-----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, OtTYfpEykjWXkqpvC8cJQBBtxHFH38jRz9JdP4MZLVRkpNjFsAnppF4BOwTfRQIU fbE+ulyekiNYFa+zv9T1rw== 0000950152-03-005093.txt : 20030507 0000950152-03-005093.hdr.sgml : 20030507 20030506211028 ACCESSION NUMBER: 0000950152-03-005093 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20030507 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10273 FILM NUMBER: 03685053 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-K/A 1 l00786ae10vkza.txt WAXMAN INDUSTRIES, INC. | FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-5888 WAXMAN INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price at which such stock was sold on the Over-The-Counter Bulletin Board on August 21, 2002: $4,828,720 Number of shares of Common Stock outstanding as of August 21, 2002: Common Stock 1,003,990 Class B Common Stock 214,189 EXPLANATORY NOTE This Form 10-K/A (Amendment No. 1) amends the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002, which was originally filed on August 28, 2002, in order to: (i) include disclosure in "Item 1. Business" regarding the Registrant's comprehensive financial restructuring plan that was completed in fiscal year 2001; (ii) include a description of the customary covenants relating to the Registrant's senior credit facility in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources;" (iii) expand existing disclosure regarding foreign exchange rate risk appearing in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk;" (iv) include the fiscal 2002 audit reports of TN Soong & Co. and Chien Chyuan & Co., relating to the audited financial statements of two wholly-owned foreign subsidiaries of the Registrant, TWI, International Taiwan, Inc. and CWI International China, Ltd., respectively; (v) include disclosure relating to the audit report previously issued by Arthur Andersen, LLP on August 28, 2000; and (vi) include descriptions of the Registrant's accounting policies relating to revenue recognition, shipping and handling fees and split-dollar life insurance policies under "Note 1. Summary of Significant Accounting Policies" to the Registrant's Consolidated Financial Statements. For the convenience of the reader, this Amendment No. 1 amends and restates in its entirety the entire Form 10-K, amending only the aforementioned disclosures. This Amendment No. 1 has not been updated to reflect any events that occurred after the day of the original filing of the Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE Registrant intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days of the close of its fiscal year ended June 30, 2002, portions of which document shall be deemed to be incorporated by reference in Part I and Part III of this Annual Report on Form 10-K from the date such document is filed. The Company consists of Waxman Industries, Inc. and subsidiaries in which Waxman Industries, Inc. directly or indirectly has a majority voting interest. 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. CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of the Company and its management. When used in this document, the words "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "should," and similar expressions are intended to identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, including, but not limited to, risks associated with currently unforeseen competitive pressures and risks affecting the Company's industry, such as decreased consumer spending, customer concentration issues and the effects of general economic conditions. In addition, the Company's business, operations and financial condition are subject to the risks, uncertainties and assumptions which are described in the Company's reports and statements filed from time to time with the Securities and Exchange Commission, including this Report. Should one or more of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. PART I ITEM 1. BUSINESS GENERAL The Company believes it is one of the leading suppliers of specialty plumbing, floor and surface protection and other hardware products to the repair and remodeling market in the United States. The Company also distributes its products to non-U.S. countries through its operations based in Asia, primarily to wholesale distributors, industrial and O.E.M. customers. The Company distributes its products to approximately 770 customers, including a wide variety of large national and regional retailers, independent retail customers and wholesalers. The Company's consolidated net sales were $70.4 million in fiscal 2002. 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. Consumer Products, the 2 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, International, Inc. includes TWI International Taiwan Inc. and its sales operation, TWI Industrial, Inc. (collectively, "TWI"), located primarily in Taiwan, and CWI International China, Ltd. ("CWI"), located in Mainland China. TWI and CWI manufacture, package, source and assemble product purchased by Consumer Products and non-affiliated businesses. Approximately 44% of Consumer Products' purchases are from TWI or CWI. 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 5). 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. The Company recorded equity earnings from this investment of $1.4 million for the first fiscal quarter ended September 30, 2000. The Company did not report equity earnings thereafter, due to the sale of its ownership interest in Barnett. See the "Business -- Comprehensive Financial Restructuring Plan" section, the "Management's Discussion and Analysis -- Significant Developments -- Prior Year Strategic and Restructuring Developments" section and Notes 2 and 3 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for information regarding the sale of the Company's interest in Barnett. COMPREHENSIVE FINANCIAL RESTRUCTURING PLAN In fiscal 2001, the Company completed its comprehensive financial restructuring plan (See Note 3 of the Notes to Consolidated Financial Statements in this Form 10-K), disposing of 7,186,530 shares of Barnett Common Stock and using the $94.5 million in proceeds as follows: - 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 11 1/8% Senior Notes due 2001 (the "Senior Notes") of Waxman USA Inc., a direct wholly-owned subsidiary of the Company, plus accrued interest. - paid approximately $6.0 million in semi-annual interest due on June 1, 2000 to the holders of the Company's 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "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 defined below). The sale of the Barnett Common Stock and payments outlined above were 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 filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Court for the District of Delaware. On November 14, 2000, the Company's Joint Plan was approved by the Court and on March 14, 2001, the Court closed the Chapter 11 case, and the Company emerged from bankruptcy. CONSUMER PRODUCTS Consumer Products actively markets and distributes approximately 3,000 products to a wide variety of retailers, primarily do-it-yourself ("D-I-Y") warehouse home centers, home improvement centers and mass merchandisers. Consumer Products' customers include large national retailers such as Wal-Mart, Kmart, Lowe's and Sears, as well as several regional D-I-Y retailers such as Meijers, Fred Meyers and Menards. Consumer Products works closely with its customers to develop comprehensive marketing and merchandising programs designed to improve their profitability, efficiently manage shelf space, reduce inventory levels and maximize floor stock turnover. Consumer Products also offers certain of its customers the option of private label programs and direct import programs. Consumer Products' net sales for fiscal 2002 were $39.8 million, excluding direct import sales. 3 In recent years, the rapid growth of large mass merchandisers and D-I-Y retailers has contributed to a significant consolidation of the United States retail industry and the formation of large, dominant, product specific and multi-category retailers. These retailers demand suppliers who can offer a broad range of quality products and can provide strong marketing and merchandising support. Due to the consolidation in the D-I-Y retail industry, a substantial portion of Consumer Products' net sales are generated by a small number of customers. Sales to Consumer Products' larger customers for fiscal 2002, 2001 and 2000, respectively, were as follows; Wal-Mart accounted for 29.0%, 25.0% and 13.6%; Lowes accounted for 16.1%, 8.4% and 5.8%; and Kmart accounted for 13.6%, 11.3% and 16.7%. The retail industry consolidation has resulted in the cessation of business for a number of weaker organizations over the past several years, including some companies served by Consumer Products. In January 2002, Kmart filed for Chapter 11 bankruptcy protection. The Company had adequate reserves to account for any loss on its accounts receivable at the time of Kmart's Chapter 11 filing. The Company will continue to provide Kmart with approximately $2.2 million in floor and surface protection products in fiscal 2003. The Company is working to expand its sales to Kmart to include some products in plumbing repair, a program that ended in June 2002. Although the Company expects a decrease in monthly revenue initially, we believe that increases in sales with other customers will ultimately offset any loss of Kmart revenue. The Company is evaluating the reduction in the Kmart revenue base and ways to reduce its cost structure to be more in line with a potentially smaller revenue base. The Company also expects that programs with other retailers will ultimately offset much of the loss of this business. However, in the short-term it may not be able to absorb all of the expenses due to the curtailment of Kmart's purchases of the plumbing repair products from Consumer Products. In the event Consumer Products were to further lose any of its larger retail accounts as a customer or one of its larger accounts were to significantly curtail its purchases from Consumer Products, there would be material short-term adverse effects until the Company could further modify Consumer Products' cost structure to be more in line with its anticipated revenue base. Consumer Products would likely incur significant charges if a materially adverse change in its customer relationships were to occur. In fiscal 1999, Consumer Products moved its distribution center from Bedford Heights, Ohio to a more modern and efficient center in Groveport, Ohio, a suburb of Columbus. In the fourth quarter of fiscal 2000, Consumer Products closed its warehouse in Grand Prairie, Texas, and now operates from one national distribution center in Groveport. Consumer Products also closed its packaging facility in Tijuana, Mexico. The items previously packaged in Mexico are now packaged at the Company's overseas operations and, to a lesser extent, by domestic packagers. The closure of these facilities resulted in a charge of $0.6 million, but Consumer Products has benefited from significant cost savings as a result of this consolidation. In the past several years, certain retailers have begun to develop direct import programs to improve their profitability. Those retailers generally select certain product categories and import full containers of such products to their domestic distribution centers. Consumer Products has responded to this trend by working with the Company's foreign sourcing operations to provide the products, while Consumer Products provides certain value added services, such as account management, selling and marketing support and customer service. Due to the sharing of responsibilities in servicing the domestic retail accounts, profits are shared by Consumer Products and the foreign operation. The direct shipment arrangement generally results in lower gross profit margins for the Company, but also results in lower selling, general and administrative costs. Consumer Products' marketing strategy includes offering mass merchandisers and D-I-Y retailers a comprehensive merchandising program, which includes design, layout and setup of selling areas. Sales and service personnel assist the retailer in determining the proper product mix in addition to designing category layouts to effectively display products and optimally utilize available floor and shelf space. Consumer Products supplies point-of-purchase displays for both bulk and packaged products, including color-coded product category signs and color-coordinated bin labels to help identify products and backup tags to identify products that require reordering. Consumer Products also offers certain of its customers the option of private label programs for their plumbing and floor care products. In-house design, assembly and packaging capabilities enable Consumer Products to react quickly and effectively to service its customers' changing needs. Consumer Products' products are packaged and designed for ease of use, with "how to" instructions to simplify installation, even for the uninitiated D-I-Y consumer. In addition, Consumer Products has sophisticated EDI capabilities, enabling customers to reduce inventory levels and increase return on investment. PRODUCTS The following is a discussion of Consumer Products' principal product groups: Plumbing Products. Consumer Products' plumbing repair products include toilet repair, sink and faucet repair, water supply repair, drain repair, shower and bath repair, hose and pipe repair, and connection repair. Consumer Products also offers proprietary lines of faucets under the trade name AquaLife(R) and a line of shower and bath accessories under the proprietary trade name Spray Sensations(R). Consumer Products' product line also includes a full line of valves and fittings, rubber products and 4 tubular products such as traps and elbows. Many of Consumer Products' plumbing products are sold under the proprietary trade names Plumbcraft(R) and PlumbKing(R). In addition, Consumer Products offers certain of its customers the option of private label programs. Floor and Surface Protective Hardware Products. Consumer Products' floor and surface protective hardware products include casters, doorstops, and other floor, furniture, felt and rubber surface protective and wall protective items. Consumer Products markets a complete line of floor and surface protective hardware products under the proprietary trade name SoftTouch(TM) and also under private labels. New Product and Packaging Introductions. In recent years, as the consolidation in the United States retail industry has accelerated, decreasing the number of potential customers in the Company's traditional market, the Company has placed an emphasis on new product development, product line extensions and the redesign of existing products and packaging concepts to allow it to diversify its product offerings to its existing customers and to enable it to penetrate new customer categories. Consumer Products has several new product and new packaging initiatives planned. In the shower category, Consumer Products has repackaged and re-named its shower product line with eye catching graphics targeted to the female consumer. In addition, new shower products with the features and functions desired most by consumers have been added. Consumer Products has also developed a new line of luxury shower products targeted for placement in home stores and with mass merchandisers. This line has unique product features with designer packaging that will command premium yet affordable pricing. EZ Mount(R), a unique self adhering, non marking, reusable product that sticks on any surface, will be launched in the fall of 2002. This exciting new product line with dozens of decorating, mounting and communications uses, has specifically been targeted for office supply stores, mass retailers, home stores and specialty toy stores. EZ Caster(R), is a unique self stick caster that requires no tools for installation and has a locking mechanism that is designed to fit a number of surfaces and will not scratch hardwood or vinyl floors. EZ Caster is targeted for placement in office supply retailers, mass retailers, big box stores and home stores. OTHER DOMESTIC OPERATIONS WAMI Sales WAMI Sales was started by the Company in July 1997 to distribute pipe nipples that were manufactured in Tijuana, Mexico by Western American Manufacturing Inc. ("WAMI"), an operation that was sold effective March 31, 2000. WAMI Sales distributes pipe nipples, fittings and other products to industrial supply and wholesale operations throughout the United States and, to a lesser extent, Canada. It distributes approximately 2,680 products to approximately 650 customers through its own sales force and through outside sales representative organizations. WAMI Sales has developed relationships with foreign suppliers, including producers from Asia and with the acquirer of WAMI, to supply the products it distributes. WAMI Sales' net sales amounted to $3.3 million in fiscal 2002. Medal Prior to its sale effective March 31, 2001, Medal was a supplier of hardware and plumbing products to approximately 600 independent hardware stores and small independent retailers within a 250 mile radius of its facility in Sharon, Pennsylvania. Medal was formerly a division of WOC Inc., which also included U.S. Lock, a full line supplier of security hardware products, until its sale on January 1, 1999. In fiscal 2001, WOC was renamed Medal of Pennsylvania, Inc. to reflect its only remaining operation. Medal's net sales amounted to $3.4 million for the nine-month period it operated in fiscal 2001. FOREIGN OPERATIONS The Company conducts its foreign operations through TWI, International, Inc. including TWI in Taiwan and CWI in Mainland China. TWI and CWI manufacture, package, source and assemble product purchased by Consumer Products and non-affiliated businesses. These businesses were initially intended to support Consumer Products and other affiliated companies, but they have also developed their own base of non-affiliated companies. TWI and Consumer Products have also responded to the increasing interest by certain retailers in direct import programs, with the added benefit of domestic account management. For the years ended June 30, 2002, 2001 and 2000, products purchased from the foreign operations accounted for approximately 15.9%, 15.1% and 16.8%, respectively, of the total product purchases made by the Company. For fiscal 2002, the combined foreign 5 operations had net sales of $35.3 million, of which $7.9 million were intercompany transactions, which are eliminated in consolidation. Approximately $13.1 million of the Company's non-retail sales are to Barnett, a former affiliated company. However, the Company has made significant progress in recent years in its effort to develop the non-retail customer base served by its foreign operations. The Company believes that these facilities give it competitive advantages in terms of cost and flexibility in sourcing. Both labor and physical plant costs are significantly below those in the United States. Substantially all of the other products purchased by the Company are manufactured by third parties. The Company estimates that it purchases products and materials from approximately 215 suppliers and is not dependent on any single unaffiliated supplier for a material portion of its requirements. Effective March 31, 2000, the Company sold nearly all of the assets and certain liabilities of WAMI, a company that manufactured galvanized, black, brass and chrome pipe nipples in Tijuana, Mexico. In June 2000, the Company closed one of its facilities in China that manufactured faucet components, resulting in a restructuring charge of $1.2 million to write down assets to their fair value and provide for two months of costs to close the facility. The Company will continue to distribute faucets that have been assembled by the Company, with components being manufactured by outside suppliers. PRINCIPAL PRODUCT GROUPS The following table sets forth the approximate percentage of net sales attributable to the Company's principal product groups. 2002 2001 2000 ---- ---- ---- Plumbing 72% 77% 79% Hardware 28% 23% 21% --- --- --- Total net sales 100% 100% 100% === === === IMPORT RESTRICTIONS AND CUSTOMS ISSUES Under current United States government regulations, some products manufactured offshore are subject to import restrictions. The Company currently imports goods from China and Taiwan. When the Company chooses to directly import goods purchased outside of the United States, the Company may be subject to import quota restrictions, depending on the country of origin of assembly. If the Company cannot obtain the necessary quota, the Company will not be able to import the goods into the United States. These restrictions may limit the amount of goods from a particular country that may be imported into the United States or increase the cost of goods being imported into this country. In fiscal 2002, the United States imposed a 15% tariff on many imported products made of steel, including products imported by WAMI Sales. This tariff has increased the cost structure of this business. Export visas for the goods purchased offshore by the Company are readily available. As indicated above, many of the Company's imported goods are of Chinese origin, which was granted most favored nation status in the spring of 2000. There is no guarantee this will continue to be the case in the future. EQUITY INVESTMENT - BARNETT AFFILIATE Until September 29, 2000, the Company held an equity interest in Barnett, a direct marketer and distributor of an extensive line of plumbing, electrical, hardware and security hardware products to professional contractors, independent hardware stores, maintenance managers, liquid propane gas dealers and locksmiths throughout the United States. The Company owned 100% of Barnett prior to an initial public offering in April 1996. A secondary offering in April 1997 reduced the Company's ownership interest to approximately 44.4% of the Barnett Common Stock. In July 2000, the Company announced that it had reached an agreement to monetize its Barnett Common Stock for $13.15 per share as part of the purchase of all of Barnett's outstanding shares by Wilmar Industries, Inc. (the "Barnett Merger"). In September 2000, the remaining 7,186,530 shares of Barnett Common Stock were used to raise $94.5 million in proceeds as part of the Company's comprehensive financial restructuring plan. 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 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 fiscal 2001, which was being recognized as Barnett amortized the goodwill associated with its purchase of U.S. Lock. COMPETITION The Company faces significant competition within each of its product lines, although it has no competitor offering the 6 range of products in all of the product lines that the Company offers. The Company believes that its buying power, extensive inventory, use of technology, emphasis on customer service and merchandising programs have contributed to its ability to compete successfully in its various markets. The Company faces significant competition from smaller companies which specialize in particular types of products and larger companies which manufacture their own products and have greater financial resources than the Company. The Company believes that competition in sales to retailers is primarily based on price, product quality and selection, as well as customer service, which includes speed of responses for packaging, delivery and merchandising for retailers. EMPLOYEES As of June 30, 2002, the Company employed 405 persons, 117 of whom were clerical and administrative personnel, 64 of whom were sales and service representatives and 224 of whom were either production or warehouse personnel. None of the Company's employees are represented by collective bargaining units. The Company considers its relations with its employees to be satisfactory. TRADEMARKS Several of the trademarks and trade names used by the Company are considered to have significant value in its business. See "Business -- Consumer Products - Products" ENVIRONMENTAL REGULATIONS The Company is subject to certain federal, state and local environmental laws and regulations. The Company believes that it is in material compliance with such laws and regulations applicable to it. To the extent any subsidiaries of the Company are not in compliance with such laws and regulations, the Company, as well as such subsidiaries, may be liable for such non-compliance. The Company or one of its indirect subsidiaries have been threatened with litigation by two separate California public interest groups alleging unlawful discharge of chemicals under California's Safe Drinking Water and Toxic Enforcement Act of 1986. The Company is researching the merits of the allegations and intends to contest and vigorously defend itself. Any potential liability related to this threatened litigation cannot be assessed at this time as the Company is in the very preliminary stages of its investigation. SEASONALITY The Company's sales are generally consistent throughout its fiscal year, although the third fiscal quarter is generally weaker in sales than the other quarters. 7 ITEM 2. DESCRIPTION OF PROPERTIES The following table sets forth, as of the most current date, certain information with respect to the Company's principal physical properties:
LEASE APPROXIMATE EXPIRATION LOCATION SQUARE FEET PURPOSE DATE -------- ----------- ------- ---------- 24460 Aurora Road 21,000 Corporate Office Owned Bedford Hts., OH 24455 Aurora Road 46,000 Consumer Products Corporate 6/30/07 Bedford Hts., OH (1) Office and Distribution Center 5920 Green Pointe Dr. 142,000 Consumer Products 11/1/08 Groveport, OH Office and Distribution Center 24001 Aurora Road 28,000 Consumer Products 9/1/02 Bedford Hts., OH Warehouse No. 10, 7th Road 55,000 TWI Owned Industrial Park Office, Packaging Taichung, Taiwan and Distribution Center Republic of China Dan Keng Village 57,000 CWI Owned Fu Ming County Office, Packaging, Manufacturing Shenzhen, P.R. China and Distribution Center 9430 Cabot Drive 13,000 WAMI Sales 1/31/03 San Diego, California Office and Distribution Center 4647 Leston Avenue 12,000 WAMI Sales 6/30/04 Dallas, Texas Office and Distribution Center
(1) Aurora Investment Co., a partnership owned by Melvin Waxman, Chairman of the Board and Co-Chief Executive Officer of the Company, and Armond Waxman, President and Co-Chief Executive Officer of the Company, together with certain other members of their families, is the owner and lessor of this property. In fiscal 2002, Consumer Products leased 9,000 square feet of office space and 20,000 square feet of warehouse space from Aurora Investment. The remaining 97,000 square feet of warehouse space in this facility had been subleased to Handl-it, Inc. (see below for information regarding affiliated ownership) until the lease expired on June 30, 2002. Rent expense under this lease was $326,716 in fiscal 2002, 2001 and 2000. Effective July 1, 2002, Consumer Products extended the lease with Aurora Investment for the 9,000 square feet of office space and 20,000 square feet of warehouse space for five years. In addition, Consumer Products began subleasing 17,000 square feet of warehouse space from Handl-it at the same location to consolidate the warehouse location at 24001 Aurora Road in Bedford Heights that was previously scheduled to expire in September 2002. Handl-it Inc., a corporation owned by John S. Peters, a director of and consultant to the Company, together with another member of his family, and Melvin Waxman and Armond Waxman, subleased warehouse space from Consumer Products through June 30, 2002. The sublease by Handl-it allowed Consumer Products to move to a more efficient national distribution center in Groveport, Ohio. The Company charged Handl-it, Inc. $191,079, $290,496 and $290,970 in fiscal 2002, 2001 and 2000, respectively, for subleasing the warehouse in Bedford Hts., Ohio. However, Handl-it owes the Company for $133,638 of unpaid rent in fiscal 2002, for which it has signed a note (see Note 10, Related Party Transactions of the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K). In fiscal 2001 and 2000, Handl-it provided Consumer Products with certain outside transportation services, for which Consumer Products paid Handl-it Inc. approximately $27,000 and $40,000, respectively. From July 1, 1999 through April 2001, WAMI Sales utilized Handl-it to provide all warehousing, labor and shipping functions in Cleveland, Ohio for a fee equal to a percentage of monthly sales plus other direct costs from this operation. The charge amounted to $67,000 and $74,000 in fiscal 2001 and 2000, respectively. Consumer Products also utilizes an outside 8 packaging operation in certain instances where the packaging cannot be performed by the Company's operations in Asia. This outside packager, which was acquired by Handl-it, received $377,599, $234,368 and $110,577 for these services in fiscal 2002, 2001 and 2000, respectively. Consumer Products had been using Con-Pak Inc. for several years before its acquisition by Handl-it in 1999. The Company believes that its facilities are suitable for its operations and provide the Company with adequate productive capacity and that the related party leases and rental arrangements are on terms comparable to those that would be available from unaffiliated third parties. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the financial position or operations of the Company. As further described in Note 14 of the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K, the Company or one of its indirect subsidiaries have been threatened with litigation by two separate California public interest groups. The Company is researching the merits of the allegations and intends to contest and vigorously defend itself. Any potential liability related to this threatened litigation cannot be assessed at this time as the Company is in the very preliminary stages of its investigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the executive officers of the Company and a brief description of their business experience. Each executive officer will hold office until his successor is chosen and qualified. Mr. Melvin Waxman, age 68, has been the Chairman of the Board and since August 1976, other than from June 1995 until April 1996, when he was Co-Chairman of the Board. Mr. Waxman was the Chief Executive Officer from 1962 until May 1988, when he became the Co-Chief Executive Officer of the Company. Mr. Waxman has been a director of the Company since 1962. Melvin Waxman and Armond Waxman are brothers. Mr. Armond Waxman, age 63, is the Co-Chief Executive Officer, President and Treasurer of the Company. Mr. Waxman became the Co-Chief Executive Officer in May 1988, and has been the President and Treasurer of the Company since August 1976, other than from August 1976 to May 1988, when he was the Chief Operating Officer of the Company. Mr. Waxman has been a director of the Company since 1962. Armond Waxman and Melvin Waxman are brothers. Mr. Laurence Waxman, age 45, has been Senior Vice President of the Company since November 1993 and is also President of Consumer Products, a position he has held since 1988. Mr. Waxman joined the Company in 1981. Mr. Waxman has been a director of the Company since July 1996. Mr. Laurence Waxman is the son of Melvin Waxman. Mr. Mark Wester, age 47, is a Senior Vice President and Chief Financial Officer of the Company and a certified public accountant. Mr. Wester joined the Company in October 1996 as Corporate Controller and in January 1997 became the Vice President-Finance. In April 1997, Mr. Wester became the Chief Financial Officer of the Company, and in May 2002, he became a Senior Vice President and Chief Financial Officer. Mr. Wester provided consulting services to the Company from May 1996 through September 1996. From March 1992 to April 1996, Mr. Wester was a limited partner with a privately owned telecommunications company, Capital Communications Cooperative and the Chief Financial Officer of Progressive Communications Technologies. From 1978 to 1992, Mr. Wester was employed by The Fairchild Corporation (formerly, Banner Industries, Inc.), where he held several positions during his tenure, including Vice President and Corporate Controller. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on the Over-The-Counter Bulletin Board ("OTCBB"). On February 20, 2001, the Company effected a 1 for 10 reverse stock split (the "Reverse Stock Split") for the Company's Common Stock, which trades under the symbol "WAXM.BB" and Class B Common Stock. From March 22, 1999 until the Reverse Stock Split, the Company's Common Stock traded under the symbol "WAXX". The Company's Class B Common Stock does not trade in the public market due to restricted transferability. However, the Class B Common Stock may be converted into Common Stock on a share-for-share basis at any time. The following table sets forth the high and low closing quotations as reported by the OTCBB for fiscal 2002 and 2001 (adjusted for the Reverse Stock Split).
2002 2001 ------ ------ HIGH LOW HIGH LOW ------- ------- ------ ------ First Quarter $2.35 $1.55 $3.44 $1.25 Second Quarter 3.46 1.70 3.50 1.25 Third Quarter 5.00 3.25 3.13 1.50 Fourth Quarter 6.25 4.40 2.05 1.50
HOLDERS OF RECORD As of August 21, 2002, there were 578 holders of record of the Company's Common Stock and 97 holders of record of the Company's Class B Common Stock. DIVIDENDS The Company declared no dividends in fiscal 2002 or 2001. Restrictions contained in the Company's debt instruments currently prohibit the declaration and payment of cash dividends. 10 ITEM 6. SELECTED FINANCIAL DATA INCOME STATEMENT DATA:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 (8) 2000 (9) 1999 (10) 1998 --------- ---------- --------- --------- --------- Net sales (1) $ 70,425 $ 71,370 $ 80,710 $ 96,616 $ 105,662 Cost of sales (2) 47,253 49,890 59,259 69,264 69,429 --------- --------- --------- --------- --------- Gross profit 23,172 21,480 21,451 27,352 36,233 Selling, general and administrative expenses 21,535 21,763 27,094 31,635 30,290 Restructuring and impairment charges (3) -- 350 9,720 2,015 24 --------- --------- --------- --------- --------- Operating income (loss) 1,637 (633) (15,363) (6,298) 5,919 Gain on sale of Barnett stock, net (4) -- 47,473 -- -- -- Loss on the sale of Medal, net (5) -- (1,105) -- -- -- Loss on sale of WAMI, net (3) (5) -- -- (2,024) -- -- Gain on sale of U.S. Lock, net (5) -- -- -- 10,298 -- Equity earnings of Barnett -- 1,370 6,511 6,744 6,341 Amortization of deferred U.S. Lock gain (6) -- 7,815 202 -- -- Interest expense, net 723 5,414 18,201 17,192 16,031 --------- --------- --------- --------- --------- Income (loss) from operations before income taxes and extraordinary items 914 49,506 (28,875) (6,448) (3,771) (Benefit) provision for income taxes (671) 1,680 (27) 1,029 537 --------- --------- --------- --------- --------- Income (loss) from operations before extraordinary items 1,585 47,826 (28,848) (7,477) (4,308) Extraordinary items (7) -- 52,222 -- -- 92 --------- --------- --------- --------- --------- Net income (loss) $ 1,585 $ 100,048 $ (28,848) $ (7,477) $ (4,500) ========= ========= ========= ========= ========= Average number of shares outstanding 1,215 1,212 1,207 1,206 1,203 ========= ========= ========= ========= ========= Basic earnings (loss) per share: From operations before extraordinary items $ 1.30 $ 39.46 $ (23.91) $ (6.20) $ (3.58) Extraordinary items -- 43.09 -- -- (.16) --------- --------- --------- --------- --------- Net income (loss) per share $ 1.30 $ 82.55 $ (23.91) $ (6.20) $ (3.74) ========= ========= ========= ========= ========= Diluted earnings (loss) per share: From operations before extraordinary items $ 1.30 $ 39.46 $ (23.91) $ (6.20) $ (3.58) Extraordinary items -- 43.09 -- -- (.16) --------- --------- --------- --------- --------- Net income (loss) per share $ 1.30 $ 82.55 $ (23.91) $ (6.20) $ (3.74) ========= ========= ========= ========= ========= Cash dividends per share: Common stock $ -- $ -- $ -- $ -- $ -- Class B common stock $ -- $ -- $ -- $ -- $ -- BALANCE SHEET DATA: Working capital $ 8,767 $ 7,209 $ (5,725) $ 21,945 $ 15,776 Total assets 40,296 40,832 94,218 100,210 105,743 Total long-term debt 950 532 128,453 128,480 118,314 Stockholders' equity (deficit) 20,786 19,032 (80,543) (52,086) (44,744)
(1) Prior to fiscal 2002, the Company charged off business procurement charges for inventory repurchases as a contra sale, while reporting other business procurement costs, such as slotting fees and the cost of reorganizing a customer's store aisles and displays in order to accommodate the Company's products, as a separate operating expense category. Beginning in fiscal 2002, the Company adopted a new Financial Accounting Standards Board standard, EITF Issue No. 00-25, and began to report all of these charges as a reduction in net sales. As a result, net sales for fiscal 2001, 2000 and 1999 were reduced by $2.15 million, $0.65 million and $2.5 million, respectively, for charges not previously reported as a contra sale, but there was no impact on operating income. There were no procurement costs in fiscal 1998 that had not previously been reported as a reduction in net sales. 11 (2) In the fiscal 2000 fourth quarter, Consumer Products incurred higher cost of sales for the write off of $1.7 million in packaging material and other inventory associated with the closure of (i) a distribution facility in Grand Prairie, Texas, which was consolidated into Consumer Products' national distribution center near Columbus, Ohio and (ii) a packaging operation in Tijuana, Mexico that transferred operations to the Company's operations in Taiwan and China. The Company also reported a reduction in sales of $0.4 million and additional charges to cost of sales of $0.5 million for the realizability of receivables and inventory in the fiscal 2000 fourth quarter for the closure of its Premier Faucet Company. (3) In the fiscal 2001 first quarter, the Company recorded a $0.35 million charge associated with additional restructuring costs for warehouses closed by Consumer Products in prior years. In the fiscal 2000 second quarter, the Company recorded a $1.3 million restructuring charge related to the consolidation of its packaged plumbing products under the Plumbcraft(R) brand name. In the fiscal 2000 fourth quarter, the Company recorded a $0.6 million restructuring charge related to (i) the closure of its Grand Prairie, Texas distribution center, which was consolidated into Consumer Products' distribution center near Columbus, Ohio, and (ii) the closure of a packaging operation in Tijuana, Mexico that was transferred to the Company's operations in Taiwan and China. In the fourth quarter of fiscal 2000, the Company also recorded an asset impairment charge of $6.7 million related to the write-off of goodwill as required by SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of", for two product lines that were acquired by Consumer Products in December 1986 and May 1988. Also included in restructuring costs is a $1.2 million charge from the closure of Premier Faucet Corporation in June 2000. In fiscal 1999, the Company recorded a $2.1 million restructuring charge associated with the move of one of Consumer Products' warehouses. In fiscal 1998, the Company recorded an estimated restructuring charge of $24,000 for warehouse closure costs and other expenses associated with the sale of LeRan Gas Products. (4) In September 2000, the Company sold its remaining 7,186,530 shares of Barnett common stock as part of its comprehensive debt restructuring, recognizing a net gain of $47.5 million. (5) The sale of significantly all of the assets and certain liabilities of these operations are detailed in Note 5 to the Consolidated Financial Statements, including the $1.1 million loss on the March 31, 2001 sale of Medal, the $2.0 million loss on the March 31, 2000 sale of Western American Manufacturing, Inc. and the $10.3 million gain on the January 1, 1999 sale of U.S. Lock. (6) The Company deferred $8.1 million of the gain on the sale of U.S. Lock in fiscal 1999 due to its continued ownership interest in Barnett. The gain was being amortized as Barnett wrote-off the goodwill associated with the U.S. Lock purchase. In fiscal 2001, the Company recognized the remaining $7.8 million in deferred gain on the U.S. Lock sale due to the disposal of its remaining interest in Barnett. See Notes 2 and 5 to the Consolidated Financial Statements. (7) Fiscal 2001 amounts reflect the extraordinary gain on the defeasance of debt at a discount, net of the write-off of deferred financing costs (see Note 6 to the Consolidated Financial Statements). Fiscal 1998 extraordinary charges represents the write-off of deferred financing costs resulting from the repayment and refinancing of debt, as further described in Notes 2 and 7 to the Consolidated Financial Statements. (8) The results of Medal were consolidated by the Company until its sale, which was effective March 31, 2001. As a result of the sale, fiscal 2001 includes results for Medal for nine months, while the previous fiscal years include results for twelve months. See Note 5 to the Consolidated Financial Statements for further discussion of the sale of Medal. Fiscal 2001 also includes equity earnings for Barnett through September 2000, when the remaining Barnett stock was sold. Prior periods presented include equity earnings from Barnett for the full fiscal year. (9) The results of WAMI were consolidated by the Company until its sale, which was effective March 31, 2000. As a result of the sale, fiscal 2000 only includes nine months of WAMI's results while the previous fiscal years include results for twelve months. See Note 5 to the Consolidated Financial Statements for further discussion of the sale of WAMI. (10) The results of U.S. Lock were consolidated by the Company until its sale, which was effective January 1, 1999. As a result of the sale, fiscal 1999 includes only six months of U.S. Lock's results while the previous fiscal years include results for twelve months. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company operates in two business segments -- the distribution of specialty plumbing and hardware products to retailers and the distribution of plumbing and other products to non-retail businesses. Distribution of plumbing and hardware products to retailers is primarily conducted through domestic operations, but is also conducted through direct import programs from the foreign sourcing, manufacturing and packaging operations. In fiscal 2002, approximately 22.3% of the Company's foreign operations' sales were to the Company's domestic wholly-owned operations, respectively, which are eliminated in consolidation. SIGNIFICANT DEVELOPMENTS Current Year Developments The Company has been a supplier to Kmart for approximately 15 years. For fiscal 2002, Kmart accounted for $6.3 million, or approximately 8.9 percent and 13.6 percent of the Company's and Consumer Products' net sales, respectively. On January 22, 2002, Kmart filed for Chapter 11 bankruptcy protection. The Company had adequate reserves to account for the loss of its outstanding account receivable that were not covered by credit insurance at the time of Kmart's Chapter 11 filing. In connection with the Chapter 11 filing, Kmart reviewed its vendor relationships, including the financial commitments required of suppliers. The Company also assessed the issues associated with maintaining certain of its supply arrangements with Kmart, including the cost of retaining and supporting these programs and the cash flow implications of such programs, the risk/reward profile of each of such programs and the potential opportunities with other customers. The Company will continue to provide Kmart with approximately $2.2 million in floor and surface protection products in fiscal 2003. The Company is working to expand its sales to Kmart to include some products in plumbing repair, a program that ended in June 2002. Although the Company expects a decrease in monthly revenue initially, we believe that increases in sales with other customers will ultimately offset any loss of Kmart revenue. However, 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. The Company is evaluating the possible reduction or loss of the remaining Kmart revenue base and ways to reduce its cost structure to be more in line with a potentially smaller revenue base. The Company believes that increases in sales with other customers will ultimately offset any potential loss of Kmart revenue, however, in the short term it may not be able to absorb all of the expenses due to this revenue loss. Prior Year Strategic and Restructuring Developments In fiscal 2001, the Company completed its comprehensive financial restructuring plan (See Note 3 of the Notes to Consolidated Financial Statements in this Form 10-K), disposing of 7,186,530 shares of Barnett Common Stock and using the $94.5 million in proceeds as follows: - 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 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 defined below). The sale of the Barnett Common Stock and payments outlined above were 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 filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Court for the District of Delaware. On November 14, 2000, the Company's Joint Plan was approved by the Court and on March 14, 2001, the Court closed the Chapter 11 case, and the Company emerged from bankruptcy. 13 A historic overview of other strategic and restructuring developments includes: Effective March 31, 2001, the Company sold nearly all of the assets and certain liabilities of Medal, which sold a wide range of products to small independent hardware stores and other independent retailers in a 250-mile radius of Sharon, Pennsylvania. Over the past several years, Medal's customer base and operating results had deteriorated due to competitive pressures. In September 2000, the Company sold its remaining 7,186,530 shares of Barnett Common Stock for $94.5 million, resulting in a net pre-tax gain of $47.5 million. Barnett was a wholly-owned subsidiary until April 1996, when the Company completed an initial public offering of Barnett (see Note 2 for additional information related to Barnett stock transactions). The sale of the Barnett Common Stock enabled the Company to complete its comprehensive financial restructuring. In June 2000, the Company closed its Premier Faucet Corporation facility in China that manufactured faucets and faucet components, resulting in a restructuring charge of $1.2 million to write down assets to their fair value and provide for costs to close the facility. The closure of this operation also resulted in an additional loss in gross profit of $0.9 million due to the reduction in sales of $0.4 million and additional charges to cost of sales of $0.5 million for the realizability of receivables and inventory. The Company will continue to distribute faucets that have been assembled by the Company, with components manufactured by outside suppliers. In the fourth quarter of fiscal 2000, Consumer Products consolidated certain operations to improve its efficiencies, including the closure of Consumer Product's Grand Prairie distribution center and packaging operations in Tijuana, Mexico. Distribution operations for Consumer Products will be conducted from a national distribution center near Columbus, Ohio, while the packaging operations will be conducted at the Company's operations in China and Taiwan. Effective March 31, 2000, the Company sold nearly all of the assets and certain liabilities of Western American Manufacturing Inc., a company that manufactured galvanized, black, brass, and chrome pipe nipples in Tijuana, Mexico, for $1.8 million in cash. The Company continues to evaluate its operations, including various options to further streamline its operations, reduce expenses and improve margins, while distributing high quality products at a fair value to retailers. The Company intends to examine means to further develop an international customer base to further utilize the capabilities of the Asian sourcing, manufacturing and packaging operations. RESULTS OF OPERATIONS The following table sets forth certain items reflected in the Company's consolidated statements of operations as a percentage of net sales:
Fiscal Year Ended June 30, -------------------------- 2002 2001 2000 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 67.1% 69.9% 73.4% Gross profit 32.9% 30.1% 26.6% Selling, general and administrative expenses 30.6% 30.5% 33.6% Restructuring and impairment charges -- 0.5% 12.0% Operating income (loss) 2.3% (0.9%) (19.0%) Gain on sale of Barnett, net -- 66.5% -- Loss on sale of Medal, net -- (1.5%) -- Loss on sale of WAMI, net -- -- (2.5%) Equity earnings of Barnett -- 1.9% 8.1% Amortization of deferred U.S. Lock gain -- 10.9% 0.3% Interest expense, net 1.0% 7.5% 22.6% Income (loss) before income taxes and extraordinary items 1.3% 69.4% (35.7%) (Benefit) provision for income taxes (1.0%) 2.4% 0.0% Income (loss) before extraordinary items 2.3% 67.0% (35.7%) Extraordinary items -- 73.2% -- Net income (loss) 2.3% 140.2% (35.7%)
14 YEAR ENDED JUNE 30, 2002 VS. JUNE 30, 2001 NET SALES Net sales for the continuing operations for fiscal 2002 totaled $70.4 million, an increase of $2.4 million as compared to $68.0 million for the same continuing operations in fiscal 2001. Fiscal 2001 net sales, including Medal, an operation sold on March 31, 2001, would have been $71.4 million. Net sales for continuing operations were stronger earlier this fiscal year due to the expansion of product offerings at certain retailers, an increase 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 $2.4 million in slotting fees and other business procurement charges being recorded as a contra-sale for fiscal 2002. Net sales for the comparable period in fiscal 2001 have been restated, resulting in $3.1 million being recorded as a contra sale, including $0.9 million of additional business procurement costs originally reported in operating expenses. Net sales to retailers amounted to $52.6 million and $54.8 million for fiscal 2002 and 2001, respectively. The fiscal 2001 net sales to retailers included $3.4 million of sales from Medal, which was sold in fiscal 2001. Excluding Medal's net sales, sales to retailers improved in fiscal 2002 due to strong sales to certain other retailers, primarily WalMart and Lowes, which offset lower sales to Kmart. Non-retail sales amounted to $25.6 million and $24.2 million for fiscal 2002 and 2001, respectively. GROSS PROFIT Gross profit in fiscal 2002 was $23.2 million, with a gross profit margin of 32.9%, as compared to the prior year gross profit of $20.7 million and a gross profit margin of 30.4% for businesses continuing in fiscal 2002. Including Medal through March 31, 2001, the date it was sold, gross profit for fiscal 2001 would have been $21.5 million and gross profit margin would have been 30.1%. The increase in the gross profit and gross profit margin is primarily attributable to the improved sales to retailers from our domestic operations, which typically have higher profit margins than sales from our foreign operations. In addition, the mix of products sold domestically contributed to the improvement. While domestic retail sales have higher gross margins than direct import sales and other industrial sales from our foreign operations, they also have higher SG&A expenses due to the level of additional support and services provided to customers. The gross profit margin for fiscal 2002 also improved due to the exclusion of sales for Medal, which historically reported lower profit margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses for continuing businesses amounted to $21.5 million and $20.6 million for fiscal 2002 and 2001, respectively. SG&A expenses as a percentage of net sales decreased to 30.5% for fiscal 2002 from 30.4% for fiscal 2001. SG&A expenses for fiscal 2001, including Medal, were $21.8 million for fiscal 2001, or 30.5% of sales. Included in fiscal 2002 SG&A expenses is $0.2 million in fees paid to Congress Financial Corporation when the Company terminated the bank facility prior to its expiration and replaced it with a new bank facility from PNC Bank. Also affecting fiscal 2002 SG&A expenses are foreign exchange losses from the Company's foreign operations of $0.2 million as compared to a gain of $0.4 million in fiscal 2001 due to the weakness in the US Dollar. The $0.6 million change in SG&A expenses from the foreign exchange loss accounts for a significant portion of the increase in expense between years. RESTRUCTURING CHARGES There were no restructuring charges in fiscal 2002. In 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 quarter ended September 30, 2000. As detailed in Notes 2 and 3 of the Consolidated Financial Statements in this Form 10K, the Company sold its equity investment in Barnett on September 29, 2000 as part of its comprehensive financial restructuring. GAIN ON SALE OF EQUITY INVESTMENT, AMORTIZATION OF DEFERRED GAIN ON SALE OF U.S. LOCK AND LOSS ON SALE OF AN OPERATION In fiscal 2001, the Company sold its 7,186,530 shares of Barnett Common Stock for $13.15 per share in connection with the Barnett Merger, receiving gross proceeds from the sale of $94.5 million. The Company's equity investment in Barnett amounted to $44.3 15 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 and was 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. Effective March 31, 2001, the Company sold substantially all of the assets and certain liabilities of Medal to Medal USA Inc. for approximately $0.8 million in cash and the assumption of certain liabilities. The sale of Medal resulted in a net pretax loss of $1.1 million in the quarter ended March 31, 2001. INTEREST EXPENSE In fiscal 2002, net interest expense totaled $0.7 million, as compared to $5.4 million in fiscal 2001. Average borrowings for fiscal 2002 amounted to $9.4 million, with a weighted average interest rate of 6.2%, as compared to fiscal 2001 average borrowings of $44.9 million at a weighted average interest rate of 11.9%. The Company benefited from the reduction in the prime lending rate over the past 18 months, as well as the reduction in the working capital borrowings, which have resulted lower interest expense for fiscal 2002. In addition, the Company completed its comprehensive financial restructuring in fiscal 2001 and eliminated the Company's Senior Notes and Deferred Coupon Notes, thereby significantly reducing the Company's average borrowings for fiscal 2002. PROVISION FOR INCOME TAXES In fiscal 2002, the Company's recorded a net tax benefit of $0.7 million, which includes a tax benefit of approximately $0.8 million, partially offset by a provision for various state and foreign taxes. The tax benefit was the result of a change in tax law in March 2002, allowing the Company to utilize its net operating loss carryforward to fully offset its alternative minimum taxable income for fiscal 2001. The difference between the effective and statutory tax rates in fiscal 2002 is primarily due to the aforementioned change in the tax law and a lower tax rate on foreign earnings compared to the domestic statutory tax rate. The provision for income taxes amounted to $1.7 million for fiscal 2001. The Company's tax provision for fiscal 2001 provided for federal taxes based on the alternative minimum tax method and for state and various foreign taxes. 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. EXTRAORDINARY CHARGE The Company did not have any extraordinary items in fiscal 2002. In fiscal 2001, the Company reported net extraordinary income of $52.2 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 The Company reported net income of $1.6 million, or $1.30 per basic and diluted share, in fiscal 2002. In fiscal 2001, the Company reported significant transaction related gains and reported net income of $100.0 million, or $82.55 per basic and diluted share. The fiscal 2001 results include the $47.5 million net gain on the sale of the Barnett Common Stock, the $52.2 million extraordinary gain, or $43.09 per share, from the defeasance of debt at a discount, the recognition of $7.8 million of deferred gain from the sale of U.S. Lock and the loss of $1.1 million on the sale of Medal. YEAR ENDED JUNE 30, 2001 VS. JUNE 30, 2000 NET SALES Net sales for fiscal 2001 totaled $71.4 million, as compared to $80.7 million for fiscal 2000. Included in the prior year were $8.3 million in net sales for WAMI, which was sold effective March 31, 2000, and Premier Faucet, which was closed in June 2000, and Medal, which was sold effective March 31, 2001. Excluding the results of disposed or closed businesses, net sales for fiscal 2001 16 amounted to $68.0 million as compared to $72.4 million in fiscal 2000. The results were lower due to weak sales to retailers in the first half of fiscal 2001. Net sales for the continuing businesses in fiscal 2001, while 6.1% lower than fiscal 2000, improved in the second half of fiscal 2001. The reduction for the fiscal year was due to weaker than anticipated sales to retailers for the first six months of fiscal 2001, including sales made through the direct import program from our Asian operations. In part, this reduction was due to the closure of certain retailers served by the Company. The largest retailer closing that affected the Company was the loss of Associated Distributors, Inc., which closed all but 11 of its stores in August 2000. The Company believes that Associated Distributors, which accounted for nearly $2.2 million of Consumer Products' net sales in fiscal 2000, has changed its strategy for its remaining stores and has discontinued the distribution of plumbing products. Retail sales amounted to $54.8 million and $60.3 million for fiscal 2001 and 2000, respectively. The reduction was primarily the result of the exclusion of sales for WAMI and Premier Faucet in the fiscal 2001 results, the inclusion of Medal for only nine months in fiscal 2001 and lower sales to Barnett. In fiscal 2002, the Company adopted the Financial Accounting Standards Board ("FASB") EITF Issue No. 00-25 relating to the accounting for up-front "slotting fees" charged by retailers for the right to shelf space and has reclassified financial statements for prior periods. Prior to the adoption of the new pronouncement, the Company expensed charges of this nature as a separate expense category, while the new pronouncement recommended the classification as a contra-sale. Accordingly, fiscal 2001 and 2000 net revenues were restated to reflect a business procurement charge of $2.15 million and $0.65 million, respectively, which were previously included in a separate expense category. Effective March 31, 2001, the Company sold substantially all of the assets, net of certain liabilities, of Medal. Medal's results of operations have been included in the operating results of the Company through March 31, 2001, including $3.4 million and $4.7 million in net sales for fiscal 2001 and fiscal 2000, respectively. Effective March 31, 2000, the Company sold substantially all of the assets, net of certain liabilities, of WAMI, excluding trade receivables, trade payables and certain other liabilities, which were retained by the Company. The net sales of $2.9 million and an operating loss of $0.4 million for WAMI have been consolidated in the results of operations through March 31, 2000. GROSS PROFIT The gross profit margin for fiscal 2001 improved to 30.1% from 26.6% for fiscal 2000. The improvement was due to a favorable mix of product sold and the sale and closure of WAMI and Premier Faucet, respectively, which had lower gross profit levels. The gross profit for fiscal 2001 and fiscal 2000 were approximately the same at $21.5 million. Gross profit for fiscal 2000 was impacted by a $1.7 million fourth quarter charge in cost of sales at Consumer Products to write-off packaging material and other inventory associated with the move of its packaging facility to Asia, and the consolidation of its Grand Prairie, Texas facility into its National Distribution Center in Groveport, Ohio. In addition, the June 2000 closure of Premier Faucet Corporation resulted in a reduction in gross profit of $0.9 million due to the reduction in sales of $0.4 million and additional charges to cost of sales of $0.5 million for the realizability of receivables and inventory. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses decreased to $21.8 million for fiscal 2001 from $27.1 million for fiscal 2000. Approximately $1.4 million of the prior year SG&A expenses were attributed to WAMI and Premier Faucet. SG&A expenses for continuing operations amounted to $20.6 million in fiscal 2001 as compared to $24.3 million in the prior fiscal year. The majority of the improvement in the expenses was due to the consolidation of Consumer Product's distribution operations into one national center, the relocation of its packaging operations to the Company's facilities overseas and cost improvements at the Company's foreign operations. In addition, the percentage of SG&A expenses to net sales improved to 30.5% in fiscal 2001 from 33.6% in the prior fiscal year. RESTRUCTURING AND IMPAIRMENT CHARGES In fiscal 2001, Consumer Products recorded $0.35 million in restructuring charges in the quarter ended September 30, 2000 for costs associated with its closed warehouse facilities. Based on current estimates, the Company believes it has provided for all remaining costs to be incurred in connection with the closing of these facilities. In fiscal 2000, Consumer Products recorded $9.7 million in non-recurring charges, including $1.3 million for the consolidation of its packaged plumbing products under the Plumbcraft(R) brand name, $0.6 million for the completion of its plan to create a National Distribution Center and consolidate its Grand Prairie, Texas warehouse into the Groveport, Ohio facility and the 17 move of the packaging operations from Tijuana, Mexico to the Company's operations in China, which should reduce certain packaging costs. In the fourth quarter of fiscal 2000, Consumer Products also recorded an asset impairment charge of $6.7 million related to the write-off of goodwill as required by SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of", for two product lines that were acquired by Consumer Products in December 1986 and May 1988. In addition, in June 2000 the Company closed its Premier Faucet Corporation facility in China that manufactured faucets and faucet components, resulting in a restructuring charge of $1.2 million to write down assets to their fair value and provide for costs to close the facility. The closure of this operation also resulted in an additional loss in gross profit of $0.9 million due to the reduction in sales of $0.4 million and additional charges to cost of sales of $0.5 million for the realizability of receivables and inventory. The Company continues to distribute faucets that have been assembled by the Company, with components manufactured by outside suppliers. OPERATING LOSSES: For fiscal 2001, the Company reported a loss of $0.6 million, as compared to the loss of $15.4 million for fiscal 2000. The fiscal 2001 loss included $2.15 million of business procurement charges and $0.35 million of restructuring charges, while the large loss in fiscal 2000 included $0.65 million of business procurement charges, $9.75 million of restructuring and impairment charges and higher cost of sales and SG&A expenses for the realizability of accounts receivable and inventory from the closure of the Company's Premier Faucet business in fiscal 2000. EQUITY EARNINGS OF BARNETT As a result of the sale of the Company's interest in Barnett in September 2000, the Company only reported equity earnings for the fiscal 2001 first quarter, which amounted to $1.4 million. The Company recorded equity earnings from its ownership interest in Barnett of $6.5 million for fiscal 2000. GAIN ON SALE OF EQUITY INVESTMENT AND AMORTIZATION OF DEFERRED GAIN ON SALE OF U.S. LOCK On July 10, 2000, the Company announced that it has reached an agreement to monetize its 7,186,530 shares of Barnett Common Stock for $13.15 per share in connection with the Barnett Merger. On September 1, 2000, as part of the agreement on the Barnett Merger, the Company sold to Barnett 160,723 shares the Barnett Common Stock to fund the interest payment on its Senior Notes. The Barnett Merger was approved by Barnett's shareholders on September 27, 2000, and the Company's remaining shares of Barnett Common Stock were sold on September 29, 2000. The gross proceeds from the sale of the 7,186,530 shares of Barnett Common Stock amounted to $94.5 million. The Company's equity investment in Barnett amounted to $44.3 million immediately prior to the sale. The Company reported a net gain on the sale of Barnett of $47.5 million, after the write-off of $2.7 million in transaction related costs associated with the Barnett Sale and other costs associated with the comprehensive financial restructuring of the Company. Effective January 1, 1999, the Company sold U.S. Lock to Barnett for $33.0 million in cash, before certain adjustments and expenses. The sale of U.S. Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2 million being recognized in the fiscal 1999 third quarter. The remaining $8.1 million was originally reported as a deferred gain in the Company's consolidated balance sheet due to the Company's continued ownership of 44.2% of Barnett, the acquirer of U.S. Lock. Until the sale of its remaining interest in Barnett, the Company recognized the deferred gain as the goodwill generated by the purchase of U.S. Lock was amortized by Barnett, resulting in an amortization of the deferred gain of $0.2 million in fiscal 2000. 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. LOSS ON SALE OF OPERATION, NET In April 2001, the Company sold substantially all of the assets and certain liabilities of Medal to Medal USA Inc. for approximately $0.80 million in cash and the assumption of certain liabilities (the "Medal Sale"). The Medal Sale was effective March 31, 2001, resulting in a net pretax loss of $1.1 million in the quarter ended March 31, 2001. This operation, which served the small, independent hardware stores within a 250 mile radius of Sharon, Pennsylvania, had been losing a significant share of its customer base over the past several years to the larger do-it-yourself retailers that established operations throughout the area served by Medal. Effective March 31, 2000, the Company sold substantially all of the assets and certain liabilities of WAMI to Niples Del Norte, S.A. de C.V. for approximately $1.8 million in cash, resulting in a net pretax loss of $2.0 million, including a write-off of approximately $1.0 million of goodwill. INTEREST EXPENSE Net interest expense for fiscal 2001 totaled $5.4 million, as compared to $18.2 million in fiscal 2000. The significant decrease in interest was due to the use of proceeds from the September 2000 sale of the Barnett Common Stock to retire the Senior Notes in 18 September 2000, reduce working capital debt and to retire the Deferred Coupon Notes in November 2000. In addition, the reduction in the prime rate was also a factor in reducing interest expense. Average borrowings for fiscal 2001 amounted to $44.9 million, with a weighted average interest rate of 11.9%, as compared to $140.8 million in fiscal 2000, with a weighted average interest rate of 12.3%. Included in net interest expense for fiscal 2001 was interest income of $0.3 million earned on the proceeds from the sale of Barnett until they were used to satisfy the Deferred Coupon Notes. PROVISION FOR INCOME TAXES The provision for income taxes amounted to $1.7 million for fiscal 2001. The Company utilized a portion of its net operating loss carryforwards to offset its federal tax due based on the regular method of computing tax liability. The Company's tax provision for fiscal 2001 provides for federal taxes based on the alternative minimum tax method and for state and various foreign taxes. In fiscal 2000, the Company recognized a state tax benefit due to a refund from a prior year payment, which offset various state and foreign taxes and resulted in a net tax benefit of $27,000. EXTRAORDINARY ITEM In fiscal 2001, the Company reported net extraordinary income of $52.2 million from the retirement of the Company's Deferred Coupon Notes, after 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 addition, 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's net income for fiscal 2001 amounted to $100.0 million, or $82.55 per basic and diluted share, as compared to the net loss of $28.8 million, or $23.91 per basic and diluted share, in fiscal 2000. The fiscal 2001 results include the $47.5 million net gain on the sale of the Barnett Common Stock, the $52.2 million extraordinary gain, or $43.09 per share, from the defeasance of debt at a discount, the recognition of $7.8 million of deferred gain from the sale of U.S. Lock and the loss on the sale of Medal. The Company's fiscal 2000 net loss amounted to $28.8 million, or $23.91 per basic and diluted share. The fiscal 2000 results were affected by $10.4 million of restructuring, impairment and procurement charges, $1.7 million in costs for the consolidation of the KF(R) packaged plumbing line and $2.0 million from the loss on the sale of WAMI. LIQUIDITY AND CAPITAL RESOURCES In February 2002, the Company refinanced the Loan and Security Agreement with Congress Financial Corporation, which was scheduled to expire on June 18, 2002 and replaced it with a working capital and term loan facility from PNC Bank, NA. The PNC Revolving Credit, Term Loan and Security Agreement ("PNC Bank Facility") is between Waxman Industries, Inc., Consumer Products, WAMI Sales and Waxman USA, as borrowers (the "Borrowers"). The PNC Bank Facility provides, among other things, for revolving credit advances of up to $15.0 million. The Term Loan facility provided an initial loan on the Company's corporate office building of $1,155,000, to be amortized over 7 years. As of June 30, 2002, the Company had $7.3 million in borrowings under the revolving credit line of the facility and had approximately $2.4 million available under such facility. The PNC Bank Facility provides 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) $7.5 million or (ii) 60% of the amount of eligible raw and finished goods inventory. Revolving credit advances bear interest at a rate equal to the higher of (a) the PNC Bank, NA base prime rate plus 0.5% or (b) Federal Funds Rate plus 1.0%. The Term Loan advance bears interest at a rate equal to the higher of (a) the PNC Bank, NA base prime rate plus 1.0% or (b) Federal Funds Rate plus 1.5%. The PNC Bank Facility includes a letter of credit subfacility of $1.0 million, with none outstanding at June 30, 2002. Borrowings under the PNC Revolving Credit Loan 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 PNC Bank Facility 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 PNC Bank Facility 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, and contains customary negative, affirmative and financial covenants and conditions. The financial covenants require the Company to maintain a certain fixed charge coverage ratio and tangible net worth and not exceed a certain amount of capital expenditures in any given period. The ratios and dollar amounts of such financial covenants vary during the term of the PNC Bank Facility and are contained in the agreement governing the PNC Bank Facility, which appears as Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on February 27, 2002 and is incorporated herein by reference as Exhibit 4.10 to this Form 10-K. The customary negative covenants 19 contained in the PNC Bank Facility include restrictions, subject to important enumerated exceptions, on the Company's ability to effect a merger, consolidation, acquisition or sale of its assets, create liens, enter into guarantees, acquire interests in other entities, make loans to other entities, incur indebtedness, and engage in transactions with affiliates. The Company was in compliance with all loan covenants at June 30, 2002. The PNC Bank Facility also contains a material adverse condition clause, which allows PNC Bank, NA to terminate the Agreement under certain circumstances. In fiscal 2001, the Company completed its comprehensive financial restructuring plan (see Note 3 of the Notes to Consolidated Financial Statements in this Form 10K and Management's Discussion and Analysis - Significant Developments - Prior Year Strategic and Restructuring Developments section in this Form 10-K for a discussion of the Company's sale of its interest in Barnett as part of a comprehensive financial reorganization), disposing of 7,186,530 shares of Barnett Common Stock and using the $94.5 million in proceeds as follows: - 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 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 approval of the Joint Plan, along with the retirement of the Senior Notes and reduction of its bank working capital debt, improved the Company's financial condition significantly, as well as reduced its interest expense by approximately $17 million per year. 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. Sales to Consumer Products' larger customers for fiscal 2002, 2001 and 2000, respectively, were as follows; Wal-Mart accounted for 29.0%, 25.0% and 13.6%; Lowes accounted for 16.1%, 8.4% and 5.8%; and Kmart accounted for 13.6%, 11.3% and 16.7%. The Company has been a supplier to Kmart for approximately 15 years. For fiscal 2002, Kmart accounted for $6.3 million, or approximately 8.9 percent and 13.6 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 had adequate reserves to account for the loss of its outstanding accounts receivable that were not covered by credit insurance at the time of Kmart's Chapter 11 filing. In connection with the Chapter 11 filing, Kmart reviewed its vendor relationships, including the financial commitments required of suppliers. The Company also assessed the issues associated with maintaining certain of its supply arrangements with Kmart, including the costs of retaining and supporting these programs and the cash flow implications of such programs, the risk/reward profile of each of such programs and the potential opportunities with other customers. As a result of these reviews, the Company will retain its floor and surface protection program with Kmart. However, the continuation of the plumbing repair program, which generated $4.6 million in sales in fiscal 2002 has been discontinued until such time that the Company and Kmart can agree to the level, terms and conditions of any future plumbing supply relationship. The Company believes its relationship with Kmart is good, however, there can be no assurances as to the level, if any, of future purchases or the terms and conditions applicable to any future supply relationship. The Company is evaluating the possible reduction or loss of the remaining Kmart revenue base and ways to reduce its cost structure to be more in line with a potentially smaller revenue base. The Company believes that increases in sales with other customers will ultimately offset any potential loss of Kmart revenue, however, in the short-term it may not be able to absorb all of the expenses due to this additional revenue loss. 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. 20 The Company paid $0.2 million and $1.2 million in income taxes in fiscal 2002 and 2001, respectively. At June 30, 2002, the Company had $17.4 million of available domestic net operating loss carryforwards for income tax purposes, which will expire in 2010 through 2022. The Company has total future lease commitments for various facilities and other leases totaling $4.4 million, of which approximately $0.9 million relates to fiscal 2003. The Company does not have any other commitments to make substantial capital expenditures. The fiscal 2003 capital expenditure plan includes expenditures to improve the efficiencies of the Company's operations, to continue developing our operations with technology and to provide for certain expansion plans for the Company's foreign operations. At June 30, 2002, the Company had working capital of $8.8 million and a current ratio of 1.5 to 1. DISCUSSION OF CASH FLOWS Net cash provided by operations was $4.6 million for fiscal 2002, principally due to the decrease in inventories and the income generated during the period, which was offset by the decrease in accounts payable and accrued liabilities. Cash flow used for investments, which primarily represented capital expenditures, totaled $1.8 million. Cash flow used in financing activities totaled approximately $2.1 million, comprised primarily of reductions in the Company's working capital bank facility. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The U.S. dollar is the functional currency for a significant portion of the Company's U.S. operations. Intra-company transactions between Waxman Industries, Inc. and its Asian operations, TWI and CWI, are effected in U.S. dollars. The functional currency of the Company's foreign operations is their local currency. Specifically, the functional currencies relating to TWI and CWI are the New Taiwan dollar (N.T. Dollar) and the Chinese Renminbi, respectively. As a result, the Company is exposed to currency translation risks, which primarily result from fluctuations of the foreign currencies in which the Company's foreign subsidiaries deal as compared to the U.S. dollar over time, which is a non-cash and non profit or loss item. The foreign currency transaction risks arise from certain receivables and payables being denominated in a currency other than the functional currency. The majority of TWI's transaction risk relates to it selling goods in U.S. dollars and the exchange rate changing in the 30 day to 60 day period that it takes to settle the receivable. TWI purchases very little goods that are not in NT Dollars. CWI has nearly no transaction risk because the Chinese Renminbi is fixed relative to the U.S. dollar. The Company does not enter into foreign currency exchange rate risk sensitive instruments, and the Company does not hedge the above-referenced transactions. Gains and losses that result from foreign currency transactions are included in the Company's consolidated statements of operations on a current basis and affect the Company's reported net income (loss). Gains or losses created by the translation of the foreign company balance sheets are reported as cumulative foreign currency translation adjustments, and are included as a separate component of stockholders' equity in the Company's consolidated balance sheets and are also reported in comprehensive income in the Company's consolidated statements of operations. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Begins on Following Page) 21 MANAGEMENT'S REPORT The management of Waxman Industries, Inc. has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. The Corporation's financial statements have been audited by Meaden & Moore Ltd., independent auditors. Management has made available to Meaden & Moore all of the Corporation's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to Meaden & Moore Ltd. during its audit were valid and appropriate. The Corporation maintains a system of internal accounting controls designed to provide reasonable assurance that the books and records properly reflect the transactions of the Company, and that assets are safeguarded against unauthorized acquisition, use or disposition. The design, monitoring and revision of internal accounting controls involve, among other things, management's judgments with respect to the relative cost and the expected benefits of specific control measures. The Company management reviews and evaluates internal accounting and operating controls. The Company's management and the Audit Committee of the Board of Directors also coordinates with Meaden & Moore Ltd. on the audit of the Company's financial statements. Meaden & Moore Ltd. also discusses the internal control procedures with management and communicates with the Audit Committee of their understanding and adequacy of internal control procedures. The Audit Committee of the Board of Directors, which is composed of directors who are not employees of the Company and a majority of directors who are independent, meets with management periodically and the independent auditors to ensure that each is carrying out its responsibilities. The Audit Committee consists of Irving Friedman (chairman) and Mark Reichenbaum. As part of the new corporate governance provisions established by the Sarbanes-Oxley Act of 2002, the Audit Committee will (i) hire and oversee the work of the auditors, (ii) establish procedures for the handling of anonymous submissions from employees regarding questionable accounting practices, (iii) provide at least one member who is a "financial expert", (iv) not accept consulting, advisory or other compensatory fees from the company and (v) receive reports from the auditors regarding the company's critical accounting policies and material communications between the auditors and company management. The independent auditors have full and free access to the Audit Committee. Melvin Waxman, Co-Chief Executive Officer and Chairman of the Board Armond Waxman, Co-Chief Executive Officer and President Mark Wester, Senior Vice President and Chief Financial Officer Irving Friedman, Director and Chairman of the Audit Committee 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Waxman Industries, Inc.: We have audited the accompanying consolidated balance sheet of Waxman Industries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of June 30, 2002 and 2001, and the related consolidated statement of operations, stockholders' equity and cash flows for the years ended June 30, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of TWI, International Taiwan, Inc. and CWI International China, Ltd. two wholly owned subsidiaries for 2002, which statements reflect total assets of $15,042,000 as of June 30, 2002, and total revenues of $35,236,000, for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for TWI, International Taiwan and CWI International China, Ltd., is based solely on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waxman Industries, Inc. and Subsidiaries as of June 30, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Meaden & Moore, Ltd. Cleveland, Ohio, August 9, 2002. 23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders TWI International Taiwan Inc. We have audited the accompanying balance sheet of TWI International Taiwan Inc. as of June 30, 2002 and the related statements of income, changes in stockholders' equity and cash flows for the year then ended. These financial statements (not presented separately herein) are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based. on our audit. We conducted our audit in accordance with Regulations for Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China and auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit Includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Accounting principles generally accepted in the Republic of China require that investments in shares of stock wherein the Corporation exercises significant influence on their operating and financial policy decisions be accounted for using the equity method. As more fully explained in Note 6 to the financial statements (not presented separately herein), the investment in CWI International, Inc. - Shenzen, a wholly owned subsidiary, has been accounted for using the cost method with the result that the carrying value of the investments was understated by NT$80,714,270 as of June 30, 2002, and income before income tax for the year then ended was understated by NT$84,114,033. In our opinion, except for the effects of accounting for the investment in CWI International, Inc. - Shenzen using the cost method as discussed in the preceding paragraph, the financial statements (not presented separately herein) refer to above present fairly, in all material respects, the financial position of TWI International Taiwan Inc. as of June 30, 2002 and the result of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of China. /s/ T N Soong & Co T N Soong & Co An Associate Member Firm of Deloitte Touche Tohmatsu Effective April 22, 2002 (Formerly a Member Firm of Andersen Worldwide, SC) Taipei, Taiwan The Republic of China July 23, 2002 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CWI International China Inc. We have audited the accompanying balance sheets of CWI International China Inc. - - ShenZhen as of June 30, 2002 and 2001, and the related statements of income and unappropriated earnings and cash flow for the years then ended. These statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards, Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CWI International China Inc. - -ShenZhen as of June 30, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our examination also comprehended the translations of the RMB dollar financial statements into U. S. dollars on the basis stated in Note 2 to the financial statements solely for the convenience of readers, and in our opinion, such translations have been made in conformity with such basis. /s/ Chien Chyuan & Co. Chien Chyuan & Co., Certified Public Accountants August 5, 2002 25 THE FOLLOWING AUDITOR'S REPORT DATED AUGUST 28, 2000 BY ARTHUR ANDERSEN, LLP IS A COPY OF SAID REPORT PREVIOUSLY ISSUED ON AUGUST 28, 2000, AND THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Waxman Industries, Inc.: We have audited the accompanying consolidated balance sheet of Waxman Industries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of June 30, 2000, and the related consolidated statements of operations, stockholders' equity and cash flow for the year ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waxman Industries, Inc. and Subsidiaries as of June 30, 2000, and the results of their operations and their cash flow for the year ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations, has not paid its interest payment on its Deferred Coupon Notes, has a net stockholders' deficit and plans to file a pre-negotiated consensual joint plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 14 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. Arthur Andersen LLP Cleveland, Ohio, August 28, 2000. 26 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND 2001 (IN THOUSANDS) ASSETS
2002 2001 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,420 $ 740 Trade receivables, net 11,529 12,592 Other receivables 1,979 1,400 Inventories 10,497 11,895 Prepaid expenses 1,902 1,850 -------- -------- Total current assets 27,327 28,477 -------- -------- PROPERTY AND EQUIPMENT: Land 554 551 Buildings 4,662 4,318 Equipment 11,427 10,415 -------- -------- 16,643 15,284 Less accumulated depreciation and amortization (8,302) (6,996) -------- -------- Property and equipment, net 8,341 8,288 -------- -------- CASH SURRENDER VALUE OF OFFICERS LIFE INSURANCE POLICIES 3,265 2,934 UNAMORTIZED DEBT ISSUANCE COSTS, NET 315 142 NOTES RECEIVABLE FROM RELATED PARTIES 548 452 OTHER ASSETS 500 539 -------- -------- $ 40,296 $ 40,832 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 27 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001 ---- ---- CURRENT LIABILITIES: Short-term borrowings $ 7,596 $ 9,870 Current portion of long term debt 235 175 Accounts payable 6,754 6,932 Accrued liabilities 3,975 4,291 -------- ------- Total current liabilities 18,560 21,268 -------- ------- TERM DEBT - LONG-TERM PORTION 935 -- OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 15 532 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value per share: authorized and unissued 2,000 shares -- -- Common stock, $0.01 par value per share: 22,000 shares authorized; 1,003 and 998 shares issued and outstanding, respectively 99 99 Class B common stock, $.01 par value per share: 6,000 shares authorized; 214 issued and outstanding in each year 21 21 Paid-in capital 21,760 21,752 Retained deficit (123) (1,708) -------- ------- 21,757 20,164 Accumulated other comprehensive loss (971) (1,132) -------- ------- Total stockholders' equity 20,786 19,032 -------- ------- $ 40,296 $40,832 ======== =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 28 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended June 30, -------------------------- 2002 2001 2000 ---- ---- ---- Net sales $ 70,425 $ 71,370 $ 80,710 Cost of sales 47,253 49,890 59,259 --------- --------- --------- Gross profit 23,172 21,480 21,451 Selling, general and administrative expenses 21,535 21,763 27,094 Restructuring and impairment charges (Note 4) -- 350 9,720 --------- --------- --------- Operating income (loss) 1,637 (633) (15,363) Gain on sale of Barnett, net (Note 2) -- 47,473 -- Loss on sale of Medal, net (Note 5) -- (1,105) -- Loss on sale of WAMI, net (Note 5) -- -- (2,024) Equity earnings of Barnett -- 1,370 6,511 Amortization of deferred U.S. Lock gain -- 7,815 202 Interest expense 723 5,414 18,201 --------- --------- --------- Income (loss) before extraordinary item and income taxes and extraordinary loss 914 49,506 (28,875) (Benefit) provision for income taxes (671) 1,680 (27) --------- --------- --------- Income (loss) before extraordinary gain 1,585 47,826 (28,848) Extraordinary gain -- 52,222 -- --------- --------- --------- Net income (loss) $ 1,585 $ 100,048 $ (28,848) ========= ========= ========= Other comprehensive income (loss): Foreign currency translation adjustment 161 (473) 370 --------- --------- --------- Comprehensive income (loss) $ 1,746 $ 99,575 $ (28,478) ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 29 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended June 30, -------------------------- 2002 2001 2000 ---- ---- ---- Basic income (loss) per share: Income (loss) before extraordinary gain $1.30 $ 39.46 $ (23.91) Extraordinary gain -- 43.09 -- ----- ------- -------- Net income (loss) $1.30 $ 82.55 $ (23.91) ===== ======= ========= Diluted income (loss) per share: Income (loss) before extraordinary gain $1.30 $ 39.46 $ (23.91) Extraordinary gain -- 43.09 -- ----- ------- -------- Net income (loss) $1.30 $ 82.55 $ (23.91) ===== ======= ======== Weighted average number of common shares outstanding 1,215 1,212 1,207 ===== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 30 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDING JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS)
Accumulated Total Class B Other Stockholders' Common Common Paid-in Retained Comprehensive (Deficit) Stock Stock Capital Deficit Income (Loss) Equity ------ ------- ------- -------- ------------- ----------- Balance June 30, 1999 $ 98 $ 21 $ 21,732 $ (72,908) $ (1,029) $ (52,086) Net loss -- -- -- (28,848) -- (28,848) Employee Stock Purchase Plan 1 -- 20 -- -- 21 purchases Currency translation adjustment -- -- -- -- 370 370 --------- --------- --------- --------- --------- --------- Balance June 30, 2000 99 21 21,752 (101,756) (659) (80,543) Net income -- -- -- 100,048 -- 100,048 Currency translation adjustment -- -- -- -- (473) (473) --------- --------- --------- --------- --------- --------- Balance June 30, 2001 99 21 21,752 (1,708) (1,132) 19,032 Net income -- -- -- 1,585 -- 1,585 Conversions of Class B common stock -- -- -- -- -- -- Employee Stock Purchase Plan purchases -- -- 8 -- -- 8 Currency translation adjustment -- -- -- -- 161 161 --------- --------- --------- --------- --------- --------- Balance June 30, 2002 $ 99 $ 21 $ 21,760 $ (123) $ (971) $ 20,786 ========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 31 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Fiscal Year Ended June 30, -------------------------- Cash From (Used For): 2002 2001 2000 ---- ---- ---- Operations: Net income (loss) $ 1,585 $100,048 $(28,848) Adjustments to reconcile net income (loss) to net cash used for operations: Extraordinary item -- debt defeasance -- (52,222) -- Non-cash restructuring and impairment charges -- 1,050 11,677 Gain on sale of Barnett stock, net -- (47,473) -- Loss on sale of Medal -- 1,105 -- Loss on sale of WAMI -- -- 2,024 Non-cash interest 182 83 250 Amortization of deferred U.S. Lock gain -- (7,815) (203) Equity earnings of Barnett -- (1,370) (6,511) Depreciation and amortization 1,346 2,314 2,767 Deferred income taxes -- 367 173 Bad debt provision 371 215 242 Changes in assets and liabilities: Trade and other receivables 113 1,307 (1,840) Inventories 1,398 1,860 (600) Prepaid expenses and other (52) (1,922) (437) Accounts payable (178) 749 (315) Accrued liabilities (316) (8,484) 4,022 Net change in operating assets and liabilities of U.S. Lock -- -- 185 Other, net 161 (473) 249 ------- ------- -------- Net cash provided by (used for) operations 4,610 (10,661) (17,165) ------- ------- -------- Investments: Capital expenditures, net (1,399) (1,229) (1,794) Change in other assets (388) 2,764 (2,388) Net proceeds from sales of businesses -- 94,503 1,800 ------- ------- -------- Net cash (used for) provided by investments (1,787) 96,038 (2,382) ------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 32
Financing: 2002 2001 2000 ---- ---- ---- Net change in short-term borrowings (2,274) (10,016) 19,419 Proceeds from long-term debt 1,155 -- -- Repayment of long-term debt (677) (248) (277) Debt issuance costs (355) -- (137) Retirement of 11 1/8% Senior Secured Notes -- (35,855) -- Retirement of 123/4% Deferred Coupon Notes -- (39,329) Issuance of common stock 8 -- 21 -------- -------- -------- Net cash (used for) provided by financing (2,143) (85,448) 19,036 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 680 (71) (511) Balance, beginning of year 740 811 1,322 -------- -------- -------- Balance, end of year $ 1,420 $ 740 $ 811 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 33 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF CONSOLIDATION AND DESCRIPTION OF THE COMPANY The accompanying consolidated financial statements include the accounts of Waxman Industries, Inc. ("Waxman Industries") and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to the prior year statements in order to conform to the current year presentation. Until September 29, 2000, the Company owned 44.2% of the common stock of Barnett Inc. ("Barnett Common Stock"), a direct marketer and distributor of plumbing, electrical and hardware products, and accounted for Barnett Inc. ("Barnett") under the equity method of accounting. See Management's Discussion and Analysis "Significant Developments - Comprehensive Financial Restructuring" section and Note 2 in these Notes to Consolidated Financial Statements for information regarding the sale of the Company's interest in Barnett. 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 International"). 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 International includes TWI International Taiwan Inc. and its sales operation, TWI Industrial Inc. (collectively, "TWI"), located primarily in Taiwan, and CWI International China, Ltd. ("CWI"), located in China. TWI and CWI manufacture, package, source and assemble product purchased by Consumer Products and non-affiliated businesses. 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, subject to certain liabilities, of this business were sold (see Note 5). Until the sale of Western American Manufacturing Inc. ("WAMI") effective March 31, 2000, TWI also included a manufacturing operation in Mexico that threaded galvanized, black, brass, and chrome pipe and imported malleable fittings. Consumer Products utilizes the Company's and non-affiliated foreign sourcing suppliers. B. CASH AND CASH EQUIVALENTS In accordance with the terms of the PNC Revolving Credit, Term Loan and Security Agreement ("PNC Bank Facility") and the Congress Financial Loan and Security Agreement (as discussed in Note 7), all restricted cash balances have been excluded from cash and have been applied against outstanding borrowings. Cash balances include certain unrestricted operating accounts and accounts of foreign operations. The Company considers all highly liquid temporary cash investments with original maturities of less than three months to be cash equivalents. Cash investments are valued at cost plus accrued interest, which approximates market value. C. TRADE RECEIVABLES Trade receivables are presented net of allowances for doubtful accounts of $0.6 million and $0.5 million at June 30, 2002 and 2001, respectively. Bad debt expense totaled $0.4 million in fiscal 2002, $0.2 million in fiscal 2001 and $0.2 million in fiscal 2000. The Company sells specialty plumbing, floor and surface protection and other hardware products throughout the United States to do-it-yourself ("D-I-Y") retailers, mass merchandisers, smaller independent retailers and wholesalers. The Company performs ongoing credit evaluations of its customers' financial conditions. The Company's largest customers are retailers. As a percentage of the Company's net sales, the largest customers accounted for the following percentages in fiscal 2002, 2001 and 2000, respectively: Wal-Mart, accounted for 16.3%, 12.8% and 9.2%, Kmart accounted for 8.9%, 10.0% and 10.3%, and Lowes accounted for 15.7%, 9.6% and 5.8%. During the same periods, the Company's ten largest customers 34 accounted for approximately 57.8%, 51.1% and 43.6% of net sales and approximately 53.7% and 51.0% of accounts receivable at June 30, 2002 and 2001, respectively. D. INVENTORIES At June 30, 2002 and 2001, inventories, consisting primarily of finished goods, are carried at the lower of first-in, first-out (FIFO) cost or market. The Company regularly evaluates its inventory carrying value, with appropriate consideration given to any excess, slow-moving and/or nonsalable inventories. In fiscal 2002, 2001 and 2000, the Company recorded charges of $0.1 million, $0.6 million and $0.1 million, respectively, in connection with its evaluation of its inventory carrying value. E. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. For financial reporting purposes, buildings and equipment are depreciated on a straight-line basis over the estimated useful lives of the related assets. Depreciable lives are 15 to 40 years for buildings and 3 to 15 years for equipment. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the useful life of the asset, whichever is shorter. For income tax purposes, accelerated methods of depreciation are used. Depreciation expense in each of the last three fiscal years ended June 30, 2002, 2001 and 2000 totaled $1.3 million, $1.4 million and $1.6 million, respectively. Repairs and maintenance are expensed as incurred. F. COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED In the fourth quarter of fiscal 2000, management evaluated its goodwill in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," on an originating entity basis considering future undiscounted operating cash flows and the inconsistency of the Company's earnings. In fiscal 2000, based on the lack of operating cash flow from operations to support future growth, the inconsistency of the Company's and Consumer Products' earnings, the competitiveness of the industry in supplying customers in the D-I-Y retail market and the cash flow expectations of the business, as compared to the contribution of those product lines, along with the Company's comprehensive financial restructuring plan, the Company wrote off $6.7 million of goodwill at its Consumer Products operation, which relates to two product lines acquired in December 1986 and May 1988. In prior years, the cost of businesses in excess of net assets acquired was being amortized primarily over 40 years using the straight-line method. Goodwill amortization expense totaled $0.3 million in fiscal 2000. G. UNAMORTIZED DEBT ISSUANCE COSTS Unamortized debt issuance costs relate to the Company's long-term and short-term debt (See Note 7) and are amortized over the life of the related debt. Amortization expense totaled $0.3 million in fiscal 2002, $0.4 million in fiscal 2001 and $0.8 million in fiscal 2000, and is included in interest expense in the accompanying consolidated statements of operations. The Company incurred an extraordinary charge in fiscal 2001 related to the accelerated amortization of unamortized debt issuance costs (See Note 6). H. 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 began recording all of these business procurement costs as a reduction in sales. 35 The Company reduced its net sales by $2.4 million, $2.4 million and $0.65 million in fiscal 2002, 2001 and 2000, respectively, for a combination of the above mentioned procurement costs. Of the amounts in fiscal 2001 and 2000, the Company previously reported $0.9 million and $1.5 million, respectively, in contra sales, and reclassified $2.1 million and $0.7 million of costs originally recorded as an operating expense as a reduction of net sales. I. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS All balance sheet accounts of foreign subsidiaries are translated at the exchange rate as of the end of the fiscal year. Income statement items are translated at the average currency exchange rates during the fiscal year. The resulting translation adjustment is recorded as a component of stockholders' equity and comprehensive loss. Foreign currency transaction gains or losses are included in the consolidated statements of operations as incurred. J. FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. K. EARNINGS PER SHARE In February 1997, The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share" to be effective for financial statements issued for periods ending after December 15, 1997. Under SFAS No. 128, primary earnings per share have been replaced by "basic earnings per share", which represents net income divided by the weighted average number of common shares outstanding. Diluted earnings per share utilizes the weighted average number of common stock and common stock equivalents, which include stock options and warrants. In fiscal 2002, the Company cancelled all of the outstanding stock options issued pursuant to an Exchange Offer (see Note 13) and the warrants were anti-dilutive due to the stock price being below the strike price of the warrants. For fiscal 2001, 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. In fiscal 2000, the Company was in a loss position and the impact of the options and warrants was anti-dilutive, therefore the Company has disclosed basic earnings per share as basic and diluted for these years. As further described in Note 12, 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. The number of common shares used to calculate basic and diluted earnings per share are as follows (in thousands): 2002 2001 2000 ----- ----- ----- Basic 1,215 1,212 1,207 Diluted 1,215 1,212 1,207 L. REVENUE RECOGNITION Revenue is recognized as risk and title to the product transfers to the customer, which usually occurs at the time shipment is made. In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," which summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition. The Company has determined that SAB 101's revenue recognition guidelines are consistent with the Company's existing revenue recognition policies; therefore, SAB 101 did not have a material impact on the Company's consolidated financial statements. M. SHIPPING AND HANDLING FEES In May 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus with respect to EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF 00-10 recognizes the inconsistencies in practice of the recording of shipping and handling costs incurred by most companies that sell goods. The Company has historically recorded freight and any directly related associated cost of 36 transporting finished product to customers as a component of its selling, general and administrative expenses. The amounts of $2.2, $2.9 and $3.6 for fiscal years 2002, 2001 and 2000, respectively, are recorded in selling, general and administrative expenses. N. SPLIT-DOLLAR LIFE INSURANCE POLICIES Split-dollar life insurance policies are maintained for the following officers and directors: (1) three policies for Melvin Waxman providing for total death benefits of $8,535,000, (2) two policies for Armond Waxman providing for total death benefits of $12,000,000, (3) one policy for Laurence Waxman providing for death benefits of $1,274,000 and (4) one policy for John Peters providing for death benefits of $1,250,000. In the event of the death of any of the above-referenced insureds, the Company will be repaid for the aggregate premiums paid by the Company for such policies from the insurance proceeds paid to the split-dollar life insurance trusts which own such policies. 2. 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. 3. COMPREHENSIVE FINANCIAL RESTRUCTURING PLAN / CONFIRMATION OF CHAPTER 11 FILING Over a several year period concluding in fiscal 2001, the Company 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' 12 3/4% Senior Secured Deferred Coupon Notes due 2004 (the "Deferred Coupon Notes") and approximately 65% of the 11 1/8% Senior Notes due 2001 (the "Senior Notes") of Waxman USA Inc., a direct wholly-owned subsidiary of the Company, entered into an agreement (the "Debt Reduction Agreement") that 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. 37 - 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. - 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. Included in accrued liabilities at June 30, 2002 and 2001 are accrued restructuring charges in the amount of $980,000. 4. MANAGEMENT'S REVIEW OF OPERATIONS -- RESTRUCTURING AND IMPAIRMENT CHARGES Since fiscal 1994, the Company's strategic effort has been to reduce its high level of debt through the monetization of assets and to improve the efficiencies from its continuing businesses. As a result, the Company has undertaken various initiatives to raise cash, improve its cash flow and reduce its debt obligations or improve its financial flexibility during that period. Accordingly, management performed strategic reviews of its business operations in past fiscal years that resulted in the Company recording significant charges as follows. FISCAL 2001 -- Distribution and packaging operations consolidation: Included in the results for the fiscal 2001 are $0.35 million in additional costs and restructuring charges recorded by Consumer Products during the quarter ended September 30, 2000 which were associated with its warehouses closed in prior years. FISCAL 2000 -- Product line consolidation: In the second quarter of fiscal 2000, Consumer Products recorded a restructuring charge of $1.3 million related to the consolidation of its packaged plumbing products under the Plumbcraft(R) brand 38 name. The Plumbcraft(R) packaging, which was re-designed, and the consolidation of brands has resulted in cost savings by reducing the amount of inventory needed to support the business and creating workforce efficiencies. Distribution and packaging operations consolidation: In the fourth quarter of fiscal 2000, Consumer Products recorded a $0.6 million restructuring charge to consolidate its Grand Prairie, Texas warehouse into its national distribution center in Groveport, Ohio, and to move its packaging operations from Tijuana, Mexico to the Company's operations in China. The facilities were closed at a time when leases expired, therefore, there are no future leases costs for the closed facilities. The warehouse closure costs included costs associated with the incremental employee salaries and benefits associated with closing the warehouse of $0.2 million and other miscellaneous moving and closing costs of $0.4 million. All but $0.1 million of these costs were paid in fiscal 2000. Consumer Products also wrote off $1.7 million in packaging material and other inventory associated with these closings, which are recorded in cost of sales. Asset impairment: In the fourth quarter of fiscal 2000, Consumer Products recorded an asset impairment charge of $6.7 million related to a write-off of goodwill as required by SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of", for two product lines that were acquired by Consumer Products in December 1986 and May 1988. This charge has been reported as a separate component in operating expenses and reflects the lack of operating cash flow from operations to support future growth, the inconsistency of the Company's and Consumer Products' earnings, the competitiveness of the industry in supplying customers in the D-I-Y retail market and the cash flow expectations of the business, as compared to the contribution of those product lines, along with management's plans associated with the Company's comprehensive financial restructuring plan. Closure of operations: During the fourth quarter of fiscal 2000, TWI closed Premier Faucet Corporation, one of its facilities in China that manufactured faucets and faucet components. The closure resulted in a charge of $1.2 million to write down fixed assets and other long term assets to their fair value and provide for miscellaneous costs to close the facility. In addition, the operation recorded a charge of $0.5 million to write down inventory and other assets, which is recorded in cost of sales and $0.4 million to write down accounts receivable, which was charged to sales. The loss from this operation in fiscal 2000 and 1999 amounted to $2.0 million and $0.6 million, respectively. 5. DISPOSAL OF BUSINESSES: A. SALE OF MEDAL OF PENNSYLVANIA, INC. -- FISCAL 2001 The Company sold substantially all of the assets and certain liabilities of Medal of Pennsylvania, Inc. ("Medal"), to a newly formed corporation, Medal USA, Inc. for approximately $0.8 million in cash and the assumption of certain liabilities (the "Medal Sale"). The Medal Sale was effective March 31, 2001, resulting in a net pretax loss of $1.1 million in the quarter ended March 31, 2001. The Company consolidated Medal's financial information in its results through March 31, 2001. The impact of not consolidating Medal's results would have been to reduce consolidated net sales and improve the Company's net income (loss) as follows (in thousands, except per share data): Fiscal 2001 Fiscal 2000 ----------- ----------- Net sales $ 3,407 $ 4,724 Net loss $ ( 151) $ ( 103) Basic and diluted loss per share $ ( 0.12) $ ( 0.09) B. SALE OF WESTERN AMERICAN MANUFACTURING INC. -- FISCAL 2000 Effective March 31, 2000, the Company sold substantially all of the assets and certain liabilities of Western American Manufacturing Inc., a division of TWI, to a Mexican company, Niples Del Norte, S.A. de C.V. for approximately $1.8 million in cash (the "WAMI Sale"), resulting in a net pretax loss of $2.0 million, including approximately $1.0 million for the write-off of goodwill. The Company consolidated WAMI's financial information in its results through March 31, 2000. The impact of not consolidating WAMI's results would have been to reduce the consolidated net sales and net loss for the Company as follows (in thousands, except per share data): 39 Fiscal 2000 ----------- Net sales $ 2,923 Net loss $ (273) Basic and diluted loss per share $ (0.23) 6. EXTRAORDINARY ITEMS 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 included 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 tax provision on the extraordinary gain due to the tax regulations on the treatment of debt defeasance income in a bankruptcy. 7. DEBT A. LONG-TERM DEBT Total other long-term debt consists of the following at June 30, 2002 and 2001 (in thousands of dollars):
2002 2001 ---- ---- Bank Agreement $ 7,298 $ 9,870 Term Loan maturing in 2005, bearing interest at prime plus 1%, secured by the Company's 1,100 -- corporate land and building Capital leases maturing in 2003 to 2006, bearing interest at 6.93% - 17.33%, secured by leased 85 169 equipment Other debt, maturing in 2002, bearing interest at 5.7%, secured by TWI's land and building 298 -- Other debt, maturing through 2009, bearing interest at 7.4%, secured by TWI's land and building -- 538 -------- -------- 8,781 10,577 Less: current portion (7,831) (10,045) -------- -------- Long-term debt, net of current portion $ 950 $ 532 ======== ========
In February 2002, the Company refinanced the Loan and Security Agreement with Congress Financial Corporation, which was scheduled to expire on June 18, 2002, and replaced it with a working capital and term loan facility from PNC Bank, NA. The Company incurred $0.2 million in early termination fees to Congress Financial Corporation. The PNC Revolving Credit, Term Loan and Security Agreement ("PNC Bank Facility") is between Waxman Industries, Inc., Consumer Products, WAMI Sales and Waxman USA, as borrowers (the "Borrowers"). The PNC Bank Facility provides, among other things, for revolving credit advances of up to $15.0 million. The Term Loan facility provided an initial loan on the Company's corporate office building of $1,155,000, to be amortized over 7 years. As of June 30, 2002, the Company had $7.3 million in borrowings under the revolving credit line of the facility and had approximately $2.4 million available under such facility. The PNC Bank Facility provides 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) $7.5 million or (ii) 60% of the amount of eligible raw and finished goods inventory. Revolving credit advances bear interest at a rate equal to the higher of (a) the PNC Bank, NA base prime rate plus 0.5% or (b) Federal Funds Rate plus 1.0%. The Term Loan advance bears interest at a rate equal to the higher of (a) the PNC Bank, NA base prime rate plus 1.0% or (b) Federal Funds Rate plus 1.5%. The PNC Bank Facility includes a letter of credit subfacility of $1.0 million, with none outstanding at June 30, 2002. Borrowings under the PNC 40 Revolving Credit Loan is 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 PNC Bank Facility 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 PNC Bank Facility 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, and contains customary negative, affirmative and financial covenants and conditions. The Company was in compliance with all loan covenants at June 30, 2002. The PNC Bank Facility also contains a material adverse condition clause, which allows PNC Bank, NA to terminate the loan facility under certain circumstances. B. SENIOR SECURED DEFERRED COUPON NOTES In November 2000, the Company's Joint Plan became effective and the Company paid its Deferred Coupon Note obligation to the Deferred Coupon Note holders (see Note 3). The Deferred Coupon Notes were issued in May 1994, when the Company exchanged $50 million principal amount of its 13 3/4% Senior Subordinated Notes due June 1, 1999 ("Senior Subordinated Notes") for Deferred Coupon Notes having an initial accreted value of $50 million, along with detachable warrants to purchase 295,000 post-split shares of the Company's common stock. The Deferred Coupon Notes were fully accreted at June 1, 1999, and began accruing cash interest at a rate of 12 3/4% which became payable on December 1, 1999 and semi-annually thereafter. The warrants are exercisable through June 1, 2004. As a result of the Company's reverse stock split in February 2001, the original 2.95 million warrants exercisable at $2.45 per share became 295,000 warrants exercisable at $24.50 per share. A portion of the initial accreted value of the Deferred Coupon Notes had been allocated to the warrants and as a result, paid-in capital increased by $2.5 million. The related $2.5 million reduction in the recorded initial accreted value of the Deferred Coupon Notes was being amortized as interest expense over the life of the Deferred Coupon Notes, and was accelerated with the settlement of the Deferred Coupon Notes in connection with the effectuation of the Joint Plan (see Note 3). C. SENIOR NOTES On September 29, 2001, the Company redeemed its remaining Senior Notes as part of its Debt Reduction Agreement and comprehensive financial restructuring, paying the principal and interest in full. The Senior Notes were initiated in April 1996, when the Company, through its wholly-owned subsidiary, Waxman USA, consummated an offer to exchange $48.8 million principal amount of Senior Notes for a like amount of the Company's outstanding Senior Subordinated Notes, and in connection therewith solicited consents to certain amendments to the indenture pursuant to which the Senior Subordinated Notes were issued. Approximately $43.0 million of Senior Subordinated Notes were exchanged in fiscal 1996. In fiscal 1997, the Company initiated a similar exchange offer and exchanged an additional $4.9 million of Senior Subordinated Notes, bringing the total amount exchanged to $47.9 million. In May 1997, the Company commenced an offer to purchase $12.0 million principal amount of Senior Notes at par (the "Purchase Offer"). The offer expired on July 2, 1997, with $2.5 million of the notes being purchased. On July 3, 1997, the Company called for the redemption of $9.5 million of Senior Notes that had not been tendered in the Purchase Offer, and on August 4, 1997, the Company completed the note redemption. The Company used a portion of the net proceeds from the Barnett Secondary Offering to purchase the Senior Notes. The Company recorded an extraordinary charge of $0.2 million in the first quarter of fiscal 1998 related to the write-off of unamortized deferred financing costs associated with the purchase and redemption of these Senior Notes D. CAPITAL LEASES The Company has certain obligations under capital leases which are included in the debt balances in the Long-Term Debt table provided in Note 7A. The obligations under capital leases have fixed interest rates ranging from 6.93% to 7.75% and are collateralized by property, plant and equipment. Property under capitalized leases consists of the following: 2002 2001 ---- ---- Machinery and equipment $ 432 $ 411 41 Less: Accumulated depreciation 280 93 ----- ----- $ 152 $ 318 ===== ===== The future minimum rentals for property under capital leases are as follows: 2003 $73 2004 6 2005 5 2006 5 2007 1 ---- Total minimum lease obligation 90 Less interest 5 ---- Present value of total minimum lease obligation $ 85 ==== E. TERM DEBT The PNC Bank Facility provides for a Term Loan facility on the Company's corporate office building. The initial loan amount was $1,155,000, to be amortized over 7 years and bears an interest rate of prime plus 1.0%. Monthly principal payments of $13,750 plus interest are made. Since inception, the Company made $55,000 in principal payments and principal payments of $165,000 will be made in each fiscal year beginning with fiscal 2003 through fiscal 2008, with $110,000 being made in fiscal 2009. F. MISCELLANEOUS The Company made cash interest payments of $0.6 million, $9.3 million and $11.3 million in fiscal 2002, 2001 and 2000, respectively. The Company made its June 1, 2000 interest payment to the Deferred Coupon Note Holders in September 2000, with a portion of the proceeds from the Barnett Merger as part of an agreement with the Ad Hoc Committee. The Ad Hoc Committee had provided instructions to the Trustee for the Deferred Coupon Notes not to take any action with respect to the failure to pay the June interest payment, pending the anticipated completion of the Barnett Merger. The Company reported interest income of $0.3 million in fiscal 2001, but did not have interest income in fiscal 2002 or fiscal 2000. Prior to fiscal 2001, the Company also had a significant amount of non-cash interest, accrued interest and interest cost from the amortization of deferred financing costs, which made up the balance of the interest expense presented in the accompanying consolidated statements of operations. Management believes the carrying value of its bank loan approximates its fair value as it bears interest based upon the bank's prime lending rates. 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 basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The components of income (loss) from continuing operations before income taxes and extraordinary gain are as follows (in thousands of dollars): 42
Fiscal Year Ended June 30, -------------------------- 2002 2001 2000 ---- ---- ---- Domestic $ (80) $ 47,895 $ (26,683) Foreign 994 1,611 (2,192) ------ -------- --------- Total $ 914 $ 49,506 $(28,875) ====== ======== =========
The components of the provision for income taxes are (in thousands of dollars):
Fiscal Year Ended June 30, -------------------------- Currently payable: 2002 2001 2000 ---- ---- ---- U.S. Federal $ (773) $ 740 $ -- Foreign, state and other 102 573 (200) ------- ------ ------ Total current (671) 1,313 (200) Deferred: State -- 367 173 ------- ------ ------ Total provision $ (671) $ 1,680 $ (27) ======= ======= ======
The following table reconciles the U.S. statutory rate to the Company's effective tax rate:
2002 2001 2000 ---- ---- ---- U.S. statutory rate 35.0% 35.0% 35.0% Domestic losses not benefited -- -- (21.5) State taxes, net 1.8 0.8 0.4 Goodwill amortization -- -- (9.6) Foreign tax items (13.0) (0.6) (3.1) Change in valuation allowance -- (32.0) -- Change in tax law (84.6) -- -- Nondeductible compensation -- -- -- Original issue discount -- -- (0.9) Other, net (12.6) 0.2 (0.2) ------ ------ ------ Effective tax rate (73.4)% 3.4% 0.1% ====== ====== ======
The deferred tax assets and liabilities as of June 30, 2002 and 2001 are as follows (in thousands of dollars): 43
2002 2001 ---- ---- Net operating loss carryforwards $ 6,082 $ 6,130 Accrued expenses 97 163 Inventories 409 405 Accounts receivable 188 188 Procurement costs 910 1,005 Alternative minimum tax credit 718 1,743 Other 472 448 ------- ------- Deferred tax asset 8,876 10,082 ------- ------- Property (941) (962) ------- ------- Deferred tax liabilities (941) (962) ------- ------- Net deferred tax asset 7,935 9,120 Valuation allowance (7,935) (9,120) ------- ------- $ -- $ -- ======= =======
SFAS No. 109 requires the Company to assess the realizability of its deferred tax assets based on whether it is more likely than not that the Company will realize the benefit from these deferred tax assets in the future. If the Company determines the more likely than not criteria is not met, SFAS No. 109 requires the deferred tax assets be reduced by a valuation allowance. In assessing the realizability of its net deferred tax asset as of June 30, 2002, 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, 2002 and 2001, the Company's net deferred tax assets were fully offset by a valuation allowance. At June 30, 2002, the Company had $17.4 million of available domestic net operating loss carryforwards for income tax purposes, which will expire in 2010 through 2022. In fiscal 2002, the Company recorded a net tax benefit of $0.7 million, which represents a tax benefit of $0.8 million for a change in tax law related to the carryforward of an alternative minimum tax net operating loss to fiscal 2001, a benefit of $0.1 million for the reversal of tax reserves related to the 2001 financial restructuring and a provision for various state and foreign taxes. The fiscal 2001 provision for income taxes amounted to $1.7 million. The Company's tax provision for fiscal 2001 provided for federal taxes based on the alternative minimum tax method and for state and various foreign taxes. The Company utilized a portion of its net operating loss carryforwards in fiscal 2001 to offset its federal tax due based on the regular method of computing tax liability. In addition to the net operating losses utilized, the Company's net operating loss carryforward and alternative minimum tax credit carryforward were reduced as a result of the bankruptcy. In fiscal 2001, 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. Undistributed earnings of the Company's foreign operations was approximately $1.0 million for fiscal 2002. These earnings are considered to be indefinitely reinvested and accordingly, no U.S. federal or state taxes have been provided. The Company made no federal income tax payments in fiscal 2002 and 2000, but made payments of $0.8 for fiscal 2001. The Company's foreign operations made payments of $0.1 million in fiscal 2002, as compared to $0.1 million and $0.2 million for fiscal 2001 and fiscal 2000, respectively. The Company paid approximately $114,000, $330,000 and $914,000 in state taxes for fiscal 2002, 2001 and 2000, respectively. Refunds received totaled $28,000 in fiscal 2002, $6,000 in fiscal 2001 and $445,000 in fiscal 2000. 9. LEASE COMMITMENTS 44 The Company leases certain warehouse and office facilities and equipment under operating lease agreements, which expire at various dates through 2008. Future minimum rental payments are as follows (in thousands of dollars): 2003 $942 2004 822 2005 710 2006 678 2007 672 Thereafter 606 ------ $4,430 Total rent expense charged to operations was $0.9 million, $0.8 million and $1.5 million in fiscal 2002, 2001 and 2000, respectively. Consumer Products leases certain warehouse space from related parties. Related parties' rent expense totaled $0.3 million in each of fiscal 2002, fiscal 2001 and fiscal 2000. Those related party relationships consist of the following: - Aurora Investment Co., a partnership owned by Melvin Waxman, Chairman of the Board and Co-Chief Executive Officer of the Company, and Armond Waxman, President and Co-Chief Executive Officer of the Company, together with certain other members of their families, is the owner and lessor of the building used by Consumer Products for its executive offices, administrative functions and, until the move of the warehouse to Groveport, Ohio, one of its distribution facilities. Rent expense under this lease was $326,712 in each of fiscal 2002, 2001 and 2000. All but 97,000 square feet of the warehouse portion of this facility was subleased to Handl-it, Inc. (see Note 10 for information regarding related party ownership of Handl-it) through the June 30, 2002 term of the lease. Consumer Products renewed the lease for the 9,000 square feet of office space and 20,000 square feet of warehouse space that it uses effective July 1, 2002. - Handl-it Inc., a corporation owned by John S. Peters, a director and consultant to the Company, together with certain other members of his family, Melvin Waxman and Armond Waxman, sublet warehouse space from Consumer Products through June 30, 2002. The Company reported rental income from Handl-it, Inc. of $191,079, $290,496 and $290,970 in fiscal 2002, 2001 and 2000, respectively, for subleasing the warehouse in Bedford Hts., Ohio. See Note 10 for additional information regarding this related party transaction. - From July 1, 1999 through April 2001, WAMI Sales utilized Handl-it Inc. to provide all warehousing, labor and shipping functions in Cleveland, Ohio for a fee equal to a percentage of monthly sales plus other direct expenses from this operation. The charge amounted to $67,000 in fiscal 2001 and $74,000 in fiscal 2000. The Company believes these terms are comparable to those that would be available from unaffiliated third parties. 10. RELATED-PARTY TRANSACTIONS The Company purchases certain products, which it can not manufacture with its existing operations, from WDI International, Inc., a company owned in part by certain members of the Waxman family and other non-affiliated individuals. In fiscal 2002, 2001 and 2000, purchases from WDI International amounted to $1.6 million, $1.7 million and $3.7 million, respectively. The Company believes that the prices it receives are on terms comparable to those that would be available from unaffiliated third parties. The Company leases certain facilities from Aurora Investment Co., a partnership owned by members of the Waxman family (see Note 9 for additional information regarding this arrangement). Aurora Investments developed the building currently leased by Consumer Products for office and warehouse space in Bedford Hts., Ohio. The lease, which expired on June 30, 2002, was renewed for the office area and a portion of the warehouse being used by Consumer Products for a period of 5 years. Rent expense under this lease was $326,712 in each of fiscal 2002, 2001 and 2000. All 45 but 97,000 square feet of the warehouse portion of this facility was subleased to Handl-it, Inc. (see below for information regarding affiliated ownership of Handl-it Inc.) through the June 30, 2002 term of the lease. Beginning in fiscal 2003, Consumer Products's annual payment to Aurora Investments Co. will be approximately $96,000 for lease of 9,000 square feet of office space and 20,000 square space of warehouse space. At June 30, 2002 and 2001, the Company had the following receivables from related parties (in thousands): Related Party 2002 2001 ------------- ---- ---- Melvin Waxman, Co-CEO $ 60 $ 60 Armond Waxman, Co-CEO 135 86 Waxman Development 84 72 Aurora Investments Co. 71 71 Handl-it Inc. 134 99 All other related parties 64 64 ---- ---- Total $548 $452 ==== ==== All of the related party notes receivable are documented by a promissory note, which will begin to bear interest in July 2002 at the minimum rates established by the Internal Revenue Service to avoid imputed interest attribution. Principal payments of $10,000 will be made by each officer beginning in fiscal 2003, as well as quarterly interest payments. The receivable from Waxman Development relates to a real estate development venture initially formed to build facilities for Barnett, a former affiliate, and other operations. The Barnett stock owned by the Company was disposed of in September 2000. The promissory notes for Waxman Development and Aurora Investments bear interest at the minimum rates established by the Internal Revenue Service to avoid imputed interest. Aurora Investments has been paying interest, while Waxman Development will begin to pay interest in fiscal 2003. Principal payments on the Aurora Investments and Waxman Development notes begin in fiscal 2007 and are payable over a ten year period. Handl-it Inc., a corporation owned by John S. Peters, a director and consultant to the Company, together with another member of his family, and Melvin Waxman and Armond Waxman, sublet warehouse space in Bedford Hts., Ohio from Consumer Products through June 30, 2002. In order to facilitate Consumer Products move to a more efficient warehouse that was also logistically beneficial in serving their customer base, Handl-it agreed to sublease 97,000 square feet of office space, which it would attempt to utilize for the warehousing needs of its customers. Due to the prolonged economic downturn in this area, Handl-it was unable to fully utilize the warehouse, and negotiated an adjustment with Consumer Products to offset its revenue shortfall for this warehouse. Accordingly, Consumer Products reduced its rental charge to Handl-it by approximately $99,000, and received concessions of $26,000 over the next 26 months from Aurora Investments. The Company charged Handl-it, Inc. $191,079 in fiscal 2002 (after the rent adjustment), $290,496 in fiscal 2001 and $290,970 in fiscal 2000 for the subleasing of warehouse space. At June 30, 2002 and 2001, Handl-it owed Consumer Products $134,000 and $99,000 in unpaid rent, respectively, which is evidenced by a promissory note, which bears interest at a rate of 5.25% per annum. Effective July 1, 2002, Consumer Products entered into an agreement to sublease 17,000 square feet of space from Handl-it at a monthly charge of $5,100. Consumer Products will offset the receivable it has from Handl-it by the future monthly rental payments that would otherwise be paid to Handl-it until the receivable has been repaid. Consumer Products also utilizes Con-Pak Inc., an outside packaging operation, in certain instances where the packaging can not be performed by the Company's operations in Asia. Con-Pak, Inc. was acquired by Handl-it in 1999, received $377,599, $234,368 and $110,577 for these services in fiscal 2002, 2001 and 2000, respectively. Consumer Products also paid Handl-it Inc. approximately $27,000 and $40,000 for the cost of transportation of products in fiscal 2001 and 2000, respectively. Handl-it is also compensated for the consulting services provided to the Company by Mr. Peters, which amounted to approximately $115,000, $73,000 and $45,000 in fiscal 2002, 2001 and 2000, respectively. Melvin Waxman and Armond Waxman are directors and co-owners of Handl-it, and each received director fees of $8,000 and consulting income of $20,000 from Handl-it in the twelve months ended June 30, 2002. 11. RETIREMENT PLANS The eligible employees of the Company's corporate office and certain domestic subsidiaries of the Company participate in a trusteed, profit sharing and 401(k) retirement plan. Contributions are discretionary and are determined by the Company's Board of Directors. There were no profit sharing contributions in fiscal 2002, 2001 or 2000; however, the Company contributed a 50% match of up to the first 4% of salary deferral by employees, which amounted to $0.1 million in fiscal 2002, 2001 and 2000. The Company's domestic operations currently offers no other retirement, post-retirement 46 or post-employment benefits. Beginning July 1, 2002, the Company modified the 401(k) retirement plan to meet the Department of Labor's Safe Harbor Match provisions. Accordingly, the Company match will increase to 100% of the first 3% and 50% for the next 2% of deferral by employees. Under the new provisions, all contributions are 100% vested. The Company's operation in Taiwan has a retirement plan covering all regular employees, which provides for payment of benefits based on length of service and basic pay at the time of retirement, making a monthly contribution of 2% of salary and wages to the retirement fund. Contributions approximated $20,000 in fiscal 2002 and 2001 and $48,000 in fiscal 2000. 12. CAPITAL STOCK AND REVERSE STOCK SPLIT Each share of the Company's common stock (the "Common Stock") entitles its holder to one vote, while each share of Class B common stock entitles its holder to ten votes. Cash dividends on the Class B common stock may not exceed those on the Common Stock. Due to restricted transferability, there is no trading market for the Class B common stock. However, the Class B common stock may be converted, at the stockholder's option, into Common Stock on a share-for-share basis at any time, without cost to the stockholder. The Company is authorized to issue two million shares of preferred stock in series, with terms fixed by resolution of the Board of Directors. No preferred shares have been issued as of June 30, 2002. On February 6, 2001, the Company's shareholders approved a 1 for 10 reverse stock split, which became effective on February 20, 2001 (the "Reverse Stock Split"). As a result of the Reverse Stock Split, every ten shares of the Company's common stock and class B common stock were converted into one share of common stock and class B common stock, respectively. The Company did not issue certificates for fractional shares. Instead, shareholders who otherwise were entitled to a fractional share received a full share for such fractional share interest. The Company did not change the par value or number of authorized shares of Common Stock or Class B Common Stock under its Certificate of Incorporation, which is set at 22,000,000 shares of Common Stock and 6,000,000 shares of Class B Common Stock. On the record date for the Reverse Stock Split, there were 9,976,974 shares of Common Stock and 2,141,496 shares of Class B Common Stock outstanding (not considering the effect of the proposed Reverse Stock Split). An additional 1,800,000 shares of Common Stock had been reserved for issuance under the 1992 Stock Option Plan, 100,000 shares of Common Stock had been reserved for issuance under the 1996 Non-employee Director Incentive Plan and 500,000 shares of Common Stock had been reserved for issuance under the Stock Appreciation Rights Plan. In addition, 2,142,058 shares of Common Stock had been reserved for issuance upon conversion of the Class B Common Stock. Each of these amounts decreased ten-fold as a result of the Reverse Stock Split, and the exercise price of the options issued under the aforementioned plans have been multiplied by ten. As a result of the Reverse Stock Split, the number of shares purchasable upon exercise of the warrants issued to the holders of the Company's former Deferred Coupon Notes (the "Warrants") were adjusted. The pre-split Warrants representing the rights of the holders to purchase an aggregate of 2,950,000 Warrant Shares at $2.45 per share became, on a post-split basis, the right to purchase an aggregate of 295,000 Warrant Shares at $24.50 per share. Each stockholder's percentage share of total voting rights in the Company was the same as it was prior to the Stock Split, except for the de minimus effect of certain stockholders receiving an additional share of Common Stock or Class B Common Stock in lieu of fractional shares. The number of additional shares issued in lieu of fractional shares increased the number of post-split shares by 154 for the Common Stock and 49 for the Class B Common Stock. There was no change in the number of stockholders as a result of the Stock Split. The Company expects to seek stockholder approval at the 2002 Annual Meeting to reduce the number of authorized shares of Common Stock, Class B Common Stock and Preferred Stock. The Company's Common Stock is quoted on the Over-The-Counter Bulletin Board ("OTCBB"), which is expected to cease as an exchange in 2003. The Nasdaq has advised companies that it expects to establish a new Bulletin Board Exchange (the "BBX") with improved order processing and automatic trading features. The Company is evaluating the criteria to be listed on this and other exchanges, and expects that its stock will continue to be listed on an exchange. 13. STOCK OPTION PLANS, RESTRICTED SHARE PLANS, STOCK APPRECIATION RIGHTS AND EMPLOYEE STOCK PURCHASE PLAN In December 2001, the Company's Board of Directors (including directors who are controlling shareholders) of 47 the Company, voted to establish a new stock incentive plan (the "2002 Stock Incentive Plan") and to submit the plan for shareholder approval at the Company's 2002 Annual Meeting of Shareholders. The 2002 Stock Incentive Plan reserves 275,000 shares of Common Stock 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 equity incentive plans (the "Exchange Offer"). The Exchange Offer provided current option holders the opportunity to cancel options they had under The 1992 Non-Qualified and Incentive Stock Option Plan, as amended (the "1992 Stock Option Plan") and the 1994 Non-Employee Directors Stock Option Plan (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 offerees accepting the offer. The stock options and stock appreciation rights (which were exchanged on terms substantially the same as in the Exchange Offer) were cancelled on January 9, 2002. The replacement options were granted on July 10, 2002 (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 were terminated. In fiscal 1996, the Board of Directors adopted the 1996 Non-Employee Directors Restricted Share Plan (the "1996 Plan"). Pursuant to the 1996 Plan, 500 restricted shares of Common Stock were 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 served as a director after the date of the award. There were no awards made since fiscal 1998 and effective December 2001, the 1996 Plan was terminated. 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 and for 10,000 shares to the President of Consumer Products, in each case at a base price of $33.75. Each SAR was scheduled to expire ten years from the date of grant and vested in whole, three years after the date of grant. Each SAR was exercisable, at the election of the grantee, for either cash or Common Stock. Due to the market price of the Company's stock being below the exercise price of the SAR's, no expense had been recorded for the value of this plan since fiscal 1997. The SAR's were cancelled in January 2002. In fiscal 1994, the Board of Directors of the Company adopted the 1994 Non-Employee Directors 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 current market price at that time. Until their cancellation in January 2002 pursuant to the Exchange Offer (described below), 3 persons held 5,000 options at an average price of $22.50. The Company applied APB Opinion No. 25 and related Interpretations in accounting for these stock options. Accordingly, no compensation costs had been recognized for these stock based compensation awards. 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 were exercisable for a period not exceeding 10 years from the date of grant. In January 2002, the Company cancelled 130,155 options held by 33 persons at an average price of $21.75, pursuant to the Exchange Offer. Pro forma net income and earnings per share for the fiscal years ended June 30, 2001 and 2000 assuming compensation costs for the Company had been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", are presented in the following table (in thousands of dollars, except per share data), while fiscal 2002 results are not presented since all stock based compensation plans were terminated.
Pro forma net income and earnings per share 2001 2000 ------------------------------------------- ---- ---- Net income (loss) as reported $100,808 $(28,848) Pro forma net income (loss) $98,970 $(29,102) Basic and diluted income (loss) per share as reported $82.55 $(23.91) Pro forma basic and diluted income (loss) per share $82.48 $(24.12)
Pro forma disclosure for companies using APB Opinion No. 25 requires calculating compensation cost for the effects of all awards granted in the first fiscal year beginning after December 15, 1994. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants 48 made since July 1, 1995: no dividends; expected volatility of 138.9%; average risk-free interest rate of 6.0%; and expected life of 8.9 to 10 years. Because the cost of calculating compensation under SFAS No. 123 has not been applied to options granted before July 1, 1995, the resulting pro forma expense may not be representative of the actual expense that may be incurred in the future. Changes in stock options outstanding for the 1992 Stock Option Plan and the 1994 Non-Employee Directors Stock Option Plan are as follows (in thousands, except per share prices), with no options being outstanding at June 30, 2002:
1992 Plan - 1994 Plan - Shares Option Price Shares Option Price Stock Options Outstanding Per Share Outstanding Per Share ------------- ----------- --------- ----------- --------- Balance - June 30, 1999 151 $10.00 - $56.25 5 $22.50 Granted 9 $4.10 -- -- Exercised -- -- -- -- Expired or terminated (17) $4.10 - $40.63 -- -- ---- --- Balance - June 30, 2000 143 $10.00 - $56.25 5 $22.50 Granted -- -- -- -- Exercised -- -- -- -- Expired or terminated (13) $4.10 - $56.25 -- -- ---- --- Balance - June 30, 2001 130 $4.10 - $56.25 5 $22.50 Granted -- -- -- -- Exercised -- -- -- -- Expired or terminated (130) $4.10 - $56.25 (5) $22.50 ---- --- Balance - June 30, 2002 -- -- ==== ===
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. 14. CONTINGENCIES The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the Company's consolidated financial statements or results of operations. The Company or one of its indirect subsidiaries have been threatened with litigation by two separate California public interest groups alleging unlawful discharge of chemicals under California's Safe Drinking Water and Toxic Enforcement Act of 1986. The Company is researching the merits of the allegations and intends to contest and vigorously defend itself. Any potential liability related to this threatened litigation cannot be assessed at this time as the Company is in the very preliminary stages of its investigation. 15. SEGMENT INFORMATION The Company's businesses distribute specialty plumbing products, floor and surface protection products, galvanized, black, brass and chrome pipe nipples, imported malleable fittings and other products. Since the foreign sourcing and manufacturing operations sell a significant portion of their products through the Company's wholly-owned operations, which primarily sell to retailers, and to Barnett, a distributor, the Company has classified its business segments into retail and non-retail categories. Products are sold to (i) retail operations, including large national and regional retailers, D-I-Y home centers and smaller independent retailers in the United States, and (ii) non-retail operations, including wholesale and industrial supply distributors in the United States. Sales outside of the United States are not significant. Until the January 1, 1999 sale of U.S. Lock, the Company also distributed security hardware to non-retail operations, including security hardware installers and locksmiths. Set forth below is certain financial data relating to the Company's business segments (in thousands of dollars). 49
Corporate and Retail Non-Retail Other Elimination Total ------ ---------- ----- ----------- ----- Reported net sales: Fiscal 2002 $ 52,643 $ 25,638 -- $ (7,856) $ 70,425 Fiscal 2001 54,759 24,177 -- (7,856) 71,370 Fiscal 2000 60,361 30,597 -- (10,248) 80,710 Operating income (loss): Fiscal 2002 $ 4,039 $ 588 $ (2,990) -- $ 1,637 Fiscal 2001 1,459 628 (2,720) -- (633) Fiscal 2000 (11,578) (857) (2,928) -- (15,363) Identifiable assets: June 30, 2002 $ 27,474 $ 9,892 $ 5,930 -- $ 40,296 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 $35.3 million, $34.5 million and $40.2 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Of these amounts, approximately $7.9 million, $7.6 million and $10.2 million were intercompany sales for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Identifiable assets for the foreign operations were $13.5 million and $12.6 million at June 30, 2002 and 2001, respectively. SUPPLEMENTARY FINANCIAL INFORMATION Quarterly Results of Operations: Presented below is a summary of the unaudited quarterly results of operations for the fiscal years ended June 30, 2002 and 2001 (in thousands, except per share amounts).
FISCAL 2002 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. - ----------- -------- -------- -------- -------- Net sales $ 18,733 $ 18,116 $ 15,552 $ 18,024 Gross profit 6,055 5,606 5,445 6,066 Operating income (loss) 896 656 166 (81) Income before provision (benefit) for income taxes 658 472 24 (240) Net income (loss) $ 584 $ 384 $ 673 $ (56) Basic loss per share: Net income $ 0.48 $ 0.32 $ 0.55 $ (0.05) Diluted loss per share: Net income $ 0.48 $ 0.32 $ 0.55 $ (0.05)
FISCAL 2001 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. - ----------- -------- -------- -------- -------- Net sales $ 17,289 $ 17,660 $ 19,974 $ 16,447 Gross profit 5,093 5,687 6,410 4,290 Restructuring and impairment charges 350 -- -- -- Operating income (loss) (916) 234 645 (596) Gain on sale of Barnett, net 47,473 -- -- -- Loss on sale of Medal, net -- -- (1,105) -- Amortization of U.S. Lock gain 7,815 -- -- --
50 Income (loss) before provision (benefit) for income taxes And extraordinary items 51,017 157 (798) (870) Extraordinary items (57) 52,279 -- -- Net income (loss) $ 48,210 $ 52,636 $ (848) $ 50 FISCAL 2001 - ----------- Basic loss per share: $ 39.83 $ 0.29 $ (0.70) $ 0.04 Net income (loss) before extraordinary items Extraordinary items (.05) 43.14 -- -- -------- -------- -------- ------ Net income (loss) $ 39.78 $ 43.43 $ (0.70) $ 0.04 ======== ======== ======== ====== Diluted loss per share: Net income (loss) before extraordinary items $ 39.83 $ 0.29 $ (0.70) $ 0.04 Extraordinary items (0.05) 43.14 -- -- -------- -------- -------- ------ Net income (loss) $ 39.78 $ 43.43 $ (0.70) $ 0.04 ======== ======== ======== ======
In fiscal 2002, the Company adopted a FASB Emerging Issues Task Force pronouncement and began to record all business procurement charges as an offset to sales, with prior period results being restated. There was no impact on operating income or net income since the Company previously reported business procurement costs as a contra sale or an operating expense in prior years. Net income for the fiscal 2002 third quarter were affected by a $0.8 million tax benefit for a change in the tax law. Operating income for the fiscal 2002 third quarter was affected by $246,000 in SG&A expenses associated with the write-off of costs and early termination of the bank facility with Congress Financial. If the fiscal 2002 fourth quarter, the Company reported foreign exchange losses due to the weakening U.S. Dollar of approximately $228,000, as compared to exchange gains of $317,000 in the same period last year. Results for the fiscal 2001 first quarter were affected by the $47.5 million gain on the sale of the Company's remaining interest in Barnett, the recognition a $7.8 million deferred gain on the sale of U.S. Lock and $0.35 million of restructuring charges to provide for additional future costs for facilities closed in fiscal 2000. In the fiscal 2001 second quarter, the Company reported a net extraordinary gain of $52.3 million on the defeasance of debt. In the fiscal 2001 third quarter, results were affected by the $1.1 million loss on the sale of substantially all of the assets of Medal. In the fiscal 2001 fourth quarter, the Company's tax provision was adjusted, resulting in a benefit of $0.9 million. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III Part III, except for certain information relating to Executive Officers included in Part I, Item 4A, is omitted inasmuch as the Company intends to file with the Securities and Exchange Commission within 120 days of the close of its fiscal year ended June 30, 2002 a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following consolidated financial statements are included in Part II, Item 8: Report of Independent Public Accountants Balance Sheets--June 30, 2002 and 2001 Statements of Operations--For the Years Ended June 30, 2002, 2001 and 2000 Statements of Stockholders' Equity--For the Years Ended June 30, 2002, 2001 and 2000 Statements of Cash Flows--For the Years Ended June 30, 2002, 2001 and 2000 Notes to Financial Statements For the Years Ended June 30, 2002, 2001 and 2000 Supplementary Financial Information (a) (2) All schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements including notes thereto. (a) (3) Exhibits 3.1* Certificate of Incorporation of the Company dated October 27, 1989 (Exhibit 3(a) to the Company's Form S-8 filed December 4, 1989, File No. 0-5888, incorporated herein by reference). 3.2* By-laws of the Company (Exhibit 3.2 to Annual Report on Form 10-K for the year ended June 30, 1990, File No. 0-5888, incorporated herein by reference). 4.7* Warrant Agreement, dated as of May 20, 1994, by and between Waxman Industries, Inc. and The Huntington National Bank, as Warrant Agent (Exhibit 4.2 to Waxman Industries, Inc.'s Form S-4 filed June 20, 1994, incorporated herein by reference). 4.8* Warrant Certificate (Exhibit 4.3 to Waxman Industries, Inc.'s Form S-4 filed June 20, 1994, incorporated herein by reference). 4.9* Securities Purchase Agreement for Notes and Warrants dated as of September 17, 1991, among the Company and each of the Purchasers referred to therein (Exhibit 4.4 to Annual Report on Form 10-K for the year ended June 30, 1991, File No. 0-5888, incorporated herein by reference). 4.10* Revolving Credit, Term Loan and Security Agreement, dated as of February 13, 2002, by and among PNC Bank, National Association, as Lender and as Agent, and Waxman Industries, Inc., Waxman Consumer Products Group Inc., Waxman USA Inc. and WAMI Sales, Inc., as Borrowers (Exhibit 10.1 on Report 8-K filed February 27, 2002, incorporated herein by reference). 10.1* Lease between the Company as Lessee and Aurora Investment Co. as Lessor dated June 30, 1992 (Exhibit 10.1 to Annual Report on Form 10-K for the year ended June 30, 1992, File No. 0-5888, incorporated herein by reference). 10.2* Policy Statement (revised as of June 1, 1980) regarding the Company's Profit Incentive Plan (Exhibit 10(c)-1 to Annual Report on Form 10-K for the year ended June 30, 1984, File No. 0-5888, incorporated herein by reference). 52 10.6* Tax Sharing Agreement dated May 20, 1994 among Waxman Industries, Waxman USA, Waxman Consumer Products Group Inc., WOC Inc. and Western American Manufacturing, Inc. (Exhibit 10.6 to Waxman Industries, Inc.'s Form S-4 filed June 20, 1994, incorporated herein by reference). 10.7* Waxman Industries, Inc. 2002 Stock Incentive Plan, adopted as of December 6, 2001 (Exhibit 8 to Schedule to Tender Offer Statement filed on December 7, 2001, incorporated herein by reference). 10.8* Intercorporate Agreement dated May 20, 1994 among Waxman Industries, Waxman USA, Waxman Consumer Products Group Inc., WOC Inc. and Western American Manufacturing, Inc. (Exhibit 10.7 to Waxman Industries, Inc.'s Form S-4). 10.10* Employment Agreement dated November 1, 1994 between Waxman Consumer Products Group Inc. and Laurence Waxman (Exhibit 10.5 to Waxman Industries, Inc.'s Amendment No. 4 to Registration Statement on Form S-2 filed October 10, 1995, Registration No. 33-54211, incorporated herein by reference). 10.11* Intercorporate Agreement dated March 28, 1996 among Waxman Industries, Inc., Waxman USA Inc., Waxman Consumer Products Group Inc., WOC Inc. and TWI, International, Inc. (Exhibit 10.8 to Waxman Industries, Inc.'s Amendment No. 8 to Registration Statement on Form S-2 filed April 15, 1996, Registration No. 33-54211, incorporated herein by reference). 10.26* Merger Agreement, dated as of July 10, 2000, by and among Wilmar Industries, Inc. ("Wilmar"), BW Acquisition, Inc. ("BW Acquisition") and Barnett Inc. ("Barnett") (Exhibit 10.1 to Current Report on Form 8-K filed July 17, 2000, File No. 0-5888, incorporated herein by reference). 10.27* Stockholder Agreement, dated as of July 10, 2000, by and among the Company, Waxman USA, Wilmar and BW Acquisition (Exhibit 10.2 to Current Report on Form 8-K filed July 17, 2000, File No. 0-5888, incorporated herein by reference). 10.28* Voting Trust Agreement, dated as of July 10, 2000, by and among Waxman USA, Wilmar, BW Acquisition, Barnett and American Stock Transfer & Trust Company. (Exhibit 10.3 to Current Report on Form 8-K filed July 17, 2000, File No. 0-5888, incorporated herein by reference). 10.29* Agreement, dated as of July 7, 2000, by and between Waxman USA and Barnett (Exhibit 10.4 to Current Report on Form 8-K filed July 17, 2000, File No. 0-5888, incorporated herein by reference). 21.1* Subsidiaries (Exhibit 21.1 to Waxman Industries, Inc.'s Form S-4 filed June 20, 1994, incorporated herein by reference). 23.1 Consent of Meaden & Moore, Ltd. 23.2 Consent of TN Soong & Co. 23.3 Consent of Chien Chyuan & Co. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Incorporated herein by reference as indicated. (b) REPORTS ON FORM 8-K None 53 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WAXMAN INDUSTRIES, INC. April 30, 2003 By: /s/ Mark Wester ---------------------- Mark Wester Chief Financial Officer and Senior Vice President 54 CERTIFICATION I, Mark Wester, certify that: 1) I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of Waxman Industries, Inc.; 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 30, 2003 By: /s/ Mark W. Wester ---------------------------- Mark W. Wester Senior Vice President and Chief Financial Officer (principal financial and accounting officer) 55 CERTIFICATION I, Armond Waxman, certify that: 1) I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of Waxman Industries, Inc.; 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 30, 2003 By: /s/ Armond Waxman ------------------------------ Armond Waxman President and Co-Chief Executive Officer 56 CERTIFICATION I, Melvin Waxman, certify that: 1) I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of Waxman Industries, Inc.; 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 30, 2003 By: /s/ Melvin Waxman ------------------------------- Melvin Waxman Chairman of the Board and Co-Chief Executive Officer 57 EX-23.1 3 l00786aexv23w1.txt EX-23.1 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 [Letterhead of Meaden & Moore, Ltd.] CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 333-92076 on Form S-8 of our report on the consolidated financial statements and report as to schedules included in the Annual Report on Form 10-K/A of Waxman Industries, Inc. and Subsidiaries for the years ended June 30, 2002 and June 30, 2001. /s/ Meaden & Moore, Ltd. - ------------------------------ MEADEN & MOORE, LTD. Certified Public Accountants April 22, 2003 Cleveland, Ohio EX-23.2 4 l00786aexv23w2.txt EX-23.2 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.2 [Letterhead of TN Soong & Co] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement No. 333-92076 of Waxman Industries, Inc. and subsidiaries on Form S-8 of our report on TWI International Taiwan, Inc. financial statements dated July 23, 2002 (relating to the financial statements of TWI International Taiwan, Inc. not presented separately herein), appearing in and incorporated by reference in the Annual Report on Form 10-K/A of Waxman Industries, Inc. and subsidiaries for the year ended June 30, 2002. /s/ TN Soong & Co - --------------------- TN Soong & Co An Associate Member Firm of Deloitte Touche Tohmatsu Effective April 22, 2002 (Formerly a Member Firm of Andersen Worldwide, SC) Taipei, Taiwan The Republic of China February 28, 2003 EX-23.3 5 l00786aexv23w3.txt EX-23.3 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.3 [Letterhead of Chien Chyuan & Co.] CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 333-92076 on Form S-8 of our report on CWI International China, Inc. financial statements and report as to schedules included in the Annual Report on Form 10-K/A of Waxman Industries, Inc. and Subsidiaries for the year ended June 30, 2002. /s/ Chien Chyuan & Co. - ---------------------------------- Chien Chyuan & Co., Certified Public Accountants February 11, 2003 Taichung, Taiwan EX-99.1 6 l00786aexv99w1.txt EX-99.1 906 CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K/A (Amendment No. 1) of Waxman Industries, Inc. (the "Company") for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: - - the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - - the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. April 30, 2003 /s/ Melvin Waxman ----------------------------------------------------- Melvin Waxman Chairman of the Board and Co-Chief Executive Officer /s/ Armond Waxman ----------------------------------------------------- Armond Waxman President, Co-Chief Executive Officer and Treasurer /s/ Mark W. Wester ----------------------------------------------------- Mark W. Wester Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----