<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, 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
--- ---
9,914,939 shares of Common Stock, $.01 par value, and 2,142,358 shares of Class
B Common Stock, $.01 par value, were outstanding as of November 5, 1999.
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO FORM 10-Q
------------------
PAGE
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and 1998..................3
Condensed Consolidated Balance Sheets - September 30, 1999
and June 30, 1999...............................................4-5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 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............................12-17
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
SIGNATURES
- ----------
EXHIBIT INDEX
- -------------
2
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PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 22,837 $ 28,229
Cost of sales 15,652 19,141
---------- ----------
Gross profit 7,185 9,088
Selling, general and administrative expenses 6,773 8,247
Non-recurring and procurement charges 150 1,350
---------- ----------
Operating income (loss) 262 (509)
Equity earnings of Barnett 1,604 1,527
Amortization of deferred U.S. Lock gain 51 --
Interest expense, net 4,318 4,310
---------- ----------
Loss before income taxes (2,401) (3,292)
Provision for income taxes 233 186
---------- ----------
Net loss $ (2,634) $ (3,478)
========== ==========
Other comprehensive income (loss):
Foreign currency translation adjustment 121 26
---------- ----------
Comprehensive loss $ (2,513) $ (3,452)
========== ==========
Loss per share (basic and diluted):
Net loss $ (0.22) $ (0.29)
========== ==========
Weighted average shares and equivalents 12,057 12,057
========== ==========
</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, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 81 $ 1,322
Trade receivables, net 14,436 10,686
Other receivables 4,337 4,350
Inventories 17,618 19,052
Prepaid expenses 3,072 2,333
----------- -----------
Total current assets 39,544 37,743
----------- -----------
INVESTMENT IN BARNETT 37,989 36,385
----------- -----------
PROPERTY AND EQUIPMENT:
Land 579 575
Buildings 4,552 4,462
Equipment 13,751 13,369
----------- -----------
18,882 18,406
Less accumulated depreciation and amortization ( 7,603) ( 7,238)
----------- -----------
Property and equipment, net 11,279 11,168
----------- -----------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 7,853 7,920
UNAMORTIZED DEBT ISSUANCE COSTS, NET 2,996 3,052
DEFERRED TAX ASSET 537 540
OTHER ASSETS 4,688 3,402
----------- -----------
$ 104,886 $ 100,210
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
----------- ---------
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 6,754 $ 937
Accounts payable 7,294 7,308
Accrued liabilities 3,699 3,923
Accrued income taxes payable 1,049 1,314
Accrued interest 4,276 2,316
--------- ---------
Total current liabilities 23,072 15,798
---------- ----------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 961 1,057
SENIOR SECURED DEFERRED COUPON NOTES, NET 91,630 91,568
SENIOR NOTES 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK 7,967 8,018
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 9,915 at September 30, 1999
and 9,914 at June 30, 1999 98 98
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,142 at September 30, 1999
and 2,143 at June 30, 1999 21 21
Paid-in capital 21,732 21,732
Retained deficit ( 75,542) ( 72,908)
--------- ---------
( 53,691) ( 51,057)
Cumulative currency translation adjustment (908) ( 1,029)
------- ----------
Total stockholders' equity (deficit) ( 54,599) ( 52,086)
--------- ---------
$ 104,886 $ 100,210
=========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,634) $ (3,478)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-recurring charges -- 1,350
Non-cash interest 62 2,675
Amortization of deferred U.S. Lock gain (51) --
Equity earnings of Barnett (1,604) (1,527)
Depreciation and amortization 616 644
Deferred income taxes 3 --
Changes in assets and liabilities:
Trade receivables, net (3,750) (1,039)
Inventories 1,434 2,063
Other assets (2,012) (844)
Accounts payable (14) 1,066
Accrued liabilities (224) (1,080)
Accrued interest 1,960 (971)
Accrued taxes (265) (23)
Other, net 121 26
---------- ----------
Net Cash Used in Operating Activities (6,358) (1,138)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (476) (1,322)
---------- ----------
Net Cash Used in Investing Activities (476) (1,322)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 20,109 23,705
Payments under credit agreements (14,292) (21,012)
Debt issuance costs (128) --
Repayments of long-term debt, net (96) (42)
---------- ----------
Net Cash Provided by
Financing Activities 5,593 2,651
---------- ----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (1,241) 191
BALANCE, BEGINNING OF PERIOD 1,322 72
---------- ----------
BALANCE, END OF PERIOD $ 81 $ 263
============ ==========
</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, 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"). All significant intercompany transactions and
balances are eliminated in consolidation. As of September 30, 1999, the Company
owned 44.3% of the common stock of Barnett Inc. (the "Barnett Common Stock"), a
direct marketer and distributor of plumbing, electrical, hardware, and security
hardware products, 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, 1999 and 1998, the condensed balance sheet as of
September 30, 1999 and the condensed statements of cash flows for the three
months ended September 30, 1999 and 1998 have been prepared by the Company
without audit, while the condensed balance sheet as of June 30, 1999 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, 1999 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 or
other interim periods. 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, 1999, filed with the Securities and Exchange
Commission.
The Company's 12 3/4% Senior Secured Deferred Coupon Notes due 2004
(the "Deferred Coupon Notes") accreted interest until June 1, 1999. Thereafter,
interest on the Deferred Coupon Notes began to accrue, with the first
semi-annual cash payment of approximately $6 million due on December 1, 1999. In
addition, the Company has a significant amount of debt which, over the past
several years, the Company has endeavored to reduce through the monetization of
assets and by improving the efficiencies of its continuing businesses. As a
result, the Company has undertaken various initiatives to raise cash, improve
its cash flow and reduce its debt obligations and / or improve its financial
flexibility during that period. The Company believes that operating cash flow,
together with borrowings under its working capital credit facilities, and the
monetization, from time to time, of a portion of the Barnett Common Stock or
other selected assets, will be sufficient for at least the next 12 to 15 months
to fund its working capital requirements. However, ultimately, the Company 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 shares of common stock of Barnett owned by the Company and/or a
restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the
repurchase of its shares owned by the Company. The Company continues to have
discussions with Barnett's management regarding a share repurchase and continues
to evaluate opportunities to monetize all or a portion of its investment in
Barnett, including as part of a comprehensive plan to eliminate a significant
portion of its debt. The Company also continues discussions with certain of its
bondholders regarding potential debt reduction / restructuring transactions. At
this time, the Company does not have an agreement to monetize its investment in
Barnett or reduce its high level of debt. However, the Company continues to
pursue a debt restructuring and / or debt elimination plan. Accordingly, the
accompanying condensed 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
--------
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The Company's common stock is quoted on the Over-The-Counter Bulletin
Board ("OTCBB") under the symbol "WAXX." The Company is a supplier of specialty
plumbing, hardware and other products to the repair and remodeling market in the
United States. The Company distributes its products to approximately 1,400
customers, including a wide variety of large national and regional retailers,
independent retail customers and wholesalers.
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 Medal
Distributing, a supplier of hardware products and, included the operations of
U.S. Lock, a distributor of a full line of security hardware products, prior to
its January 1, 1999 sale to Barnett. TWI includes the Company's foreign
operations, including manufacturing, packaging and sourcing operations in China
and Taiwan, and an operation in Mexico that threads galvanized, black, brass,
and chrome pipe and imports malleable fittings. Consumer Products, WOC and
Barnett utilize the Company's and non-affiliated foreign suppliers.
At September 30, 1999, the Company owned 44.3% of Barnett, a direct
marketer and distributor of an extensive line of plumbing, electrical, hardware,
and security hardware products to approximately 73,400 active customers
throughout the United States. Barnett offers approximately 21,000 name brand and
private label products through its industry-recognized Barnett(R) and U.S.
Lock(R) catalogs and telesales operations. Barnett markets its products through
six distinct, comprehensive catalogs that target professional contractors,
independent hardware stores, maintenance managers, security hardware installers,
liquid propane gas dealers, and locksmiths. In January 1999, the Company
completed the sale of U.S. Lock to Barnett. Barnett's net sales for fiscal 1999
were $241.4 million. The Company recorded equity earnings from this investment
of $1.6 million and $1.5 million for the quarters ended September 30, 1999 and
1998, respectively. 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 SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the asset
and liability method, where deferred tax assets and liabilities are recognized
for the future tax consequences attributable to net operating loss carryforwards
and to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
At June 30, 1999, the Company has $48.0 million of available domestic
net operating loss carryforwards for income tax purposes, which expire 2009
through 2013. The Company also has alternative minimum tax carryforwards of
approximately $1.0 million at June 30, 1999, which are available to reduce
future regular income taxes over an indefinite period.
At September 30, 1999, the Company's net deferred tax assets were
substantially offset by a valuation allowance, except for the deferred tax
asset related to state taxes currently payable on the deferred gain on the sale
of U.S. Lock. SFAS No. 109 requires the Company to assess the realizability of
its deferred tax assets based on whether it is more likely than not that the
Company will realize the benefit from these deferred tax assets in the future.
If the Company determines that the more likely than not criteria is not met,
SFAS No. 109 requires the deferred tax assets be reduced by a valuation
allowance. In assessing the realizability of its net deferred tax asset as of
September 30, 1999, the Company considered various factors such as (i) its
historical and projected taxable losses and its inability to utilize its net
operating loss carryforwards, which comprise a significant portion of the net
deferred tax asset; (ii) the tax deductibility of the accreted interest on the
Deferred Coupon Notes will not be realized until such interest is paid; (iii)
its current inability to assess the taxable income that may be recognized upon
the monetization of the Company's continued ownership of 44.3% of the Barnett
Common Stock or other operating assets, (iv) the Company has not yet been able
to complete a financial restructuring plan that may ultimately result in the
realization of a portion or all of the Company's net deferred tax asset and
thus, the ultimate impact cannot be objectively anticipated or verified.
Based on the Company's consideration of the above factors, the Company
believed it was appropriate to maintain a valuation allowance on its net
deferred tax asset, except for on the deferred tax asset related to state taxes
currently payable on the deferred gain on the sale of U.S. Lock. As a result, as
of September 30, 1999, the Company
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<PAGE> 9
has substantially offset its net deferred tax asset with a valuation allowance.
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 Company's tax provisions for the three months ended September 30,
1999 and 1998 represent the provision for various state and foreign taxes.
NOTE 4 - BARNETT
-------
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common
Stock as of September 30, 1999. This investment is accounted for under the
equity method of accounting.
The following table presents unaudited summary financial data for
Barnett at September 30, 1999 and June 30, 1999 and for the three months ended
September 30, 1999 and 1998 (in thousands of dollars):
Statement of income data: 1999 1998
----------- -----------
Net sales $ 67,400 $ 52,391
Gross profit 21,734 17,176
Net income 3,618 3,441
Balance sheet data:
Current assets $ 100,220 $ 94,941
Non-current assets 55,073 54,245
Current liabilities 26,965 24,615
Non-current liabilities 33,000 33,000
NOTE 5 - NON-RECURRING AND PROCUREMENT CHARGES
-------------------------------------
In the first quarter of fiscal 1999, 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 were
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 has enabled Consumer Products
to provide more sophisticated distribution services to its customers and has
helped it remain competitive through annual cost savings.
Procurement costs represent the amount paid by the Company in
connection with a customer's agreement to purchase products from the Company for
a specific period. The amount includes the consideration paid to the new or
existing customer (i) for the right to supply such customer for a specified
period, (ii) to assist such customer in reorganizing its store aisles and
displays in order to accommodate the Company's products and (iii) to purchase
competitor's merchandise that the customer has on hand when it changes
suppliers, less the salvage value received by the Company. The Company expenses
these costs in the fiscal year incurred. Procurement costs for (i) above totaled
$150,000 in the fiscal 2000 first quarter. The Company did not incur this type
of cost in the fiscal 1999 first quarter. The Company did not incur procurement
costs related to (ii) above in the fiscal 2000 and 1999 first quarters. These
types of procurement costs are included as procurement charges in the
accompanying consolidated statements of operations. Procurement costs for (iii)
above totaled $0.3 million and $0.5 million the first quarter of fiscal 2000 and
1999, respectively, and are included as a contra-sales amount in net sales in
the accompanying consolidated statements of operations.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1999 and 1998
included interest of $2.1 million and $2.4 million, respectively. The Company
made no federal income tax payments in the first quarter of fiscal 2000 or
fiscal 1999. However, the Company paid $0.4 in state taxes in the first quarter
of fiscal 2000.
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NOTE 7 - 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. 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, 1999 and 1998.
The number of common shares used to calculate basic and diluted
earnings per share are as follows (in thousands):
Period ended September 30, 1999 1998
------ ------
Basic 12,057 12,057
Diluted 12,057 12,057
A reconciliation of basic shares to diluted shares is as follows:
Period ended September 30, 1999 1998
------ ------
Basic 12,057 12,057
Dilutive effect of:
Stock options -- --
Warrants -- --
------ ------
Diluted 12,057 12,057
NOTE 8 - 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 other wholly-owned
operations, which primarily sell to retailers, and to Barnett, a distributor,
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 not significant. Until the January 1, 1999 sale of U.S. Lock, 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>
Corporate
Retail Non-Retail and Other Elimination Total
------ ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 2000 three months $ 17,350 $ 8,579 -- $ $ 22,837
Fiscal 1999 three months 18,487 13,184 (3,092) 28,229
--
(3,442)
Operating income (loss):
Fiscal 2000 three months $ 927 $ 220 $ (885) -- $ 262
Fiscal 1999 three months (1,002) 1,419 (926) -- (509)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Identifiable assets:
September 30, 1999 $ 44,705 $ 17,532 $ 42,649 -- $104,886
June 30, 1999 45,017 15,866 39,327 -- 100,210
</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. Net sales for those foreign
operations amounted to $11.7 million and $9.0 million for the first quarter of
fiscal 2000 and 1999, respectively. Of these amounts, approximately $3.1 million
and $3.4 million were intercompany sales for the first quarter of fiscal 2000
and 1999, respectively. Identifiable assets for the foreign operations were
$20.0 million and $18.7 million at September 30, 1999 and June 30, 1999,
respectively.
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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 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, 1999
-------------------------------------------------------------------
AND 1998
--------
Net Sales
- ---------
Net sales for the fiscal 2000 first quarter ended September 30, 1999
totaled $22.8 million, as compared to $28.2 million for the fiscal 1999 first
quarter. Excluding the results of U.S. Lock, which was sold effective January 1,
1999, comparable net sales for the remaining businesses increased 5.3 percent
from the recasted net sales of $21.7 million for the fiscal 1999 first quarter.
As we have discussed previously, net sales originating from our Asian operations
continue to increase due to the 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 $17.4 million for the first quarter
ended September 30, 1999, a decrease from the $18.5 million for the same period
last year. Sales to Hechinger / Builders Square decreased to $0.1 million in the
fiscal 2000 first quarter, as compared to $1.9 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 also began shipping
to Target, a new customer, in September 1999. 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 this
fiscal year. A portion of this additional business, which would include
showerheads, faucets, floor care products, and packaged plumbing items, will be
shipped under the direct import program from the Company's Asian facilities.
Non-retail net sales amounted to $8.6 million for the fiscal 2000 first
quarter, a decrease from $13.2 million for the same period in fiscal 1999.
Excluding the net sales of U.S. Lock, which amount to $6.5 million in the fiscal
1999 first quarter, non-retail net sales would have increased by $1.9 million.
This increase is primarily due to an increase in net sales to Barnett.
Gross Profit
- ------------
Gross profit for the fiscal 2000 first quarter was $7.2 million, with a
gross profit margin of 31.5 percent, as compared to gross profit of $9.1 million
and a gross profit margin of 32.2 percent for the three months ended
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<PAGE> 13
September 30, 1998. Excluding U.S. Lock from the prior year results, gross
profit increased by $0.3 million from the recasted fiscal 1999 first quarter
gross profit of $6.9 million, while the gross profit margin would have decreased
from 32.0 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.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
decreased from $8.2 million for the quarter ended September 30, 1999 to $6.8
million for the quarter ended September 30, 1999. Included in the prior year's
results are $1.3 million in SG&A expenses related to U.S. Lock. Excluding the
SG&A expenses related to U.S. Lock, as a percentage of net sales, SG&A expenses
decreased from 31.9% for the fiscal 1999 first quarter to 29.7% for the fiscal
2000 first 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 lower SG&A expenses.
Non-Recurring and Procurement Charges
- -------------------------------------
In the fiscal 1999 first quarter, the Company recorded $1.35 million in
non-recurring charges related to costs involved in the relocation of the
Consumer Products' Bedford Heights warehouse to Groveport, Ohio. In the fiscal
2000 first quarter, the Company recorded procurement costs of $150,000 related
to customer agreements to purchase products from the Company for a period of
time.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its ownership interest in
Barnett of $1.6 million for the quarter ended September 30, 1999, as compared to
$1.5 million for the same quarter in fiscal 1999.
Amortization of Deferred 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 was reported as a deferred gain in the Company's consolidated balance
sheet due to the Company's continued ownership of 44.3% of Barnett, the acquirer
of U.S. Lock. The Company is recognizing 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. In the fiscal 2000 first
quarter, the Company recognized $51,000 of this deferred gain.
Interest Expense
- ----------------
For the quarter ended September 30, 1999, net interest expense totaled
$4.3 million, approximately the same as the first quarter in fiscal 1999.
Average borrowings for the current year's quarter amounted to $130.2 million,
with a weighted average interest rate of 12.6%, as compared to $136.7 million in
the same quarter last year, with a weighted average interest rate of 11.9%.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.2 million for the first
quarter of fiscal 2000, as compared to $0.2 million for the same quarter last
year. The provision for the current quarter primarily represents various state
and foreign taxes of the Company's wholly-owned operations. For the fiscal 2000
and 1999 first quarters, the difference between the effective and statutory tax
rates is primarily due to domestic operating losses not benefited and goodwill
amortization.
13
<PAGE> 14
Net Loss
- --------
The Company's net loss for the quarter ended September 30, 1999
amounted to $2.6 million, or $0.22 per basic and diluted share, as compared to
the loss of $3.5 million, or $0.29 per basic and diluted share, in the fiscal
1999 first quarter. The first quarter of fiscal 1999 was affected by the $1.35
million non-recurring charge associated with the relocation of a warehouse.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Over the past several years, the Company has endeavored to reduce its
high level of debt through the monetization of assets and to improve the
efficiencies of its continuing businesses. As a result, the Company has
undertaken various initiatives to raise cash, improve its cash flow and reduce
its debt obligations and / or improve its financial flexibility during that
period. The Company believes that operating cash flow, together with borrowings
under its working capital credit facilities, and the monetization, from time to
time, of a portion of the Barnett Common Stock, will be sufficient for at least
the next 12 to 15 months to fund its working capital requirements. However,
ultimately, the Company 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 shares of common stock of
Barnett owned by the Company and/or a restructuring of such debt instruments.
The Company continues its efforts to complete a financial restructuring plan,
which includes the sale of its investment in Barnett and a restructuring and /
or elimination of its debt. Pending the completion of a comprehensive financial
restructuring, the Company may also pursue the sale, from time to time, of a
portion of its shares of Barnett or other selected assets to provide it with
additional liquidity and financial flexibility.
As stated previously, the Company's business strategy includes the
reduction of its interest expense and its leverage by the sale of selected
assets and/or the refinancing or reduction of its remaining indebtedness
whenever possible. To that end, the Company completed the sale of U.S. Lock for
approximately $33.0 million in January 1999. The Company believes its operating
cash flow, its borrowing availability under the Loan and Security Agreement and
proceeds from sales of selected assets will be sufficient to fund its current
liquidity and working capital requirements, capital expenditures and the first
few semi-annual interest payments on the Deferred Coupon Notes. The first
semi-annual cash interest payment of approximately $6 million under the Deferred
Coupon Notes is due on December 1, 1999. Without the completion of a financial
restructuring plan as described above, the Company currently believes that,
while 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.
In August 1999, Barnett announced that it was considering the
repurchase of its shares owned by the Company. The Company continues to have
discussions with Barnett's management regarding a share repurchase and continues
to evaluate other opportunities to monetize all or a portion of its investment
in Barnett, including as part of a comprehensive plan to eliminate a significant
portion of its debt. The Company also continues to have discussions with certain
of its bondholders regarding potential debt reduction / restructuring
transactions. At this time, the Company does not have an agreement to monetize
its investment in Barnett or reduce its high level of debt. However, the Company
continues to pursue a debt restructuring and / or debt elimination plan. As
discussed above, the Company may also pursue the sale, from time to time, of a
portion of its shares of Barnett or other selected assets to provide it with
additional liquidity and financial flexibility. There can be no assurance that
the Company will be able to consummate such financial restructuring or any of
the other aforementioned transactions.
In June 1999, the Company entered into the Loan and Security Agreement
with Congress Financial Corporation to replace the Credit Agreement with
BankAmerica Business Credit, Inc. that was to expire on July 15, 1999. The Loan
and Security Agreement is between Consumer Products, WOC, WAMI and WAMI Sales,
as borrowers (the "Borrowers"), with the Company, Waxman USA Inc. ("Waxman USA")
and TWI as guarantors. The Loan and Security Agreement provides for, among other
things, revolving credit advances of up to $20.0 million. As of September 30,
1999, the Company had $5.3 million in borrowings under the revolving credit line
of the facility and had approximately $10.9 million available under such
facility. The Loan and Security Agreement expires on September 1, 2001, but may
be extended under certain conditions.
The Loan and Security Agreement provides for revolving credit advances
of (a) up to 85.0% of the amount
14
<PAGE> 15
of eligible accounts receivable, (b) up to the lesser of (i) $10.0 million or
(ii) 60% of the amount of eligible raw and finished goods inventory and (c) up
to the lesser of (i) $5.0 million or (ii) 70% of the fair market value of
500,000 shares of Barnett Inc. common stock. Revolving credit advances bear
interest at a rate equal to (a) First Union National Bank's prime rate plus 0.5%
or (b) LIBOR plus 2.50%. The Loan and Security Agreement includes a letter of
credit subfacility of $10.0 million, with none outstanding at September 30,
1999. Borrowings under the Loan and Security Agreement are secured by the
accounts receivable, inventories, certain general intangibles, and unencumbered
fixed assets of Waxman Industries, Inc., Consumer Products, TWI, International
Inc. and WOC, and a pledge of 65% of the stock of various foreign subsidiaries.
In addition, up to $5.0 million of indebtedness under the Loan and Security
Agreement is 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 Loan and Security 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 Loan and Security
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 Notes and the Company's Deferred Coupon
Notes, and contains customary negative, affirmative and financial covenants and
conditions. The Company was in compliance with all loan covenants at September
30, 1999. The Loan and Security Agreement also contains a material adverse
condition clause which allows Congress Financial Corporation to terminate the
Agreement under certain circumstances.
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 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 20.8% of net sales for Consumer Products in fiscal 1999. 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 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, beginning in January 1999. The combined
operations of Hechinger / Builders Square, accounted for approximately $3.7
million, or 7.8% and 3.8% of Consumer Products and the Company's net sales in
fiscal 1999, respectively. Hechinger / Builders Square filed for Chapter 11
bankruptcy protection in June 1999, and for Chapter 7 liquidation in September
1999. Consumer Products' accounts receivable from Hechinger / Builders Square
was $0.3 million at the time of the bankruptcy filing. 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 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 $0.4 million in income taxes in the first quarter of
fiscal 2000. At June 30, 1999, the Company had $48.0 million of available
domestic net operating loss carryforwards for income tax purposes, which expire
2009 through 2013, and $41.3 million of original issue discount, as of June 30,
1999, that has been expensed on the Company's financial statements and will
become deductible for tax purposes when the interest on the Deferred Coupon
Notes is paid. In the event the Company completes a financial restructuring,
which includes the sale of its investment in Barnett and, recognizes a gain from
that sale, the Company will be able to use the net operating loss carryforwards
to offset income taxes that will be payable.
The Company has total future lease commitments for various facilities
and other leases totaling $3.0 million, of which approximately $1.3 million is
due in fiscal 2000 and $0.3 million was paid in the first quarter of fiscal
2000. The Company does not have any other commitments to make substantial
capital expenditures. The fiscal 2000 capital expenditure plan includes
expenditures to improve the efficiencies of the Company's operations, to provide
new data technology and certain expansion plans for the Company's foreign
operations. Except as noted
15
<PAGE> 16
below, all operations have completed their Year 2000 compliance. Year 2000
modifications at TWI are nearly completed and are undergoing testing and final
modifications will continue for the next 30 to 60 days. The expenditures
included 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 total approximately $11,000
for hardware, $14,000 for software and $2,000 in labor to make the Year 2000
modifications.
At September 30, 1999, the Company had working capital of $16.5 million
and a current ratio of 1.7 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $6.4 million in the fiscal 2000 first
quarter principally due to an increase in trade receivables and other assets,
offset by a decrease in inventories and an increase in accrued interest. Also
affecting net cash used for operations was $1.6 million in equity earnings of
Barnett. Excluding this item, the net cash used by operations was $4.8 million.
Cash flow used in investments totaled $0.5 million, attributable to capital
expenditures. Cash flow provided by financing activities, and net borrowings
under the Company's credit facilities, totaled approximately $5.6 million.
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, NT servers and personal 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 has replaced certain PC's for
approximately $10,000 to upgrade its remaining hardware to be Year 2000
compliant. WAMI's software and hardware have been reviewed by an external
information technology professional for Year 2000 compliance.
Medal Distributing has an IBM System 36, which was upgraded, with
software modifications completed to be Year 2000 compliant. The modifications
were completed in July 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. The majority of these modifications were completed as of September
30, 1999 and financed through working capital with minimal cost. The remaining
modifications to the information technology systems will be completed in the
next quarter. The expenditures included 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 total 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.
16
<PAGE> 17
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 and develop alternate suppliers as
required. Although there is uncertainty of the ultimate impact that the Year
2000 may have on our customers and suppliers, the Company believes that is has
taken prudent business measures with its internal systems and continues to
monitor the progress made by its customers and vendors to minimize the affect,
if any, that Year 2000 may have on its business.
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.
17
<PAGE> 18
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, 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: NOVEMBER 8, 1999 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
18
<PAGE> 19
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)
19
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<NAME> WAXMAN INDUSTRIES, INC.
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 81
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<RECEIVABLES> 15,440
<ALLOWANCES> (1,004)
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<CURRENT-ASSETS> 39,544
<PP&E> 18,882
<DEPRECIATION> (7,603)
<TOTAL-ASSETS> 104,886
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0
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