-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pgte+cdHUMfz8CVsJ9ngwFciz6k+B7lDcfkno3hsyBCnoE/xXv7PpKJnipc+ugh1 LZjr1BUfjFmzhcji3knOsg== 0000950152-02-000660.txt : 20020414 0000950152-02-000660.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950152-02-000660 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020201 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: 02524696 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 l92506ae10-q.txt WAXMAN INDUSTRIES, INC. 10-Q FOR 12/31/2001 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, 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 --- --- 1,003,990 shares of Common Stock, $.01 par value, and 214,189 shares of Class B Common Stock, $.01 par value, were outstanding as of January 30, 2002. 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 and Six Months Ended December 31, 2001 and 2000.................................. 3 Condensed Consolidated Balance Sheets - December 31, 2001 and June 30, 2001............ 4-5 Condensed Consolidated Statements of Cash Flows - Three and Six Months Ended December 31, 2001 and 2000.................................. 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 - ----------
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Six Months ------------ ---------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 18,116 $ 17,660 $ 36,849 $ 34,949 Cost of sales 12,510 11,973 25,188 24,169 --------- --------- --------- --------- Gross profit 5,606 5,687 11,661 10,780 Selling, general and administrative expenses 4,950 5,453 10,109 11,112 Restructuring charges -- -- -- 350 --------- --------- --------- --------- Operating income (loss) 656 234 1,552 (682) 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 184 77 422 4,802 --------- --------- --------- --------- Income before income taxes and extraordinary charge 472 157 1,130 51,174 Provision (benefit) for income taxes 88 (200) 162 2,550 --------- --------- --------- --------- Income (loss) from continuing operations before extraordinary items 384 357 968 48,624 Extraordinary items, net of taxes -- 52,279 -- 52,222 --------- --------- --------- --------- Net income $ 384 $ 52,636 $ 968 $ 100,846 ========== ========= ========= ========= Other comprehensive income: Foreign currency translation adjustment (80) 41 (61) (31) ----------- --------- --------- --------- Comprehensive income $ 304 $ 52,677 $ 907 $ 100,815 ========== ========= ========= ========= Income per share (basic and diluted): Income from continuing operations before extraordinary items $ 0.32 $ 0.29 $ 0.80 $ 40.12 Extraordinary items -- 43.14 -- 43.09 ---------- --------- --------- --------- Net income $ 0.32 $ 43.43 $ 0.80 $ 83.21 ========== ========= ========= ========= Weighted average shares and equivalents 1,212 1,212 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 ------------------------------------- DECEMBER 31, 2001 AND JUNE 30, 2001 (IN THOUSANDS) ASSETS
December 31, June 30, 2001 2001 (Unaudited) (Audited) ----------- --------- CURRENT ASSETS: Cash and cash equivalents $ 96 $ 740 Trade receivables, net 12,706 12,592 Other receivables 1,386 1,400 Inventories 10,062 11,895 Prepaid expenses 1,799 1,850 --------- -------- Total current assets 26,049 28,477 --------- -------- PROPERTY AND EQUIPMENT: Land 546 551 Buildings 3,803 4,318 Equipment 11,397 10,415 --------- -------- 15,746 15,284 Less accumulated depreciation and amortization ( 7,570) ( 6,996) --------- -------- Property and equipment, net 8,176 8,288 --------- -------- CASH SURRENDER VALUE OF OFFICER'S LIFE INSURANCE POLICIES 3,129 2,934 UNAMORTIZED DEBT ISSUANCE COSTS, NET 65 142 OTHER ASSETS 1,129 991 --------- -------- $ 38,548 $ 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 ------------------------------------- DECEMBER 31, 2001 AND JUNE 30, 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30, 2001 2001 (Unaudited) (Audited) ------------ ----------- CURRENT LIABILITIES: Current portion of long-term debt $ 8,291 $ 10,045 Accounts payable 5,495 6,932 Accrued liabilities 4,526 4,291 ---------- ----------- Total current liabilities 18,312 21,268 ---------- ----------- OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 297 532 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 December 31, 2001 and June 30, 2001 99 99 Class B common stock, $.01 par value per share: Authorized 6,000 shares; Issued 214 at December 31, 2001 and June 30, 2001 21 21 Paid-in capital 21,752 21,752 Retained deficit ( 740) ( 1,708) ---------- ----------- 21,132 20,164 Accumulated other comprehensive income (1,193) (1,132) ---------- ----------- Total stockholders' equity 19,939 19,032 ---------- ----------- $ 38,548 $ 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 SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 968 $ 100,846 Adjustments to reconcile net income (loss) to net cash used in operating activities: Extraordinary loss-debt defeasance -- (52,222) Gain on sale of Barnett stock, net -- (47,473) Non-cash interest 78 83 Amortization of deferred U.S. Lock gain -- (7,815) Equity earnings of Barnett -- (1,370) Depreciation and amortization 727 1,164 Deferred income taxes -- 367 Changes in assets and liabilities: Trade receivables, net (114) 1,115 Inventories 1,833 1,035 Other assets (268) 1,320 Accounts payable (1,437) (254) Accrued liabilities 235 2,131 Accrued interest -- -- Accrued taxes -- (405) Other, net (61) (31) --------- --------- Net Cash Provided by (Used in) Operating Activities 1,961 (9,740) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of Barnett stock -- 94,503 Capital expenditures, net (616) (562) --------- --------- Net Cash (Used in) Provided by Investing Activities (616) 93,941 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in line of credit (1,754) (8,910) Retirement of 11 1/8% Senior Secured Notes due 2001 -- 35,855 Restricted cash to retire the 12 3/4% Deferred Coupon Notes due 2004 -- 39,329 Change in long-term debt, net (235) (134) --------- --------- Net Cash (Used in) Provided by Financing Activities (1,989) (84,228) --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (644) (27) BALANCE, BEGINNING OF PERIOD 740 811 --------- --------- BALANCE, END OF PERIOD $ 96 $ 784 ========= =========
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) DECEMBER 31, 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 and six months ended December 31, 2001 and 2000, the condensed balance sheet as of December 31, 2001 and the condensed statements of cash flows for the six months ended December 31, 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 December 31, 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 leading supplier of specialty plumbing, floor and surface protection and other hardware products to the repair and remodeling market. Through its wholly-owned subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products") and WAMI Sales, Inc. ("WAMI Sales"), the Company distributes products to approximately 750 customers, including a wide variety of national and regional retailers and wholesalers in the United States. Through its Asian operations, TWI and CWI (as defined below), the Company manufactures, sources, assembles and packages plumbing and other products for sale to its U.S. based operations and to manufacturers, wholesalers, retailers and other industrial customers in the United States and globally. The Company conducts its business primarily through its wholly-owned subsidiaries, Consumer Products, 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 ("CWI") and Taiwan ("TWI"). 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 13). 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 customers throughout the United States. The Company recorded equity earnings from this investment of $1.4 million for the 7 fiscal 2000 first quarter ended September 30, 2000. The Barnett Common Stock traded on the Nasdaq National Market under the symbol "BNTT" until the completion of the acquisition of Barnett by a subsidiary of Wilmar Industries, Inc. (the "Barnett Merger") on September 27, 2000. NOTE 3 - 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 in connection with 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. - On September 27, 2000, the Barnett shareholders approved the Barnett Merger. 8 - 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 $525,000 and $1.35 million in the three and six month periods ended December 31, 2001, respectively, for a combination of the above mentioned procurement costs. In the three and six month periods ended December 31, 2000, the Company reported $450,000 and $1.2 million, respectively, in contra sales, including the reclassification of $300,000 and $450,000 of costs originally recorded as an operating expense as a reduction of net sales. NOTE 6 - RESTRUCTURING CHARGES 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. 9 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. In November 2000, the Company reported net extraordinary income of $52.2 million, which includes a gain of $56.5 million from the retirement of the Company's $92.8 million of Deferred Coupon Notes at a discount, the write-off of $1.9 million of unamortized debt issuance costs associated with the Deferred Coupon Notes and $2.4 million of expenses associated with the debt restructuring. The Company did not provide a provision on the extraordinary gain due to the tax regulations on the treatment of debt defeasance income in a bankruptcy. 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 three and six month periods, the Company recorded a tax provision of $0.1 million and $0.2 million, which represents various state and foreign taxes. The Company will continue to analyze the trends in the operating results of its domestic operations to assess the realizability of its deferred tax asset in fiscal 2002. In the three and six month months ended December 31, 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 three and six month periods 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 and six months ended December 31, 2001 included interest of $0.2 million and $0.4 million, respectively, as compared to $0.3 million and $8.8 million for the three and six month periods in fiscal 2000, respectively. The Company made no federal income tax payments in the three and six month periods of fiscal 2002 but made payments of $0.8 million for the three and six month periods in fiscal 2001. The Company paid approximately $3,300 and $0.3 million in state taxes for the three months ended December 31, 2001 and 2000, and $27,300 and $0.3 million for the six months ended December 31, 2001 and 2000, respectively. NOTE 10 - EARNINGS PER SHARE 10 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 three and six months ended December 31, 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. 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 Six months Six months ended ended ended ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- Basic 1,212 1,212 1,212 1,212 Diluted 1,212 1,212 1,212 1,212 Basic 1,212 1,212 1,212 1,212 Dilutive effect of: Stock options -- -- -- -- Warrants -- -- -- -- ----- ----- ----- ----- Diluted 1,212 1,212 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 - STOCK OPTIONS, STOCK APPRECIATION RIGHTS, RESTRICTED STOCK AND STOCK PURCHASE PLANS The Company had two plans under which stock options could be granted. The Company applied 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. The 1992 Non-Qualified and Incentive Stock Option Plan, as amended (the "1992 Stock Option Plan"), authorized the issuance of an aggregate of 180,000 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 were 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 December 31, 2001, 33 persons held 130,155 options at an average price of $21.75. 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 2,000 shares of the Company's Common Stock the then current market price (the "1994 Non-Employee Director Plan"). As of December 31, 2001, 3 persons held 5,000 options at an average price of $22.50. In fiscal 1996, the Board of Directors adopted the 1996 Non-Employee Directors Restricted Share Plan (the "1996 Plan"). The 1996 Plan was 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 called for 500 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. There were no awards made since fiscal 1998. The 1996 Plan was terminated by the Board of Directors in December 2001. Also in fiscal 1996, the Stock Option Committee granted Stock Appreciation Rights ("SAR") for 20,000 shares to each of the Co-Chief Executive Officers of the Company at a base price of $33.75, and in September 1996, an SAR for 10,000 shares to the President of Consumer Products at a base price of $33.75. Each SAR was scheduled to expire ten years from the date of grant and vests in whole, three years after the date of grant. Upon exercise, the grantee was entitled to an amount equal to the excess of the fair value per share of the Common Stock on the date of exercise over 11 the base price of the SAR. Each SAR was 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". Due to the market price of the Company's stock being below the exercise price of the SAR's, no expense has been recorded for the value of this plan since fiscal 1997. In December 2001, the Company's Board of Directors (including directors who are controlling shareholders) of the Company, voted to establish a new stock incentive plan and to submit the plan for shareholder approval at the Company's Fiscal 2002 Annual Meeting of Shareholders (the "2002 Stock Incentive Plan"). The 2002 Stock Incentive Plan sets aside up to 275,000 shares of Common Stock that can be used to replace existing stock options and Stock Appreciation Rights, and for future grants to attract, reward and provide incentive to the Company's officers, directors, employees and consultants. In December 2001, the Company offered to exchange a promise to grant new options under the 2002 Stock Incentive Plan for an equivalent number of options under the Company's prior plans (the "Exchange Offer"). The Exchange Offer provided current option holders the opportunity to cancel options they had under the 1992 Stock Option Plan and the 1994 Non-Employee Director Plan for an equivalent number of options under the 2002 Stock Incentive Plan. On January 8, 2002, the Exchange Offer expired with all of the participants accepting the offer. The stock options and SAR's (which were exchanged on terms substantially the same as in the Exchange Offer) were cancelled on January 9, 2002. The replacement options will be granted six months and one day after the expiration of the Exchange Offer to preserve fixed accounting for the options. In connection with the successful completion of the Exchange Offer, the 1992 Stock Option Plan and the 1994 Non-Employee Director Plan. Through December 31, 2001, the Company also allowed employees to defer a portion of their salary to participate in an Employee Stock Purchase Plan (the "ESPP"). The ESPP allowed employees to make an election to purchase shares at the lower of 85 percent of the closing market price of the Company's stock on the first or last day of the calendar year. In fiscal 2002, 6,129 shares were purchased by employees, while there were no purchases in fiscal 2001. The Company allowed this plan to expire without renewing it. NOTE 12 - 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 2002 second quarter $ 12,684 $ 7,194 -- $ (1,762) $ 18,116 Fiscal 2001 second quarter 12,992 6,779 -- (2,111) 17,660 Fiscal 2002 six months $ 26,776 $ 14,019 -- $ (3,946) $ 36,849 Fiscal 2001 six months 25,353 13,313 -- (3,717) 34,949 Operating income (loss): Fiscal 2002 second quarter $ 1,007 $ 267 $ (618) -- $ 656 Fiscal 2001 second quarter 649 315 (730) -- 234 Fiscal 2002 six months $ 2,373 $ 510 $ (1,331) -- $ 1,552 Fiscal 2001 six months 458 403 (1,543) -- (682) Identifiable assets:
12
December 31, 2001 $ 24,247 $ 9,305 $ 4,996 -- $ 38,548 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 $9.5 million and $18.7 million for the three and six months ended December 31, 2001, and $6.0 million and $12.1 million for the three and six months ended December 31, 2000, respectively. Of these amounts, approximately $1.8 million and $3.9 million were intercompany sales for the three months and six months ended December 31, 2001, and $2.1 million and $3.7 million were sales for the three and six months ended December 31, 2000, respectively. Identifiable assets for the foreign operations were $11.8 million and $12.6 million at December 31, 2001 and June 30, 2001, respectively. NOTE 13 - 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 three and six months ended December 31, 2000, Medal's net sales and net loss, which have been included in the December 31, 2000, results were as follows (in thousands, except per share data): Three Months Six Months December 31, December 31, 2000 2000 ---- ---- Net sales $ 1,115 $ 2,366 Net loss $ (47) $ (65) Basic and diluted loss per share $ (0.04) $ (0.05) 13 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 and credit risk 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 Financial Restructuring - ----------------------- 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 14 Company's Joint Plan was approved by the Court and 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. Kmart Business - -------------- The Company has been a supplier of Kmart for approximately 15 years. For the six months ended December 31, 2001, Kmart accounted for approximately 11 percent and 20 percent of the Company's and Consumer Product's net sales, respectively. On January 22, 2002, Kmart filed for Chapter 11 bankruptcy protection. The Company believes that it has adequate reserves to account for any loss on its outstanding account receivable. The Company is continuing to evaluate the impact of Kmart's financial difficulties and their Chapter 11 filing. In connection with Kmart's bankruptcy proceedings, the Company expects that Kmart will review all of its vendor relationships. Accordingly, there can be no assurances as to whether the Company will continue to supply Kmart with all of the existing product lines, the level, if any, of future purchases or the terms and conditions applicable to any future supply relationship. In assessing the nature of any future relationship with Kmart, the Company will consider a variety of factors, including the potential reduction in the number of Kmart stores and revenue reduction as a result of their financial restructuring, credit risk and the cost of financing working capital to support sales to and other programs with Kmart. The Company is evaluating the possible reduction or loss of this revenue base and ways to reduce its cost structure to be more in line with a potentially smaller revenue base. However, in the short term it may not be able to absorb all of the expenses due to this revenue loss if there is a significantly, sustained curtailment of Kmart's purchases from Consumer Products. The Company believes that increases in sales with other customers, will ultimately offset any potential short term loss of Kmart revenue. A. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 Net Sales - --------- Net sales for the fiscal 2002 second quarter ended December 31, 2001 totaled $18.1 million, an increase of $0.4 million as compared to $17.7 million for the same period in the prior fiscal year. Excluding Medal Distributing, an operation sold on March 31, 2001, the prior year second quarter net sales would have been $16.5 million for the continuing businesses, and the increase in net sales for comparable businesses would have been $1.6 million, or 9.5%. 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 31, 2001, resulting in $0.5 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 $0.45 million being recorded as a contra sale, including $0.3 million of additional business procurement costs, originally reported in operating expenses. Net sales to retailers amounted to $12.7 million and $13.0 million for the quarters ended December 31, 2001 and 2000, respectively, and were nearly identical after intercompany eliminations. Non-retail sales accounted for the increase in the Company's net sales for the quarter ended December 31, 2001, amounting to $7.2 million and $6.8 million for the quarters ended December 31, 2001 and 2000, respectively. The growth in sales from the foreign operations continues to be one of the Company's long term growth strategies. Gross Profit - ------------ Gross profit for the fiscal 2002 second quarter was $5.6 million, with a gross profit margin of 31.0 percent, as compared to gross profit of $5.7 million and a gross profit margin of 32.6 percent for the three months ended 15 December 31, 2000. The slight decrease in the gross profit and gross profit margin is primarily attributable to stronger sales being made by the Company's foreign operations. 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 $5.0 million and $5.5 million for the quarters ended December 31, 2001 and 2000. SG&A expenses as a percentage of net sales decreased to 27.3% for the fiscal 2002 second quarter from 30.9% for the fiscal 2001 second quarter. The improvement is due to the sale of Medal, which reported $0.4 million in SG&A in the fiscal 2001 second quarter. Excluding Medal's SG&A expenses, the Company's SG&A expenses improved by $0.2 million. The ratio of SG&A expenses to net sales improved primarily due to the significant increase in sales in the fiscal 2002 second quarter. Interest Expense - ---------------- For the quarter ended December 31, 2001, net interest expense totaled $0.2 million, as compared to $0.1 million in the fiscal 2001 second quarter. The prior year second quarter net interest expense was lower due to $0.3 million in interest income earned on proceeds held and invested until the Deferred Coupon Notes were repaid on November 16, 2000. Average borrowings for the current year's quarter amounted to $10.0 million, with a weighted average interest rate of 5.9%, as compared to $10.0 million in the same quarter last year, with a weighted average interest rate of 11.1%. 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 December 31, 2001, the Company's tax provision amounted to $0.1 million. The tax provision for the fiscal 2002 second quarter represents various state and foreign taxes. For the fiscal 2002 second 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 second quarter, the Company recorded a benefit from income taxes of $0.2 million. The benefit for the current quarter primarily represents the utilization of net operating loss carryforwards, which offset various state and foreign taxes of the Company's wholly-owned operations. For the fiscal 2001 second quarter, the difference between the effective and statutory tax rates is primarily due to the impact of the favorable tax treatment of debt defeasance income in a bankruptcy and the utilization of net operating loss carryforwards, Extraordinary Item - ------------------ In November 2000, the Company reported extraordinary income of $56.5 million from the retirement of the Company's Deferred Coupon Notes at a discount, net of the write-off of $1.9 million of deferred loan costs associated with the Deferred Coupon Notes and costs incurred as part of the restructuring of $2.4 million. Net Income (Loss) - ----------------- The Company reported net income of $0.4 million, or $0.32 per basic and diluted share, for the fiscal 2002 second quarter ended December 31, 2001. The Company's net income for the quarter ended December 31, 2000 amounted to $52.7 million, or $43.43 per basic and diluted share. The significant change in net income is due to the recognition of the net extraordinary gain on the defeasance of debt. FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 Net Sales - --------- 16 Net sales for the fiscal 2002 six month period ended December 31, 2001 totaled $36.8 million, an increase of $1.9 million as compared to $34.9 million for the same period in the prior fiscal year. Excluding Medal Distributing, an operation sold on March 31, 2001, net sales for the prior year six month period would have been $32.6 million for the continuing businesses, and the increase in net sales for comparable businesses would have been $4.2 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, and stronger sales by the foreign operations. The Company adopted a new financial accounting standard in the fiscal 2002 first quarter ended September 30, 2001, resulting in $1.35 million in slotting fees and other business procurement charges being recorded as a contra-sale for the fiscal 2002 six month period. Net sales for the comparable period in fiscal 2001 have been restated, resulting in $1.2 million being recorded as a contra sale, including $0.45 million of additional business procurement costs, originally reported in operating expenses. Net sales to retailers amounted to $26.9 million and $25.4 million for the six months ended December 31, 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 in the fiscal 2002 first quarter. Non-retail sales amounted to $14.0 million and $13.3 million for the six months ended December 31, 2001 and 2000, respectively. Gross Profit - ------------ Gross profit for the fiscal 2002 six month period was $11.7 million, with a gross profit margin of 31.7 percent, as compared to gross profit of $10.8 million and a gross profit margin of 30.8 percent for the six months ended December 31, 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 $10.1 million and $11.1 million for the six months ended December 31, 2001 and 2000. SG&A expenses as a percentage of net sales decreased to 27.4% for the fiscal 2002 second quarter from 31.8% for the fiscal 2001 six month period. The improvement is due to the sale of Medal, which reported $0.7 million in SG&A in the fiscal 2001 six month period. Excluding Medal's SG&A expenses, the Company's SG&A expenses improved by $0.3 million. The ratio of SG&A expenses to net sales improved primarily due to the significant increase in sales in the fiscal 2002 second 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. 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 17 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 six months ended December 31, 2001, net interest expense totaled $0.4 million, as compared to $4.8 million in the fiscal 2001 six month period. Average borrowings for the six months ended December 31, 2001 amounted to $10.5 million, with a weighted average interest rate of 6.7%, as compared to $78.6 million in the same period 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 six months ended December 31, 2001, the Company's tax provision amounted to $0.2 million, which represents various state and foreign taxes. For the fiscal 2002 six month period, the difference between the effective and statutory tax rates is primarily due to the utilization of domestic operating losses previously not benefited. The provision for income taxes for the fiscal 2001 six month period amounted to $2.6 million. Income recognized from the sale of Barnett and defeasance of debt in the six months ended December 31, 2000 generated taxable income. The Company utilized its net operating loss carryforwards to offset its federal tax due based on the regular method of computing tax liability and, taxes on the debt defeasance income were not provided due to favorable tax treatment allowed in a bankruptcy. The Company's tax provision for the fiscal 2001 six month period provides for federal taxes based on the alternative minimum tax method and for state and various foreign taxes. Extraordinary Charge - -------------------- In the six months ended December 31, 2000, the Company reported extraordinary income of $56.5 million from the retirement of the Company's Deferred Coupon Notes, net of the write-off of $1.9 million of deferred loan costs associated with the Deferred Coupon Notes and costs incurred as part of the restructuring process of $2.4 million. In the quarter ended September 30, 2000, the Company recorded an extraordinary loss of $57,000, net of a tax benefit of $38,000, to write-off deferred loan costs associated with the retirement of the Senior Notes. Net Income (Loss) - ----------------- The Company reported net income of $1.0 million, or $0.80 per basic and diluted share, for the fiscal 2002 six month period ended December 31, 2001. The Company's net income for the six month period ended December 31, 2000 amounted to $100.8 million, or $83.21 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, $7.8 million of previously deferred gain from the sale of U.S. Lock and $52.2 million in net extraordinary income. B. LIQUIDITY AND CAPITAL RESOURCES In fiscal 2001, the Company completed its comprehensive financial restructuring plan (See Notes 3 and 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: 18 - 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 December 31, 2001, the Company had $8.2 million in borrowings under the revolving credit line of the facility and had approximately $0.8 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 reduced the advance rate on the inventory to 50% during the fiscal 2002 second quarter. 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, 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 December 31, 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. 19 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 been a supplier of Kmart for approximately 15 years. For the six months ended December 31, 2001, Kmart accounted for approximately 11 percent and 20 percent of the Company's and Consumer Product's net sales, respectively. On January 22, 2002, Kmart filed for Chapter 11 bankruptcy protection. The Company believes that it has adequate reserves to account for any loss on its outstanding account receivable. The Company is continuing to evaluate the impact of Kmart's financial difficulties and their Chapter 11 filing. In connection with Kmart's bankruptcy proceedings, the Company expects that Kmart will review all of its vendor relationships. Accordingly, there can be no assurances as to whether the Company will continue to supply Kmart with all of the existing product lines, the level, if any, of future purchases or the terms and conditions applicable to any future supply relationship. In assessing the nature of any future relationship with Kmart, the Company will consider a variety of factors, including the potential reduction in the number of Kmart stores and revenue reduction as a result of their financial restructuring, credit risk and the cost of financing working capital to support sales to and other programs with Kmart. The Company is evaluating the possible reduction or loss of this revenue base and ways to reduce its cost structure to be more in line with a potentially smaller revenue base. However, in the short term it may not be able to absorb all of the expenses due to this revenue loss if there is a significantly, sustained curtailment of Kmart's purchases from Consumer Products. The Company believes that increases in sales with other customers, will ultimately offset any potential short term loss of Kmart revenue. The Company has had discussions with several 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 has received a commitment letter from a new lender and believes that it will complete an agreement for a new working capital facility during the fiscal 2002 third quarter. The Company paid $27,000 and $1.1 million in income taxes in the six months ended December 31, 2001 and 2000, 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 six month period 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 second 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 December 31, 2001, the Company had working capital of $7.7 million and a current ratio of 1.4 to 1. DISCUSSION OF CASH FLOWS Net cash provided for operations was $2.0 million for the six months ended December 31, 2001, principally due to the decrease in inventories and the increase in accrued liabilities and the income generated during the period, which was offset by the decrease in accounts payable and the increase in other assets and trade receivables during the period. Cash flow used for investments totaled $0.6 million for capital expenditures. Cash flow used in financing 20 activities totaled approximately $2.0 million, comprised primarily of payments on the Company's working capital bank facility. 21 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 December 31, 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: JANUARY 31, 2002 BY: /S/ MARK W. WESTER MARK W. WESTER VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 22 -----END PRIVACY-ENHANCED MESSAGE-----