0000950152-01-505408.txt : 20011107
0000950152-01-505408.hdr.sgml : 20011107
ACCESSION NUMBER: 0000950152-01-505408
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011102
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: WAXMAN INDUSTRIES INC
CENTRAL INDEX KEY: 0000105096
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070]
IRS NUMBER: 340899894
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-10273
FILM NUMBER: 1773593
BUSINESS ADDRESS:
STREET 1: 24460 AURORA RD
CITY: BEDFORD HEIGHTS
STATE: OH
ZIP: 44146
BUSINESS PHONE: 2164391830
MAIL ADDRESS:
STREET 1: 24460 AURORA ROAD
CITY: BEDFORD HEIGHTS
STATE: OH
ZIP: 44146
10-Q
1
l91167ae10-q.txt
WAXMAN INDUSTRIES, INC. FORM 10-Q
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, 2001
------------------
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
---- ----
997,861 shares of Common Stock, $.01 par value, and 214,189 shares of Class B
Common Stock, $.01 par value, were outstanding as of November 1, 2001.
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, 2001 and 2000 ................................................... 3
Condensed Consolidated Balance Sheets - September 30, 2001 and June 30, 2001 ..................... 4 -5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 2001 and 2000.................................................... 6
Notes to Condensed Consolidated Financial Statements.............................................. 7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................................. 13 - 18
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information .................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K ..................................................................... 19
SIGNATURES
----------
2
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, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months
------------
2001 2000
-------- --------
Net sales $ 18,733 $ 17,289
Cost of sales 12,678 12,196
-------- --------
Gross profit 6,055 5,093
Selling, general and administrative expenses 5,159 5,659
Restructuring charges -- 350
-------- --------
Operating income (loss) 896 (916)
Equity earnings of Barnett -- 1,370
Gain on sale of Barnett, net -- 47,473
Amortization of deferred U.S. Lock gain -- 7,815
Interest expense, net 238 4,725
-------- --------
Income before income taxes and extraordinary charge 658 51,017
Provision for income taxes 74 2,750
-------- --------
Income (loss) from continuing operations before
extraordinary charge 584 48,267
Extraordinary charge, net of taxes -- 57
-------- --------
Net income $ 584 $ 48,210
======== ========
Other comprehensive income:
Foreign currency translation adjustment 19 (72)
-------- --------
Comprehensive income $ 604 $ 48,138
======== ========
Income (loss) per share (basic and diluted):
Income (loss) from continuing operations before
extraordinary charge $ 0.48 $ 39.83
Extraordinary charge -- (0.05)
-------- --------
Net income $ 0.48 $ 39.78
======== ========
Weighted average shares and equivalents 1,212 1,212
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 2001 AND JUNE 30, 2001
(IN THOUSANDS)
ASSETS
September 30, June 30,
2001 2001
(Unaudited) (Audited)
----------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,368 $ 740
Trade receivables, net 13,411 12,592
Other receivables 1,355 1,400
Inventories 11,198 11,895
Prepaid expenses 1,974 1,850
-------- --------
Total current assets 29,306 28,477
-------- --------
INVESTMENT IN BARNETT -- --
-------- --------
PROPERTY AND EQUIPMENT:
Land 550 551
Buildings 4,383 4,318
Equipment 10,508 10,415
-------- --------
15,441 15,284
Less accumulated depreciation and amortization (7,267) (6,996)
-------- --------
Property and equipment, net 8,174 8,288
-------- --------
CASH SURRENDER VALUE OF OFFICER'S LIFE INSURANCE POLICIES 3,050 2,934
UNAMORTIZED DEBT ISSUANCE COSTS, NET 103 142
OTHER ASSETS 1,022 991
-------- --------
$ 41,655 $ 40,832
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 2001 AND JUNE 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2001 2001
(UNAUDITED) (AUDITED)
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt $ 11,009 $ 10,045
Accounts payable 5,824 6,932
Accrued liabilities 4,643 4,291
-------- --------
Total current liabilities 21,476 21,268
-------- --------
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 544 532
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 998 at September 30, 2001
and June 30, 2001 99 99
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued 214 at September 30, 2001
and June 30, 2001 21 21
Paid-in capital 21,752 21,752
Retained deficit (1,124) (1,708)
-------- --------
20,748 20,164
Accumulated other comprehensive income (1,113) (1,132)
-------- --------
Total stockholders' equity 19,635 19,032
-------- --------
$ 41,655 $ 40,832
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS)
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 584 $ 48,210
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Extraordinary loss-write-off of deferred financing costs, net -- 57
Gain on sale of Barnett stock, net -- (47,473)
Non-cash interest -- 62
Amortization of deferred U.S. Lock gain -- (7,815)
Equity earnings of Barnett -- (1,370)
Depreciation and amortization 416 602
Deferred income taxes -- 367
Changes in assets and liabilities:
Trade receivables, net (819) 784
Inventories 697 1,118
Other assets (226) (1,033)
Accounts payable (1,108) (437)
Accrued liabilities 300 1,325
Accrued interest -- (4,287)
Accrued taxes 52 995
Other, net 19 (72)
-------- --------
Net Cash Used in Operating Activities (85) (8,967)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of Barnett stock -- 94,503
Capital expenditures, net (263) (330)
-------- --------
Net Cash (Used in) Provided by Investing Activities (263) 94,173
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit 964 (10,194)
Retirement of 11 1/8% Senior Secured Notes due 2001 -- (35,855)
Restricted cash to retire the 123/4% Deferred Coupon Notes due 2004 -- (39,024)
Change in long-term debt, net 12 (41)
-------- --------
Net Cash (Used in) Provided by
Financing Activities 976 (85,114)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 628 92
BALANCE, BEGINNING OF PERIOD 740 811
-------- --------
BALANCE, END OF PERIOD $ 1,368 $ 903
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 2001
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Waxman Industries, Inc. ("Waxman") and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances are eliminated in consolidation. Until its sale on September 29, 2000,
the Company owned 44.2% of the common stock of Barnett Inc. (the "Barnett Common
Stock"), a direct marketer and distributor of plumbing, electrical, hardware,
and security hardware products, and accounted for Barnett Inc. ("Barnett") under
the equity method of accounting. See Management's Discussion and Analysis
"Recent Developments" section and Notes 3 and 4 in these notes to consolidated
financial statements for information regarding the sale of the Company's
interest in Barnett.
The condensed consolidated statements of operations for the three months
ended September 30, 2001 and 2000, the condensed balance sheet as of September
30, 2001 and the condensed statements of cash flows for the three months ended
September 30, 2001 and 2000 have been prepared by the Company without audit,
while the condensed balance sheet as of June 30, 2001 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, 2001 and for all periods
presented. Certain information and footnote disclosures normally included in
audited financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted. All
significant intercompany transactions and balances are eliminated in
consolidation. 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, 2001.
NOTE 2 - BUSINESS
The Company's common stock is quoted on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol "WAXM". The Company is a supplier of specialty
plumbing, floor and surface protection and other hardware products to the repair
and remodeling market in the United States. The Company distributes its products
to approximately 680 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"), WAMI
Sales, Inc. ("WAMI Sales") and TWI, International, Inc. ("TWI"). Consumer
Products, the Company's largest operation, is a supplier of specialty plumbing,
floor and surface protection and other hardware products to a wide variety of
large retailers. WAMI Sales distributes galvanized, black, chrome and brass pipe
nipples and fittings to industrial and wholesale distributors. TWI includes the
Company's foreign operations, including manufacturing, packaging and sourcing
operations in China and Taiwan. Until March 31, 2001, the Company also supplied
plumbing and hardware products to hardware stores and smaller independent
retailers through Medal of Pennsylvania, Inc. ("Medal", formerly known as WOC
Inc. ("WOC")), when substantially all of the assets and certain liabilities of
this business were sold (see Note x). Consumer Products and WAMI Sales utilize
the Company's and non-affiliated foreign suppliers.
Until its sale on September 29, 2000, the Company owned 44.2% of Barnett, a
direct marketer and distributor of an extensive line of plumbing, electrical,
hardware, and security hardware products to approximately 73,000 active
customers throughout the United States. The Company recorded equity earnings
from this investment of $1.4 million for the fiscal 2000 first quarter ended
September 30, 2000. The Barnett Common Stock traded on
7
the Nasdaq National Market under the symbol "BNTT" until the completion of the
acquisition of Barnett by a subsidiary of Wilmar Industries, Inc. (the "Barnett
Merger") on September 27, 2000.
NOTE 3 - BARNETT
In April 1996, the Company completed an initial public offering of the
Barnett Common Stock, reducing its interest in the former wholly-owned
subsidiary to 49.9% of the outstanding Barnett Common Stock and, together with
certain convertible non-voting preferred stock owned by the Company,
approximately a 54% economic interest. In April 1997, the Company completed a
secondary offering of 1.3 million shares of Barnett Common Stock, reducing its
voting and economic interests to 44.5% and, accordingly, began to account for
its interest in Barnett under the equity method of accounting. In July 2000, the
Company announced that it had reached an agreement to monetize the remaining
7,186,530 shares of Barnett Common Stock for $13.15 per share as part of the
purchase of all of Barnett's outstanding shares by B&W Acquisition Inc., a
merger subsidiary formed by Wilmar Industries, Inc. (the "Barnett Merger"). In
September 2000, the Barnett Merger was approved by Barnett's shareholders and
the Company sold its remaining shares of Barnett Common Stock.
The gross proceeds from the sale of the 7,186,530 shares of Barnett Common
Stock amounted to $94.5 million. The Company's equity investment in Barnett
amounted to $44.3 million immediately prior to the sale, including equity
earnings recognized by the Company in the quarter ended September 30, 2000 of
$1.4 million. The Company reported a net gain on the sale of Barnett of $47.5
million, after the write-off of $2.7 million in transaction related costs
associated with the Barnett Merger and other costs associated with the
comprehensive financial restructuring of the Company. In addition, the Company
recognized $7.8 million in deferred gain on the sale of U.S. Lock in the quarter
ended September 30, 2000, which was being recognized as Barnett amortized the
goodwill associated with its purchase of U.S. Lock.
NOTE 4 - COMPREHENSIVE FINANCIAL RESTRUCTURING PLAN / CONFIRMATION OF CHAPTER 11
FILING
Over a several year period concluding in fiscal 2001, the Company had
endeavored to reduce its high level of debt through the monetization of assets
and to improve the efficiencies of its continuing businesses. As a result, the
Company undertook various initiatives to raise cash, improve its cash flow and
reduce its debt obligations and / or improve its financial flexibility during
that period. However, the Company believed that it would have been unable to
continue to make all of the interest and principal payments under its debt
obligations without the development of a comprehensive financial restructuring
plan, which would include the monetization of the value of the shares of the
Barnett Common Stock owned by the Company. The key developments in the
comprehensive financial restructuring were as follows:
- On December 13, 1999, the Company and an ad hoc committee (the
"Committee") representing the holders of approximately 87.6% of the
$92.8 million outstanding principal amount of Waxman Industries'
123/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred
Coupon Notes") and approximately 65% of the 11 1/8% Senior Notes due
2001 (the "Senior Notes") of Waxman USA Inc., a direct wholly-owned
subsidiary of the Company, entered into an agreement (the "Debt
Reduction Agreement") that provided, subject to certain conditions
(including Bankruptcy Court approval), for the process that would lead
to the full satisfaction of the Deferred Coupon Notes and the Senior
Notes as part of a comprehensive financial restructuring of the
Company.
- On July 10, 2000, the Company announced that it had reached agreements
with the Committee, among others, for the monetization of its Barnett
Common Stock and the financial restructuring of Waxman Industries.
These agreements included the Company's agreement to vote its
7,186,530 shares of Barnett Common Stock owned by Waxman USA Inc. in
favor of the acquisition of Barnett by Wilmar Industries, Inc. for
$13.15 per share.
- On August 28, 2000, the Company and the Committee commenced the
solicitation for the approval of the Deferred Coupon Note holders for
the jointly sponsored, prepackaged plan of reorganization in advance
of its filing with the United States Bankruptcy Court (the "Joint
Plan"). Under the Joint Plan, the holders of the Deferred Coupon Notes
were the only impaired class of creditors; none of the Company's
operating subsidiaries or divisions were included in the filing and
they paid their trade creditors, employees and other liabilities under
normal conditions.
- On September 1, 2000, the Company sold to Barnett 160,723 shares of
Barnett Common Stock to fund the interest due on the Company's Senior
Notes.
8
- On September 27, 2000, the Barnett shareholders approved the Barnett
Merger.
- On September 28, 2000, the holders of approximately 97% of the
Deferred Coupon Notes voted in favor of accepting the Joint Plan, with
the remaining holders not voting.
- On September 29, 2000, the Company received gross proceeds from the
sale of the remaining Barnett Common Stock, which together with the
shares sold to Barnett on September 1, 2000, amounted to $94.5
million. The Company utilized the proceeds from the sale of the
Barnett Common Stock in the following order:
- paid or reserved for payment approximately $1.35 million for
state and federal taxes associated with the sale of the Barnett
shares.
- reduced its borrowings under its working capital credit facility
by approximately $10 million.
- retired all of its approximately $35.9 million principal amount
of Senior Notes, plus accrued interest.
- paid approximately $6.0 million in semi-annual interest due on
June 1, 2000 to its Deferred Coupon Note holders.
- funded a dedicated account with the remaining gross proceeds of
approximately $39.0 million, which was used for the full
satisfaction of the Deferred Coupon Notes, including accrued
interest, upon confirmation of the Joint Plan.
- On October 2, 2000, the Company, excluding Waxman USA Inc. and all of
its direct and indirect operating subsidiaries, filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
United States Court for the District of Delaware. The petition sought
confirmation by the court of the Joint Plan to settle, at a discount,
all amounts due on the Company's Deferred Coupon Notes. Under the
Joint Plan, the only impaired creditors were the Deferred Coupon Note
holders.
- On November 14, 2000, the Company's Joint Plan was approved by the
Court
- On November 16, 2000, the Company's Joint Plan became effective, and
the Company paid its obligation to the Deferred Coupon Note holders.
- On March 14, 2001, the Court closed the Chapter 11 case, and the
Company emerged from bankruptcy.
NOTE 5 - PROCUREMENT CHARGES
The Financial Accounting Standards Board ("FASB") has reviewed the industry
practices regarding the accounting for up-front "slotting fees" charged by
retailers for the right to shelf space and issued EITF Issue No. 00-25 related
to these types of charges. The FASB has concluded that charges of this nature
should be reported as a reduction in revenue beginning in annual or interim
periods after December 15, 2001, with financial statements for prior periods
being reclassified to comply with this requirement. The Company adopted this
standard in the quarter ended September 30, 2001.
Prior to the adoption of this standard, the Company reported and expensed
these costs in the period paid or incurred. The Company reported certain types
of business procurement costs as a separate category in its operating costs.
These business procurement costs included costs incurred in connection with a
customer's agreement to purchase products from the Company for a specific
period, including the consideration paid to the new or existing customer (i) for
the right to supply such customer for a specified period and (ii) to assist such
customer in reorganizing its store aisles and displays in order to accommodate
the Company's products. The Company classified a third type of business
procurement cost as a contra sale in prior years. This type was associated with
the purchase of a competitor's merchandise that the customer has on hand when it
changes suppliers, less the salvage value received by the Company. Beginning in
fiscal 2002, the Company will record all of these business procurement costs as
a reduction in sales.
The Company reduced its net sales by $825,000 in the quarter ended
September 30, 2001 for a combination of the above mentioned procurement costs.
In the quarter ended September 30, 2000, the Company reported $750,000 in contra
sales, including the reclassification of $154,000 of costs originally recorded
as an operating expense as a reduction of net sales.
NOTE 6 - RESTRUCTURING CHARGES
9
In the fiscal 2001 first quarter ended September 30, 2000, Consumer
Products recorded $350,000 in restructuring charges, which were associated with
its closed warehouses. The Company believes that all of the costs associated
with these closed facilities has been paid or provided for.
NOTE 7 - EXTRAORDINARY ITEM
In September 2000, the Company retired Waxman USA's Senior Notes, utilizing
a portion of the proceeds from the Barnett Merger. As a result, the Company
wrote off $57,000, net of taxes of $38,000, of deferred loan costs associated
with these notes.
NOTE 8 - 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.
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, the Company
considered the historic performance of the Company and uncertainty of it being
able to generate enough domestic taxable income to utilize these assets. At June
30, 2001, the Company's net deferred tax assets were fully offset by a valuation
allowance, and the Company continues to believe that the Company's net deferred
tax assets should continue to be offset by a valuation allowance. In the fiscal
2002 first quarter, the Company recorded a tax provision of $0.1 million, which
represents various state and foreign taxes. The Company will continue to analyze
the trends in the operating results of its domestic operations and to assess the
realizability of its deferred tax asset in fiscal 2002.
In the fiscal 2001 first quarter ended September 30, 2000, the Company did
not record a tax provision on the extraordinary gain from the defeasance of debt
due to its favorable treatment in a bankruptcy. For regular federal tax
purposes, the Company's net operating loss carryforwards were sufficient to
offset any regular federal tax liability. However, the Company provided for
federal taxes based on the alternative minimum tax method in the fiscal 2001
first quarter and for state and various foreign taxes.
In addition to the net operating losses utilized in fiscal 2001, the
Company lost a portion of its net operating loss carryforwards as a result of
the bankruptcy. At June 30, 2001, the Company had $17.5 million of available
domestic net operating loss carryforwards for income tax purposes, which will
expire in 2010 through 2020. The Company also had alternative minimum tax
carryforwards of approximately $1.7 million at June 30, 2001, which are
available to reduce future regular income taxes over an indefinite period.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended September 30, 2001 and 2000
included interest of $0.3 million and $8.5 million, respectively. The Company
made no federal income tax payments in the first quarters of fiscal 2002 or
fiscal 2001. The Company paid approximately $24,000 and $5,000 in state taxes
for the three months ended September 30, 2001 and 2000, respectively.
NOTE 10 - EARNINGS PER SHARE
Basic earnings per share represents net income divided by the weighted
average number of common shares outstanding. Diluted earnings per share utilizes
the weighted average number of common stock and common stock equivalents, which
include stock options and warrants. For the quarters ended September 30, 2001
and 2000, the impact of the options and warrants is anti-dilutive as the price
of the Company's stock was below the exercise prices of those instruments.
10
The number of common shares used to calculate basic and diluted earnings
per share, along with a reconciliation of such shares, is as follows (in
thousands):
Three months Three months
ended ended
September 30, September 30,
2001 2000
----- -----
Basic 1,212 1,212
Diluted 1,212 1,212
Basic 1,212 1,212
Dilutive effect of:
Stock options -- --
Warrants -- --
----- -----
Diluted 1,212 1,212
On February 6, 2001, the Company's shareholders voted in favor of a 1 for
10 reverse stock split, which became effective on February 20, 2001.
Accordingly, the share information presented below and on the face of the income
statement has been restated to reflect the reverse stock split.
NOTE 11 - SEGMENT INFORMATION
The Company's businesses distribute specialty plumbing products, floor and
surface protection products, galvanized, black, brass and chrome pipe nipples,
imported malleable fittings, and other products. As the foreign sourcing and
manufacturing operations sell a significant portion of their products through
the Company's other wholly-owned operations, which primarily sell to retailers,
and to Barnett, a distributor, the Company has classified its business segments
into retail and non-retail categories. Products are sold to (i) retail
operations, including large national and regional retailers, do-it-yourself
("D-I-Y") home centers and smaller independent retailers in the United States,
and (ii) non-retail operations, including wholesale and industrial supply
distributors in the United States. Sales outside of the United States are not
significant. Set forth below is certain financial data relating to the Company's
business segments (in thousands of dollars).
Corporate
Retail Non-Retail and Other Elimination Total
------ ---------- --------- ----------- -----
Reported net sales:
Fiscal 2001 three months $ 14,092 $ 6,825 -- $ (2,184) $ 18,733
Fiscal 2000 three months 12,361 6,534 -- (1,606) 17,289
Operating income (loss):
Fiscal 2001 three months $ 1,366 $ 243 $ (713) -- $ (896)
Fiscal 2000 three months (191) 88 (813) -- (916)
Identifiable assets:
September 30, 2001 $ 26,890 $ 9,927 $ 4,838 -- $ 41,655
June 30, 2001 26,907 9,135 4,790 -- 40,832
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 $9.2 million and $7.9 million for the first quarter of fiscal 2002
and 2001, respectively. Of these amounts, approximately $2.2 million and $1.6
million were intercompany sales for the first
11
quarter of fiscal 2002 and 2001, respectively. Identifiable assets for the
foreign operations were $12.5 million and $12.6 million at September 30, 2001
and June 30, 2001, respectively.
NOTE 12 - DISPOSAL OF BUSINESSES
A. SALE OF MEDAL OF PENNSYLVANIA, INC. - FISCAL 2001
The Company continued to consolidate the results of Medal of Pennsylvania,
Inc. ("Medal"), until March 31, 2001, the date the Company sold substantially
all of Medal's assets and certain liabilities. Medal was sold for approximately
$0.8 million in cash and the assumption of certain liabilities (the "Medal
Sale") resulting in a net pretax loss of $1.1 million in the quarter ended March
31, 2001.
In the quarter ended September 30, 2000, Medal's net sales and net loss,
which have been included in the September 30, 2000 results were as follows (in
thousands, except per share data):
Fiscal 2001
First Quarter
-------------
Net sales $ 1,251
Net loss $ (18)
Basic and diluted loss per share $ (0.01)
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains certain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 that are
based on the beliefs of the Company and its management. When used in this
document, the words "anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "should," and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including, but not limited to risks associated
with currently unforeseen competitive pressures and risks affecting the
Company's industry, such as decreased consumer spending, customer concentration
issues and the effects of general economic conditions. In addition, the
Company's business, operations and financial condition are subject to the risks,
uncertainties and assumptions which are described in the Company's reports and
statements filed from time to time with the Securities and Exchange Commission,
including this Report. Should one or more of those risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein.
RECENT DEVELOPMENTS
Over the past several years, the Company has endeavored to reduce its high
level of debt through the monetization of assets and to improve the efficiencies
of its continuing businesses. As a result, the Company undertook various
initiatives to raise cash, improve its cash flow and reduce its debt obligations
and / or improve its financial flexibility during that period. However, the
Company believed that it would have been unable to continue to make all of the
interest and principal payments under its debt obligations without the
development of a comprehensive financial restructuring plan, which would include
the monetization of the value of the shares of the Barnett Common Stock owned by
the Company. See Note 3 in this Form 10-Q for a discussion of the Company's sale
of its interest in Barnett.
In fiscal 2001, the Company completed its comprehensive financial
restructuring plan (See Note 4 of the Notes to Condensed Consolidated Financial
Statements in this Form 10-Q), disposing of 7,186,530 shares of Barnett Common
Stock and using the $94.5 million in proceeds as follows:
- paid approximately $1.35 million for state and federal taxes
associated with the sale of the Barnett shares.
- reduced its borrowings under its working capital credit facility by
approximately $10 million.
- retired all of its approximately $35.9 million principal amount of
Senior Notes plus accrued interest.
- paid approximately $6.0 million in semi-annual interest due on June 1,
2000 to the holders of its Deferred Coupon Notes.
- funded a dedicated account with the remaining gross proceeds of
approximately $39.0 million, which was used for the full satisfaction
of the Deferred Coupon Notes, including accrued interest, upon
confirmation of the Joint Plan.
The sale of the Barnett Common Stock and payments outlined above were the
made subsequent to the Company and an ad hoc committee representing a
controlling portion of the Deferred Coupon Notes and Senior Notes developing a
jointly sponsored, prepackaged plan of reorganization in advance of its filing
with the United States Bankruptcy Court (the "Joint Plan"). The Joint Plan
received the approval of the holders of approximately 97% of the Deferred Coupon
Notes. Under the Joint Plan, the holders of the Deferred Coupon Notes were the
only impaired class of creditors; none of the Company's operating subsidiaries
or operating divisions were included in the filing and they paid their trade
creditors, employees and other liabilities under normal conditions.
On October 2, 2000, the Company, excluding Waxman USA Inc. and all of its
direct and indirect operating subsidiaries, filed a petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in the United States Court for the
District of Delaware. The petition sought confirmation by the court of the Joint
Plan to settle, at a discount, all amounts due on the Company's Deferred Coupon
Notes. On November 14, 2000, the Company's Joint Plan was approved by the Court
and on November 16, 2000, the Company's Joint Plan became
13
effective, and the Company paid its obligation to the Deferred Coupon Note
holders. On March 14, 2001, the Court closed the Chapter 11 case, and the
Company emerged from bankruptcy.
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NET SALES
Net sales for the fiscal 2002 first quarter ended September 30, 2001
totaled $18.7 million, an increase of $1.4 million as compared to $17.3 million
for the same period in the prior fiscal year. Excluding Medal Distributing, an
operation sold on March 31, 2001, net sales for the continuing businesses
increased by $2.7 million. Net sales improved due to strong orders from existing
customers, including the expansion of product offerings at certain retailers,
the expansion in the number of retail stores served of other retailers and other
promotion programs.
The Company adopted a new financial accounting standard in the fiscal 2002
first quarter ended September 30, 2001, resulting in $0.8 million in slotting
fees and other business procurement charges being recorded as a contra-sale. Net
sales for the comparable period in fiscal 2001 have been restated, resulting in
$0.8 million being recorded as a contra sale, including $0.2 million of
additional business procurement costs, originally reported in operating
expenses.
Net sales to retailers amounted to $14.1 million and $12.4 million for the
quarters ended September 30, 2001 and 2000, respectively. The increase is due to
strong sales to the growth of programs with certain retail customers and the
expansion into stores not previously served with existing customers. Non-retail
sales amounted to $6.8 million and $6.5 million for the quarters ended September
30, 2001 and 2000, respectively.
GROSS PROFIT
Gross profit for the fiscal 2002 first quarter was $6.1 million, with a
gross profit margin of 32.3 percent, as compared to gross profit of $5.1 million
and a gross profit margin of 29.5 percent for the three months ended September
30, 2000. The increase in the gross profit and margin is primarily attributable
to improved sales to retailers, which typically have higher profit margins than
non-retail sales. In addition, the gross profit margin for fiscal 2002 improved
due the exclusion of sales for Medal Distributing, which historically reported
lower profit margins. While non-retail sales and sales from the direct import
sales program have a lower gross margin, they also have lower selling, general
and administrative expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A expenses") amounted to
$5.2 million and $5.7 million for the quarters ended September 30, 2001 and
2000. SG&A expenses as a percentage of net sales decreased to 27.5% for the
fiscal 2002 first quarter from 32.7% for the fiscal 2001 first quarter. The
improvement is due to the sale of Medal, which reported $0.4 million in SG&A in
the fiscal 2001 first quarter. Excluding Medal's SG&A expenses, the Company's
SG&A expenses improved by $0.1 million. The ratio of SG&A expenses to net sales
improved primarily due to the significant increase in sales in the fiscal 2002
first quarter.
RESTRUCTURING CHARGES
In the first quarter of fiscal 2001, Consumer Products recorded $350,000 in
restructuring charges for costs associated with its closed warehouse facilities.
Based on current estimates, the Company believes it has provided for all
remaining costs to be incurred in connection with the closing of these
facilities.
EQUITY EARNINGS OF BARNETT
The Company recorded equity earnings from its ownership interest in Barnett
of $1.4 million for the quarters ended September 30, 2000. As detailed in Notes
3 and 4, the Company sold its equity investment in Barnett on September 29, 2000
as part of its comprehensive financial restructuring plan.
14
GAIN ON SALE OF EQUITY INVESTMENT AND AMORTIZATION OF DEFERRED GAIN ON SALE OF
U.S. LOCK
On July 10, 2000, the Company announced that it has reached an agreement to
monetize its 7,186,530 shares of Barnett Common Stock for $13.15 per share in
connection with the Barnett Merger. In September 2000, the Company sold its
remaining shares of Barnett Common Stock. The gross proceeds from the sale of
the 7,186,530 shares of Barnett Common Stock amounted to $94.5 million. The
Company's equity investment in Barnett amounted to $44.3 million immediately
prior to the sale. The Company reported a net gain on the sale of Barnett of
$47.5 million, after the write-off of $2.7 million in transaction related costs
associated with the Barnett sale and other costs associated with the
comprehensive financial restructuring of the Company.
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for $33.0
million in cash, before certain adjustments and expenses. The sale of U.S. Lock
resulted in a net pretax gain of $18.3 million, with approximately $10.2 million
being recognized in the fiscal 1999 third quarter. The remaining deferred gain
was carried on the Company's consolidated balance sheet due and being amortized
as Barnett amortized the goodwill associated with the U.S. Lock acquisition. As
a result of the sale of its remaining interest in Barnett, the Company
recognized the remaining $7.8 million of unamortized deferred gain in the
quarter ended September 30, 2000.
INTEREST EXPENSE
For the quarter ended September 30, 2001, net interest expense totaled $0.2
million, as compared to $4.7 million in the fiscal 2001 first quarter. Average
borrowings for the current year's quarter amounted to $11.0 million, with a
weighted average interest rate of 7.3%, as compared to $147.2 million in the
same quarter last year, with a weighted average interest rate of 12.2%. In late
September 2000, the Company completed the sale of the Barnett Common Stock,
however, the average borrowings for the fiscal 2001 first quarter were virtually
unaffected by the late completion of this transaction. Fiscal 2002 interest
benefited from the completion of the comprehensive financial restructuring and
elimination of the Company's Senior Notes and Deferred Coupon Notes in fiscal
2001.
PROVISION FOR INCOME TAXES
In the quarter ended September 30, 2001, the Company's tax provision
amounted to $0.1 million. The tax provision for the fiscal 2002 first quarter
represents various state and foreign taxes. For the fiscal 2002 first quarter,
the difference between the effective and statutory tax rates is primarily due to
the utilization of domestic operating losses previously not benefited.
In the fiscal 2001 first quarter, the Company recognized significant income
from the sale of its Barnett Common Stock. The Company was able to utilize a
portion of its net operating loss carryforwards to offset its federal tax
liability calculated using the regular tax method. However, the Company provided
for federal taxes based on the alternative minimum tax method in the quarter
ended September 30, 2001, and for state and various foreign taxes.
EXTRAORDINARY CHARGE
In the quarter ended September 30, 2000, the Company retired the Waxman USA
Inc. Senior Notes with a portion of the proceeds from the Barnett sale.
Accordingly, the Company reported an extraordinary charge of $57,000, net of a
tax benefit of $38,000 to write-off the deferred loan costs associated with the
Senior Notes.
NET INCOME (LOSS)
The Company reported net income of $0.6 million, or $0.48 per basic and
diluted share, for the fiscal 2002 first quarter ended September 30, 2001.
The Company's net income for the quarter ended September 30, 2000 amounted
to $48.2 million, or $39.78 per basic and diluted share. The significant change
in net income is due to the recognition of a $47.5 million net gain on the
Barnett Sale and $7.8 million of previously deferred gain from the sale of U.S.
Lock.
B. LIQUIDITY AND CAPITAL RESOURCES
15
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 resulted in the development of a comprehensive financial
restructuring plan, including a Debt Restructuring Agreement with an ad hoc
committee, the members of which owned approximately 87.6 percent of the
Company's Deferred Coupon Notes and nearly 65 percent of the Senior Notes. An
integral component of the Debt Restructuring Plan was the sale of all of the
Company's remaining interest in Barnett. See Notes 3 and 4 in this Form 10-Q for
a discussion of the Company's sale of its interest in Barnett and the
development of the comprehensive financial restructuring plan. The financial
reorganization did not involve any of the Company's operating subsidiaries,
which have their own bank credit facility. The operating companies paid all of
their trade creditors, employees and other liabilities under normal trade
conditions.
In fiscal 2001, the Company completed its comprehensive financial
restructuring plan (See Note 4 of the Notes to Condensed Consolidated Financial
Statements in this Form 10-Q), disposing of 7,186,530 shares of Barnett Common
Stock and using the $94.5 million in proceeds as follows:
- paid approximately $1.35 million for state and federal taxes
associated with the sale of the Barnett shares.
- reduced its borrowings under its working capital credit facility by
approximately $10 million.
- retired all of its approximately $35.9 million principal amount of
Senior Notes, plus accrued interest.
- paid approximately $6.0 million in semi-annual interest due on June 1,
2000 to the holders of its Deferred Coupon Notes.
- funded a dedicated account with the remaining gross proceeds of
approximately $39.0 million, which was used for the full satisfaction
of the Deferred Coupon Notes, including accrued interest, upon
confirmation of the Joint Plan.
As part of its comprehensive financial restructuring plan, on October 2,
2000, the Company filed its Chapter 11 Joint Plan of Reorganization with the
courts. On October 4, 2000, the First Day Orders were approved and, based on the
overwhelming support of the holders of 97% of the Deferred Coupon Notes, the
date of November 14, 2000 was set for the confirmation hearing to effectuate
terms of the Joint Plan. The Company believes that the approval of the Joint
Plan, along with the retirement of the Senior Notes and reduction of its bank
working capital debt, has improved its financial condition significantly, as
well as reduced its interest expense by approximately $17 million per year.
In June 1999, the Company entered into the Loan and Security Agreement with
Congress Financial Corporation to replace the Credit Agreement with BankAmerica
Business Credit, Inc. that was to expire on July 15, 1999. The Loan and Security
Agreement is between Consumer Products, Medal of Pennsylvania, Inc. (formerly
known as WOC Inc.), WAMI and WAMI Sales, as borrowers (the "Borrowers"), with
the Company, Waxman USA Inc. ("Waxman USA") and TWI as guarantors. In March
2000, the Company and Congress Financial Corporation amended the loan agreement
to, among other changes, increase the facility by up to $3.0 million. The Loan
and Security Agreement provided, among other things, for revolving credit
advances of up to $22.0 million. In April 2000, the Loan and Security Agreement
was further amended to allow the sale of substantially all of the assets of
WAMI. This facility decreased to $20 million with the completion of the Barnett
Sale in September 2000. As of September 30, 2001, the Company had $10.9 million
in borrowings under the revolving credit line of the facility and had
approximately $1.0 million available under such facility. The Loan and Security
Agreement expires on June 18, 2002.
The Loan and Security Agreement provided for revolving credit advances of
(a) up to 85.0% of the amount of eligible accounts receivable and (b) up to the
lesser of (i) $10.0 million or (ii) 60% of the amount of eligible raw and
finished goods inventory. Congress Financial Corporation notified the Company
subsequent to September 30, 2001, that it will be reducing the advance rate on
the inventory to 50% over a ten week period in the fiscal 2002 second quarter.
The Company is considering its all of its options, including opportunities to
increase its bank availability by using the value of in-transit inventory that
is owned by the Company and being shipped from Asia and the value of the
Corporate office building.
Revolving credit advances bear interest at a rate equal to (a) First Union
National Bank's prime rate plus
17
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,
2001. Borrowings under the Loan and Security Agreement are secured by the
accounts receivable, inventories, certain general intangibles, and unencumbered
fixed assets of Waxman Industries, Inc., Consumer Products, WAMI Sales, and a
pledge of 65% of the stock of various foreign subsidiaries. The Loan and
Security Agreement requires the Borrowers to maintain cash collateral accounts
into which all available funds are deposited and applied to service the facility
on a daily basis. The Loan and Security Agreement prevents dividends and
distributions by the Borrowers except in certain limited instances including, so
long as there is no default or event of default and the Borrowers are in
compliance with certain financial covenants, the payment of interest on the
Senior Notes and the Company's Deferred Coupon Notes, and contains customary
negative, affirmative and financial covenants and conditions. The Company was in
compliance with or has obtained a waiver for all loan covenants at September 30,
2001. The Loan and Security Agreement also contains a material adverse condition
clause, which allows Congress Financial Corporation to terminate the Agreement
under certain circumstances.
The Company relies primarily on Consumer Products for cash flow. Consumer
Products' customers include D-I-Y warehouse home centers, home improvement
centers, mass merchandisers and hardware stores. Consumer Products may be
adversely affected by prolonged economic downturns or significant declines in
consumer spending. There can be no assurance that any such prolonged economic
downturn or significant decline in consumer spending will not have a material
adverse impact on Consumer Products' business and its ability to generate cash
flow. Furthermore, Consumer Products has a high proportion of its sales with a
concentrated number of customers. Consumer Products' largest customers, Wal-Mart
and Kmart, accounted for approximately 25.8% and 19.9% of its net sales in
fiscal 2001, respectively. In the event Consumer Products were to lose one of
its 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 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 has had discussions with lenders regarding the use of other
assets to secure additional borrowing capacity, which it believes it will need
to meet its operating cash flow demands, including working capital to support
its existing business and to fund business retention and procurement costs. The
Company believes that securing this additional capital is important in meeting
all of its growth and operating needs. The current working capital facility may
not be sufficient to fund all of these working capital requirements.
The Company paid $24,000 and $5,000 in income taxes in the first quarter in
fiscal 2002 and 2001, respectively. For regular federal tax purposes, the
Company's net operating loss carryforwards were sufficient to offset any regular
federal tax liability. However, the Company has provided for federal taxes based
on the alternative minimum tax method in the fiscal 2001 first quarter and for
state and various foreign taxes. At June 30, 2001, the Company had $17.5 million
of available domestic net operating loss carryforwards for income tax purposes,
which will expire in 2010 through 2020.
The Company has total future lease commitments for various facilities and
other leases totaling $3.1 million, of which approximately $0.7 million is due
in fiscal 2002 and $0.2 million was paid in the fiscal 2002 first quarter. The
Company does not have any other commitments to make substantial capital
expenditures. The fiscal 2002 capital expenditure plan includes expenditures to
improve the efficiencies of the Company's operations, to provide new data
technology and certain expansion plans for the Company's foreign operations.
At September 30, 2001, the Company had working capital of $7.8 million and
a current ratio of 1.4 to 1.
DISCUSSION OF CASH FLOWS
Net cash used for operations was $0.1 million for the first quarter of
fiscal 2002 principally due to the increase in receivables and payment of
accounts payable, which offset the decrease in inventory, depreciation and
income generated during the period. Cash flow used for investments totaled $0.3
million for capital expenditures. Cash flow provided by financing activities
totaled approximately $1.0 million, primarily borrowing on the Company's working
capital bank facility.
17
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 2001 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 1, 2001 BY: /S/ MARK W. WESTER
MARK W. WESTER
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
19