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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-5888
WAXMAN INDUSTRIES, INC.
-----------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-0899894
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
--------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(440) 439-1830
---------------
(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- -----
1,003,990 shares of Common Stock, $.01 par value, and 214,189 shares of Class B
Common Stock, $.01 par value, were outstanding as of October 25, 2002.
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 2002 and 2001............................................... 3
Condensed Consolidated Balance Sheets - September 30, 2002 and June 30, 2002................. 4 -5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 2002 and 2001............................................... 6
Notes to Condensed Consolidated Financial Statements......................................... 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................................... 11 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 14
Item 4. Controls and Procedures......................................................................... 14
PART II. OTHER INFORMATION
Item 5. Other Information............................................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................................ 15
SIGNATURES............................................................................................... 15
CERTIFICATIONS .......................................................................................... 16 - 18
EXHIBIT INDEX............................................................................................ 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
2002 2001
---- ----
Net sales $ 18,208 $ 18,733
Cost of sales 12,283 12,678
--------- --------
Gross profit 5,925 6,055
Selling, general and administrative expenses 5,343 5,159
--------- --------
Operating income 582 896
Interest expense, net 124 238
-------- --------
Income before income taxes and extraordinary charge 458 658
Provision for income taxes 109 74
--------- --------
Net income $ 349 $ 584
========= ========
Other comprehensive income:
Foreign currency translation adjustment (218) 19
--------- --------
Comprehensive income $ 131 $ 603
========= ========
Net income per share (basic and diluted) $ 0.29 $ 0.48
========= ========
Weighted average shares and equivalents 1,218 1,212
========= ========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND JUNE 30, 2002
(IN THOUSANDS)
ASSETS
September 30, June 30,
2002 2002
(UNAUDITED) (AUDITED)
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 777 $ 1,420
Trade receivables, net 11,617 11,529
Other receivables 962 1,979
Inventories 10,433 10,497
Prepaid expenses 1,748 1,902
-------- -------
Total current assets 25,537 27,327
-------- -------
PROPERTY AND EQUIPMENT:
Land 543 554
Buildings 4,622 4,662
Equipment 11,989 11,427
-------- -------
17,154 16,643
Less accumulated depreciation and amortization ( 8,609) (8,302)
--------- ---------
Property and equipment, net 8,545 8,341
--------- ---------
CASH SURRENDER VALUE OF OFFICER'S LIFE INSURANCE POLICIES 3,284 3,265
UNAMORTIZED DEBT ISSUANCE COSTS, NET 293 315
NOTES RECEIVABLE FROM RELATED PARTIES 558 574
OTHER ASSETS 689 474
--------- ---------
$ 38,906 $ 40,296
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND JUNE 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2002 2002
(UNAUDITED) (AUDITED)
------------ ---------
CURRENT LIABILITIES:
Short-term borrowings $ 6,536 $ 7,596
Current portion of long-term debt 205 235
Accounts payable 6,425 6,754
Accrued liabilities 3,916 3,975
---------- ---------
Total current liabilities 17,082 18,560
---------- ---------
TERM DEBT - LONG-TERM PORTION 894 935
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 13 15
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 2,000 shares - -
Common Stock, $.01 par value per share:
Authorized 22,000 shares; Issued xxx at September 30, 2002
and June 30, 2002 99 99
Class B common stock, $.01 par value per share:
Authorized 6,000 shares; Issued xxx at September 30, 2002
and June 30, 2002 21 21
Paid-in capital 21,760 21,760
Retained earnings (deficit) 226 (123)
---------- ----------
22,106 21,757
Accumulated other comprehensive income (1,189) (971)
---------- ---------
Total stockholders' equity 20,917 20,786
---------- ---------
$ 38,906 $ 40,296
========== =========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
2002 2001
--------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 349 $ 584
Adjustments to reconcile net income to
net cash used in operating activities:
Non-cash interest 31 39
Depreciation and amortization 355 377
Changes in assets and liabilities:
Trade receivables, net (88) (819)
Inventories 64 697
Other assets 953 (226)
Accounts payable (329) (1,108)
Accrued liabilities (59) 352
Other, net (149) 19
------- -------
Net Cash Provided by (Used) in Operating Activities 1,127 (85)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (628) (263)
------- -------
Net Cash Used in Investing Activities (628) (263)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings (1,060) 1,005
Debt issuance costs (9) --
Repayment of long-term debt (73) (29)
------- -------
Net Cash (Used in) Provided by
Financing Activities (1,142) 976
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (643) 628
BALANCE, BEGINNING OF PERIOD 1,420 740
------- -------
BALANCE, END OF PERIOD $ 777 $ 1,368
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Waxman Industries, Inc. ("Waxman") and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances are eliminated in consolidation.
The condensed consolidated statements of operations for the three
months ended September 30, 2002 and 2001, the condensed balance sheet as of
September 30, 2002 and the condensed statements of cash flows for the three
months ended September 30, 2002 and 2001 have been prepared by the Company
without audit, while the condensed balance sheet as of June 30, 2002 was derived
from audited financial statements. In the opinion of management, these financial
statements include all adjustments, all of which are normal and recurring in
nature, necessary to present fairly the financial position, results of
operations and cash flows of the Company as of September 30, 2002 and for all
periods presented. Certain information and footnote disclosures normally
included in audited financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. All significant intercompany transactions and balances are eliminated
in consolidation. The Company believes that the disclosures included herein are
adequate and provide a fair presentation of interim period results. Interim
financial statements are not necessarily indicative of financial position or
operating results for an entire year or other interim periods. It is suggested
that these condensed interim financial statements be read in conjunction with
the audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
NOTE 2 - BUSINESS
The Company's common stock is quoted on the Over-The-Counter Bulletin
Board ("OTCBB") under the symbol "WAXM". The Company is a supplier of specialty
plumbing, floor and surface protection and other hardware products to the repair
and remodeling market in the United States. The Company distributes its products
to approximately 770 customers, including a wide variety of large national and
regional retailers, independent retail customers and wholesalers.
The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WAMI
Sales, Inc. ("WAMI Sales") and TWI, International, Inc. ("TWI"). Consumer
Products, the Company's largest operation, is a supplier of specialty plumbing,
floor and surface protection and other hardware products to a wide variety of
large retailers. WAMI Sales distributes galvanized, black, chrome and brass pipe
nipples and fittings to industrial and wholesale distributors. TWI includes the
Company's foreign operations, including manufacturing, packaging and sourcing
operations in China and Taiwan. Consumer Products and WAMI Sales utilize the
Company's and non-affiliated foreign suppliers.
NOTE 3 - 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
7
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 recorded all of
these business procurement costs as a reduction in sales.
NOTE 4 - INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the asset
and liability method, where deferred tax assets and liabilities are recognized
for the future tax consequences attributable to net operating loss carryforwards
and to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax 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.
SFAS No. 109 requires the Company to assess the realizability of its
deferred tax assets based on whether it is more likely than not that the Company
will realize the benefit from these deferred tax assets in the future. If the
Company determines the more likely than not criteria is not met, SFAS No. 109
requires the deferred tax assets be reduced by a valuation allowance. In
assessing the realizability of its net deferred tax asset, the Company
considered its historic performance and the uncertainty of it being able to
generate enough domestic taxable income to utilize these assets. At June 30,
2002, the Company's net deferred tax assets were fully offset by a valuation
allowance, and the Company continues to believe that the Company's net deferred
tax assets should continue to be offset by a valuation allowance. In the fiscal
2003 first quarter, the Company recorded a tax provision of $0.1 million, which
represents various state and foreign taxes. The Company will continue to analyze
the trends in the operating results of its domestic operations to assess the
realizability of its deferred tax asset in fiscal 2003.
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 2020.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended September 30, 2002 and 2001
included interest of $0.1 million and $0.3 million, respectively. The Company
made no federal income tax payments in the first quarters of fiscal 2003 or
fiscal 2002; however, the Company received a federal tax refund of $0.8 million
in the quarter ended September 30, 2002. The tax benefit, which was reported in
fiscal 2002, represented the change in tax law relating to use of a alternative
minimum tax net operating loss carryforward. The Company paid approximately
$4,000 and $24,000 in state taxes and $18,000 and $23,000 in foreign taxes for
the three months ended September 30, 2002 and 2001, respectively.
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share represents net income divided by the weighted
average number of common shares outstanding. Diluted earnings per share utilizes
the weighted average number of common stock and common stock equivalents, which
include stock options and warrants. For the quarters ended September 30, 2002
and 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.
The number of common shares used to calculate basic and diluted
earnings per share, along with a reconciliation of such shares, is as follows
(in thousands):
Three months Three months
ended ended
September 30, September 30,
2002 2001
---- ----
Basic 1,218 1,212
Diluted 1,218 1,212
8
Basic 1,218 1,212
Dilutive effect of:
Stock options -- --
Warrants -- --
----- -----
Diluted 1,218 1,212
NOTE 7 - SEGMENT INFORMATION
The Company's businesses distribute specialty plumbing products, floor
and surface protection products, galvanized, black, brass and chrome pipe
nipples, imported malleable fittings, and other products. As the foreign
sourcing and manufacturing operations sell a significant portion of their
products through the Company's other wholly-owned operations, which primarily
sell to retailers, and to Barnett, a distributor, the Company has classified its
business segments into retail and non-retail categories. Products are sold to
(i) retail operations, including large national and regional retailers,
do-it-yourself ("D-I-Y") home centers and smaller independent retailers in the
United States, and (ii) non-retail operations, including wholesale and
industrial supply distributors in the United States. Sales outside of the United
States are not significant. Set forth below is certain financial data relating
to the Company's business segments (in thousands of dollars).
CORPORATE
RETAIL NON-RETAIL AND OTHER ELIMINATION TOTAL
------ ---------- ---------- ----------- -----
Reported net sales:
Fiscal 2003 three months $ 12,187 $ 7,748 -- $ (1,727) $ 18,208
Fiscal 2002 three months 14,092 6,825 -- (2,184) 18,733
Operating income (loss):
Fiscal 2003 three months $ 988 $ 342 $ (748) -- $ 582
Fiscal 2002 three months 1,366 243 (713) -- 896
Identifiable assets:
September 30, 2002 $ 23,137 $ 10,760 $ 5,009 -- $ 38,906
June 30, 2002 27,474 9,892 5,930 -- 40,296
The Company's foreign operations manufacture, assemble, source and
package products that are distributed by the Company's wholly-owned operations,
Barnett, retailers and other non-retail customers. Net sales for those foreign
operations amounted to $9.7 million and $9.2 million for the first quarter of
fiscal 2003 and 2002, respectively. Of these amounts, approximately $1.7 million
and $2.2 million were intercompany sales for the first quarter of fiscal 2003
and 2002, respectively. Identifiable assets for the foreign operations were
$13.3 million and $13.5 million at September 30, 2002 and June 30, 2002,
respectively.
NOTE 8 - STOCK OPTION PLAN
In December 2001, the Company's Board of Directors (including directors
who are controlling shareholders) of the Company, voted to establish a new stock
incentive plan (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 incentives 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 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
9
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. In connection with the successful completion of the Exchange Offer, the
1992 Stock Option Plan and the 1994 Non-Employee Director Plan were terminated.
On July 10, 2002 (six months and one day after the expiration of the Exchange
Offer to preserve fixed accounting for the options), 176,655 replacement options
were granted at an exercise price of $5.91 per share. The approval of the 2002
Stock Incentive Plan has been submitted to stockholders for approval at the
Company's December 3, 2002 annual stockholder meeting.
NOTE 9 - AUTHORIZED SHARES
The Company's Certificate Of Incorporation presently authorizes the
issuance of 22,000,000 shares of Common Stock, 6,000,000 shares of Class B
Common Stock and 2,000,000 shares of Preferred Stock. In February 2001, the
stockholders of the Company approved a 1-for-10 reverse stock split, thereby
reducing the outstanding number of shares of the Company. At that that time, the
number of authorized shares was not reduced. The Company must pay annual
franchise taxes to the State of Delaware based, in part, on its number of
authorized shares of capital stock. A large disparity between the number of
authorized shares of capital stock and the number of outstanding shares has the
effect of significantly increasing these Delaware franchise taxes.
As the Company currently does not anticipate a need to have authorized
more than 8,000,000 shares of Common Stock, 1,500,000 shares of Class B Common
Stock and 200,000 shares of Preferred Stock for issuance in the future, the
Board of Directors has determined that it is in the best interests of the
Company and its stockholders to amend the Company's Certificate of Incorporation
to reduce the number of authorized shares of Common Stock, Class B Common Stock
and Preferred Stock accordingly. Accordingly, at a meeting of the Company's
Board of Directors on August 27, 2002, resolutions were duly adopted a proposed
amendment to the Certificate of Incorporation of the Corporation to effect a
reduction in the number of the Company's authorized shares of (i) common stock,
par value $0.01 per share, (ii) Class B common stock, par value $0.01 per share,
and (iii) preferred stock, par value $0.01 per share, and directing the
amendment to be considered at the annual meeting of the stockholders on December
3, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that are based on the beliefs of the Company and its management. When
used in this document, the words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "should," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, but not limited to
risks associated with currently unforeseen competitive pressures and risks
affecting the Company's industry, such as decreased consumer spending, customer
concentration issues and the effects of general economic conditions. In
addition, the Company's business, operations and financial condition are subject
to the risks, uncertainties and assumptions which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission, including this Report. Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein.
RECENT DEVELOPMENTS
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's revenues
declined due to the loss of a portion of the Kmart business, it believes 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 strategies 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 have and should continue to 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.
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NET SALES
Net sales for the fiscal 2003 first quarter ended September 30, 2002
totaled $18.2 million, a decrease of $0.5 million as compared to $18.7 million
for the same period in the prior fiscal year. Increases in net sales with
several large retailers and industrial sales were offset by a larger reduction
in sales to Kmart in the fiscal 2003 first quarter. In addition, higher than
normal sales were reported in last year's first quarter due to the territorial
expansion of a program with an existing retail customer.
Net sales to retailers amounted to $12.2 million and $14.1 million for
the quarters ended September 30, 2002 and 2001, respectively. The decrease is
due to lower sales to Kmart, which was partially offset by increased sales to
other retail customers. In order to reduce the dependence on the retail
industry, the Company has been developing its non-retail sales program, which
includes sales to wholesalers and other industrial and OEM
11
customers. Non-retail sales increased to $7.7 million for the quarter ended
September 30, 2002, as compared to $6.8 million for the same quarter last year.
GROSS PROFIT
Gross profit and gross margins for the fiscal 2003 and 2002 first
quarters were $5.9 million, or 32.5%, and $6.1 million, or 32.3%, respectively.
The gross margin percentage was consistent with last year, but the reduction in
net sales resulted in a decrease in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A expenses") amounted
to $5.3 million and $5.2 million, respectively, for the quarters ended September
30, 2002 and 2001. SG&A expenses as a percentage of net sales increased to 29.3%
for the fiscal 2003 first quarter from 27.5% in the comparable period last year.
The increases in expenses, coupled with the decrease in net sales both resulted
in the increase in expenses expressed as a percent of net sales. SG&A expenses
have increased, in part, due to the expansion of the non-retail and industrial
sales program.
INTEREST EXPENSE
For the quarter ended September 30, 2002, net interest expense totaled
$0.1 million, as compared to $0.2 million in the fiscal 2002 first quarter.
Average borrowings for the current year's quarter amounted to $8.1 million, with
a weighted average interest rate of 5.4%, as compared to $11.0 million in the
same quarter last year, with a weighted average interest rate of 7.4%. Interest
expense is lower due to lower rates and debt levels from the reduction in debt
in fiscal 2002.
PROVISION FOR INCOME TAXES
The Company's tax provision amounted to $0.1 million in the quarters
ended September 30, 2002 and 2001. The tax provisions for fiscal 2003 and 2002
first quarters represent various state and foreign taxes. For the fiscal 2003
first quarter, the difference between the effective and statutory rates is
primarily due to the effect of current losses of the domestic U.S. operations
and foreign tax rates being lower than U.S. tax rates. For the fiscal 2002 first
quarter, the difference between the effective and statutory tax rates is
primarily due to the utilization of domestic operating losses previously not
benefited.
NET INCOME (LOSS)
The Company reported net income of $0.4 million, or $0.29 per basic and
diluted share, for the fiscal 2003 first quarter ended September 30, 2002. The
Company reported net income of $0.6 million, or $0.48 per basic and diluted
share, for the fiscal 2002 first quarter ended September 30, 2001.
B. LIQUIDITY AND CAPITAL RESOURCES
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 September 30, 2002,
the Company had $6.5 million in borrowings under the revolving credit line of
the facility and had approximately $3.6 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 September 30, 2002. Borrowings under the PNC Revolving
Credit Loan are secured by the accounts receivable, inventories, certain
12
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 September 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 February 2002, the PNC Bank Facility replaced the Loan and Security
Agreement with Congress Financial Corporation, which was scheduled to expire on
June 18, 2002.
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 were as follows; Wal-Mart accounted for 29.0%;
Lowes accounted for 16.1%; and Kmart accounted for 13.6%.
The Company paid $22,000 and $47,000 in state and foreign income taxes
in the first quarter in fiscal 2003 and 2002, respectively. For regular federal
tax purposes, the Company's net operating loss carryforwards were sufficient to
offset any regular federal tax liability. The Company received a tax refund of
$0.8 million in September 2002. 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 2020.
The Company has total future lease commitments for various facilities
and other leases totaling $4.4 million, of which approximately $0.9 million is
due in fiscal 2003 and $0.2 million was paid in the fiscal 2003 first quarter.
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 provide new data
technology and certain expansion plans for the Company's foreign operations.
At September 30, 2002, the Company had working capital of $8.5 million
and a current ratio of 1.5 to 1.
DISCUSSION OF CASH FLOWS
Net cash provided by operations was $1.1 million for the first quarter
of fiscal 2003 principally due to the decrease in other receivables and income
generated during the period, which offset the decrease in accounts payable. The
reduction in other receivables is due to the $0.8 million tax refund received in
September 2002. Cash flow used for investments totaled $0.6 million for capital
expenditures. Cash flow used for financing activities totaled approximately $1.1
million, primarily used to reduce the Company's working capital bank facility.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The U.S. dollar is the functional currency for a significant portion of
the Company's consolidated operations. However, certain transactions of the
Company are completed in foreign currencies. In addition, for certain of the
Company's foreign operations, the functional currency is the local currency. As
a result, the Company is exposed to currency transaction and translation risks,
which primarily result from fluctuations of the foreign currencies in which the
Company deals as compared to the U.S. dollar over time.
Gains and losses that result from foreign currency transactions are
included in the Company's consolidated statements of operations on a current
basis and affect the Company's reported net income (loss). The cumulative
foreign currency translation effects for the Company's foreign operations that
utilize the local currency as their functional currency are included as a
separate component of stockholders' equity in the Company's consolidated balance
sheets and are considered in determining comprehensive income as reported in the
Company's consolidated statements of operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports filed pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its Co-Chief Executive Officers and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
During the quarter ended September 30, 2002, the Company formed a
Disclosure Committee that consists of certain key management personnel of the
Company's operations. The Disclosure Committee provides support for management
and the Audit Committee and has developed a sub-certification form to be
completed by key management personnel at the Company's subsidiaries, reporting
on financial information, internal control procedures and disclosure matters.
The Disclosure Committee has also developed a standard Internal Control
Questionnaire to be completed by management personnel at each of the Company's
subsidiaries.
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the foregoing, the Company's Co-Chief Executive Officers and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's Exchange Act
reports.
Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
14
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
4.11 First Amendment Agreement among Waxman Industries, Inc., Waxman
Consumer Products Group, Inc., Waxman USA Inc. and WAMI Sales Inc.,
as Borrowers, the financial institutions, as Lenders, and PNC Bank,
National Association, as agent for the Lenders, effective September
6, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 2002 or the answer is negative or a response has
been previously reported and an additional report of the information need not be
made, pursuant to the instructions to Part II.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAXMAN INDUSTRIES, INC.
------------------------
REGISTRANT
DATE: OCTOBER 30, 2002 BY: /S/ MARK W. WESTER
MARK W. WESTER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
15
CERTIFICATIONS
I, Mark Wester, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Waxman Industries,
Inc.;
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function);
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
quarterly 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: OCTOBER 30, 2002 BY: /S/ MARK W. WESTER
MARK W. WESTER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16
CERTIFICATIONS
I, Armond Waxman, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Waxman Industries,
Inc.;
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function);
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
quarterly 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: OCTOBER 30, 2002 BY: /S/ ARMOND WAXMAN
ARMOND WAXMAN
PRESIDENT AND
CO-CHIEF EXECUTIVE OFFICER
17
CERTIFICATIONS
I, Melvin Waxman, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Waxman Industries,
Inc.;
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function);
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
quarterly 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: OCTOBER 30, 2002 BY: /S/ MELVIN WAXMAN
MELVIN WAXMAN
CHAIRMAN OF THE BOARD AND
CO-CHIEF EXECUTIVE OFFICER
18
EXHIBIT INDEX
4.11 First Amendment Agreement among Waxman Industries, Inc., Waxman Consumer
Products Group, Inc., Waxman USA Inc. and WAMI Sales Inc., as Borrowers,
the financial institutions, as Lenders, and PNC Bank, National
Association, as agent for the Lenders, effective September 6, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
19