<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, 2000
--------------
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 May 1, 2000.
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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 -
Nine and Three Months Ended March 31, 2000
and 1999 ................................................ 3
Condensed Consolidated Balance Sheets - March 31, 2000
and June 30, 1999........................................ 4 -5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 2000 and 1999................ 6
Notes to Condensed Consolidated Financial Statements..... 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 14 - 21
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information............................................ 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
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 NINE AND THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Three Months
----------- ------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 62,361 $ 79,613 $ 19,822 $ 22,186
Cost of sales 43,110 55,617 13,647 15,939
-------- -------- -------- --------
Gross profit 19,251 23,996 6,175 6,247
Selling, general and administrative expenses 20,296 23,365 6,740 6,675
Non-recurring and procurement charges 1,950 4,250 500 2,900
-------- -------- -------- --------
Operating loss (2,995) (3,619) (1,065) (3,328)
Equity earnings of Barnett 5,333 5,024 1,729 1,693
(Loss) gain on sale of operations, net (1,966) 10,196 (1,966) 10,196
Amortization of deferred U.S. Lock gain 152 -- 51 --
Interest expense, net 13,446 12,919 4,672 4,187
-------- -------- -------- --------
(Loss) income before income taxes (12,922) (1,318) (5,923) 4,374
Provision for income taxes 395 1,139 68 899
-------- -------- -------- --------
Net (loss) income $(13,317) $ (2,457) $ (5,991) $ 3,475
======== ======== ======== ========
Other comprehensive income:
Foreign currency translation adjustment 434 130 229 (288)
-------- -------- -------- --------
Comprehensive (loss) income $(12,883) $ (2,327) $ (5,762) $ 3,187
======== ======== ======== ========
(Loss) income per share (basic and diluted):
Net (loss) income $ (1.10) $ (0.20) $ (0.49) $ 0.29
======== ======== ======== ========
Weighted average shares and equivalents 12,057 12,057 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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<TABLE>
<CAPTION>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 2000 AND JUNE 30, 1999
(IN THOUSANDS)
ASSETS
March 31, June 30,
2000 1999
(Unaudited) (Audited)
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 363 $ 1,322
Trade receivables, net 12,970 10,686
Other receivables 5,020 4,350
Inventories 18,844 19,052
Prepaid expenses 3,078 2,333
--------- ---------
Total current assets 40,275 37,743
--------- ---------
INVESTMENT IN BARNETT 41,718 36,385
--------- ---------
PROPERTY AND EQUIPMENT:
Land 589 575
Buildings 4,651 4,462
Equipment 11,455 13,369
--------- ---------
16,695 18,406
Less accumulated depreciation and amortization (7,150) (7,238)
--------- ---------
Property and equipment, net 9,545 11,168
--------- ---------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 6,751 7,920
UNAMORTIZED DEBT ISSUANCE COSTS, NET 2,619 3,052
DEFERRED TAX ASSET 530 540
OTHER ASSETS 5,784 3,402
--------- ---------
$ 107,222 $ 100,210
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
MARCH 31, 2000 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2000 1999
(Unaudited) (Audited)
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 20,566 $ 937
Accounts payable 7,393 7,308
Accrued liabilities 3,147 3,923
Accrued income taxes payable 565 1,314
Accrued interest 4,276 2,316
--------- ---------
Total current liabilities 35,947 15,798
--------- ---------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 768 1,057
SENIOR SECURED DEFERRED COUPON NOTES, NET 91,755 91,568
SENIOR NOTES 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK 7,866 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 March 31, 2000
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 March 31, 2000
and 2,143 at June 30, 1999 21 21
Paid-in capital 21,732 21,732
Retained deficit (86,225) (72,908)
--------- ---------
(64,374) (51,057)
Accumulated other comprehensive income (595) (1,029)
--------- ---------
Total stockholders' equity (deficit) (64,969) (52,086)
--------- ---------
$ 107,222 $ 100,210
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,317) $ (2,457)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss (gain) on sale of operations, net 1,966 (10,196)
Non-cash interest 187 8,272
Amortization of deferred U.S. Lock gain (152) --
Equity earnings of Barnett (5,333) (5,024)
Depreciation and amortization 1,851 2,093
Deferred income taxes 10 --
Changes in assets and liabilities:
Trade receivables, net (2,374) 711
Inventories (708) (1,033)
Other assets (2,257) (2,641)
Accounts payable 85 1,576
Accrued liabilities (810) (307)
Accrued interest 1,960 (969)
Accrued taxes (749) 796
Net change in operating assets and liabilities of operations sold 185 268
Other, net 313 130
-------- --------
Net Cash Used in Operating Activities (19,143) (8,781)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of business -- 28,249
Capital expenditures, net (1,179) (1,377)
-------- --------
Net Cash (Used in) Provided by Investing Activities (1,179) 26,872
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 60,369 49,290
Payments under credit agreements (40,740) (58,804)
Debt issuance costs (137) --
Issuance of common stock -- 1
Repayments of long-term debt, net (129) (262)
-------- --------
Net Cash Provided by (Used in)
Financing Activities 19,363 (9,775)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (959) 8,316
BALANCE, BEGINNING OF PERIOD 1,322 72
-------- --------
BALANCE, END OF PERIOD $ 363 $ 8,388
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 7
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
MARCH 31, 2000
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 March 31, 2000, 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 nine and
three months ended March 31, 2000 and 1999, the condensed balance sheet as of
March 31, 2000 and the condensed statements of cash flows for the nine months
ended March 31, 2000 and 1999 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 March 31, 2000 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States 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 and the Form 8-K filed on December 14, 1999 in
connection with the contemplated financial reorganization plan, with the
Securities and Exchange Commission.
The Company has endeavored over the past several years to reduce its
significant amount of debt 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. In the spring of 1999, the Company began having discussions with some of
its bondholders regarding its high level of debt and cash flow issues.
On December 13, 1999, the Company and an ad hoc committee (the
"Committee") representing the holders of approximately 87 % of the $92.8 million
outstanding principal amount of the 12 3/4% Senior Secured Deferred Coupon Notes
due 2004 (the "Deferred Coupon Notes") and approximately 65% of the 11 1/8%
Senior Notes due 2001 (the "Senior Notes") of Waxman USA Inc. entered into an
agreement (the "Debt Reduction Agreement") that provides, subject to certain
conditions (including Bankruptcy Court approval), for the full satisfaction of
the Deferred Coupon Notes and the Senior Notes as part of a comprehensive
financial restructuring of the Company.
The key provisions of the financial restructuring plan are:
- The Debt Reduction Agreement contemplates that Barnett will
engage an investment banker to conduct an orderly process to sell
itself, or otherwise maximize shareholder value, in connection
with such transaction. To that end, on December 13, 1999, Barnett
issued a press release announcing the engagement of Deutsche Bank
Alex. Brown to pursue initiatives to maximize shareholder value.
- If Barnett's efforts to maximize shareholder value result in a
sale, the Company would sell all of the 7,186,530 shares of
Barnett common stock owned by Waxman USA Inc., a direct,
wholly-owned subsidiary of the Company.
- The Company would apply the proceeds of any sale of the Barnett
Common Stock owned by Waxman USA, net of applicable taxes, in the
following order:
- approximately $35.9 million, plus accrued interest, to repay
in full the Senior Notes
- approximately $10 million to reduce borrowings under its
working capital credit facility, which were used to fund
approximately $6 million in interest paid to the Deferred
Coupon
7
<PAGE> 8
Note holders on December 1, 1999, $2 million in interest
paid to the Senior Note holders on March 1, 2000, and up to
$2 million in other costs associated with the financial
restructuring transaction, and
- the remaining net proceeds to a trust account to be used for
the full satisfaction of the Deferred Coupon Notes.
The Debt Reduction Agreement contemplates the completion of the sale of
the Barnett Common Stock as the first step in the financial restructuring plan.
Following the anticipated sale of the Company's interest in Barnett, the Company
and the Committee would file a jointly sponsored, prepackaged plan of
reorganization with the United States Bankruptcy Court (the "Joint Plan") to
effectuate the terms of the Debt Reduction Agreement. Under the Joint Plan, the
holders of the Deferred Coupon Notes will be the only impaired class of
creditors; none of the Company's operating subsidiaries or operating divisions
will be included in the filing and they will continue to pay their trade
creditors, employees and other liabilities under normal conditions.
The Company is discussing several options to fund the interest payment
of $6.0 million due on June 1, 2000 to the Deferred Coupon Note Holders and,
based on discussions with the Committee, believes that it will be able to amend
the Debt Reduction Agreement to include the resolution of this payment. Various
solutions are being discussed, including the sale or collateralization of a
portion of the Barnett Common Stock owned by the Company to fund all or a
portion of this payment. Excluding the cash required for this interest payment,
the Company believes that operating cash flow, together with borrowings under
its working capital credit facilities, will be sufficient to fund its working
capital requirements until the expected completion of the above mentioned
financial reorganization. Based on discussions with the Company's current
working capital lender, Congress Financial Corporation, the Company believes
that debtor in possession financing will not be necessary, and Congress will
continue to provide financing during and after the financial reorganization. In
the event the financial reorganization is not consummated, 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 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 furtherance of its effort to enhance its liquidity position, the
Company sold substantially all of the assets and certain liabilities of Western
American Manufacturing Inc. effective March 31, 2000 for $1.8 million, excluding
trade receivables, trade payables and certain other obligations, which were
retained by the Company.
The Company believes that the completion of the transactions set forth
in the Debt Reduction Agreement will result in a stronger company, with an
amount of debt that can be supported by the operating cash flow of the Company's
subsidiaries. In addition to the reduced debt levels of the Company, the
Company's balance sheet will be strengthened significantly as a result of the
anticipated net after tax gain on the sale of Barnett Common Stock, the discount
on the redemption of the Deferred Coupon Notes, net of the write off of the
unamortized debt issuance costs, the realization for accounting purposes of the
deferred gain on the sale of U.S. Lock, and the utilization of the Company's net
operating loss carryforwards. Furthermore, the elimination of the indebtedness
from the Senior Notes and Deferred Coupon Notes will reduce the Company's annual
interest expense by approximately $16 million.
Although the Company has entered into the Debt Reduction Agreement, at
this time the Company does not have an agreement that would monetize its
investment in Barnett. The Company believes that an agreement will be completed
during the fiscal 2000 fourth quarter. Accordingly, the accompanying condensed
consolidated financial statements have been prepared assuming the Company will
continue as a going concern and, as such, adjustments to the financial
statements, if any, that may be required for presentation on another basis have
not been considered.
NOTE 2 - BUSINESS
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
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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 WAMI Sales, a domestic U.S. operation that distributes
galvanized, black, chrome and brass pipe nipples and fittings to industrial and
wholesale distributors. Until the sale of Western American Manufacturing Inc.
("WAMI") effective March 31, 2000, TWI also included a manufacturing operation
in Mexico that threaded galvanized, black, brass, and chrome pipe and imported
malleable fittings (see Note 3). Consumer Products, WOC and Barnett utilize the
Company's and non-affiliated foreign suppliers.
At March 31, 2000, 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 73,000 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 $5.3 million and $1.7 million and $5.0 million and $1.7 million for the nine
months and quarters ended March 31, 2000 and 1999, respectively. The Barnett
Common Stock trades on the Nasdaq National Market under the symbol "BNTT". See
Note 1 and Management's Discussion and Analysis - Recent Developments section in
this Form 10-Q for a discussion of the Company's intention to sell its interest
in Barnett as part of a comprehensive financial restructuring.
NOTE 3 - SALE OF DIVISION
WESTERN AMERICAN MANUFACTURING INC.- FISCAL 2000:
In April 2000, the Company completed an agreement to sell substantially
all of the assets and certain liabilities of Western American Manufacturing
Inc., a division of TWI, to a Mexican company, Niples Del Norte, S.A. de C.V.
for approximately $1.8 million in cash (the "WAMI Sale"). The WAMI Sale was
effective March 31, 2000, resulting in a net pretax loss of $2.0 million in the
quarter ended March 31, 2000, which includes an approximate $1.0 million
write-off of goodwill.
The Company consolidated WAMI's financial information in its results
through March 31, 2000. The impact of not consolidating WAMI's results would
have reduced the consolidated net sales and improved the 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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $2,923 $2,536 $ 776 $ 656
Net income 428 826 357 667
Basic and diluted
income per share 0.04 0.07 0.03 0.06
</TABLE>
U.S. LOCK - FISCAL 1999:
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"). The U.S. Lock Sale was effective
January 1, 1999, resulting in an estimated net pretax gain of $18.3 million, of
which approximately $8.1 million was originally reported as a deferred gain for
financial statement purposes due to the Company's continued ownership of 44.3%
of Barnett, the
9
<PAGE> 10
acquirer of U.S. Lock. The remaining gain of $10.2 million was 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 utilized 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:
Nine months Three months
March 31, March 31,
1999 1999
---- ----
Net sales $13,361 --
Net loss 1,000 --
Basic and diluted loss
per share 0.08 --
NOTE 4 - 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 had $46.8 million of available domestic
net operating loss carryforwards for income tax purposes, which expire 2009
through 2013. The Company also had alternative minimum tax carryforwards of
approximately $0.9 million at June 30, 1999, which are available to reduce
future regular income taxes over an indefinite period.
At March 31, 2000, the Company's net deferred tax assets were
substantially offset by a valuation allowance, except for the deferred tax asset
related to state taxes paid on the deferred gain on the U.S. Lock Sale. 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 March 31, 2000, the Company
considered various factors including (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 the deferred tax asset related to state taxes
paid on the deferred gain on the sale of U.S. Lock. As a result, as of March 31,
2000, the Company 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.
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The Company's tax provisions for the nine and three months ended March
31, 2000 represent the provision for various state and foreign taxes. The
Company's tax provisions for the nine months and three months ended March 31,
1999 represent the provision for the alternative minimum tax due on the U.S.
Lock Sale and for various state and foreign taxes.
NOTE 5 - BARNETT
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common
Stock as of March 31, 2000. This investment is accounted for under the equity
method of accounting. See Note 1 and Management's Discussion and Analysis -
Recent Developments section in this Form 10-Q for a discussion of the Company's
agreement to sell its interest in Barnett as part of a comprehensive financial
restructuring plan.
The following table presents unaudited summary financial data for
Barnett at March 31, 2000 and June 30, 1999 and for the nine and three months
ended March 31, 2000 and 1999 (in thousands of dollars):
Statement of income data: 2000 1999
----------- -----------
Nine Months:
Net sales $211,820 $174,390
Gross profit 69,548 58,060
Net income 12,051 11,333
Three Months:
Net sales $ 73,348 $ 63,879
Gross profit 24,463 21,606
Net income 3,921 3,827
3/31/00 6/30/99
------- -------
Balance sheet data:
Current assets $106,242 $ 94,941
Non-current assets 55,259 54,245
Current liabilities 24,543 24,615
Non-current liabilities 33,000 33,000
NOTE 6 - NON-RECURRING AND PROCUREMENT CHARGES
In the second quarter of fiscal 2000, Consumer Products recorded a
non-recurring charge of $1.3 million related to the consolidation of its
packaged plumbing products under the Plumbcraft(R) brand name. The Company
believes the Plumbcraft(R) packaging, which was recently re-designed, and the
consolidation of brands will result in cost savings by reducing the amount of
inventory needed to support the business and creating workforce efficiencies.
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. In the third quarter
of fiscal 1999, Consumer Products recorded an additional non-recurring charge of
$0.45 million for additional costs involved with the move, the training of
personnel and the future shortfall on subleasing the warehouse in Bedford
Heights.
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
11
<PAGE> 12
the Company. The Company expenses these costs in the fiscal year incurred.
Procurement costs for (i) above totaled $150,000 in the first quarter, none in
the second quarter and $500,000 in the third quarter of fiscal 2000. The Company
incurred $2.0 million of this type of cost in the fiscal 1999 third quarter and
nine month periods. The Company did not incur procurement costs related to (ii)
above in the fiscal 2000 and, but incurred $0.45 million in the fiscal 1999
third quarter and nine month periods for this type of charge. These types of
procurement costs are included as procurement charges in the accompanying
consolidated statements of operations. Procurement costs for (iii) above totaled
$0.4 million and $1.3 million in the third quarter and $1.1 million and $2.2
million for the first nine months of fiscal 2000 and 1999, respectively, which
are included as a contra-sales amount in net sales in the accompanying
consolidated statements of operations.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the nine and three months ended March 31, 2000 and
1999 included interest of $10.7 million and $5.1 million (nine months), and $2.4
million and $2.2 million (three months), respectively. The Company made no
federal income tax payments in the nine months or third quarter of fiscal 2000
or fiscal 1999. However, the Company paid $0.8 million in state taxes for the
nine months ended March 31, 2000.
NOTE 8 - 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. When 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 nine months and
quarter ended March 31, 2000 and the nine months ended March 31, 1999. 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, along with a reconciliation of such shares, is as follows
(in thousands):
<TABLE>
<CAPTION>
Nine months Nine months Three months Three months
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic 12,057 12,057 12,057 12,057
Diluted 12,057 12,057 12,057 12,057
Basic 12,057 12,057 12,057 12,057
Dilutive effect of:
Stock options -- -- -- --
Warrants -- -- -- --
------ ------ ------ ------
Diluted 12,057 12,057 12,057 12,057
</TABLE>
NOTE 9 - 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, do-it-yourself ("D-I-
12
<PAGE> 13
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 $ 14,778 $ 8,168 -- $ (3,124) $ 19,822
Fiscal 1999 three months 18,681 6,496 -- (2,991) 22,186
Fiscal 2000 nine months 46,883 25,514 -- (10,036) 62,361
Fiscal 1999 nine months 53,777 36,120 -- (10,284) 79,613
Operating income (loss):
Fiscal 2000 three months $ (143) $ (241) $ (681) -- $ (1,065)
Fiscal 1999 three months (1,443) (970) (915) -- (3,328)
Fiscal 2000 nine months (842) 271 (2,424) -- (2,995)
Fiscal 1999 nine months (1,843) 990 (2,766) -- (3,619)
Identifiable assets:
March 31, 2000 $ 43,244 $ 16,393 $ 47,585 -- $ 107,222
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 $10.3 million and $11.1 million for the third quarter of
fiscal 2000 and 1999, respectively. Of these amounts, approximately $3.1 million
and $3.0 million were intercompany sales for the third quarter of fiscal 2000
and 1999, respectively. For the nine months ended March 31, 2000 and 1999, net
sales for those foreign operations amounted to $32.8 million and $32.4 million,
respectively. Of these amounts, approximately $10.0 million and $10.3 million
were intercompany sales for the nine months ended March 31, 2000 and 1999,
respectively. Identifiable assets for the foreign operations were $17.5 million
and $18.7 million at March 31, 2000 and June 30, 1999, respectively.
13
<PAGE> 14
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 complete 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.
RECENT DEVELOPMENTS
The Company has endeavored over the past several years to reduce its
significant amount of debt 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. In the spring of 1999, the Company began having discussions with some of
its bondholders regarding its high level of debt and cash flow issues. The
Company is discussing several options to fund the interest payment of $6.0
million due on June 1, 2000 to the Deferred Coupon Note Holders and, based on
discussions with the Committee, believes that it will be able to amend the Debt
Reduction Agreement, as defined below, to include the resolution of this
payment. Various solutions are being discussed, including the sale or
collateralization of a portion of the Barnett Common Stock owned by the Company
to fund all or a portion of this payment. Excluding the cash requirements for
this interest payment, the Company believes that operating cash flow, together
with borrowings under its working capital credit facilities, will be sufficient
to fund its working capital requirements until the expected completion of the
financial reorganization as discussed below. In the event the financial
reorganization is not completed, 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 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.
On December 13, 1999, the Company and an ad hoc committee (the
"Committee") representing the holders of approximately 87 % of the $92.8 million
outstanding principal amount of the 12 3/4% Senior Secured Deferred Coupon Notes
due 2004 (the "Deferred Coupon Notes") and approximately 65% of the 11 1/8%
Senior Notes due 2001 (the "Senior Notes") of Waxman USA Inc. entered into an
agreement (the "Debt Reduction Agreement") that provides, subject to certain
conditions (including Bankruptcy Court approval), for the full satisfaction of
the Deferred Coupon Notes and the Senior Notes as part of a comprehensive
financial restructuring of the Company.
The key provisions of the financial restructuring plan are:
- The Debt Reduction Agreement contemplates that Barnett will
engage an investment banker to conduct an orderly process to sell
itself, or otherwise maximize shareholder value, in connection
with such transaction. To that end, on December 13, 1999, Barnett
issued a press release announcing the engagement of Deutsche Bank
Alex. Brown to pursue initiatives to maximize shareholder value.
- If Barnett's efforts to maximize shareholder value result in a
sale, the Company would sell all of the 7,186,530 shares of
Barnett common stock owned by Waxman USA Inc., a direct,
wholly-owned subsidiary of the Company.
- The Company would apply the proceeds of any sale of the Barnett
Common Stock owned by
14
<PAGE> 15
Waxman USA, net of applicable taxes, in the following order:
- approximately $35.9 million, plus accrued interest, to repay in
full the Senior Notes
- approximately $10 million to reduce borrowings under its working
capital credit facility, which were used to fund approximately $6
million in interest paid to the Deferred Coupon Note holders on
December 1, 1999, $2 million in interest paid to the Senior Note
holders on March 1, 2000, and up to $2 million in other costs
associated with the financial restructuring transaction, and
- the remaining net proceeds to a trust account to be used for the
full satisfaction of the Deferred Coupon Notes.
The Debt Reduction Agreement contemplates the completion of the sale of
the Barnett Common Stock as the first step in the financial restructuring plan.
Following the anticipated sale of the Company's interest in Barnett, the Company
and the Committee would file a jointly sponsored, prepackaged plan of
reorganization with the United States Bankruptcy Court (the "Joint Plan") to
effectuate the terms of the Debt Reduction Agreement. Under the Joint Plan, the
holders of the Deferred Coupon Notes will be the only impaired class of
creditors; none of the Company's operating subsidiaries or operating divisions
will be included in the filing and they will continue to pay their trade
creditors, employees and other liabilities under normal conditions.
Excluding the June 1, 2000 interest payment discussed above, the
Company believes that operating cash flow, together with borrowings under its
working capital credit facilities, will be sufficient to fund its working
capital requirements until the expected completion of the above mentioned
financial reorganization. Based on discussions with the Company's current
working capital lender, Congress Financial Corporation, the Company believes
that debtor in possession financing will not be necessary, and Congress will
continue to provide financing during and after the financial reorganization. In
the event the financial reorganization is not consummated, 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 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 furtherance of its effort to enhance its liquidity position, the
Company sold substantially all of the assets and certain liabilities of Western
American Manufacturing Inc. effective March 31, 2000 for $1.8 million, excluding
trade receivables, trade payables and certain other obligations, which were
retained by the Company. Cash from this transaction was not received until April
2000.
The Company believes that the completion of the transactions set forth
in the Debt Reduction Agreement will result in a stronger company, with an
amount of debt that can be supported by the operating cash flow of the Company's
subsidiaries. In addition to the reduced debt levels of the Company, the
Company's balance sheet will be strengthened significantly as a result of the
anticipated net after tax gain on the sale of Barnett Common Stock, the discount
on the redemption of the Deferred Coupon Notes, net of the write off of the
unamortized debt issuance costs, the realization for accounting purposes of the
deferred gain on the sale of U.S. Lock, and the utilization of the Company's net
operating loss carryforwards. Furthermore, the elimination of the indebtedness
from the Senior Notes and Deferred Coupon Notes will reduce the Company's annual
interest expense by approximately $16 million.
The Company believes that the Joint Plan should proceed through the
judicial process in a timely manner due to the overwhelming support of the
Deferred Coupon Note holders, the only impaired class of creditors. The Company
believes that an agreement will be completed during the fiscal 2000 fourth
quarter and expects to complete the Joint Plan by the fall of 2000.
Although the Company has entered into the Debt Reduction Agreement, at
this time the Company does not have an agreement that would monetize its
investment in Barnett. Accordingly, the accompanying condensed consolidated
financial statements have been prepared assuming the Company will continue as a
going concern and, as such, adjustments to the financial statements, if any,
that may be required for presentation on another basis have not been considered.
15
<PAGE> 16
The Company continues to evaluate various options to streamline its
operations, reduce expenses and improve cash flow and margins. As part of that
process, the Company disposed of WAMI effective March 31, 2000 as it believes
that sourcing pipe nipples will result in improved profit levels for the
operations that distribute those products. The Company is also reviewing the
logistics of its distribution facilities in an effort to improve efficiencies
and reduce costs. The Company expects to complete this review and initiate
various expense reduction plans within the next three months.
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------
Net Sales
- ---------
Net sales for the fiscal 2000 third quarter ended March 31, 2000
totaled $19.8 million, as compared to $22.2 million for the fiscal 1999 third
quarter. The net sales decrease was due to weaker than anticipated net sales to
retailers, including sales made through the direct import program from our Asian
operations. In addition, sales to the now defunct Hechinger / Builders Square
operations in the prior year third quarter contributed $0.4 million to the
decrease in net sales in the current quarter.
Net sales to retailers amounted to $14.8 million for the third quarter
ended March 31, 2000, a decrease from the $18.7 million for the same period last
year. Weaker sales to several of the larger retailers accounted for nearly all
of the decrease. In addition, net sales for the third quarter of fiscal 1999
included $0.4 million in sales to the now defunct Hechinger / Builders Square
operations. The Company's new sales programs with several retailers were not
sufficient to offset the sluggish sales to some national retailers and the loss
of the Hechinger / Builders Square business. The Company believes that many of
these retailers reduced inventories for year-end inventory and cash management
purposes. Sales improved in the month of March and, indications are for improved
sales in May and June 2000.
Effective March 31, 2000, the Company sold substantially all of the
assets and certain liabilities of WAMI, excluding trade receivables, trade
payables and certain other liabilities, which were retained by the Company. The
net sales and operating results of WAMI have been consolidated in the results of
operations for the quarter ended March 31, 2000. The net sales of WAMI for the
three month periods ended March 31, 2000 and 1999 were $0.8 million and $0.7
million, respectively.
Gross Profit
- ------------
Gross profit for the fiscal 2000 third quarter was $6.2 million, with a
gross profit margin of 31.2 percent, as compared to gross profit of $6.2 million
and a gross profit margin of 28.2 percent for the three months ended March 31,
1999. The gross profit was relatively the same, although the gross profit margin
improved due to an adjustment in the prior year to the gross profit of the pipe
nipple manufacturing and distribution operations, which decreased profits and
the profit margin. The current year profit and margins were also affected by the
termination of the packaged plumbing program sales to Hechinger / Builders
Square.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A expenses") amounted
to $6.7 million for the quarters ended March 31, 2000 and 1999. SG&A expenses as
a percentage of net sales increased from 30.1% for the fiscal 1999 third quarter
to 34.0% for the fiscal 2000 third quarter. The increased percentage of SG&A
expenses to net sales is due to relatively fixed costs being spread over a lower
net sales base. The Company is evaluating various expense reduction programs,
which should help improve its expense ratios in fiscal 2001.
Non-Recurring and Procurement Charges
- -------------------------------------
In the third quarter of fiscal 2000, Consumer Products recorded a
procurement charge of $0.5 million, representing the amount paid by the Company
in connection with a customer's agreement to purchase products from the Company.
In the fiscal 1999 third quarter, the Company's Consumer Products business
recorded a business
16
<PAGE> 17
procurement charge of $2.45 million and $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.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its ownership interest in
Barnett of $1.7 million for the quarters ended March 31, 2000 and 1999.
(Loss) Gain on Sales of Operations and Amortization of Deferred Gain on Sale of
- -------------------------------------------------------------------------------
U.S. Lock
- ---------
In April 2000, the Company completed an agreement to sell substantially
all of the assets and certain liabilities of Western American Manufacturing
Inc., a division of TWI, to a Mexican company, Niples Del Norte, S.A. de C.V.
for approximately $1.8 million in cash (the "WAMI Sale"). The WAMI Sale was
effective March 31, 2000, resulting in a net pretax loss of $2.0 million in the
quarter ended March 31, 2000, which includes an approximate $1.0 million
write-off of goodwill.
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 originally 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 third
quarter, the Company recognized $51,000 of this deferred gain.
Interest Expense
- ----------------
For the quarter ended March 31, 2000, net interest expense totaled $4.7
million, as compared to $4.2 million in the fiscal 1999 third quarter. Average
borrowings for the current year's quarter amounted to $145.2 million, with a
weighted average interest rate of 12.3%, as compared to $134.2 million in the
same quarter last year, with a weighted average interest rate of 12.3%. The
average borrowings were lower in the prior year due to the proceeds received
from the sale of U.S. Lock effective January 1, 1999, while the weighted average
interest rate remained consistent.
Provision for Income Taxes
- --------------------------
The provision for income taxes amounted to $0.1 million for the third
quarter of fiscal 2000, as compared to $0.9 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. The Company's tax
provision for the three months ended March 31, 1999 represents the provision for
the alternative minimum tax due on the U.S. Lock Sale and for various state and
foreign taxes. For the fiscal 2000 and 1999 third quarters, the difference
between the effective and statutory tax rates is primarily due to domestic
operating losses not benefited and goodwill amortization.
Net Loss
- --------
The Company's net loss for the quarter ended March 31, 2000 amounted to
$6.0 million, or $0.49 per basic and diluted share, as compared to net income of
$3.5 million, or $0.29 per basic and diluted share, in the fiscal 1999 third
quarter. The third quarter of fiscal 2000 was affected by the $2.0 million loss
on the sale of WAMI. The quarter ended March 31, 1999 was favorably affected by
the $10.2 million gain on the sale of U.S. Lock.
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
- -------------------------------------------------
Net Sales
- ---------
Net sales for the nine months ended March 31, 2000 totaled $62.4
million as compared to $66.2 million for the same period in the prior fiscal
year, excluding the results of U.S. Lock, which was sold effective January 1,
17
<PAGE> 18
1999. Including U.S. Lock's net sales for the nine months ended March 31, 1999
of $13.4 million, the Company's net sales amounted to $79.6 million. The
decrease in comparable net sales of $3.8 million between years is attributable
to the loss of the Hechinger / Builders Square account relationship, which
accounted for a $3.4 million reduction in net sales for the Company and to lower
than anticipated sales to other retailers in the current fiscal year. The net
sales to Hechinger / Builders Square for the nine months ended March 31, 2000
and 1999 amounted to $75,000 and $3.5 million, respectively.
Gross Profit
- ------------
The gross profit for the nine months ended March 31, 2000 decreased to
$19.3 million, as compared to $19.6 million excluding U.S. Lock or $24.0 million
including U.S. Lock. For the nine months ended March 31, 2000, the gross profit
margin improved to 30.9% from 29.6% for the nine months ended March 31, 1999,
excluding U.S. Lock. The pipe nipple manufacturing and distribution operations
accounted for most of the improvement due to certain financial statement
adjustments in the third quarter of fiscal 1999, which decreased the margins for
the prior year period.
Selling, General and Administrative Expenses
- --------------------------------------------
SG&A expenses, excluding U.S. Lock, amounted to $20.3 million and $20.6
million for the nine months ended March 31, 2000 and 1999, respectively.
Including U.S. Lock, SG&A expenses for the nine months ended March 31, 1999
amounted to $23.4 million. As a percentage of net sales, SG&A expenses,
excluding U.S. Lock, increased slightly from 31.2% for the nine month period in
fiscal 1999 to 32.5% for the nine months ended March 31, 2000, primarily due to
the decrease in net sales.
Non-Recurring and Procurement Charges
- -------------------------------------
Consumer Products recorded non-recurring charges for the nine months
ended March 31, 2000, including procurement costs of $650,000 related to
customer agreements to purchase product for a period of time, and $1.3 million
for the consolidation of its packaged plumbing products under the Plumbcraft(R)
brand name.
In the fiscal 1999 nine months ended March 31, 1999, Consumer Products
recorded a non-recurring charge of $1.8 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 relocation to a more modern and
efficient facility, which was completed in November 1998, has enabled Consumer
Products to provide more sophisticated distribution services to its customers
and has helped 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 in the nine months ended March 31, 1999.
Equity Earnings of Barnett
- --------------------------
The Company recorded equity earnings from its 44.3% ownership interest
in Barnett of $5.3 million for the nine months ended March 31, 2000. For the
comparable period in fiscal 1999, the Company recorded equity earnings of $5.0
million.
(Loss) Gain on Sales of Operations and Amortization of Deferred Gain on Sale of
- -------------------------------------------------------------------------------
U.S. Lock
- ---------
In April 2000, the Company completed an agreement to sell substantially
all of the assets and certain liabilities of WAMI to Niples Del Norte, S.A. de
C.V. for approximately $1.8 million in cash. The WAMI Sale was effective March
31, 2000, resulting in a net pretax loss of $2.0 million in the quarter ended
March 31, 2000, which includes an approximate $1.0 million write-off of
goodwill.
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 originally reported as a deferred gain in the Company's consolidated
balance sheet due to the Company's continued ownership of
18
<PAGE> 19
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 nine month period, the Company recognized $152,000
of this deferred gain.
Interest Expense
- ----------------
For the nine months ended March 31, 2000, interest expense totaled
$13.4 million, an increase of $0.5 million from the $12.9 million in the
comparable period last year. The increase is primarily due to an increase in
borrowings under the Company's bank credit agreement and an increase in the
interest on the Deferred Coupon Notes. Average borrowings for the nine months
ended March 31, 2000 amounted to $137.9 million, with a weighted average
interest rate of 12.4%, as compared to $137.4 million in the same period last
year, with a weighted average interest rate of 12.3%. The average borrowings are
higher due to the proceeds received in the prior year from the sale of U.S. Lock
effective January 1, 1999, and the weighted average interest rate increased due
to the reduction of debt with a lower rate.
Provision for Income Taxes
- --------------------------
The provisions for income taxes amounted to $0.4 million and $1.1
million for the nine months ended March 31, 2000 and 1999, respectively. The
provision for the current period primarily represents various state and foreign
taxes of the Company's wholly-owned operations. The Company's tax provision for
the nine months ended March 31, 1999 represents the provision for the
alternative minimum tax due on the U.S. Lock Sale and for various state and
foreign taxes. The difference between the effective and statutory tax rates is
primarily due to domestic operating losses not benefited and goodwill
amortization.
Net Loss
- --------
The Company's net loss for the nine months ended March 31, 2000
amounted to $13.3 million, or $1.10 per basic and diluted share, as compared to
the net loss of $2.5 million, or $0.20 per basic and diluted share, in the same
period last year. Included in the fiscal 2000 results are procurement charges of
$0.65 million and $1.3 million for the consolidation of Consumer Products'
packaged plumbing line of products under the Plumbcraft(R) name. The third
quarter of fiscal 2000 was affected by the $2.0 million loss on the sale of
WAMI.
The fiscal 1999 nine month results included 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. The quarter ended March 31, 1999 was favorably affected by
the $10.2 million gain on the sale of U.S. Lock.
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 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. These efforts recently resulted in the Company reaching an agreement
with an ad hoc committee representing the holders of approximately 87% of its
Deferred Coupon Notes and approximately 65% of its Senior Notes. See Note 1 and
"Management's Discussion and Analysis - Recent Developments" in this Form 10-Q
for a discussion of the Company's agreement to sell its interest in Barnett as
part of a comprehensive financial reorganization.
The Company is discussing several options to fund the interest payment
of $6.0 million due on June 1, 2000 to the Deferred Coupon Note Holders and,
based on discussions with the Committee, believes that it will be able to amend
the Debt Reduction Agreement to include the resolution of this payment. Various
solutions are being discussed, including the sale or collateralization of a
portion of the Barnett Common Stock owned by the Company to fund all or a
portion of this payment. Excluding the cash requirements for this interest
payment, the Company believes that operating cash flow, together with borrowings
under its working capital credit facilities, will be sufficient to fund its
working capital requirements until the expected completion of the debt reduction
effort contemplated by the Debt Reduction Agreement. In the event the financial
reorganization is not completed,
19
<PAGE> 20
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 to fund its working capital. 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 furtherance of its effort to enhance its liquidity position, the
Company sold substantially all of the assets and certain liabilities of Western
American Manufacturing Inc. effective March 31, 2000 for $1.8 million, excluding
trade receivables, trade payables and certain other obligations, which were
retained by the Company. Cash from this transaction was not received until April
2000.
The financial reorganization does not involve any of the Company's
operating subsidiaries, which have their own bank credit facility. These
operating companies will continue to pay all of their trade creditors, employees
and other liabilities under normal trade conditions. The Company believes that
the Joint Plan should proceed quickly through the judicial process because it
has the overwhelming support of the Deferred Coupon Note holders, the only
impaired class of creditors. The Company expects to complete the Joint Plan by
the fall of 2000.
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. In March 2000, the Company and Congress Financial
Corporation amended the loan agreement to, among other changes, increase the
facility by up to $3.0 million, utilizing inventory and accounts receivable that
were already collateralized under the original agreement. The Loan and Security
Agreement provides for, among other things, revolving credit advances of up to
$22.0 million. As of March 31, 2000, the Company had $19.4 million in borrowings
under the revolving credit line of the facility and had approximately $1.7
million available under such facility. The Loan and Security Agreement expires
on September 1, 2001, but may be extended under certain conditions. In April
2000, the Loan and Security Agreement was further amended to allow the sale of
substantially all of the assets of WAMI.
The Loan and Security Agreement provides for revolving credit advances
of (a) up to 85.0% of the amount 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. In
December 1999, the Loan and Security Agreement was amended to provide Congress
Financial an additional 500,000 shares of Barnett Inc. common stock (which,
together with the initial 500,000 shares, constitutes approximately 6.2% of all
outstanding stock of Barnett Common Stock), as collateral and allowing the
Company to borrow up to the lesser of i) $10,000,000 or ii) 70% of the fair
value of the 1,000,000 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 March
31, 2000. 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.
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 or has obtained a waiver for all loan covenants at March 31,
2000. 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
20
<PAGE> 21
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 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% of Consumer
Products and 3.8% of the Company's net sales in fiscal 1999. 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 material adverse
changes in its customer relationships were to occur.
The Company paid $0.8 million in income taxes in the first nine months
of fiscal 2000. At June 30, 1999, the Company had $46.8 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 reorganization,
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 $1.0 million was paid in the first nine months 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.
At March 31, 2000, the Company had working capital of $4.3 million and
a current ratio of 1.1 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $19.2 million for the first nine
months of fiscal 2000 principally due to an increase in trade receivables and
other assets, offset by an increase in accrued interest. The most significant
items affecting net cash used for operations were the $2.0 million net loss on
the sale of certain assets and liabilities of WAMI and the $5.3 million in
equity earnings of Barnett. Excluding these items, the net cash used by
operations was $15.8 million. Cash flow used in investments totaled $1.2
million, attributable to capital expenditures. Cash flow provided by financing
activities, and net borrowings under the Company's credit facilities, totaled
approximately $19.4 million.
YEAR 2000
The Company utilizes management information systems, software technology and
non-information technology systems that were Year 2000 compliant, prior to
December 31, 1999. The Company continues to monitor its operations, as well as
its customers and suppliers to ensure its systems continue to meet its internal
and external requirements. The Company does not believe that it has been or will
be negatively impacted by the Year 2000.
21
<PAGE> 22
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) See Exhibit 27.
b) Form 8-K
None
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 2000 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 4, 2000 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
22
<PAGE> 23
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)
23
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000105096
<NAME> Waxman Industries, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 363
<SECURITIES> 0
<RECEIVABLES> 14,083
<ALLOWANCES> (1,113)
<INVENTORY> 18,844
<CURRENT-ASSETS> 40,275
<PP&E> 16,695
<DEPRECIATION> (7,150)
<TOTAL-ASSETS> 107,222
<CURRENT-LIABILITIES> 35,947
<BONDS> 128,378
0
0
<COMMON> 119
<OTHER-SE> (65,088)
<TOTAL-LIABILITY-AND-EQUITY> 107,222
<SALES> 62,361
<TOTAL-REVENUES> 62,361
<CGS> 43,110
<TOTAL-COSTS> 20,296
<OTHER-EXPENSES> 1,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,446
<INCOME-PRETAX> (12,922)
<INCOME-TAX> 395
<INCOME-CONTINUING> (13,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,317)
<EPS-BASIC> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
