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SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Amendment No. 1
CHECK THE APPROPRIATE BOX:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
WAXMAN INDUSTRIES, INC.
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(Name of Registrant as Specified In Its Charter)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
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<S> <C>
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies: N/A
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2) Aggregate number of securities to which transaction applies: N/A
--------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule
0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
$94,502,869.50 In aggregate cash to be received by Registrant (rule 240.0-11(c)(2))
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid: $18,900.57
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[ ] Fee previously paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the
filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:_____________________________________________________
3) Filing Party:_____________________________________________________________________________________
4) Date Filed:_______________________________________________________________________________________
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WAXMAN INDUSTRIES, INC.
24460 Aurora Road
Bedford Heights, Ohio 44146
August __, 2000
To all stockholders of Waxman Industries, Inc.:
The attached Information Statement is being delivered to you
pursuant to Regulation 14C of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
The attached Information Statement is being mailed on or about
August __, 2000 to all stockholders of record on August __, 2000 of Waxman
Industries, Inc., a Delaware corporation (the "Company"or "Waxman Industries")
in connection with the proposed sale of all of the outstanding common stock of
Barnett Inc., a Delaware corporation ("Barnett"), held by Waxman USA Inc., a
Delaware corporation and wholly-owned subsidiary of the Company ("Waxman USA"),
pursuant to the acquisition of Barnett by Wilmar Industries, Inc. (such
transaction herein referred to as the "Barnett Stock Sale"). The Barnett Stock
Sale has been approved by the Board of Directors of the Company, the Board of
Directors of Waxman USA and the holders of a majority of the votes of the
outstanding shares of common stock, par value $0.01 per share, and Class B
common stock, $.01 par value per share, of the Company entitled to vote with
respect to the Barnett Stock Sale. Accordingly, resolutions will not be
submitted to the stockholders for a vote.
The attached Information Statement is being provided to you
pursuant to Rule 14c-2 under the Securities Exchange Act of 1934, as amended.
The Information Statement contains a more detailed description of the Barnett
Stock Sale. The Information Statement also constitutes notice to the Company's
stockholders of the taking of corporate action by written consent of the
stockholders, as required by Section 228(d) of the Delaware General Corporation
Law. I encourage you to read the Information Statement, including the exhibits
thereto, thoroughly, but you need not take any other action at this time. No
vote will take place because all required stockholder approvals have been
obtained.
Sincerely,
Armond Waxman
President and Co-Chief Executive
Officer of the Company
Bedford Heights, Ohio
August __, 2000
<PAGE> 3
WAXMAN INDUSTRIES, INC
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
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INFORMATION STATEMENT
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WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
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This summary does not contain all the information that is important to
you. To more fully understand the sale by Waxman USA Inc. of its shares of
Barnett Inc. and related transactions, you should carefully read the entire
information statement, which is first being mailed to stockholders on or about
August ___, 2000.
THE MERGER TRANSACTION (SEE PAGE 9)
- THE MERGER. Barnett, Wilmar Industries, Inc., and BW
Acquisition, Inc., a wholly-owned subsidiary of Wilmar, have
entered into a merger agreement pursuant to which Barnett will
be acquired by Wilmar.
- CONSIDERATION. As a result of the merger, Barnett
stockholders, including Waxman USA, will receive $13.15 in
cash, without interest, for each share of Barnett common
stock. Waxman USA, a wholly-owned subsidiary of Waxman
Industries, Inc., will receive an aggregate of $94,502,869.50
in cash for the 7,186,530 shares of Barnett common stock that
it owns.
- BARNETT STOCK PRICE. Shares of Barnett are traded on the
Nasdaq National Market under the symbol "BNTT." On July 7,
2000, which was the last trading day before the announcement
of the merger, Barnett common stock closed at $10.50 per
share. The average closing price of Barnett common stock for
the 20 trading days immediately before the announcement of the
merger was $10.25 per share.
- FAIRNESS OPINION. Deutsche Bank Securities, Inc. has delivered
to the special committee and the board of directors of Barnett
its opinion that the $13.15 merger price is fair to the
holders of Barnett common stock from a financial point of
view.
- CONDITIONS PRECEDENT. The consummation of the merger is
subject to several conditions, including regulatory and
shareholder approval and the receipt by Wilmar of debt
financing necessary to fund the merger.
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- VOTING TRUST AGREEMENT. Waxman USA, Wilmar, Barnett and
American Stock Transfer and Trust Company, as voting trustee,
entered into a voting trust agreement pursuant to which Waxman
USA has deposited 6,186,530 of its Barnett shares in a voting
trust to be voted in favor of the merger.
- STOCKHOLDER AGREEMENT. Waxman Industries and Waxman USA
entered into a stockholder agreement with Wilmar providing for
certain covenants by Waxman USA to vote the 1,000,000 Barnett
Shares that are pledged to Waxman's secured lender in favor
of, and to take such actions as will facilitate the
consummation of, the merger. Waxman also delivered to Wilmar a
proxy to vote these shares in this manner.
- BARNETT AGREEMENT. Waxman USA and Barnett have entered into an
agreement pursuant to which Barnett has agreed to purchase
from Waxman USA shares of Barnett common stock equal in value
to $2,000,000 if the merger has not occurred by September 1,
2000.
APPLICATION OF PROCEEDS (SEE PAGE 10)
The proceeds received by Waxman USA from the sale of its Barnett stock
will be applied to pay the following, in accordance with the provisions of the
recapitalization agreement among the consenting noteholders of Waxman Industries
and Waxman USA:
- TAXES. All required taxes in connection with Waxman USA's sale
of its Barnett stock, currently estimated to be approximately
$1.35 million.
- PAYMENT TO SECURED LENDER. A payment of approximately $9.9
million to Waxman's secured lender, Congress Financial
Corporation.
- SATISFACTION OF OBLIGATIONS UNDER THE SENIOR NOTES. A payment
of approximately $35.9 million of principal, plus accrued and
unpaid interest, to the holders of Waxman USA's 111/8% Senior
Notes due September 2001, in full and complete satisfaction of
such notes.
- SATISFACTION OF OBLIGATIONS UNDER THE DEFERRED COUPON NOTES.
Any proceeds from Waxman USA's sale of its Barnett Stock
remaining after the payment of the foregoing items will be
deposited into a segregated account to be applied to the
satisfaction of Waxman Industries' 12 3/4% Senior Secured
Deferred Coupon Notes due June 2004.
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CONSENTS AND REGULATORY APPROVALS (SEE PAGE 11)
- NOTEHOLDERS. Waxman Industries, Waxman USA and a majority of
their noteholders have entered into agreements whereby such
consenting noteholders consent to the taking of certain
actions by Waxman with respect to the above- referenced
transactions, waive any defaults under the indentures
occasioned by the completion of such transactions and agree
not to accelerate or otherwise take any action against Waxman
due to a default in the payment of interest on the deferred
coupon notes.
- SECURED LENDER. Waxman received a letter from Congress
Financial Corporation consenting to the sale by Waxman USA of
its Barnett Shares and waiving certain defaults under the
controlling loan and security agreement occasioned by the
completion of certain of the transactions referenced herein.
- HART-SCOTT-RODINO AND OTHER REGULATORY MATTERS. Among other
things, the merger is conditioned upon the receipt of approval
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976
and filing of a Certificate of Merger with the Secretary of
State of the State of Delaware.
JOINT PLAN OF REORGANIZATION (SEE PAGE 12)
It is anticipated that, promptly following the completion of the
merger, the Company will file a prepackaged, consensual Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code, such plan to be jointly
sponsored by Waxman Industries and the consenting noteholders. The only class of
security holders to be affected under the Joint Plan of Reorganization would be
the holders of the deferred coupon notes.
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<PAGE> 6
This Information Statement is being furnished to holders of the
outstanding shares of common stock, par value $0.01 per share, and Class B
common stock, $.01 par value per share (collectively, the "Common Stock"), of
Waxman Industries, Inc., a Delaware corporation (the "Company" or "Waxman
Industries") in connection with the proposed sale of all of the outstanding
common stock of Barnett Inc., a Delaware corporation ("Barnett"), held by Waxman
USA Inc., a Delaware corporation and wholly-owned subsidiary of the Company
("Waxman USA") pursuant to the acquisition of Barnett by Wilmar Industries, Inc.
("Wilmar") (such transaction herein referred to as the "Barnett Stock Sale").
In conformance with the Delaware General Corporation Law ("DGCL") and
the Company's Certificate of Incorporation, the affirmative vote of the holders
of a majority of the votes of the outstanding shares of Common Stock entitled to
vote have approved the Barnett Stock Sale. Accordingly, the Company is not
asking you for a proxy and you are requested not to send us a proxy. For that
reason, no proxy card has been enclosed and no meeting of stockholders will be
held to consider approval of the Barnett Stock Sale. The Barnett Stock Sale will
not become effective until at least twenty days after the mailing of this
Information Statement.
THIS INFORMATION STATEMENT IS FURNISHED BY THE COMPANY FOR INFORMATION
PURPOSES ONLY. This Information Statement is first being mailed on or about
August __, 2000 to holders of record of Common Stock as of the close of business
on August __, 2000 (the "Record Date"). As of the Record Date, [______] shares
of common stock and [_______] shares of Class B common stock were outstanding.
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THESE ACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH ACTIONS NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
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The date of this Information Statement is August __, 2000.
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<PAGE> 7
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and,
accordingly, files periodic reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
filed with the Commission are available for inspection and copying at the public
reference facilities of the Commission located in Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and should also be available
for inspection and copying at prescribed rates at the regional offices of the
Commission located at Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of this material may also be obtained by mail, upon
payment of the Commission's customary fees, from the Commission's principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains an Internet web site at http://www.sec.gov that contains reports,
proxy statements and other information. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. The
Company's filings can also be read at the NASDAQ Stock Market, 800 Merritt
Boulevard, Trumbull, CT 06601.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Information
Statement other than those contained herein. Any information or representations
with respect to such matters not contained herein or therein must not be relied
upon as having been authorized by the Company. The delivery of this Information
Statement shall not, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof or that
the information in this Information Statement is correct as of any time
subsequent to the date hereof or thereof.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Information Statement may contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are based on the beliefs of the Company and its management. When used in this
document, the words "anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "should," and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including, but not limited to, the risk that the
Company may not be able to implement its debt reduction program (as described
herein), 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. 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.
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INTRODUCTION
This Information Statement is being furnished to holders of Common
Stock in accordance with the rules and regulations promulgated by the
Commission.
APPROVAL OF THE BARNETT STOCK SALE
On July 9, 2000, the Board of Directors of the Company and Waxman USA
approved the Barnett Stock Sale. Messrs. Melvin Waxman, Armond Waxman and
Laurence Waxman, stockholders holding in the aggregate approximately 63.8% of
the aggregate voting power of the Common Stock, have acted by written consent in
lieu of a meeting of stockholders and voted to approve the Barnett Stock Sale.
No additional stockholder vote is necessary to approve the Barnett Stock Sale.
Neither your vote nor your proxy will be solicited.
EFFECTIVENESS OF THE STOCKHOLDER APPROVAL OF THE BARNETT STOCK SALE
The Company currently anticipates that the Barnett Stock Sale will be
consummated during the third quarter of this year, but in no event will the
Barnett Stock Sale be consummated less than 20 calendar days after the mailing
of this Information Statement.
Stockholders of the Company will have no "dissenter's rights" upon
consummation of the Barnett Stock Sale. For additional information regarding the
Barnett Stock Sale, see "Financial Restructuring of the Company" below.
PARTIES TO THE TRANSACTION
THE COMPANY
The Company is a leading supplier of specialty plumbing, hardware and
other products to the repair and remodeling market in the United States. The
Company distributes its products to over 1,400 customers including a wide
variety of large national and regional retailers, independent retail customers
and wholesalers. Waxman USA is a Delaware corporation and wholly-owned
subsidiary of the Company.
The principal executive offices of the Company and Waxman USA are
located at:
Waxman Industries, Inc.
24460 Aurora Road
Bedford Heights, Ohio 44146
(440) 439-1830
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BARNETT
Barnett is a leading direct marketer and distributor of an extensive
line of plumbing, hardware, electrical and security hardware products to
approximately 71,500 active customers. Barnett markets its products through six
distinct comprehensive catalogs supported by a nationwide network of
distribution centers and a sophisticated telesales operation. Barnett offers
approximately 21,300 name brand and private label products through its
industry-recognized Barnett(R) and U.S. Lock(R) catalogs and telesales
operations. Barnett's six distinct, comprehensive catalogs target professional
contractors, independent hardware stores, maintenance managers, liquid propane
gas dealers and locksmiths.
The principal executive offices of Barnett are located at:
Barnett Inc.
3333 Lenox Avenue
Jacksonville, Florida 32254
(904) 384-6350
WILMAR
Wilmar is a specialty plumbing and maintenance products distributor
based in Moorestown, New Jersey. Wilmar, which has 24 distribution centers
located throughout the United States, had sales of approximately $225.9 million
in 1999, primarily in the apartment housing market. In May 2000, Wilmar was
acquired in a merger recapitalization transaction by a group of investors
including Parthenon Capital, Chase Capital Partners, General Motors Investment
Management Corporation, Sterling Investment Partners, LP, Svoboda, Collins LLC
and BancBoston Capital, all of whom have committed to purchase additional equity
of Wilmar to finance a portion of the merger transaction. BW Acquisition is a
newly-formed Delaware corporation incorporated as a wholly-owned subsidiary of
Wilmar. BW Acquisition has not conducted business except in connection with
activities related to the merger between Barnett and Wilmar.
The principal executive offices of Wilmar and BW Acquisition are
located at:
Wilmar Industries, Inc.
303 Harper Drive
Moorestown, New Jersey 08057
(856) 439-1222
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FINANCIAL RESTRUCTURING OF THE COMPANY
BACKGROUND
As the Company has previously disclosed, since fiscal 1994, when the
Company last restructured its debt, the Company has continuously endeavored to
reduce its high level of debt through the monetization of its assets, as well as
through gaining efficiencies from its continuing businesses. As a result, the
Company has undertaken various initiatives to raise cash, improve its cash flow
and reduce its debt obligations or improve its financial flexibility during the
intervening period. Nonetheless, the Company continues to have a significant
amount of indebtedness.
As of March 31, 2000, the Company's consolidated debt (excluding trade
payables and accrued liabilities) was approximately $148.2 million. That
indebtedness is principally comprised of (i) approximately $92.797 million
accreted principal amount of 12 3/4% Senior Secured Deferred Coupon Notes due
June 2004 of the Company (the "Deferred Coupon Notes") issued pursuant to that
certain indenture (as amended, the "DC Notes Indenture"), dated as of May 20,
1994, by and between the Company and The Huntington National Bank, as trustee,
(ii) $35.855 million principal amount of 111/8% Senior Notes due September 2001
of Waxman USA (the "Senior Notes") issued pursuant to that certain indenture (as
amended, the "Senior Notes Indenture" and together with the DC Notes Indenture,
the "Indentures"), dated as of April 1, 1996, by and between Waxman USA and the
United States Trust Company of New York, as trustee and (iii) $20.566 million of
current maturities of debt, including obligations under the Company's working
capital credit facility (the "Congress Credit Facility") with Congress Financial
Corporation ("Congress"). Cash interest of approximately $6.0 million is payable
semi-annually with respect to the Deferred Coupon Notes, and the Senior Notes
require semi-annual cash interest payments of approximately $2.0 million.
Excluding these interest payments, the Company believes that operating cash
flow, together with borrowings under its working capital credit facilities, will
be sufficient in the short-term to fund its working capital requirements,
capital expenditures and cash interest requirements under the Congress Credit
Facility until the expected completion of the Barnett Stock Sale. Ultimately,
however, the Company will not be able to make the interest and principal
payments under its debt instruments without a restructuring of such debt
instruments and/or a significant appreciation in, and monetization of, the value
of the 7,186,530 shares of common stock of Barnett owned by Waxman USA (the
"Barnett Shares"). The Barnett Shares constitute approximately 44.3% of the
outstanding common stock, $.01 par value per share, of Barnett (the "Barnett
Common Stock"), a formerly wholly-owned subsidiary of the Company. Shares of
Barnett Common Stock are listed on the Nasdaq National Market under the symbol
"BNTT." As of July 10, 2000, the closing price at which the Barnett Common Stock
was sold on Nasdaq was $12.3125 per share, and the aggregate market value of the
Barnett Shares based on such closing price was $88.5 million.
The Company held discussions with several of the holders of the
Deferred Coupon Notes and the Senior Notes throughout 1999. Certain of these
bondholders (the "Consenting Noteholders") formed an ad hoc committee of holders
of Deferred Coupon Notes and Senior Notes, with which Committee the Company
continued to have discussions. As a result of these discussions, as
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<PAGE> 11
previously announced by the Company, on December 8, 1999, the Company entered
into an agreement (as amended (see below), the "Recapitalization Agreement")
with the Consenting Noteholders with respect to certain elements of the
financial restructuring of the Company (the "Financial Restructuring"). Key
elements of the Financial Restructuring include (x) the sale of the Barnett
Shares and the application of the net proceeds of such sale to pay taxes on such
sale, to pay certain amounts outstanding under the Congress Credit Facility, to
pay certain transaction expenses incurred by the Company, to repay in full the
Senior Notes and, after payment of the foregoing obligations, to apply the
remaining amounts to repay, on a discounted basis, the Deferred Coupon Notes and
(y) after the closing of the Barnett Stock Sale but before the repayment of the
Deferred Coupon Notes, the filing of a consensual, prepackaged Joint Plan of
Reorganization under Chapter 11 of Bankruptcy Code. The application of proceeds
upon consummation of the Barnett Stock Sale is more fully described below in the
subsection entitled "Financial Restructuring-Application of Proceeds." As
discussed in greater detail below, the Company expects to receive gross proceeds
of approximately $94.5 million upon consummation of the Barnett Stock Sale.
THE MERGER TRANSACTION
On July 10, 2000, Barnett, Wilmar and BW Acquisition, Inc., a Delaware
corporation and a wholly-owned subsidiary of Wilmar ("Merger Sub" and together
with Wilmar, the "Purchaser") entered into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which the Purchaser agreed to acquire all of
the outstanding shares of Barnett Common Stock, for $13.15 per share in cash
(the "Merger Consideration"), pursuant to a merger of Merger Sub with and into
Barnett (the "Merger"). The consummation of the Merger is subject to several
conditions, including regulatory and shareholder approval and the receipt by the
Purchaser of debt financing necessary to fund the Merger. Certain of the
operative agreements with respect to the Merger are summarized below.
The aggregate Merger Consideration that Waxman USA will receive for the
Barnett Shares is $94,502,870. The fairness of the Merger Consideration has been
addressed in a fairness opinion issued by Deutsche Bank Securities, Inc., which
was retained by a special committee of outside directors of the Board of
Directors of Barnett.
The Company and Waxman USA entered into several agreements with the
Purchaser with respect to the Merger and the transactions contemplated by the
Merger Agreement. The Company and Waxman USA entered into a stockholder
agreement, dated as of July 10, 2000 (the "Stockholder Agreement"), by and among
the Company, Waxman USA, Wilmar and Merger Sub, providing for, among other
things, a Proxy in favor of the Purchaser and certain covenants by Waxman USA to
vote the Barnett Shares in favor of, and to take such other actions as will
facilitate the consummation of, the Merger. Waxman USA also entered into a
Voting Trust Agreement, dated as of July 10, 2000 (the "Voting Trust
Agreement"), by and among Waxman USA, Wilmar, Merger Sub, Barnett and American
Stock Transfer & Trust Company, as voting trustee (the "Voting Trustee"). The
Voting Trust Agreement provides for the delivery of certain of the Barnett
Shares to the Voting Trustee to vote such shares in favor of the Merger.
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Waxman USA also entered into an agreement, dated as of July 7, 2000
(the "Barnett Agreement" and together with the Merger Agreement, the Stockholder
Agreement and the Voting Trust Agreement, the "Transaction Agreements"), by and
between Waxman USA and Barnett, pursuant to which Barnett agrees to purchase
from Waxman USA shares of Barnett Common Stock equal in value to $2,000,000, if
the Merger has not occurred by September 1, 2000.
APPLICATION OF PROCEEDS
The proceeds received by Waxman USA from the Barnett Stock Sale will be
applied as follows, in accordance with the provisions set forth in the
Recapitalization Agreement:
- Taxes. Upon the consummation of the Barnett Stock Sale, the
Company shall pay all required taxes with respect to the
Barnett Stock Sale for the taxable year in which the Barnett
Shares are sold ("Taxes"). The Company estimates that the
Taxes will be approximately $1.35 million.
- Payment to Secured Lender. Upon the consummation of the
Barnett Stock Sale, approximately $9.9 million (representing
the sum of (x) approximately $5,916,000 of interest actually
paid in cash on the Deferred Coupon Notes on December 1, 1999,
(y) approximately $1,994,000 of interest actually paid in cash
on the Senior Notes on March 1, 2000 and (z) $2,000,000 of
restructuring expenses already paid by the Company) shall be
immediately paid by the Company to Congress to be applied to
the obligations under the Congress Credit Facility.
- Satisfaction of Obligations Under the Senior Notes. Upon the
consummation of the Barnett Stock Sale, each holder of Senior
Notes would receive its pro rata share of $35,855,000 of
principal (plus accrued and unpaid interest from March 1, 2000
to the date of payment), in full and complete satisfaction of
the Senior Notes. Assuming the Merger is completed on August
31, 2000, the amount payable to the holders of the Senior
Notes will be approximately $37,849,434, which includes
$1,994,434 in accrued interest.
- Satisfaction of Obligations Under the Deferred Coupon Notes.
Upon the consummation of the Barnett Stock Sale, the remaining
proceeds will be deposited into a segregated account to be
applied to the satisfaction of the Deferred Coupon Notes. On
the effective date (the "Effective Date") of the confirmation
of the Joint Plan of Reorganization by the Bankruptcy Court,
each holder of Deferred Coupon Notes would receive (i) its pro
rata share of the remaining proceeds, allocated between (x)
accrued and unpaid interest and (y) principal and (ii) all
accrued interest or other investment proceeds earned on the
proceeds from the date of the closing of the Barnett Stock
Sale through the date such funds are distributed to the
holders of the Deferred Coupon Notes, in full and complete
satisfaction of any and all claims relating to the Company,
including with respect to the Deferred Coupon Notes.
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- Additional Consideration to Holders of Deferred Coupon Notes.
If, within one year from the date the Joint Plan of
Reorganization is confirmed by the Bankruptcy Court, the
Company sells itself or any of its subsidiaries or operating
divisions, or any assets thereof, other than sales of
inventory and other assets in the ordinary course of business
or sells additional equity securities, and such transactions
generate in the aggregate net proceeds in excess of $15.0
million during such one year period ("Excess"), then the
Company shall pay to the holders of the Deferred Coupon Notes
who received the distribution from the Joint Plan of
Reorganization 50% of such Excess.
CONSENTS AND REGULATORY APPROVALS
The Company and Waxman USA obtained the requisite consents from their
bondholders and secured lender to enter into the transactions contemplated by
the Transaction Agreements. The Company, Waxman USA and the Consenting
Noteholders entered into an Amendment, Consent and Waiver, dated as of July 9,
2000 (the "Amendment, Consent & Waiver"), pursuant to which (i) certain
provisions of the Recapitalization Agreement were amended, (ii) the Consenting
Noteholders consented to the taking of certain actions by the Company and Waxman
USA as set forth in the Transaction Agreements, (iii) the Consenting Noteholders
waived any defaults under the Indentures occasioned by the completion of the
transactions contemplated by the Transaction Agreements and (iv) the Consenting
Noteholders agreed not to accelerate, or otherwise take any action against the
Company, due to a default in payment of interest on the Deferred Coupon Notes.
In a letter to the Trustee, dated July 12, 2000, the Consenting Noteholders
instructed the Trustee not to seek acceleration of the Deferred Coupon Notes, or
otherwise take any action against the Company, due to a default in payment of
interest on the Deferred Coupon Notes.
Congress Financial Corporation ("Congress"), secured lender for the
Company, Waxman USA and certain subsidiaries of Waxman USA, consented to the
entering into of the transactions contemplated by the Transaction Agreement by
delivery of a letter agreement, dated as of July 10, 2000 (the "Congress Consent
Letter"), with respect to that certain Loan and Security Agreement, dated as of
June 17, 1999 (as same may be amended from time to time, the "Loan and Security
Agreement"), by and among Western American Manufacturing, Inc. ("WAMI"), WAMI
Sales, Inc. ("WAMI Sales"), Medal of Pennsylvania, Inc. ("Medal") and Waxman
Consumer Products Group Inc. ("WCPG," and together with WAMI, WAMI Sales and
Medal, the "Borrowers"), as Borrowers, and the Company, Waxman USA and TWI,
International, Inc. ("TWI" and together with the Company and Waxman USA, the
"Guarantors") and Congress Financial Corporation ("Congress"). The Congress
Consent Letter provides for the consent by Congress to the sale by Waxman USA of
all of the Barnett Shares (including those Barnett Shares pledged to Congress
pursuant to the Pledge and Security Agreement, dated as of June 17, 1999 and
amended as of December 8, 1999 and July 10, 2000, by and between Waxman USA and
Congress) in one sale or a series of related sales pursuant to the Merger
Agreement and the other Transaction Agreements and the waiver of certain
defaults under the Loan and Security Agreement occasioned by the completion of
the transactions contemplated by the Transaction Agreements, the
Recapitalization Agreement and the Amendment, Consent and Waiver.
-11-
<PAGE> 14
There are no federal or state regulatory requirements that the Company
must comply with, or approvals relating thereto that the Company must obtain, in
connection with the Barnett Stock Sale. The consummation of the Merger itself,
however, is conditioned on the expiration or the termination of any waiting
period applicable to the consummation of the Merger under the Hart- Scott-Rodino
Antitrust Improvement act of 1976, as amended, and the filing of a certificate
of merger with the Secretary of State of the State of Delaware in accordance
with the Delaware General Corporation Law. Wilmer received notice of early
termination of the Hart-Scott-Rodino waiting period on August 4, 2000.
JOINT PLAN OF REORGANIZATION
An integral component of the Financial Restructuring is the filing by
the Company of a prepackaged, consensual Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code. This Joint Plan of Reorganization would be
jointly sponsored by the Company and the Consenting Noteholders, and the only
class of securityholder to be affected under the Joint Plan of Reorganization
would be the holders of the Deferred Coupon Notes. The holders of Common Stock
of the Company would not be impaired under the Joint Plan of Reorganization. In
addition, none of the Company's subsidiaries or operating divisions would be a
part of the Joint Plan of Reorganization, and they would continue to pay all of
their trade creditors, employees and other liabilities under normal trade
conditions. As of the date of this Information Statement, the Joint Plan of
Reorganization has the support of bondholders owning approximately $81,269,000
principal amount of Deferred Coupon Notes, or approximately 87.6% of the total
principal amount of such Deferred Coupon Notes.
Although the Consenting Noteholders have agreed to the terms of a
consensual debt restructuring program and have entered into the Recapitalization
Agreement, there can be no assurance that the Financial Restructuring, as
described herein, will be effected as contemplated. Bankruptcy entails many
risks, some of which may change the outcome of the Financial Restructuring and
cause such outcome to materially deviate from the terms as described herein.
-12-
<PAGE> 15
SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
financial statements of Waxman Industries, Inc. The financial statements for
each of the years in the five year period ended June 30, 1999 have been audited
by Arthur Andersen LLP, independent certified public accountants. The financial
statements for the nine month periods ended March 31, 2000 and March 31, 1999
are unaudited.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, FISCAL YEARS ENDED JUNE 30,
--------------------------- ---------------------------
(Amounts in thousands, except per share amounts)
2000 1999 1999(8) 1998 1997 1996(9) 1995(9)
---- ---- ------- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 62,361 $ 79,613 $ 99,116 $ 105,662 $ 119,006 $ 235,067 $ 232,304
Cost of sales 43,110 55,617 69,264 69,429 84,574 160,556 152,368
----------------------------------------------------------------------------------
Gross profit 19,251 23,996 29,852 36,233 34,432 74,511 79,936
Selling, general and administrative expenses 20,296 23,365 31,635 30,290 34,996 70,628 62,023
Restructuring, procurement and non-recurring
charges (1) 1,950 4,250 4,515 24 1,522 19,507 3,237
----------------------------------------------------------------------------------
Operating income (loss) (2,995) (3,619) (6,298) 5,919 (2,086) (15,624) (14,676)
Gain on sale of Barnett stock, net (2) -- -- -- -- 16,693 65,917 --
Gain on sale of U.S. Lock, net (3) -- 10,196 10,298 -- -- -- --
Loss on sale of WAMI, net (4) (1,966) -- -- -- -- -- --
Amortization of deferred U.S. Lock gain 152 -- -- -- -- -- --
Equity earnings of Barnett 5,333 5,024 6,744 6,341 5,843 -- --
Interest expense, net 13,446 12,919 17,192 16,031 16,477 24,264 26,411
----------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes, minority interest, discontinued
operation, extraordinary loss and cumulative
effect of change in accounting (12,922) (1,318) (6,448) (3,771) 3,973 26,029 (11,735)
Provision for income taxes 395 1,139 1,029 537 401 2,395 338
----------------------------------------------------------------------------------
Income (loss) from continuing operations before
minority interest, discontinued operation,
extraordinary loss and cumulative effect of
change in accounting (13,317) (2,457) (7,477) (4,308) 3,572 23,634 (12,073)
Minority interest in consolidated affiliate -- -- -- -- -- 975 --
Discontinued operation: (5)
Reversal of loss (and loss) on disposal -- -- -- -- -- 11,000 (11,000)
----------------------------------------------------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of change in accounting (13,317) (2,457) (7,477) (4,308) 3,572 33,659 (23,073)
Extraordinary loss (6) -- -- -- 192 -- 6,251 --
Cumulative effect of change in accounting (7) -- -- -- -- -- 8,213 --
----------------------------------------------------------------------------------
Net income (loss) $ (13,317) $ (2,457) $ (7,477) $ (4,500) $ 3,572 $ 19,195 $ (23,073)
==================================================================================
Average number of shares outstanding 12,057 12,057 12,057 12,026 11,919 11,759 11,712
==================================================================================
Basic earnings (loss) per share:
From continuing operations before minority
interest, discontinued operations, extraordinary
loss and cumulative effect of change in $ (1.10) $ (.20) $ (.62) $ (.35) $ .30 $ 2.01 $ (1.03)
accounting
Minority interest in consolidated affiliate -- -- -- -- -- (.08) --
Discontinued operations:
Reversal of loss (and loss) on disposal -- -- -- -- -- .93 (.94)
Extraordinary loss -- -- -- (.02) -- (.53) --
</TABLE>
-13-
<PAGE> 16
<TABLE>
<CAPTION>
2000 1999 1999(8) 1998 1997 1996(9) 1995(9)
---- ---- ------- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative effect of change in accounting -- -- -- -- -- (.70) --
----------------------------------------------------------------------------------
Net income (loss) per share $ (1.10) $ (.20) $ (.62) $ (.37) $ .30 $ 1.63 $ (1.97)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Diluted earnings (loss) per share:
From continuing operations before minority
Interest, discontinued operations,
extraordinary loss and cumulative effect of
change in accounting $ (1.10) $ (.20) $ (.62) $ (.35) $ .26 $ 1.74 $ (1.03)
Minority interest in consolidated affiliate -- -- -- -- -- (.07) --
Discontinued operations:
Reversal of loss (and loss) on disposal -- -- -- -- -- .81 (.94)
Extraordinary loss -- -- -- (.02) -- (.46) --
Cumulative effect of change in accounting -- -- -- -- -- (.61) --
----------------------------------------------------------------------------------
Net income (loss) per share $ (1.10) $ (.20) $ (.62) $ (.37) $ .26 $ 1.41 $ (1.97)
==================================================================================
Cash dividends per share:
Common stock $ -- $ -- $ -- $ -- $ -- $ -- $ --
Class B common stock $ -- $ -- $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Working capital 4,328 26,775 $ 21,945 $ 15,776 $ 31,093 $ 51,460 $ 25,828
Total assets 107,222 108,813 100,210 105,743 107,232 142,637 169,744
Total long-term debt 128,378 126,803 128,480 118,314 120,994 113,080 145,064
Stockholders' equity (deficit) (64,969) (47,070) (52,086) (44,744) (39,506) (43,254) (62,697)
</TABLE>
------------------------------------------
1) For the nine months ended March 31, 2000, the Company recorded
a charge of $1.3 million related to the consolidation of its
packaged plumbing products under the Plumbcraft(R) brand name
and a business procurement charge of $0.65 million. In the
nine months ended March 31, 1999, the Company recorded a $1.8
million charge related to the relocation of its Bedford
Heights, Ohio warehouse to Groveport, Ohio and a business
procurement charge of $2.45 million. In fiscal 1999, the
Company recorded a $2.1 million non-recurring charge
associated with the move of one of Consumer Products'
warehouses and a business procurement charge of $2.45 million.
In the first quarter of fiscal 1998, the Company recorded an
estimated non-recurring charge of $133,000 for warehouse
closure costs and other expenses associated with the sale of
LeRan Gas Products. In the fourth quarter of fiscal 1998, the
estimated loss was adjusted to the actual loss of $24,000. In
the fourth quarter of fiscal 1997, the Company sold Madison
Equipment Company and recorded a loss on sale of $0.7 million.
In fiscal 1997, Consumer Products also recorded a business
procurement charge of $0.8 million. During fiscal 1996, the
Company recorded a $19.5 million restructuring and asset
impairment loss, which included a $7.4 million restructuring
charge primarily attributable to strategic initiatives at
Consumer Products and a $12.1 million asset impairment charge
primarily attributable to U.S. Lock in accordance with SFAS
121. During fiscal 1995, the Company incurred $2.8 million in
warehouse closure costs as Consumer Products' distribution
network was downsized from four locations to three. In fiscal
year 1995, Consumer Products incurred a business procurement
charge of $0.5 million. See Note 1 to the Consolidated
Financial Statements (the "Consolidated Financial Statements")
appearing in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 attached hereto as Annex A for
further discussion of the fiscal 1999 and 1997 business
procurement charges and Note 4 for further discussion of the
fiscal 1998 and 1997 charges.
2) Reflects the gains on the Barnett Public Offerings as further
described in Note 2 to the Consolidated Financial Statements.
3) Reflects the gain on the sale of U.S. Lock as further
described in Note 4 to the Consolidated Financial Statements.
4) Reflects the loss on the sale of substantially all of the
assets and certain liabilities of Western American
Manufacturing Inc., which was sold effective March 31, 2000.
5) Fiscal 1996 amount represents the reversal of the fiscal 1995
estimated loss on the disposal of Consumer Products.
6) Represents the write-off of deferred financing costs resulting
from the repayment and refinancing of debt in fiscal 1998 and
1996, as further described in Notes 2 and 5 to the
Consolidated Financial Statements.
7) See Note 1 to the Consolidated Financial Statements for a
discussion of procurement charges. Effective July 1, 1995,
the Company
-14-
<PAGE> 17
changed its method of accounting for procurement costs to its
current method, resulting in the cumulative effect of a change
in accounting for procurement costs of $8.2 million, before
tax benefit, in fiscal 1996.
8) The results of U.S. Lock were consolidated by the Company
until its sale, which was effective January 1, 1999. As a
result of the sale, fiscal 1999 only includes six months of
U.S. Lock's results while the previous fiscal years include
results for twelve months. See Note 4 to the Consolidated
Financial Statements for further discussion of the sale of
U.S. Lock.
9) The results of Barnett were consolidated by the Company until
the Barnett Secondary Offering in 1997. As a result of the
Barnett Secondary Offering, fiscal years subsequent to fiscal
1996 do not consolidate the results of Barnett.
-15-
<PAGE> 18
PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information has been derived from the
financial statements of Waxman Industries, Inc. The financial statements for the
year ended June 30, 1999 have been audited by Arthur Andersen LLP, independent
certified public accountants. The financial statements for the nine month period
ended March 31, 2000 are unaudited.
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORIC (5) PRO FORMA PRO FORMA
JUNE 30, 1999 ADJUSTMENTS JUNE 30, 1999
------------- ----------- -------------
<S> <C> <C> <C>
Net sales................................................ $99,116 -- $99,116
Cost of sales............................................ 69,264 -- 69,264
--------------------- --------------------- -----------------
Gross profit............................................. 29,852 -- 29,852
Selling, general and administrative expenses............. 31,635 -- 31,635
Procurement and non-recurring Charges (1)................ 4,515 -- 4,515
--------------------- --------------------- -----------------
Operating income (loss).................................. (6,298) -- (6,298)
Gain on sale of U.S. Lock, net (2)....................... 10,298 -- 10,298
Equity earnings of Barnett (3)........................... 6,744 (6,744) --
Interest expenses, net (4)............................... 17,192 (15,549) 1,643
--------------------- --------------------- -----------------
Income (loss) before income taxes........................ (6,448) 8,805 2,357
Provision for income taxes............................... 1,029 -- 1,029
--------------------- --------------------- -----------------
Net income (loss)........................................ ($7,477) $ 8,805 $ 1,328
--------------------- --------------------- -----------------
Other comprehensive income:
Foreign currency translation adjustment................. 134 -- 134
--------------------- --------------------- -----------------
Comprehensive income (loss).............................. ($7,343) $ 8,805 $ 1,462
--------------------- --------------------- -----------------
Average number of shares outstanding..................... 12,057 12,057
--------------------- -----------------
Basic earnings (loss) per share:
Net income (loss) per share............................. ($0.62) $0.11
--------------------- -----------------
Diluted earnings (loss) per share:
Net income (loss) per share............................. ($0.62) $0.11
--------------------- -----------------
</TABLE>
-16-
<PAGE> 19
------------------------------------------
1. In fiscal 1999, the Company recorded a $2.1 million
non-recurring charge associated with the move of one of
Consumer Products' warehouses and a business procurement
charge of $2.5 million. Business procurement costs represent
the amount paid by the Company in connection with a customer's
agreement to purchase products from the Company for a specific
period. The amount includes the consideration paid to the new
or existing customer (i) for the right to supply such customer
for a specified period, (ii) to assist such customer in
reorganizing its store aisles and displays in order to
accommodate the Company's products and (iii) to purchase
competitor's merchandise that the customer has on hand when it
changes suppliers, less the salvage value received by the
Company. The Company expenses these costs in the fiscal year
incurred. Procurement costs for (i) above totaled $2.0 million
in fiscal 1999. Procurement costs related to (ii) above
totaled $0.5 million in fiscal 1999. These types of
procurement costs are included as procurement charges in the
accompanying consolidated statements of operations.
Procurement costs for (iii) above totaled $1.1 million in
fiscal 1999, and are included as a contra-sales amount in net
sales in the accompanying consolidated statements of
operations.
2. In fiscal 1999, the Company sold U.S. Lock to Barnett,
recognizing $10.3 million of the total net gain, which
amounted to $18.3 million, due to the continued ownership in
Barnett. The remaining net gain of $8.0 million is recognized
with the sale of Barnett.
3. The pro forma adjustment reflects the elimination of the
Barnett equity earnings as if Barnett had been sold as of the
beginning of the fiscal year.
4. The pro forma adjustment reflects the elimination of interest
from the 12 3/4% Deferred Coupon Notes due 2004, 11 1/8%
Senior Notes due 2001 and a reduction in bank working capital
borrowings being repaid with proceeds from the transaction.
The pro forma adjustment also reflects the elimination of
deferred loan amortization costs for the Deferred Coupon Notes
and the Senior Notes.
5. The results of U.S. Lock were consolidated by the Company
until its sale, which was effective January 1, 1999. As a
result of the sale, fiscal 1999 only includes six months of
U.S. Lock's results.
-17-
<PAGE> 20
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORIC PRO FORMA PRO FORMA
MARCH 31, 2000 ADJUSTMENTS MARCH 31, 2000
---------------------- ----------------------- -----------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. $62,361 -- $62,361
Cost of sales............................................. 43,110 -- 43,110
---------------------- ----------------------- -----------------
Gross profit.............................................. 19,251 -- 19,251
Selling, general and administrative expenses.............. 20,296 -- 20,296
Procurement and non-recurring Charges (1)................. 1,950 -- 1,950
---------------------- ----------------------- -----------------
Operating income (loss)................................... (2,995) -- (2,995)
Loss on sale of WAMI, net (2)............................. (1,966) -- (1,966)
Amortization of deferred U.S. Lock gain (3)............... 152 (152) --
Equity earnings of Barnett (4)............................ 5,333 (5,333) --
Interest expense, net (5)................................. 13,446 (13,010) 436
---------------------- ----------------------- -----------------
Income (loss) before income taxes ........................ (12,922) 7,525 (5,397)
Provision for income taxes ............................... 395 -- 395
---------------------- ----------------------- -----------------
Net income (loss)......................................... $(13,317) $ 7,525 ($ 5,792)
---------------------- ----------------------- -----------------
Other comprehensive income:
Foreign currency translation adjustment.................. 434 -- 434
---------------------- ----------------------- -----------------
Comprehensive income (loss)............................... $(12,883) $ 7,525 $(5,358)
---------------------- ----------------------- -----------------
Average number of shares outstanding...................... 12,057 12,057
---------------------- -----------------
Basic earnings (loss) per share:..........................
Net income (loss) per share............................... ($1.10) ($0.48)
-----------------
Diluted earnings (loss) per share:........................
Net income (loss) per share............................... ($1.10) ($0.48)
---------------------- -----------------
</TABLE>
-18-
<PAGE> 21
---------------------------------
1. 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. In addition, Consumer Products
recognized a business procurement charge of $0.65 million.
Procurement costs represent the amount paid by the Company in
connection with a customer's agreement to purchase products
from the Company for a specific period. The amount includes
the consideration paid to the new or existing customer (i) for
the right to supply such customer for a specified period, (ii)
to assist such customer in reorganizing its store aisles and
displays in order to accommodate the Company's products and
(iii) to purchase competitor's merchandise that the customer
has on hand when it changes suppliers, less the salvage value
received by the Company. The Company expenses these costs in
the fiscal year incurred. Procurement costs for (i) above
totaled $150,000 in the first quarter, none in the second
quarter and $500,000 in the third quarter of fiscal 2000. The
Company did not incur procurement costs related to (ii) above
in the fiscal 2000. These types of procurement costs are
included as procurement charges in the accompanying
consolidated statements of operations. Procurement costs for
(iii) above totaled $1.1 million for the first nine months of
fiscal 2000, which are included as a contra-sales amount in
net sales in the accompanying consolidated statements of
operations.
2. Effective March 31, 2000, the Company sold substantially all
of the assets and business of Western American Manufacturing
Inc. ("WAMI") for $1.8 million in cash, resulting in a loss of
approximately $2.0 million.
3. The pro forma adjustment reflects the elimination of the
amortization of the U.S. Lock gain due to its full recognition
with the sale of Barnett.
4. The pro forma adjustment reflects the elimination of the
Barnett equity earnings as if Barnett had been sold as of the
beginning of the fiscal year.
5. The pro forma adjustment reflects the elimination of interest
from the 12 3/4% Deferred Coupon Notes due 2004 and the
11 1/8% Senior Notes due 2001. The pro forma adjustment also
reflects the elimination of deferred loan amortization costs
for the Deferred Coupon Notes and the Senior Notes.
-19-
<PAGE> 22
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORIC PRO FORMA PRO FORMA
MARCH 31, 2000 ADJUSTMENTS MARCH 31, 2000
------------------------------ ---------------------- -------------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash (1)........................................... $363 $7,090 $7,453
Trade Receivables, net............................. 12,970 -- 12,970
Other Receivables.................................. 5,020 -- 5,020
Inventories........................................ 18,844 -- 18,844
Prepaid Expenses................................... 3,078 -- 3,078
------------------------------ ---------------------- -------------------
Total Current Assets...................... 40,275 7,090 47,365
------------------------------ ---------------------- -------------------
Investment in Barnett (2).......................... 41,718 (41,718) --
------------------------------ ---------------------- -------------------
Property and Equipment:
Land............................................... 589 -- 589
Buildings.......................................... 4,651 -- 4,651
Equipment.......................................... 11,455 -- 11,455
------------------------------ ---------------------- -------------------
16,695 -- 16,695
Less Accumulated Depreciation
and Amortization................................... (7,150) -- (7,150)
------------------------------ ---------------------- -------------------
Property and Equipment, net........................ 9,545 -- 9,545
------------------------------ ---------------------- -------------------
Cost of Businesses in Excess of
Net Assets Acquired , net........................ 6,751 -- 6,751
Unamortized Debt Issuance Costs, net (3)........... 2,619 (2,353) 266
Other Assets (4) .................................. 6,314 (1,844) 4,470
------------------------------ ---------------------- -------------------
Total Assets.............................. $107,222 ($38,825) $68,397
------------------------------ ---------------------- -------------------
</TABLE>
LIABILITIES:
Current Liabilities:
-20-
<PAGE> 23
<TABLE>
<CAPTION>
HISTORIC PRO FORMA PRO FORMA
MARCH 31, 2000 ADJUSTMENTS MARCH 31, 2000
------------------------- --------------------- -----------------
<S> <C> <C> <C>
Current Portion of Long - Term Debt (5)............. $20,566 ($9,912) $10,654
Accounts Payable.................................... 7,393 -- 7,393
Accrued Liabilities................................. 3,147 -- 3,147
Accrued Taxes (6)................................... 565 (565) --
Accrued Interest (7)................................ 4,276 (4,276) --
------------------------- --------------------- -----------------
Total Current Liabilities.................. 35,947 (14,753) 21,194
------------------------- --------------------- -----------------
Long-Term Debt, net of current portion ............. 768 -- 768
Senior Secured Deferred Coupon Notes, net (8)....... 91,755 (91,755) --
Senior Notes (8).................................... 35,855 (35,855) --
Deferred Gain (9)................................... 7,866 (7,866) --
Stockholders' Equity:
Preferred Stock 0 -- 0
Common Stock 98 -- 98
Class B Common Stock 21 -- 21
Paid-in Capital 21,732 -- 21,732
Retained Deficit (10) (86,225) 111,404 25,179
------------------------- --------------------- -----------------
(64,374) 111,404 47,030
Cumulative Currency Translation Adjustment (595) -- (595)
------------------------- --------------------- -----------------
Total Stockholders' Equity (64,969) 111,404 46,435
------------------------- --------------------- -----------------
Total Liabilities and Equity $107,222 ($38,825) $68,397
========================= ===================== =================
</TABLE>
--------------------------
1. The pro forma adjustment represents the net cash received from
the transaction, based on the debt level and current
settlement amounts.
2. The pro forma adjustment reflects the elimination of the
investment in Barnett as a result of the sale of stock as part
of the Company's financial reorganization plan.
3. The pro forma adjustment reflects the write-off of unamortized
deferred financing costs due to the repayment of the 12 3/4%
Deferred Coupon Note and 11 1/8% Senior Note obligations.
4. The pro forma adjustment reflects the write-off of capitalized
costs associated with the financial reorganization and debt
restructuring.
5. Represents the amount of debt to be repaid on the Company's
working capital credit facility per the settlement with the
bondholders.
6. Represents the payment and elimination of all taxes as a
result of the transactions.
7. Represents the payment and elimination of all interest as a
result of the transactions.
-21-
<PAGE> 24
8. Represents the payment and elimination of the Deferred Coupon
Notes and Senior Notes as a result of the transactions.
9. Represents the recognition of the remaining deferred gain from
the sale of U.S. Lock. In fiscal 1999, the Company sold U.S.
Lock to Barnett, recognizing $10.3 million of the total net
gain, which amounted to $18.3 million, due to the continued
ownership in Barnett.
10. Represents the net gain from the sale of the Barnett stock,
debt defeasance income, the tax impact of the transactions,
net of the utilization of the net operating loss carryforward,
write-offs and expenses associated with the transaction.
-22-
<PAGE> 25
INFORMATION WITH RESPECT TO WAXMAN INDUSTRIES, INC.
Certain information with respect to the Company may be found in the
following documents that accompany this Information Statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1999, attached hereto as Annex A.
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999, attached hereto as Annex B.
3. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1999, attached hereto as Annex C.
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2000, attached hereto as Annex D.
INFORMATION WITH RESPECT TO BARNETT INC.
Certain information with respect to Barnett may be found in the
following documents that accompany this Information Statement:
1. Barnett's Annual Report on Form 10-K for the fiscal year ended June
30, 1999, attached hereto as Annex E.
2. Barnett's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1999, attached hereto as Annex F.
3. Barnett's Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 1999, attached hereto as Annex G.
4. Barnett's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2000, attached hereto as Annex H.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Melvin Waxman and Armond Waxman are the Chairman of the Board of
Directors and Vice Chairman of the Board of Directors of Barnett, respectively.
In addition, Melvin Waxman individually owns 24,000 shares of Barnett Common
Stock (constituting less than 0.2% of the outstanding shares of Barnett Common
Stock) and an option, granted under the 1997 Directors Stock Option Plan of
Barnett, exercisable to acquire 100,000 shares of the Barnett Common Stock
(constituting less than 0.7% of the outstanding shares of Barnett Common Stock)
at $21.00 per share. Armond Waxman owns 24,700 shares of Barnett Common Stock
(constituting less than 0.2% of the outstanding shares of Barnett Common Stock)
and an option, granted under the 1997 Directors Stock Option Plan of Barnett,
exercisable to acquire 100,000 shares of Barnett Common Stock
-23-
<PAGE> 26
(constituting less than 0.7% of the outstanding shares of Barnett Common Stock)
at $21.00 per share. The aforementioned options will be terminated, without
value, upon consummation of the transactions contemplated hereby.
Barnett has established a committee of its independent directors to
review and approve the Barnett Stock Sale, and has retained independent advisors
to render advice to it with respect thereto. Melvin Waxman, Armond Waxman and
William R. Pray, the President and Chief Executive Officer of Barnett, are not
members of such committee. In addition, it is agreed that each of Melvin Waxman
and Armond Waxman will resign from the Board of Directors of Barnett upon the
consummation of the Barnett Stock Sale.
The Company's wholly-owned subsidiaries engage in business transactions
with Barnett. Products sold to Barnett for resale totaled $19.9 million in
fiscal 1999, $16.2 million in fiscal 1998 and $13.7 million in fiscal 1997.
There were no purchases from Barnett in fiscal 1999 and $0.1 million in fiscal
1997.
The Company and Barnett provide to and receive from each other certain
selling, general and administrative services and reimburse each other for
out-of-pocket disbursements related to those services. In connection with
initial public offering of Barnett, the Company and Barnett, among others,
entered into an intercorporate agreement (the "Intercorporate Agreement").
Pursuant to the Intercorporate Agreement, the Company provides certain
managerial, administrative and financial services to Barnett and is paid by
Barnett for the allocable cost of the salaries and expenses of the Company's
employees while they are rendering such services. Barnett also reimburses the
Company for actual out-of-pocket disbursements to third parties by the Company
required for the provision of such services by the Company. In addition to the
services provided by the Company to Barnett pursuant to the Intercorporate
Agreement, Barnett also provided certain services to U.S. Lock, LeRan Gas
Products and Madison Equipment, which were divisions or subsidiaries of the
Company until they were sold by the Company.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
CAPITAL STOCK
The following table sets forth, as of June 30, 2000, the number of
shares of common stock and Class B common stock beneficially owned by each
director and executive officer, by the directors and executive officers of the
Company as a group and by each holder of at least five percent of common stock
and Class B common stock known to the Company, and the respective percentage
ownership of the outstanding common stock and Class B common stock and voting
power held by each such holder and group. The mailing address for Messrs. Melvin
and Armond Waxman is the executive office of the Company.
-24-
<PAGE> 27
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially Owned Ownership
-------------------------------- --------------------------
Class B Class B Percentage of
Common Common Common Common Aggregate
Name and Beneficial Owner Stock Stock Stock Stock Voting Power
---------------------------------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Melvin Waxman(1).................. 1,129,300 1,011,932 11.0% 47.2% 35.5%
Armond Waxman(2).................. 1,030,882 770,282 10.0 35.9 27.6
Laurence S. Waxman(3)............. 231,900 55,252 2.6 2.6 2.6
Irving Friedman(4)................ 25,000 -- * -- *
Judy Robins(5).................... 109,750 75,250 1.1 3.5 2.7
Directors and officers as a 2,620,007 1,912,716 24.2 89.3 67.4
group (7 individuals).............
Credit Suisse First Boston,
Inc. (6).......................... 550,000 -- 5.5 -- 1.8
11 Madison Avenue
New York, NY 10010
Herzog, Heine Geduld,. Inc.
525 Washington Blvd. 544,144 -- 5.5 - 1.7
Jersey City, NJ 07310
</TABLE>
-----------------
* less than 1%
(1) Includes 300,000 shares of common stock subject to options granted to
Mr. Melvin Waxman pursuant to the Company's 1992 Non-Qualified and
Incentive Stock Option Plan (the "1992 Stock Option Plan") and 100
shares of common stock owned by a member of Mr. Waxman's immediate
family, as to which shares Mr. Waxman disclaims beneficial ownership.
Does not include 200,000 shares of common stock subject to stock
appreciation rights granted to Mr. Waxman by the Company which are
vested but have a $3.375 trigger price.
(2) Includes 300,000 shares of common stock subject to options granted to
Mr. Armond Waxman pursuant to the 1992 Stock Option Plan and 100 shares
of common stock owned by a member of Mr. Waxman's immediate family, as
to which shares Mr. Waxman disclaims beneficial ownership. Does not
include 200,000 shares of common stock subject to stock appreciation
rights granted to Mr. Waxman by the Company which have vested but have
a 3.375 trigger price.
(3) Includes 166,250 shares of common stock subject to options granted to
Mr. Laurence Waxman pursuant to the 1992 Stock Option Plan and 27,100
shares of common stock for which Mr. Waxman is custodian to his minor
children. Does not include 100,000 shares of common stock subject to
stock appreciation rights granted to Mr. Waxman by the Company which
have vested, but have a $3.375 trigger price.
(4) Includes 20,000 shares of common stock subject to options granted to
Mr. Friedman pursuant to the 1994 Non-Employee Directors Stock Option
Plan (the "1994 Directors Plan") and 5,000 shares of common stock
granted to Mr. Friedman pursuant to the 1996 Non-Employee Directors'
Restricted Share Plan (the "1996 Directors Plan").
(5) Includes 20,000 and 10,000 shares of common stock subject to options
granted to Mrs. Robins as director and her spouse, pursuant to the 1994
Directors Plan, as Corporate Secretary of the Company, respectively,
and 15,000 shares of common stock granted to Mrs. Robins pursuant to
the 1996 Directors Plan.
-25-
<PAGE> 28
(6) The information set forth in the table with respect to Credit Suisse
First Boston, Inc. was obtained from a statement on Schedule 13G ,
dated February 13, 1998, filed with the Securities and Exchange
Commission. Such statement reflects Credit Suisse First Boston, Inc.'s
beneficial ownership as of December 31, 1997.
(7) The information set forth in the table with respect to Herzog, Heine
Geduld, Inc. was derived from a statement on Schedule 13G, dated as of
December 31, 1999, filed with the Securities and Exchange Commission.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company is required to identify any officer, director or beneficial
owner of more than 10% of the Company's equity securities who failed to timely
file with the Commission a required report relating to ownership and changes in
ownership of the Company's equity securities. Based on material provided to the
Company by such officers, directors and beneficial owners of more than 10% of
the Company's equity securities, the Company believes that during the year ended
March 31, 2000, there was compliance with all such filing requirements.
-26-
<PAGE> 29
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
23.1 Consent of Arthur Andersen LLP relating to Waxman Industries, Inc.
23.2 Consent of Arthur Andersen LLP relating to Barnett Inc.
-27-
<PAGE> 30
Annex A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-5888
------------------------
WAXMAN INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 34-0899894
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
24460 AURORA ROAD, 44146
BEDFORD HEIGHTS, OHIO (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(440) 439-1830
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing price at which such stock was sold on the
Over-The-Counter Bulletin Board on September 20, 1999: $5,093,083
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 20, 1999:
COMMON STOCK 9,914,939
CLASS B COMMON STOCK 2,142,358
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 31
DOCUMENTS INCORPORATED BY REFERENCE
Registrant intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange
Act of 1934 within 120 days of the close of its fiscal year ended June 30, 1999,
portions of which document shall be deemed to be incorporated by reference in
Part I and Part III of this Annual Report on Form 10-K from the date such
document is filed.
The Company consists of Waxman Industries, Inc. and subsidiaries in which
Waxman Industries, Inc. directly or indirectly has a majority voting interest.
In fiscal 1997, the Company began accounting for Barnett Inc. ("Barnett") under
the equity method of accounting due to the reduction of the Company's ownership
of Barnett to 44.5% in the fiscal 1997 fourth quarter. Prior to that time, the
Company consolidated Barnett's results, with a minority interest charge for the
portion of Barnett not owned by the Company. The Barnett Form 10-K for the year
ended June 30, 1999 is incorporated by reference into Item 8 of this Annual
Report on Form 10-K.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that are based on the beliefs of the Company and its management. When
used in this document, the words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "should," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, but not limited to, the
risk that the Company may not be able to implement its deleveraging strategy in
the intended manner, risks associated with currently unforeseen competitive
pressures and risks affecting the Company's industry, such as decreased consumer
spending, customer concentration issues and the effects of general economic
conditions. In addition, the Company's business, operations and financial
condition are subject to the risks, uncertainties and assumptions which are
described in the Company's reports and statements filed from time to time with
the Securities and Exchange Commission, including this Report. Should one or
more of those risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein.
PART I
ITEM 1. BUSINESS
GENERAL
The Company believes it is one of the leading suppliers 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's consolidated net
sales were $99.1 million in fiscal 1999.
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, until its sale effective
January 1, 1999, U.S. Lock ("U.S. Lock"), a distributor of a full line of
security hardware products. TWI includes the Company's foreign operations,
including manufacturing, packaging and sourcing operations in China and Taiwan,
and an operation in Mexico that threads galvanized, black, brass, and chrome
pipe and imports malleable fittings. Consumer Products, WOC and Barnett utilize
the Company's and non-affiliated foreign sourcing suppliers.
At June 30, 1999, the Company owned 44.3% of Barnett, a direct marketer and
distributor of an extensive line of plumbing, electrical, hardware, and security
hardware products to approximately 73,400 active customers throughout the United
States. Barnett offers approximately 20,300 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,
2
<PAGE> 32
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. In fiscal 1999, the Company recognized $6.7 million in
equity income from this investment.
In April 1996, the Company completed an initial public offering of the
common stock of Barnett (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 to the current level of 7,186,530 shares. The Barnett
Common Stock trades on the Nasdaq National Market under the symbol "BNTT".
CONSUMER PRODUCTS
Consumer Products markets and distributes approximately 6,300 products to a
wide variety of retailers, primarily do-it-yourself ("D-I-Y") warehouse home
centers, home improvement centers, mass merchandisers and hardware stores.
Consumer Products' customers include large national retailers such as Kmart,
Wal-Mart and Sears, as well as several large regional D-I-Y retailers. According
to rankings of the largest D-I-Y retailers published in National Home Center
News, an industry trade publication, Consumer Products' customers include 12 of
the 25 largest D-I-Y retailers and three of the top five mass merchandisers in
the United States. Consumer Products works closely with its customers to develop
comprehensive marketing and merchandising programs designed to improve their
profitability, efficiently manage shelf space, reduce inventory levels and
maximize floor stock turnover. Consumer Products also offers certain of its
customers the option of private label programs and direct import programs.
Consumer Products' net sales for fiscal 1999 were $47.7 million, excluding
direct import sales.
In recent years, the rapid growth of large mass merchandisers and D-I-Y
retailers has contributed to a significant consolidation of the United States
retail industry and the formation of large, dominant, product specific and
multi-category retailers. These retailers demand suppliers who can offer a broad
range of quality products and can provide strong marketing and merchandising
support. Due to the consolidation in the D-I-Y retail industry, a substantial
portion of Consumer Products' net sales are generated by a small number of
customers. In January 1999, Consumer Products entered into a three year supply
agreement with Kmart, which expanded the sales program to include additional
product categories. 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. In
fiscal 1998, Builders Square accounted for $11.7 million, or 21.1% and 11.0% of
Consumer Products' and the Company's net sales, respectively. Due to the loss of
this revenue base, Consumer Products implemented plans to reduce its cost
structure to be more in line with its revenue base. The combined operations of
Hechinger/Builders Square, accounted for approximately $3.7 million, or 7.8% and
3.8% of Consumer Products and the Company's net sales in fiscal 1999,
respectively. Hechinger/Builders Square filed for Chapter 11 bankruptcy
protection in June 1999, and for Chapter 7 liquidation in September 1999.
Consumer Products' accounts receivable from Hechinger/Builders Square was $0.3
million at the time of the bankruptcy filing. In the event Consumer Products
were to lose any additional large retail accounts as a customer or one of its
largest accounts were to significantly curtail its purchases from Consumer
Products, there would be material short-term adverse effects until the Company
could further modify Consumer Products' cost structure to be more in line with
its anticipated revenue base. Consumer Products would likely incur significant
charges if a materially adverse change in its customer relationships were to
occur.
3
<PAGE> 33
In furtherance of its continuing efforts to improve Consumer Products'
prospects, during fiscal 1997, the Company began to augment certain existing
product lines, streamline its packaged plumbing product lines, enhance the
appearance and appeal of its existing plumbing product packaging and undertook
certain customer retention and development programs. The Company believes the
redesign effort has helped and should continue to help in its effort to retain
existing business and to diversify its customer base by attracting new business.
In order to minimize the financial impact on Consumer Products, the rollout of
the package redesign program will continue into fiscal 2000.
In the past several years, certain retailers have begun to develop direct
import programs to improve their profitability. Those retailers generally select
certain product categories and import full containers of such products to their
domestic distribution centers. Consumer Products has responded to this trend by
working with the Company's foreign sourcing operations to provide the products,
while Consumer Products provides certain of the value added services discussed
below, such as account management, selling and marketing support and customer
service. Due to the sharing of responsibilities in servicing the domestic retail
account, profits are shared by Consumer Products and the foreign operation. The
direct shipment arrangement generally results in lower gross profit margins for
the Company, but also lower selling, general and administrative costs.
Consumer Products' marketing strategy includes offering mass merchandisers
and D-I-Y retailers a comprehensive merchandising program, which includes
design, layout and setup of selling areas. Sales and service personnel assist
the retailer in determining the proper product mix in addition to designing
category layouts to effectively display products and optimally utilize available
floor and shelf space. Consumer Products supplies point-of-purchase displays for
both bulk and packaged products, including color-coded product category signs
and color-coordinated bin labels to help identify products and backup tags to
identify products that require reordering. Consumer Products also offers certain
of its customers the option of private label programs for their plumbing and
floor care products. In-house design, assembly and packaging capabilities enable
Consumer Products to react quickly and effectively to service its customers'
changing needs. In addition, Consumer Products' products are packaged and
designed for ease of use, with "how to" instructions to simplify installation,
even for the uninitiated D-I-Y consumer.
Consumer Products' sales and service representatives visit stores regularly
to take reorders and recommend program improvements. These representatives also
provide reports to Consumer Products, enabling it to stay abreast of changing
consumer demand and identify developing trends. In order to support its
customers' "just-in-time" requirements, Consumer Products has sophisticated EDI
capabilities, enabling customers to reduce inventory levels and increase return
on investment. During fiscal 1998, Consumer Products completed the modifications
of all of its information systems to be Year 2000 compliant. Consumer Products
operates and distributes its products through two strategically located
distribution facilities near Columbus, Ohio and Dallas, Texas. In fiscal 1999,
Consumer Products completed the move of its distribution warehouse from Bedford
Heights, Ohio, to a more modern and efficient center in Groveport, Ohio, a
suburb of Columbus. The charges incurred by the Company in connection with this
move amounted to approximately $2.1 million, including the write-off of specific
tangible assets at its Bedford Heights warehouse. The cost savings of the new
facility are expected to offset these charges in less than two years. The
Company's non-warehouse functions continue to be performed in Bedford Heights.
PRODUCTS
The following is a discussion of Consumer Products' principal product
groups:
Plumbing Products. Consumer Products' plumbing repair products include
toilet repair, sink and faucet repair, water supply repair, drain repair, shower
and bath repair, hose and pipe repair, and connection repair. Consumer Products
also offers proprietary lines of faucets under the trade name Premier(R), as
well as a line of shower and bath accessories under the proprietary trade name
Spray Sensations(R). Consumer Products' product line also includes a full line
of valves and fittings, rubber products and tubular products such as traps and
elbows. Many of Consumer Products' plumbing products are sold under the
proprietary trade names Plumbcraft(R), PlumbKing(R) and KF(R). In addition,
Consumer Products offers certain of its customers the option
4
<PAGE> 34
of private label programs. In August 1999, Consumer Products introduced a new
product, the Soap 'n Spray(TM) all-in-one sink sprayer, which should be an
attractive product offering for the bed and bath industry in addition to many of
the large D-I-Y retailers and mass merchandisers served by the Company.
Floor Protective Hardware Products. Consumer Products' floor protective
hardware products include casters, doorstops and other floor, furniture and wall
protective items. Consumer Products markets a complete line of floor protective
hardware products under the proprietary trade name KF(R) and also under private
labels. In the last several years, the Floor Protective Program has been
expanded to include a new line of surface protection products, which are being
distributed under the proprietary trade name SoftTouch(TM).
WOC OPERATIONS
WOC currently has one operating division, Medal Distributing, a supplier of
hardware products to approximately 700 independent retailers. Until its January
1, 1999 sale, U.S. Lock, a full line supplier of security hardware products, was
also included in the operations of WOC. In late fiscal 1997 and early fiscal
1998, two other WOC divisions were sold, including the Madison Equipment
division ("Madison"), a supplier of electrical products, which was sold in April
1997, and substantially all of the business of the LeRan Gas Products division
("LeRan"), a supplier of copper tubing, brass fittings and other related
products, which was sold to Barnett on July 1, 1997. WOC's net sales amounted to
$18.2 million in fiscal 1999, including $13.4 million for U.S. Lock, until its
January 1, 1999 sale.
MEDAL DISTRIBUTING
Medal Distributing, which was acquired by the Company in 1980, is a
regional distributor of hardware products to independent hardware stores and
small independent retailers. Medal Distributing distributes its products
primarily through outside sales representatives and through a catalog and
monthly circulars. The operations for Medal Distributing are located in Sharon,
Pennsylvania, serving customers within a 250 mile radius. At June 30, 1999,
Medal Distributing marketed approximately 13,500 products to its 700 customers.
The continued expansion of certain national, large, multi-category retailers has
continued to impact the smaller, independent retail operations served by Medal
Distributing. Medal Distributing is working closely with its outside sales
representatives and the small independent retailers to adjust to the expansion
of the large national retailers.
FOREIGN OPERATIONS
Through TWI, the Company conducts its foreign operations in Mexico, China
and Taiwan, which support Consumer Products, WOC and Barnett. Over the past
several years, certain retailers have begun to source a portion of their product
requirements through direct import programs. TWI and Consumer Products have
responded by participating with some retailers in direct import programs, with
the added benefit of domestic account management. For the years ended June 30,
1999 and 1998, products purchased from the foreign operations accounted for
approximately 19.6% and 24.0%, respectively, of the total product purchases made
by the Company. For fiscal 1999, the operations owned by TWI had net sales of
$46.3 million, of which $19.9 million were to Barnett and $13.1 million were
intercompany transactions, which eliminate in consolidation. Although a
significant portion of the Company's non-retail sales are to Barnett, the
Company has made significant progress in recent years in its effort to develop
the non-retail customer base served by its foreign operations.
TWI, through its subsidiaries, operates the Taiwan and Mainland China
facilities, which source, manufacture, assemble and package plumbing products.
In addition, facilities in Mainland China manufacture and package floor
protective hardware products. The Company believes that these facilities give it
competitive advantages in terms of cost and flexibility in sourcing. Both labor
and physical plant costs are significantly below those in the United States.
Western American Manufacturing, Inc. ("WAMI"), a manufacturer of
galvanized, black, brass, and chrome pipe nipples in Tijuana, Mexico, provides
the Company vertical integration in the manufacture and distribution of pipe
nipples. Pipe nipples are lengths of pipe, which range from 1/2 of an inch to 10
feet long,
5
<PAGE> 35
threaded at each end. In order to take advantage of lower labor costs, the
Company has relocated certain of its packaging operations to WAMI. In fiscal
1998, WAMI formed a sales organization, WAMI Sales, Inc. ("WAMI Sales"), to
distribute its products to industrial supply and wholesale operations.
Substantially all of the other products purchased by the Company are
manufactured by third parties. The Company estimates that it purchases products
and materials from approximately 600 suppliers and is not dependent on any
single unaffiliated supplier for a material portion of its requirements.
The following table sets forth the approximate percentage of net sales
attributable to the Company's principal product groups.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Plumbing.................................................... 68% 63% 71%
Electrical.................................................. 1% 1% 1%
Hardware.................................................... 31% 36% 28%
--- --- ---
Total net sales............................................. 100% 100% 100%
=== === ===
</TABLE>
IMPORT RESTRICTIONS AND CUSTOMS ISSUES
Under current United States government regulations, some products
manufactured offshore are subject to import restrictions. The Company currently
imports goods from China and Taiwan. The Company also imports United States
goods assembled in Mexico under the preferential import regulations commonly
known as '9802', formerly item '807'. The '9802' arrangement permits an importer
who purchases raw materials in the United States and then ships the raw
materials to an offshore factory for assembly, to reimport the goods without
quota restriction and to pay a duty only on the value added in the offshore
factory.
When the Company chooses to directly import goods purchased outside of the
United States, the Company may be subject to import quota restrictions,
depending on the country of origin of assembly. These restrictions may limit the
amount of goods from a particular country that may be imported into the United
States. If the Company cannot obtain the necessary quota, the Company will not
be able to import the goods into the United States. Export visas for the goods
purchased offshore by the Company are readily available.
The above arrangements, both '9802' and quota restrictions, were superseded
by more favorable regulations with respect to Mexico under the North American
Free Trade Agreement ("NAFTA") and may be limited by revision or canceled at any
time by the United States government. As a result of the passage of NAFTA,
importation from Mexico is more competitive relative to importation from other
exporting countries. The Company does not believe that its relative competitive
position is adversely affected by NAFTA. As indicated above, many of the
Company's imported goods are of Chinese origin. Favorable tariff rates under the
tariff hearings for China are dependent upon review of most favored nations
status (MFN) which has currently been extended, but there is no guarantee this
will continue to be the case in the future.
EQUITY INVESTMENT -- BARNETT AFFILIATE
Barnett is a direct marketer and distributor of an extensive line of
plumbing, electrical, hardware and security hardware products to approximately
73,400 active customers throughout the United States. Barnett offers and
promotes approximately 20,300 name brand and private label products through its
industry-recognized Barnett(R) catalogs and telesales operations. Barnett
markets its products through six distinct, comprehensive catalogs that target
professional contractors, independent hardware stores, maintenance managers,
liquid propane gas dealers and locksmiths. Barnett's staff of over 145
knowledgeable telesales, customer service and technical support personnel work
together to serve customers by assisting in product selection and offering
technical advice. To provide rapid delivery and a strong local presence, Barnett
has established a network of 40 distribution centers strategically located in 34
major metropolitan areas throughout the United States and Puerto Rico. Through
these local distribution centers, approximately 70% of Barnett's orders are
shipped directly to the customer on the same day the order is received. The
remaining 30% of the orders are picked up by the customer at one of Barnett's
local distribution centers. Barnett's
6
<PAGE> 36
strategy of being a low-cost, competitively priced supplier is facilitated by
its volume of purchases and the offshore sourcing of a significant portion of
its private label products. Products are purchased from over 650 domestic and
foreign suppliers, including TWI.
Barnett was a wholly-owned subsidiary of the Company until the completion
of an initial public offering in April 1996 (the "Barnett Initial Public
Offering"). In such offering, 7,207,200 shares, representing approximately 55.1%
of the Barnett Common Stock, were sold in the aggregate by Barnett and the
Company at an initial public offering price per share of $14.00, resulting in
aggregate net proceeds of $92.6 million. In April 1997, a secondary offering of
1,300,000 shares of Barnett Common Stock (the "Barnett Secondary Offering", and
together with the Barnett Initial Public Offering, the "Barnett Public
Offerings") was completed and the Company converted its remaining convertible
non-voting preferred stock of Barnett to Barnett Common Stock. The Company
received a per share price of $17.50, before the underwriters' discount,
resulting in $21.6 million of net proceeds. 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. In January 1999, the Company sold substantially
all of the assets and certain liabilities of U.S. Lock, a division of WOC, to
Barnett. At June 30, 1999, the Company owned 44.3% of the outstanding shares of
Barnett Common Stock. Management intends to utilize its interest in Barnett in
its debt reduction efforts. The Barnett Common Stock trades on the Nasdaq
National Market under the symbol "BNTT".
COMPETITION
The Company faces significant competition within each of its product lines,
although it has no competitor offering the range of products in all of the
product lines that the Company offers. The Company believes that its buying
power, extensive inventory, emphasis on customer service and merchandising
programs have contributed to its ability to compete successfully in its various
markets. The Company faces significant competition from smaller companies which
specialize in particular types of products and larger companies which
manufacture their own products and have greater financial resources than the
Company. The Company believes that competition in sales to retailers is
primarily based on price, product quality and selection, as well as customer
service, which includes speed of responses for packaging, delivery and
merchandising for retailers.
EMPLOYEES
As of June 30, 1999, the Company employed 733 persons, 147 of whom were
clerical and administrative personnel, 57 of whom were sales service
representatives and 529 of whom were either production or warehouse personnel.
Eleven of the Company's employees are represented by collective bargaining
units. The Company considers its relations with its employees, including those
represented by collective bargaining units, to be satisfactory.
TRADEMARKS
Several of the trademarks and trade names used by the Company are
considered to have significant value in its business. See "Business -- Consumer
Products -- Products".
ENVIRONMENTAL REGULATIONS
The Company is subject to certain federal, state and local environmental
laws and regulations. The Company believes that it is in material compliance
with such laws and regulations applicable to it. To the extent any subsidiaries
of the Company are not in compliance with such laws and regulations, the
Company, as well as such subsidiaries, may be liable for such non-compliance.
However, in any event, the Company is not aware of any such liabilities that
could have a material adverse effect on it or any of its subsidiaries.
SEASONALITY
The Company's sales are generally consistent throughout its fiscal year,
although the third fiscal quarter is generally weaker in sales than the other
quarters.
7
<PAGE> 37
ITEM 2. DESCRIPTION OF PROPERTIES
The following table sets forth, as of June 30, 1999, certain information
with respect to the Company's principal physical properties:
<TABLE>
<CAPTION>
LEASE
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET PURPOSE DATE
-------- ----------- ------- --------------
<S> <C> <C> <C>
24460 Aurora Road 21,000 Corporate Office Owned
Bedford Hts., OH
24455 Aurora Road 26,000 Consumer Products Corporate 6/30/02
Bedford Hts., OH (1) Office
902 Avenue T. 108,000 Consumer Products 5/31/00
Grand Prairie, TX (2) Office and Distribution Center
5920 Green Pointe Dr. 114,000 Consumer Products 11/1/08
Groveport, OH Office and Distribution Center
330 Vine Street 80,000 Medal Distributing 2/28/01
Sharon, PA Office and Distribution Center
No. 10, 7th Road 55,000 TWI Owned
Industrial Park Office, Packaging
Taichung, Taiwan and Distribution Center
Republic of China
TWI/CWI Owned
Dan Keng Village 45,000 Office, Packaging,
Fu Ming County Manufacturing
Shenzhen, P.R. China and Distribution Center
113, 9 Sur Y 6 Oriente St., CD 41,000 WAMI / WAMI Sales 6/15/00
Industrial Mesa De Otay Office and Manufacturing
Tijuana, Mexico Center
16002, 9 Sur St., CD 37,000 WAMI 3/31/00
Industrial Mesa De Otay Packaging Center
Tijuana, Mexico
9430 Cabot Drive 13,000 WAMI Sales 1/31/00
San Diego, California Office and Distribution Center
20052, 6 Oriente St., CD 12,000 WAMI month-to-month
Industrial Mesa De Otay Manufacturing Center lease
Tijuana, Mexico
</TABLE>
---------------
(1) Aurora Investment Co., a partnership owned by Melvin Waxman, Chairman of the
Board and Co-Chief Executive Officer of the Company, and Armond Waxman,
President and Co-Chief Executive Officer of the Company, together with
certain other members of their families, is the owner and lessor of this
property. In November 1998, Consumer Products completed the move of its
warehouse to Groveport, Ohio, but continues to lease 9,000 square feet of
office space and 17,000 square feet of warehouse space in Bedford Hts.,
Ohio. The remaining 97,000 square feet of warehouse space in this facility
has been subleased to Handl-it, Inc. (see below for information regarding
affiliated ownership) for the duration of the lease term. Rent expense under
this lease was $326,716 in fiscal 1999, $314,150 in fiscal 1998 and $314,150
in fiscal 1997. The Company received rental income from Handl-it, Inc. of
$95,324 in fiscal 1999 for subleasing the warehouse in Bedford Hts., Ohio
for a portion of the year.
(2) The Company has the option to renew the lease for three additional five-year
terms.
Handl-it Inc., a corporation owned by John S. Peters, a consultant to the
Company, together with certain other members of his family, Melvin Waxman and
Armond Waxman provides Consumer Products with certain outside warehousing
services under month-to-month rental arrangements from time to time. Con-
8
<PAGE> 38
sumer Products may enter into month-to-month leases in the future, depending on
its business requirements at the time. Rent expense under these lease
arrangements was $10,000, $30,000 and $137,000 for fiscal 1999, 1998 and 1997,
respectively. Consumer Products Group also paid Handl-it Inc. approximately
$55,000 for the cost of transportation of products in fiscal 1999. Effective
July 1, 1999, WAMI Sales replaced an internally operated warehouse facility in
Cleveland, Ohio with an arrangement with Handl-it Inc. to provide all
warehousing, labor and shipping functions for a fee equal to 7.5% of monthly
sales from the location.
The Company believes that its facilities are suitable for its operations
and provide the Company with adequate productive capacity and that the related
party leases and rental arrangements are on terms comparable to those that would
be available from unaffiliated third parties.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the financial position or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the executive officers of the Company and a
brief description of their business experience. Each executive officer will hold
office until his successor is chosen and qualified.
Mr. Melvin Waxman, age 65, was elected Co-Chairman of the Board in June
1995. Upon consummation of the Barnett Initial Public Offering in April 1996,
Mr. Waxman became Chairman of the Board of the Company. Mr. Waxman was elected
Co-Chief Executive Officer of the Company in May 1988. Mr. Waxman has been a
Chief Executive Officer of the Company for over 20 years and has been a director
of the Company since 1962. Mr. Waxman has been Chairman of the Board of the
Company since August 1976. Mr. Waxman is the Chairman of the Board of Barnett.
Melvin Waxman and Armond Waxman are brothers.
Mr. Armond Waxman, age 60, was elected Co-Chairman of the Board in June
1995. Upon consummation of the Barnett Initial Public Offering in April 1996,
Mr. Waxman became President of the Company. Mr. Waxman was elected Co-Chief
Executive Officer of the Company in May 1988. Mr. Waxman has been the President
and Treasurer of the Company since August 1976. Mr. Waxman has been a director
of the Company since 1962 and was Chief Operating Officer of the Company from
August 1976 to May 1988. Mr. Waxman is the Vice Chairman of the Board of
Barnett. Armond Waxman and Melvin Waxman are brothers.
Mr. Laurence Waxman, age 42, has been Senior Vice President of the Company
since November 1993 and is also President of Consumer Products, a position he
has held since 1988. Mr. Waxman joined the Company in 1981. Mr. Waxman has been
a director of the Company since July 1996. Mr. Laurence Waxman is the son of
Melvin Waxman.
Mr. Mark Wester, age 44, a certified public accountant, joined the Company
in October 1996 as Corporate Controller and in January 1997 became the Vice
President-Finance. Upon completion of the Barnett Secondary Offering in April
1997, Mr. Wester became the Chief Financial Officer of the Company. Mr. Wester
provided consulting services to the Company from May 1996 through September
1996. From March 1992 to April 1996, Mr. Wester was a limited partner with a
privately owned telecommunications company, Capital Communications Cooperative
and the Chief Financial Officer of Progressive Communications Technologies. From
1978 to 1992, Mr. Wester was employed by The Fairchild Corporation (formerly,
Banner Industries, Inc.), where he held several positions during his tenure,
including Vice President and Corporate Controller.
9
<PAGE> 39
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol "WAXX". Prior to March 22, 1999, the Company's stock
was listed on the New York Stock Exchange ("NYSE") under the symbol "WAX". The
Company's Class B Common Stock does not trade in the public market due to
restricted transferability. However, the Class B Common Stock may be converted
into Common Stock on a share-for-share basis at any time.
The following table sets forth the high and low closing quotations as
reported by the OTCBB and NYSE for fiscal 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter.................. $3.63 $1.06 $5.19 $3.63
Second Quarter................. 1.81 0.69 4.38 3.13
Third Quarter.................. 1.25 0.25 4.44 3.13
Fourth Quarter................. 0.50 0.31 4.06 2.94
</TABLE>
HOLDERS OF RECORD
As of August 27, 1999, there were 675 holders of record of the Company's
Common Stock and 118 holders of record of the Company's Class B Common Stock.
DIVIDENDS
The Company declared no dividends in fiscal 1999 or 1998. Restrictions
contained in the Company's debt instruments currently prohibit the declaration
and payment of cash dividends.
10
<PAGE> 40
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------------------------------
1999(7) 1998 1997 1996(8) 1995(8)
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales..................................... $ 99,116 $105,662 $119,006 $235,067 $232,304
Cost of sales................................. 69,264 69,429 84,574 160,556 152,368
-------- -------- -------- -------- --------
Gross profit.................................. 29,852 36,233 34,432 74,511 79,936
Selling, general and administrative
expenses.................................... 31,635 30,290 34,996 70,628 62,023
Restructuring, procurement and non-recurring
charges(1).................................. 4,515 24 1,522 19,507 3,237
-------- -------- -------- -------- --------
Operating income (loss)....................... (6,298) 5,919 (2,086) (15,624) 14,676
Gain on sale of Barnett stock, net(2)......... -- -- 16,693 65,917 --
Gain on sale of U.S. Lock, net(3)............. 10,298 -- -- -- --
Equity earnings of Barnett.................... 6,744 6,341 5,843 -- --
Interest expense, net......................... 17,192 16,031 16,477 24,264 26,411
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes, minority interest,
discontinued operation, extraordinary loss
and cumulative effect of change in
accounting.................................. (6,448) (3,771) 3,973 26,029 (11,735)
Provision for income taxes.................... 1,029 537 401 2,395 338
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before minority interest, discontinued
operation, extraordinary loss and cumulative
effect of change in accounting.............. (7,477) (4,308) 3,572 23,634 (12,073)
Minority interest in consolidated affiliate... -- -- -- 975 --
Discontinued operation(4):
Reversal of loss (and loss) on disposal..... -- -- -- 11,000 (11,000)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and
cumulative effect of change in accounting... (7,477) (4,308) 3,572 33,659 (23,073)
Extraordinary loss(5)......................... -- 192 -- 6,251 --
Cumulative effect of change in
accounting(6)............................... -- -- -- 8,213 --
-------- -------- -------- -------- --------
Net income (loss)............................. $ (7,477) $ (4,500) $ 3,572 $ 19,195 $(23,073)
======== ======== ======== ======== ========
Average number of shares outstanding.......... 12,057 12,026 11,919 11,759 11,712
======== ======== ======== ======== ========
Basic earnings (loss) per share:
From continuing operations before minority
interest, discontinued operations,
extraordinary loss and cumulative effect
of change in accounting................... $ (.62) $ (.35) $ .30 $ 2.01 $ (1.03)
Minority interest in consolidated
affiliate................................. -- -- -- (.08) --
Discontinued operations:
Reversal of loss (and loss) on disposal..... -- -- -- .93 (.94)
Extraordinary loss............................ -- (.02) -- (.53) --
Cumulative effect of change in accounting..... -- -- -- (.70) --
-------- -------- -------- -------- --------
Net income (loss) per share................... $ (.62) $ (.37) $ .30 $ 1.63 $ (1.97)
======== ======== ======== ======== ========
Diluted earnings (loss) per share:
From continuing operations before minority
interest, discontinued operations,
extraordinary loss and cumulative effect
of change in accounting................... $ (.62) $ (.35) $ .26 $ 1.74 $ (1.03)
Minority interest in consolidated
affiliate................................. -- -- -- (.07) --
</TABLE>
11
<PAGE> 41
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------------------------------
1999(7) 1998 1997 1996(8) 1995(8)
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Discontinued operations:
Reversal of loss (and loss) on disposal..... -- -- -- .81 (.94)
Extraordinary loss............................ -- (.02) -- (.46) --
Cumulative effect of change in accounting..... -- -- -- (.61) --
-------- -------- -------- -------- --------
Net income (loss) per share................... $ (.62) $ (.37) $ .26 $ 1.41 $ (1.97)
======== ======== ======== ======== ========
Cash dividends per share:
Common stock................................ $ -- $ -- $ -- $ -- $ --
Class B common stock........................ $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Working capital............................... $ 21,945 $ 15,776 $ 31,093 $ 51,460 $ 25,828
Total assets.................................. 100,210 105,743 107,232 142,637 169,744
Total long-term debt.......................... 128,480 118,314 120,994 113,080 145,064
Stockholders' equity (deficit)................ (52,086) (44,744) (39,506) (43,254) (62,697)
</TABLE>
---------------
(1) In fiscal 1999, the Company recorded a $2.1 million non-recurring charge
associated with the move of one of Consumer Products' warehouses and a
business procurement charge of $2.5 million. In the first quarter of fiscal
1998, the Company recorded an estimated non-recurring charge of $133 for
warehouse closure costs and other expenses associated with the sale of LeRan
Gas Products. In the fourth quarter of fiscal 1998, the estimated loss was
adjusted to the actual loss of $24. In the fourth quarter of fiscal 1997,
the Company sold Madison Equipment Company and recorded a loss on sale of
$0.7 million. In fiscal 1997, Consumer Products also recorded a business
procurement charge of $0.8 million. During fiscal 1996, the Company recorded
a $19.5 million restructuring and asset impairment loss, which included a
$7.4 million restructuring charge primarily attributable to strategic
initiatives at Consumer Products and a $12.1 million asset impairment charge
primarily attributable to U.S. Lock in accordance with SFAS 121. During
fiscal 1995, the Company incurred $2.8 million in warehouse closure costs as
Consumer Products' distribution network was downsized from four locations to
three. In fiscal 1995, Consumer Products also recorded a business
procurement charge of $0.5 million. See Note 1 to the Consolidated Financial
Statements for further discussion of the fiscal 1999 and 1997 business
procurement charges and Note 4 for further discussion of the fiscal 1998 and
1997 charges.
(2) Reflects the gains on the Barnett Public Offerings as further described in
Note 2 to the Consolidated Financial Statements.
(3) Reflects the gain on the sale of U.S. Lock as further described in Note 4 to
the Consolidated Financial Statements.
(4) Fiscal 1996 amount represents the reversal of the fiscal 1995 estimated loss
on the disposal of Consumer Products.
(5) Represents the write-off of deferred financing costs resulting from the
repayment and refinancing of debt in fiscal 1998 and 1996, as further
described in Notes 2 and 5 to the Consolidated Financial Statements.
(6) See Note 1 to the Consolidated Financial Statements for a discussion of
procurement charges. Effective July 1, 1995, the Company changed its method
of accounting for procurement costs to its current method as described in
Note 1 to the Consolidated Financial Statements, resulting in the cumulative
effect of a change in accounting for procurement costs of $8.2 million,
before tax benefit, in fiscal 1996.
(7) The results of U.S. Lock were consolidated by the Company until its sale,
which was effective January 1, 1999. As a result of the sale, fiscal 1999
only includes six months of U.S. Lock's results while the previous fiscal
years include results for twelve months. See Note 4 to the Consolidated
Financial Statements for further discussion of the sale of U.S. Lock.
(8) The results of Barnett were consolidated by the Company until the Barnett
Secondary Offering in 1997. As a result of the Barnett Secondary Offering,
fiscal years subsequent to fiscal 1996 do not consolidate the results of
Barnett.
12
<PAGE> 42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company operates in two business segments -- the distribution of
specialty plumbing and hardware products to retailers and the distribution of
plumbing products to non-retail businesses. Distribution of plumbing and
hardware products to retailers is conducted through domestic operations, as well
as through direct import programs from the foreign sourcing, manufacturing and
packaging operations. In fiscal 1999, approximately 40.4% and 47.1% of the
Company's foreign operations' sales were to the Company's domestic wholly-owned
operations and Barnett, respectively, which are considered non-retail sales.
Intercompany sales are eliminated in consolidation.
DEBT RESTRUCTURING EFFORTS
Over the past several years, the Company has endeavored to reduce its high
level of debt through the monetization of assets and to improve the efficiencies
of its continuing businesses. As a result, the Company has undertaken various
initiatives to raise cash, improve its cash flow and reduce its debt obligations
and/or improve its financial flexibility during that period. The Company
believes that operating cash flow, together with borrowings under its working
capital credit facilities, and the monetization, from time to time, of a portion
of the Barnett Common Stock or other selected assets, will be sufficient for at
least the next 18 months to fund its working capital requirements. However,
ultimately, the Company will not be able to continue to make all of the interest
and principal payments under its debt obligations without a significant
appreciation in, and monetization of, the value of the shares of common stock of
Barnett owned by the Company and/or a restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the repurchase of
its shares owned by the Company. The Company has had discussions with Barnett's
management regarding a share repurchase and continues to evaluate opportunities
to monetize all or a portion of its investment in Barnett, including as part of
a comprehensive plan to eliminate a significant portion of its debt. The Company
has also had discussions with certain of its bondholders regarding potential
debt reduction/restructuring transactions. At this time, the Company does not
have an agreement to monetize its investment in Barnett or reduce its high level
of debt. However, the Company continues to pursue a debt restructuring and/or
debt elimination plan.
HISTORICAL OVERVIEW
A historic overview of some of the Company's other recent strategic
developments is summarized below.
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common Stock at
June 30, 1999, which are accounted for under the equity method of accounting. In
April 1996, the Company completed the Barnett Initial Public Offering, receiving
net proceeds of $92.6 million, after the underwriters' discount, and recorded a
$65.9 million pre-tax gain. In April 1997, the Company completed the Barnett
Secondary Offering, receiving net proceeds of $21.6 million, after the
underwriters' discount, and recorded a $16.7 million pre-tax gain. In April
1997, the Company converted the remaining convertible non-voting preferred stock
of Barnett it owned to Barnett Common Stock. In July 1997, the Company received
24,730 shares of Barnett as a result of the sale of the gas products business of
LeRan Gas Products to Barnett (see Note 4). In January 1999, the Company
completed the sale of U.S. Lock to Barnett (see Note 4).
In fiscal 1997, the Company recorded charges totaling $7.2 million,
including adjustments to cost of sales of $4.3 million, selling, general and
administrative ("SG&A") expenses of $2.6 million and $0.3 million of sales
allowances. The largest portion of the adjustments were made at Consumer
Products, with charges of $4.2 million, $1.1 million and $0.3 million to cost of
sales, SG&A expenses and sales allowances, respectively, related to the decision
to augment certain existing product lines, streamline its packaged plumbing
product line, enhance and redesign its existing plumbing product packaging,
undertake certain customer retention and development programs and establish
inventory reserves which were necessary, in part, for the reduction in the
buying patterns of Builders Square and Kmart. In addition, the Company recorded
$0.1 million and
13
<PAGE> 43
$1.5 million in additional cost of sales and SG&A expenses, respectively, in
total at its remaining operations, primarily related to inventory adjustments
and charges for valuation reserves, professional services and the increase in
value of certain stock appreciation rights granted to certain key executives.
The Company also recorded a loss of $0.7 million on the disposal of Madison
in the fourth quarter of fiscal 1997. In April 1997, Madison, a supplier of
electrical products, was sold for $2.0 million, and in July 1997, substantially
all of the business of the LeRan Gas Products division ("LeRan"), a supplier of
copper tubing, brass fittings and other related products was sold to Barnett for
$3.2 million in cash and 24,730 shares of Barnett Common Stock, with a value of
$0.6 million at the time of the transaction.
In May 1997, the Company commenced an offer to repurchase (the "Purchase
Offer"), at par, $12.0 million of Waxman USA's 11 1/8% Senior Notes due 2001
(the "Senior Notes"). In July 1997, the Purchase Offer expired with $2.5 million
principal amount of Senior Notes tendered. Upon the expiration of the Purchase
Offer, the Company called for the redemption of $9.5 million principal amount of
Senior Notes that had not been tendered in the Purchase Offer and completed the
redemption of these notes in August 1997.
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 are severance
benefits for personnel and the loss on the write-off of tangible assets at the
Bedford Heights warehouse. In the third and fourth quarters of fiscal 1999,
Consumer Products recorded additional non-recurring charges of $0.45 million and
$0.27 million, respectively, for additional costs involved in the relocation of
the Bedford Heights warehouse, the recruiting and training of personnel at the
Groveport warehouse and the future shortfall on subleasing the warehouse in
Bedford Heights. 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 help it remain competitive through
annual cost savings.
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 adjustments. The
sale of U.S. Lock was completed effective January 1, 1999. The proceeds were
used by the Company to reduce the portion of the BankAmerica Business Credit
Agreement collateralized by U.S. Lock's assets and to reinvest in the Company's
remaining businesses.
In June 1999, the remaining $0.9 million of the Company's 13 3/4% Senior
Subordinated Notes matured and were paid by the Company. Also in June 1999, the
Company entered into a loan and security agreement with Congress Financial
Corporation (the "Loan and Security Agreement") to replace the Credit Agreement
with BankAmerica Business Credit, Inc. that was to expire on July 15, 1999. The
Loan and Security Agreement provides for, among other things, revolving credit
advances of up to $20.0 million.
RESULTS OF OPERATIONS
The following table sets forth certain items reflected in the Company's
consolidated statements of operations as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 69.9% 65.7% 71.1%
Gross profit................................................ 30.1% 34.3% 28.9%
Selling, general and administrative expenses................ 31.9% 28.7% 29.4%
Non-recurring and procurement charges....................... 4.6% -- 1.3%
Operating income (loss)..................................... (6.4%) 5.6% (1.8%)
Gain on sale of Barnett stock, net.......................... -- -- 14.0%
Gain on sale of U.S. Lock, net.............................. 10.4% -- --
Equity earnings of Barnett.................................. 6.8% 6.0% 4.9%
</TABLE>
14
<PAGE> 44
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest expense, net....................................... 17.3% 15.2% 13.8%
Income (loss) before income taxes and extraordinary loss.... (6.5%) (3.6%) 3.3%
Provision for income taxes.................................. 1.0% 0.5% 0.3%
Income (loss) before extraordinary loss..................... (7.5%) (4.1%) 3.0%
Extraordinary loss.......................................... -- (0.2%) --
Net income (loss)........................................... (7.5%) (4.3%) 3.0%
</TABLE>
YEAR ENDED JUNE 30, 1999 VS. YEAR ENDED JUNE 30, 1998
NET SALES
Net sales of the Company's wholly-owned operations for fiscal 1999 totaled
$99.1 million, a decrease of $6.6 million from the $105.7 million for the
comparable period in fiscal 1998. Excluding U.S. Lock, which was sold effective
January 1, 1999, net sales for fiscal 1999 amounted to $85.8 million, an
increase of $2.9 million, or 3.4 percent, over the $82.9 million for the
comparable period last year. Due to the sale of U.S. Lock effective January 1,
1999, the fiscal 1999 results include only six months of U.S. Lock's net sales,
or $13.4 million, as compared to $22.8 million for fiscal 1998. Net sales to
retailers amounted to $58.0 million for the twelve months ended June 30, 1999, a
decrease of $3.9 million as compared to the same period last year. Sales to
Hechinger/Builders Square decreased by $8.0 million to $3.7 million in fiscal
1999, as compared to $11.7 million in the same period last year, offsetting the
increase in sales to other retailers. As previously disclosed by the Company, as
a part of Hechinger/Builders Square consolidating their operations and supplier
relationships, Consumer Products would retain only the bulk plumbing business
beginning in January 1999. In June 1999, Hechinger/Builders Square filed for
Chapter 11 bankruptcy protection, and for Chapter 7 liquidation in September
1999. During the fiscal 1999 third quarter, the Company entered into a
three-year agreement with Kmart, which the Company anticipates will result in
additional annual net sales of $4 to $5 million. A portion of these sales, which
include showerheads, faucets, floor care, and packaged plumbing, will be shipped
under the direct import program from the Company's Asian operations. The direct
import sales result in a lower gross margin but also have lower selling, general
and administrative ("SG&A") expenses.
The trend in the retail market is to develop direct relationships with
foreign supply sources, including foreign sourcing operations similar to those
owned by the Company. The Company will utilize its foreign sourcing operations
to obtain new business when our domestic operation would be unable or less
likely to compete, and therefore, has emphasized developing business outside of
the intercompany and affiliated company arrangements for the foreign sourcing
operations. This effort is expected to be of increasing importance in future
results as more retailers emphasize direct import relationships. The Company
believes sales from its foreign sourcing operations will continue to increase to
both Barnett, due to its growth, and through direct sales to non-affiliated
operations.
Non-retail net sales amounted to $41.1 million for fiscal 1999, a decrease
of $2.7 million for the same period in fiscal 1998. Excluding the results of
U.S. Lock, non-retail net sales increased by $6.7 million in fiscal 1999, as
compared to the same period last year, due primarily to an increase in sales to
Barnett.
GROSS PROFIT
The gross profit margin for fiscal 1999 decreased to 30.1% from 34.3% for
fiscal 1998. The reduction in the gross profit margin is attributable to a
higher proportion of sales from the lower gross margin direct import sales
program and competitive pricing pressures at our Mexican pipe nipple operation.
Gross profit decreased to $29.9 million for fiscal 1999, as compared to $36.2
million for fiscal 1998. Excluding U.S. Lock for both periods, the gross profit
for fiscal 1999 would have been $25.5 million, as compared to $28.6 million in
the same period last year. The decrease in gross profit dollars is attributable
to the reduction in sales to
15
<PAGE> 45
Hechinger/Builders Square, competitive pricing issues associated with the
Mexican pipe nipple operation and the sales increase for the lower margin direct
import program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased from $30.3 million for fiscal 1998 to $31.6 million
for fiscal 1999. As a percentage of net sales, SG&A expenses increased from
28.7% for fiscal 1998 to 31.9% for fiscal 1999. The increase in expenses was
primarily due to foreign exchange transaction losses of $0.4 million in fiscal
1999, as compared to $1.0 million in foreign exchange transaction income being
reported for fiscal 1998.
NON-RECURRING AND PROCUREMENT CHARGES
In the fiscal 1999 first quarter, 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. In the third and fourth quarters of
fiscal 1999, Consumer Products recorded additional non-recurring charges of
$0.45 million and $0.27 million, respectively, for additional costs involved in
the relocation of the Bedford Heights warehouse, the recruiting and training of
personnel at the Groveport warehouse and the future shortfall on subleasing the
warehouse in Bedford Heights. 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 addition to the non-recurring charge for the relocation of the
warehouse, the Company's operations also recorded a business procurement charge
of $2.5 million in fiscal 1999.
GAIN ON SALE OF U.S. LOCK
Effective January 1, 1999, the Company sold U.S. Lock, to Barnett, for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million being recognized in the fiscal 1999 third quarter. The remaining $8.1
million was 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 1999 fourth
quarter, the Company recognized $0.1 million of this deferred gain, which is
included in the gain on sale of U.S. Lock in the accompanying consolidated
statements of operations.
EQUITY EARNINGS OF BARNETT
The Company recorded equity earnings from its 44.3% ownership interest in
Barnett of $6.7 million for fiscal 1999, as compared to $6.3 million in fiscal
1998.
INTEREST EXPENSE
For fiscal 1999, interest expense totaled $17.2 million, an increase of
$1.2 million from the $16.0 million in fiscal 1998. The increase is primarily
due to higher average borrowings under the Credit Agreement for a portion of the
fiscal year and an increase in the accretion of interest on the Deferred Coupon
Notes. Interest expense for the Deferred Coupon Notes amounted to $11.2 million
in fiscal 1999, as compared to $9.9 million for fiscal 1998. As of June 1, 1999,
the Deferred Coupon Notes were fully accreted and interest expense after that
date is classified as accrued interest, with the first cash interest payment due
on December 1, 1999. Average borrowings for fiscal 1999 amounted to $141.3
million, with a weighted average interest rate of 11.6%, as compared to $125.8
million in fiscal 1998, with a weighted average interest rate of 12.0%.
16
<PAGE> 46
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $1.0 million and $0.5 million
for fiscal 1999 and 1998, respectively. The fiscal 1999 provision primarily
represents the federal alternative minimum tax and state taxes due on the gain
on the sale of U.S. Lock, as well as various state and foreign taxes of the
Company's wholly-owned operations. The fiscal 1998 income tax provision
primarily represents various state and foreign taxes of the Company's
wholly-owned operations. The difference between the effective and statutory tax
rates is primarily due to domestic losses not benefited.
NET LOSS
The Company's net loss for fiscal 1999 amounted to $7.5 million, or $0.62
per basic and diluted share, as compared to the loss of $4.5 million, or $0.37
per basic and diluted share, in fiscal 1998. The fiscal 1999 results include the
$10.2 million gain on the sale of U.S. Lock, a non-recurring charge of $2.1
million for the relocation of Consumer Products' distribution center from
Bedford Hts., Ohio to Groveport, Ohio, as well as a $2.5 million charge for
business procurement costs. Included in the fiscal 1998 results is an
extraordinary charge of $0.2 million, or $0.02 per basic and diluted share, from
the write-off of deferred financing costs.
YEAR ENDED JUNE 30, 1998 VS. YEAR ENDED JUNE 30, 1997
NET SALES
Net sales of the Company's wholly-owned operations for fiscal 1998 of
$105.7 million increased by $5.5 million or 5.5% in comparison to fiscal 1997,
excluding the disposed operations of Madison Equipment and LeRan Gas Products.
The increase in fiscal 1998 net sales is attributable to an increase of 21.5% at
U.S. Lock and 22.4% at the Company's foreign sourcing and manufacturing
operations. Increases from these operations were partially offset by a 3.4%
decrease at Consumer Products. Net sales for fiscal 1997, including $18.8
million in sales from the disposed operations, amounted to $119.0 million.
Madison was sold in April 1997, while substantially all of LeRan's gas products
business was sold to Barnett on July 1, 1997. LeRan's malleable fitting business
was transferred to WAMI's sales division as a result of this sale. Retail and
non-retail sales in fiscal 1998 amounted to $61.9 million and 43.8 million,
respectively, as compared to $63.8 million and $55.2 million for fiscal 1997.
The growth at U.S. Lock is the result of an increase in the size of its
professional telesales staff, additional sales from its monthly promotional
flyer program, an increase in new products and the success of its Rx "Dealer
Only"(TM) restricted keyway program. In the fourth quarter of fiscal 1998, U.S.
Lock also moved a distribution center from Sacramento to Ontario, California,
near Los Angeles, which is expected to be a stronger market for its products. In
addition, U.S. Lock's fiscal 1998 net sales increase benefited from a full year
of operations of its fifth warehouse, which was opened in Charlotte, North
Carolina in March 1997. The increase in sales at the Company's foreign sourcing
operations is primarily the result of an increase in sales to Barnett. However,
the foreign operation supplying pipe nipples to Barnett experienced a reduction
in sales for the second half of the fiscal year due to the loss of one of
Barnett's pipe nipple customers. Until those pipe nipple sales are replaced by
sales to other customers, the Company expects its WAMI operation to have
approximately $1.5 million less in annual sales. Sales for the Company's
Consumer Products operation decreased $3.0 million in fiscal 1998, primarily due
to the closing of select stores by Hechinger/Builders Square, the inclusion of
$1.1 million in fiscal 1997 sales to Ernst, which was lost as a customer due to
its bankruptcy and a reduction in purchases by Kmart due to its inventory
management program. In August 1998, Consumer Products was informed that it would
only retain the bulk plumbing portion of its business with Hechinger/Builders
Square.
GROSS PROFIT
Gross profit for the Company's wholly-owned operations amounted to $36.2
million in fiscal 1998, an increase of $1.8 million over the $34.4 million for
fiscal 1997. The gross profit margin for the wholly-owned operations increased
to 34.3% in fiscal 1998 from 28.9% for the wholly-owned operations in fiscal
1997. The relatively low gross profit margin in fiscal 1997 was due to $4.3
million of charges, including $4.2 million at
17
<PAGE> 47
Consumer Products, related to the decision to augment certain existing product
lines, streamline its packaged plumbing product line, enhance and redesign its
existing plumbing product packaging, undertake certain customer retention and
development programs and establish inventory reserves which were necessary, in
part, for the reduction in the buying patterns of Builders Square and Kmart. In
addition, the gross profit margin in fiscal 1997 was lower due to the inclusion
of LeRan and Madison, which were lower margin businesses. Excluding the disposed
operations, gross profit margin for fiscal 1997 would have been 29.7%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses of the wholly-owned operations decreased by $4.7 million, or
13.4%, to $30.3 million in fiscal 1998 from $35.0 million in fiscal 1997. The
fiscal 1997 SG&A expenses included $3.9 million of SG&A expenses from the
disposed operations and $2.6 million of year end adjustments. As a percentage of
net sales, SG&A expenses were 28.7% in fiscal 1998 compared to 29.4% for the
wholly-owned operations in fiscal 1997. The fiscal 1997 percentage, excluding
the disposed operations, would have been 31.0%.
NON-RECURRING AND PROCUREMENT CHARGES
In the fiscal 1997 fourth quarter, the Company sold Madison Equipment
Company and recorded a loss on sale of $0.7 million. In fiscal 1997, Consumer
Products recorded a business procurement charge of $0.8 million.
INTEREST EXPENSE
Interest expense decreased slightly to $16.0 million for fiscal 1998 from
$16.5 million in the prior year. Average borrowings decreased to $125.8 million
in fiscal 1998 from $130.2 million in fiscal 1997; however, the weighted average
interest rate increased from 11.9% to 12.0% during the same period. The decrease
in average borrowings is due to the repayment of indebtedness with a portion of
the net proceeds from the Barnett Secondary Offering, which caused an
improvement for most of the fiscal 1998 period. The weighted average interest
rate increased due to the retirement of a portion of the Senior Notes, which
have a lower interest rate than the average rate of the remaining debt.
OPERATING INCOME AND INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
Operating income for fiscal 1998 improved to $5.9 million, from the loss of
$2.1 million in fiscal 1997. Fiscal 1997 results included approximately $7.2
million in year-end adjustments, described in Note 3 to the Consolidated
Financial Statements. Excluding the year-end adjustments in fiscal 1997,
operating income improved by 15.7% in fiscal 1998 over the prior year. Consumer
Products, U.S. Lock and the foreign sourcing operations contributed to the
improvement. The continued growth of U.S. Lock and consistent contribution to
operating income, resulted in an improvement in the operating income of the
Company. The Company's foreign sourcing operations benefited from the growth of
Barnett, which accounted for nearly all of their external sales during the
period. An additional factor in the improvement of the foreign sourcing
operations was the foreign currency devaluation. Since the foreign operations
contract their sales in U.S. dollars, they benefited by using less dollars to
purchase goods and pay for labor in local currencies.
Pre-tax results decreased from income of $4.0 million in fiscal 1997 to a
loss of $3.8 million in fiscal 1998, primarily due to the net pre-tax gain of
$16.7 million from the Barnett Secondary Offering completed in April 1997.
Excluding the $16.7 million gain on the sale of Barnett Common Stock and the
$7.2 million in year end adjustments in fiscal 1997, the comparable pre-tax loss
would have been $5.5 million for fiscal 1997. The pre-tax results for fiscal
1998 and 1997 included $6.3 million and $5.8 million of equity income from the
Company's investment in Barnett, respectively.
INCOME TAXES
The provision for income taxes was $0.5 million in fiscal 1998 as compared
to $0.4 million in fiscal 1997. In fiscal 1998, the tax provision represents
foreign and state taxes. The fiscal 1997 provision includes an alternative
minimum tax on the gain from the Barnett Secondary Offering and foreign and
state taxes.
18
<PAGE> 48
Differences between the effective tax rate and the statutory rate are primarily
the result of domestic losses not benefited in fiscal 1998, state and foreign
taxes, goodwill amortization, which is not deductible for tax purposes and the
utilization of loss carryforwards in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Over the past several years, the Company has endeavored to reduce its high
level of debt through the monetization of assets and to improve the efficiencies
of its continuing businesses. As a result, the Company has undertaken various
initiatives to raise cash, improve its cash flow and reduce its debt obligations
and/or improve its financial flexibility during that period. The Company
believes that operating cash flow, together with borrowings under its working
capital credit facilities, and the monetization, from time to time, of a portion
of the Barnett Common Stock, will be sufficient for at least the next 18 months
to fund its working capital requirements. However, ultimately, the Company will
not be able to continue to make all of the interest and principal payments under
its debt obligations without a significant appreciation in, and monetization of,
the value of the shares of common stock of Barnett owned by the Company and/or a
restructuring of such debt instruments. The Company continues its efforts to
complete a financial restructuring plan, which includes the sale of its
investment in Barnett and a restructuring and/or elimination of its debt.
Pending the completion of a comprehensive financial restructuring, the Company
may also pursue the sale, from time to time, of a portion of its shares of
Barnett or other selected assets to provide it with additional liquidity and
financial flexibility.
As stated previously, the Company's business strategy includes the
reduction of its interest expense and its leverage by the sale of selected
assets and/or the refinancing or reduction of its remaining indebtedness
whenever possible. To that end, the Company completed the sale of U.S. Lock for
approximately $33.0 million in January 1999. The Company believes its operating
cash flow, its borrowing availability under the Loan and Security Agreement and
proceeds from sales of selected assets will be sufficient to fund its current
liquidity and working capital requirements, capital expenditures and the first
few semi-annual interest payments on the Deferred Coupon Notes. The first
semi-annual cash interest payment of approximately $6 million under the Deferred
Coupon Notes is due on December 1, 1999. Without the completion of a financial
restructuring plan as described above, the Company currently believes that,
while it will be able to pay its near-term debt maturities and cash interest
requirements, it will not be able to continue to make all of the interest and
principal payments under its debt obligations without a significant appreciation
in, and monetization of, the value of the Barnett Common Stock and/or a
restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the repurchase of
its shares owned by the Company. The Company has had discussions with Barnett's
management regarding a share repurchase and continues to evaluate opportunities
to monetize all or a portion of its investment in Barnett, including as part of
a comprehensive plan to eliminate a significant portion of its debt. The Company
has also had discussions with certain of its bondholders regarding potential
debt reduction/restructuring transactions. At this time, the Company does not
have an agreement to monetize its investment in Barnett or reduce its high level
of debt. However, the Company continues to pursue a debt restructuring and/or
debt elimination plan. As discussed above, the Company may also pursue the sale,
from time to time, of a portion of its shares of Barnett or other selected
assets to provide it with additional liquidity and financial flexibility. There
can be no assurance that the Company will be able to consummate such financial
restructuring or any of the other aforementioned transactions.
In June 1999, the Company entered into the Loan and Security Agreement with
Congress Financial Corporation to replace the Credit Agreement with BankAmerica
Business Credit, Inc. that was to expire on July 15, 1999. The Loan and Security
Agreement is between Consumer Products, WOC, WAMI and WAMI Sales, as borrowers
(the "Borrowers"), with the Company, Waxman USA Inc. ("Waxman USA") and TWI as
guarantors. The Loan and Security Agreement provides for, among other things,
revolving credit advances of up to $20.0 million. As of June 30, 1999, the
Company had $0.4 million in borrowings under the revolving credit line of the
facility and had approximately $14.4 million available under such facility. The
Loan and Security Agreement expires on September 1, 2001, but may be extended
under certain conditions.
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<PAGE> 49
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.
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 June 30, 1999. Borrowings under the Loan and Security
Agreement are secured by the accounts receivable, inventories, certain general
intangibles, and unencumbered fixed assets of Waxman Industries, Inc., Consumer
Products, TWI, International Inc. and WOC, and a pledge of 65% of the stock of
various foreign subsidiaries. In addition, up to $5.0 million of indebtedness
under the Loan and Security Agreement is also secured by a pledge of 500,000
shares of Barnett Common Stock owned by the Company (constituting approximately
3.1% of all outstanding Barnett Common Stock). The Loan and Security Agreement
requires the Borrowers to maintain cash collateral accounts into which all
available funds are deposited and applied to service the facility on a daily
basis. The Loan and Security Agreement prevents dividends and distributions by
the Borrowers except in certain limited instances including, so long as there is
no default or event of default and the Borrowers are in compliance with certain
financial covenants, the payment of interest on the Senior Notes and the
Company's 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred
Coupon Notes"), and contains customary negative, affirmative and financial
covenants and conditions. The Company was in compliance with all loan covenants
at June 30, 1999. The Loan and Security Agreement also contains a material
adverse condition clause which allows Congress Financial Corporation to
terminate the Agreement under certain circumstances. The Loan and Security
Agreement expires September 1, 2001, but may be extended under certain
circumstances.
Since the consummation of the Barnett Initial Public Offering, the cash
flow generated by Barnett is no longer available to the Company. The Company
relies primarily on Consumer Products and, prior to January 1, 1999, U.S. Lock
for cash flow. The sale of U.S. Lock further increases the Company's dependence
on Consumer Products' business. Consumer Products' customers include D-I-Y
warehouse home centers, home improvement centers, mass merchandisers and
hardware stores. Consumer Products may be adversely affected by prolonged
economic downturns or significant declines in consumer spending. There can be no
assurance that any such prolonged economic downturn or significant decline in
consumer spending will not have a material adverse impact on the Consumer
Products' business and its ability to generate cash flow. Furthermore, Consumer
Products has a high proportion of its sales with a concentrated number of
customers. One of Consumer Products' largest customers, Kmart, accounted for
approximately 20.8% and 18.2% of net sales for Consumer Products in fiscal 1999
and 1998, respectively. In July 1997, Kmart agreed to sell its Builders Square
chain to Leonard Green & Partners, a merchant-banking firm. Leonard Green also
acquired another home improvement retailer, Hechinger Co., and has combined the
two companies to form the nation's third largest home improvement chain. In
August 1998, Consumer Products was informed that the Hechinger/Builders Square
operations were consolidating their supplier relationships and Consumer Products
would retain only the bulk plumbing business, beginning in January 1999. In
fiscal 1998, Builders Square accounted for $11.7 million, or 21.1% and 11.0% of
Consumer Products' and the Company's net sales, respectively. The combined
operations of Hechinger/Builders Square, accounted for approximately $3.7
million, or 7.8% and 3.8% of Consumer Products and the Company's net sales in
fiscal 1999, respectively. Hechinger/Builders Square filed for Chapter 11
bankruptcy protection in June 1999, and for Chapter 7 liquidation in September
1999. Consumer Products' accounts receivable from Hechinger/Builders Square was
$0.3 million at the time of the bankruptcy filing. In the event Consumer
Products were to lose any additional large retail accounts as a customer or one
of its largest accounts were to significantly curtail its purchases from
Consumer Products, there would be material short-term adverse effects until the
Company could further modify Consumer Products' cost structure to be more in
line with its anticipated revenue base. Consumer Products would likely incur
significant charges if additional materially adverse changes in its customer
relationships were to occur.
The Company paid $0.5 million in income taxes in fiscal 1999. At June 30,
1999, the Company had $48.0 million of available domestic net operating loss
carryforwards for income tax purposes, which expire 2009 through 2013, and $41.3
million of original issue discount, as of June 30, 1999, that has been expensed
on
20
<PAGE> 50
the Company's financial statements and will become deductible for tax purposes
when the interest on the Deferred Coupon Notes is paid. In the event the Company
completes a financial restructuring plan, 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 $1.3 million is due in fiscal 2000.
The Company does not have any other commitments to make substantial capital
expenditures. The fiscal 2000 capital expenditure plan includes expenditures to
improve the efficiencies of the Company's operations, to provide new data
technology and certain expansion plans for the Company's foreign operations.
Except as noted below, all operations have completed their Year 2000 compliance.
In August 1998, WAMI's PC-based Year 2000 software upgrade was provided by the
software manufacturer at no cost and has been installed and tested. As part of a
periodic replacement of hardware, WAMI will replace certain PC's for
approximately $10,000 to upgrade its remaining hardware to be Year 2000
compliant. WAMI's software and hardware has been reviewed by an external
information technology professional for Year 2000 compliance. Medal Distributing
has an IBM System 36, which was upgraded, with software modifications being made
to be Year 2000 compliant. The modifications were completed in July 1999,
totaling approximately $10,000. Based on information from hardware and software
vendors, the PC-based information systems at TWI will require minor
modifications to be Year 2000 compliant. These modifications are expected to be
completed in the fall of 1999 and financed through working capital with minimal
cost. The expected expenditures include approximately $13,000 for hardware,
$10,000 for software and $10,000 in labor to make the Year 2000 modifications.
CWI's modifications and timetable are similar to those of TWI, with the costs
expected to be approximately $11,000 for hardware, $14,000 for software and
$2,000 in labor to make the Year 2000 modifications.
The Company has reviewed its non-information technology systems and
believes that the systems are Year 2000 compliant.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $8.7 million in fiscal 1999. A decrease in
the Company's trade and other receivables and inventories and an increase in
accounts payable provided sources of funds. The most significant items affecting
net cash used for operations were the $10.3 million net gain on the sale of U.S.
Lock, $10.2 million of non-cash interest and $6.7 million in equity earnings of
Barnett. Excluding these items, the net cash used in operations was $1.9
million. Cash flow provided by investments totaled $25.7 million, attributable
to the net cash generated from the sale of U.S. Lock. Cash used for financing
activities amounted to $15.7 million, primarily due to the reduction in net
borrowings under the Company's credit facilities.
At June 30, 1999, the Company had working capital of $21.9 million and a
current ratio of 2.4 to 1.
YEAR 2000
The Company utilizes management information systems and software technology
that may be affected by Year 2000 issues throughout its businesses. The Company
continues to implement plans at certain of its operations to ensure those
systems continue to meet its internal and external requirements. A summary of
the progress made by each of the Company's operations is provided below.
During fiscal 1998, the Company's largest division, Consumer Products,
completed a version upgrade of its J.D. Edwards software, which was Year 2000
compliant. In addition, Consumer Products made certain modifications to it
systems and completed the testing of its information systems in fiscal 1998 to
insure that it is Year 2000 compliant. Consumer Products utilizes IBM AS400
hardware, NT servers and personal computers that are also Year 2000 compliant.
The specific cost of upgrading the hardware and software in fiscal 1998 was
approximately $0.8 million; however, the majority of this cost was part of a
process of developing Consumer Products' capabilities to serve its customers and
to operate its business, with Year 2000 compliance being an additional benefit.
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<PAGE> 51
The Company's corporate office completed the development of its accounting
package in March 1999, using Consumer Products' hardware and software. The
accounting package was develop by internal personnel with MIS support at no
additional cost, using the standard reporting format developed for Consumer
Products.
In August 1998, WAMI's PC-based Year 2000 software upgrade was provided by
the software manufacturer at no cost and has been installed and tested. As part
of a periodic replacement of hardware, WAMI will replace certain PC's for
approximately $10,000 to upgrade its remaining hardware to be Year 2000
compliant. WAMI's software and hardware has been reviewed by an external
information technology professional for Year 2000 compliance.
Medal Distributing has an IBM System 36, which was upgraded, with software
modifications being made to be Year 2000 compliant. The modifications were
completed in July 1999, at a cost of approximately $10,000.
Based on information from hardware and software vendors, the PC-based
information systems at TWI will require minor modifications to be Year 2000
compliant. These modifications, which are in progress, are expected to be
completed by September 30, 1999 and financed through working capital with
minimal cost. The expected expenditures include approximately $13,000 for
hardware, $10,000 for software and $10,000 in labor to make the Year 2000
modifications. CWI's modifications and timetable are similar to those of TWI,
with the costs expected to be approximately $11,000 for hardware, $14,000 for
software and $2,000 in labor to make the Year 2000 modifications.
The Company has reviewed its non-information technology systems and
believes that the systems are Year 2000 compliant.
The Company's operations have developed questionnaires and contacted key
suppliers and customers regarding their Year 2000 compliance to determine any
impact on its operations. In general, the suppliers and customers have developed
or are in the process of developing plans to address Year 2000 issues. The
Company will continue to monitor and evaluate the progress of its suppliers and
customers on this critical matter and develop alternate suppliers as required.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The U.S. dollar is the functional currency for a significant portion of the
Company's consolidated operations. However, certain transactions of the Company
are completed in foreign currencies. In addition, for certain of the Company's
foreign operations, the functional currency is the local currency. As a result,
the Company is exposed to currency transaction and translation risks, which
primarily result from fluctuations of the foreign currencies in which the
Company deals as compared to the U.S. dollar over time.
Gains and losses that result from foreign currency transactions are
included in the Company's consolidated statements of operations on a current
basis and affect the Company's reported net income (loss). The cumulative
foreign currency translation effects for the Company's foreign operations that
utilize the local currency as their functional currency are included as a
separate component of stockholders' equity in the Company's consolidated balance
sheets and are considered in determining comprehensive income as reported in the
Company's consolidated statements of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(BEGINS ON FOLLOWING PAGE)
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<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Waxman Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Waxman
Industries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
June 30, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waxman Industries, Inc. and
Subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
September 20, 1999.
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<PAGE> 53
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,322 $ 72
Trade receivables, net.................................... 10,686 15,503
Other receivables......................................... 4,350 4,026
Inventories............................................... 19,052 26,162
Prepaid expenses.......................................... 2,333 2,186
-------- --------
Total current assets.............................. 37,743 47,949
-------- --------
INVESTMENT IN BARNETT....................................... 36,385 29,641
-------- --------
PROPERTY AND EQUIPMENT:
Land...................................................... 575 1,379
Buildings................................................. 4,462 7,397
Equipment................................................. 13,369 13,541
-------- --------
18,406 22,317
Less accumulated depreciation and amortization.............. (7,238) (9,346)
-------- --------
Property and equipment, net................................. 11,168 12,971
-------- --------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET.... 7,920 8,189
UNAMORTIZED DEBT ISSUANCE COSTS, NET........................ 3,052 3,524
DEFERRED TAX ASSET.......................................... 540 --
OTHER ASSETS................................................ 3,402 3,469
-------- --------
$100,210 $105,743
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
<PAGE> 54
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 937 $ 16,343
Accounts payable.......................................... 7,308 7,741
Accrued liabilities....................................... 3,923 6,500
Accrued income taxes payable.............................. 1,314 250
Accrued interest.......................................... 2,316 1,339
-------- --------
Total current liabilities......................... 15,798 32,173
-------- --------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION................ 1,057 1,091
SENIOR SECURED DEFERRED COUPON NOTES, NET................... 91,568 81,368
SENIOR NOTES................................................ 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK.......................... 8,018 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value per share:
authorized and unissued 2,000 shares...................... -- --
Common stock, $0.01 par value per share:
22,000 shares authorized; 9,914 and 9,908 shares issued
and outstanding, respectively............................. 98 98
Class B common stock, $.01 par value per share:
6,000 shares authorized; 2,143 and 2,148 shares issued and
outstanding, respectively................................. 21 21
Paid-in capital............................................. 21,732 21,731
Retained deficit............................................ (72,908) (65,431)
-------- --------
(51,057) (43,581)
Cumulative currency translation adjustment................ (1,029) (1,163)
-------- --------
Total stockholders' equity (deficit).............. (52,086) (44,744)
-------- --------
$100,210 $105,743
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
25
<PAGE> 55
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Net sales..................................... $99,116 $105,662 $119,006
Cost of sales................................. 69,264 69,429 84,574
------- -------- --------
Gross profit.................................. 29,852 36,233 34,432
Selling, general and administrative expenses.. 31,635 30,290 34,996
Non-recurring and procurement charges......... 4,515 24 1,522
------- -------- --------
Operating income (loss)....................... (6,298) 5,919 (2,086)
Gain on sale of Barnett stock, net............ -- -- 16,693
Gain on sale of U.S. Lock, net................ 10,298 -- --
Equity earnings of Barnett.................... 6,744 6,341 5,843
Interest expense, net......................... 17,192 16,031 16,477
------- -------- --------
Income (loss) before income taxes and
extraordinary loss....................... (6,448) (3,771) 3,973
Provision for income taxes.................... 1,029 537 401
------- -------- --------
Income (loss) before extraordinary loss....... (7,477) (4,308) 3,572
Extraordinary loss............................ -- 192 --
------- -------- --------
Net income (loss)............................. $(7,477) $ (4,500) $ 3,572
======= ======== ========
Other comprehensive income (loss):
Foreign currency translation adjustment....... 134 (822) (53)
------- -------- --------
Comprehensive (loss) income................... $(7,343) $ (5,322) $ 3,519
======= ======== ========
</TABLE>
26
<PAGE> 56
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Basic earnings (loss) per share:
From income (loss) before extraordinary loss................ $(0.62) $(0.35) $ 0.30
Extraordinary loss.......................................... -- (0.02) --
------ ------ -------
Net income (loss)........................................... $(0.62) $(0.37) $ 0.30
====== ====== =======
Diluted earnings (loss) per share:
From income (loss) before extraordinary loss................ $(0.62) $(0.35) $ 0.26
Extraordinary loss.......................................... -- (0.02) --
------ ------ -------
Net income (loss)........................................... $(0.62) $(0.37) $ 0.26
====== ====== =======
Average number of common shares outstanding................. 12,057 12,026 11,919
====== ====== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
27
<PAGE> 57
'
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
CLASS B CURRENCY TOTAL
COMMON COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
------- ------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996.......... $ 96 $ 22 $21,419 $(64,503) $ (288) $(43,254)
Net income................... 3,572 3,572
Conversions of Class B common
stock..................... 1 1
Exercise of stock options,
warrants and convertible
notes..................... 228 228
Currency translation
adjustment................ (53) (53)
------- ------- ------- -------- -------- --------
Balance June 30, 1997.......... 97 22 21,647 (60,931) (341) (39,506)
Net loss..................... (4,500) (4,500)
Conversions of Class B common
stock..................... 1 (1) --
Exercise of stock options,
warrants and convertible
notes..................... 84 84
Currency translation
adjustment................ (822) (822)
------- ------- ------- -------- -------- --------
Balance June 30, 1998.......... 98 21 21,731 (65,431) (1,163) (44,744)
Net loss..................... (7,477) (7,477)
Exercise of stock options,
warrants and convertible
notes..................... 1 1
Currency translation
adjustment................ 134 134
------- ------- ------- -------- -------- --------
Balance June 30, 1999.......... $ 98 $ 21 $21,732 $(72,908) $ (1,029) $(52,086)
======= ======= ======= ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
28
<PAGE> 58
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash From (Used For):
Operations:
Net income (loss)...................................... $ (7,477) $ (4,500) $ 3,572
Adjustments to reconcile net income (loss) to net cash
used for operations:
Extraordinary loss..................................... -- 192 --
Non-recurring charges.................................. -- -- 746
Gain on sale of Barnett stock.......................... -- -- (16,693)
Gain on sale of U.S. Lock.............................. (10,298) -- --
Non-cash interest...................................... 10,200 9,883 8,762
Other non-cash charges................................. -- -- 4,123
Equity earnings of Barnett............................. (6,744) (6,341) (5,843)
Depreciation and amortization.......................... 2,555 2,957 2,714
Deferred income taxes.................................. (540) -- --
Bad debt provision..................................... 274 282 565
Changes in assets and liabilities:
Trade and other receivables......................... 1,659 (2,687) (554)
Inventories......................................... 1,455 (1,751) 1,835
Prepaid expenses and other.......................... (204) (10) (3,307)
Accounts payable.................................... 1,157 (674) (3,813)
Accrued liabilities................................. 189 (2,977) 564
Net change in operating assets and liabilities of
U.S. Lock......................................... (1,109) -- --
Other, net.......................................... 134 (822) (53)
-------- -------- ---------
Net cash used for operations........................ (8,749) (6,448) (7,382)
-------- -------- ---------
Investments:
Capital expenditures, net.............................. (2,741) (3,441) (2,339)
Change in other assets................................. 212 (480) (704)
Net proceeds from sales of businesses.................. 28,249 3,203 23,613
-------- -------- ---------
Net cash provided by (used for) investments......... 25,720 (718) 20,570
-------- -------- ---------
Financing:
Borrowings under credit agreements..................... 56,327 105,043 116,028
Payments under credit agreements....................... (70,872) (95,526) (122,012)
Debt issuance costs.................................... (282) -- (256)
Retirement of Senior Notes............................. -- (12,000) --
Retirement of Senior Subordinated Notes................ (895) -- --
Issuance of common stock............................... 1 84 229
-------- -------- ---------
Net cash used for financing......................... (15,721) (2,399) (6,011)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents..... 1,250 (9,565) 7,177
Balance, beginning of year............................... 72 9,637 2,460
-------- -------- ---------
Balance, end of year..................................... $ 1,322 $ 72 $ 9,637
======== ======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
29
<PAGE> 59
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF CONSOLIDATION AND DESCRIPTION OF THE COMPANY
The accompanying consolidated financial statements include the accounts of
Waxman Industries, Inc. ("Waxman Industries") and its wholly-owned subsidiaries
(collectively, the "Company"). As of June 30, 1999, the Company owned 44.3% of
the common stock of Barnett Inc. ("Barnett Common Stock"), a direct marketer and
distributor of plumbing, electrical and hardware products, and accounts for
Barnett Inc. ("Barnett") under the equity method of accounting. Certain
reclassifications have been made to the prior year statements in order to
conform to the current year presentation. All significant intercompany
transactions and balances are eliminated in consolidation.
The Company is a supplier of specialty plumbing, hardware and other
products to the repair and remodeling market in the United States. The Company
distributes its products to approximately 1,400 customers, including a wide
variety of large national and regional retailers, independent retail customers
and wholesalers. The Company conducts its business primarily through its
wholly-owned subsidiaries, Waxman Consumer Products Group Inc. ("Consumer
Products"), WOC Inc. ("WOC") and TWI, International, Inc. ("TWI"). WOC is
comprised of Medal Distributing, a supplier of hardware products and, included
the operations of U.S. Lock, a distributor of a full line of security hardware
products, prior to its January 1, 1999 sale. TWI includes the Company's foreign
operations, including manufacturing, packaging and sourcing operations in China
and Taiwan, and an operation in Mexico that threads galvanized, black, brass,
and chrome pipe and imports malleable fittings. Consumer Products, WOC and
Barnett utilize the Company's and non-affiliated foreign sourcing suppliers.
B. CASH AND CASH EQUIVALENTS
In accordance with the terms of the Loan and Security Agreement (as defined
in Note 5), all restricted cash balances have been excluded from cash and have
been applied against outstanding borrowings under the Loan and Security
Agreement. Cash balances include certain unrestricted operating accounts and
accounts of foreign operations. The Company considers all highly liquid
temporary cash investments with original maturities of less than three months to
be cash equivalents. Cash investments are valued at cost plus accrued interest,
which approximates market value.
C. TRADE RECEIVABLES
Trade receivables are presented net of allowances for doubtful accounts of
$1.0 million and $1.1 million at June 30, 1999 and 1998, respectively. Bad debt
expense totaled $0.3 million in fiscal 1999, $0.3 million in fiscal 1998, and
$0.6 million in fiscal 1997.
The Company sells plumbing, hardware and other products throughout the
United States to do-it-yourself ("D-I-Y") retailers, mass merchandisers, smaller
independent retailers and wholesalers. The Company performs ongoing credit
evaluations of its customers' financial conditions. As a percentage of the
Company's net sales, the largest customer of Consumer Products, Kmart, accounted
for 10.0%, 9.5% and 8.0% in fiscal 1999, 1998 and 1997, respectively. As a
percentage of Consumer Products' net sales, Kmart accounted for 20.8%, 18.2% and
16.5%, for the same periods, respectively. During the same periods, the
Company's ten largest customers accounted for approximately 39.6%, 42.7% and
36.5% of net sales and approximately 55.7% and 42.3% of accounts receivable at
June 30, 1999 and 1998, respectively.
D. INVENTORIES
At June 30, 1999 and 1998, inventories, consisting primarily of finished
goods, are carried at the lower of first-in, first-out (FIFO) cost or market.
The Company regularly evaluates its inventory carrying value, with
30
<PAGE> 60
appropriate consideration given to any excess, slow-moving and/or nonsalable
inventories. In fiscal 1999, 1998 and 1997, the Company recorded charges of $0.6
million, $0.5 million and $2.1 million, respectively, in connection with its
evaluation of its inventory carrying value.
E. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. For financial reporting
purposes, buildings and equipment are depreciated on a straight-line basis over
the estimated useful lives of the related assets. Depreciable lives are 15 to 40
years for buildings and 3 to 15 years for equipment. Leasehold improvements are
amortized on a straight-line basis over the term of the lease or the useful life
of the asset, whichever is shorter. For income tax purposes, accelerated methods
of depreciation are used. Depreciation expense totaled $1.6 million in fiscal
1999, $1.6 million in fiscal 1998 and $1.6 million in fiscal 1997.
F. COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED
Cost of businesses in excess of net assets acquired is being amortized
primarily over 40 years using the straight-line method. Management has evaluated
its accounting for goodwill in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of," on an originating entity basis
considering future undiscounted operating cash flows and believes that the net
asset is realizable and the amortization period is appropriate. Management
continues to evaluate the realizability of this asset. Goodwill amortization
expense totaled $0.3 million in fiscal 1999, $0.3 million in fiscal 1998 and
$0.3 million in fiscal 1997. Accumulated amortization totaled $15.1 million and
$14.8 million at June 30, 1999 and 1998, respectively.
G. UNAMORTIZED DEBT ISSUANCE COSTS
Unamortized debt issuance costs relate to the Company's long-term and
short-term debt (See Note 5) and are amortized over the life of the related
debt. Amortization expense totaled $0.8 million in fiscal 1999, $0.8 million in
fiscal 1998 and $0.8 million in fiscal 1997, and is included in interest expense
in the accompanying consolidated statements of operations. The Company incurred
an extraordinary charge in fiscal 1998 related to the accelerated amortization
of unamortized debt issuance costs. (See Note 2).
H. ISSUANCES OF STOCK BY A SUBSIDIARY
The Company recognizes gains on issuances of stock by a subsidiary in its
consolidated statements of operations in amounts proportionate to its ownership
percentage of the subsidiary. In fiscal 1997, a portion of the gain the Company
recognized on the sale of Barnett stock was attributable to the gain recognized
on the issuance of stock by Barnett. (See Note 2).
I. PROCUREMENT COSTS
Procurement costs represent the amount paid by the Company in connection
with a customer's agreement to purchase products from the Company for a specific
period. The amount includes the consideration paid to the new or existing
customer (i) for the right to supply such customer for a specified period, (ii)
to assist such customer in reorganizing its store aisles and displays in order
to accommodate the Company's products and (iii) to purchase competitor's
merchandise that the customer has on hand when it changes suppliers, less the
salvage value received by the Company. The Company expenses these costs in the
fiscal year incurred. Procurement costs for (i) above totaled $2.0 million in
fiscal 1999 and $0.5 million in fiscal 1997. Procurement costs related to (ii)
above totaled $0.5 million in fiscal 1999 and $0.3 million in fiscal 1997. The
Company did not incur these types of procurement costs in fiscal 1998. These
types of procurement costs are included as procurement charges in the
accompanying consolidated statements of operations. Procurement costs for (iii)
above totaled $1.1 million, $1.1 million and $2.0 million in fiscal 1999, 1998
and 1997, respectively, and are included as a contra-sales amount in net sales
in the accompanying consolidated statements of operations.
31
<PAGE> 61
J. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
All balance sheet accounts of foreign subsidiaries are translated at the
exchange rate as of the end of the fiscal year. Income statement items are
translated at the average currency exchange rates during the fiscal year. The
resulting translation adjustment is recorded as a component of stockholders'
equity and comprehensive income. Foreign currency transaction gains or losses
are included in the consolidated statements of operations as incurred.
K. FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
L. EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share" to be effective for financial statements
issued for periods ending after December 15, 1997. Under SFAS No. 128, primary
earnings per share have been replaced by "basic earnings per share", which
represents net income divided by the weighted average number of common shares
outstanding. Diluted earnings per share continues to utilize the weighted
average number of common stock and common stock equivalents, which include stock
options and warrants. Since the Company is in a loss position in fiscal 1999 and
1998, the impact of these options and warrants is anti-dilutive, therefore the
Company has disclosed basic earnings per share as basic and diluted for these
years.
The number of common shares used to calculate basic and diluted earnings
per share are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic................................................... 12,057 12,026 11,919
Diluted................................................. 12,057 12,026 13,855
</TABLE>
A reconciliation of basic shares to diluted shares is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic................................................... 12,057 12,026 11,919
Dilutive effect of:
Stock options......................................... -- -- 502
Warrants.............................................. -- -- 1,434
------ ------ ------
Diluted................................................. 12,057 12,026 13,855
</TABLE>
2. BARNETT PUBLIC OFFERINGS AND EXTRAORDINARY CHARGE
In fiscal 1997, the Company completed a secondary offering of 1.3 million
shares of the Barnett Common Stock at a per share price of $17.50, before the
underwriters' discount (the "Barnett Secondary Offering"). Barnett participated
in the Barnett Secondary Offering and sold 425,000 of its own shares. The
Company received net proceeds, after the underwriters' discount, of $21.6
million and recorded a $16.7 million pre-tax gain. The Company converted the
remaining convertible non-voting preferred stock of Barnett it owned to Barnett
Common Stock. 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.
As a result of these transactions, at June 30, 1999, the Company owned 7,186,530
shares, or 44.3%, of the outstanding shares of Barnett Common Stock. This
investment is accounted for under the equity method of accounting.
32
<PAGE> 62
Prior to the Barnett Secondary Offering, the Company owned approximately
49.9% of the Barnett Common Stock and, including convertible non-voting
preferred stock of Barnett, a 54% economic interest in the capital stock of
Barnett. The Company's ownership in Barnett was reduced to this level in fiscal
1996 when the Company consummated an initial public offering of the Barnett
Common Stock.
Net proceeds received by the Company from the Barnett Secondary Offering
were used primarily to repay outstanding indebtedness. As a result, the Company
recorded an extraordinary charge of approximately $0.2 million in fiscal 1998,
relating to the accelerated amortization of the related unamortized debt
discount and debt issuance costs attributed to indebtedness repaid from the net
proceeds of the Barnett Secondary Offering (See Note 5).
The following table presents summary financial data for Barnett at June 30,
1999 and 1998 and for the years ended June 30 1999, 1998 and 1997 (in thousands
of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statement of income data:
Net sales....................................... $241,374 $199,578 $160,068
Gross profit.................................... 80,191 67,443 54,692
Net income...................................... 15,215 14,277 12,035
Balance sheet data:
Current assets.................................. $ 94,941 $ 72,054 $ 61,271
Non-current assets.............................. 54,245 23,730 15,744
Current liabilities............................. 24,615 19,623 16,404
Non-current liabilities......................... 33,000 -- --
</TABLE>
The Barnett Form 10-K for the year ended June 30, 1999 is herein
incorporated by reference.
3. MANAGEMENT'S REVIEW OF WHOLLY-OWNED OPERATIONS
Since fiscal 1994, the Company's strategic effort has been to reduce its
high level of debt through the monetization of assets and to improve the
efficiencies from its continuing businesses. As a result, the Company has
undertaken various initiatives to raise cash, improve its cash flow and reduce
its debt obligations or improve its financial flexibility during that period.
Accordingly, management performed strategic reviews of its business operations
in past fiscal years that resulted in the Company recording significant charges
as follows.
FISCAL 1997 --
In fiscal 1997, the Company recorded charges totaling $7.2 million,
including adjustments to cost of sales of $4.3 million, selling, general and
administrative ("SG&A") expenses of $2.6 million and $0.3 million to sales
allowances. The largest portion of the adjustments were made at Consumer
Products, with charges of $4.2 million, $1.1 million and $0.3 million to cost of
sales, SG&A expenses and sales, respectively, related to the decision to augment
certain existing product lines, streamline its packaged plumbing product line,
enhance and redesign its existing plumbing product packaging, undertake certain
customer retention and development programs, and establish inventory reserves
which were necessary, in part, for the reduction in the buying patterns of
Builders Square and Kmart. In addition, the Company recorded $0.1 million and
$1.5 million in additional cost of sales and SG&A expenses, respectively, in
total at its remaining operations, primarily related to inventory adjustments
and charges for valuation reserves, professional services and the increase in
value of certain stock appreciation rights granted to certain key executives.
The Company also recorded a loss of $0.7 million on the disposal of Madison in
the fourth quarter of fiscal 1997 (described in Note 4).
33
<PAGE> 63
4. SALE OF DIVISIONS
A. SALE OF U.S. LOCK
In January 1999, the Company sold 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. A portion of the proceeds from the
sale of U.S. Lock was used to repay the BankAmerica Business Credit working
capital loan collateralized by the accounts receivable and inventory of U.S.
Lock and to pay expenses associated with the transaction, with the remaining
funds being reinvested in the Company's businesses.
The sale of U.S. Lock resulted 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 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 fourth quarter of fiscal 1999, the Company recognized $0.1
million of this deferred gain, which is included in the gain on sale of U.S.
Lock in the accompanying consolidated statements of operations. The Company
utilized a portion of its net operating loss carryforwards to offset a portion
of the tax on the net gain from the sale of U.S. Lock.
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 subsequent to December 31,
1998. The impact of not consolidating U.S. Lock's results would have reduced the
consolidated net sales and resulted in a larger net loss (lower net income for
fiscal 1997) for the Company as follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................... $13,361 $22,762 $18,738
Net (loss) income........................... $ 1,000 $ 1,683 $ 1,115
Basic income per share...................... $ 0.08 $ 0.14 $ 0.09
Diluted income per share.................... $ 0.08 $ 0.14 $ 0.08
</TABLE>
B. SALE OF LERAN GAS PRODUCTS
Effective July 1, 1997, the Company sold the gas products business of
LeRan, to Barnett, for $3.2 million in cash and 24,730 shares of Barnett Common
Stock, with a value of $0.6 million at the time of the transaction. For fiscal
1997 and 1996, LeRan reported approximately $13.8 million and $16.3 million in
net sales and operating income of approximately $0.4 million and $28,000,
respectively. In the first quarter of fiscal 1998, the Company recorded an
estimated loss on the sale of LeRan of $133,000, including certain costs
associated with disposing of assets not included in the transaction and the sale
and closing of certain warehouses. The estimated loss was adjusted in the fourth
quarter of fiscal 1998 to an actual loss of $24,000. The net proceeds were
reinvested in the continuing businesses of the Company, thereby effectively
reducing borrowings under the Credit Agreement (as defined in Note 5).
C. SALE OF MADISON EQUIPMENT COMPANY
In April 1997, the Company sold Madison Equipment Company ("Madison"), a
division of WOC, for $2.0 million in cash. The loss of $0.7 million from the
sale of Madison is included as a non-recurring charge in the accompanying
consolidated statements of operations. Madison's net sales, which are included
in the 1997 fiscal year, amounted to $5.0 million and operating income amounted
to $0.2 million. The net proceeds were reinvested in the continuing businesses
of the Company, thereby effectively reducing borrowings under the Credit
Agreement (as defined in Note 5).
34
<PAGE> 64
5. DEBT
A. LONG-TERM DEBT
Total other long-term debt consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------ --------
<S> <C> <C>
Bank Agreement.............................................. $ 444 $ 9,804
Bank Term Loans............................................. -- 5,000
Senior Subordinated Notes................................... -- 895
Capital leases maturing through 2002, bearing interest at
rates ranging from 7.75% to 11.8%, secured by the leased
equipment................................................. 924 1,095
Other notes, maturing through 2007, bearing interest at
rates ranging from 7.1% to 9.0%, secured by the land,
building and equipment of TWI............................. 626 640
------ --------
1,994 17,434
Less: current portion....................................... (937) (16,343)
------ --------
Long-term debt, net of current portion................. $1,057 $ 1,091
====== ========
</TABLE>
On June 17, 1999, the Company entered into the Loan and Security Agreement
with Congress Financial Corporation to replace the Credit Agreement with
BankAmerica Business Credit, Inc. that was to expire on July 15, 1999. The Loan
and Security Agreement is between Consumer Products, WOC, WAMI and WAMI Sales,
as borrowers (the "Borrowers"), with the Company, Waxman USA Inc. ("Waxman USA")
and TWI as guarantors (the "Loan and Security Agreement"). The Loan and Security
Agreement provides for, among other things, revolving credit advances of up to
$20.0 million. As of June 30, 1999, the Company had $0.4 million in borrowings
under the revolving credit line of the credit facility and had approximately
$14.4 million available under such facility.
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 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 Company is
required to pay a commitment fee of 0.375% per annum on the unused commitment.
The Loan and Security Agreement includes a letter of credit subfacility of $10.0
million, with none outstanding at June 30, 1999. Borrowings under the Loan and
Security Agreement are secured by the accounts receivable, inventories, certain
general intangibles, and unencumbered fixed assets of Waxman Industries, Inc.,
Consumer Products, TWI, International Inc. and WOC, and a pledge of 65% of the
stock of various foreign subsidiaries. In addition, up to $5.0 million of the
Loan and Security Agreement is also secured by a pledge of 500,000 shares of
Barnett Common Stock owned by the Company (constituting approximately 3.1% of
all outstanding Barnett Common Stock). The Loan and Security Agreement requires
the Borrowers to maintain cash collateral accounts into which all available
funds are deposited and applied to service the facility on a daily basis. The
Loan and Security Agreement prevents dividends and distributions by the
Borrowers and Guarantors except in certain limited instances including, so long
as there is no default or event of default and the Borrowers are in compliance
with certain financial covenants, the payment of interest on the Senior
Subordinated Notes and Deferred Coupon Notes of the Company, and contains
customary negative, affirmative and financial covenants and conditions such as
minimum net worth covenant. The Company was in compliance with all loan
covenants at June 30, 1999. As a result of the inclusion of a material adverse
effect clause as an event of default and the requirement to maintain cash
collateral accounts, the borrowings under the Loan and Security Agreement have
been classified as a current liability. The material adverse condition clause
allows Congress Financial Corporation to terminate the Agreement under certain
circumstances. The Loan and Security Agreement expires September 1, 2001, but
may be extended under certain circumstances.
35
<PAGE> 65
Prior to entering into the Loan and Security Agreement, Consumer Products
and WOC participated in a credit facility provided by BankAmerica Business
Credit, Inc. (the "Credit Agreement"), which began in June 1996. The Credit
Agreement provided for, among other things, revolving credit advances of up to
$30.0 million and term loans of up to $5.0 million.
B. SENIOR SECURED DEFERRED COUPON NOTES
On May 20, 1994, the Company exchanged $50 million principal amount of its
Senior Subordinated Notes (as defined below) for $50 million initial accreted
value of 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred
Coupon Notes") along with detachable warrants to purchase 2.95 million shares of
the Company's common stock. The Deferred Coupon Notes were fully accreted at
June 1, 1999, and began accruing cash interest at a rate of 12 3/4% which is
payable on December 1,1999 and semi-annually thereafter. The Deferred Coupon
Notes are redeemable, in whole or in part, at the option of the Company, after
June 1, 1999 at 106.375% of accreted value, which decreases annually to 100% at
the maturity date. The Deferred Coupon Notes are secured by a pledge of the
capital stock of Waxman USA. The Deferred Coupon Notes rank senior in right of
payment to all existing and future subordinated indebtedness of the Company and
rank pari passu in right of payment with all other existing or future
unsubordinated indebtedness of the Company. The Deferred Coupon Notes contain
certain covenants which, among other things, limit the ability of the Company
and its subsidiaries to incur additional indebtedness, transfer or sell assets,
pay dividends, make certain restricted payments or investments, create liens or
enter into sale lease-back transactions, transactions with affiliates and
mergers. The Company was in compliance with all covenants at June 30, 1999.
In the event of a change of control, as defined in the Deferred Coupon Note
Indenture, the Company is obligated to make an offer to purchase all outstanding
Deferred Coupon Notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any. The Company is obligated in certain circumstances to
make an offer to purchase Deferred Coupon Notes at a redemption price plus
unpaid interest, if any, with the net cash proceeds of certain sales or other
dispositions of assets, to the extent such proceeds are not reinvested in the
Company's businesses in a one year period.
The warrants are exercisable through June 1, 2004, at a price of $2.45 per
share. A portion of the initial accreted value of the Deferred Coupon Notes was
allocated to the warrants and as a result, paid-in capital increased by $2.5
million. The related $2.5 million reduction in the recorded initial accreted
value of the Deferred Coupon Notes is being amortized as interest expense over
the life of the Deferred Coupon Notes.
C. SENIOR NOTES
On April 3, 1996, the Company, through its wholly-owned subsidiary, Waxman
USA, consummated an offer to exchange $48.8 million principal amount of its
11 1/8% Senior Notes due September 1, 2001 ("Senior Notes") for a like amount of
the Company's outstanding 13 3/4% Senior Subordinated Notes due June 1, 1999
("Senior Subordinated Notes"), and in connection therewith solicited consents to
certain amendments to the indenture pursuant to which the Senior Subordinated
Notes were issued. Approximately $43.0 million of Senior Subordinated Notes were
exchanged in fiscal 1996. In fiscal 1997, the Company initiated a similar
exchange offer and exchanged an additional $4.8 million of Senior Subordinated
Notes, bringing the total amount exchanged to $47.9 million.
In May 1997, the Company commenced an offer to purchase $12.0 million
principal amount of Senior Notes at par (the "Purchase Offer"). The offer
expired on July 2, 1997, with $2.5 million of the notes being purchased. On July
3, 1997, the Company called for the redemption of $9.5 million of Senior Notes
that had not been tendered in the Purchase Offer, and on August 4, 1997, the
Company completed the note redemption. The Company used a portion of the net
proceeds from the Barnett Secondary Offering to purchase the Senior Notes. The
Company recorded an extraordinary charge of $0.2 million in the first quarter of
fiscal 1998 related to the write-off of unamortized deferred financing costs
associated with the purchase and redemption of these Senior Notes.
The Senior Notes are general unsecured obligations of Waxman USA ranking
pari passu in right of payment to any future indebtedness of Waxman USA that is
not subordinated in right of payment to the
36
<PAGE> 66
Senior Notes and senior in right of payment to any future indebtedness of Waxman
USA that is subordinated in right of payment to the Senior Notes. The Senior
Notes are structurally subordinated to the Loan and Security Agreement and any
refinancing thereof. The indenture under which the Senior Notes were issued (the
"Senior Note Indenture") contains certain covenants that, among other things,
limit the ability of Waxman USA and its subsidiaries to incur additional
indebtedness, transfer or sell assets, pay dividends, make certain other
restricted payments or investments, create liens or enter into sale lease-back
transactions, transactions with affiliates and mergers. Waxman USA was in
compliance with all covenants at June 30, 1999.
In the event of a change of control, as defined in the Senior Note
Indenture, the Company is obligated to make an offer to purchase all outstanding
Senior Notes at 101% of the principal amount thereof plus accrued and unpaid
interest, if any. The Company is obligated in certain circumstances to make an
offer to purchase Senior Notes at a redemption price plus unpaid interest, if
any, with the net cash proceeds of certain sales or other dispositions of
assets, to the extent such proceeds are not reinvested in the Company's
businesses in a one year period.
D. SENIOR SUBORDINATED NOTES
In June 1989, the Company issued $100 million principal amount of Senior
Subordinated Notes. During 1994, the Company exchanged $50 million principal
amount of the Senior Subordinated Notes for a like amount of Deferred Coupon
Notes. As discussed above, the Company issued Senior Notes in exchange for $43.0
million principal amount of Senior Subordinated Notes in fiscal 1996 and an
additional $4.8 million in fiscal 1997. On June 1, 1999, approximately $0.9
million of Senior Subordinated Notes matured, representing the remaining amount
of the Senior Subordinated Notes, and were repaid.
E. MISCELLANEOUS
The Company made cash interest payments of $6.2 million in fiscal 1999,
$5.8 million in fiscal 1998 and $6.5 million in fiscal 1997. Interest income was
$0.2 million in fiscal 1999 and $0.1 million in fiscal 1998 and 1997. The
Company also has a significant amount of non-cash interest, accrued interest and
interest cost from the amortization of deferred financing costs, which makes up
the balance of the interest expense presented in the accompanying consolidated
statements of operations.
Management believes the carrying value of its bank loan approximates its
fair value as it bears interest based upon the banks' prime lending rates. At
June 30, 1999, the market price for the Deferred Coupon Notes is approximately
$46.4 million, which is approximately 50% below the carrying value of the debt.
The fair value, determined using quoted market prices for the Senior Notes,
approximates their carrying amount.
6. 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.
The components of income (loss) from continuing operations before income
taxes and extraordinary loss are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Domestic......................................... $(7,209) $(5,297) $2,569
Foreign.......................................... 761 1,526 1,404
------- ------- ------
Total.......................................... $(6,448) $(3,771) $3,973
======= ======= ======
</TABLE>
37
<PAGE> 67
The components of the provision for income taxes are (in thousands of
dollars):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Currently payable:
U.S. Federal.......................................... $ 171 $ -- $210
Foreign, state and other.............................. 1,398 537 191
------ ---- ----
Total current....................................... 1,569 537 401
Deferred: State....................................... (540) -- --
------ ---- ----
Total provision..................................... $1,029 $537 $401
====== ==== ====
</TABLE>
Barnett is not included in the Company's consolidated tax return.
The following table reconciles the U.S. statutory rate to the Company's
effective tax rate:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
U.S. statutory rate................................... 35.0% 35.0% 35.0%
Domestic losses not benefited......................... -- (43.9) --
State taxes, net...................................... (6.0) (4.0) 2.1
Goodwill amortization................................. (1.5) (1.1) 3.1
Foreign tax items..................................... 0.1 6.2 1.0
Change in valuation allowance......................... (22.0) -- (38.3)
Nondeductible compensation............................ (14.7) -- --
Original issue discount............................... (3.8) (5.8) 4.8
Other, net............................................ (3.1) (0.6) 2.4
----- ----- -----
Effective tax rate.................................. (16.0%) (14.2%) 10.1%
===== ===== =====
</TABLE>
The deferred tax assets and liabilities as of June 30, 1999 and 1998 are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards.......................... $16,801 $18,433
Original issue discount................................... 14,459 11,113
Deferred gain on sale of U.S. Lock........................ 3,346 --
Accrued expenses.......................................... 1,129 1,206
Inventories............................................... 709 1,270
Accounts receivable....................................... 333 389
Alternative minimum tax credit............................ 990 895
Other..................................................... 848 372
------- -------
Deferred tax asset...................................... 38,615 33,678
------- -------
Investment in subsidiaries................................ (12,185) (9,825)
Property.................................................. (1,139) (494)
Other assets.............................................. (3) (27)
------- -------
Deferred tax liabilities................................ (13,327) (10,346)
------- -------
Net deferred tax asset.................................. 25,288 23,332
Valuation allowance..................................... (24,748) (23,332)
------- -------
$ 540 $ --
======= =======
</TABLE>
At June 30, 1999, the Company has $48.0 million of available domestic net
operating loss carryforwards for income tax purposes, which expire 2009 through
2013. The Company also has alternative minimum tax
38
<PAGE> 68
carryforwards of approximately $1.0 million at June 30, 1999, which are
available to reduce future regular income taxes over an indefinite period.
At June 30, 1999, the Company's net deferred tax assets are substantially
offset by a valuation allowance, except for the deferred tax asset related to
state taxes currently payable on the deferred gain on the sale of U.S. Lock.
SFAS No. 109 requires the Company to assess the realizability of its deferred
tax assets based on whether it is more likely than not that the Company will
realize the benefit from these deferred tax assets in the future. If the Company
determines 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 June 30, 1999, the Company
considered factors such as (i) its historical and projected taxable losses and
its inability to utilize its net operating loss carryforwards, which comprise a
significant portion of the net deferred tax; (ii) the benefit of the deferred
tax asset related to the original issue discount will not be realized unless the
interest accreted on the Senior Secured Deferred Coupon Notes is paid; (iii) the
Company continues to own a 44.3% interest in Barnett, as well as other operating
assets, which, upon disposition, could potentially generate future taxable
income but the taxable income generated, if any, would be dependent upon the
disposition terms; (iv) the Company has not yet been able to complete a
financial restructuring plan that may ultimately result in the realization of a
portion or all of the Company's net deferred tax asset and thus, the ultimate
impact cannot be objectively anticipated or verified.
Based on the Company's consideration of the above factors, the Company
believed it was appropriate to maintain a valuation allowance on its net
deferred tax asset, except for on the deferred tax asset related to state taxes
currently payable on the deferred gain on the sale of U.S. Lock. As a result, as
of June 30, 1999, 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.
The Company made income tax payments of $0.5 million in fiscal 1999, $0.3
million in fiscal 1998 and $1.3 million in fiscal 1997. Refunds received totaled
$1,300 in fiscal 1999, $39,000 in fiscal 1998, and $47,000 in fiscal 1997.
7. LEASE COMMITMENTS
The Company leases certain warehouse and office facilities and equipment
under operating lease agreements, which expire at various dates through 2008.
Future minimum rental payments are as follows (in thousands of dollars) :
<TABLE>
<S> <C>
2000................................................. $1,348
2001................................................. 662
2002................................................. 340
2003................................................. 137
2004................................................. 106
Thereafter........................................... 440
------
$3,033
</TABLE>
Total rent expense charged to operations was $1.6 million in fiscal 1999,
$2.5 million in fiscal 1998 and $1.7 million in fiscal 1997. Consumer Products
leases certain warehouse space from related parties. Related parties rent
expense totaled $0.3 million in fiscal 1999, $0.3 million in fiscal 1998 and
$0.5 million in fiscal 1997. Those related party relationships consist of the
following:
- Aurora Investment Co., a partnership owned by Melvin Waxman,
Chairman of the Board and Co-Chief Executive Officer of the Company,
and Armond Waxman, President and Co-Chief Executive Officer of the
Company, together with certain other members of their families, is
the owner and lessor of the building used by Consumer Products for
its executive offices, administrative functions and, until the move
of the warehouse to Groveport, Ohio, one of its
39
<PAGE> 69
distribution facilities. The warehouse portion of this facility has
been subleased to Handl-it, Inc. (see below for information
regarding affiliated ownership) for the duration of the lease term.
Rent expense under this lease was $326,716 in fiscal 1999, $314,150
in fiscal 1998 and $314,150 in fiscal 1997. The Company received
rental income from Handl-it, Inc. of $95,324 in fiscal 1999 for
subleasing the warehouse in Bedford Hts., Ohio for a portion of the
year.
- Handle-it Inc., a corporation owned by John S. Peters, a consultant
to the Company, together with certain other members of his family,
Melvin Waxman and Armond Waxman, provides Consumer Products with
certain outside warehousing services under month-to-month rental
arrangements from time to time. Consumer Products may enter into
month-to-month leases in the future, depending on its business
requirements at the time. Rent expense under these lease
arrangements was $10,000, $30,000 and $137,000 for fiscal 1999, 1998
and 1997, respectively. Consumer Products Group also paid Handl-it
Inc. approximately $55,000 for the cost of transportation of
products in fiscal 1999.
- Effective July 1, 1999, WAMI Sales replaced an internally operated
warehouse facility in Cleveland, Ohio with an arrangement with
Handl-it Inc. to provide all warehousing, labor and shipping
functions for a fee equal to 7.5% of monthly sales from this
location.
8. PROFIT SHARING AND 401(K) PLAN
The eligible employees of the Company and certain subsidiaries of the
Company participate in a trusteed, profit sharing and 401(k) retirement plan.
Contributions are discretionary and are determined by the Company's Board of
Directors. There were no profit sharing contributions in fiscal 1999, 1998 or
1997; however, the Company contributed a 50% match of up to the first 4% of
salary deferral by employees, which amounted to $0.1 million in fiscal 1999,
1998 and 1997. The Company currently offers no other retirement, post-retirement
or post-employment benefits.
9. RELATED-PARTY TRANSACTIONS
The Company's wholly-owned subsidiaries engage in business transactions
with Barnett. Products sold to Barnett for resale totaled $19.9 million in
fiscal 1999, $16.2 million in fiscal 1998 and $13.7 million in fiscal 1997.
There were no purchases from Barnett in fiscal 1999 or 1998 and $0.1 million in
fiscal 1997.
The Company and Barnett provide to and receive from each other certain
selling, general and administrative services and reimburse each other for
out-of-pocket disbursements related to those services. The Company and Barnett
entered into an Intercorporate Agreement (the "New Intercorporate Agreement")
under which the Company provides certain managerial, administrative and
financial services to Barnett and is paid by Barnett for the allocable cost of
the salaries and expenses of the Company's employees while they are rendering
such services. Barnett also reimburses the Company for actual out-of-pocket
disbursements to third parties by the Company required for the provision of such
services by the Company. In addition to the services provided by the Company to
Barnett pursuant to the New Intercorporate Agreement, Barnett also provided
certain services to U.S. Lock, LeRan and Madison, until their sale. These
services included the utilization of Barnett's management information systems,
financial accounting, order processing and billing and collection services. The
Company paid Barnett the allocable cost of the salaries and expenses of
Barnett's employees while they were performing such services. The Company also
reimbursed Barnett for all actual out-of-pocket disbursements to third parties
by Barnett required for the provision of such services. The net effect of these
charges is not material. The arrangements provided in the New Intercorporate
Agreement may be modified and additional arrangements may be entered into
pursuant to a written agreement between the Company and Barnett.
All amounts incurred by the Company on behalf of Barnett, have been
reimbursed by Barnett. All amounts incurred by Barnett on behalf of the Company,
have been reimbursed by the Company and are reflected in selling, general and
administrative expenses in the accompanying statements of operations.
40
<PAGE> 70
The Company leases certain facilities and has other related party
relationships as more fully disclosed in Note 7.
10. CAPITAL STOCK
Each share of the Company's common stock (the "Common Stock") entitles its
holder to one vote, while each share of Class B common stock entitles its holder
to ten votes. Cash dividends on the Class B common stock may not exceed those on
the Common Stock. Due to restricted transferability, there is no trading market
for the Class B common stock. However, the Class B common stock may be
converted, at the stockholder's option, into Common Stock on a share-for-share
basis at any time, without cost to the stockholder.
The Company is authorized to issue two million shares of preferred stock in
series, with terms fixed by resolution of the Board of Directors. No preferred
shares have been issued as of June 30, 1999.
11. STOCK OPTION PLANS, RESTRICTED SHARE PLANS AND STOCK APPRECIATION RIGHTS
The Company has two plans under which stock options may be granted. The
Company applies APB Opinion No. 25 and related Interpretations in accounting for
these stock options. Accordingly, no compensation costs have been recognized for
these stock based compensation awards. Pro forma net income and earnings per
share for the fiscal years ended June 30th, assuming compensation costs for the
Company had been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation", would have been (in thousands of dollars, except per
share data):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Net income (loss) as reported.................... $(7,477) $(4,500) $3,572
Pro forma net income (loss)...................... $(7,865) $(4,849) $3,455
Basic earnings (loss) per share as reported...... $ (0.62) $ (0.37) $ 0.30
Pro forma basic earnings (loss) per share........ $ (0.65) $ (0.40) $ 0.29
Diluted earnings (loss) per share as reported.... $ (0.62) $ (0.37) $ 0.26
Pro forma diluted earnings (loss) per share...... $ (0.65) $ (0.40) $ 0.25
</TABLE>
Pro forma disclosure for companies using APB Opinion No. 25 requires
calculating compensation cost for the effects of all awards granted in the first
fiscal year beginning after December 15, 1994. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants made since July 1, 1995: no
dividends; expected volatility of 88.5%; average risk-free interest rate of
6.0%; and expected life of 8.9 to 10 years. Because the cost of calculating
compensation under SFAS No. 123 has not been applied to options granted before
July 1, 1995, the resulting pro forma expense may not be representative of the
actual expense that may be incurred in the future.
The 1992 Non-Qualified and Incentive Stock Option Plan, as amended (the
"1992 Stock Option Plan"), authorizes the issuance of an aggregate of 1.8
million shares of Common Stock in the form of stock options to officers and key
employees of the Company or its subsidiaries. Under the terms of the 1992 Stock
Option Plan, all options granted are at an option price not less than the market
value at the date of grant and may be exercised for a period not exceeding 10
years from the date of grant. As of June 30, 1999, 58 persons held such options.
In fiscal 1994, the Board of Directors of the Company adopted the 1994
Non-Employee Directors Stock Option Plan pursuant to which each current
non-employee director of the Company was granted an option to purchase an
aggregate of 20 shares of the Company's Common Stock at an exercise price of
$2.25 per share and each future non-employee director of the Company would be
granted, on the date such person becomes a non-employee director of the Company,
an option to purchase an aggregate of 20 shares of Common Stock at an exercise
price equal to the fair market value of the Company's Common Stock at the date
of grant. In addition, during fiscal 1994, the Company granted a consultant to
the Company an option to purchase an aggregate of 10 shares of Common Stock at
an exercise price of $2.25 per share. During fiscal 1999, options to
41
<PAGE> 71
purchase 20 shares expired as a result of the retirement of one non-employee
director. As of June 30, 1999, 3 persons held such options.
Changes in stock options outstanding for the 1992 Stock Option Plan and the
1994 Non-Employee Directors Stock Option Plan are as follows (in thousands,
except per share prices):
<TABLE>
<CAPTION>
1992 PLAN 1994 PLAN
SHARES OPTION PRICE SHARES OPTION PRICE
STOCK OPTIONS OUTSTANDING PER SHARE OUTSTANDING PER SHARE
------------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance as of June 30, 1996...... 1,354 $ 1.00-$2.25 70 $2.25
Granted.......................... 146 $3.375-$5.625 -- --
Exercised........................ (40) $ 1.00-$2.25 -- --
Expired or terminated............ (97) $ 1.00-$3.375 -- --
----- ----
Balance as of June 30, 1997...... 1,363 $ 1.00-$5.625 70 $2.25
Granted.......................... 270 $ 3.50-$4.0625 -- --
Exercised........................ (53) $ 1.00-$2.25 -- --
Expired or terminated............ (45) $ 1.00-$5.625 -- --
----- ----
Balance as of June 30, 1998...... 1,535 $ 1.00-$5.625 70 $2.25
Granted.......................... 75 $ 0.56-$3.375 -- --
Exercised........................ (1) $ 1.00 -- --
Expired or terminated............ (96) $ 1.00-$4.25 (20) $2.25
----- ----
Balance as of June 30, 1999...... 1,513 $ 1.00-$5.625 50 $2.25
</TABLE>
As of June 30, 1999, options for 1,148,275 shares were exercisable under
the 1992 Stock Option Plan and 50,000 were exercisable under the 1994
Non-Employee Directors Stock Option Plan.
In fiscal 1996, the Board of Directors adopted the 1996 Non-Employee
Directors Restricted Share Plan (the "1996 Plan"). The 1996 Plan is designed to
increase the proprietary and vested interest of the non-employee directors of
the Company in the growth, development and financial success of the Company. The
1996 Plan calls for 5,000 restricted shares of the Common Stock to be granted to
each non-employee director for each five years of service as a director. The
restricted shares vest on the last day of the second consecutive year during
which the individual serves as a director after the date of the award. Prior to
being vested, the shares bear a restricted legend and are held by the Company's
corporate secretary. In fiscal 1998, the Company awarded 5,000 restricted shares
and recorded compensation cost of approximately $20,000. There were no awards
made in fiscal 1999.
Also in fiscal 1996, the Stock Option Committee granted Stock Appreciation
Rights ("SAR") for 200,000 shares to each of the Co-Chief Executive Officers of
the Company at a base price of $3 3/8, and in September 1996, an SAR for 100,000
shares to the President of Consumer Products at a base price of $3 3/8. Each SAR
expires ten years from the date of grant and vests in whole, three years after
the date of grant. Upon exercise, the grantee is entitled to an amount equal to
the excess of the fair value per share of the Common Stock on the date of
exercise over the base price of the SAR. Each SAR is exercisable, at the
election of the grantee, for either cash or Common Stock. The SAR ceases to be
exercisable on the date of the termination of the employment of the grantee with
the Company, except due to death, disability or other than "for cause". In
fiscal 1997, the Company expensed $0.3 million related to the value of the
compensation due to the SAR's. Due to the market price of the Company's common
stock at June 30, 1998, in comparison to the prior year, no expense was recorded
relating to the value of the SAR's in fiscal 1998. In fiscal 1999, the Company
recorded into income the reversal of the charge taken in fiscal 1997 for the
SAR's due to the market price of the Company's stock being below the exercise
price of the SAR's.
42
<PAGE> 72
12. CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the Company's consolidated financial statements or results of operations.
13. SEGMENT INFORMATION
The Company's businesses distribute specialty plumbing products,
galvanized, black, brass and chrome pipe nipples, imported malleable fittings
and other products. Since the foreign sourcing and manufacturing operations sell
a significant portion of their products through the Company's wholly-owned
operations, which primarily sell to retailers, and to Barnett, a distributor,
the Company has classified its business segments into retail and non-retail
categories. Products are sold to (i) retail operations, including large national
and regional retailers, D-I-Y home centers and smaller independent retailers in
the United States, and (ii) non-retail operations, including wholesale and
industrial supply distributors in the United States. Sales outside of the United
States are not significant. Until the January 1, 1999 sale of U.S. Lock, the
Company also distributed security hardware to non-retail operations, including
security hardware installers and locksmiths. Set forth below is certain
financial data relating to the Company's business segments (in thousands of
dollars).
<TABLE>
<CAPTION>
CORPORATE AND
RETAIL NON-RETAIL OTHER ELIMINATION TOTAL
------- ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 1999................. $69,084 $43,150 -- $(13,118) $ 99,116
Fiscal 1998................. 77,000 45,355 -- (16,693) 105,662
Fiscal 1997................. 78,058 56,234 -- (15,286) 119,006
Operating income (loss):
Fiscal 1999................. $(2,800) $ 400 $ (3,898) -- $ (6,298)
Fiscal 1998................. 3,789 5,759 (3,629) -- 5,919
Fiscal 1997................. (3,308) 5,614 (4,392) -- (2,086)
Identifiable assets:
June 30, 1999............... $45,017 $15,866 $ 39,327 -- $100,210
June 30, 1998............... 46,109 23,041 36,593 -- 105,743
</TABLE>
The Company's foreign operations manufacture, assemble, source and package
products that are distributed by the Company's wholly-owned operations, Barnett,
retailers and other non-retail customers. Net sales for those foreign operations
amounted to $46.3 million, $39.2 million and $33.7 million for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively. Of these amounts,
approximately $13.1 million, $16.7 million and $15.3 million were intercompany
sales for the fiscal year ended June 30, 1999, 1998 and 1997, respectively.
Identifiable assets for the foreign operations were $18.7 million and $18.0
million at June 30, 1999 and 1998.
43
<PAGE> 73
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS:
Presented below is a summary of the unaudited quarterly results of
operations for the fiscal years ended June 30, 1999 and 1998 (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
FISCAL 1999 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $28,229 $29,198 $22,186 $19,503
Gross profit....................................... 9,088 8,661 6,247 5,856
Non-recurring and procurement charges.............. 1,350 -- 2,900 265
Operating income (loss)............................ (509) 218 (3,328) (2,679)
Gain on sale of U.S. Lock, net..................... -- -- 10,196 102
Income (loss) before provision for income taxes.... (3,292) (2,400) 4,374 (5,130)
Net income (loss).................................. $(3,478) $(2,454) $ 3,475 $(5,020)
Basic earnings (loss) per share:
Net income (loss)................................ $ (0.29) $ (0.20) $ 0.29 $ (0.42)
Diluted earnings (loss) per share:
Net income (loss)................................ $ (0.29) $ (0.20) $ 0.29 $ (0.42)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $28,157 $26,808 $24,444 $26,253
Gross profit....................................... 9,501 9,364 8,544 8,824
Non-recurring and procurement charges (income)..... 133 -- -- (109)
Operating income................................... 2,005 1,872 1,024 1,018
Loss before provision for income taxes and
extraordinary loss............................... (383) (323) (1,610) (1,455)
Extraordinary loss................................. 192 -- -- --
Net loss........................................... $ (819) $ (635) $(1,840) $(1,206)
Basic loss per share:
Loss before extraordinary loss................... $ (0.05) $ (0.05) $ (0.15) $ (0.10)
Extraordinary loss............................... (0.02) -- -- --
Net loss......................................... $ (0.07) $ (0.05) $ (0.15) $ (0.10)
Diluted loss per share:
Net loss......................................... $ (0.05) $ (0.05) $ (0.15) $ (0.10)
Extraordinary loss............................... (0.02) -- -- --
Net loss......................................... $ (0.07) $ (0.05) $ (0.15) $ (0.10)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
Part III, except for certain information relating to Executive Officers
included in Part I, Item 4A, is omitted inasmuch as the Company intends to file
with the Securities and Exchange Commission within 120 days of the close of its
fiscal year ended June 30, 1999 a definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934.
44
<PAGE> 74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) The following consolidated financial statements are included
in Part II, Item 8:
Report of Independent Public Accountants.
Balance Sheets -- June 30, 1999 and 1998.
Statements of Operations -- For the Years Ended June 30,
1999, 1998 and 1997.
Statements of Stockholders' Equity -- For the Years Ended
June 30, 1999, 1998 and 1997.
Statements of Cash Flows -- For the Years Ended June 30,
1999, 1998 and 1997.
Notes to Financial Statements For the Years Ended June 30,
1999, 1998 and 1997.
Supplementary Financial Information.
(a)(2) All schedules have been omitted because the required
information is not present or not present in amounts
sufficient to require submission of the schedule, or because
the information required is included in the consolidated
financial statements including notes thereto.
(a)(3) EXHIBITS
3.1* Certificate of Incorporation of the Company dated October
27, 1989 (Exhibit 3(a) to the Company's Form S-8 filed
December 4, 1989, File No. 0-5888, incorporated herein by
reference).
3.2* By-laws of the Company. (Exhibit 3.2 to Annual Report on
Form 10-K for the year ended June 30, 1990, File No. 0-5888,
incorporated herein by reference.)
4.1* Indenture dated as of June 1, 1989 (the "Ameritrust
Indenture") between the Company and Ameritrust Company
National Association (Exhibit 4.1 to Annual Report on Form
10-K for the year ended June 30, 1989, File No. 0-5888,
incorporated herein by reference).
4.2* Form of the Company's 13 3/4% Senior Subordinated Note due
June 1, 1999 (Exhibit 4.2 to Annual Report on Form 10-K for
the year ended June 30, 1989, File No. 0-5888, incorporated
herein by reference).
4.3* First Supplemental Indenture to the Ameritrust Indenture
dated November 29, 1989. (Exhibit 4.2 to Annual Report on
Form 10-K for the year ended June 30, 1990, File No. 0-5888,
incorporated herein by reference.)
4.4* Second Supplemental Indenture to the Ameritrust Indenture
dated November 23, 1993 (Exhibit 4.3 to Waxman Industries,
Inc.'s Form S-2 filed July 8, 1994, incorporated herein by
reference).
4.5* Third Supplemental Indenture to the Ameritrust Indenture
dated May 20, 1994 (Exhibit 4.4 to Waxman Industries, Inc.'s
Form S-2 filed July 8, 1994 incorporated herein by
reference).
4.6* Indenture, dated as of May 20, 1994, by and between Waxman
Industries, Inc. and The Huntington National Bank, as
Trustee, with respect to the Deferred Coupon Notes,
including the form of Deferred Coupon Notes (Exhibit 4.1 to
Waxman Industries, Inc.'s Form S-4 filed June 20, 1994,
incorporated herein by reference).
4.7* Warrant Agreement, dated as of May 20, 1994, by and between
Waxman Industries, Inc. and The Huntington National Bank, as
Warrant Agent (Exhibit 4.2 to Waxman Industries, Inc.'s Form
S-4 filed June 20, 1994, incorporated herein by reference).
4.8* Warrant Certificate (Exhibit 4.3 to Waxman Industries,
Inc.'s Form S-4 filed June 20, 1994, incorporated herein by
reference).
4.9* Securities Purchase Agreement for Notes and Warrants dated
as of September 17, 1991, among the Company and each of the
Purchasers referred to therein. (Exhibit 4.4 to Annual
Report on Form 10-K for the year ended June 30, 1991, File
No. 0-5888, incorporated herein by reference).
</TABLE>
45
<PAGE> 75
<TABLE>
<S> <C>
4.10* Loan and Security Agreement dated as of June 17, 1999 by and
among Congress Financial Corporation, as Lender, and Waxman
Consumer Products Group Inc., WOC Inc., Western American
Manufacturing, Inc. and WAMI Sales, Inc. ,as Borrowers, and
Waxman Industries, Inc. , Waxman USA Inc. and TWI,
International, Inc. , as Guarantors (Exhibit x.x to Waxman
Industries, Inc.'s Report on Form 8-K filed June 17, 1999,
incorporated herein by reference).
4.11* Reserved
4.20* Reserved.
4.23* Reserved.
4.27* First Supplemental Indenture dated as of January 19, 1996 by
and between Waxman Industries, Inc. and The Huntington
National Bank, as Trustee (Exhibit 4.2 to Waxman Industries,
Inc.'s Amendment No. 8 to Registration Statement on Form S-2
filed April 15, 1996 Registration No. 33-54211, incorporated
herein by reference).
4.28* Indenture dated as of April 3, 1996 by and between Waxman
USA Inc. and the United States Trust Company of New York, as
Trustee, with respect to the 11 1/8% Senior Notes due 2001
of Waxman USA Inc., including the form of Senior Notes
(Exhibit 10.14 to Waxman Industries, Inc.'s Amendment No. 8
to Registration Statement on Form S-2 filed April 15, 1996,
Registration No. 33-54211, incorporated herein by
reference).
4.29* Registration Rights Agreement dated as of April 3, 1996 by
and between Waxman USA Inc. and the United States Trust
Company of New York (Exhibit 10.15 to Waxman Industries,
Inc.'s Amendment No. 8 to Registration Statement on Form S-2
filed April 15, 1996, Registration No. 33-54211,
incorporated herein by reference).
4.32* Standstill Agreement dated March 28, 1996 between Waxman
Industries, Inc. and Barnett Inc. (Exhibit No. 10.13 to
Waxman Industries, Inc.'s Amendment No. 8 to Registration
Statement on Form S-2 filed April 15, 1996, Registration No.
33-54211, incorporated by reference).
4.33* Loan and Security Agreement dated as of June 28, 1996 among
the Financial Institutions named therein and BankAmerica
Business Credit, Inc., as the Agent, Waxman Consumer
Products Group Inc. and WOC Inc., including certain exhibits
thereto (Exhibit No. 4.33 to Annual Report on Form 10-K for
the year ended June 30, 1996, File No. 0-05888, incorporated
herein by reference).
10.1* Lease between the Company as Lessee and Aurora Investment
Co. as Lessor dated June 30, 1992 (Exhibit 10.1 to Annual
Report on Form 10-K for the year ended June 30, 1992, File
No. 0-5888, incorporated herein by reference).
10.2* Policy Statement (revised as of June 1, 1980) regarding the
Company's Profit Incentive Plan (Exhibit 10(c)-1 to Annual
Report on Form 10-K for the year ended June 30, 1984, File
No. 0-5888, incorporated herein by reference).
10.4* Form of Stock Option Agreement between the Company and its
Directors. (Exhibit 10.5 to Annual Report on Form 10-K for
the year ended June 30, 1991, File No. 0-5888, incorporated
herein by reference).
10.6* Tax Sharing Agreement dated May 20, 1994 among Waxman
Industries, Waxman USA, Barnett Inc., Waxman Consumer
Products Group Inc., WOC Inc. and Western American
Manufacturing, Inc. (Exhibit 10.6 to Waxman Industries,
Inc.'s Form S-4 filed June 20, 1994, incorporated herein by
reference).
10.7* 1992 Non-Qualified and Incentive Stock Option Plan of Waxman
Industries, Inc., adopted as of July 1, 1992 (Exhibit 10.7
to Annual Report of Form 10-K for the year ended June 30,
1993, File No. 0-5888, incorporated herein by reference).
10.8* Intercorporate Agreement dated May 20, 1994 among Waxman
Industries, Waxman USA, Barnett Inc., Waxman Consumer
Products Group Inc., WOC Inc. and Western American
Manufacturing, Inc. (Exhibit 10.7 to Waxman Industries,
Inc.'s Form S-4).
</TABLE>
46
<PAGE> 76
<TABLE>
<S> <C>
10.9* Employee Stock Purchase Plan of Waxman Industries, Inc.,
adopted on September 1, 1992 (Exhibit 10.8 to Annual Report
on Form 10-K for the year ended June 30, 1993, File No.
0-5888, incorporated herein by reference).
10.10* Employment Agreement dated November 1, 1994 between Waxman
Consumer Products Group Inc. and Laurence Waxman (Exhibit
10.5 to Waxman Industries, Inc.'s Amendment No. 4 to
Registration Statement on Form S-2 filed October 10, 1995,
Registration No. 33-54211, incorporated herein by
reference).
10.11* Intercorporate Agreement dated March 28, 1996 among Waxman
Industries, Inc., Waxman USA Inc., Barnett Inc., Waxman
Consumer Products Group Inc., WOC Inc. and TWI,
International, Inc. (Exhibit 10.8 to Waxman Industries,
Inc.'s Amendment No. 8 to Registration Statement on Form S-2
filed April 15, 1996, Registration No. 33-54211,
incorporated herein by reference).
10.12* Waxman Industries, Inc. 1996 Non-Employee Directors'
Restricted Share Plan (Exhibit A to Waxman Industries, Inc.
1996 Proxy Statement, File No. 001-10273, incorporated
herein by reference).
10.13* SAR Agreement, dated as of March 29, 1996, between Waxman
Industries, Inc. and Armond Waxman (Exhibit 10.18 to Waxman
Industries, Inc. Form S-2 filed January 18, 1997,
incorporated herein by reference).
10.14* SAR Agreement, dated as of March 29, 1996, between Waxman
Industries, Inc. and Melvin Waxman (Exhibit 10.19 to Waxman
Industries, Inc. Form S-2 filed January 18, 1997,
incorporated herein by reference).
10.25* SAR Agreement, dated as of September 27, 1996, between
Waxman Industries, Inc. and Laurence Waxman (Exhibit 10.20
to Waxman Industries, Inc. Form S-2 filed January 18, 1997,
incorporated herein by reference).
18.2* Letter Regarding Change in Accounting Principles (Exhibit
18.2 to Annual Report on Form 10-K for the year ended June
30, 1996, File No. 001-10273, incorporated herein by
reference).
21.1* Subsidiaries. (Exhibit 21.1 to Waxman Industries, Inc.'s
Form S-4 filed June 20, 1994, incorporated herein by
reference).
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
---------------
* Incorporated herein by reference as indicated.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on June 17, 1999, incorporating by
reference the June 17, 1999 press release by the Registrant regarding the
completion of a $20 million bank credit facility with Congress Financial
Corporation.
47
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
By: /s/ ARMOND WAXMAN
------------------------------------
Armond Waxman
President, Co-Chief Executive
Officer
and Director
September 21, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ MELVIN WAXMAN Chairman of the Board, Co-Chief September 21, 1999
--------------------------------------- Executive Officer and Director
Melvin Waxman
/s/ ARMOND WAXMAN President, Co-Chief Executive Officer September 21, 1999
--------------------------------------- and Director
Armond Waxman
/s/ MARK W. WESTER Chief Financial Officer and Vice September 21, 1999
--------------------------------------- President -- Finance (principal
Mark W. Wester accounting officer)
/s/ WILLIAM R. PRAY Director September 21, 1999
---------------------------------------
William R. Pray
/s/ JUDY ROBINS Director September 21, 1999
---------------------------------------
Judy Robins
/s/ IRVING Z. FRIEDMAN Director September 21, 1999
---------------------------------------
Irving Z. Friedman
/s/ LAURENCE S. WAXMAN Director September 21, 1999
---------------------------------------
Laurence S. Waxman
</TABLE>
48
<PAGE> 78
Annex B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-5888
WAXMAN INDUSTRIES, INC.
-----------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-0899894
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
--------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(440) 439-1830
--------------
(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
--- ---
9,914,939 shares of Common Stock, $.01 par value, and 2,142,358 shares of Class
B Common Stock, $.01 par value, were outstanding as of November 5, 1999.
1
<PAGE> 79
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
INDEX TO FORM 10-Q
------------------
PAGE
----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and 1998..................3
Condensed Consolidated Balance Sheets - September 30, 1999
and June 30, 1999...............................................4-5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1999 and 1998..................6
Notes to Condensed Consolidated Financial Statements............7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................12-17
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
SIGNATURES
----------
EXHIBIT INDEX
-------------
2
<PAGE> 80
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 22,837 $ 28,229
Cost of sales 15,652 19,141
---------- ----------
Gross profit 7,185 9,088
Selling, general and administrative expenses 6,773 8,247
Non-recurring and procurement charges 150 1,350
---------- ----------
Operating income (loss) 262 (509)
Equity earnings of Barnett 1,604 1,527
Amortization of deferred U.S. Lock gain 51 --
Interest expense, net 4,318 4,310
---------- ----------
Loss before income taxes (2,401) (3,292)
Provision for income taxes 233 186
---------- ----------
Net loss $ (2,634) $ (3,478)
========== ==========
Other comprehensive income (loss):
Foreign currency translation adjustment 121 26
---------- ----------
Comprehensive loss $ (2,513) $ (3,452)
========== ==========
Loss per share (basic and diluted):
Net loss $ (0.22) $ (0.29)
========== ==========
Weighted average shares and equivalents 12,057 12,057
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE> 81
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 81 $ 1,322
Trade receivables, net 14,436 10,686
Other receivables 4,337 4,350
Inventories 17,618 19,052
Prepaid expenses 3,072 2,333
----------- -----------
Total current assets 39,544 37,743
----------- -----------
INVESTMENT IN BARNETT 37,989 36,385
----------- -----------
PROPERTY AND EQUIPMENT:
Land 579 575
Buildings 4,552 4,462
Equipment 13,751 13,369
----------- -----------
18,882 18,406
Less accumulated depreciation and amortization ( 7,603) ( 7,238)
----------- -----------
Property and equipment, net 11,279 11,168
----------- -----------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 7,853 7,920
UNAMORTIZED DEBT ISSUANCE COSTS, NET 2,996 3,052
DEFERRED TAX ASSET 537 540
OTHER ASSETS 4,688 3,402
----------- -----------
$ 104,886 $ 100,210
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE> 82
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Audited)
----------- ---------
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 6,754 $ 937
Accounts payable 7,294 7,308
Accrued liabilities 3,699 3,923
Accrued income taxes payable 1,049 1,314
Accrued interest 4,276 2,316
--------- ---------
Total current liabilities 23,072 15,798
---------- ----------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 961 1,057
SENIOR SECURED DEFERRED COUPON NOTES, NET 91,630 91,568
SENIOR NOTES 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK 7,967 8,018
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 2,000 shares - -
Common Stock, $.01 par value per share:
Authorized 22,000 shares; Issued 9,915 at September 30, 1999
and 9,914 at June 30, 1999 98 98
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,142 at September 30, 1999
and 2,143 at June 30, 1999 21 21
Paid-in capital 21,732 21,732
Retained deficit ( 75,542) ( 72,908)
--------- ---------
( 53,691) ( 51,057)
Cumulative currency translation adjustment (908) ( 1,029)
------- ----------
Total stockholders' equity (deficit) ( 54,599) ( 52,086)
--------- ---------
$ 104,886 $ 100,210
=========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 83
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,634) $ (3,478)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-recurring charges -- 1,350
Non-cash interest 62 2,675
Amortization of deferred U.S. Lock gain (51) --
Equity earnings of Barnett (1,604) (1,527)
Depreciation and amortization 616 644
Deferred income taxes 3 --
Changes in assets and liabilities:
Trade receivables, net (3,750) (1,039)
Inventories 1,434 2,063
Other assets (2,012) (844)
Accounts payable (14) 1,066
Accrued liabilities (224) (1,080)
Accrued interest 1,960 (971)
Accrued taxes (265) (23)
Other, net 121 26
---------- ----------
Net Cash Used in Operating Activities (6,358) (1,138)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (476) (1,322)
---------- ----------
Net Cash Used in Investing Activities (476) (1,322)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 20,109 23,705
Payments under credit agreements (14,292) (21,012)
Debt issuance costs (128) --
Repayments of long-term debt, net (96) (42)
---------- ----------
Net Cash Provided by
Financing Activities 5,593 2,651
---------- ----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (1,241) 191
BALANCE, BEGINNING OF PERIOD 1,322 72
---------- ----------
BALANCE, END OF PERIOD $ 81 $ 263
============ ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 84
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 - BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements include the accounts of
Waxman Industries, Inc. ("Waxman") and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances are eliminated in consolidation. As of September 30, 1999, the Company
owned 44.3% of the common stock of Barnett Inc. (the "Barnett Common Stock"), a
direct marketer and distributor of plumbing, electrical, hardware, and security
hardware products, and accounts for Barnett Inc. ("Barnett") under the equity
method of accounting.
The condensed consolidated statements of operations for the three
months ended September 30, 1999 and 1998, the condensed balance sheet as of
September 30, 1999 and the condensed statements of cash flows for the three
months ended September 30, 1999 and 1998 have been prepared by the Company
without audit, while the condensed balance sheet as of June 30, 1999 was derived
from audited financial statements. In the opinion of management, these financial
statements include all adjustments, all of which are normal and recurring in
nature, necessary to present fairly the financial position, results of
operations and cash flows of the Company as of September 30, 1999 and for all
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the disclosures included herein are adequate and provide a fair presentation of
interim period results. Interim financial statements are not necessarily
indicative of financial position or operating results for an entire year or
other interim periods. It is suggested that these condensed interim financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999, filed with the Securities and Exchange
Commission.
The Company's 12 3/4% Senior Secured Deferred Coupon Notes due 2004
(the "Deferred Coupon Notes") accreted interest until June 1, 1999. Thereafter,
interest on the Deferred Coupon Notes began to accrue, with the first
semi-annual cash payment of approximately $6 million due on December 1, 1999. In
addition, the Company has a significant amount of debt which, over the past
several years, the Company has endeavored to reduce through the monetization of
assets and by improving the efficiencies of its continuing businesses. As a
result, the Company has undertaken various initiatives to raise cash, improve
its cash flow and reduce its debt obligations and / or improve its financial
flexibility during that period. The Company believes that operating cash flow,
together with borrowings under its working capital credit facilities, and the
monetization, from time to time, of a portion of the Barnett Common Stock or
other selected assets, will be sufficient for at least the next 12 to 15 months
to fund its working capital requirements. However, ultimately, the Company will
not be able to continue to make all of the interest and principal payments under
its debt obligations without a significant appreciation in, and monetization of,
the value of the shares of common stock of Barnett owned by the Company and/or a
restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the
repurchase of its shares owned by the Company. The Company continues to have
discussions with Barnett's management regarding a share repurchase and continues
to evaluate opportunities to monetize all or a portion of its investment in
Barnett, including as part of a comprehensive plan to eliminate a significant
portion of its debt. The Company also continues discussions with certain of its
bondholders regarding potential debt reduction / restructuring transactions. At
this time, the Company does not have an agreement to monetize its investment in
Barnett or reduce its high level of debt. However, the Company continues to
pursue a debt restructuring and / or debt elimination plan. Accordingly, the
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern and, as such, adjustments,
if any, that may be required for presentation on another basis have not been
considered.
NOTE 2 - BUSINESS
--------
7
<PAGE> 85
The Company's common stock is quoted on the Over-The-Counter Bulletin
Board ("OTCBB") under the symbol "WAXX." The Company is a supplier of specialty
plumbing, hardware and other products to the repair and remodeling market in the
United States. The Company distributes its products to approximately 1,400
customers, including a wide variety of large national and regional retailers,
independent retail customers and wholesalers.
The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WOC
Inc. ("WOC") and TWI, International, Inc. ("TWI"). WOC is comprised of Medal
Distributing, a supplier of hardware products and, included the operations of
U.S. Lock, a distributor of a full line of security hardware products, prior to
its January 1, 1999 sale to Barnett. TWI includes the Company's foreign
operations, including manufacturing, packaging and sourcing operations in China
and Taiwan, and an operation in Mexico that threads galvanized, black, brass,
and chrome pipe and imports malleable fittings. Consumer Products, WOC and
Barnett utilize the Company's and non-affiliated foreign suppliers.
At September 30, 1999, the Company owned 44.3% of Barnett, a direct
marketer and distributor of an extensive line of plumbing, electrical, hardware,
and security hardware products to approximately 73,400 active customers
throughout the United States. Barnett offers approximately 21,000 name brand and
private label products through its industry-recognized Barnett(R) and U.S.
Lock(R) catalogs and telesales operations. Barnett markets its products through
six distinct, comprehensive catalogs that target professional contractors,
independent hardware stores, maintenance managers, security hardware installers,
liquid propane gas dealers, and locksmiths. In January 1999, the Company
completed the sale of U.S. Lock to Barnett. Barnett's net sales for fiscal 1999
were $241.4 million. The Company recorded equity earnings from this investment
of $1.6 million and $1.5 million for the quarters ended September 30, 1999 and
1998, respectively. The Barnett Common Stock trades on the Nasdaq National
Market under the symbol "BNTT".
NOTE 3 - INCOME TAXES
------------
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the asset
and liability method, where deferred tax assets and liabilities are recognized
for the future tax consequences attributable to net operating loss carryforwards
and to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
At June 30, 1999, the Company has $48.0 million of available domestic
net operating loss carryforwards for income tax purposes, which expire 2009
through 2013. The Company also has alternative minimum tax carryforwards of
approximately $1.0 million at June 30, 1999, which are available to reduce
future regular income taxes over an indefinite period.
At September 30, 1999, the Company's net deferred tax assets were
substantially offset by a valuation allowance, except for the deferred tax
asset related to state taxes currently payable on the deferred gain on the sale
of U.S. Lock. SFAS No. 109 requires the Company to assess the realizability of
its deferred tax assets based on whether it is more likely than not that the
Company will realize the benefit from these deferred tax assets in the future.
If the Company determines that the more likely than not criteria is not met,
SFAS No. 109 requires the deferred tax assets be reduced by a valuation
allowance. In assessing the realizability of its net deferred tax asset as of
September 30, 1999, the Company considered various factors such as (i) its
historical and projected taxable losses and its inability to utilize its net
operating loss carryforwards, which comprise a significant portion of the net
deferred tax asset; (ii) the tax deductibility of the accreted interest on the
Deferred Coupon Notes will not be realized until such interest is paid; (iii)
its current inability to assess the taxable income that may be recognized upon
the monetization of the Company's continued ownership of 44.3% of the Barnett
Common Stock or other operating assets, (iv) the Company has not yet been able
to complete a financial restructuring plan that may ultimately result in the
realization of a portion or all of the Company's net deferred tax asset and
thus, the ultimate impact cannot be objectively anticipated or verified.
Based on the Company's consideration of the above factors, the Company
believed it was appropriate to maintain a valuation allowance on its net
deferred tax asset, except for on the deferred tax asset related to state taxes
currently payable on the deferred gain on the sale of U.S. Lock. As a result, as
of September 30, 1999, the Company
8
<PAGE> 86
has substantially offset its net deferred tax asset with a valuation allowance.
The Company will continue to assess the valuation allowance and to the extent it
is determined that such allowance is no longer required, the tax benefit of the
remaining net deferred tax assets will be recognized in the future.
The Company's tax provisions for the three months ended September 30,
1999 and 1998 represent the provision for various state and foreign taxes.
NOTE 4 - BARNETT
-------
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common
Stock as of September 30, 1999. This investment is accounted for under the
equity method of accounting.
The following table presents unaudited summary financial data for
Barnett at September 30, 1999 and June 30, 1999 and for the three months ended
September 30, 1999 and 1998 (in thousands of dollars):
Statement of income data: 1999 1998
----------- -----------
Net sales $ 67,400 $ 52,391
Gross profit 21,734 17,176
Net income 3,618 3,441
Balance sheet data:
Current assets $ 100,220 $ 94,941
Non-current assets 55,073 54,245
Current liabilities 26,965 24,615
Non-current liabilities 33,000 33,000
NOTE 5 - NON-RECURRING AND PROCUREMENT CHARGES
-------------------------------------
In the first quarter of fiscal 1999, Consumer Products recorded a
non-recurring charge of $1.35 million related to the relocation of its Bedford
Heights, Ohio warehouse to Groveport, Ohio. Included in the charge were
severance benefits for personnel and the loss on the write-off of tangible
assets at the Bedford Heights warehouse. The Company believes that the
relocation to a more modern and efficient facility has enabled Consumer Products
to provide more sophisticated distribution services to its customers and has
helped it remain competitive through annual cost savings.
Procurement costs represent the amount paid by the Company in
connection with a customer's agreement to purchase products from the Company for
a specific period. The amount includes the consideration paid to the new or
existing customer (i) for the right to supply such customer for a specified
period, (ii) to assist such customer in reorganizing its store aisles and
displays in order to accommodate the Company's products and (iii) to purchase
competitor's merchandise that the customer has on hand when it changes
suppliers, less the salvage value received by the Company. The Company expenses
these costs in the fiscal year incurred. Procurement costs for (i) above totaled
$150,000 in the fiscal 2000 first quarter. The Company did not incur this type
of cost in the fiscal 1999 first quarter. The Company did not incur procurement
costs related to (ii) above in the fiscal 2000 and 1999 first quarters. These
types of procurement costs are included as procurement charges in the
accompanying consolidated statements of operations. Procurement costs for (iii)
above totaled $0.3 million and $0.5 million the first quarter of fiscal 2000 and
1999, respectively, and are included as a contra-sales amount in net sales in
the accompanying consolidated statements of operations.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1999 and 1998
included interest of $2.1 million and $2.4 million, respectively. The Company
made no federal income tax payments in the first quarter of fiscal 2000 or
fiscal 1999. However, the Company paid $0.4 in state taxes in the first quarter
of fiscal 2000.
9
<PAGE> 87
NOTE 7 - EARNINGS PER SHARE
------------------
In February 1997, The Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share" to be effective for financial
statements issued for periods ending after December 15, 1997. Under SFAS No.
128, primary earnings per share have been replaced by "basic earnings per
share", which represents net income divided by the weighted average number of
common shares outstanding. Diluted earnings per share continues to utilize the
weighted average number of common stock and common stock equivalents, which
include stock options and warrants. Since the Company is in a loss position, the
impact of these options and warrants is anti-dilutive, therefore the Company has
disclosed basic earnings per share as basic and diluted for the quarters ended
September 30, 1999 and 1998.
The number of common shares used to calculate basic and diluted
earnings per share are as follows (in thousands):
Period ended September 30, 1999 1998
------ ------
Basic 12,057 12,057
Diluted 12,057 12,057
A reconciliation of basic shares to diluted shares is as follows:
Period ended September 30, 1999 1998
------ ------
Basic 12,057 12,057
Dilutive effect of:
Stock options -- --
Warrants -- --
------ ------
Diluted 12,057 12,057
NOTE 8 - SEGMENT INFORMATION
-------------------
The Company's businesses distribute specialty plumbing products,
galvanized, black, brass and chrome pipe nipples, imported malleable fittings,
and other products. Since the foreign sourcing and manufacturing operations sell
a significant portion of their products through the Company's other wholly-owned
operations, which primarily sell to retailers, and to Barnett, a distributor,
the Company has classified its business segments into retail and non-retail
categories. Products are sold to (i) retail operations, including large national
and regional retailers, D-I-Y home centers and smaller independent retailers in
the United States, and (ii) non-retail operations, including wholesale and
industrial supply distributors in the United States. Sales outside of the United
States are not significant. Until the January 1, 1999 sale of U.S. Lock, the
Company also distributed security hardware to non-retail operations, including
security hardware installers and locksmiths. Set forth below is certain
financial data relating to the Company's business segments (in thousands of
dollars).
<TABLE>
<CAPTION>
Corporate
Retail Non-Retail and Other Elimination Total
------ ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 2000 three months $ 17,350 $ 8,579 -- $ $ 22,837
Fiscal 1999 three months 18,487 13,184 (3,092) 28,229
--
(3,442)
Operating income (loss):
Fiscal 2000 three months $ 927 $ 220 $ (885) -- $ 262
Fiscal 1999 three months (1,002) 1,419 (926) -- (509)
</TABLE>
10
<PAGE> 88
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Identifiable assets:
September 30, 1999 $ 44,705 $ 17,532 $ 42,649 -- $104,886
June 30, 1999 45,017 15,866 39,327 -- 100,210
</TABLE>
The Company's foreign operations manufacture, assemble, source and
package products that are distributed by the Company's wholly-owned operations,
Barnett, retailers and other non-retail customers. Net sales for those foreign
operations amounted to $11.7 million and $9.0 million for the first quarter of
fiscal 2000 and 1999, respectively. Of these amounts, approximately $3.1 million
and $3.4 million were intercompany sales for the first quarter of fiscal 2000
and 1999, respectively. Identifiable assets for the foreign operations were
$20.0 million and $18.7 million at September 30, 1999 and June 30, 1999,
respectively.
11
<PAGE> 89
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
This Quarterly Report contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are based on the beliefs of the Company and its management. When used in this
document, the words "anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "should," and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including, but not limited to, the risk that the
Company may not be able to implement its deleveraging strategy in the intended
manner, risks associated with currently unforeseen competitive pressures and
risks affecting the Company's industry, such as decreased consumer spending,
customer concentration issues and the effects of general economic conditions. In
addition, the Company's business, operations and financial condition are subject
to the risks, uncertainties and assumptions which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission, including this Report. Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein.
A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------
AND 1998
--------
Net Sales
---------
Net sales for the fiscal 2000 first quarter ended September 30, 1999
totaled $22.8 million, as compared to $28.2 million for the fiscal 1999 first
quarter. Excluding the results of U.S. Lock, which was sold effective January 1,
1999, comparable net sales for the remaining businesses increased 5.3 percent
from the recasted net sales of $21.7 million for the fiscal 1999 first quarter.
As we have discussed previously, net sales originating from our Asian operations
continue to increase due to the direct import program to retailers, which is
managed by Consumer Products, and due to additional sales to Barnett. The direct
import program for certain retailers requires coordination between the
customers, who receive the direct shipment into their warehouses, the billing
and collection services from our Asian operations, and selling, administrative
and customer services from Consumer Products. We anticipate that this program
will continue to play an important part in the Company's results and have begun
presenting the Company's operating segment results based on business with
retailers and non-retailers.
Net sales to retailers amounted to $17.4 million for the first quarter
ended September 30, 1999, a decrease from the $18.5 million for the same period
last year. Sales to Hechinger / Builders Square decreased to $0.1 million in the
fiscal 2000 first quarter, as compared to $1.9 million in the same period last
year, while sales to Kmart and certain other retailers increased. As previously
disclosed by the Company, Consumer Products was informed that the Hechinger /
Builders Square operations were consolidating their supplier relationships and
Consumer Products would retain only the bulk plumbing business beginning in
January 1999. During the fiscal 1999 third quarter, the Company signed a
three-year agreement with Kmart, which the Company expects will result in
additional annual net sales of $4 to $5 million. The Company also began shipping
to Target, a new customer, in September 1999. The Company believes that
discussions with several other major retailers should result in new and expanded
business opportunities for its Consumer Products and Asian operations in this
fiscal year. A portion of this additional business, which would include
showerheads, faucets, floor care products, and packaged plumbing items, will be
shipped under the direct import program from the Company's Asian facilities.
Non-retail net sales amounted to $8.6 million for the fiscal 2000 first
quarter, a decrease from $13.2 million for the same period in fiscal 1999.
Excluding the net sales of U.S. Lock, which amount to $6.5 million in the fiscal
1999 first quarter, non-retail net sales would have increased by $1.9 million.
This increase is primarily due to an increase in net sales to Barnett.
Gross Profit
------------
Gross profit for the fiscal 2000 first quarter was $7.2 million, with a
gross profit margin of 31.5 percent, as compared to gross profit of $9.1 million
and a gross profit margin of 32.2 percent for the three months ended
12
<PAGE> 90
September 30, 1998. Excluding U.S. Lock from the prior year results, gross
profit increased by $0.3 million from the recasted fiscal 1999 first quarter
gross profit of $6.9 million, while the gross profit margin would have decreased
from 32.0 percent. The decrease in the gross margin is primarily attributable to
a higher proportion of sales from the direct import sales program, which has a
lower gross margin as well as lower selling, general and administrative
expenses. The termination of the packaged plumbing program sales to Hechinger /
Builders Square reduced the Company's gross profit and offset the increased
gross profit from sales to other retailers. In addition, competitive pricing
pressure from overseas suppliers of pipe nipples and valves has reduced the
Company's sales and gross margins for those products.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses ("SG&A expenses")
decreased from $8.2 million for the quarter ended September 30, 1999 to $6.8
million for the quarter ended September 30, 1999. Included in the prior year's
results are $1.3 million in SG&A expenses related to U.S. Lock. Excluding the
SG&A expenses related to U.S. Lock, as a percentage of net sales, SG&A expenses
decreased from 31.9% for the fiscal 1999 first quarter to 29.7% for the fiscal
2000 first quarter. The decreased percentage of expenses to net sales is due to
a higher proportion of sales from the Asian operations and an increase in sales
through the direct import program, which have lower SG&A expenses.
Non-Recurring and Procurement Charges
-------------------------------------
In the fiscal 1999 first quarter, the Company recorded $1.35 million in
non-recurring charges related to costs involved in the relocation of the
Consumer Products' Bedford Heights warehouse to Groveport, Ohio. In the fiscal
2000 first quarter, the Company recorded procurement costs of $150,000 related
to customer agreements to purchase products from the Company for a period of
time.
Equity Earnings of Barnett
--------------------------
The Company recorded equity earnings from its ownership interest in
Barnett of $1.6 million for the quarter ended September 30, 1999, as compared to
$1.5 million for the same quarter in fiscal 1999.
Amortization of Deferred Gain on Sale of U.S. Lock
--------------------------------------------------
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million being recognized in the fiscal 1999 third quarter. The remaining $8.1
million was reported as a deferred gain in the Company's consolidated balance
sheet due to the Company's continued ownership of 44.3% of Barnett, the acquirer
of U.S. Lock. The Company is recognizing the deferred gain as the goodwill
generated by the purchase of U.S. Lock is amortized by Barnett, or as the
Company reduces its ownership interest in Barnett. In the fiscal 2000 first
quarter, the Company recognized $51,000 of this deferred gain.
Interest Expense
----------------
For the quarter ended September 30, 1999, net interest expense totaled
$4.3 million, approximately the same as the first quarter in fiscal 1999.
Average borrowings for the current year's quarter amounted to $130.2 million,
with a weighted average interest rate of 12.6%, as compared to $136.7 million in
the same quarter last year, with a weighted average interest rate of 11.9%.
Provision for Income Taxes
--------------------------
The provision for income taxes amounted to $0.2 million for the first
quarter of fiscal 2000, as compared to $0.2 million for the same quarter last
year. The provision for the current quarter primarily represents various state
and foreign taxes of the Company's wholly-owned operations. For the fiscal 2000
and 1999 first quarters, the difference between the effective and statutory tax
rates is primarily due to domestic operating losses not benefited and goodwill
amortization.
13
<PAGE> 91
Net Loss
--------
The Company's net loss for the quarter ended September 30, 1999
amounted to $2.6 million, or $0.22 per basic and diluted share, as compared to
the loss of $3.5 million, or $0.29 per basic and diluted share, in the fiscal
1999 first quarter. The first quarter of fiscal 1999 was affected by the $1.35
million non-recurring charge associated with the relocation of a warehouse.
B. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Over the past several years, the Company has endeavored to reduce its
high level of debt through the monetization of assets and to improve the
efficiencies of its continuing businesses. As a result, the Company has
undertaken various initiatives to raise cash, improve its cash flow and reduce
its debt obligations and / or improve its financial flexibility during that
period. The Company believes that operating cash flow, together with borrowings
under its working capital credit facilities, and the monetization, from time to
time, of a portion of the Barnett Common Stock, will be sufficient for at least
the next 12 to 15 months to fund its working capital requirements. However,
ultimately, the Company will not be able to continue to make all of the interest
and principal payments under its debt obligations without a significant
appreciation in, and monetization of, the value of the shares of common stock of
Barnett owned by the Company and/or a restructuring of such debt instruments.
The Company continues its efforts to complete a financial restructuring plan,
which includes the sale of its investment in Barnett and a restructuring and /
or elimination of its debt. Pending the completion of a comprehensive financial
restructuring, the Company may also pursue the sale, from time to time, of a
portion of its shares of Barnett or other selected assets to provide it with
additional liquidity and financial flexibility.
As stated previously, the Company's business strategy includes the
reduction of its interest expense and its leverage by the sale of selected
assets and/or the refinancing or reduction of its remaining indebtedness
whenever possible. To that end, the Company completed the sale of U.S. Lock for
approximately $33.0 million in January 1999. The Company believes its operating
cash flow, its borrowing availability under the Loan and Security Agreement and
proceeds from sales of selected assets will be sufficient to fund its current
liquidity and working capital requirements, capital expenditures and the first
few semi-annual interest payments on the Deferred Coupon Notes. The first
semi-annual cash interest payment of approximately $6 million under the Deferred
Coupon Notes is due on December 1, 1999. Without the completion of a financial
restructuring plan as described above, the Company currently believes that,
while it will be able to pay its near-term debt maturities and cash interest
requirements, it will not be able to continue to make all of the interest and
principal payments under its debt obligations without a significant appreciation
in, and monetization of, the value of the Barnett Common Stock and/or a
restructuring of such debt instruments.
In August 1999, Barnett announced that it was considering the
repurchase of its shares owned by the Company. The Company continues to have
discussions with Barnett's management regarding a share repurchase and continues
to evaluate other opportunities to monetize all or a portion of its investment
in Barnett, including as part of a comprehensive plan to eliminate a significant
portion of its debt. The Company also continues to have discussions with certain
of its bondholders regarding potential debt reduction / restructuring
transactions. At this time, the Company does not have an agreement to monetize
its investment in Barnett or reduce its high level of debt. However, the Company
continues to pursue a debt restructuring and / or debt elimination plan. As
discussed above, the Company may also pursue the sale, from time to time, of a
portion of its shares of Barnett or other selected assets to provide it with
additional liquidity and financial flexibility. There can be no assurance that
the Company will be able to consummate such financial restructuring or any of
the other aforementioned transactions.
In June 1999, the Company entered into the Loan and Security Agreement
with Congress Financial Corporation to replace the Credit Agreement with
BankAmerica Business Credit, Inc. that was to expire on July 15, 1999. The Loan
and Security Agreement is between Consumer Products, WOC, WAMI and WAMI Sales,
as borrowers (the "Borrowers"), with the Company, Waxman USA Inc. ("Waxman USA")
and TWI as guarantors. The Loan and Security Agreement provides for, among other
things, revolving credit advances of up to $20.0 million. As of September 30,
1999, the Company had $5.3 million in borrowings under the revolving credit line
of the facility and had approximately $10.9 million available under such
facility. The Loan and Security Agreement expires on September 1, 2001, but may
be extended under certain conditions.
The Loan and Security Agreement provides for revolving credit advances
of (a) up to 85.0% of the amount
14
<PAGE> 92
of eligible accounts receivable, (b) up to the lesser of (i) $10.0 million or
(ii) 60% of the amount of eligible raw and finished goods inventory and (c) up
to the lesser of (i) $5.0 million or (ii) 70% of the fair market value of
500,000 shares of Barnett Inc. common stock. Revolving credit advances bear
interest at a rate equal to (a) First Union National Bank's prime rate plus 0.5%
or (b) LIBOR plus 2.50%. The Loan and Security Agreement includes a letter of
credit subfacility of $10.0 million, with none outstanding at September 30,
1999. Borrowings under the Loan and Security Agreement are secured by the
accounts receivable, inventories, certain general intangibles, and unencumbered
fixed assets of Waxman Industries, Inc., Consumer Products, TWI, International
Inc. and WOC, and a pledge of 65% of the stock of various foreign subsidiaries.
In addition, up to $5.0 million of indebtedness under the Loan and Security
Agreement is also secured by a pledge of 500,000 shares of Barnett Common Stock
owned by the Company (constituting approximately 3.1% of all outstanding Barnett
Common Stock). The Loan and Security Agreement requires the Borrowers to
maintain cash collateral accounts into which all available funds are deposited
and applied to service the facility on a daily basis. The Loan and Security
Agreement prevents dividends and distributions by the Borrowers except in
certain limited instances including, so long as there is no default or event of
default and the Borrowers are in compliance with certain financial covenants,
the payment of interest on the Senior Notes and the Company's Deferred Coupon
Notes, and contains customary negative, affirmative and financial covenants and
conditions. The Company was in compliance with all loan covenants at September
30, 1999. The Loan and Security Agreement also contains a material adverse
condition clause which allows Congress Financial Corporation to terminate the
Agreement under certain circumstances.
Since the consummation of the Barnett Initial Public Offering, the cash
flow generated by Barnett is no longer available to the Company. The Company
relies primarily on Consumer Products and, prior to January 1, 1999, U.S. Lock
for cash flow. The sale of U.S. Lock further increases the Company's dependence
on Consumer Products' business. Consumer Products' customers include D-I-Y
warehouse home centers, home improvement centers, mass merchandisers and
hardware stores. Consumer Products may be adversely affected by prolonged
economic downturns or significant declines in consumer spending. There can be no
assurance that any such prolonged economic downturn or significant decline in
consumer spending will not have a material adverse impact on the Consumer
Products' business and its ability to generate cash flow. Furthermore, Consumer
Products has a high proportion of its sales with a concentrated number of
customers. One of Consumer Products' largest customers, Kmart, accounted for
approximately 20.8% of net sales for Consumer Products in fiscal 1999. In July
1997, Kmart agreed to sell its Builders Square chain to Leonard Green &
Partners, a merchant-banking firm. Leonard Green also acquired another home
improvement retailer, Hechinger Co., and has combined the two companies to form
the nation's third largest home improvement chain. In August 1998, Consumer
Products was informed that the Hechinger / Builders Square operations were
consolidating their supplier relationships and Consumer Products would retain
only the bulk plumbing business, beginning in January 1999. The combined
operations of Hechinger / Builders Square, accounted for approximately $3.7
million, or 7.8% and 3.8% of Consumer Products and the Company's net sales in
fiscal 1999, respectively. Hechinger / Builders Square filed for Chapter 11
bankruptcy protection in June 1999, and for Chapter 7 liquidation in September
1999. Consumer Products' accounts receivable from Hechinger / Builders Square
was $0.3 million at the time of the bankruptcy filing. In the event Consumer
Products were to lose any additional large retail accounts as a customer or one
of its largest accounts were to significantly curtail its purchases from
Consumer Products, there would be material short-term adverse effects until the
Company could further modify Consumer Products' cost structure to be more in
line with its anticipated revenue base. Consumer Products would likely incur
significant charges if additional materially adverse changes in its customer
relationships were to occur.
The Company paid $0.4 million in income taxes in the first quarter of
fiscal 2000. At June 30, 1999, the Company had $48.0 million of available
domestic net operating loss carryforwards for income tax purposes, which expire
2009 through 2013, and $41.3 million of original issue discount, as of June 30,
1999, that has been expensed on the Company's financial statements and will
become deductible for tax purposes when the interest on the Deferred Coupon
Notes is paid. In the event the Company completes a financial restructuring,
which includes the sale of its investment in Barnett and, recognizes a gain from
that sale, the Company will be able to use the net operating loss carryforwards
to offset income taxes that will be payable.
The Company has total future lease commitments for various facilities
and other leases totaling $3.0 million, of which approximately $1.3 million is
due in fiscal 2000 and $0.3 million was paid in the first quarter of fiscal
2000. The Company does not have any other commitments to make substantial
capital expenditures. The fiscal 2000 capital expenditure plan includes
expenditures to improve the efficiencies of the Company's operations, to provide
new data technology and certain expansion plans for the Company's foreign
operations. Except as noted
15
<PAGE> 93
below, all operations have completed their Year 2000 compliance. Year 2000
modifications at TWI are nearly completed and are undergoing testing and final
modifications will continue for the next 30 to 60 days. The expenditures
included approximately $13,000 for hardware, $10,000 for software and $10,000 in
labor to make the Year 2000 modifications. CWI's modifications and timetable are
similar to those of TWI, with the costs expected to total approximately $11,000
for hardware, $14,000 for software and $2,000 in labor to make the Year 2000
modifications.
At September 30, 1999, the Company had working capital of $16.5 million
and a current ratio of 1.7 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $6.4 million in the fiscal 2000 first
quarter principally due to an increase in trade receivables and other assets,
offset by a decrease in inventories and an increase in accrued interest. Also
affecting net cash used for operations was $1.6 million in equity earnings of
Barnett. Excluding this item, the net cash used by operations was $4.8 million.
Cash flow used in investments totaled $0.5 million, attributable to capital
expenditures. Cash flow provided by financing activities, and net borrowings
under the Company's credit facilities, totaled approximately $5.6 million.
YEAR 2000
The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its businesses.
The Company continues to implement plans at certain of its operations to ensure
those systems continue to meet its internal and external requirements. A summary
of the progress made by each of the Company's operations is provided below.
During fiscal 1998, the Company's largest division, Consumer Products,
completed a version upgrade of its J.D. Edwards software, which was Year 2000
compliant. In addition, Consumer Products made certain modifications to it
systems and completed the testing of its information systems in fiscal 1998 to
insure that it is Year 2000 compliant. Consumer Products utilizes IBM AS400
hardware, NT servers and personal computers that are also Year 2000 compliant.
The specific cost of upgrading the hardware and software in fiscal 1998 was
approximately $0.8 million; however, the majority of this cost was part of a
process of developing Consumer Products' capabilities to serve its customers and
to operate its business, with Year 2000 compliance being an additional benefit.
The Company's corporate office completed the development of its
accounting package in March 1999, using Consumer Products' hardware and
software. The accounting package was develop by internal personnel with MIS
support at no additional cost, using the standard reporting format developed for
Consumer Products.
In August 1998, WAMI's PC-based Year 2000 software upgrade was provided
by the software manufacturer at no cost and has been installed and tested. As
part of a periodic replacement of hardware, WAMI has replaced certain PC's for
approximately $10,000 to upgrade its remaining hardware to be Year 2000
compliant. WAMI's software and hardware have been reviewed by an external
information technology professional for Year 2000 compliance.
Medal Distributing has an IBM System 36, which was upgraded, with
software modifications completed to be Year 2000 compliant. The modifications
were completed in July 1999, at a cost of approximately $10,000.
Based on information from hardware and software vendors, the PC-based
information systems at TWI will require minor modifications to be Year 2000
compliant. The majority of these modifications were completed as of September
30, 1999 and financed through working capital with minimal cost. The remaining
modifications to the information technology systems will be completed in the
next quarter. The expenditures included approximately $13,000 for hardware,
$10,000 for software and $10,000 in labor to make the Year 2000 modifications.
CWI's modifications and timetable are similar to those of TWI, with the costs
expected to total approximately $11,000 for hardware, $14,000 for software and
$2,000 in labor to make the Year 2000 modifications.
The Company has reviewed its non-information technology systems and
believes that the systems are Year 2000 compliant.
16
<PAGE> 94
The Company's operations have developed questionnaires and contacted
key suppliers and customers regarding their Year 2000 compliance to determine
any impact on its operations. In general, the suppliers and customers have
developed or are in the process of developing plans to address Year 2000 issues.
The Company will continue to monitor and evaluate the progress of its suppliers
and customers on this critical matter and develop alternate suppliers as
required. Although there is uncertainty of the ultimate impact that the Year
2000 may have on our customers and suppliers, the Company believes that is has
taken prudent business measures with its internal systems and continues to
monitor the progress made by its customers and vendors to minimize the affect,
if any, that Year 2000 may have on its business.
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan and timeline to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. As the Company's plan is to address its significant
Year 2000 issues prior to being affected by them, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
17
<PAGE> 95
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) See Exhibit 27.
b) Form 8-K
None
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 1999 or the answer is negative or a response has
been previously reported and an additional report of the information need not be
made, pursuant to the instructions to Part II.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
-----------------------
REGISTRANT
DATE: NOVEMBER 8, 1999 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
18
<PAGE> 96
EXHIBIT INDEX
-------------
EXHIBIT PAPER (P) OR
------- ------------
NUMBER DESCRIPTION ELECTRONIC (E)
------ ----------- --------------
(27) Financial Data Schedule E
(submitted to the Securities
and Exchange Commission in
Electronic Format)
19
<PAGE> 97
Annex C
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 DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-5888
WAXMAN INDUSTRIES, INC.
-----------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-0899894
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
--------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(440) 439-1830
--------------
(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
---- ----
9,914,939 shares of Common Stock, $.01 par value, and 2,142,358 shares of Class
B Common Stock, $.01 par value, were outstanding as of January 31, 2000.
1
<PAGE> 98
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 -
Six and Three Months Ended December 31, 1999 and 1998 ................................3
Condensed Consolidated Balance Sheets - December 31, 1999 and June 30, 1999.... 4 -5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1999 and 1998...........................................6
Notes to Condensed Consolidated Financial Statements..................................7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................................13 - 20
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information........................................................................21
Item 6. Exhibits and Reports on Form 8-K.........................................................21
SIGNATURES
----------
EXHIBIT INDEX
-------------
</TABLE>
2
<PAGE> 99
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Three Months
---------- ------------
1999 1998 1999 1998
---- ----- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 42,539 $ 57,427 $ 19,702 $ 29,198
Cost of sales 29,463 39,678 13,811 20,537
-------- -------- -------- --------
Gross profit 13,076 17,749 5,891 8,661
Selling, general and administrative expenses 13,556 16,690 6,783 8,443
Non-recurring and procurement charges 1,450 1,350 1,300 --
-------- -------- -------- --------
Operating income (loss) (1,930) (291) (2,192) 218
Equity earnings of Barnett 3,604 3,331 2,000 1,804
Amortization of deferred U.S. Lock gain 101 -- 50 --
Interest expense, net 8,774 8,732 4,456 4,422
-------- -------- -------- --------
Loss before income taxes (6,999) (5,692) (4,598) (2,400)
Provision for income taxes 327 240 94 54
-------- -------- -------- --------
Net loss $ (7,326) $ (5,932) $ (4,692) $ (2,454)
======== ======== ======== ========
Other comprehensive income:
Foreign currency translation adjustment 205 418 83 392
-------- -------- -------- --------
Comprehensive loss $ (7,121) $ (5,514) $ (4,609) $ (2,062)
======== ======== ======== ========
Loss per share (basic and diluted):
Net loss $ (0.61) $ (0.49) $ (0.39) $ (0.20)
======== ======== ======== ========
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
<PAGE> 100
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
DECEMBER 31, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 477 $ 1,322
Trade receivables, net 13,705 10,686
Other receivables 3,524 4,350
Inventories 20,356 19,052
Prepaid expenses 2,657 2,333
--------- ----------
Total current assets 40,719 37,743
--------- ----------
INVESTMENT IN BARNETT 39,989 36,385
--------- ----------
PROPERTY AND EQUIPMENT:
Land 581 575
Buildings 4,651 4,462
Equipment 14,059 13,369
--------- ----------
19,291 18,406
Less accumulated depreciation and amortization ( 7,958) ( 7,238)
--------- ----------
Property and equipment, net 11,333 11,168
--------- ----------
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 7,786 7,920
UNAMORTIZED DEBT ISSUANCE COSTS, NET 2,812 3,052
DEFERRED TAX ASSET 533 540
OTHER ASSETS 5,167 3,402
--------- ----------
$ 108,339 $ 100,210
========= ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE> 101
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
DECEMBER 31, 1999 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
(Unaudited) (Audited)
----------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 16,016 $ 937
Accounts payable 8,277 7,308
Accrued liabilities 4,035 3,923
Accrued income taxes payable 561 1,314
Accrued interest 2,316 2,316
----------- ----------
Total current liabilities 31,205 15,798
----------- ----------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 876 1,057
SENIOR SECURED DEFERRED COUPON NOTES, NET 91,693 91,568
SENIOR NOTES 35,855 35,855
DEFERRED GAIN ON SALE OF U.S. LOCK 7,917 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 December 31, 1999
and 9,914 at June 30, 1999 98 98
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 2,142 at December 31, 1999
and 2,143 at June 30, 1999 21 21
Paid-in capital 21,732 21,732
Retained deficit ( 80,234) ( 72,908)
----------- ----------
( 58,383) ( 51,057)
Cumulative currency translation adjustment (824) ( 1,029)
----------- ----------
Total stockholders' equity (deficit) ( 59,207) ( 52,086)
----------- ----------
$ 108,339 $ 100,210
=========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 102
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,326) $ (5,932)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-cash charges -- 42
Non-cash interest 125 5,412
Amortization of deferred U.S. Lock gain (101) --
Equity earnings of Barnett (3,604) (3,331)
Depreciation and amortization 1,257 1,407
Deferred income taxes 7 --
Changes in assets and liabilities:
Trade receivables, net (3,019) ( 1,323)
Inventories (1,304) 887
Other assets (1,262) (3,002)
Accounts payable 969 2,229
Accrued liabilities 112 (1,646)
Accrued interest -- (2)
Accrued taxes (753) 10
Other, net 205 418
---------- ----------
Net Cash Used in Operating Activities ( 14,694) ( 4,831)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (912) (1,257)
---------- ----------
Net Cash Used in Investing Activities (912) (1,257)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 43,659 47,985
Payments under credit agreements (28,580) (41,589)
Debt issuance costs (137) --
Repayments of long-term debt, net (181) (47)
---------- ----------
Net Cash Provided by
Financing Activities 14,761 6,349
---------- ----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (845) 261
BALANCE, BEGINNING OF PERIOD 1,322 72
---------- ----------
BALANCE, END OF PERIOD $ 477 $ 333
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 103
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
DECEMBER 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the
accounts of Waxman Industries, Inc. ("Waxman") and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances are eliminated in consolidation. As of December 31, 1999, the Company
owned 44.3% of the common stock of Barnett Inc. (the "Barnett Common Stock"), a
direct marketer and distributor of plumbing, electrical, hardware, and security
hardware products, and accounts for Barnett Inc. ("Barnett") under the equity
method of accounting.
The condensed consolidated statements of operations for the six and
three months ended December 31, 1999 and 1998, the condensed balance sheet as of
December 31, 1999 and the condensed statements of cash flows for the six months
ended December 31, 1999 and 1998 have been prepared by the Company without
audit, while the condensed balance sheet as of June 30, 1999 was derived from
audited financial statements. In the opinion of management, these financial
statements include all adjustments, all of which are normal and recurring in
nature, necessary to present fairly the financial position, results of
operations and cash flows of the Company as of December 31, 1999 and for all
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the disclosures included herein are adequate and provide a fair presentation of
interim period results. Interim financial statements are not necessarily
indicative of financial position or operating results for an entire year or
other interim periods. It is suggested that these condensed interim financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999 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:
7
<PAGE> 104
- 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 to be 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 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 for at least the next 12 to
15 months; however, ultimately, the Company will not be able to continue to make
all of the interest and principal payments under its debt obligations without a
significant appreciation in, and monetization of, the value of the shares of
common stock of Barnett owned by the Company and/or a restructuring of such debt
instruments.
The Company believes that the completion of the transactions set forth
in the Debt Reduction Agreement will result in a much stronger company, with a
small 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. Accordingly, the accompanying condensed consolidated
financial statements have been prepared assuming the Company will continue as a
going concern and, as such, adjustments, if any, that may be required for
presentation on another basis have not been considered.
NOTE 2 - BUSINESS
The Company's common stock is quoted on the Over-The-Counter Bulletin
Board ("OTCBB") under the symbol "WAXX." The Company is a supplier of specialty
plumbing, hardware and other products to the repair and remodeling market in the
United States. The Company distributes its products to approximately 1,400
customers, including a wide variety of large national and regional retailers,
independent retail customers and wholesalers.
The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WOC
Inc. ("WOC") and TWI, International, Inc. ("TWI"). WOC is comprised of Medal
Distributing, a supplier of hardware products and, included the operations of
U.S. Lock, a
8
<PAGE> 105
distributor of a full line of security hardware products, prior to its January
1, 1999 sale to Barnett. TWI includes the Company's foreign operations,
including manufacturing, packaging and sourcing operations in China and Taiwan,
and an operation in Mexico that threads galvanized, black, brass, and chrome
pipe and imports malleable fittings. Consumer Products, WOC and Barnett utilize
the Company's and non-affiliated foreign suppliers.
At December 31, 1999, the Company owned 44.3% of Barnett, a direct
marketer and distributor of an extensive line of plumbing, electrical, hardware,
and security hardware products to approximately 73,000 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 $3.6 million and $3.3 million and $2.0 million and $1.8 million for the six
months and quarters ended December 31, 1999 and 1998, 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 - 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 $48.0 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 $1.0 million at June 30, 1999, which are available to reduce
future regular income taxes over an indefinite period.
At December 31, 1999, the Company's net deferred tax assets were
substantially offset by a valuation allowance, except for the deferred tax asset
related to state taxes paid on the deferred gain on the January 1, 1999 sale of
U.S. Lock. SFAS No. 109 requires the Company to assess the realizability of its
deferred tax assets based on whether it is more likely than not that the Company
will realize the benefit from these deferred tax assets in the future. If the
Company determines that the more likely than not criteria is not met, SFAS No.
109 requires the deferred tax assets be reduced by a valuation allowance. In
assessing the realizability of its net deferred tax asset as of December 31,
1999, 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 December
31, 1999, 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.
The Company's tax provisions for the six and three months ended
December 31, 1999 and 1998 represent the provision for various state and foreign
taxes.
9
<PAGE> 106
NOTE 4 - BARNETT
The Company owns 7,186,530 shares, or 44.3%, of the Barnett Common
Stock as of December 31, 1999. 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 December 31, 1999 and June 30, 1999 and for the six and three months
ended December 31, 1999 and 1998 (in thousands of dollars):
Statement of income data: 1999 1998
--------- ---------
Six Months:
Net sales $ 138,472 $ 110,511
Gross profit 45,086 36,454
Net income 8,130 7,506
Three Months:
Net sales $ 71,072 $ 58,120
Gross profit 23,352 19,278
Net income 4,512 4,065
12/31/99 6/30/99
-------- -------
Balance sheet data:
Current assets $ 105,867 $ 94,941
Non-current assets 55,617 54,245
Current liabilities 28,570 24,615
Non-current liabilities 33,000 33,000
NOTE 5 - 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 brand name. The Company believes
the Plumbcraft 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.
Procurement costs represent the amount paid by the Company in
connection with a customer's agreement to purchase products from the Company for
a specific period. The amount includes the consideration paid to the new or
existing customer (i) for the right to supply such customer for a specified
period, (ii) to assist such customer in reorganizing its store aisles and
displays in order to accommodate the Company's products and (iii) to purchase
competitor's merchandise that the customer has on hand when it changes
suppliers, less the salvage value received by the Company. The Company expenses
these costs in the fiscal year incurred. Procurement costs for (i) above totaled
$150,000 in the first quarter and none in the second quarter of fiscal 2000. The
Company did not incur this type of cost in the fiscal 1999 first or second
quarter. The Company did not incur procurement costs related to (ii) above in
the fiscal 2000 and 1999 first or second quarters. These types of procurement
costs are included as procurement charges in the accompanying consolidated
statements of operations. Procurement costs for (iii) above totaled $0.3 million
and $0.5 million the first quarter and $0.7 million and $0.9 million for the
first six months of
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<PAGE> 107
fiscal 2000 and 1999, respectively, which are included as a contra-sales amount
in net sales in the accompanying consolidated statements of operations.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the six and three months ended December 31, 1999
and 1998 included interest of $8.3 million and $2.9 million (six months), and
$6.2 million and $0.5 million (three months), respectively. The Company made no
federal income tax payments in the six months or second quarter of fiscal 2000
or fiscal 1999. However, the Company paid $0.4 and $0.5 million in state taxes
in the first quarter and second quarter of fiscal 2000, respectively.
NOTE 7 - EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share" to be effective for financial
statements issued for periods ending after December 15, 1997. Under SFAS No.
128, primary earnings per share have been replaced by "basic earnings per
share", which represents net income divided by the weighted average number of
common shares outstanding. Diluted earnings per share continues to utilize the
weighted average number of common stock and common stock equivalents, which
include stock options and warrants. Since the Company is in a loss position, the
impact of these options and warrants is anti-dilutive, therefore the Company has
disclosed basic earnings per share as basic and diluted for the six months and
quarters ended December 31, 1999 and 1998.
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):
Six months Six months Three months Three months
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
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
NOTE 8 - SEGMENT INFORMATION
The Company's businesses distribute specialty plumbing products,
galvanized, black, brass and chrome pipe nipples, imported malleable fittings,
and other products. Since the foreign sourcing and manufacturing operations sell
a significant portion of their products through the Company's other wholly-owned
operations, which primarily sell to retailers, and to Barnett, a distributor,
the Company has classified its business segments into retail and non-retail
categories. Products are sold to (i) retail operations, including large national
and regional retailers, D-I-Y home centers and smaller independent retailers in
the United States, and (ii) non-retail operations, including wholesale and
industrial supply distributors in the United States. Sales outside of the United
States are not significant. Until the January 1, 1999 sale of U.S. Lock, the
Company also distributed security hardware to non-retail operations, including
security hardware installers and locksmiths. Set forth below is certain
financial data relating to the Company's business segments (in thousands of
dollars).
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<PAGE> 108
<TABLE>
<CAPTION>
Corporate
Retail Non-Retail and Other Elimination Total
------ ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Reported net sales:
Fiscal 2000 three months $ 14,756 $ 8,766 -- $ (3,820) $ 19,702
Fiscal 1999 three months 16,635 16,411 -- (3,848) 29,198
Fiscal 2000 six months 32,105 17,346 -- (6,912) 42,539
Fiscal 1999 six months 35,121 29,596 -- (7,290) 57,427
Operating income (loss):
Fiscal 2000 three months $ (1,626) $ 292 $ (858) -- (2,192)
Fiscal 1999 three months (166) 1,309 (925) -- 218
Fiscal 2000 six months (699) 512 (1,743) -- (1,930)
Fiscal 1999 six months (1,167) 2,727 (1,851) -- (291)
Identifiable assets:
December 31, 1999 $ 43,509 $ 19,106 $ 45,724 -- $108,339
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 $10.8 million and $12.4 million for the second quarter of
fiscal 2000 and 1999, respectively. Of these amounts, approximately $3.8 million
were intercompany sales for both the second quarter of fiscal 2000 and 1999. For
the six months ended December 31, 1999 and 1998, net sales for those foreign
operations amounted to $22.4 million and $21.4 million, respectively. Of these
amounts, approximately $6.9 million and $7.3 million were intercompany sales for
the six months ended December 31, 1999 and 1998, respectively. Identifiable
assets for the foreign operations were $21.3 million and $18.7 million at
December 31, 1999 and June 30, 1999, respectively.
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<PAGE> 109
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 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, as defined 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 for at least the next 12 to 15 months, 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 Waxman USA, net of applicable taxes, in the
following order:
- approximately $35.9 million, plus accrued interest, to repay in
full the Senior Notes
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<PAGE> 110
- 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 to be 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 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 for at least the next 12 to
15 months; however, ultimately, the Company will not be able to continue to make
all of the interest and principal payments under its debt obligations without a
significant appreciation in, and monetization of, the value of the shares of
common stock of Barnett owned by the Company and/or a restructuring of such debt
instruments.
The Company believes that the completion of the transactions set forth
in the Debt Reduction Agreement will result in a much stronger company, with a
small 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
expects to complete the Joint Plan by mid-2000.
As noted above, in December 1999, Barnett announced that it had engaged
an investment banker to assist it with strategic alternatives to maximize
shareholder value. 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.
The Company is evaluating various options to streamline its operations,
reduce expenses and improve margins. As part of that process, the logistics of
our distribution facilities and the utilization of operations to source products
as opposed to manufacturing products are being evaluated. The Company expects to
complete this review and initiate various expense reduction plans within the
next six months.
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<PAGE> 111
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
NET SALES
Net sales for the fiscal 2000 second quarter ended December 31, 1999
totaled $19.7 million, as compared to $29.2 million for the fiscal 1999 second
quarter. Excluding the results of U.S. Lock, which was sold effective January
1, 1999, comparable net sales for the remaining businesses decreased by $2.7
million, or 12.0% percent, from the recasted net sales of $22.4 million for the
fiscal 1999 second quarter. The net sales decrease was attributable to the loss
of $1.1 million in net sales from the now defunct Hechinger / Builders Square
operations and weaker than anticipated net sales to retailers, including sales
made through the direct import program from our Asian operations, with certain
domestic support services provided by Consumer Products.
Net sales to retailers amounted to $14.8 million for the second quarter
ended December 31, 1999, a decrease from the $16.6 million for the same period
last year. Sales to nearly all of our largest retail customers were lower than
the prior year and our expectations. In addition, net sales for the second
quarter of fiscal 1999 included $1.1 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 sluggish sales with 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 and that sales should improve late in the
quarter ended March 31, 2000.
Non-retail net sales amounted to $8.8 million for the fiscal 2000
second quarter, a decrease from $16.4 million for the same period in fiscal
1999. Excluding the net sales of U.S. Lock, which amount to $6.8 million in the
fiscal 1999 second quarter, non-retail net sales decreased by $0.8 million. This
decrease is primarily due to a decrease in net sales to Barnett.
GROSS PROFIT
Gross profit for the fiscal 2000 second quarter was $5.9 million, with
a gross profit margin of 29.9 percent, as compared to gross profit of $8.7
million and a gross profit margin of 29.7 percent for the three months ended
December 31, 1998. Excluding U.S. Lock from the prior year results, gross profit
decreased by $0.5 million from the recasted fiscal 1999 second quarter gross
profit of $6.4 million, while the gross profit margin would have increased from
28.7 percent. The decrease in the gross margin is primarily attributable to a
higher proportion of sales from the direct import sales program, which has a
lower gross margin as well as lower selling, general and administrative
expenses. The termination of the packaged plumbing program sales to Hechinger /
Builders Square reduced the Company's gross profit and offset the increased
gross profit from sales to other retailers. In addition, competitive pricing
pressure from overseas suppliers of pipe nipples and valves has reduced the
Company's sales and gross margins for those products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A expenses")
decreased from $8.4 million for the quarter ended December 31, 1998 to $6.8
million for the quarter ended December 31, 1999. Included in the prior year's
results are $1.4 million in SG&A expenses related to U.S. Lock. Excluding the
SG&A expenses related to U.S. Lock, as a percentage of net sales, SG&A expenses
increased from 31.5% for the fiscal 1999 second quarter to 34.4% for the fiscal
2000 second quarter. The increased percentage of expenses to net sales is due to
the reduction in sales levels and certain relatively fixed costs.
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 brand name. The Company believes
the Plumbcraft 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.
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<PAGE> 112
EQUITY EARNINGS OF BARNETT
The Company recorded equity earnings from its ownership interest in
Barnett of $2.0 million for the quarter ended December 31, 1999, as compared to
$1.8 million for the same quarter in fiscal 1999.
AMORTIZATION OF DEFERRED GAIN ON SALE OF U.S. LOCK
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million being recognized in the fiscal 1999 third quarter. The remaining $8.1
million was reported as a deferred gain in the Company's consolidated balance
sheet due to the Company's continued ownership of 44.3% of Barnett, the acquirer
of U.S. Lock. The Company is recognizing the deferred gain as the goodwill
generated by the purchase of U.S. Lock is amortized by Barnett, or as the
Company reduces its ownership interest in Barnett. In the fiscal 2000 second
quarter, the Company recognized $50,000 of this deferred gain.
INTEREST EXPENSE
For the quarter ended December 31, 1999, net interest expense totaled
$4.5 million, as compared to $4.4 million in the fiscal 1999 second quarter.
Average borrowings for the current year's quarter amounted to $137.7 million,
with a weighted average interest rate of 12.4%, as compared to $141.5 million in
the same quarter last year, with a weighted average interest rate of 11.8%. The
average borrowings are lower due to the proceeds received from the sale of U.S.
Lock effective January 1, 1999, while the weighted average interest rate
increased due to the reduction of debt with a lower rate.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $0.1 million for the second
quarter of fiscal 2000, as compared to $0.1 million for the same quarter last
year. The provision for the current quarter primarily represents various state
and foreign taxes of the Company's wholly-owned operations. For the fiscal 2000
and 1999 second 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 December 31, 1999 amounted
to $4.7 million, or $0.39 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 fiscal 1999
second quarter. The second quarter of fiscal 2000 was affected by the $1.3
million non-recurring charge associated with the consolidation of its packaged
plumbing products under the Plumbcraft brand name.
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
NET SALES
Excluding U.S. Lock, which was sold effective January 1, 1999, net
sales for the six months ended December 31, 1999 totaled $42.5 million, a
decrease of $1.5 million from the $44.1 million for the comparable period in
fiscal 1999. Including U.S. Lock's net sales for the six months ended December
31, 1998 of $13.4 million, the Company's net revenue was $57.4 million. The
decrease in net sales is attributable to the lower than anticipated sales to
retailers for the fiscal 2000 second quarter and the loss of the Hechinger /
Builders Square account relationship and their filing for Chapter 7 liquidation,
which accounted for a $3.0 million reduction in net sales for the Company. The
net sales to Hechinger / Builders Square for the six months ended December 31,
1999 and 1998 amounted to $74,000 and $3.1 million, respectively.
GROSS PROFIT
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<PAGE> 113
The gross profit margin for the six months ended December 31, 1999
improved to 30.7% from 30.3% for the six months ended December 31, 1998,
excluding U.S. Lock. Nearly all of the operations reported a slight improvement
in their gross margins. For the six months ended December 31, 1999 and 1998,
excluding U.S. Lock, gross profit amounted to $13.1 million and $13.4 million,
respectively. Including U.S. Lock, the gross profit for the six months ended
December 31, 1998 amounted to $17.7 million. The decrease in gross profit was
due to the decrease in net sales and a higher proportion of sales from the lower
gross margin direct import sales program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses, excluding U.S. Lock, decreased from $14.0 million for
the six months ended December 31, 1998 to $13.6 million for the six month period
ended December 31, 1999. SG&A expenses for the six months ended December 31,
1998 were $16.7 million including U.S. Lock. As a percentage of net sales, SG&A
expenses, excluding U.S. Lock, increased slightly from 31.7% for the six month
period in fiscal 1999 to 31.9% for the six months ended December 31, 1999.
NON-RECURRING AND PROCUREMENT CHARGES
Consumer Products recorded non-recurring charges for the six months
ended December 31, 1999 including procurement costs of $150,000, 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
brand name.
In the fiscal 1999 first quarter ended September 30, 1998, Consumer
Products recorded a non-recurring charge of $1.35 million related to the
relocation of its Bedford Heights, Ohio warehouse to Groveport, Ohio. Included
in the charge 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.
EQUITY EARNINGS OF BARNETT
The Company recorded equity earnings from its 44.3% ownership interest in
Barnett of $3.6 million for the six months ended December 31, 1999. For the
comparable period in fiscal 1999, the Company recorded equity earnings of $3.3
million.
INTEREST EXPENSE
For the six months ended December 31, 1999, interest expense totaled
$8.8 million, a slight increase from the $8.7 million in the comparable period
last year. The increase is primarily due to an increase in borrowings under its
bank credit agreement and an increase in the accretion of interest on the
Deferred Coupon Notes of $5.9 million as compared to $5.3 million for the six
months ended December 31, 1999 and 1998, respectively. Average borrowings for
the six months ended December 31, 1999 amounted to $134.4 million, with a
weighted average interest rate of 12.5%, as compared to $139.2 million in the
same period last year, with a weighted average interest rate of 11.8%. The
average borrowings are lower due to the proceeds received from the sale of U.S.
Lock effective January 1, 1999, while the weighted average interest rate
increased due to the reduction of debt with a lower rate.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $0.3 million and $0.2
million for the six months ended December 31, 1999 and 1998, respectively. The
provision for the current period primarily represents various state and foreign
taxes of the Company's wholly-owned operations. The difference between the
effective and statutory tax rates is primarily due to domestic operating losses
not benefited and goodwill amortization.
NET LOSS
The Company's net loss for the six months ended December 31, 1999
amounted to $7.3 million, or $0.61 per basic and diluted share, as compared to
the net loss of $5.9 million, or $0.49 per basic and diluted share, in the same
period last year. Included in the fiscal 2000 results is a non-recurring charge
of $0.15 million in procurement
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<PAGE> 114
costs and $1.3 million for the consolidation of its packaged plumbing under the
Plumbcraft name. The fiscal 1999 six month results included a non-recurring
charge of $1.35 million for the relocation of the Consumer Products' warehouse
from Bedford Hts., Ohio to Groveport, Ohio.
B. LIQUIDITY AND CAPITAL RESOURCES
Over the past several years, the Company has endeavored to reduce its
high level of debt through the monetization of assets and to improve the
efficiencies of its continuing businesses. As a result, the Company has
undertaken various initiatives to raise cash, improve its cash flow and reduce
its debt obligations and / or improve its financial flexibility during that
period. 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 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 reorganization. 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,
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 for at least the next 12 to
15 months, however, ultimately, the Company will not be able to continue to make
all of the interest and principal payments under its debt obligations without a
significant appreciation in, and monetization of, the value of the shares of
common stock of Barnett owned by the Company and/or a restructuring of such debt
instruments.
The 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 Plan by mid-
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. The Loan and Security Agreement provides for, among other
things, revolving credit advances of up to $20.0 million. As of December 31,
1999, the Company had $13.8 million in borrowings under the revolving credit
line of the facility and had approximately $5.3 million available under such
facility. The Loan and Security Agreement expires on September 1, 2001, but may
be extended under certain conditions.
The Loan and Security Agreement provides for revolving credit advances
of (a) up to 85.0% of the amount 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
December 31, 1999. Borrowings under the Loan and Security Agreement are secured
by the accounts receivable, inventories, certain general intangibles, and
unencumbered fixed assets of Waxman Industries, Inc., Consumer Products, TWI,
International Inc. and WOC, and a pledge of 65% of the stock of various foreign
subsidiaries. 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
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<PAGE> 115
distributions by the Borrowers except in certain limited instances including, so
long as there is no default or event of default and the Borrowers are in
compliance with certain financial covenants, the payment of interest on the
Senior Notes and the Company's Deferred Coupon Notes, and contains customary
negative, affirmative and financial covenants and conditions. The Company was in
compliance with all loan covenants at December 31, 1999. The Loan and Security
Agreement also contains a material adverse condition clause which allows
Congress Financial Corporation to terminate the Agreement under certain
circumstances.
Since the consummation of the Barnett Initial Public Offering, the cash
flow generated by Barnett is no longer available to the Company. The Company
relies primarily on Consumer Products and, prior to January 1, 1999, U.S. Lock
for cash flow. The sale of U.S. Lock further increases the Company's dependence
on Consumer Products' business. Consumer Products' customers include D-I-Y
warehouse home centers, home improvement centers, mass merchandisers and
hardware stores. Consumer Products may be adversely affected by prolonged
economic downturns or significant declines in consumer spending. There can be no
assurance that any such prolonged economic downturn or significant decline in
consumer spending will not have a material adverse impact on the Consumer
Products' business and its ability to generate cash flow. Furthermore, Consumer
Products has a high proportion of its sales with a concentrated number of
customers. One of Consumer Products' largest customers, Kmart, accounted for
approximately 20.8% of net sales for Consumer Products in fiscal 1999. In July
1997, Kmart agreed to sell its Builders Square chain to Leonard Green &
Partners, a merchant-banking firm. Leonard Green also acquired another home
improvement retailer, Hechinger Co., and 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 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 $0.9 million in income taxes in the first six months
of fiscal 2000. At June 30, 1999, the Company had $48.0 million of available
domestic net operating loss carryforwards for income tax purposes, which expire
2009 through 2013, and $41.3 million of original issue discount, as of June 30,
1999, that has been expensed on the Company's financial statements and will
become deductible for tax purposes when the interest on the Deferred Coupon
Notes is paid. In the event the Company completes a financial 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 $0.7 million was paid in the first six 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 December 31, 1999, the Company had working capital of $9.5 million
and a current ratio of 1.3 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $14.7 million for the first six months
of fiscal 2000 principally due to an increase in trade receivables, inventories
and other assets, offset by an increase in accounts payable. Also affecting net
cash used for operations was $3.6 million in equity earnings of Barnett.
Excluding this item, the net cash used by operations was $11.1 million. Cash
flow used in investments totaled $0.9 million, attributable to capital
expenditures. Cash flow provided by financing activities, and net borrowings
under the Company's credit facilities, totaled approximately $14.8 million.
19
<PAGE> 116
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 Year 2000. A summary of the progress made
by each of the Company's operations is provided below.
During fiscal 1998, the Company's largest division, Consumer Products,
completed a version upgrade of its J.D. Edwards software, which was Year 2000
compliant. In addition, Consumer Products made certain modifications to its
systems and completed the testing of its information systems in fiscal 1998 to
insure that it was Year 2000 compliant. Consumer Products utilizes IBM AS400
hardware, NT servers and personal computers that were also Year 2000 compliant.
The specific cost of upgrading the hardware and software in fiscal 1998 was
approximately $0.8 million; however, the majority of this cost was capitalized
as it was part of a process of developing Consumer Products' capabilities to
serve its customers and to operate its business, with Year 2000 compliance being
an additional benefit.
The Company's corporate office completed the development of its
accounting package in March 1999, using Consumer Products' hardware and
software. The accounting package was developed by internal personnel with MIS
support at no additional cost, using the standard reporting format developed for
Consumer Products.
In August 1998, WAMI's PC-based Year 2000 software upgrade was provided
by the software manufacturer at no cost and was installed and tested. As part of
a periodic replacement of hardware, WAMI replaced certain PC's for approximately
$10,000 to upgrade its remaining hardware to be Year 2000 compliant. WAMI's
software and hardware were reviewed by an external information technology
professional for Year 2000 compliance.
Medal Distributing has an IBM System 36, which was upgraded, with
software modifications completed to be Year 2000 compliant. The modifications
were completed in July 1999, at a cost of approximately $10,000.
TWI and CWI's PC-based information systems required minor modifications
to be Year 2000 compliant, which were completed before December 31, 1999 and
financed through working capital with minimal cost. The expenditures at TWI
included approximately $13,000 for hardware, $10,000 for software and $10,000 in
labor to make the Year 2000 modifications. CWI's costs to modify its systems for
Year 2000 were approximately $11,000 for hardware, $14,000 for software and
$2,000 in labor.
20
<PAGE> 117
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) See Exhibit 27.
b) Form 8-K
The Registrant filed a report on Form 8-K on December
14, 1999, regarding the Agreement between the Company
and an ad hoc committee of holders of the Company's
12 3/4% Senior Secured Deferred Coupon Notes due
2004.
All other items in Part II are either inapplicable to the Company during the
quarter ended December 31, 1999 or the answer is negative or a response has been
previously reported and an additional report of the information need not be
made, pursuant to the instructions to Part II.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
-----------------------
REGISTRANT
DATE: FEBRUARY 2, 2000 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
21
<PAGE> 118
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)
22
<PAGE> 119
Annex D
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.
<PAGE> 120
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
<PAGE> 121
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
<PAGE> 122
<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> 123
<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> 124
<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> 125
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> 126
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
8
<PAGE> 127
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
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<PAGE> 128
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.
10
<PAGE> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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
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<PAGE> 135
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,
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<PAGE> 136
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
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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,
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<PAGE> 138
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
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<PAGE> 139
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.
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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)
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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)
23
<PAGE> 142
Annex E
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21728
BARNETT INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-1380437
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3333 LENOX AVENUE, JACKSONVILLE, FLORIDA 32254
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (904) 384-6530
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(TITLE OF EACH CLASS)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Aggregate market value of voting stock held by non-affiliates of the
Registrant based on the closing price at which such stock was sold on the NASDAQ
National Market on September 21, 1999: $82,527,077
Number of shares of Common Stock outstanding as of September 21, 1999:
16,217,769
--------------------------------------------------------------------------------
<PAGE> 143
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement in connection with its 1999 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Annual Report on
Form 10-K from the date such document is filed.
PART I
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K 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, as well as
assumptions made by and information currently available to the Company and its
management. When used in this document, the words "anticipate," "believe,"
"continue," "estimate," "expect," "intend," "may," "should" and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current view of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions, including, but not
limited to, the risk that the Company may not be able to implement its growth
strategy in the intended manner, price competition, risks associated with
currently unforeseen competitive pressures and risks affecting the Company's
industry such as increased distribution costs 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 these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from these
described herein as anticipated, believed, estimated, expected or intended.
ITEM 1. BUSINESS
OVERVIEW
Barnett Inc. (the "Company") is a direct marketer and distributor of an
extensive line of plumbing, electrical, hardware and security hardware products
to approximately 73,400 active customers throughout the United States, the
Caribbean and South America. Effective January 1, 1999, the Company acquired
U.S. Lock, a division of WOC, Inc., a wholly-owned subsidiary of Waxman
Industries, Inc., for a cash purchase price of $33.0 million and the assumption
of liabilities estimated at approximately $2.0 million.
The Company offers approximately 20,300 name brand and private label
products through its industry-recognized Barnett(R) and U.S. Lock(R) catalogs
and telesales operations. The Company markets its products through six distinct,
comprehensive catalogs that target professional contractors, independent
hardware stores, maintenance managers, liquid propane gas ("LP Gas") dealers and
locksmiths. The Company's staff of over 145 knowledgeable telesales, customer
service and technical support personnel work together to serve customers by
assisting in product selection and offering technical advice. To provide rapid
delivery and a strong local presence, the Company has established a network of
40 distribution centers strategically located in 34 major metropolitan areas
throughout the United States and Puerto Rico. Through these local distribution
centers, approximately 70% of the Company's orders are shipped to the customer
on the same day the order is received. The remaining 30% of the orders are
picked up by the customer at one of the Company's local distribution centers.
The Company's strategy of being a low-cost, competitively priced supplier is
facilitated by its volume of purchases and offshore sourcing of a significant
portion of its
1
<PAGE> 144
private label products. Products are purchased from over 650 domestic and
foreign suppliers.
The Company believes that its distinctive business model has enabled it
to become a high-volume, cost-efficient direct marketer of competitively priced
plumbing, electrical, hardware and security hardware products. The Company's
approximately 1,000-page catalogs offer an extensive selection of products in an
easy to use format enabling customers to consolidate purchases with a single
vendor. The Company provides an updated version of its catalogs to its customers
an average of three times a year. To attract new customers and offer special
promotions to existing customers, the Company supplements its catalogs with
monthly promotional flyers. The Company's experienced and knowledgeable inbound
telesales staff, located at the Company's centralized headquarters in
Jacksonville, Florida, uses the Company's proprietary information systems to
take customer orders as well as offer technical advice. The Company's highly
trained outbound telesales staff maintains frequent customer contact, makes
telesales presentations, encourages additional purchases and solicits new
customers. The Company's high in-stock position and extensive network of local
distribution centers enable it to fulfill approximately 94% of the items
included in each customer order and provide rapid delivery. As a result of its
emphasis on customer service, the Company's customer retention rate (i.e.,
customers who place orders in the following year) has consistently remained in
the 80% range for the past three years.
The Company has actively pursued increased sales of its private label
products sourced primarily from foreign suppliers. During the fiscal year ended
June 30, 1999, approximately 28.0% of the Company's net sales were attributable
to sales of private label products. Many of the Company's private label products
provide the customer with lower cost, high quality alternatives to brand name
products, as well as providing the Company with higher profit margins. The
Company's private label products are sold under brand names such as
Premier(R),ProPlus(R),Barnett(R),Legend(TM),Electracraft(R),Lumina(TM),U.S.
Lock(R), and Big Duty Deadbolt(R).
INDUSTRY OVERVIEW
The Company competes in a large and highly fragmented industry. The
Company broadly defines its industry as the sale of plumbing, electrical,
hardware and security hardware products primarily to plumbing and electrical
repair and remodeling contractors, maintenance managers, independent hardware
stores, LP Gas dealers and locksmiths. Plumbing and electrical contractors are
primarily responsible for making repairs on a daily basis and generally do not
have time to shop with multiple vendors. Plumbing and electrical contractors,
therefore, value extensive product selection, convenient ordering, reliable,
rapid delivery and other value-added services. In addition, such contractors
typically operate with limited working capital, making competitive pricing
important. Plumbing, electrical and hardware contractors have traditionally
purchased supplies through a variety of distribution channels including:
Local or Regional Broad-Line Suppliers. There are numerous broad-line
suppliers offering product categories similar to those found in the Company's
catalogs. Most of these suppliers are local or regional in scope. Although these
competitors typically use a direct sales force, often supported by a
manufacturer's catalog, they are smaller and therefore tend to offer brand name
products only, and fewer services than offered by the Company. However, many of
these suppliers offer a greater breadth of products than the Company.
Specialty Suppliers. Specialty suppliers focus on a single product
category, such as plumbing or electrical supplies, and often offer a greater
number of products
2
<PAGE> 145
within their product categories. Specialty suppliers are typically local or
regional in scope and cannot provide the one-stop shopping sought by many of the
Company's customers.
Industrial Suppliers. There are a few industrial suppliers that include
a limited selection of plumbing, electrical and hardware products in their
merchandise mix but do not focus on the Company's target markets.
Mail Order Distributors. There are several mail order catalog
distributors that offer a broad selection of repair and maintenance products,
have multiple distribution centers and offer rapid delivery services. However,
these companies generally do not have a significant telesales staff or the
Company's geographic scope and typically focus on fewer customer segments.
BUSINESS STRENGTHS
The Company's strategy is to continue to be a high-volume, cost
efficient direct marketer of competitively priced plumbing, electrical, hardware
and security hardware products, providing superior customer service. The Company
believes that the following business strengths are the key elements of this
strategy:
Direct Marketing Sales Approach. The Company displays and promotes its
products through six comprehensive catalogs: The Barnett Professional Catalog,
Maintenance USA, Hardware Express, Barnett of the Caribbean, LeRan Gas Products
and U.S. Lock. These catalogs are targeted, respectively, to such major customer
groups as professional plumbing and electrical repair and remodeling
contractors, maintenance managers, hardware stores, LP Gas dealers and
locksmiths. The Company mailed its first catalog in 1958 and currently mails its
principal catalog to the 73,400 active customers on its proprietary mailing
list. These mailings are supplemented with direct mail promotional flyers to
existing and potential customers on a monthly basis. Typical catalogs mailed by
the Company contain over 11,900 items in the Barnett catalogs and 8,400 in the
U.S. Lock catalog and are approximately 1,000 pages in length. The Company's
objective is to leverage its direct sales experience to sell a broader array of
products to a larger number of customers. The Company's comprehensive catalogs
provide its customers with the opportunity to purchase a substantial portion of
their plumbing, electrical, hardware and security hardware supplies from a
single vendor.
Sophisticated Data Based Telesales. During fiscal 1999, approximately
66.3% of the Company's net sales were generated through the Company's 146
outbound and inbound telesalespersons. Outbound telesalespersons are assigned
account management responsibilities for existing customers with an emphasis on
customer service, new product introductions and new product lines. Inbound
telesalespersons are trained to quickly process orders from existing customers.
All telesalespersons are highly knowledgeable and are required to go through
extensive product and sales training before they begin to work with customers.
The Company's proprietary telesales software provides the telesales staff with
detailed customer profiles and information about products, pricing, promotions
and competition. This data enables the Company to segment its customer base,
analyze mailing effectiveness on a weekly basis, closely track and manage
inventory on a real-time basis and quickly react to, and capitalize on, business
opportunities.
National Network of Distribution Centers. To provide more rapid
delivery and a strong local presence, the Company has established a network of
40 distribution centers strategically located in 34 major metropolitan areas
throughout the United States and Puerto Rico. The distribution centers enable
the Company to be closer to many of its customers for faster product delivery
and to generate incremental over-the-counter sales. The Company's experience
indicates that many of its customers
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<PAGE> 146
prefer to purchase from local suppliers and often choose to pick up their orders
in person. Approximately 30% of the Company's orders are picked up by the
customer at one of the Company's local distribution centers.
Superior Customer Service. As a result of its large in-stock inventory,
the Company is typically able to fulfill approximately 94% of the items included
in each customer order, and, in almost all cases, ships the order within the
same day of receipt of the order. In addition, as a result of its large number
of distribution centers, the Company is able to provide its customers with more
rapid delivery to markets within the continental United States, the Caribbean
and South America. In an effort to maximize sales and increase customer
retention, the Company has structured its telesales staff to create regular
contact between the Company's telesales personnel and each active customer. The
Company's customer retention rate (i.e., customers who place orders in the
following year) has consistently remained in the 80% range for the past three
years.
Competitive Pricing and Private Label Products. Due to the Company's
size, volume of purchases, substantial vendor base and offshore sourcing
capabilities, the Company is frequently able to obtain purchase terms that the
Company believes are more favorable than those available to its competition.
This enables the Company to offer prices that are generally lower than those
available from its competitors. Many of the Company's private label products
provide the customer with lower-cost, high quality alternatives to name brand
products, as well as providing the Company with higher profit margins. During
fiscal 1999, approximately 28.0% of the Company's net sales were attributable to
sales of private label products.
Centralized Management Information Systems. The Company's proprietary
integrated centralized management information systems provide the Company with
real-time information for managing telesales, distribution, customer service,
inventory control and financial controls. The management information systems
also enable the Company to effectively coordinate its purchasing, marketing,
outbound telesales, order entry, shipping and billing. The current system has
enabled the Company to enhance its levels of customer service and increase the
productivity and profitability of its telesales operations, as well as enabling
management to make well informed business decisions. The system can be easily
and cost-effectively upgraded as the Company grows.
MARKETING AND DISTRIBUTION
The Company markets its products nationwide and internationally to
existing and potential customers through regular catalog and promotional
mailings, supported by a telesales operation. Products are shipped from a
network of 40 distribution centers allowing for shipment to and pick up by
customers generally the same day the order is received. The outbound telesales
operation is utilized to make telephonic sales presentations to existing and
potential customers that have received written promotional materials. The
Company's inbound telesalespersons provide customer assistance and take customer
orders. The Barnett outbound and inbound telesales operations are centralized in
Jacksonville, Florida and the U.S. Lock operations are centralized in Long
Island, New York.
Catalogs
The Company's six approximately 1000-page catalogs containing
approximately 20,300 plumbing, electrical, hardware and security hardware
products are mailed to its approximately 73,400 active customers. These catalogs
are supplemented by monthly promotional flyers. The Company's targeted customers
include professional contractors, independent hardware stores, maintenance
managers, LP Gas dealers and
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locksmiths. The Company has been distributing its principal catalog since 1958
and believes that both the Barnett(R) and U.S. Lock(R) names have achieved a
very high degree of recognition among the Company's customers and suppliers.
The Company makes its initial contact with potential customers
primarily through promotional flyers. The Company obtains the names of
prospective customers through the purchase and rental of mailing lists from
outside marketing information services and other sources. Sophisticated
proprietary information systems are used to analyze the results of individual
catalog and promotional flyer mailings. The information derived from these
mailings, as well as information obtained from the Company's telesales
operations, is used to create and/or supplement individual customer profiles and
to target future mailings. The Company updates its mailing lists frequently to
delete inactive customers.
The Company believes that due, in part, to the continuing expansion of
its product offerings in conjunction with continuing its expanded promotional
flyer campaigns, it has the opportunity to market its products to attract new
customers. In fiscal 1999, approximately 18,000 new customers contributed
approximately $21.7 million to net sales.
The Company's in-house art department produces the design and layout
for its catalogs and promotional mailings. The catalogs are indexed and
illustrated, provide simplified pricing and highlight new product offerings.
Telesales
During fiscal 1999, approximately 66.3% of the Company's net sales were
generated through the Company's telesales operation. The Company's telesales
operation has been designed to make ordering its products as convenient and
efficient as possible, thereby enabling the Company to provide superior customer
service. The Company offers its customers a nationwide toll-free telephone
number that currently is staffed by approximately 146 telesales, customer
service and technical support personnel who utilize the Company's proprietary,
on-line order processing system. This sophisticated software provides the
telesales staff with detailed customer profiles and information about products,
pricing, promotions and competition. This data enables the Company to segment
its customer base, analyze mailing effectiveness on a weekly basis, closely
track and manage inventory on a real-time basis and quickly react to and
capitalize on market opportunities.
The Company divides its telesales staff into outbound and inbound
groups. The Company's experience indicates that customer loyalty is bolstered by
the ability of the telesales staff to develop an ongoing personal relationship
with their customers. The Company's highly trained outbound telesales staff
maintains frequent customer contact, makes telesales presentations and
encourages additional purchases. Inbound telesalespersons are trained to quickly
process orders from existing customers, provide technical support, expedite and
process new customer applications as well as handle all customer service. They
endeavor to increase sales by informing customers of price breaks for larger
orders, companion items and replacement items with higher margins. Outbound
telesales persons are also utilized to make telephonic sales presentations to
both potential and existing customers. Also, for several months prior to the
opening of new distribution centers, the Company utilizes its telesales
operation to generate awareness of the Company, its product offerings and the
upcoming opening of new distribution centers located near the target customers.
The Company conducts a customized, in-depth six week training course
for new telesales employees. Training includes the use of role playing and
videotape analysis. Upon satisfactory completion of their training, new
telesales personnel are
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provided with a dedicated, experienced associate who serves as a "coach" for the
next year. In order to better assure high telesales service levels, telesales
supervisors regularly monitor telesales calls.
The direct marketing channel primarily uses product catalogs and
promotional materials to target small to mid-size customers. Barnett markets its
full line catalogs to its existing customer base and mails flyers and other
promotional material to prospective customers and also as supplemental mailings
to existing customers.
Export business
The Company believes that many opportunities for direct marketing to
the Company's existing target markets exist in foreign locations including South
America, the Caribbean and Europe. In October 1997, the Company opened its first
offshore distribution center in Puerto Rico. Although the Company does not
intend to commit material resources to international expansion during the next
few years, the Company has begun to, and intends to continue to, access these
markets through its existing telesales operations and increased mailings of its
promotional flyers. The Company believes that customers in these international
areas are receptive to mail order purchasing and that potential customers would
be attracted to the breadth of the Company's product lines and its competitive
pricing.
Factory Direct Programs
During fiscal 1999, the Company significantly enhanced its factory
direct programs. Factory direct programs represent products shipped directly to
the Company's customers from certain suppliers and manufacturers. The Company
now offers approximately 2,000 factory direct items in its various catalogs.
Distribution Center Network
The Company has established a network of 40 local distribution centers
strategically located in 34 major metropolitan areas throughout the United
States and Puerto Rico. This network enables the Company to provide rapid and
complete product delivery and provides a strong local presence.
The Company's distribution centers range in size from approximately
17,000 square feet to 60,000 square feet. Distribution centers are typically
maintained under operating leases in commercial or industrial centers.
Distribution centers primarily consist of warehouse and shipping facilities, but
also include "city sales counters". These city sales counters typically occupy
approximately 900 square feet, where customers can pick up orders or browse
through a limited selection of promotional items. The Company is often able to
generate incremental sales from customers who pick up their orders.
Over the next few years, the Company plans to add two to four new
distribution centers in major metropolitan areas and has identified ten to
twelve potential locations. The Company opened new distribution centers in
Birmingham, Alabama in September 1998, and Parsippany, New Jersey in March 1999
and is expected to open in Phoenix, Arizona and Orlando, Florida in October
1999. The addition of new distribution centers in new geographic areas, as well
as in geographic areas in which the Company has existing distribution centers,
has increased, and is expected to continue to increase, the Company's overall
level of business. New distribution centers enhance marketing efforts, heighten
the Company's name recognition, generate new over-the-counter business and allow
for faster product delivery.
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The factors considered in site selection include the number of
prospective customers in the local target area, the existing sales volume in
such area and the availability and cost of warehouse space, as well as other
demographic information. The Company has substantial expertise in distribution
center site selection, negotiating leases, reconfiguring space to suit its
needs, and stocking and opening new distribution centers. The average investment
required to open a distribution center is approximately $1,000,000, including
approximately $600,000 for inventory.
PRODUCTS
The Company markets an extensive line of approximately 20,300 plumbing,
electrical, hardware and security hardware products, many of which are sold
under its proprietary trade names and trademarks. This extensive line of
products allows the Company to serve as a single source supplier for many of its
customers. Many of these products are higher margin products bearing the
Company's proprietary trade names and trademarks. In addition, proprietary
products are often the customers' higher margin product offerings.
The Company tracks sales of new products the first year they are
offered and new products that fail to meet specified sales criteria are
discontinued. The Company believes that its customers respond favorably to the
introduction of new product lines in areas that allow the customers to realize
additional cost savings and to utilize the Company's catalogs as a means of
one-stop shopping for many of their needs.
The Company plans to increase its new product offerings by 1,200 to
1,500 items per year over the next three years, which will deepen the Company's
existing product lines and establish new product categories. The Company's name
and reputation have enabled the Company to successfully market a trusted line of
private label products, and accordingly, a significant portion of new product
additions will be private label products. Private label products offer customers
high quality, lower-cost alternatives to the brand name products the Company
sells. The Company's catalogs and monthly promotional flyers emphasize the
comparative value of the Company's private label products. During fiscal 1999,
approximately 28.0% of the Company's net sales were generated by the sale of the
Company's private label products. The Company believes that the introduction of
new product lines will expand the Company's total potential target market.
Examples of new product lines recently introduced include builder's hardware,
heating, venting and air conditioning repair parts and appliance repair parts.
The Company's products are generally covered by a one year warranty, and
returns, which require prior authorization from the Company, have historically
been immaterial in amount.
The following is a discussion of the Company's principal product
groups:
Plumbing Products. The Company sells branded products of leading
plumbing supply manufacturers including Delta(R), Moen(R) and Price Pfister(R).
The Company's private label plumbing products are also sold under its
Barnett(R), Premier(R) and ProPlus(R) trademarks.
Electrical Products. The Company sells branded products of leading
electrical supply manufacturers including Phillips(R), Westinghouse(R),
Honeywell(R) and General Electric(R). Certain of the Company's private label
electrical products are sold under its own proprietary trademarks including
Barnett(R), Premier(R), Electracraft(R) and Lumina(TM).
Hardware Products. The Company sells hardware products of leading
hardware product manufacturers including DAP(R) sealants and caulks,
Rust-oleum(R) paints and
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Milwaukee(R) power tools. Certain of the Company's hardware products are also
sold under its own proprietary Legend(TM) trademark.
Security Hardware Products. The Company sells a full line of security
hardware products including locksets, door closers and locksmith tools including
Kwikset(R) and Schlage(R). Certain of the Company's security hardware products
are also sold under its own proprietary U.S. Lock(R), Legend(TM) and Rx(TM)
trademarks.
HVAC/R Products. The Company began selling a limited number of brand
name HVAC/R products in July 1997 and intends to continue expanding this product
line.
SOURCING
The products sold by the Company are purchased from approximately 600
domestic and 50 foreign suppliers. Domestically manufactured products are
shipped directly to the Company's 40 distribution centers. Products manufactured
abroad are initially shipped to the Company's 5 regional distribution centers
and subsequently redistributed to each of the remaining local distribution
centers. The Company is not dependent upon any single supplier for any of its
requirements. Due to the volume of the Company's purchases and its utilization
of over 650 vendors, it is able to obtain purchase terms it believes to be more
favorable than those available to most local suppliers of plumbing, electrical
and hardware products. Approximately 72.5% of the Company's purchases for the
year ended June 30, 1999 were from domestic manufacturers and 27.5% were from
foreign manufacturers, primarily located in Asia. During fiscal 1999, the
Company purchased approximately 11.6% of its products through Waxman Industries
entities. Although the Company intends to continue to purchase products through
Waxman Industries entities in the future, the Company is not committed to
purchase any products from Waxman Industries.
MANAGEMENT INFORMATION SYSTEMS
The Company has integrated all of its operating units into its
state-of-the-art management information system. This system encompasses all of
the Company's major business functions and was designed to enable the Company to
receive and process orders, manage inventory, verify credit and payment history,
invoice customers, receive payments and manage the Company's proprietary mail
order customer lists. In addition, all of the Company's local distribution
centers are linked to the Company's computer system to provide real-time access
to all necessary information, including inventory availability, order tracking,
and customer creditworthiness. The system can be easily and cost-effectively
upgraded as the Company grows. The Company has adopted procedures to protect the
data in its computer systems and to provide for recovery in the event of
equipment failures. All data systems are backed up to tape daily with backup
tapes stored off-site. End of month tapes, tape archives and production software
kept on-site are stored in a fire-proof safe. Additionally, the Company
maintains a geographically remote "hot site" computer system that is able to
communicate with all of the Company's distribution centers in the event of a
failure of the Company's primary system.
The Company's customers can place orders directly via mail, facsimile,
telephone or through an electronic data interchange ("EDI") transmission.
Utilizing EDI, the Company's customers can send electronic purchase orders
directly to the Company's order entry systems. The Company makes this ordering
process simple for its customers by providing well-developed computer media
containing the Company's product information including item number, product
description, price, package quantity and UPC codes to be loaded directly into
the customer's purchasing system. The Company
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automatically edits and processes EDI orders and sends the majority of EDI
orders received directly to shipping. The few EDI orders that need editing are
sent immediately to a sales representative for review. Through EDI, the Company
can provide faster order turnaround, thereby further fostering customer
satisfaction.
The Company is in the process of developing a fully functional
e-commerce and supply chain website. This website will house most of the
Company's catalogs on-line and provide vendor links, which the Company believes
will strengthen its competitive position in the marketplace. The Company expects
this system to be fully functional at the end of its first fiscal 2000 quarter.
To address the Year 2000 ("Y2K") issues, the Company has identified all
computer-based systems and applications (including embedded systems) that are
not Year 2000 compliant and has determined what revisions, replacements or
updates are needed to achieve compliance. As of August 1, 1999, all necessary
system modifications have been made and implemented except for the remediation
and testing of non-mission critical areas, with an expected completion date of
September 30, 1999.
Costs associated with bringing the systems into compliance have been
immaterial, approximating $35,000, as the Company has not incorporated material
revisions or updates to the current systems to bring them into Y2K compliance.
As part of the Y2K review, the Company is examining its relationship
with certain key vendors and others with whom it has significant business
relationships to determine, to the extent practical, the degree of such parties'
Y2K compliance and their effect on the Company's operations. The Company does
not have a relationship with any third party vendor which is material to the
operations of the Company, and thus believes that the failure of any such party
to be Y2K compliant would not have a material adverse effect on the Company.
To date, the Company is creating a formal contingency plan for dealing
with a failure by either the Company or its third party vendors to achieve Y2K
compliance.
COMPETITION
The market in which the Company competes is highly fragmented
consisting of many regional and local distributors of plumbing, electrical and
hardware products. The Company believes that competition is primarily based on
price, product quality and selection, as well as service, which includes rapid
order turnaround. The Company believes that its operating strategy positions it
to be an effective competitor in its markets. The Company's major competitors
include local and regional broad line suppliers, specialty suppliers, industrial
suppliers, direct mail distributors and warehouse home centers.
SEASONALITY
The Company's sales are generally consistent throughout the year.
ENVIRONMENTAL REGULATIONS
The Company's facilities are subject to certain federal, state and
local environmental laws and regulations. The Company believes that it is in
compliance with all environmental laws and regulations applicable to it.
EMPLOYEES
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As of June 30, 1999, the Company employed 771 individuals, 187 of whom
were clerical and administrative personnel, 168 of whom were telesales and sales
representatives and 416 of whom were either production or warehouse personnel.
The Company's employees are not unionized. The Company considers its relations
with its employees to be good.
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ITEM 2. PROPERTIES
The Company's headquarters and largest distribution center are located at
3333 Lenox Avenue, Jacksonville, Florida. The building in which the headquarters
are located is leased by the Company through October 31, 2003, and contains
approximately 47,000 square feet of warehouse space and 19,000 square feet of
offices. The Company has built a new 38,000 square foot telesales center in
Jacksonville, Florida, which it occupied in May 1998. This new telesales center
has enabled the Company to continue expanding its telesales staff, and has
enabled the Company to either terminate or consolidate existing leased spaces.
As part of the U.S. Lock acquisition, the Company owns a 59,400 square foot
building in Long Island, New York which houses the U.S. Lock management team and
telesales center, as well as its largest distribution center.
The Company's 40 distribution centers utilize leased space ranging from
17,000 to 60,000 square feet and are all located in the United States and Puerto
Rico. The leases expire at various dates from April 2000 to November 2009. The
Company believes that its distribution facilities are adequate for its current
needs and does not anticipate that it will have any problem leasing additional
space when needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not have a material
impact on the financial position, liquidity or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the names, ages, positions and offices with the
Company held by the present executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE PRESENTLY HELD
---- --- ----------------------------------
<S> <C> <C>
William R. Pray 52 President, Chief Executive Officer and Director
David R. Janosz 53 Vice President--Marketing
Andrea M. Luiga 42 Vice President--Finance, Chief Financial Officer
Alfred C. Poindexter 47 Vice President--Operations
</TABLE>
Mr. William R. Pray was elected President, Chief Executive Officer and
a Director of the Company in February 1993. Mr. Pray was elected President and
Chief Operating Officer of Waxman Industries in June 1995, and resigned these
positions in April 1996, upon consummation of the Company's initial public
offering, (the "Initial Public Offering"). From February 1991 to February 1993,
Mr. Pray was Senior Vice President-- President of Waxman Industries' U.S.
Operations, after serving as President of the Mail Order/Telesales Group (which
included the Company) since 1989. He joined the Company in 1978 as Regional
Sales Manager, became Vice President of Sales and Marketing in 1984 and was
promoted to President in 1987. Mr. Pray is a Director of Waxman Industries.
Mr. David R. Janosz was appointed Vice President--Marketing of the
Company in October 1998. He joined the Company in that position at the same
time. Mr Janosz's previous experience includes tenure in executive positions in
the automotive and industrial distribution industries.
Ms. Andrea M. Luiga was elected Vice President--Finance, Chief
Financial Officer of the Company in February 1993. Ms. Luiga was elected Vice
President and Chief Financial Officer of Waxman Industries in August 1995, and
resigned these positions in April 1996 upon consummation of the Initial Public
Offering. From September 1991 to February 1993, Ms. Luiga was Vice
President--Group Controller of the Mail Order Group of Waxman Industries (which
included the Company) after serving as Group Controller of the Mail Order Group
since October 1989. Ms. Luiga joined the Company in March 1988 as Controller.
Mr. Alfred C. Poindexter was elected Vice President--Operations of the
Company in February 1993. From September 1988 to February 1993, Mr. Poindexter
served as Vice President--Operations of the Company after serving as Director of
Operations of the Company since 1987. He joined the Company in 1983 as
Purchasing Manager.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the NASDAQ National Market
under the symbol "BNTT". The following table sets forth the high and low sales
prices for the Common Stock for each quarter during the past two fiscal years,
as reported by NASDAQ.
High Low
---- ---
Fiscal 1999
First Quarter $ 22.75 $ 8.38
Second Quarter 14.88 7.88
Third Quarter 17.63 8.44
Fourth Quarter 11.13 7.50
Fiscal 1998
First Quarter $ 26.25 $ 19.25
Second Quarter 22.75 17.25
Third Quarter 25.25 21.50
Fourth Quarter 22.50 16.50
HOLDERS OF RECORD
As of September 17, 1999, there were approximately 252 holders of record
of the Common Stock.
DIVIDENDS
The Company presently retains all of its earnings to finance the
expansion of its business and does not anticipate paying cash dividends on its
common stock in the foreseeable future. Any determination to pay cash dividends
in the future will be at the discretion of the Board of Directors after taking
into account various factors, including the Company's financial condition,
results of operations, current and anticipated cash needs and plans for
expansion. In addition, the Company's current credit facility limits the amount
of cash dividends payable on the common stock in any one year to the Company's
net income for such year.
SALE OF UNREGISTERED SECURITIES
On July 1, 1997, the Company acquired certain of the assets of LeRan
Gas Products, an operating unit of Waxman Industries. The acquisition price was
$3.8 million, of which $3.2 million was paid in cash and the remainder was paid
by the issuance of 24,730 shares of the common stock of the Company. The
issuance of shares to the Company's former parent Corporation, Waxman
Industries, Inc., was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 as a transaction not involving a public offering.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the last five fiscal years
through 1999 has been derived from the financial statements of the Company for
such years, which have been audited by Arthur Andersen LLP, independent
certified public accountants, whose report is included elsewhere herein. All
such information is qualified by reference to the Financial Statements included
elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
( Amounts in Thousands, except per share amounts )
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales (1) $241,374 $199,578 $160,068 $127,395 $109,107
Cost of sales 161,183 132,135 105,376 84,748 71,815
-------- -------- -------- -------- --------
Gross profit 80,191 67,443 54,692 42,647 37,292
Selling , general and administrative
expenses 53,906 44,061 35,068 26,877 23,772
Corporate charge -- -- -- 1,342 1,862
-------- -------- -------- -------- --------
Operating income 26,285 23,382 19,624 14,428 11,658
Interest expense 1,217 157 59 1,921 2,139
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item 25,068 23,225 19,565 12,507 9,519
Provision for income taxes 9,853 8,948 7,530 4,625 3,500
-------- -------- -------- -------- --------
Income before extraordinary item 15,215 14,277 12,035 7,882 6,019
Extraordinary loss on early
retirement of debt, net of
tax benefit (2) -- -- -- 724 --
-------- -------- -------- -------- --------
Net income $ 15,215 $ 14,277 $ 12,035 $ 7,158 $ 6,019
======== ======== ======== ======== ========
Earnings per common share:
Basic $ 0.94 $ 0.88 $ 0.76 $ 0.55 $ 0.65
Diluted $ 0.94 $ 0.87 $ 0.75 $ 0.55 $ 0.65
Weighted average shares
outstanding:(3)
Basic 16,195 16,179 15,785 12,914 9,318
Diluted 16,200 16,341 15,987 12,914 9,318
</TABLE>
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<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
( Amounts in Thousands, except per share amounts )
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital $ 70,326 $ 52,431 $ 44,867 $ 30,744 $ 29,171
Total Assets 149,186 95,784 77,015 58,300 52,413
Total long-term debt, excluding
push-down bank debt 33,000 0 0 0 18,126
Push-down bank debt (4) 0 0 0 0 4,874
Stockholders' equity 91,571 76,161 60,611 41,324 17,428
</TABLE>
(1) Prior to July 1, 1995, the Company recorded shipments delivered directly
to the customer from certain suppliers (factory direct) as contributed
margin (net reduction of cost of goods sold). Beginning on July 1, 1995,
the Company began to record these shipments as net sales resulting in an
increase in net sales of $2,979 for the fiscal year ended June 30, 1996.
(2) In accordance with certain Securities and Exchange Commission rules, the
financial statements have been adjusted to reflect push-down adjustments
from Waxman, comprised of certain bank indebtedness ("push-down debt")
which was repaid by the Company with the net proceeds of the Initial
Public Offering. The Company incurred a one-time, non-cash extraordinary
charge of $724 (net of applicable tax benefit of $426) which was a result
of the write-off of unamortized debt issuance costs incurred in connection
with the Company prepaying its borrowings under a secured revolving credit
facility, which indebtedness included push-down bank indebtedness from
Waxman. This charge was recorded in the quarter ended June 30, 1996.
(3) The historical shares outstanding for fiscal years ended 1996 and 1995,
were prior to the Initial Public Offering which changed the Company's
capitalization structure.
(4) Pursuant to certain Securities and Exchange Commission rules, the
Company's historic financial statements for periods prior to the Initial
Public Offering have been adjusted to reflect the push-down of certain
bank indebtedness from Waxman USA that was secured by the accounts
receivable, inventory, certain general intangibles and unencumbered fixed
assets of the Company, WOC and Waxman Consumer Products Group Inc., a
wholly owned indirect subsidiary of Waxman. The push-down bank debt was
retired upon the consummation of the Initial Public Offering and the
application of the net proceeds therefrom.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
--------------------------
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including but not limited to the
Year 2000 Issue (subsequently defined) constitute 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 "expect", "believe", "intend", "may", "should",
"anticipate", and similar expressions are intended to identify forward- looking
statements. Such forward-looking statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions including, but not limited to, the risk that the
Company may not be able to implement its growth strategy in the intended manner,
risks associated with currently unforeseen competitive pressures and risks
affecting the Company's industry such as increased distribution costs 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 these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
OVERVIEW
--------
The Company is a direct marketer and distributor of an extensive line of
plumbing, electrical, hardware and security hardware products, to approximately
73,400 active customers throughout the United States, the Caribbean and South
America. The Company offers approximately 20,300 name brand and private label
products through its industry-recognized Barnett(R) and U.S. Lock(R) catalogs
and telesales operations. The Company markets its products through six distinct,
comprehensive catalogs that target professional contractors, independent
hardware stores, locksmiths and maintenance managers. The Company's staff of
over 145 knowledgeable telesales, customer service and technical support
personnel work together to serve customers by assisting in product selection and
offering technical advice. To provide rapid delivery and a strong local
presence, the Company has established a network of 40 distribution centers
strategically located in 34 major metropolitan areas throughout the United
States and Puerto Rico. Through these local distribution centers, approximately
70% of the Company's orders are shipped to the customer on the same day the
order is received. The remaining 30% of the orders are picked up by the customer
at one of the Company's local distribution centers. The Company's strategy of
being a low-cost, competitively priced supplier is facilitated by its volume of
purchases and offshore sourcing of a significant portion of its private label
products. Products are purchased from over 650 domestic and foreign suppliers.
Commensurate with the Company's Initial Public Offering on April 3, 1996
and its secondary stock offering on April 18, 1997, Waxman USA Inc.,("Waxman"),
currently owns 7.2 million shares or 44.3% of the issued and outstanding stock
of the Company.
On July 1, 1997, the Company acquired certain of the assets of LeRan Gas
Products, an operating unit of Waxman. The acquisition price was $3.8 million,
of which $3.2 million was paid in cash and the remainder was paid by the
issuance to Waxman of 24,730 shares of the common stock of the Company. The
operations related to these assets are not material to the Company's financial
statements.
Effective January 1, 1999, the Company acquired U.S. Lock, a division of
WOC, Inc., a wholly-owned subsidiary of Waxman, for a cash purchase price of
approximately $33.0 million and the assumption of liabilities estimated at
approximately $2.0 million. The acquisition of U.S. Lock was accounted for as a
purchase. Accordingly, the purchase price was allocated to the net assets
acquired based upon their estimated fair market values. The excess of the
purchase price over the estimated fair value of net assets acquired amounted to
approximately
16
<PAGE> 159
$23.0 million. This has been accounted for as goodwill and is being amortized
over 40 years using the straight line method.
RESULTS OF OPERATIONS
The following table shows the percentage relationship to net sales of items
derived from the Statements of Income.
Percentage of
Net Sales
Fiscal years ended June 30,
1999 1998 1997
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 66.8 66.2 65.8
----- ----- -----
Gross Profit 33.2 33.8 34.2
Selling, general and
administrative expense 22.3 22.1 21.9
----- ----- -----
Operating income 10.9 11.7 12.3
Interest expense 0.5 0.1 0.1
----- ----- -----
Income before income
taxes 10.4 11.6 12.2
Provision for income taxes 4.1 4.4 4.7
----- ----- -----
Net Income 6.3% 7.2% 7.5%
===== ===== =====
FISCAL 1999 VERSUS FISCAL 1998
NET SALES
The Company's net sales for fiscal 1999 totaled $241.4 million compared with
$199.6 million in fiscal 1998, an increase of 20.9%. Net sales from the
acquisition of U.S. Lock accounted for $14.2 million of the revenue increase.
Approximately 77.4% of the increase in the Company's net sales was derived from
the Company's telesales operations, primarily resulting from increased sales by
existing telesalespersons and the addition of 20 telesalespersons internally and
25 telesalespersons acquired with U.S. Lock, compared to the prior year. The
remainder of the net sales increase was attributable to the Company's outside
sales force, integrated account management teams, factory direct programs and
the Company's export division. As a result of the Company's promotional flyer
campaign, the Company added approximately 18,000 new customers during the fiscal
year, and these new customers contributed approximately $21.7 million to the net
sales increase during the year. Also contributing to the net sales increase for
fiscal 1999 was revenue from new product introductions approximating $10.8
million.
As noted above, the Company began an integration of its outside sales force
with its telesales force. The integrated account management provides synergies
with improved customer knowledge, as well as superior customer service and
quicker response times. These integrated account management teams produced
revenue increases in fiscal 1999 exceeding 24%. Additionally, the Company's
export division, primarily consisting of a small dedicated
17
<PAGE> 160
international telesales staff, garnished revenue increases in excess of 21%.
Furthermore, the Company continues to invest in its factory direct programs
whereby products are shipped directly to the customer from certain suppliers and
manufacturers. These programs yielded more than 67% revenue increases in fiscal
1999.
The Company opened its 33rd distribution center in Birmingham, Alabama
in September 1998 and its 34th distribution center in Parsippany, New Jersey in
March 1999. U.S. Lock opened its 6th distribution center in Dallas, Texas in
March 1999. These three new distribution centers averaged a 34.4% sales increase
over the base business transferred to them.
GROSS PROFIT
Gross profit increased 18.9% to $80.2 million in fiscal 1999 from $67.4
million in fiscal 1998. Gross profit margins decreased to 33.2% in fiscal 1999
from 33.8% in fiscal 1998 primarily as a result of a higher mix of the
aforementioned factory direct shipments which carry much lower gross profit
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $9.8
million, or 22.3%, to $53.9 million for fiscal 1999 from $44.1 million for
fiscal 1998. The increase was primarily due to the increased sales volume which
required additional staffing and support. Additionally, combining the expenses
of U.S Lock, along with the full year effect of occupancy and other expenses
related to the opening of three new distribution centers in the prior year, and
the opening of three new distribution centers in fiscal 1999 also played
contributing roles to the overall expense increase. Increased wages and training
costs related to personnel turnover in various distribution centers also
contributed to the increased expense level, as well as the amortization of
goodwill related to the U.S. Lock acquisition. SG&A expenses represented 22.3%
of net sales in fiscal 1999 compared to 22.1% of net sales in fiscal 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $0.9 million or 10.1% to $9.9
million for fiscal 1999 from $8.9 million for fiscal 1998. The provision for
income taxes as a percentage of income before provision for income taxes
represents approximately 39.3% for fiscal 1999 and 38.5% for fiscal 1998.
FISCAL 1998 VERSUS FISCAL 1997
NET SALES
The Company's net sales for fiscal 1998 totaled $199.6 million compared with
$160.1 million in fiscal 1997, an increase of 24.7%. Approximately 73.2% of the
increase in the Company's net sales was derived from the Company's telesales
operations, primarily resulting from increased sales by existing
telesalespersons and the addition of 7 telesalespersons compared to the prior
year. The remainder of the net sales increase was attributable to the outside
sales force, the Company's export division and the acquisition of LeRan Gas
Products. Contributing to the overall increase in net sales was a net increase
of 1,680 in the total number of products offered by the Company over the past
twelve months which contributed approximately $15.6 million to the net sales
increase during the year. Additionally, as a result of an expanded promotional
flyer campaign, the number of active customers increased to 65,000 from 51,000
in the prior year, and these new customers contributed approximately $19.8
million to the net sales increase during the year.
As noted above, contributing to the Company's net sales increase was a 51.3%
increase in export sales, representing a net sales increase of approximately
$4.2 million for the year. This increase in international sales, which currently
represents approximately 6.2% of net sales, was primarily attributable to the
Company's establishment of a small, dedicated international telesales staff in
the prior year to complement the Company's international promotional flyer
mailings. Also, the Company opened its first off-shore distribution center
18
<PAGE> 161
in Puerto Rico in October 1997 which significantly contributed to the export
sales increase in fiscal 1998. Puerto Rico represented the Company's 31st
distribution center; the Company opened its 30th Distribution center in
Milwaukee, Wisconsin in July, 1997 and its 32nd distribution center in
Nashville, Tennessee in December, 1997. These three new distribution centers
averaged a 48.8% sales increase over the base business transferred to them.
GROSS PROFIT
Gross profit increased 23.3% to $67.4 million in fiscal 1998 from $54.7
million in fiscal 1997. Gross profit margins decreased to 33.8% in fiscal 1998
from 34.2% in fiscal 1997 primarily as a result of the acquisition of LeRan Gas
Products, whose historical margins have been lower due to product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $9.0
million, or 25.6%, to $44.1 million for fiscal 1998 from $35.1 million for
fiscal 1997. The increase was primarily due to the increased sales volume which
required additional staffing and support. Increased promotional flyer mailings
during the year, as well as increased freight and delivery costs associated with
the United Parcel Service strike in the first quarter of the fiscal year, also
played contributing roles to the overall expense increase. Occupancy costs
associated with the expansion of several distribution centers in the prior year
combined with occupancy costs and start up costs related to the three new
distribution centers this fiscal year are also primary reasons for the increased
expense level. SG&A expenses represented 22.1% of net sales in fiscal 1998
compared to 21.9% of net sales in fiscal 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $1.4 million or 18.8% to $8.9
million for fiscal 1998 from $7.5 million for fiscal 1997. The provision for
income taxes as a percentage of income before provision for income taxes
represents approximately 38.5% for fiscal 1998 and fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At June 30, 1999, the Company had working capital of $70.3 million and
a current ratio of 3.9 to 1.
Net cash provided by operating activities totaled $10.5 million for the
year ended June 30, 1999 compared to $7.6 million for the year ended June 30,
1998.
Net cash used in investing activities totaled $40.0 million for the
year ended June 30, 1999 compared to $13.0 million for the year ended June 30,
1998. These investments related primarily to the acquisition of U.S. Lock,
improved management information systems and the expansion and/or relocation of
several of the Company's distribution centers to accommodate new product
offerings.
Net cash provided by financing activities was $32.5 million for the
year ended June 30, 1999 compared to $1.4 million for the year ended June 30,
1998. Net cash provided by financing activities in fiscal 1999 represents a term
loan received in connection with the U.S. Lock acquisition.
In April 1996, the Company entered into a revolving credit agreement
with First Union National Bank of Florida ("First Union") for an unsecured
three-year credit facility providing borrowings of up to $15.0 million,
including a letter of credit subfacility of $4.0 million. On January 6, 1999, in
connection with the acquisition of U.S. Lock, (See Note 10 to the accompanying
financial statements) the Company entered into an amended and restated credit
agreement, the ("credit agreement"), with First Union. The credit agreement
provides for an unsecured revolving credit facility and letter of credit
facility providing borrowings of up to $15.0 million expiring December 31, 2001,
and a seven year term loan of $33.0 million, proceeds of which were used to
purchase U.S. Lock. Borrowings under the revolving
19
<PAGE> 162
credit facility bear interest at LIBOR plus 75 basis points. The Company is
required to pay a commitment fee of 0.1% per annum on the unused commitment. The
Company entered into an interest rate swap to minimize the risk and costs
associated with changes in interest rates. The swap agreement is a contract to
exchange the variable rate of three-month LIBOR + .825% on its term loan for
fixed interest payments of 6.29%, payable quarterly. The interest rate swap has
a notional amount of $33.0 million and a maturity date of December 31, 2005,
corresponding with the term loan. The interest rate swap had a fair value of
$1.0 million at June 30, 1999. The outstanding principal balance of the term
loan is payable in 19 equal and consecutive quarterly payments of 1/20th of the
original outstanding balance of the term loan commencing on April 30, 2001. All
remaining unpaid principal and all accrued and unpaid interest thereon is due
and payable in full on December 31, 2005.
The credit agreement contains customary affirmative and negative
covenants, including certain covenants requiring the Company to maintain debt to
net worth, interest coverage and current ratios, as well as a minimum net worth
test. The Company was in compliance with all covenants at June 30, 1999. At June
30, 1999, there were $0 of borrowings under the revolving credit agreement and
there were $3.2 million of letters of credit outstanding.
Generally, cash flow from operations has been sufficient to fund the
Company's growth. The Company believes that funds generated from operations,
together with funds available under the credit facility discussed above, will be
sufficient to fund the Company's current and foreseeable operational needs and
growth strategy. The Company has budgeted capital expenditures in fiscal 2000 of
approximately $8.0 million, which the Company expects to fund out of cash flow
from operations. These capital expenditures are primarily for (i) expansion and
reprofiling of several of the Company's existing distribution centers and (ii)
enhancements to management information systems.
20
<PAGE> 163
YEAR 2000 ISSUE
---------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or in miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, to send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.
The Company has identified all computer-based systems and applications
(including embedded systems) that are not Year 2000 compliant and has determined
what revisions, replacements or updates are needed to achieve compliance.
Management believes that most of the systems are compliant currently.
The Company has put in place project teams dedicated to implementing a
Year 2000 solution. The teams have actively worked to achieve the objectives of
Year 2000 compliance. The work included the modification of certain existing
systems, replacing hardware and software for other systems, the creation of
contingency plans, and surveying suppliers of goods and services with whom the
Company does business.
The Company is using standard methodology with three phases for the
Year 2000 compliance project. Phase I includes conducting a complete inventory
of potentially affected areas of the business (including information technology
and non-information technology), assessing and prioritizing the information
collected during the inventory, and completing project plans to address all key
areas of the project. Phase II includes the remediation and testing of all
mission critical areas of the project, surveying suppliers of goods and services
with whom the Company does business, and the creation of contingency plans to
address potential Year 2000 related problems. Phase III of the project includes
the remediation and testing of non-mission critical areas of the project, and
the implementation of contingency plans as may be necessary. The Company
completed Phase I and Phase II. Phase III is in process with an expected
completion date of September 30, 1999.
The Company has used both internal and external resources to reprogram,
replace, and test the software and hardware for Year 2000 compliance. Year 2000
work for mission critical and most non-mission critical systems and testing of
all system revisions is complete. The expenses associated with this project
include both a reallocation of existing internal resources plus the use of
outside services. Project expenses to date amount to an estimated $35,000. The
total remaining expenses associated with the Year 2000 project are estimated to
be between $5,000 - $10,000. These project expenses will be funded through the
Company's operating cash flows.
In addition to addressing internal systems, the Company's Year 2000
project team is surveying suppliers of goods and services with whom the Company
does business. This is being done to determine the extent to which the Company
is vulnerable to failures by third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies,
including those on which the Company's systems interact, will be timely
converted. A failure to convert by another company on a timely basis or a
conversion by another company that is incompatible with the Company's systems,
may have an adverse effect on the Company.
As part of Phase II of the Year 2000 project, the Company is creating
contingency plans to address potential Year 2000 related problems with key
business processes. These plans are expected to address risks to the Company's
systems as well as risks from third party suppliers, customers, and others with
whom the Company does business. It is recognized that while the Company cannot
eliminate all potential risks, the effect of the risks on the business can be
partially mitigated by creating and testing contingency plans where appropriate.
INFLATION
---------
21
<PAGE> 164
The Company does not believe inflation has had a material impact on
earnings during the past several years. Although substantial increases in
product costs, labor, and other operating expenses could adversely affect the
operations of the Company and the home repair and remodeling supply market,
management believes it can recover such increases by increasing prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result
of its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and operations. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. In seeking to minimize the risks
and/or costs associated with such activities, the Company manages its exposure
to such risk through its regular financing activities and by entering into an
interest rate swap (See Note 3 in Item 14a). The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are listed in Item 14(a) and are included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 10, 11, 12 and 13 will be contained
in the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended June 30, 1999
and such information is incorporated herein by reference. Certain information
concerning the executive officers of the Company is set forth in Part I under
the caption "Executive Officers of the Registrant."
22
<PAGE> 165
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The following financial statements and schedules of the Company are included as
Part II, Item 8 of this Form 10-K:
--------------------------------------------------------------------------------
(1) Consolidated Financial Statements Page
--------------------------------- ----
Report of Independent Certified Public F-1
Accountants
--------------------------------------------------------------------------------
Consolidated Balance Sheets - June 30, F-2 to F-3
1999 and June 30, 1998
--------------------------------------------------------------------------------
Consolidated Statements of Income for the F-4
years ended June 30, 1999, 1998 and 1997
--------------------------------------------------------------------------------
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1999,
1998 and 1997 F-5
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for
the years ended June 30, 1999, 1998 and
1997 F-6
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-7 to F-14
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(2) Supplementary Financial Information F-15
-----------------------------------
--------------------------------------------------------------------------------
(b) Financial Statement Schedule II, Valuation and Qualifying Accounts and
Reserves for each of the three years ended June 30, 1999.
(C) Exhibits:
Exhibit Number Exhibits
-------------- --------
3.2(2) Amended and Restated Certificate of Incorporation of Barnett
Inc.
3.4(3) Amended and Restated By-Laws of Barnett Inc.
10.1(1) Tax sharing agreement dated May 20, 1994 among Barnett Inc.,
Waxman USA Inc., Waxman Industries, Inc., each member of the
Waxman Group (as defined therein) and each member of the Waxman
USA Group (as defined therein).
10.3(4) Intercorporate Agreement dated March 28, 1996 among Barnett
Inc., Waxman Industries Inc., Waxman Consumer Products Group
Inc., WOC Inc. and TWI, International, Inc.
10.4(4) Registration Rights Agreement dated March 28, 1996 by and
between Barnett Inc. and Waxman Industries, Inc.
10.5(1) Trademark License Agreement dated May 20, 1994 by and between
Barnett Inc. and Waxman Consumer Products Group Inc.
*10.7(3) Amended and Restated Employment Agreement dated March 8, 1996
between Barnett Inc. and William R. Pray.
*10.8(2) Omnibus Incentive Plan of Barnett Inc.
*10.9(2) Stock Purchase Plan of Barnett Inc.
10.10 Amended Revolving Credit Agreement dated January 6, 1999
between Barnett Inc. and First Union National Bank of Florida.
*10.11(5) 1996 Stock Option Plan for Non-Employee Directors of Barnett
Inc.
10.12(4) Standstill Agreement dated March 28, 1996, between Waxman
Industries, Inc., and Barnett Inc.
*10.13(6) Barnett Inc. Profit Sharing and 401(K) Retirement Plan.
23
<PAGE> 166
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
1 Incorporated by reference to the exhibit of the same number contained in
the Company's Registration Statement on Form S-1 (the "Registration
Statement"), Registration No. 333- 829, filed with Securities and Exchange
Commission (the "SEC") on February 1, 1996.
2 Incorporated by reference to the exhibit of the same number contained in
Amendment No. 1 to the Company's Registration Statement, Registration No.
333-829, filed with SEC on March 5, 1996.
3 Incorporated by reference to the exhibit of the same number contained in
Amendment No. 3 to the Company's Registration Statement, Registration No.
333-829, filed with the SEC on March 25, 1996.
4 Incorporated by reference to the exhibit of the same number contained in
the Company's Annual Report on Form 10-K for the year ended June 30, 1996.
5 Incorporated by reference to the exhibit of the same number contained in
the Company's Registration Statement on Form S-1, Registration No.
333-22453, filed with the SEC on February 27, 1997.
6 Incorporated by reference to Exhibit 4.1 contained in the Company's
Registration Statement on Form S-8, Registration No. 333-30485, filed with
the SEC on June 30, 1997.
* Management contract or compensatory plan or arrangement.
(d) Reports on Form 8-K
None
24
<PAGE> 167
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BARNETT INC.
By /s/ WILLIAM R. PRAY
---------------------------
William R. Pray
Dated: September 22, 1999 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ WILLIAM R. PRAY President, Chief Executive Officer and Director September 22, 1999
---------------------- (Principal Executive Officer)
William R. Pray
/s/ ANDREA M. LUIGA Vice President - Finance and Chief Financial September 22, 1999
---------------------- Officer (Principal Financial and Accounting
Andrea M. Luiga Officer)
/s/ MELVIN WAXMAN Chairman of the Board and Director September 22, 1999
----------------------
Melvin Waxman
/s/ ARMOND WAXMAN Vice-Chairman of the Board and Director September 22, 1999
----------------------
Armond Waxman
/s/ SHELDON ADELMAN Director September 22, 1999
----------------------
Sheldon Adelman
/s/ MORRY WEISS Director September 22, 1999
----------------------
Morry Weiss
</TABLE>
25
<PAGE> 168
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Barnett Inc.and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Barnett
Inc. (a Delaware corporation) and subsidiaries, as of June 30, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Barnett Inc. and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 8, Financial
Statements and Supplementary Data, is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, based on our audits, fairly states in all material aspects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
August 16, 1999
F-1
<PAGE> 169
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
June 30,
--------
1999 1998
---- ----
Current Assets:
Cash $ 3,421 $ 450
Accounts receivable, net 35,914 28,866
Inventories 52,733 40,599
Prepaid expenses 2,873 2,139
--------- ---------
Total current assets 94,941 72,054
--------- ---------
Property and Equipment:
Machinery and equipment 19,352 15,252
Furniture and fixtures 4,662 3,378
Leasehold improvements 8,265 6,620
Building and improvements 7,281 3,668
--------- ---------
39,560 28,918
Less accumulated depreciation
and amortization (15,978) (11,876)
--------- ---------
23,582 17,042
--------- ---------
Cost of Businesses in Excess of Net
Assets Acquired, net 27,353 4,815
Deferred Tax Assets, net 857 716
Other Assets 2,453 1,157
--------- ---------
$ 149,186 $ 95,784
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-2
<PAGE> 170
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
--------
1999 1998
---- ----
Current Liabilities:
Accounts payable $ 20,061 $ 16,247
Accrued liabilities 4,061 2,297
Accrued income taxes 151 365
Accrued interest 342 --
Short - term debt -- 714
-------- --------
Total current liabilities 24,615 19,623
-------- --------
Commitments and Contingencies (Notes
3,5,6,7,8, and 9)
Long - Term Debt 33,000 --
Stockholders' Equity:
Serial preferred stock, $ 0.10 par value,
10,000 shares authorized, 0 shares
issued and outstanding at June 30, 1999
and 1998 -- --
Common stock, $ 0.01 par value,
40,000 shares authorized, 16,218 and
16,194 issued and outstanding at
June 30, 1999 and 1998, respectively 162 161
Paid-in capital 47,937 47,743
Retained earnings 43,472 28,257
-------- --------
91,571 76,161
-------- --------
$149,186 $ 95,784
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-3
<PAGE> 171
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
---- ---- ----
Net sales $241,374 $199,578 $160,068
Cost of sales 161,183 132,135 105,376
-------- -------- --------
Gross profit 80,191 67,443 54,692
Selling, general and administrative
expenses 53,906 44,061 35,068
-------- -------- --------
Operating income 26,285 23,382 19,624
Interest expense, net 1,217 157 59
-------- -------- --------
Income before provision for
income taxes 25,068 23,225 19,565
Provision for income taxes 9,853 8,948 7,530
-------- -------- --------
Net income $ 15,215 $ 14,277 $ 12,035
======== ======== ========
Earnings per common share:
Basic $ 0.94 $ 0.88 $ 0.76
Diluted $ 0.94 $ 0.87 $ 0.75
Weighted average shares used:
Basic 16,195 16,179 15,785
Diluted 16,200 16,341 15,987
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-4
<PAGE> 172
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
SERIAL STOCK-
PREFERRED COMMON PAID-IN RETAINED HOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 127 $ 143 $ 39,109 $ 1,945 $ 41,324
Net income 12,035 12,035
Net proceeds from issuance
of common stock 4 6,649 6,653
Conversion of 1,271 shares of
preferred stock to common
stock (127) 13 114 --
Common stock issued for:
Exercise of options 184 184
Employee stock plans 415 415
-------- -------- -------- -------- --------
Balance June 30, 1997 -- 160 46,471 13,980 60,611
Net income 14,277 14,277
Common stock issued for:
Acquisition of LeRan Gas Products 600 600
Exercise of options 1 415 416
Employee stock plans 195 195
Tax benefits related to
stock option plans 62 62
-------- -------- -------- -------- --------
Balance June 30, 1998 -- 161 47,743 28,257 76,161
Net income 15,215 15,215
Common stock issued for:
Exercise of options 1 79 80
Employee stock plans 49 49
Tax benefits related to
stock option plans 66 66
-------- -------- -------- -------- --------
Balance June 30, 1999 $ -- $ 162 $ 47,937 $ 43,472 $ 91,571
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-5
<PAGE> 173
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS:
Net income $ 15,215 $ 14,277 $ 12,035
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 4,933 3,813 2,406
Deferred taxes (141) (365) 149
Changes in assets and liabilities
(net of businesses acquired):
Accounts receivable, net (4,160) (6,186) (4,157)
Inventories (5,944) (4,840) (6,410)
Prepaid expenses (791) (753) (262)
Other assets (1,213) (295) (1,373)
Accounts payable 2,088 2,258 (574)
Accrued liabilities 516 (292) 2
-------- -------- --------
Net cash provided by operations 10,503 7,617 1,816
-------- -------- --------
INVESTMENTS:
Capital expenditures, net (7,013) (9,783) (6,346)
Acquisition of LeRan Gas Products -- (3,200) --
Acquisition of U.S. Lock (33,000) -- --
-------- -------- --------
Net cash used for investments (40,013) (12,983) (6,346)
-------- -------- --------
FINANCING:
Net proceeds from issuance of Common Stock 195 673 7,252
Borrowings under credit agreement 48,727 39,414 30,592
Payments under credit agreement (49,441) (38,700) (30,592)
Borrowings in connection with acquisition
of U.S. Lock 33,000 -- --
-------- -------- --------
Net cash provided by
financing 32,481 1,387 7,252
-------- -------- --------
Net increase (decrease) in cash 2,971 (3,979) 2,722
Balance, beginning of period 450 4,429 1,707
-------- -------- --------
Balance, end of period $ 3,421 $ 450 $ 4,429
======== ======== ========
</TABLE>
F-6
<PAGE> 174
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
BARNETT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
----------------------------------------------------------------------
A. Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Barnett Inc.(a Delaware corporation) and its wholly owned
subsidiaries (collectively, the "Company"). All intercompany accounts
and transactions have been eliminated.
B. Business
The Company operates in a single business segment -- the distribution
of plumbing, electrical, hardware and security hardware products,
utilizing mail order catalogs and a telesales program. The Company's
various products are economically similar and do not require separate
segment reporting.
C. Accounts Receivable
The Company's trade receivables are exposed to credit risk. The
majority of the market served by the Company is comprised of numerous
individual accounts, none of which is individually significant. The
Company monitors the creditworthiness of its customers on an ongoing
basis and provides a reserve for estimated bad debt losses. The Company
had allowances for doubtful accounts of $1,980 and $1,231 for June 30,
1999 and 1998, respectively. Bad debt expense totaled $872 in fiscal
1999, $616 in fiscal 1998, and $621 in fiscal 1997.
D. Inventories
At June 30, 1999 and 1998, inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. The Company regularly
evaluates its inventory carrying value, with appropriate consideration
given to any excess and/or slow-moving inventories.
E. Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, machinery and equipment and furniture and fixtures are
depreciated on a straight-line basis over their estimated useful lives
of 5 to 7 years. Leasehold improvements are amortized over the life of
the improvement or remaining period of the lease, whichever is shorter.
Building and improvements are depreciated on a straight-line basis over
their estimated useful life of 39 years. Expenditures for maintenance
and repairs are charged against income as incurred. Betterments which
increase the value or materially extend the life of the assets are
capitalized and amortized over the period which the life is extended.
For income tax purposes, accelerated methods are used. Depreciation and
amortization expense totaled $4,144 in fiscal 1999, $3,183 in fiscal
1998 and $2,278 in fiscal 1997.
F. Cost of Businesses in Excess of Net Assets Acquired
Cost of businesses in excess of net assets acquired is being amortized
over 40 years, using the straight-line method. Management has evaluated
its accounting for goodwill, considering such factors as historical
profitability and future undiscounted operating cash flows, and
believes that the asset is realizable and the amortization period is
appropriate. Goodwill amortization expense totaled $470 in fiscal 1999,
$173 in fiscal 1998 and $128 fiscal 1997. The accumulated amortization
of goodwill at June 30, 1999 and 1998 was $2,183 and $1,713,
respectively. The Company periodically assesses all long-lived assets,
including goodwill, to determine if there is impairment. Based on these
evaluations, there were no adjustments in the carrying value of the
long-lived assets for fiscal 1999 and 1998.
G. Deferred Advertising
F-7
<PAGE> 175
Costs of producing and distributing sales catalogs and promotional
flyers are capitalized and charged to expense in the periods in which
the related sales occur. Total advertising expense capitalized was $752
and $802 in fiscal years 1999 and 1998, respectively. Total advertising
expenses were $2,922, $2,313 and $1,214 in fiscal years 1999, 1998 and
1997, respectively.
H. Deferred Start-Up Costs
Costs of establishing local distribution centers are capitalized and
charged to expense over a 12 month period. Total capitalized start-up
costs were $207, $148 and $283 in fiscal years 1999, 1998, and 1997,
respectively. Amortization expense totaled $319, $456, and $96 in
fiscal years 1999, 1998, and 1997, respectively. Statement of Position
("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities",
which is effective for fiscal years beginning after December 15, 1998,
requires all start-up and organizational costs to be expensed as
incurred. The Company adopted this statement on July 1, 1999.
I. Income Taxes
The Company uses the asset and liability method in accounting for
income taxes. Deferred income taxes result from the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
J. Revenue Recognition
The Company records sales as orders are shipped to or picked up by the
customer.
K. Earnings Per Share
Basic earnings per share is calculated based on weighted average number
of shares of common stock outstanding. Diluted earnings per share is
calculated based on the weighted average number of shares of common
stock outstanding and common stock equivalents, consisting of
outstanding stock options. Common stock equivalents are determined
using the treasury method for diluted shares outstanding. The
difference between diluted and basic shares outstanding are common
stock equivalents from stock options outstanding in the years ended
June 30, 1999, 1998, and 1997. The earnings per share calculations for
fiscal 1997 additionally assume the conversion of outstanding
convertible preferred stock.
L. Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
M. Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash, trade receivables, and accounts payable, approximate their fair
values due to the short-term nature of these assets and liabilities.
N. Stock-Based Compensation
The Company accounts for its stock-based compensation plan using the
intrinsic value approach of Accounting Principles Board ("APB")
Statement No. 25 "Accounting for Stock-Based Compensation". The Company
has adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation". In accordance with SFAS No. 123, for
footnote disclosure purposes only, the Company computes its earnings
and earnings per share on a pro forma basis as if the fair value method
had been applied.
O. Statements of Cash Flows
The Company's investing and financing activities were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Business Acquisitions
Fair value of identifiable asset acquired $12,015 $ 3,500 --
Liabilities assumed 2,023 996 --
Issuance of common stock -- 600 --
Tax benefit related to stock options 66 62 $ 184
</TABLE>
F-8
<PAGE> 176
F-9
<PAGE> 177
P. Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," to be effective for financial statements issued for fiscal
years beginning after December 31, 1997. SFAS 130 requires companies to
display the components of comprehensive income with the same prominence
as the other financial statements for all periods presented. The
Company does not have any comprehensive income items as of June 30,
1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," to be effective for
financial statements issued for fiscal years beginning after December
15, 1997. The statement establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports to shareholders. The Company operates in a single business
segment so no additional disclosures are required.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments
(including certain derivative instruments imbedded in other contracts).
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The adoption of this standard is not expected to have a material
impact on reported results of the Company's operations.
2. SALE OF COMMON STOCK
--------------------
In April 1997, the Company consummated a secondary public offering
pursuant to which 425 and 1,300 shares were sold by the Company and its
former parent, Waxman USA Inc. ("Waxman"), respectively, resulting in
net proceeds of approximately $6.7 million to the Company. The Company
used approximately $3.1 million to repay borrowings under its credit
facility and the remainder for working capital. Subsequent to the
secondary public offering, Waxman converted the remainder of the
convertible non-voting preferred stock of the Company to common stock.
As a result of the secondary offering and the subsequent conversion of
preferred stock, Waxman owned 44.3% of the Company's common stock as of
June 30, 1999 and 44.4% as of June 30, 1998.
3. DEBT
----
In April 1996, the Company entered into a revolving credit agreement
with First Union National Bank of Florida ("First Union") for an
unsecured three-year credit facility providing borrowings of up to
$15.0 million, including a letter of credit subfacility of $4.0
million. On January 6, 1999, in connection with the acquisition of U.S.
Lock, (See Note 10 to the accompanying financial statements) the
Company entered into an amended and restated credit agreement, the
("credit agreement"), with First Union. The credit agreement provides
for an unsecured revolving credit facility and letter of credit
facility providing borrowings of up to $15.0 million expiring December
31, 2001, and a seven year term loan of $33.0 million, proceeds of
which were used to purchase U.S. Lock. Borrowings under the revolving
credit facility bear interest at LIBOR plus 75 basis points. The
Company is required to pay a commitment fee of 0.1% per annum on the
unused commitment. The Company entered into an interest rate swap to
minimize the risk and costs associated with changes in interest rates.
The swap agreement is a contract to exchange the variable rate of
three-month LIBOR + .825% on its term loan for fixed interest rate
payments of 6.29%, payable quarterly. The interest swap has a notional
amount of $33.0 million and a maturity date of December 31, 2005,
corresponding with the term loan. The interest rate swap had a fair
value of $1.0 million at June 30, 1999. The outstanding principal
balance of the term loan is payable in 19 equal and consecutive
quarterly payments of 1/20th of the original outstanding balance of the
term loan commencing on April 30, 2001. All remaining unpaid principal
and all accrued and unpaid interest thereon is due and payable in full
on December 31, 2005.
The credit agreement contains customary affirmative and negative
covenants, including certain covenants requiring the Company to
maintain debt to net worth, interest coverage and current ratios, as
well as a minimum net worth test. At June 30, 1999, there were $0 of
borrowings under the revolving credit agreement and there were $3.2
million of letters of credit outstanding.
The Company made interest payments of $891 in fiscal 1999, $164 in
fiscal 1998 and $116 in fiscal 1997.
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
an asset and liability approach and
F-10
<PAGE> 178
deferred taxes are determined based on the estimated future tax effects
of differences between the financial and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The
provisions for income taxes are detailed as follows:
F-11
<PAGE> 179
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
---- ---- ----
Current:
U.S. Federal $ 8,690 $ 8,095 $ 6,697
State 1,304 1,218 684
------- ------- -------
9,994 9,313 7,381
Deferred (141) (365) 149
------- ------- -------
$ 9,853 $ 8,948 $ 7,530
======= ======= =======
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The deferred tax
assets and liabilities are as follows:
JUNE 30,
--------
1999 1998
---- ----
Inventories $ 970 $ 781
Accounts receivable 476 539
Accrued benefits 242 176
Other 292 214
------- -------
Deferred tax assets 1,980 1,710
------- -------
Property (733) (628)
Deferred costs (390) (366)
------- -------
Deferred tax liabilities (1,123) (994)
------- -------
$ 857 $ 716
======= =======
The following table reconciles the U.S. statutory rate applied to
pretax income to the Company's provision for income taxes:
FISCAL YEAR ENDED JUNE 30,
1999 1998 1997
---- ---- ----
U.S. Statutory rate applied
to pretax income $ 8,776 $ 8,129 $ 6,848
State taxes, net 848 792 650
Goodwill amortization 181 49 44
Other 48 (22) (12)
------- ------- -------
Provision for income taxes $ 9,853 $ 8,948 $ 7,530
======= ======= =======
All deferred tax accounts are considered to be realizable due to
assumed future taxable income; thus, no valuation allowance has been
recorded against the deferred tax assets.
The Company made federal income tax payments of $8,972, $7,876 and
$7,250 in fiscal 1999, 1998 and 1997, respectively, and state income
tax payments of $2,025, $1,496 and $719 in fiscal 1999, 1998 and 1997,
respectively.
5. LEASE COMMITMENTS
-----------------
F-12
<PAGE> 180
The Company leases its distribution centers and office facilities as
well as certain equipment under operating lease agreements, which
expire at various dates through 2009 with, in some cases, options to
extend the terms of the leases.
Future minimum payments, by year and in the aggregate, consist of the
following at June 30, 1999:
2000 $4,517
2001 4,475
2002 4,069
2003 3,216
2004 2,352
Thereafter 5,181
-----
Total future minimum lease $23,810
payments =======
Total rent expense was $4,104 in fiscal 1999, $3,458 in fiscal 1998 and
$2,503 in fiscal 1997.
6. BENEFIT PLANS
-------------
During fiscal 1997, the Company established a 401(k) retirement plan
for employees. Employees are able to contribute up to 15% of pretax
compensation and control the investment options for their entire
account. Employees vest in Company contributions ratably over 5 years
of service.
Company contributions to the 401(k) plan are discretionary and may be
changed each year as determined by the Board of Directors. In fiscal
1999 and 1998, the Company contributed $251 and $209, respectively, in
matching contributions to the Company's 401(k) plan. The Board of
Directors approved a 50% match of up to 4% of employee contributions
for fiscal 2000.
The Company offers no other post-retirement or post-employment benefits
to its employees.
7. EMPLOYEE STOCK PLANS
--------------------
The Company has established an Omnibus Incentive Plan (the "Omnibus
Plan") and an Employee Stock Purchase Plan ("ESPP") under which an
aggregate of 1,500 shares of common stock may be subject to awards.
Under the Omnibus Plan, awards may be granted for no consideration and
consist of stock options and other stock based awards. The Omnibus Plan
was designed to provide an incentive to the officers and other key
employees of the Company by making available to them an opportunity to
acquire a proprietary interest in the Company.
In fiscal 1999, 1998 and 1997, the Company granted options to employees
which vest over four years and are exercisable for a ten year period.
The following table sets forth stock options granted, exercised,
canceled, expired and outstanding for each of the fiscal years ended
1999, 1998 and 1997:
F-13
<PAGE> 181
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 937.4 $18.02 780.0 $16.91 507.5 $14.04
Granted 152.5 $13.71 215.0 $21.80 303.5 $21.43
Exercised (5.7) $14.00 (26.2) $14.00 (13.0) $14.04
Canceled / Expired (49.0) $18.17 (31.4) $19.63 (18.0) $14.04
------- ----- -----
Outstanding at end of 1,035.2 $17.39 937.4 $18.02 780.0 $16.91
year ======= ===== =====
Exercisable at end of 497.6 $16.86 276.7 $15.97 109.9 $14.04
year
Weighted average fair
value of options
granted during the
year $ 7.18 $9.51 $9.84
</TABLE>
As of June 30, 1999, 785 shares of common stock are available for
issuance under the plan. The information relating to the different
ranges of exercise prices of stock options as of June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Options Options Exercisable
------- -------------------
Outstanding
-----------
Weighted
Number of Average Weighted Number of
Options Remaining Average Options
Actual Range of Outstanding Contractual Exercise Exercisable Weighted Average
Exercise Prices at 6/30/99 Life Price at 6/30/99 Exercise Price
--------------- ---------- ---- ----- ---------- --------------
<S> <C> <C> <C> <C> <C>
$ 8.50 to $12.75 47.0 9.5 $10.25 0
$13.25 to $19.75 519.5 7.2 $14.27 309.4 $14.04
$20.25 to $27.25 468.7 7.6 $21.56 188.2 $21.49
------- -----
$ 8.50 to $27.25 1,035.2 7.5 $17.39 497.6 $16.86
======= =====
</TABLE>
The Company has chosen to continue to account for its options under the
provisions of APB Statement No. 25 "Accounting for Stock Issued to
Employees" and thus has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option plans, as
the exercise price of options granted were equal to the fair value at
the date of grant. Pro forma net income and net income per share for
the fiscal years ended 1999, 1998, and 1997, assuming the Company had
accounted for the plans as defined in SFAS No. 123, are as follows:
1999 1998 1997
---- ---- ----
Net Income-as reported $15,215 $14,277 $12,035
Net Income-pro forma $13,297 $12,422 $10,783
Basic Net Income per
share- as reported $ 0.94 $ 0.88 $ 0.76
Basic Net Income per
share- pro forma $ 0.82 $ 0.77 $ 0.68
Diluted Net Income per
F-14
<PAGE> 182
share-as reported $0.94 $0.87 $0.75
Diluted Net Income per
share- pro forma $0.82 $0.76 $0.67
The assumptions regarding the stock options issued to executives in
fiscal 1999 and fiscal 1998 are that the options vest equally over four
years. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions. In fiscal 1999: dividend yield of 0.0%; expected
volatility of 55.0%; risk free interest rate of 4.63%; turnover rate of
10% for employees and 0% for executives; and expected life of options
of 5 years. In fiscal 1998: dividend yield of 0.0%; expected volatility
of 38.4%; risk free interest rate of 6.05%; turnover rate of 10% for
employees and 0% for executives; and expected life of options of 5
years. In fiscal 1997: dividend yield of 0.0%; expected volatility of
42.0%; risk free interest rate of 6.31%; turnover rate of 10% for
employees and 0% for executives; and expected life of options of 5
years.
The ESPP enables employees of the Company to subscribe for shares of
common stock on annual offering dates at a purchase price which is 85%
of the fair market value of the shares on the first day of the annual
period. Employee contributions to the ESPP were $49, $195, and $415 for
fiscal 1999, 1998, and 1997, respectively. Pursuant to the ESPP, 6, 11,
and 35 shares were issued to employees during fiscal 1999, 1998, and
1997, respectively.
8. RELATED PARTY TRANSACTIONS
--------------------------
The Company engages in business transactions with Waxman Industries and
its subsidiaries. Products purchased for resale from Waxman Industries
and its subsidiaries totaled $18,176 in fiscal 1999, $15,307 in fiscal
1998 and $13,702 in fiscal 1997. Sales to these entities totaled $79 in
fiscal 1999, $517 in fiscal 1998 and $140 in fiscal 1997. The Company
also entered into a five year rental agreement with Waxman Industries
in fiscal 1998 for the leasing of a warehouse facility in the normal
course of business. The Company prepaid all rent totaling $500. This
warehouse facility was purchased as part of the U.S. Lock acquisition
(See Note 10) and any unamortized prepaid rent was reduced from the
purchase price of the acquisition. See Note 10 for the acquisition of
LeRan Gas Products and US Lock Corporation.
The Company and Waxman Industries provide to, and receive from each
other certain selling, general and administrative services,("S,G&A")
expenses, and reimburse each other for out-of-pocket disbursements
related to those services. The Company charged Waxman and was
reimbursed for $293, $431 and $1,056 for S,G&A expenses in each of
fiscal 1999, 1998 and 1997. The Company was charged by and reimbursed
Waxman $65, $0 and $217 for S,G&A expenses in each of fiscal 1999, 1998
and 1997.
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management,
the amount of any ultimate liability with respect to these actions will
not materially affect the Company's financial position, liquidity or
results of operations.
10. ACQUISITIONS
------------
On July 1, 1997, the Company acquired substantially all of the assets
of LeRan Gas Products, an operating unit of Waxman Industries,
accounted for using the purchase method of accounting. The acquisition
price was $3.8 million, of which $3.2 million was paid in cash and the
remainder was paid by the issuance to Waxman of 25 shares of the common
stock of the Company. The operations related to these assets, which are
not material to the Company's financial statements, have been included
in the results of the Company since the date of acquisition.
On January 8, 1999, Barnett Inc. acquired the U.S. Lock ("U.S. Lock")
division of WOC, Inc., an indirect wholly-owned subsidiary of Waxman
Industries, Inc. for a cash purchase price of approximately $33.0
million and the assumption of liabilities of approximately $2.0
million. The effective date of the U.S. Lock acquisition was January 1,
1999.
F-15
<PAGE> 183
The acquisition of U.S. Lock was accounted for as a purchase.
Accordingly, the purchase price was allocated to the net identifiable
assets acquired based upon their estimated fair market values. The
excess of the purchase price over the estimated fair value of net
assets acquired amounted to approximately $23.0 million. This has been
accounted for as goodwill and is being amortized over 40 years using
the straight line method.
The following unaudited pro forma information presents a summary of
consolidated results of operations of Barnett Inc. and U.S. Lock as if
the acquisition had occurred at the beginning of fiscal year 1998, with
pro forma adjustments to give effect to amortization of goodwill,
interest expense on acquisition debt and certain other adjustments,
together with related income tax effects (dollars in thousands, except
per share data).
<TABLE>
<CAPTION>
-------------------------- ----------- ------------ -------------- --- ---------------
Fiscal Year Fiscal Year
-------------------------- ----------- ------------ Ended 6-30-99 --- Ended 6-30-98
-------------------------- ----------- ------------ -------------- --- ---------------
<S> <C> <C> <C> <C>
Net sales $254,736 $222,339
-------------------------- ----------- ------------ -------------- --- ---------------
Net income $ 15,281 $ 14,092
-------------------------- ----------- ------------ -------------- --- ---------------
Diluted earnings per share $ 0.94 $ 0.86
-------------------------- ----------- ------------ -------------- --- ---------------
</TABLE>
F-16
<PAGE> 184
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Results of Operations:
The following is a summary of the unaudited quarterly results of
operations for the fiscal years ended June 30, 1999 and 1998 (in thousands,
except per share amounts)
---------- --------------- ---------------- ------------ --------------
Diluted
---------- --------------- ---------------- ------------ --------------
Earnings
---------- --------------- ---------------- ------------ --------------
Net Gross Net Per
---------- --------------- ---------------- ------------ --------------
Sales Profit Income share
----- ------ ------ -----
---------- --------------- ---------------- ------------ --------------
1999
---------- --------------- ---------------- ------------ --------------
Fourth $66,984 $22,131 $3,882 $0.24
---------- --------------- ---------------- ------------ --------------
Third 63,879 21,606 3,827 0.24
---------- --------------- ---------------- ------------ --------------
Second 58,120 19,278 4,065 0.25
---------- --------------- ---------------- ------------ --------------
First 52,391 17,176 3,441 0.21
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
1998
---------- --------------- ---------------- ------------ --------------
Fourth $51,577 $17,445 $3,872 $0.24
---------- --------------- ---------------- ------------ --------------
Third 49,465 16,618 3,301 0.20
---------- --------------- ---------------- ------------ --------------
Second 51,767 17,660 3,821 0.23
---------- --------------- ---------------- ------------ --------------
First 46,769 15,720 3,283 0.20
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
---------- --------------- ---------------- ------------ --------------
F-17
<PAGE> 185
BARNETT INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNT AND RESERVES
SCHEDULE II
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Additions Charged to Balance
Balance at Charged to Other at End of
Beginning Costs and Deductions Accounts Period
of Period Expenses (A) (B)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal Year Ended June 30, 1999 $1,231 872 (766) 643 $1,980
Fiscal Year Ended June 30, 1998 $ 864 616 (668) 419 $1,231
Fiscal Year Ended June 30, 1997 $ 722 621 (479) 0 $ 864
</TABLE>
(A) Uncollectible accounts written off, net of recoveries
(B) Allowance for doubtful accounts resulting from the acquisitions of U.S. Lock
in fiscal 1999 and LeRan Gas Products in fiscal 1998.
F-18
<PAGE> 186
Annex F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-21728
BARNETT INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 59-1380437
(State of Incorporation) (I.R.S. Employer
Identification Number)
3333 LENOX AVENUE
JACKSONVILLE, FLORIDA 32254
(Address of Principal Executive Offices) (Zip Code)
(904)384-6530
(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
16,247,444 shares of Common Stock, $.01 par value, were issued and outstanding
as of October 31, 1999.
1
<PAGE> 187
BARNETT INC.
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
-----------------------------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and June 30, 1999 3-4
Consolidated Statements of Income for the Three Months Ended September
30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-12
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
----------
</TABLE>
2
<PAGE> 188
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
BARNETT INC.
------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPT. 30, JUNE 30,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 6,830 $ 3,421
Accounts receivable, net 36,462 35,914
Inventories 54,646 52,733
Prepaid expenses 2,323 2,873
--------- ---------
Total current assets 100,261 94,941
--------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements 8,651 8,265
Furniture and fixtures 4,825 4,662
Machinery and equipment 20,595 19,352
Building and improvements 7,285 7,281
--------- ---------
41,356 39,560
Less accumulated depreciation and amortization (17,122) (15,978)
--------- ---------
Property and equipment, net 24,234 23,582
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 27,160 27,353
DEFERRED TAX ASSETS, NET 857 857
OTHER ASSETS 2,747 2,453
--------- ---------
$ 155,259 $ 149,186
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE> 189
BARNETT INC.
------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPT.30, JUNE 30,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 21,808 $ 20,061
Accrued liabilities 3,286 4,061
Accrued income taxes 1,493 151
Accrued interest 342 342
-------- --------
Total current liabilities 26,929 24,615
-------- --------
Long-Term Debt 33,000 33,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share:
Authorized 40,000 shares; Issued and outstanding
16,237 shares at September 30, 1999 and 16,218 at
June 30, 1999 162 162
Paid-in capital 48,078 47,937
Retained earnings 47,090 43,472
-------- --------
Total stockholders' equity 95,330 91,571
-------- --------
$155,259 $149,186
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE> 190
BARNETT INC.
------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
1999 1998
---- ----
Net sales $ 67,400 $ 52,391
Cost of sales 45,666 35,215
-------- --------
Gross profit 21,734 17,176
Selling, general and administrative expenses 15,217 11,578
-------- --------
Operating income 6,517 5,598
Interest income (expense) (487) (1)
-------- --------
Income before income taxes 6,030 5,597
Provision for income taxes 2,412 2,156
-------- --------
Net income $ 3,618 $ 3,441
======== ========
Earnings per share:
Basic $ 0.22 $ 0.21
Diluted $ 0.22 $ 0.21
Weighted average shares outstanding:
Basic 16,218 16,212
Diluted 16,219 16,274
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 191
BARNETT INC.
------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Net income $ 3,618 $ 3,441
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,391 1,040
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable, net (548) 162
Increase in inventories (1,913) (4,298)
Decrease (Increase) in prepaid expenses 550 (388)
Changes in other assets (348) 431
Increase in accounts payable 1,746 2,175
Increase in accrued liabilities 567 1,499
------- -------
Net Cash Provided by Operating Activities 5,063 4,062
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Capital expenditures, net (1,796) (1,718)
------- -------
Net Cash Used in Investing Activities (1,796) (1,718)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Borrowings under credit agreements -- 5,618
Repayments under credit agreements -- (6,332)
Net proceeds from issuance of common stock 142 78
------- -------
Net Cash Provided by (Used in) Financing Activities 142 (636)
------- -------
NET INCREASE IN CASH 3,409 1,708
BALANCE, BEGINNING OF PERIOD 3,421 450
------- -------
BALANCE, END OF PERIOD $ 6,830 $ 2,158
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 192
BARNETT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 - BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of Barnett Inc. (a
Delaware corporation) and its wholly owned subsidiary, U.S. Lock Corporation
(collectively, the "Company"). All material intercompany transactions have been
eliminated.
The consolidated statements of income for the three months ended September 30,
1999 and 1998, the consolidated balance sheet as of September 30, 1999 and the
consolidated statements of cash flows for the three months ended September 30,
1999 and 1998 have been prepared by the Company without audit, while the
consolidated 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 as of September 30, 1999 and for all periods presented. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been consolidated or omitted. The Company believes that the disclosures
included are adequate and provide a fair presentation of interim period results.
Interim financial statements are not necessarily indicative of financial
position or operating results for an entire year. It is suggested that these
consolidated interim financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 filed with
the Securities and Exchange Commission.
NOTE 2 - BUSINESS
--------
The Company operates in a single business segment -- the distribution of
plumbing, electrical, hardware and security hardware products, utilizing mail
order catalogs and a telesales program. The Company's various products are
economically similar and do not require separate segment reporting.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1999 and 1998 included
income taxes of $0.2 million and $0.5 million, respectively, and interest of
$525,000 and $15,000, respectively.
NOTE 4 - BUSINESS ACQUISITION
--------------------
On January 8, 1999, Barnett Inc. acquired the U.S. Lock ("U.S. Lock") division
of WOC, Inc., an indirect wholly-owned subsidiary of Waxman Industries, Inc. for
a cash purchase price of approximately $33.0 million and the assumption of
liabilities of approximately $2.0 million. The effective date of the U.S. Lock
acquisition was January 1, 1999.
7
<PAGE> 193
The acquisition of U.S. Lock was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based upon their
estimated fair market values. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to approximately $23.0
million. This has been accounted for as goodwill and is being amortized over 40
years using the straight line method.
The following unaudited pro forma information presents a summary of consolidated
results of operations of Barnett Inc. and U.S. Lock as if the acquisition had
occurred at the beginning of fiscal year 1999, with pro forma adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects (dollars
in thousands, except per share data).
Three Months
Ended 9-30-98
--------------------------------------------------
Net sales $58,940
Net income $3,469
Earnings per share $0.21
--------------------------------------------------
NOTE 5 - EARNINGS PER SHARE
------------------
Basic earnings per share is calculated based on weighted average number of
shares of common stock outstanding. Diluted earnings per share is calculated
based on the weighted average number of shares of common stock outstanding and
common stock equivalents, consisting of outstanding stock options. Common stock
equivalents are determined using the treasury method for diluted shares
outstanding. The difference between diluted and basic shares outstanding are
common stock equivalents from stock options outstanding in the quarters ended
September 30, 1999 and 1998.
NOTE 6 - IMPACT OF ACCOUNTING STANDARDS
------------------------------
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The statement establishes accounting and reporting
standards for derivative instruments (including certain derivative instruments
embedded in other contracts). SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of this standard is not expected to
have a material impact on reported results of the Company's operations.
NOTE 7 - ACCOUNTING CHANGE
-----------------
In the first quarter of fiscal year 2000, the Company adopted Statement of
Position ("SOP")No. 98-5, "Reporting on the Costs of Start-Up Activities" which
requires expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. The adoption of this SOP resulted in certain
Balance Sheet re-classifications in addition to write-offs charged directly to
operations, of the costs capitalized as of June 30, 1999.
8
<PAGE> 194
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 "expect", "believe", "intend", "may", "should", "anticipate" and
similar expressions are intended to identify forward looking statements. Such
forward looking statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
including, but not limited to, the risk that the Company may not be able to
implement its growth strategy in the intended manner, risks associated with
currently unforeseen competitive pressures and risks affecting the Company's
industry such as increased distribution costs 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 these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
OVERVIEW
--------
The Company is a direct marketer and distributor of an extensive line of
plumbing, electrical, hardware and security hardware products to approximately
73,400 active customers throughout the United States, the Caribbean and South
America. Effective January 1, 1999, the Company acquired U.S. Lock, a division
of WOC, Inc., a wholly-owned subsidiary of Waxman Industries, Inc., for a cash
purchase price of $33.0 million and the assumption of liabilities estimated at
approximately $2.0 million. The Company 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. The Company markets its products
through six distinct, comprehensive catalogs that target professional
contractors, independent hardware stores, maintenance managers, liquid propane
gas ("LP Gas") dealers and locksmiths. The Company's staff of over 140
knowledgeable telesales, customer service and technical support personnel work
together to serve customers by assisting in product selection and offering
technical advice. To provide rapid delivery and a strong local presence, the
Company has established a network of 40 distribution centers strategically
located in 34 major metropolitan areas throughout the United States and Puerto
Rico. Through these local distribution centers, approximately 70% of the
Company's orders are shipped to the customer on the same day the order is
received. The remaining 30% of the orders are picked up by the customer at one
of the Company's local distribution centers. The Company's strategy of being a
low-cost, competitively priced supplier is facilitated by its volume of
purchases and offshore sourcing of a significant portion of its private label
products. Products are purchased from over 650 domestic and foreign suppliers.
9
<PAGE> 195
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
---------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
NET SALES
---------
Net sales increased $15.0 million, or 28.6% to $67.4 million in the three months
ended September 30, 1999 from $52.4 million in the corresponding prior year
period. Approximately 85.8% of the increase in the Company's net sales was
derived from the Company's telesales operations, primarily resulting from
increased sales by existing telesalespersons and the addition of 11
telesalespersons internally and 24 telesalespersons acquired with U.S. Lock,
compared to the prior year period. The remainder of the net sales increase was
attributable to the Company's outside sales force, integrated account management
teams, factory direct programs and the Company's export division. New customers
garnished from the Company's promotional flyer campaigns contributed
approximately $2.5 million to the net sales increase during the three months
ended September 30, 1999 year. Also contributing to the net sales increase for
three month period was revenue from new product introductions approximating $2.8
million.
As noted above, the Company began an integration of its outside sales force
with its telesales force. The integrated account management provides synergies
with improved customer knowledge, as well as superior customer service and
quicker response times. These integrated account management teams produced
revenue increases in three months ended September 30, 1999 exceeding 21%.
Additionally, the Company's export division, primarily consisting of a small
dedicated international telesales staff, garnished revenue increases in excess
of 30%. Furthermore, the Company continues to invest in its factory direct
programs whereby products are shipped directly to the customer from certain
suppliers and manufacturers. These programs yielded more than 33% revenue
increases in three months ended September 30, 1999.
The Company opened its 33rd distribution center in Birmingham, Alabama in
September 1998 and its 34th distribution center in Parsippany, New Jersey in
March 1999. U.S. Lock opened its 6th distribution center in Dallas, Texas in
March 1999. These three new distribution centers averaged a 38.5% sales increase
over the base business transferred to them in the three months ended September
30, 1999.
GROSS PROFIT
------------
Gross profit increased by 26.5% to $21.7 million in the three months ended
September 30, 1999 from $17.2 million in the corresponding prior year period.
Gross profit margin decreased to 32.2% for the three months ended September 30,
1999 from 32.8% for the same period last year, primarily as a result of the
aforementioned increased activity in the Company's direct sales programs, which
typically carry much lower gross profit margins than the Company's warehouse
shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 31.4% to $15.2
million for the three months ended September 30, 1999, from $11.6 million for
the comparable prior year period. The increase is primarily due to combining the
expenses of U.S. Lock along with
10
<PAGE> 196
occupancy and other expenses related to the opening of three new distribution
centers in the prior year. Increased expenses also relate to the addition of
eleven telesales personnel and four outside salesmen compared to the prior year
period. Increased wages and training costs related to personnel turnover in
various distribution centers, also contributed to the increased expense level,
as well as the amortization of goodwill related to the U.S. Lock acquisition.
PROVISION FOR INCOME TAXES
--------------------------
The provision for income taxes increased $0.3 million or 11.9% to $2.4 million
for the three months ended September 30, 1999 from $2.2 million for the three
months ended September 30, 1998 primarily as a result of increased operating
income and the non-deductibility of the goodwill amortization.
YEAR 2000
---------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or in
miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, to send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.
The Company had identified all computer-based systems and applications
(including embedded systems) that are not Year 2000 compliant and determined
what revisions, replacements or updates were needed to achieve compliance.
Management believes that all of the systems are compliant currently.
The Company had put in place project teams dedicated to implementing a Year 2000
solution. The teams have actively worked to achieve the objectives of Year 2000
compliance. The work included the modification of certain existing systems,
replacing hardware and software for other systems, the creation of contingency
plans, and surveying suppliers of goods and services with whom the Company does
business.
The Company used standard methodology with three phases for the Year 2000
compliance project. Phase I included conducting a complete inventory of
potentially affected areas of the business (including information technology and
non-information technology), assessing and prioritizing the information
collected during the inventory, and completing project plans to address all key
areas of the project. Phase II included the remediation and testing of all
mission critical areas of the project, surveying suppliers of goods and services
with whom the Company does business, and the creation of contingency plans to
address potential Year 2000 related problems. Phase III of the project included
the remediation and testing of non- mission critical areas of the project, and
the implementation of contingency plans as may be necessary. The Company has
completed all phases of this project as of September 30, 1999.
The Company used both internal and external resources to reprogram, replace, and
test the software and hardware for Year 2000 compliance. Year 2000 work for
mission critical and most non-mission critical systems and testing of all system
revisions is complete. The expenses associated with this project included both a
reallocation of existing internal resources plus the use of outside services.
Project expenses to date amount to approximately $35,000.
11
<PAGE> 197
In addition to addressing internal systems, the Company's Year 2000 project team
has surveyed suppliers of goods and services with whom the Company does
business. This was done to determine the extent to which the Company is
vulnerable to failures by third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies,
including those on which the Company's systems interact, will be timely
converted. A failure to convert by another company on a timely basis or a
conversion by another company that is incompatible with the Company's systems,
may have an adverse effect on the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
(27) Financial Data Schedule
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 1999, 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.
12
<PAGE> 198
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNETT INC.
REGISTRANT
DATE: NOVEMBER 10, 1999 By: /s/ Andrea Luiga
Andrea Luiga
Chief Financial Officer
(principal financial and
accounting officer)
13
<PAGE> 199
Annex G
================================================================================
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 DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-21728
BARNETT INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 59-1380437
(State of Incorporation) (I.R.S. Employer
Identification Number)
3333 LENOX AVENUE
JACKSONVILLE, FLORIDA 32254
(Address of Principal Executive Offices) (Zip Code)
(904)384-6530
(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
16,247,444 shares of Common Stock, $.01 par value, were issued and outstanding
as of January 31, 2000.
================================================================================
1
<PAGE> 200
BARNETT INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and June 30, 1999 3-4
Consolidated Statements of Income for the Six Months
and Three Months Ended December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
-----------
2
<PAGE> 201
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BARNETT INC.
------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1999 AND JUNE 30, 1999
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, JUNE 30,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,308 $ 3,421
Accounts receivable, net 38,130 35,914
Inventories 60,036 52,733
Prepaid expenses 3,393 2,873
--------- ---------
Total current assets 105,867 94,941
--------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements 9,054 8,265
Furniture and fixtures 5,080 4,662
Machinery and equipment 21,979 19,352
Building and improvements 7,286 7,281
--------- ---------
43,399 39,560
Less accumulated depreciation and amortization (18,380) (15,978)
--------- ---------
Property and equipment, net 25,019 23,582
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 26,966 27,353
DEFERRED TAX ASSETS, NET 857 857
OTHER ASSETS 2,775 2,453
--------- ---------
$ 161,484 $ 149,186
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE> 202
<TABLE>
<CAPTION>
BARNETT INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 24,628 $ 20,061
Accrued liabilities 3,496 4,061
Accrued income taxes 103 151
Accrued interest 343 342
-------- --------
Total current liabilities 28,570 24,615
-------- --------
Long-Term Debt 33,000 33,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share:
Authorized 40,000 shares; Issued and outstanding
16,247 shares at December 31, 1999 and 16,218 at
June 30, 1999 162 162
Paid-in capital 48,152 47,937
Retained earnings 51,600 43,472
-------- --------
Total stockholders' equity 99,914 91,571
-------- --------
$161,484 $149,186
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE> 203
<TABLE>
<CAPTION>
BARNETT INC.
------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED
DEC. 31 DEC. 31
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $138,472 $110,511 $ 71,072 $ 58,120
Cost of sales 93,386 74,057 47,720 38,842
-------- -------- -------- --------
Gross profit 45,086 36,454 23,352 19,278
Selling, general and
administrative expenses 30,590 24,178 15,373 12,600
-------- -------- -------- --------
Operating income 14,496 12,276 7,979 6,678
Interest expense, net 969 66 482 65
-------- -------- -------- --------
Income before income taxes 13,527 12,210 7,497 6,613
Provision for income taxes 5,397 4,704 2,985 2,548
-------- -------- -------- --------
Net income $ 8,130 $ 7,506 $ 4,512 $ 4,065
======== ======== ======== ========
Basic earnings per share $ 0.50 $ 0.46 $ 0.28 $ 0.25
Diluted earnings per share $ 0.50 $ 0.46 $ 0.28 $ 0.25
Weighted average shares outstanding:
Basic 16,233 16,212 16,247 16,212
Diluted 16,235 16,223 16,251 16,216
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE> 204
<TABLE>
<CAPTION>
BARNETT INC.
------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
($ IN THOUSANDS)
DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,130 $ 7,506
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,789 2,164
Changes in assets and liabilities:
Increase in accounts receivable, net (2,216) (4,475)
Increase in inventories (7,303) (10,493)
Increase in prepaid expenses (520) (767)
Changes in other assets (322) (47)
Increase in accounts payable 4,567 3,677
Decrease in accrued liabilities (612) (85)
-------- --------
Net Cash Provided by (Used in) Operating Activities 4,513 (2,520)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (3,841) (3,975)
-------- --------
Net Cash Used in Investing Activities (3,841) (3,975)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreement -- 23,778
Repayments under credit agreement -- (17,491)
Net proceeds from issuance of common stock-stock options, grants 215 78
Issuance of common stock -- 1
-------- --------
Net Cash Provided by Financing Activities 215 6,366
-------- --------
NET INCREASE (DECREASE) IN CASH 887 (129)
BALANCE, BEGINNING OF PERIOD 3,421 450
-------- --------
BALANCE, END OF PERIOD $ 4,308 $ 321
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE> 205
BARNETT INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(UNAUDITED)
DECEMBER 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Barnett Inc. (a
Delaware corporation) and its wholly owned subsidiary, U.S. Lock Corporation
(collectively, the "Company"). All material intercompany transactions have been
eliminated.
The consolidated statements of income for the six months and three months ended
December 31, 1999 and 1998, the consolidated balance sheet as of December 31,
1999 and the consolidated statements of cash flows for the six months ended
December 31, 1999 and 1998 have been prepared by the Company without audit,
while the consolidated 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 as of December 31, 1999 and for all periods presented.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been consolidated or omitted. The Company believes that the
disclosures included are adequate and provide a fair presentation of interim
period results. Interim financial statements are not necessarily indicative of
financial position or operating results for an entire year. It is suggested that
these consolidated interim financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 filed with
the Securities and Exchange Commission.
NOTE 2 - BUSINESS
The Company operates in a single business segment -- the distribution of
plumbing, electrical, hardware and security hardware products, utilizing mail
order catalogs and a telesales program. The Company's various products are
economically similar and do not require separate segment reporting.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the six months ended December 31, 1999 and 1998 included
income taxes of $5.6 million and $5.1 million, respectively, and interest of
$1.0 million and $14,000, respectively.
NOTE 4 - BUSINESS ACQUISITION
On January 8, 1999, Barnett Inc. acquired the U.S. Lock ("U.S. Lock") division
of WOC, Inc., an indirect wholly-owned subsidiary of Waxman Industries, Inc. for
a cash purchase price of approximately $33.0 million and the assumption of
liabilities of approximately $2.0 million. The effective date of the U.S. Lock
acquisition was January 1, 1999.
7
<PAGE> 206
The acquisition of U.S. Lock was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based upon their
estimated fair market values. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to approximately $23.0
million. This has been accounted for as goodwill and is being amortized over 40
years using the straight line method.
The following unaudited pro forma information presents a summary of consolidated
results of operations of Barnett Inc. and U.S. Lock as if the acquisition had
occurred at the beginning of fiscal year 1999, with pro forma adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects (dollars
in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Six Months
Ended 12-31-98 Ended 12-31-98
--------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $64,932 $123,873
Net income $4,103 $7,572
Earnings per share $0.25 $0.47
--------------------------------------------------------------------------------------
</TABLE>
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share is calculated based on weighted average number of
shares of common stock outstanding. Diluted earnings per share is calculated
based on the weighted average number of shares of common stock outstanding and
common stock equivalents, consisting of outstanding stock options. Common stock
equivalents are determined using the treasury method for diluted shares
outstanding. The difference between diluted and basic shares outstanding are
common stock equivalents from stock options outstanding in the six months and
three months ended December 31, 1999 and 1998.
NOTE 6 - IMPACT OF ACCOUNTING STANDARDS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The statement establishes accounting and reporting
standards for derivative instruments (including certain derivative instruments
embedded in other contracts). SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of this standard is not expected to
have a material impact on reported results of the Company's operations.
NOTE 7 - ACCOUNTING CHANGE
In the first quarter of fiscal year 2000, the Company adopted Statement of
Position ("SOP")No. 98-5, "Reporting on the Costs of Start-Up Activities" which
requires expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. The adoption of this SOP resulted in certain
balance sheet re-classifications in addition to write-offs charged directly to
operations, of the costs capitalized as of June 30, 1999.
8
<PAGE> 207
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 "expect", "believe", "intend", "may", "should", "anticipate", and
similar expressions are intended to identify forward- looking statements. Such
forward looking statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
including, but not limited to, the risk that the Company may not be able to
implement its growth strategy in the intended manner, risks associated with
currently unforeseen competitive pressures and risks affecting the Company's
industry such as increased distribution costs 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 these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
OVERVIEW
The Company is 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 Caribbean and South
America. Effective January 1, 1999, the Company acquired U.S. Lock, a division
of WOC, Inc., a wholly-owned subsidiary of Waxman Industries, Inc., for a cash
purchase price of $33.0 million and the assumption of liabilities estimated at
approximately $2.0 million. The Company 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. The Company markets its products
through six distinct, comprehensive catalogs that target professional
contractors, independent hardware stores, maintenance managers, liquid propane
gas ("LP Gas") dealers and locksmiths. The Company's staff of over 140
knowledgeable telesales, customer service and technical support personnel work
together to serve customers by assisting in product selection and offering
technical advice. To provide rapid delivery and a strong local presence, the
Company has established a network of 42 distribution centers strategically
located in 36 major metropolitan areas throughout the United States and Puerto
Rico. Through these local distribution centers, approximately 70% of the
Company's orders are shipped to the customer on the same day the order is
received. The remaining 30% of the orders are picked up by the customer at one
of the Company's local distribution centers. The Company's strategy of being a
low-cost, competitively priced supplier is facilitated by its volume of
purchases and offshore sourcing of a significant portion of its private label
products. Products are purchased from over 650 domestic and foreign suppliers.
9
<PAGE> 208
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
SIX MONTHS ENDED DECEMBER 31, 1998
NET SALES
Net sales increased $28.0 million, or 25.3%, to $138.5 million in the six months
ended December 31, 1999 from $110.5 million in the corresponding prior year
period. Approximately 87.7% of the increase in the Company's net sales was
derived from the Company's telesales operations, primarily resulting from
increased sales by existing telesalespersons and the addition of 22
telesalespersons acquired with U.S. Lock, compared to the prior year period. The
remainder of the net sales increase was attributable to the Company's outside
sales force, integrated account management teams, factory direct programs and
the Company's export division. New customers garnished from the Company's
promotional flyer campaigns contributed approximately $6.0 million to the net
sales increase for the six months ended December 31, 1999. Also contributing to
the net sales increase for the six month period was revenue from new product
introductions approximating $5.9 million.
Last year, the Company began an integration of its outside sales force with its
telesales force. The integrated account management provides synergies with
improved customer knowledge, as well as superior customer service and quicker
response times. These integrated account management teams produced revenue
increases in six months ending December 31, 1999 exceeding 20%. Additionally,
the Company's export division, primarily consisting of a small dedicated
international telesales staff, garnished revenue increases in excess of 27%.
Furthermore, the Company continues to invest in its factory direct programs
whereby products are shipped directly to the customer from certain suppliers and
manufacturers. These programs yielded more than 30% revenue increases in the six
months ended December 31, 1999.
The Company opened its 41st distribution center in Orlando, Florida in October
1999 and its 42nd distribution center in Phoenix, Arizona in December 1999. The
sales contribution from these new distribution centers was not significant for
the current six month period.
GROSS PROFIT
Gross profit increased by 23.7% to $45.1 million in the six months ended
December 31, 1999 from $36.5 million in the corresponding prior year period.
Gross profit margins decreased to 32.6% for the six months ended December 31,
1999 from 33.0% for the same period last year, primarily as a result of the
aforementioned increased activity in the Company's direct sales programs, which
typically carry much lower gross profit margins than the Company's warehouse
shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 26.5% to $30.6
million for the six months ended December 31, 1999, from $24.2 million for the
comparable prior year period. The increase is primarily due to combining the
expenses of U.S. Lock along with the occupancy and other expenses related to the
opening of two new distribution centers in the current fiscal year. Increased
wages and training costs related to personnel turnover in various distribution
centers, also contributed to the increased expense level, as well as the
amortization of goodwill related to the U.S. Lock acquisition.
10
<PAGE> 209
PROVISION FOR INCOME TAXES
The provision for income taxes increased $0.7 million or 14.7% to $5.4 million
for the six months ended December 31, 1999 from $4.7 million for the six months
ended December 31, 1998, primarily as a result of increased operating income and
the non-deductibility of the goodwill amortization.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1998
NET SALES
Net sales increased $13.0 million, or 22.3%, to $71.1 million in the three
months ended December 31, 1999 from $58.1 million in the corresponding prior
year period. Approximately 89.7% of the increase in the Company's net sales was
derived from the Company's telesales operations, primarily resulting from
increased sales by existing telesalespersons and the addition of 22
telesalespersons acquired with U.S. Lock, compared to the prior year period. The
remainder of the net sales increase was attributable to the Company's outside
sales force, integrated account management teams, factory direct programs and
the Company's export division. New customers garnished from the Company's
promotional flyer campaigns contributed approximately $2.2 million to the net
sales increase for the three months ended December 31, 1999. Also contributing
to the net sales increase for the three month period was revenue from new
product introductions approximating $3.0 million.
As noted above, last fiscal year, the Company began an integration of its
outside sales force with its telesales force. The integrated account management
provides synergies with improved customer knowledge, as well as superior
customer service and quicker response times. These integrated account management
teams produced revenue increases in three months ending December 31, 1999
exceeding 19%. Additionally, the Company's export division, primarily consisting
of a small dedicated international telesales staff, garnished revenue increases
in excess of 24%. Furthermore, the Company continues to invest in its factory
direct programs whereby products are shipped directly to the customer from
certain suppliers and manufacturers. These programs yielded more than 38%
revenue increases in the three months ended December 31, 1999.
The Company opened its 41st distribution center in Orlando, Florida in October
1999 and its 42nd distribution center in Phoenix, Arizona in December 1999. The
sales contribution from these new distribution centers was not significant for
the current three month period.
GROSS PROFIT
Gross profit increased by 21.1% to $23.4 million in the three months ended
December 31, 1999 from $19.3 million in the corresponding prior year period.
Gross profit margins decreased to 32.9% for the three months ended December 31,
1999 from 33.2% for the same period last year, primarily as a result of the
aforementioned increased activity in the Company's direct sales programs, which
typically carry much lower gross profit margins than the Company's warehouse
shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 22.0% to $15.4
million for the three months ended December 31, 1999, from $12.6 million for the
comparable prior year
11
<PAGE> 210
period. The increase is primarily due to combining the expenses of U.S. Lock
along with the occupancy and other expenses related to the opening of two new
distribution centers in the current fiscal year. Increased wages and training
costs related to personnel turnover in various distribution centers, also
contributed to the increased expense level, as well as the amortization of
goodwill related to the U.S. Lock acquisition.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $0.4 million or 17.2% to $3.0 million
for the three months ended December 31, 1999 from $2.5 million for the three
months ended December 31, 1998, primarily as a result of increased operating
income and the non-deductibility of the goodwill amortization.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or in
miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, to send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.
The Company had identified all computer-based systems and applications
(including embedded systems) that were not Year 2000 compliant and determined
what revisions, replacements or updates were needed to achieve compliance.
Management believes that all of the systems are compliant currently.
The Company had put in place project teams dedicated to implementing a Year 2000
solution. The teams actively worked to achieve the objectives of Year 2000
compliance. The work included the modification of certain existing systems,
replacing hardware and software for other systems, the creation of contingency
plans, and surveying suppliers of goods and services with whom the Company does
business.
The Company used standard methodology with three phases for the Year 2000
compliance project. Phase I included conducting a complete inventory of
potentially affected areas of the business (including information technology and
non-information technology), assessing and prioritizing the information
collected during the inventory, and completing project plans to address all key
areas of the project. Phase II included the remediation and testing of all
mission critical areas of the project, surveying suppliers of goods and services
with whom the Company does business, and the creation of contingency plans to
address potential Year 2000 related problems. Phase III of the project included
the remediation and testing of non- mission critical areas of the project, and
the implementation of contingency plans as may be necessary. The Company
completed all phases of this project as of September 30, 1999.
The Company used both internal and external resources to reprogram, replace, and
test the software and hardware for Year 2000 compliance. Year 2000 work for
mission critical and most non-mission critical systems and testing of all system
revisions is complete. The expenses associated with this project included both a
reallocation of existing internal resources plus the use of outside services.
Project expenses to date amount to an estimated $35,000.
12
<PAGE> 211
In addition to addressing internal systems, the Company's Year 2000 project team
surveyed suppliers of goods and services with whom the Company does business.
This was done to determine the extent to which the Company is vulnerable to
failures by third parties to remedy their own Year 2000 issues. However, there
can be no guarantee that the systems of other companies, including those on
which the Company's systems interact, will be timely converted. A failure to
convert by another company on a timely basis or a conversion by another company
that is incompatible with the Company's systems, may have an adverse effect on
the Company.
Based on the information available at the time of this filing, the Company has
not experienced any significant Year 2000 related issues that would have an
adverse effect on the Company's business operations and financial condition.
There can be no assurance, however, that all potential Year 2000 related issues
have been discovered.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
(27) Financial Data Schedule
b) No Reports on Form 8-K were filed.
All other items in Part II are either inapplicable to the Company during the
quarter ended December 31, 1999, 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.
13
<PAGE> 212
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNETT INC.
REGISTRANT
DATE: FEBRUARY 1, 2000 By: /s/ Andrea Luiga
Andrea Luiga
Chief Financial Officer
(principal financial and
accounting officer)
14
<PAGE> 213
Annex H
________________________________________________________________________________
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 0-21728
BARNETT INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 59-1380437
(State of Incorporation) (I.R.S. Employer
Identification Number)
3333 LENOX AVENUE
JACKSONVILLE, FLORIDA 32254
(Address of Principal Executive Offices) (Zip Code)
(904)384-6530
(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
16,263,928 shares of Common Stock, $.01 par value, were issued and outstanding
as of April 30, 2000.
________________________________________________________________________________
1
<PAGE> 214
BARNETT INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000
and June 30, 1999 3-4
Consolidated Statements of Income for the Nine Months
and Three Months Ended March 31,2000 and 1999 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31,2000 and 1999 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
-------- -----------------
Item 4. Submission of Matters To A Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
----------
2
<PAGE> 215
PART I. FINANCIAL INFORMATION
------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
BARNETT INC. AND SUBSIDIARIES
-----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 2000 AND JUNE 30, 1999
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 5,376 $ 3,421
Accounts receivable, net 38,054 35,914
Inventories 59,003 52,733
Prepaid expenses 3,809 2,873
-------- --------
Total current assets 106,242 94,941
-------- --------
PROPERTY AND EQUIPMENT:
Leasehold improvements 9,287 8,265
Furniture and fixtures 5,215 4,662
Machinery and equipment 23,012 19,352
Building and improvements 7,283 7,281
-------- --------
44,797 39,560
Less accumulated depreciation and amortization (19,664) (15,978)
-------- --------
Property and equipment, net 25,133 23,582
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 26,429 27,353
DEFERRED TAX ASSETS, NET 857 857
OTHER ASSETS 2,840 2,453
-------- --------
$ 161,501 $ 149,186
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE> 216
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND JUNE 30, 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 20,148 $ 20,061
Accrued liabilities 4,017 4,061
Accrued income taxes 165 151
Accrued interest 336 342
-------- --------
Total current liabilities 24,666 24,615
-------- --------
Long-Term Debt 33,000 33,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share:
Authorized 40,000 shares; Issued and outstanding
16,247 shares at March 31, 2000 and 16,218 at
June 30, 1999 162 162
Paid-in capital 48,152 47,937
Retained earnings 55,521 43,472
-------- --------
Total stockholders' equity 103,835 91,571
-------- --------
$ 161,501 $ 149,186
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE> 217
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 2000 AND 1999
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31 March 31
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 211,820 $ 174,390 $ 73,348 $ 63,879
Cost of sales 142,271 116,330 48,885 42,273
-------- -------- ------- -------
Gross profit 69,549 58,060 24,463 21,606
Selling, general and
administrative expenses 47,970 38,790 17,380 14,612
-------- -------- ------- -------
Operating income 21,579 19,270 7,083 6,994
Interest expense, net 1,479 674 510 608
-------- -------- ------- -------
Income before income taxes 20,100 18,596 6,573 6,386
Provision for income taxes 8,049 7,263 2,652 2,559
-------- -------- ------- -------
Net income $ 12,051 $ 11,333 $ 3,921 $ 3,827
======== ======== ======= =======
Basic earnings per share $ 0.74 $ 0.70 $ 0.24 $ 0.24
Diluted earnings per share $ 0.74 $ 0.70 $ 0.24 $ 0.24
Weighted average shares outstanding:
Basic 16,238 16,212 16,247 16,212
Diluted 16,243 16,216 16,261 16,216
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE> 218
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
($ IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,051 $ 11,333
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,265 3,510
Changes in assets and liabilities:
Increase in accounts receivable, net (2,140) (1,965)
Increase in inventories (6,270) (10,648)
Increase in prepaid expenses (936) (644)
Increase in other assets (44) (449)
Increase (Decrease) in accounts payable 87 (29)
Increase (Decrease) in accrued liabilities (36) 704
------- --------
Net Cash Provided by (Used in) Operating Activities 6,977 1,812
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (5,237) (5,818)
Borrowings in Connection with the
Acquisition of U.S. Lock Corporation 0 (33,000)
------- --------
Net Cash Used in Investing Activities (5,237) (38,818)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreement 705 42,770
Repayments under credit agreement (705) (38,991)
Acquisition of U.S. Lock Corporation 0 33,000
Net proceeds from issuance of common stock-stock options, grants 215 79
------- --------
Net Cash Provided by Financing Activities 215 36,858
------- --------
NET INCREASE (DECREASE) IN CASH 1,955 (148)
BALANCE, BEGINNING OF PERIOD 3,421 450
------- --------
BALANCE, END OF PERIOD $ 5,376 $ 302
======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE> 219
BARNETT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
NOTE 1 - Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Barnett Inc. (a
Delaware corporation) and its wholly-owned subsidiary, U.S. Lock Corporation
(collectively, the "Company"). All material intercompany transactions have been
eliminated.
The consolidated statements of income for the nine months and three months ended
March 31, 2000 and 1999, the consolidated balance sheet as of March 31, 2000 and
the consolidated statements of cash flows for the nine months ended March 31,
2000 and 1999 have been prepared by the Company without audit, while the
consolidated 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 as of March 31, 2000 and for all periods presented. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been consolidated or omitted. The Company believes that the disclosures
included are adequate and provide a fair presentation of interim period results.
Interim financial statements are not necessarily indicative of financial
position or operating results for an entire year. It is suggested that these
consolidated interim financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 filed with
the Securities and Exchange Commission.
NOTE 2 - Business
--------
The Company operates in a single business segment -- the distribution of
plumbing, electrical, hardware and security hardware products, utilizing mail
order catalogs and a telesales program. The Company's various products are
economically similar and do not require separate segment reporting.
NOTE 3 - Supplemental Cash Flow Information
----------------------------------
Cash payments during the nine months ended March 31, 2000 and 1999 included
income taxes of $8.5 million and $8.0 million, respectively, and interest of
$1.6 million and $299,000 respectively.
NOTE 4 - Business Acquisition
--------------------
On January 8, 1999, Barnett Inc. acquired the U.S. Lock ("U.S. Lock") division
of WOC, Inc., an indirect wholly-owned subsidiary of Waxman Industries, Inc. for
a cash purchase price of approximately $33.0 million and the assumption of
liabilities of approximately $2.0 million. The effective date of the U.S. Lock
acquisition was January 1, 1999.
7
<PAGE> 220
The acquisition of U.S. Lock was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based upon their
estimated fair market values. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to approximately $23.0
million. This has been accounted for as goodwill and is being amortized over 40
years using the straight line method.
The following unaudited pro forma information presents a summary of consolidated
results of operations of Barnett Inc. and U.S. Lock as if the acquisition had
occurred at the beginning of fiscal year 1999, with pro forma adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects (dollars
in thousands, except per share data).
Nine Months
Ended 3-31-99
--------------------------------------------------------------------------------
Net sales $187,752
Net income $11,425
Earnings per share $0.71
--------------------------------------------------------------------------------
NOTE 5 - Earnings Per Share
------------------
Basic earnings per share is calculated based on weighted average number of
shares of common stock outstanding. Diluted earnings per share is calculated
based on the weighted average number of shares of common stock outstanding and
common stock equivalents, consisting of outstanding stock options. Common stock
equivalents are determined using the treasury method for diluted shares
outstanding. The difference between diluted and basic shares outstanding are
common stock equivalents from stock options outstanding in the nine months and
three months ended March 31,2000 and 1999.
NOTE 6 - Impact of Accounting Standards
------------------------------
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The statement establishes accounting and reporting
standards for derivative instruments (including certain derivative instruments
embedded in other contracts). SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of this standard is not expected to
have a material impact on reported results of the Company's operations.
NOTE 7 - Accounting Change
-----------------
In the first quarter of fiscal year 2000, the Company adopted Statement of
Position ("SOP")No. 98-5, "Reporting on the Costs of Start-Up Activities" which
requires expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. The adoption of this SOP resulted in certain
balance sheet re-classifications in addition to write-offs charged directly to
operations, of the costs capitalized as of June 30, 1999.
NOTE 8 - Interest Rate Swap
------------------
The Company entered into a interest rate swap to minimize the risk and costs
associated with changes in interest rates. The swap agreement is a contract to
exchange the variable rate
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of three-month LIBOR +.825% on its term loan for fixed interest rate payments of
6.29% payable quarterly. The interest swap had a notional of $33.0 million and a
maturity date of December 31, 2005, corresponding with the term loan. The
interest rate swap had a fair value of $1.6 million at March 31, 2000. In the
event the Company terminated the interest rate swap, the resulting gains/losses
would be deferred and amortized over the original term of the swap as an
interest adjustment to the underlying asset or liability being hedged. For tax
purposes, any termination payment would be treated as ordinary income or
expense.
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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 "expect", "believe", "intend", "may", "should", "anticipate", and
similar expressions are intended to identify forward- looking statements. Such
forward-looking statements reflect the current view of the Company with respect
to future events and are subject to certain risks, uncertainties and assumptions
including, but not limited to, the risk that the Company may not be able to
implement its growth strategy in the intended manner, risks associated with
currently unforeseen competitive pressures and risks affecting the Company's
industry such as increased distribution costs 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 these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
Overview
--------
The Company is 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 Caribbean and South
America. Effective January 1, 1999, the Company acquired U.S. Lock, a division
of WOC, Inc., a wholly-owned subsidiary of Waxman Industries, Inc., for a cash
purchase price of $33.0 million and the assumption of liabilities estimated at
approximately $2.0 million. The Company 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. The Company markets its products
through six distinct, comprehensive catalogs that target professional
contractors, independent hardware stores, maintenance managers, liquid propane
gas ("LP Gas") dealers and locksmiths. The Company's staff of over 140
knowledgeable telesales, customer service and technical support personnel work
together to serve customers by assisting in product selection and offering
technical advice. To provide rapid delivery and a strong local presence, the
Company has established a network of 42 distribution centers strategically
located in 36 major metropolitan areas throughout the United States and Puerto
Rico. Through these local distribution centers, approximately 70% of the
Company's orders are shipped to the customer on the same day the order is
received. The remaining 30% of the orders are picked up by the customer at one
of the Company's local distribution centers. The Company's strategy of being a
low-cost, competitively priced supplier is facilitated by its volume of
purchases and offshore sourcing of a significant portion of its private label
products. Products are purchased from over 650 domestic and foreign suppliers.
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Results of Operations
---------------------
Nine Months Ended March 31, 2000 Compared With
Nine Months Ended March 31, 1999
----------------------------------------------
Net Sales
---------
Net sales increased $37.4 million, or 21.5%, to $211.8 million in the nine
months ended March 31, 2000 from $174.4 million in the corresponding prior year
period. Approximately 83.4% of the increase in the Company's net sales was
derived from the Company's telesales operations, primarily resulting from
increased sales by existing telesalespersons and the addition of 22
telesalespersons acquired with U.S. Lock, compared to the prior year period. The
remainder of the net sales increase was attributable to the Company's outside
sales force, integrated account management teams, factory direct programs and
the Company's export division. New customers garnished from the Company's
promotional flyer campaigns contributed approximately $11.5 million to the net
sales increase for the nine months ended March 31, 2000. Also contributing to
the net sales increase for the nine month period was revenue from new product
introductions approximating $10.6 million.
Last year, the Company began an integration of its outside sales force with its
telesales force. The integrated account management provides synergies with
improved customer knowledge, as well as superior customer service and quicker
response times. These integrated account management teams produced revenue
increases in nine months ending March 31, 2000 exceeding 20%. Additionally, the
Company's export division, primarily consisting of a small dedicated
international telesales staff, garnished revenue increases in excess of 29%.
Furthermore, the Company continues to invest in its factory direct programs
whereby products are shipped directly to the customer from certain suppliers and
manufacturers. These programs yielded more than 30% revenue increases in the
nine months ended March 31, 2000.
The Company opened its 41st distribution center in Orlando, Florida in October
1999 and its 42nd distribution center in Phoenix, Arizona in December 1999. The
sales contribution from these new distribution centers was not significant for
the current nine month period.
Gross Profit
------------
Gross profit increased by 19.8% to $69.5 million in the nine months ended March
31,2000 from $58.1 million in the corresponding prior year period. Gross profit
margins decreased to 32.8% for the nine months ended March 31, 2000 from 33.3%
for the same period last year, primarily as a result of the aforementioned
increased activity in the Company's direct sales programs, which typically carry
much lower gross profit margins than the Company's warehouse shipments.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 23.7% to $48.0
million for the nine months ended March 31, 2000, from $38.8 million for the
comparable prior year period. The increase is primarily due to combining the
expenses of U.S. Lock along with the occupancy and other expenses related to the
opening of two new distribution centers in the current fiscal year. Increased
wages and training costs related to personnel turnover in various distribution
centers, also contributed to the increased expense level, as well as the
amortization of goodwill related to the U.S. Lock acquisition. Additionally, the
Company recorded one-time start-up costs of $0.5 million in quarter ended March
31, 2000. These start-up costs relate to pre-opening expenses of the Company's
National Distribution Center
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<PAGE> 224
("NDC") in Nashville, Tennessee. This NDC, which is expected to open in July
2000, will receive all of the Company's inventory purchases from vendors and
re-distribute them to the Company's existing distribution centers.
Provision for Income Taxes
--------------------------
The provision for income taxes increased $0.8 million or 10.8% to $8.0 million
for the nine months ended March 31, 2000 from $7.3 million for the nine months
ended March 31, 1999, primarily as a result of increased operating income and
the non-deductibility of the goodwill amortization.
Three Months Ended March 31, 2000 Compared With
Three Months Ended March 31, 1999
-----------------------------------------------
Net Sales
---------
Net sales increased $9.5 million, or 14.8%, to $73.3 million in the three months
ended March 31, 2000 from $63.9 million in the corresponding prior year period.
Approximately 68.7% of the increase in the Company's net sales was derived from
the Company's telesales operations, primarily resulting from increased sales by
existing telesalespersons. The remainder of the net sales increase was
attributable to the Company's outside sales force, integrated account management
teams, factory direct programs and the Company's export division. New customers
garnished from the Company's promotional flyer campaigns contributed
approximately $2.3 million to the net sales increase for the three months ended
March 31, 2000. Also contributing to the net sales increase for the three month
period was revenue from new product introductions approximating $4.7 million.
Net sales were somewhat hampered in the three months ended March 31, 2000 due to
harsh weather conditions in the Northeast in the month of January which forced
the closure of seven of the Company's distribution centers and U.S. Lock's
telesales facility for several days. In addition to the loss of sales on the
days our centers were closed, the Company experienced lower than expected sales
throughout this period due to customers who were closed for longer periods of
time. Furthermore, the Company's LeRan Gas Products division continues to be
hampered by the skyrocketing oil prices across the country.
As noted above, last fiscal year, the Company began an integration of its
outside sales force with its telesales force. The integrated account management
provides synergies with improved customer knowledge, as well as superior
customer service and quicker response times. These integrated account management
teams produced revenue increases in three months ending March 31, 2000 exceeding
20%. Additionally, the Company's export division, primarily consisting of a
small dedicated international telesales staff, garnished revenue increases in
excess of 20%. Furthermore, the Company continues to invest in its factory
direct programs whereby products are shipped directly to the customer from
certain suppliers and manufacturers. These programs yielded more than 46%
revenue increases in the three months ended March 31, 2000.
The Company opened its 41st distribution center in Orlando, Florida in October
1999 and its 42nd distribution center in Phoenix, Arizona in December 1999. The
sales contribution from these new distribution centers was not significant for
the current three month period.
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Gross Profit
------------
Gross profit increased by 13.2% to $24.5 million in the three months ended March
31, 2000 from $21.6 million in the corresponding prior year period. Gross profit
margins decreased to 33.4% for the three months ended March 31, 2000 from 33.8%
for the same period last year, primarily as a result of the aforementioned
increased activity in the Company's direct sales programs, which typically carry
much lower gross profit margins than the Company's warehouse shipments.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 18.9% to $17.4
million for the three months ended March 31,2000, from $14.6 million for the
comparable prior year period. The increase is primarily due to the occupancy and
other expenses related to the opening of two new distribution centers in the
current fiscal year. Increased wages and training costs related to personnel
turnover in various distribution centers, also contributed to the increased
expense level, as well as the amortization of goodwill related to the U.S. Lock
acquisition. Additionally, the Company recorded one-time start-up costs of $0.5
million in quarter ended March 31, 2000. These start-up costs relate to
pre-opening expenses of the Company's National Distribution Center ("NDC") in
Nashville, Tennessee. This NDC, which is expected to open in July 2000, will
receive all of the Company's inventory purchases from vendors and re-distribute
them to the Company's existing distribution centers.
Provision for Income Taxes
--------------------------
The provision for income taxes increased $0.1 million or 3.6% to $2.7 million
for the three months ended March 31, 2000 from $2.6 million for the three months
ended March 31, 1999, primarily as a result of increased operating income and
the non-deductibility of the goodwill amortization.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See note 8 to the financial statements.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
a) The following persons were elected to serve as Class I
directors for a three-year term and received the number of votes as set
opposite their names:
Name For Against
---- --- -------
Melvin Waxman 14,618,242 162,656
Sheldon G. Adelman 14,759,932 20,966
b) The following are the results of the vote on the ratifica-
tion of Arthur Andersen LLP as the independent public accountants of the
Company;
For Against Abstain
--- ------- -------
14,772,448 4,300 4,150
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) Exhibits:
(27) Financial Data Schedule
b) No Reports on Form 8-K were filed.
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31,2000, 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, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNETT INC.
REGISTRANT
DATE: MAY 12, 2000 By: /s/ Andrea Luiga
--------------------------------------
Andrea Luiga
Chief Financial Officer
(principal financial and
accounting officer)
15
