<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, 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
---- ----
9,976,412 shares of Common Stock, $.01 par value, and 2,142,058 shares of Class
B Common Stock, $.01 par value, were outstanding as of November 3, 2000.
1
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 2000 and 1999 .................................................. 3
Condensed Consolidated Balance Sheets - September 30, 2000 and June 30, 2000..................... 4 -5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 2000 and 1999................................................... 6
Notes to Condensed Consolidated Financial Statements............................................. 7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................................. 13 - 19
PART II. OTHER INFORMATION
Item 5. Other Information.................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................................... 20
SIGNATURES
EXHIBIT INDEX
</TABLE>
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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, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months
------------
2000 1999
---- ----
<S> <C> <C>
Net sales $ 17,443 $ 22,837
Cost of sales 12,196 15,652
-------- --------
Gross profit 5,247 7,185
Selling, general and administrative expenses 5,659 6,773
Restructuring, impairment and procurement charges 504 150
-------- --------
Operating (loss) income (916) 262
Equity earnings of Barnett 1,370 1,604
Gain on sale of Barnett, net 47,473 --
Amortization of deferred U.S. Lock gain 7,815 51
Interest expense, net 4,725 4,318
-------- --------
Income (loss) before income taxes and extraordinary charge 51,017 (2,401)
Provision for income taxes 2,750 233
-------- --------
Income (loss) from continuing operations before
extraordinary charge 48,267 (2,634)
Extraordinary charge, net of taxes 57 --
-------- --------
Net income (loss) $ 48,210 $ (2,634)
======== ========
Other comprehensive income:
Foreign currency translation adjustment (72) 121
-------- --------
Comprehensive income (loss) $ 48,138 $ (2,513)
======== ========
Income (loss) per share (basic and diluted):
Income (loss) from continuing operations before
extraordinary charge $ 3.98 $ (0.22)
Extraordinary charge -- --
-------- --------
Net income (loss) $ 3.98 $ (0.22)
======== ========
Weighted average shares and equivalents 12,118 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, 2000 AND JUNE 30, 2000
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 903 $ 811
Restricted cash 39,024 --
Trade receivables, net 11,284 12,068
Other receivables 4,164 3,656
Inventories 14,233 15,351
Prepaid expenses 1,424 1,853
-------- -------
Total current assets 71,032 33,739
-------- -------
INVESTMENT IN BARNETT -- 42,896
-------- -------
PROPERTY AND EQUIPMENT:
Land 579 585
Buildings 4,532 4,545
Equipment 11,059 11,061
-------- -------
16,170 16,191
Less accumulated depreciation and amortization (7,308) (7,137)
-------- -------
Property and equipment, net 8,862 9,054
-------- -------
UNAMORTIZED DEBT ISSUANCE COSTS, NET 2,154 2,444
DEFERRED TAX ASSET -- 367
OTHER ASSETS 4,089 5,746
-------- -------
$ 86,137 $94,246
======== =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
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WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
(Unaudited) (Audited)
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 10,172 $ 20,366
Accounts payable 6,075 6,512
Accrued liabilities 4,343 3,018
Accrued income taxes payable 1,389 394
Accrued interest 3,944 8,231
--------- ---------
Total current liabilities 25,923 38,521
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OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 739 780
SENIOR SECURED DEFERRED COUPON NOTES, NET 91,880 91,818
SENIOR NOTES -- 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK -- 7,815
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 9,976 at September 30, 2000
and June 30, 2000 99 99
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,142 at September 30, 2000
and June 30, 2000 21 21
Paid-in capital 21,752 21,752
Retained deficit (53,546) (101,756)
--------- ---------
(31,674) (79,884)
Accumulated other comprehensive income (731) (659)
--------- ---------
Total stockholders' deficit (32,405) (80,543)
--------- ---------
$ 86,137 $ 94,246
========= ==========
</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, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 48,210 $ (2,634)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Extraordinary loss-write-off of deferred financing costs, net 57 --
Gain on sale of Barnett stock, net (47,473) --
Non-cash interest 62 62
Amortization of deferred U.S. Lock gain (7,815) (51)
Equity earnings of Barnett (1,370) (1,604)
Depreciation and amortization 602 616
Deferred income taxes 367 3
Changes in assets and liabilities:
Trade receivables, net 784 (3,750)
Inventories 1,118 1,434
Other assets (1,033) (2,012)
Accounts payable (437) (14)
Accrued liabilities 1,325 (224)
Accrued interest (4,287) 1,960
Accrued taxes 995 (265)
Other, net (72) 121
-------- --------
Net Cash Used in Operating Activities (8,967) (6,358)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of Barnett stock 94,503 --
Capital expenditures, net (330) (476)
-------- --------
Net Cash (Used in) Provided by Investing Activities 94,173 (476)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 16,386 20,109
Payments under credit agreements (26,580) (14,292)
Debt issuance costs -- (128)
Retirement of 11 1/8% Senior Secured Notes due 2001 (35,855) --
Restricted cash to retire the 123/4% Deferred Coupon Notes due 2004 (39,024) --
Repayments of long-term debt, net (41) (96)
-------- --------
Net Cash (Used in) Provided by
Financing Activities (85,114) 5,593
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 92 (1,241)
BALANCE, BEGINNING OF PERIOD 811 1,322
-------- --------
BALANCE, END OF PERIOD $ 903 $ 81
======== ========
</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, 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. Until its sale on September 29, 2000,
the Company owned 44.2% 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 accounted for Barnett Inc. ("Barnett") under
the equity method of accounting.
The condensed consolidated statements of operations for the three
months ended September 30, 2000 and 1999, the condensed balance sheet as of
September 30, 2000 and the condensed statements of cash flows for the three
months ended September 30, 2000 and 1999 have been prepared by the Company
without audit, while the condensed balance sheet as of June 30, 2000 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, 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, 2000 (as amended by a
Form 10-KA-1 filed with the Securities and Exchange Commission on October 23,
2000) and the Company's Current Report on Form 8-K's dated July 17, 2000 and
October 12, 2000, filed with the Securities and Exchange Commission in
connection with the sale of Barnett Common Stock and the Company's comprehensive
financial reorganization plan. See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments and Note 9
in this Form 10-Q.
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 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"), Medal
of Pennsylvania, Inc. ("Medal", formerly known as WOC Inc. ("WOC")), WAMI Sales,
Inc. ("WAMI Sales") and TWI, International, Inc. ("TWI"). Consumer Products, the
Company's largest operation, is a supplier of specialty plumbing and floor and
surface protection products to a wide variety of large retailers. WAMI Sales
distributes galvanized, black, chrome and brass pipe nipples and fittings to
industrial and wholesale distributors. Medal is a supplier of plumbing and
hardware products to smaller, independent retailers. TWI includes the Company's
foreign operations, including manufacturing, packaging and sourcing operations
in China and Taiwan. 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. Consumer Products, WAMI Sales and Barnett utilize the
Company's and non-affiliated foreign suppliers.
Until its sale on September 29, 2000, the Company owned 44.2% 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. The Company recorded equity
earnings from this investment
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of $1.4 million and $1.6 million for the first fiscal quarters ended September
30, 2000 and 1999, respectively. The Barnett Common Stock traded on the Nasdaq
National Market under the symbol "BNTT" until the completion of the acquisition
of Barnett by a subsidiary of Wilmar Industries, Inc. (the "Barnett Merger") on
September 27, 2000.
NOTE 3 - SALE OF INTEREST IN BARNETT
In April 1996, the Company completed an initial public offering of the
Barnett Common Stock, reducing its interest in the former wholly-owned
subsidiary to 49.9% of the outstanding Barnett Common Stock and, together with
certain convertible non-voting preferred stock owned by the Company,
approximately a 54% economic interest. In April 1997, the Company completed a
secondary offering of 1.3 million shares of Barnett Common Stock, reducing its
voting and economic interests to 44.5% and, accordingly, began to account for
its interest in Barnett under the equity method of accounting. In July 1997, as
a result of the sale of a substantial portion of the business of LeRan Gas
Products, one of WOC's operations, to Barnett, the Company received cash and an
additional 24,730 shares of Barnett Common Stock, which increased the Company's
ownership in Barnett to 7,186,530 shares. On July 10, 2000, the Company
announced that it had reached an agreement to monetize the remaining Barnett
Common Stock for $13.15 per share as part of the Barnett Merger. An additional
agreement reached at the time of the Barnett Merger provided for the sale of
enough shares of Barnett Common Stock, based on a ten day average market price,
to provide the $2 million needed by Waxman USA to pay its September 1, 2000
Senior Note interest payment. Accordingly, on September 1, 2000, the Company
sold 160,723 shares of common stock to Barnett, reducing its remaining interest
in Barnett to 7,025,807. The agreement also provided for the Company to receive
the difference in the market price paid for the shares sold on September 1, 2000
and the $13.15 offering price within ten days following the Barnett Merger
closing. The Barnett Merger was approved by Barnett's shareholders on September
27, 2000, and the Company's remaining shares of Barnett Common Stock were sold
on September 29, 2000.
The gross proceeds from the sale of the 7,186,530 shares of Barnett
Common Stock amounted to $94.5 million. The Company's equity investment in
Barnett amounted to $44.3 million immediately prior to the sale, including
equity earnings recognized by the Company in the quarter ended September 30,
2000 of $1.4 million. The Company reported a net gain on the sale of Barnett of
$47.5 million, after the write-off of $2.7 million in transaction related costs
associated with the Barnett Merger and other costs associated with the
comprehensive financial restructuring of the Company. In addition, the Company
recognized $7.8 million in deferred gain on the sale of U.S. Lock in the quarter
ended September 30, 2000, which was being recognized as Barnett amortized the
goodwill associated with its purchase of U.S. Lock.
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, 2000, the Company had $66.7 million of available domestic
net operating loss carryforwards for income tax purposes, which expire 2009
through 2020. The Company also had alternative minimum tax carryforwards of
approximately $1.0 million at June 30, 2000, which are available to reduce
future regular income taxes over an indefinite period. At June 30, 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, due to the uncertainty of the completion of
the Barnett Merger and the other components of the comprehensive financial
restructuring plan. The Company generated taxable income in the quarter ended
September 30, 2000 in excess of $50 million, primarily related to the Barnett
Merger. For regular federal tax purposes, the Company's net operating loss
carryforwards were sufficient to offset any regular federal tax liability.
However, the Company was required to compute its federal tax provision based on
the alternative minimum tax method, which only allows the utilization of net
operating losses to the extent of 90 percent of taxable income. Using this
method, the Company utilized approximately $45.2 million of its net operating
loss carryforwards to offset a portion of its federal tax liability. The
Company's federal tax provision, based on the alternative minimum tax method, is
approximately $1.8 million. The remaining tax provision for the quarter ended
September 30, 2000 represents the provision for state and
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various foreign taxes. The Company believes that the completion of the
comprehensive financial restructuring plan will result in the elimination of all
of its remaining net operating loss carryforwards.
The Company's tax provision for the three months ended September 30,
1999 represent the provision for various state and foreign taxes.
NOTE 5 - RESTRUCTURING, IMPAIRMENT AND PROCUREMENT CHARGES
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 period incurred. The Company did not incur any
procurement costs related to type (i) above in the quarter ended September 30,
2000, as compared to $150,000 of costs it incurred in the first quarter of
fiscal 2000. The Company incurred $154,000 of procurement costs related to (ii)
above in the first quarter of fiscal 2001, but did not incur this type of
procurement costs in the fiscal 2000 first quarter. These types of procurement
costs are included as procurement charges in the accompanying consolidated
statements of operations. Procurement costs for (iii) above totaled $596,000 in
the fiscal 2001 first quarter and $0.3 million for the fiscal 2000 first
quarter, which are included as a contra-sales amount in net sales in the
accompanying consolidated statements of operations.
In addition, Consumer Products recorded $350,000 in restructuring
charges during the quarter ended September 30, 2000 which were associated its
closed warehouses.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended September 30, 2000 and 1999
included interest of $8.5 million and $2.1 million, respectively. The Company
made no federal income tax payments in the first quarters of fiscal 2001 or
fiscal 2000. The Company paid approximately $4,000 and $0.4 million in state
taxes for the three months ended September 30, 2000 and 1999, respectively.
The Company has restricted cash of $39.0 million, relating to the cash
held in a segregated account to be used to settle the total amount due the
Deferred Coupon Note holders upon approval of the Joint Plan (as defined
hereinafter in Note 9) by the Courts.
NOTE 7 - EARNINGS PER SHARE
Basic earnings per share represents net income divided by the weighted
average number of common shares outstanding. Diluted earnings per share utilizes
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 quarter ended
September 30, 1999. For the quarter ended September 30, 2000, 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):
Three months Three months
ended ended
September 30, September 30,
2000 1999
---- ----
Basic 12,118 12,057
Diluted 12,118 12,057
Basic 12,118 12,057
Dilutive effect of:
Stock options -- --
Warrants -- --
------- -------
Diluted 12,118 12,057
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NOTE 8 - SEGMENT INFORMATION
The Company's businesses distribute specialty plumbing products, floor
and surface protection 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-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 2001 three months $12,515 $ 6,534 -- $(1,606) $17,443
Fiscal 2000 three months 17,350 8,579 -- (3,092) 22,837
Operating income (loss):
Fiscal 2001 three months $ (191) $ 88 $ (813) -- $ (916)
Fiscal 2000 three months (927) 220 (885) -- 262
Identifiable assets:
September 30, 2000 $28,508 $13,249 $44,380 -- $86,137
June 30, 2000 31,517 13,125 49,604 -- 94,246
</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 $7.9 million and $11.7 million for the first quarter of
fiscal 2001 and 2000, respectively. Of these amounts, approximately $1.6 million
and $3.1 million were intercompany sales for the first quarter of fiscal 2001
and 2000, respectively. Identifiable assets for the foreign operations were
$14.6 million and $14.6 million at September 30, 2000 and June 30, 2000,
respectively.
NOTE 9 - COMPREHENSIVE FINANCIAL RESTRUCTURING PLAN/CHAPTER 11 FILING
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 undertook
various initiatives to raise cash, improve its cash flow and reduce its debt
obligations and / or improve its financial flexibility during that period.
However, the Company believed that it would have been unable to continue to make
all of the interest and principal payments under its debt obligations without
the monetization of the value of the shares of the Barnett Common Stock owned by
the Company and the development of a comprehensive financial restructuring plan.
The key developments in the comprehensive financial restructuring are as
follows:
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o On December 13, 1999, the Company and an ad hoc committee (the
"Committee") representing the holders of approximately 87.6% of the
$92.8 million outstanding principal amount of the Waxman Industries'
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., a direct wholly-owned
subsidiary of the Company, entered into an agreement (the "Debt
Reduction Agreement") that provides, subject to certain conditions
(including Bankruptcy Court approval), for the process that would
lead to the full satisfaction of the Deferred Coupon Notes and the
Senior Notes as part of a comprehensive financial restructuring of
the Company.
o On July 10, 2000, the Company announced that it had reached
agreements with the Committee, among others, for the monetization of
its Barnett Common Stock and the financial restructuring of Waxman
Industries. These agreements include the Company's agreement to vote
its 7,186,530 shares of Barnett Common Stock owned by Waxman USA
Inc. in favor of the acquisition of Barnett by Wilmar Industries,
Inc. for $13.15 per share.
o On August 28, 2000, the Company and the Committee commenced the
solicitation for the approval of the Deferred Coupon Note holders
for the jointly sponsored, prepackaged plan of reorganization in
advance of its filing with the United States Bankruptcy Court (the
"Joint Plan"). Under the Joint Plan, the holders of the Deferred
Coupon Notes are the only impaired class of creditors; none of the
Company's operating subsidiaries or operating divisions were
included in the filing and they continue to pay their trade
creditors, employees and other liabilities under normal conditions.
o On September 1, 2000, the Company sold to Barnett 160,723 shares of
Barnett Common Stock to fund the interest due on the Company's
Senior Notes.
o On September 27, 2000 the Barnett shareholders approved the Barnett
Merger.
o On September 28, 2000, approximately 97% of the Deferred Coupon Note
holders voted in favor of accepting the Joint Plan, with the
remaining holders not voting.
o On September 29, 2000, the Company received gross proceeds from the
sale of the remaining Barnett Common Stock, which together with the
shares sold to Barnett on September 1, 2000, amounted to $94.5
million. The Company utilized the proceeds from the sale of the
Barnett Common Stock owned by Waxman USA in the following order:
o paid or reserved for payment approximately $1.35 million for
state and federal taxes associated with the sale of the Barnett
shares.
o reduced its borrowings under its working capital credit facility
by approximately $10 million.
o retired all of its approximately $35.9 million principal amount
of Senior Notes, plus accrued interest.
o paid approximately $6.0 million in semi-annual interest due on
June 1, 2000 to its Deferred Coupon Note holders.
o funded a dedicated account with the remaining gross proceeds of
approximately $39.0 million, to be used for the full satisfaction
of the Deferred Coupon Notes, including accrued interest, upon
confirmation of the Joint Plan.
o On October 2, 2000, the Company, excluding Waxman USA Inc. and all
of its direct and indirect operating subsidiaries, filed a petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in
the United States Court for the District of Delaware. The petition
seeks ratification by the court of the Debt Reduction Agreement that
was jointly sponsored with the Committee to settle, at a discount,
all amounts due on the Company's Deferred Coupon Notes (the " Joint
Plan"). Under the Joint Plan, the only impaired creditor would be
the Deferred Coupon Note holders. On October 4, 2000, the first day
orders were approved and, based on the overwhelming support by the
holders of 97% of the Deferred Coupon Notes, the date of November
14, 2000 was set for the confirmation hearing to effectuate terms of
the Joint Plan.
The Company expects to complete its comprehensive financial
restructuring plan in the fiscal 2001 second quarter ended December 31, 2000. As
part of that plan, the principal and accrued interest on its Deferred Coupon
Notes will be settled for approximately $39.0 million. At September 30, 2000,
the Deferred Coupon Note principal balance was $91.8 million and accrued
interest amounted to $3.9 million. The Company expects to report income from the
defeasance of this debt when the contemplated transaction is completed.
Based on an agreement with the Company's current working capital
lender, Congress Financial Corporation, debtor in possession financing was not
necessary, and Congress will continue to provide financing
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during and after the financial reorganization. All obligations and trade debt of
Waxman USA and all of the operating subsidiaries will continue to be paid under
normal trade conditions. Certain pre-petition debts of the Company, principally
benefit related obligations, will be paid as they are due. Post petition debts
will also be paid as they are due. Other than the obligations due to the
Deferred Coupon Note holders, the Company expects to pay all of its pre-petition
debts unaffected by the Chapter 11.
Although the Company has sold its investment in Barnett, there is
always a risk associated with filing Chapter 11. There can be no certainty that
the Company's Joint Plan will be confirmed or that the remaining elements of the
comprehensive financial restructuring plan will be completed as currently
contemplated. However, the Company believes that it will successfully exit from
its Chapter 11 filing shortly after the confirmation hearing scheduled for
November 14, 2000. 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.
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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 complete its comprehensive financial restructuring 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
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 undertook
various initiatives to raise cash, improve its cash flow and reduce its debt
obligations and / or improve its financial flexibility during that period.
However, the Company believed that it would have been unable to continue to make
all of the interest and principal payments under its debt obligations without
the monetization of the value of the shares of the Barnett Common Stock owned by
the Company and the development of a comprehensive financial restructuring plan.
The key developments in the comprehensive financial restructuring are as
follows:
o 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 Waxman Industries'
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., a direct wholly-owned
subsidiary of the Company, entered into an agreement (the "Debt
Reduction Agreement") that provides, subject to certain conditions
(including Bankruptcy Court approval), for the process that would
lead to the full satisfaction of the Deferred Coupon Notes and the
Senior Notes as part of a comprehensive financial restructuring of
the Company.
o On July 10, 2000, the Company announced that it had reached
agreements with the Committee, among others, for the monetization of
its Barnett Common Stock and the financial restructuring of Waxman
Industries. These agreements include the Company's agreement to vote
its 7,186,530 shares of Barnett Common Stock owned by Waxman USA
Inc. in favor of the acquisition of Barnett by Wilmar Industries,
Inc. for $13.15 per share.
o On August 28, 2000, the Company and the Committee commenced the
solicitation for the approval of the Deferred Coupon Note holders
for the jointly sponsored, prepackaged plan of reorganization in
advance of its filing with the United States Bankruptcy Court (the
"Joint Plan"). Under the Joint Plan, the holders of the Deferred
Coupon Notes are the only impaired class of creditors; none of the
Company's operating subsidiaries or operating divisions were
included in the filing and they continue to pay their trade
creditors, employees and other liabilities under normal conditions.
o On September 1, 2000, the Company sold to Barnett 160,723 shares of
Barnett Common Stock to fund the interest due on the Company's
Senior Notes.
o On September 27, 2000 the Barnett shareholders approved the Barnett
Merger.
o On September 28, 2000, approximately 97% of the Deferred Coupon Note
holders voted in favor of accepting the Joint Plan, with the
remaining holders not voting.
o On September 29, 2000, the Company received gross proceeds from the
sale of the remaining Barnett Common Stock, which together with the
shares sold to Barnett on September 1, 2000, amounted to $94.5
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million. The Company utilized the proceeds from the sale of the
Barnett Common Stock owned by Waxman USA in the following order:
o paid or reserved for payment approximately $1.35 million for
state and federal taxes associated with the sale of the Barnett
shares.
o reduced its borrowings under its working capital credit facility
by approximately $10 million.
o retired all of its approximately $35.9 million principal amount
of Senior Notes, plus accrued interest.
o paid approximately $6.0 million in semi-annual interest due on
June 1, 2000 to its Deferred Coupon Note holders.
o funded a dedicated account with the remaining gross proceeds of
approximately $39.0 million, to be used for the full satisfaction
of the Deferred Coupon Notes, including accrued interest, upon
confirmation of the Joint Plan.
o On October 2, 2000, the Company, excluding Waxman USA Inc. and all
of its direct and indirect operating subsidiaries, filed a petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in
the United States Court for the District of Delaware. The petition
seeks ratification by the court of the Debt Reduction Agreement that
was jointly sponsored with the Committee to settle, at a discount,
all amounts due on the Company's Deferred Coupon Notes (the " Joint
Plan"). Under the Joint Plan, the only impaired creditor would be
the Deferred Coupon Note holders. On October 4, 2000, the first day
orders were approved and, based on the overwhelming support by the
holders of 97% of the Deferred Coupon Notes, the date of November
14, 2000 was set for the confirmation hearing to effectuate terms of
the Joint Plan.
The Company expects to complete its comprehensive financial
restructuring plan in the fiscal 2001 second quarter ended December 31, 2000. As
part of that plan, the principal and accrued interest on its Deferred Coupon
Notes will be settled for approximately $39.0 million. At September 30, 2000,
the Deferred Coupon Note principal balance was $91.9 million and accrued
interest amounted to $3.9 million. The Company expects to report income from the
defeasance of this debt when the contemplated transaction is completed.
Based on an agreement with the Company's current working capital
lender, Congress Financial Corporation, debtor in possession financing was not
necessary, and Congress will continue to provide financing during and after the
financial reorganization.
The Company believes that the completion of the transactions set forth
in the Debt Reduction Agreement will result in a stronger company. 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 sold its investment in Barnett, there is
always a risk associated with filing Chapter 11. There can be no certainty that
the Company's Joint Plan will be confirmed or that the remaining elements of the
comprehensive financial restructuring plan will be completed as currently
contemplated. However, the Company believes that it will successfully exit from
its Chapter 11 filing shortly after the confirmation hearing scheduled for
November 14, 2000. 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.
(See Note 9)
Over the past several years, the Company continuously evaluated, and
when appropriate pursued, various options to streamline its operations, reduce
expenses and improve cash flow and margins. As part of that process, effective
March 31, 2000, the Company sold nearly all of the assets and certain
liabilities of Western American Manufacturing Inc., a company that manufactured
galvanized, black, brass, and chrome pipe nipples in Tijuana, Mexico, for $1.8
million in cash. The Company believes that sourcing pipe nipples will result in
improved profit levels for the operations that distribute those products. In the
fourth quarter of fiscal 2000, Consumer Products consolidated certain operations
to improve its efficiencies, including the closure of its Grand Prairie, Texas
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distribution center and packaging operations in Tijuana, Mexico. Distribution
operations for Consumer Products will be conducted from a national distribution
center near Columbus, Ohio, while the packaging operations will be conducted at
the Company's operations in China and Taiwan. In June 2000, the Company closed
its Premier Faucet Corporation facility in China that manufactured faucets and
faucet components. The Company will continue to distribute faucets that have
been assembled by the Company, with components manufactured by outside
suppliers.
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Sales
Net sales for the fiscal 2001 first quarter ended September 30, 2000
totaled $17.4 million, a decrease of $5.4 million as compared to $22.8 million
for the same period in the prior fiscal year. Included in the prior year were
$1.4 million in net sales for WAMI Manufacturing, which was sold effective March
31, 2000, and Premier Faucet, which was closed in June 2000. The Company also
reported $0.6 million in procurement costs that were reported as a contra-sale,
because they were associated with the repurchase of inventory. In addition, 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. The Company also believes that many retailers have reduced
inventories in anticipation of a slowing economy and for cash management
purposes.
Net sales to retailers amounted to $12.5 million and $17.4 million for
the quarters ended September 30, 2000 and 1999, respectively. The reduction is
due to weaker sales to several retailers, including Kmart, and the loss of
Associated Distributors, Inc., which closed all but 11 of its stores in August
2000. The Company believes that Associated Distributors, which accounted for
nearly $2.2 million of Consumer Products net sales in fiscal 2000, will change
its strategy for its remaining stores and will discontinue the distribution of
plumbing products. Prior year net sales were also higher than normal due to the
start or expansion of sales programs with certain retailers, which results in a
larger initial stocking order at all locations.
Non-retail sales amounted to $6.5 million and $8.6 million for the
quarters ended September 30, 2000 and 1999, respectively. The reduction is
primarily the result of the non-inclusion of sales for WAMI Manufacturing and
Premier Faucet in the current period's results.
Effective March 31, 2000, the Company sold substantially all of the
assets, net of certain liabilities, of WAMI, excluding trade receivables, trade
payables and certain other liabilities, which were retained by the Company. The
net sales of $1.1 million and operating income of $10,000 for WAMI have been
consolidated in the results of operations for the quarter ended September 30,
1999.
Gross Profit
Gross profit for the fiscal 2001 first quarter was $5.2 million, with a
gross profit margin of 30.6 percent, as compared to gross profit of $7.2 million
and a gross profit margin of 31.5 percent for the three months ended September
30, 1999. The decrease in the gross margin is primarily attributable to
procurement costs charged as a contra-sale and 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. 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") amounted
to $5.7 million and $6.8 million for the quarters ended September 30, 2000 and
1999. SG&A expenses as a percentage of net sales increased from 29.7% for the
fiscal 2000 first quarter to 32.9% for the fiscal 2001 first 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 has improved its
cost structure with the consolidation of Consumer Products Group's distribution
operations into
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one national center and the relocation of its packaging operations to the
Company's facilities overseas. However, the decrease of 16.4% in expenses did
not keep pace with the 24.8% reduction in net sales.
Restructuring, Impairment and Procurement Charges
In the first quarter of fiscal 2001 and 2000, Consumer Products
recorded a procurement charge of $154,000 and $150,000, respectively,
representing the amount paid by the Company to new or existing customers for the
right to supply such customers for a specified period. In addition, Consumer
Products recorded $350,000 in restructuring charges in the quarter ended
September 30, 2000 for costs associated with its closed warehouse facilities.
Based on current estimates, the Company believes it has provided for all
remaining costs to be incurred in connection with the closing of these
facilities.
Equity Earnings of Barnett
The Company recorded equity earnings from its ownership interest in
Barnett of $1.4 million and $1.6 million for the quarters ended September 30,
2000 and 1999, respectively. As detailed in Note 3, the Company sold its equity
investment in Barnett on September 29, 2000 as part of its comprehensive
financial restructuring plan.
Gain on Sale of Equity Investment and Amortization of Deferred Gain on Sale of
U.S. Lock
On July 10, 2000, the Company announced that it has reached an
agreement to monetize its 7,186,530 shares of Barnett Common Stock for $13.15
per share in connection with the Barnett Merger. On September 1, 2000, as part
of the agreement on the Barnett Merger, the Company sold to Barnett 160,723
shares the Barnett Common Stock to fund the amount needed to pay the interest on
its Senior Notes. The Barnett Merger was approved by Barnett's shareholders on
September 27, 2000, and the Company's remaining shares of Barnett Common Stock
were sold on September 29, 2000. The gross proceeds from the sale of the
7,186,530 shares of Barnett Common Stock amounted to $94.5 million. The
Company's equity investment in Barnett amounted to $44.3 million immediately
prior to the sale. The Company reported a net gain on the sale of Barnett of
$47.5 million, after the write-off of $2.7 million in transaction related costs
associated with the Barnett Sale and other costs associated with the
comprehensive financial restructuring of the Company.
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 44.2% of Barnett, the
acquirer of U.S. Lock. Until the sale of its remaining interest in Barnett, the
Company recognized the deferred gain as the goodwill generated by the purchase
of U.S. Lock was amortized by Barnett, resulting in an amortization of the
deferred gain of $51,000 in the quarter ended September 30, 1999. As a result of
the sale of its remaining interest in Barnett, the Company recognized the
remaining $7.8 million of unamortized deferred gain in the quarter ended
September 30, 2000.
Interest Expense
For the quarter ended September 30, 2000, net interest expense totaled
$4.7 million, as compared to $4.3 million in the fiscal 1999 first quarter.
Average borrowings for the current year's quarter amounted to $147.2 million,
with a weighted average interest rate of 12.2%, as compared to $130.2 million in
the same quarter last year, with a weighted average interest rate of 12.6%. The
average borrowings were lower in the prior year due to significant use of cash
to fund interest payments and costs associated with the financial restructuring,
while the weighted average interest rate remained consistent.
Provision for Income Taxes
In the quarter ended September 30, 2000, the Company's tax provision
amounted to $2.8 million. While the income recognized in the quarter ended
September 30, 2000 generated taxable income, the Company utilized a portion of
its net operating loss carryforwards to offset its federal tax due based on the
regular method of computing tax liability. The Company was able to utilize a
portion of these tax assets to offset its federal tax liability calculated using
the regular tax method. However, the Company has provided for federal taxes
based on the alternative minimum
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tax method in the quarter ended September 30, 2000, which will be paid in the
fiscal 2001 second quarter, and for state and various foreign taxes.
For the quarter ended September 30, 1999, the provision for income
taxes amounted to $0.2 million. The provision for this period primarily
represents various state and foreign taxes of the Company's wholly-owned
operations. For the fiscal 2000 first quarter, the difference between the
effective and statutory tax rates is primarily due to domestic operating losses
not benefited and goodwill amortization.
Extraordinary Charge
In the quarter ended September 30, 2000, the Company retired the Waxman
USA Inc. Senior Notes with a portion of the proceeds from the Barnett Sale.
Accordingly, the Company reported an extraordinary charge of $57,000, net of a
tax benefit of $38,000 to write-off the deferred loan costs associated with the
Senior Notes.
Net Income (Loss)
The Company reported net income of $48.2 million, or $3.98 per basic
and diluted share, for the fiscal 2001 first quarter ended September 30, 2000.
The significant change in net income is due to the recognition of a $47.5
million net gain on the Barnett Sale and $7.8 million of previously deferred
gain from the sale of U.S. Lock.
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.
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 development of a comprehensive
financial restructuring plan, including a Debt Restructuring Agreement with an
ad hoc committee that owned approximately 87.6 percent of the Company's Deferred
Coupon Notes and nearly 65 percent of the Senior Notes. An integral component of
the Debt Restructuring Plan was the sale of all of the Company's remaining
interest in Barnett. See Note 9 and "Management's Discussion and Analysis -
Recent Developments" in this Form 10-Q for a discussion of the Company's sale of
its interest in Barnett and the development of the comprehensive financial
restructuring plan.
On September 1, 2000 the Company sold 160,723 shares of its 7,186,530
shares of Barnett Common Stock to Barnett for $2.0 million, which the Company
used to pay the September 1, 2000 interest due on its Senior Notes. This sale
was made pursuant to the agreements relating to the acquisition of Barnett by
Wilmar, and additional consideration was received in October 2000 to increase
the per share price to $13.15 per share. On September 29, 2000, the Company's
remaining shares were sold to Wilmar, bringing the total gross proceeds received
to $94.5 million for the sale of the 7,186,530 shares of Barnett Common Stock.
The Company utilized the net proceeds as follows:
o paid or reserved for payment approximately $1.35 million for
state and federal taxes associated with the sale of the Barnett
shares.
o reduced its borrowings under its working capital credit facility
by approximately $10 million.
o retired all of its approximately $35.9 million in Senior Notes,
plus accrued interest.
o paid approximately $6.0 million in semi-annual interest due on
June 1, 2000 to its Deferred Coupon Note holders.
o funded a dedicated account with approximately $39.0 million, to
be used for the full satisfaction of the Deferred Coupon Notes,
including accrued interest.
As part of its comprehensive financial restructuring plan, on October
2, 2000, the Company filed its Chapter 11 Joint Plan of Reorganization with the
courts. On October 4, 2000, the First Day Orders were approved and, based on the
overwhelming support of 97% of the Deferred Coupon Note holders, the date of
November 14, 2000
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was set for the confirmation hearing to effectuate terms of the Joint Plan. The
Company believes that the approval of the Joint Plan, along with the retirement
of the Senior Notes and reduction of its bank working capital debt, will improve
its financial condition significantly, as well as reduce its interest expense by
approximately $17 million per year.
The Company expects to complete its comprehensive financial
restructuring plan in the fiscal 2001 second quarter ended December 31, 2000. As
part of that plan, the principal and accrued interest on its Deferred Coupon
Notes will be settled for approximately $39.0 million. At September 30, 2000,
the Deferred Coupon Note principal balance was $91.8 million and accrued
interest amounted to $3.9 million. The Company expects to report income from the
defeasance of this debt when the contemplated transaction is completed.
Based on an agreement with the Company's current working capital
lender, Congress Financial Corporation, debtor in possession financing was not
necessary, and Congress will continue to provide financing during and after the
financial reorganization. The financial reorganization does not involve any of
the Company's operating subsidiaries, which have their own bank credit facility
with Congress. These operating companies will continue to pay all of their trade
creditors, employees and other liabilities under normal trade conditions.
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, Medal of Pennsylvania, Inc.
(formerly known as WOC Inc.), 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. The Loan and Security Agreement provided, among other things,
for revolving credit advances of up to $22.0 million. This facility decreased to
$20 million with the completion of the Barnett Sale. As of September 30, 2000,
the Company had $8.4 million in borrowings under the revolving credit line of
the facility and had approximately $3.5 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) $10.0 million. or (ii)
of 70% of the market value of 1,000,000 shares of Barnett Common Stock. As a
result of the Barnett Sale, there is no longer any portion of the credit
facility based on the value of the Barnett 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, 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, WAMI Sales and Medal, 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 September 30, 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.
The Company relies primarily on Consumer Products for cash flow.
Consumer Products' customers include D-I-Y warehouse home centers, home
improvement centers, mass merchandisers 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 Consumer Products' business and its ability to
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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 21.2% of its net sales in fiscal
2000. In September 1999, the combined Hechinger/Builders Square operations,
which accounted for $3.7 million of Consumer Products' net sales in fiscal 1999,
filed for Chapter 7 liquidation. Due to the loss of this revenue base, Consumer
Products reduced its cost structure to be more in line with its revenue base,
but was unable to absorb all of the expenses due to this revenue loss. 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 $4,000 in income taxes in the fiscal 2001 first
quarter. At June 30, 2000, the Company had $66.7 million of available domestic
net operating loss carryforwards for income tax purposes, which expire 2009
through 2020 and $41.8 million of original issue discount, as of September 30,
2000, 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. While the income recognized in the quarter ended September 30,
2000 generated taxable income, the Company utilized a portion of these net
operating loss carryforwards to offset its federal tax due based on the standard
method of computing tax liability. However, the Company has provided for federal
taxes based on the alternative minimum tax method in the quarter ended September
30, 2000 and for state and various foreign taxes. The Company believes that the
completion of the comprehensive financial restructuring plan will result in the
elimination of all of its remaining net operating loss carryforwards.
The Company has total future lease commitments for various facilities
and other leases totaling $3.4 million, of which approximately $0.7 million is
due in fiscal 2001 and $0.2 million was paid in the fiscal 2001 first quarter.
The Company does not have any other commitments to make substantial capital
expenditures. The fiscal 2001 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 September 30, 2000, the Company had working capital of $45.1 million
and a current ratio of 2.7 to 1, which included $39.0 million in cash which will
be used to retire the Deferred Coupon Notes when or if the Joint Plan is
approved by the Courts. Excluding this cash, the Company's working capital is
$6.1 million and the current ratio is 1.2 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $8.9 million for the first quarter of
fiscal 2001 principally due to the payment of accrued interest and the reduction
in other assets, offset by an increase in accrued interest. Also affecting the
net cash used for operations were the $47.5 million net gain on the sale of
Barnett stock, the recognition of a $7.8 million deferred gain on the sale of
U.S. Lock and $1.4 million in equity earnings of Barnett. Cash flow provided by
investments totaled $94.2 million, due to the net proceeds from the Barnett
stock sale. Cash flow used in financing activities totaled approximately $85.1
million. Included in the cash used in financing activities is the retirement of
Waxman USA's Senior Notes, which amounted to $35.9 million and $39.0 million of
restricted cash placed in a segregated account that will be used in full
settlement of the Company's Deferred Coupon Notes upon exiting from the
prepackaged Chapter 11.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On October 2, 2000, Waxman Industries, Inc., excluding Waxman USA Inc.
and all of its direct and indirect operating subsidiaries, filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States
Court for the District of Delaware. The petition seeks ratification by the court
of the Debt Reduction Agreement that was jointly sponsored by the Committee to
settle, at a discount, all amounts due to the Company's Deferred Coupon Notes
(the " Joint Plan"). Under the Joint Plan, the only impaired creditor would be
the Deferred Coupon Note holders. Management believes that the Joint Plan should
be approved because it has the support of approximately 97 percent of the
Deferred Coupon Notes. A confirmation hearing is scheduled for November 14,
2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company, with the consent of the Ad Hoc Committee, did not pay its
Deferred Coupon Note interest payment of $6.0 million that was due on June 1,
2000. Although the Company was technically in default on these notes, the
members of the Ad Hoc Committee, which have in excess of two-thirds of the
Deferred Coupon Notes, provided instructions to the Trustee for the Deferred
Coupon Notes not to take any action with respect to the failure to pay the June
interest payment, pending the completion of the Barnett Merger. This interest
payment was paid on September 29, 2000, with a portion of the proceeds received
from the Barnett Merger.
In addition, see Part II, Item 1. Legal Proceedings in this Form 10Q
regarding the Company's Chapter 11 filing.
ITEM 5. OTHER INFORMATION
(a) The Company intends to hold its next annual meeting of shareholders
in February 2001. The deadline for the submission of shareholder proposals for
inclusion in the Company's proxy statement and form of proxy for the Company's
next annual meeting, and the date after which notice of any other shareholder
proposal is considered untimely, have passed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) See Exhibit 27.
b) Form 8-K
The Registrant filed a report on Form 8-K on July 17, 2000,
incorporating by reference the July 10, 2000 press release by
the Registrant regarding the agreement to sell all of its
interest in Barnett Inc. as part of a comprehensive financial
restructuring plan.
The Registrant filed a report on Form 8-K on October 12, 2000,
incorporating by reference the September 29, 2000 press
release by the Registrant regarding the completion of the sale
of Barnett Inc. and the filing of a prepackaged joint plan of
reorganization filed on October 2, 2000 under Chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of
Delaware.
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 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.
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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 13, 2000 BY: /S/ MARK W. WESTER
--------------------------------
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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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)
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