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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 DECEMBER 31, 2002
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-5888
WAXMAN INDUSTRIES, INC.
-----------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-0899894
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
24460 AURORA ROAD
BEDFORD HEIGHTS, OHIO 44146
--------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(440) 439-1830
--------------
(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
---- ----
1,003,990 shares of Common Stock, $.01 par value, and 214,189 shares of Class B
Common Stock, $.01 par value, were outstanding as of January 30, 2003.
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations -
Three and Six Months Ended December 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets - December 31, 2002 and June 30, 2002 4 - 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended December 31, 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 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
CERTIFICATIONS 17 - 19
EXHIBIT INDEX 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Six Months
------------ ----------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 16,016 $ 18,116 $ 34,224 $ 36,849
Cost of sales 10,631 12,510 22,914 25,188
-------- -------- -------- --------
Gross profit 5,385 5,606 11,310 11,661
Selling, general and administrative expenses 5,337 4,950 10,680 10,109
-------- -------- -------- --------
Operating income 48 656 630 1,552
Interest expense, net 142 184 266 422
-------- -------- -------- --------
(Loss) income before income taxes (94) 472 364 1,130
Provision for income taxes 160 88 269 162
-------- -------- -------- --------
Net (loss) income $ (254) $ 384 $ 95 $ 968
======== ======== ======== ========
Other comprehensive (loss) income:
Foreign currency translation adjustment 30 (80) (188) (61)
-------- -------- -------- --------
Comprehensive (loss) income $ (224) $ 304 $ (93) $ 907
======== ======== ======== ========
Net (loss) income per share (basic and diluted) $ (0.21) $ 0.32 $ 0.08 $ 0.80
======== ======== ======== ========
Weighted average shares and equivalents 1,218 1,212 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
DECEMBER 31, 2002 AND JUNE 30, 2002
(IN THOUSANDS)
ASSETS
December 31, June 30,
2002 2002
(Unaudited) (Audited)
----------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 747 $ 1,420
Trade receivables, net 10,533 11,529
Other receivables 749 1,979
Inventories 10,997 10,497
Prepaid expenses 1,342 1,902
-------- --------
Total current assets 24,368 27,327
-------- --------
PROPERTY AND EQUIPMENT:
Land 543 554
Buildings 4,533 4,662
Equipment 12,032 11,427
-------- --------
17,108 16,643
Less accumulated depreciation and amortization (8,730) (8,302)
-------- --------
Property and equipment, net 8,378 8,341
-------- --------
CASH SURRENDER VALUE OF OFFICER'S LIFE INSURANCE POLICIES 3,364 3,265
UNAMORTIZED DEBT ISSUANCE COSTS, NET 275 315
NOTES RECEIVABLE FROM RELATED PARTIES 541 574
OTHER ASSETS 604 474
-------- --------
$ 37,530 $ 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
DECEMBER 31, 2002 AND JUNE 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2002 2002
(Unaudited) (Audited)
-------- --------
CURRENT LIABILITIES:
Short-term borrowings $ 6,832 $ 7,596
Current portion of long-term debt 174 235
Accounts payable 4,987 6,754
Accrued liabilities 3,979 3,975
-------- --------
Total current liabilities 15,972 18,560
-------- --------
TERM DEBT - LONG-TERM PORTION 853 935
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 12 15
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share:
Authorized and unissued 200 shares and 2,000 shares at December 31, 2002
and June 30, 2002, respectively -- --
Common Stock, $.01 par value per share:
Authorized 8,000 shares and 22,000 shares and issued 1,004 shares and
1,004 shares at December 31, 2002 and June 30, 2002, respectively 99 99
Class B common stock, $.01 par value per share:
Authorized 1,500 shares and 6,000 shares and issued 214 shares and 214
shares at December 31, 2002 and June 30, 2002, respectively 21 21
Paid-in capital 21,760 21,760
Retained earnings (deficit) (28) (123)
-------- --------
21,852 21,757
Accumulated other comprehensive income (1,159) (971)
-------- --------
Total stockholders' equity 20,693 20,786
-------- --------
$ 37,530 $ 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 SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS)
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 95 $ 968
Adjustments to reconcile net income to
net cash provided by operating activities:
Non-cash interest 64 78
Depreciation and amortization 825 727
Changes in assets and liabilities:
Trade receivables, net 996 (114)
Inventories (500) 1,833
Other assets 1,594 (268)
Accounts payable (1,767) (1,437)
Accrued liabilities 4 235
Other, net (131) (61)
------- -------
Net Cash Provided by Operating Activities 1,180 1,961
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (919) (616)
------- -------
Net Cash Used in Investing Activities (919) (616)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings (764) (1,719)
Debt issuance costs (24) --
Repayment of long-term debt (146) (270)
------- -------
Net Cash Used in Financing Activities (934) (1,989)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (673) (644)
BALANCE, BEGINNING OF PERIOD 1,420 740
------- -------
BALANCE, END OF PERIOD $ 747 $ 96
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 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 and
six months ended December 31, 2002 and 2001, the condensed balance sheet as of
December 31, 2002 and the condensed statements of cash flows for the six months
ended December 31, 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 December 31, 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 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 - 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
7
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 second quarter and six month periods, the Company
recorded a tax provision of $0.2 million and $0.3 million, respectively, 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 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest payments for the three and six months ended December 31,
2002 amounted to $0.1 million and $0.2 million, respectively. Cash interest for
the fiscal 2002 three and six month periods ended December 31, 2001 amounted to
$0.1 million and $0.3 million, respectively. The Company made no federal income
tax payments in the second quarter and six month periods ended December 31, 2002
and 2001; however, the Company received a federal tax refund of $0.8 million in
the quarter ended September 30, 2002 relating to the change in tax law that
allowed the Company to file an amended return for an earlier fiscal year to use
an alternative minimum tax net operating loss carryforward. In the fiscal 2003
three and six month periods ended December 31, 2002, the Company paid
approximately $24,000 and $29,000 in state taxes and $153,000 and $172,000 in
foreign taxes, respectively. In the fiscal 2002 three and six month periods
ended December 31, 2001, the Company paid approximately $3,000 and $27,000 in
state taxes and $114,000 and $136,000 in foreign taxes, respectively.
NOTE 5 - 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 quarter and six month periods ended
December 31, 2002 and 2001, the impact of the options and warrants was
anti-dilutive as the price of the Company's stock was below the exercise prices
of those instruments.
The number of common shares used to calculate basic and diluted
earnings per share, along with a reconciliation of such shares, is as follows
(in thousands):
Three months Three months Six months Six months
ended ended ended ended
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
----- ----- ----- -----
Basic 1,218 1,212 1,218 1,212
Diluted 1,218 1,212 1,218 1,212
Basic 1,218 1,212 1,218 1,212
Dilutive effect of:
Stock options -- -- -- --
Warrants -- -- -- --
----- ----- ----- -----
Diluted 1,218 1,212 1,218 1,212
NOTE 6 - 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 a commercial 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
8
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 $11,620 $ 6,578 -- $(2,182) $16,016
Fiscal 2002 three months 12,684 7,194 -- (1,762) 18,116
Fiscal 2003 six months 23.807 14,326 -- (3,909) 34,224
Fiscal 2002 six months 26,776 14,019 -- (3,946) 36,849
Operating income (loss):
Fiscal 2003 three months $ 509 $ 174 $ (635) -- $ 48
Fiscal 2002 three months 1,007 267 (618) -- 656
Fiscal 2003 six months 1,497 516 (1,383) -- 630
Fiscal 2002 six months 2,373 510 (1,331) -- 1,552
Identifiable assets:
December 31, 2002 $22,391 $10,023 $ 5,116 -- $37,530
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 $8.6 million and $18.3 million for the fiscal 2003 second
quarter and six month periods, and $9.5 million and $18.7 million for the fiscal
2002 second quarter and six month periods, respectively. Of these amounts,
intercompany sales amounted to approximately $2.2 million and $3.9 million for
the fiscal 2003 second quarter and six month periods and $1.8 million and $3.9
million for the fiscal 2002 second quarter and six month periods, respectively.
Identifiable assets for the foreign operations were $12.9 million and $13.5
million at December 31, 2002 and June 30, 2002, respectively.
NOTE 7 - 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 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 2002 Stock Incentive Plan was approved by
stockholders at the Company's December 3, 2002 annual stockholder meeting. There
were no options exercised during the quarter ended December 31, 2002.
9
NOTE 8 - 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 time, the
number of authorized shares was not reduced.
The Company determined that it was not likely to need more than
8,000,000 authorized 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.
Accordingly, at a meeting of the Company's Board of Directors on August 27,
2002, it approved an amendment to the Certificate of Incorporation of the
Corporation to reduce the number of the Company's authorized shares of common
stock, Class B common stock, and preferred stock, and to place the proposed
amendment on the ballot to be considered at the annual meeting of the
stockholders on December 3, 2002. The reduction in authorized shares was
approved at the December 3, 2002 annual meeting of stockholders.
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 continues to provide Kmart with approximately $2.2
million annually 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 continues to develop its sales programs with other
retailers, original equipment manufacturers and industrial supply customers. The
combination of a soft economy and loss of the Kmart plumbing program has
resulted in weak sales for the quarter ended December 31, 2002. The Company
believes that increases in sales with other customers will ultimately offset the
loss of Kmart revenue; however, in the short term it will not be able to absorb
all of the expenses due to this revenue loss, the seasonal reduction in sales
and the general weakness in the economy.
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
NET SALES
Net sales for the fiscal 2003 second quarter ended December 31, 2002
totaled $16.0 million, a decrease of $2.1 million as compared to $18.1 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 second quarter. Sales to Kmart have
decreased since they reflect only sales of floor and surface protection products
and a decrease in the number of Kmart stores. Accordingly, sales to Kmart
amounted to $0.4 million in the fiscal 2003 second quarter as compared to
approximately $1.3 million in the same quarter in the prior year. In the fiscal
11
2003 second quarter, the Company also experienced a reduction in sales to Target
of approximately $0.4 million, which will continue until a new sales program
begins in February 2003.
Net sales to retailers amounted to $11.6 million and $12.7 million for
the quarters ended December 31, 2002 and 2001, respectively. As discussed above,
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, industrial and OEM customers.
Non-retail sales amounted to $6.6 million for the quarter ended December 31,
2002, as compared to $7.2 million for the same quarter last year, reflecting the
sluggish economy.
GROSS PROFIT
Gross profit and gross margins for the fiscal 2003 and 2002 second
quarters were $5.4 million, or 33.6%, and $5.6 million, or 31.0%, respectively.
The reduction in gross profit is due to the sales decrease, while the gross
margin percentage improved in comparison to the prior year second quarter. The
improvement on the gross profit percentage is due to the product mix, with a
higher percentage of sales of certain specialty product categories that have
higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A expenses")
increased to $5.3 million in the fiscal 2003 second quarter as compared to $5.0
million in the same period in the prior year. The increase is primarily
attributed to the Company's effort to expand its industrial and non-retail sales
program. The ratio of SG&A expenses to net sales increased to 33.3% for the
fiscal 2003 second quarter from 27.3% in the comparable period last year, due to
an increase in expenses and the reduction in net sales.
INTEREST EXPENSE
For the quarter ended December 31, 2002, net interest expense totaled
$0.1 million, as compared to $0.2 million in the fiscal 2002 second quarter.
Average borrowings for the current year's quarter amounted to $7.6 million, with
a weighted average interest rate of 5.1%, as compared to $10.0 million in the
same prior year quarter, with a weighted average interest rate of 5.9%. 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 $0.2 million and $0.1 million
for the quarters ended December 31, 2002 and 2001, respectively. The tax
provisions for fiscal 2003 and 2002 second quarters represent various state and
foreign taxes. For the fiscal 2003 second 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 second 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 a net loss of $0.3 million, or $0.21 per share,
for the quarter ended December 31, 2002 as compared to net income $0.4 million,
or $0.32 per basic and diluted share, for the same prior year period. The
reduction in the current year's net income is due to the decrease in sales and
increase in SG&A expenses.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
NET SALES
Net sales for the fiscal 2003 six month period ended December 31, 2002
totaled $34.2 million, a decrease of $2.6 million as compared to $36.8 million
for the same period in the prior fiscal year. The decrease in net sales was
primarily due to a larger reduction in sales to Kmart in the fiscal 2003 six
month period. As discussed in the results for the quarter, the reduction in
sales was due to the change in the sales program with Kmart to include only
12
floor and surface protection products and a decrease in the number of Kmart
stores served. Accordingly, sales to Kmart amounted to $0.9 million in the
fiscal 2003 six month period as compared to approximately $3.7 million in the
same period last year. In the fiscal 2003 six month period, the Company also
experienced a reduction in sales to Target of approximately $1.0 million, which
will continue until its new sales program begins in February 2003.
Net sales to retailers amounted to $23.8 million and $26.9 million for
the six months ended December 31, 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 customers. Non-retail
sales increased to $14.3 million for the six months ended December 31, 2002, as
compared to $14.0 million for the same period last year.
GROSS PROFIT
Gross profit and gross margins for the fiscal 2003 and 2002 six month
periods were $11.3 million, or 33.0%, and $11.7 million, or 31.7%, respectively.
The reduction in gross profit is attributed to the reduction in sales, while the
improvement in the gross margin percentage is due to a favorable mix of
products, with a higher percentage of sales consisting of certain specialty
products with higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses amounted to $10.7 million and $10.1 million,
respectively, for the six months ended December 31, 2002 and 2001. SG&A expenses
as a percentage of net sales increased to 31.2% for the fiscal 2003 six month
period from 27.4% in the comparable period last year. The increases in expenses,
coupled with the decrease in net sales, resulted in the increase in expenses
expressed as a percentage 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 six months ended December 31, 2002, net interest expense
amounted to $0.3 million, as compared to $0.4 million in the same period in the
prior fiscal year. Average borrowings for the fiscal 2003 six month period were
$7.9 million, with a weighted average interest rate of 5.3%, as compared to
$10.5 million in the same period last year, with a weighted average interest
rate of 6.7%. 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 $0.3 million and $0.2 million
in the six months ended December 31, 2002 and 2001, respectively. The tax
provisions for fiscal 2003 and 2002 represent various state and foreign taxes.
For the fiscal 2003 year to date period, 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 year to date period, 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 $0.1 million, or $0.08 per basic and
diluted share, for the fiscal 2003 six month period ended December 31, 2002. The
Company reported net income of $1.0 million, or $0.80 per basic and diluted
share, for the six month period ended December 31, 2001. The reduction in net
income is related to the decrease in sales and increase in SG&A expenses.
B. LIQUIDITY AND CAPITAL RESOURCES
The PNC Revolving Credit, Term Loan and Security Agreement ("PNC Bank
Facility") is among 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
13
amortized over 7 years. As of December 31, 2002, the Company had $6.4 million in
borrowings under the revolving credit line of the facility and had approximately
$2.6 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 December 31, 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 Company was in
compliance with all loan covenants at December 31, 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 in
June 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 $29,000 and $172,000 in state and foreign income taxes
in the six months ended December 31, 2002 and 2001, respectively. For regular
federal tax purposes, the Company's net operating loss carryforwards were
sufficient to offset any regular federal tax liability. 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 $3.7 million, of which approximately $1.0 million is
due in fiscal 2003, of which approximately $0.5 million has been paid in the
fiscal 2003 six month period. 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 December 31, 2002, the Company had working capital of $8.4 million
and a current ratio of 1.5 to 1.
DISCUSSION OF CASH FLOWS
Net cash provided by operations amounted to $1.2 million for the six
months ended December 31, 2002, principally due to the decrease in trade
receivables and other receivables, which offset the increase in inventories and
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 $0.9 million for capital expenditures. Cash flow used for
financing activities totaled approximately $0.9 million, primarily used to
reduce the Company's working capital bank facility.
14
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 fiscal 2003 first quarter, 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.
15
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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 December 31, 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: JANUARY 31, 2003 BY: /S/ MARK W. WESTER
MARK W. WESTER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16
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: JANUARY 31, 2003 BY: /S/ MARK W. WESTER
MARK W. WESTER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
17
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: JANUARY 31, 2003 BY: /S/ ARMOND WAXMAN
ARMOND WAXMAN
PRESIDENT AND
CO-CHIEF EXECUTIVE OFFICER
18
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: JANUARY 31, 2003 BY: /S/ MELVIN WAXMAN
MELVIN WAXMAN
CHAIRMAN OF THE BOARD AND
CO-CHIEF EXECUTIVE OFFICER
19
EXHIBIT INDEX
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
20