
Selling, General and Administrative Expenses
- --------------------------------------------
14
<PAGE> 15
SG&A expenses increased from $22.4 million for the nine months ended
March 31, 1998 to $23.4 million for the nine month period ended March 31, 1999.
As a percentage of net sales, SG&A expenses increased from 28.2% for the nine
month period in fiscal 1998 to 29.3% for the fiscal 1999 nine-month period. The
increase in expenses was primarily due to a foreign exchange loss of $0.3
million being reported in the nine month period ended March 31, 1999, as
compared to $0.8 million in foreign exchange income being reported for the same
period last year. Excluding the results of U.S. Lock for both periods, SG&A
expenses as a percentage of sales increased to 31.2 percent for the fiscal 1999
nine month period as compared to 30.0 percent in the comparable prior year
period due to lower sales to offset corporate expenses.
Non-Recurring and Procurement Charges
- -------------------------------------
In the fiscal 1999 first quarter ended September 30, 1998, Consumer
Products recorded a non-recurring charge of $1.35 million related to the
relocation 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. In the third quarter of
fiscal 1999, Consumer Products recorded an additional non-recurring charge of
$0.45 million for additional costs involved in the relocation of the Bedford
Heights warehouse, the training of personnel and the future shortfall on
subleasing the warehouse in Bedford Heights. The Company believes that the
relocation to a more modern and efficient facility will allow Consumer Products
to provide more sophisticated distribution services to its customers and help it
remain competitive through significant annual savings.
In addition to the non-recurring charge for the relocation of its
warehouse, Consumer Products also recorded a business procurement charge of
$2.45 million.
Gain on Sale of U.S. Lock
- -------------------------
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million being recognized in the fiscal 1999 third quarter. The remaining $8.1
million has been reported as a deferred gain in the Company's balance sheet due
to the Company's continued ownership of 44.3% of Barnett, the acquirer of U.S.
Lock. The Company will recognize the deferred gain as the goodwill generated by
the purchase of U.S. Lock is amortized by Barnett, or as the Company reduces its
ownership interest in Barnett.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its 44.3% ownership interest
in Barnett of $5.0 million for the nine months ended March 31, 1999. For the
comparable period in fiscal 1998, the Company recorded equity earnings of $4.6
million.
Interest Expense
- ----------------
For the nine months ended March 31, 1999, interest expense totaled
$12.9 million, an increase of $1.1 million from the $11.8 million in the
comparable period last year. The increase is primarily due to an increase in
borrowings under the Credit Agreement and an increase in the accretion of
interest on the Deferred Coupon Notes of $8.3 million as compared to $7.3
million for the nine months ended March 31, 1999 and 1998, respectively. Average
borrowings for the nine months ended March 31, 1999 amounted to $137.4 million,
with a weighted average interest rate of 12.3%, as compared to $123.4 million in
the same period last year, with a weighted average interest rate of 12.1%.
Provision for Income Taxes
- --------------------------
15
<PAGE> 16
The provision for income taxes amounted to $1.1 million and $0.8
million for the nine months ended March 31, 1999 and 1998, respectively. The
provision for the current period primarily represents the alternative minimum
tax due on the gain on the sale of U.S. Lock and various state and foreign taxes
of the Company's wholly-owned operations. The provision in the nine months ended
March 31, 1998 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 losses not benefited.
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)
Net Loss
- --------
The Company's net loss for the nine months ended March 31, 1999
amounted to $2.5 million, or $0.20 per basic and diluted share, as compared to
the loss of $3.3 million, or $0.27 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 share, from the write-off of
deferred financing costs as discussed above. The fiscal 1999 nine month results
include the $10.2 million gain on the sale of U.S. Lock, a non-recurring charge
of $1.8 million for the relocation of the Consumer Products' warehouse from
Bedford Hts., Ohio to Groveport, Ohio, as well as a $2.45 million charge for
business procurement costs.
Year 2000
- ---------
The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its businesses.
The Company continues to implement plans at certain of its operations to ensure
those systems continue to meet its internal and external requirements. A summary
of the progress made by each of the Company's operations is provided below.
During fiscal 1998, the Company's largest division, Consumer Products,
completed a version upgrade of its J.D. Edwards software, which was Year 2000
compliant. In addition, Consumer Products made certain modifications to it
systems and completed the testing of its information systems in fiscal 1998 to
insure that it is Year 2000 compliant. Consumer Products utilizes IBM AS400
hardware and pentium computers that are also Year 2000 compliant. The specific
cost of upgrading the hardware and software in fiscal 1998 was approximately
$0.8 million; however, the majority of this cost was part of a process of
developing Consumer Products' capabilities to serve its customers and to operate
its business, with Year 2000 compliance being an additional benefit.
The Company's corporate office completed the development of its
accounting package in March 1999, using Consumer Products' hardware and
software. The accounting package was develop by internal personnel with MIS
support at no additional cost, using the standard reporting format developed for
Consumer Products.
In August 1998, WAMI's PC-based Year 2000 software upgrade was provided
by the software manufacturer at no cost and has been installed and tested. As
part of a periodic replacement of hardware, WAMI will replace certain PC's for
approximately $10,000 to upgrade its remaining hardware to be Year 2000
compliant. WAMI's software and hardware has been reviewed by an external
information technology professional for Year 2000 compliance.
Medal Distributing has an IBM System 36, which will require an upgrade
and software to be Year 2000 compliant. The Company expects the modifications to
be completed by June 30, 1999, at a cost of approximately $10,000.
Based on information from hardware and software vendors, the PC-based
information systems at TWI will require minor modifications to be Year 2000
compliant. These modifications are expected to be completed in the summer of
1999 and financed through working capital with minimal cost. The expected
expenditures include
16
<PAGE> 17
approximately $13,000 for hardware, $10,000 for software and $10,000 in labor to
make the Year 2000 modifications. CWI's modifications and timetable are similar
to those of TWI, with the costs expected to be approximately $11,000 for
hardware, $14,000 for software and $2,000 in labor to make the Year 2000
modifications.
The Company has reviewed its non-information technology systems and
believes that the systems are Year 2000 compliant.
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.
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.
Strategic Review of Operations
- ------------------------------
With the completion of the U.S. Lock Sale in January 1999, the Company
will be initiating a strategic review of its operations. The Company expects to
complete this review before the end of fiscal 1999.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
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
completed the U.S. Lock Sale for approximately $33.0 million in January 1999.
The Company believes its operating cash flow, the remaining net proceeds from
the U.S. Lock Sale and its borrowing availability under a working capital
facility will be sufficient in the short term to fund its liquidity and working
capital requirements, capital expenditures and the first few interest payments
on the Deferred Coupon Notes. Although the Company currently believes that it
will be able to pay its near-term debt maturities and cash interest
requirements, it will not be able to continue to make all of the interest and
principal payments under its debt obligations without a significant
appreciation in, and monetization of the value of the Barnett Common Stock
and/or a restructuring of such debt instruments. There can be no assurance
that the Company will be able to effect any of the foregoing transactions.
In June 1996, the Company entered into the Credit Agreement with
BankAmerica Business Credit, Inc. 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 March 31, 1999, the Company had
no borrowings under the revolving credit line of the credit facility and had
approximately $15.3 million available under such facility. At March 31, 1999,
there were $5.0 million of Term Loans outstanding. The Company's Credit
Agreement expires on July 15, 1999 and the first semi-annual cash interest
payment of approximately $6 million under the Deferred Coupon Notes is due on
December 1, 1999. The Company has received proposals from several banks with
respect to a replacement credit facility and believes that a replacement
facility will be arranged prior to July 15, 1999.At March 31, 1999, the Company
had approximately $8.1 million in short term investments to support the working
capital requirements of its operations.
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
17
<PAGE> 18
million, with none outstanding at March 31, 1999. The Term Loans bear interest
at a rate per 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 March 31, 1999.
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, prior to January 1, 1999, U.S. Lock
for cash flow. The sale of U.S. Lock further increases the Company's dependence
on the Consumer Products' business. 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. The
combined operations of Hechinger / Builders Square was 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 nine months of fiscal
1998. 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. The packaged
plumbing supply relationship ended late in the second quarter of fiscal 1999
and, sales to Builders Square were significantly lower during the past several
quarters due to a reduction in the number of Builders Square stores and their
aggressive inventory management program. For the nine months and quarter ended
March 31, 1999, total sales to Hechinger / Builders Square were approximately
$3.5 million and $0.4 million, respectively. 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 three quarters of fiscal
1999. At June 30, 1998, the Company had $52.1 million of available domestic net
operating loss carryforwards for income tax purposes, which expire 2008 through
2013, and $39.6 million of original issue discount, as of March 31, 1999, 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 $0.7 million in capital
expenditures for the remainder of 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 has also completed the process
of converting to this J.D. Edwards package and became Year 2000 compliant in the
fiscal 1999 third quarter. In August 1998, WAMI's PC-based Year 2000 software
upgrade was installed and is Year 2000 compliant, with minor hardware
modifications
18
<PAGE> 19
that will be made within the next several months to completed the Year 2000
compliance. Medal Distributing expects to invest approximately $10,000 in its
hardware and software modifications to be Year 2000 compliant, which should be
completed by June 30, 1999. Based on information from software vendors, the
PC-based information systems at TWI and CWI will require the installation of
minor upgrades to be Year 2000 compliant. These modifications are underway and
are expected to be completed in August 1999 and financed through working capital
with minimal cost.
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.
At March 31, 1999, the Company had working capital of $26.8 million and
a current ratio of 2.3 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $8.8 million in the nine months ended
March 31, 1999 principally due to an increase in other assets and an decrease in
accrued interest and accrued liabilities. The most significant items affecting
net cash used for operations were the $10.2 net gain on the sale of U.S. Lock,
$8.3 million of non-cash interest and $5.0 million in equity earnings of
Barnett. Excluding these items, the net cash used in operations was $2.5
million. Cash flow provided by investments totaled $26.8 million, attributable
to the net cash generated from the U.S. Lock Sale. Cash used for financing
activities amounted to $9.8 million, primarily due to the reduction in net
borrowings under the Company's credit facilities.
19
<PAGE> 20
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
The Registrant filed a report on Form 8-K on January
15, 1999, regarding the sale of U.S. Lock.
The Registrant filed a report on Form 8-K on January
15, 1999, incorporating by reference the March 9,
1999 press release by the Registrant regarding the
suspension of its stock from trading on the NYSE
effective March 22, 1999.
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 1999 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, 1999 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
20
<PAGE> 21
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)
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 8,388
<SECURITIES> 0
<RECEIVABLES> 13,071
<ALLOWANCES> (757)
<INVENTORY> 20,137
<CURRENT-ASSETS> 47,736
<PP&E> 17,034
<DEPRECIATION> (6,707)
<TOTAL-ASSETS> 108,813
<CURRENT-LIABILITIES> 20,961
<BONDS> 125,495
0
0
<COMMON> 119
<OTHER-SE> (47,189)
<TOTAL-LIABILITY-AND-EQUITY> 108,813
<SALES> 79,613
<TOTAL-REVENUES> 79,613
<CGS> 55,617
<TOTAL-COSTS> 23,365
<OTHER-EXPENSES> 4,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,919
<INCOME-PRETAX> (1,318)
<INCOME-TAX> 1,139
<INCOME-CONTINUING> (2,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,457)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
