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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-5888
WAXMAN INDUSTRIES, INC.
-----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-0899894
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
24460 AURORA ROAD,
BEDFORD HEIGHTS, OHIO 44146
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(440) 439-1830
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(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
Aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing price at which such stock was sold on the
Over-The-Counter Bulletin Board on August 21, 2002: $4,828,720
Number of shares of Common Stock outstanding as of August 21, 2002:
Common Stock 1,003,990
Class B Common Stock 214,189
1
DOCUMENTS INCORPORATED BY REFERENCE
Registrant intends to file with the Securities and Exchange Commission
a definitive Proxy Statement pursuant to Regulation 14A of the Securities
Exchange Act of 1934 within 120 days of the close of its fiscal year ended June
30, 2002, portions of which document shall be deemed to be incorporated by
reference in Part I and Part III of this Annual Report on Form 10-K from the
date such document is filed.
The Company consists of Waxman Industries, Inc. and subsidiaries in
which Waxman Industries, Inc. directly or indirectly has a majority voting
interest. Until its sale on September 29, 2000, the Company owned 44.2% of the
common stock of Barnett Inc. (the "Barnett Common Stock"), a direct marketer and
distributor of plumbing, electrical, hardware, and security hardware products,
and accounted for Barnett Inc. ("Barnett") under the equity method of
accounting.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that are based on the beliefs of the Company and its management. When
used in this document, the words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "should," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, but not limited to,
risks associated with currently unforeseen competitive pressures and risks
affecting the Company's industry, such as decreased consumer spending, customer
concentration issues and the effects of general economic conditions. In
addition, the Company's business, operations and financial condition are subject
to the risks, uncertainties and assumptions which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission, including this Report. Should one or more of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein.
PART I
ITEM 1. BUSINESS
GENERAL
The Company believes it is one of the leading suppliers of specialty
plumbing, floor and surface protection and other hardware products to the repair
and remodeling market in the United States. The Company also distributes its
products to non-U.S. countries through its operations based in Asia, primarily
to wholesale distributors, industrial and O.E.M. customers. The Company
distributes its products to approximately 770 customers, including a wide
variety of large national and regional retailers, independent retail customers
and wholesalers. The Company's consolidated net sales were $70.4 million in
fiscal 2002.
The Company conducts its business primarily through its wholly-owned
subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WAMI
Sales, Inc. ("WAMI Sales") and TWI, International, Inc. Consumer Products, the
Company's largest operation, is a supplier of specialty plumbing, floor and
surface protection and other hardware products to a wide variety of large
retailers. WAMI Sales distributes galvanized, black, chrome and brass pipe
nipples and fittings to industrial and wholesale distributors. TWI,
International, Inc. includes TWI International Taiwan Inc. and its sales
operation, TWI Industrial, Inc. (collectively, "TWI"), located primarily in
Taiwan, and CWI International China, Ltd. ("CWI"), located in Mainland China.
TWI and CWI manufacture, package, source and assemble product purchased by
Consumer Products and non-affiliated businesses. Approximately 44% of Consumer
Products' purchases are from TWI or CWI. Until March 31, 2001, the Company also
supplied plumbing and hardware products to hardware stores and smaller
independent retailers through Medal of Pennsylvania, Inc. ("Medal", formerly
known as WOC Inc. ("WOC")), when substantially all of the assets and certain
liabilities of this business were sold (see Note 5).
Until its sale on September 29, 2000, the Company owned 44.2% of
Barnett, a direct marketer and distributor of an extensive line of plumbing,
electrical, hardware and security hardware products. The Company recorded equity
earnings from this investment of $1.4 million for the first fiscal quarter ended
September 30, 2000. The Company did not report equity earnings thereafter, due
to the sale of its ownership interest in Barnett. See Management's Discussion
and Analysis "Significant Developments - Prior Year Strategic and Restructuring
Developments" section and Notes 2 and 3 of the Notes to Consolidated Financial
Statements in this Annual Report on Form 10-K for information regarding the sale
of the Company's interest in Barnett.
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CONSUMER PRODUCTS
Consumer Products actively markets and distributes approximately 3,000
products to a wide variety of retailers, primarily do-it-yourself ("D-I-Y")
warehouse home centers, home improvement centers and mass merchandisers.
Consumer Products' customers include large national retailers such as Wal-Mart,
Kmart, Lowe's and Sears, as well as several regional D-I-Y retailers such as
Meijers, Fred Meyers and Menards. Consumer Products works closely with its
customers to develop comprehensive marketing and merchandising programs designed
to improve their profitability, efficiently manage shelf space, reduce inventory
levels and maximize floor stock turnover. Consumer Products also offers certain
of its customers the option of private label programs and direct import
programs. Consumer Products' net sales for fiscal 2002 were $39.8 million,
excluding direct import sales.
In recent years, the rapid growth of large mass merchandisers and D-I-Y
retailers has contributed to a significant consolidation of the United States
retail industry and the formation of large, dominant, product specific and
multi-category retailers. These retailers demand suppliers who can offer a broad
range of quality products and can provide strong marketing and merchandising
support. Due to the consolidation in the D-I-Y retail industry, a substantial
portion of Consumer Products' net sales are generated by a small number of
customers. Sales to Consumer Products' larger customers for fiscal 2002, 2001
and 2000, respectively, were as follows; Wal-Mart accounted for 29.0%, 25.0% and
13.6%; Lowes accounted for 16.1%, 8.4% and 5.8%; and Kmart accounted for 13.6%,
11.3% and 16.7%. The retail industry consolidation has resulted in the cessation
of business for a number of weaker organizations over the past several years,
including some companies served by Consumer Products. In January 2002, Kmart
filed for Chapter 11 bankruptcy protection. The Company had adequate reserves to
account for any loss on its accounts receivable at the time of Kmart's Chapter
11 filing. The Company will continue to provide Kmart with approximately $2.2
million in floor and surface protection products in fiscal 2003. The Company is
working to expand its sales to Kmart to include some products in plumbing
repair, a program that ended in June 2002. Although the Company expects a
decrease in monthly revenue initially, we believe that increases in sales with
other customers will ultimately offset any loss of Kmart revenue.
The Company is evaluating the reduction in the Kmart revenue base and
ways to reduce its cost structure to be more in line with a potentially smaller
revenue base. The Company also expects that programs with other retailers will
ultimately offset much of the loss of this business. However, in the short-term
it may not be able to absorb all of the expenses due to the curtailment of
Kmart's purchases of the plumbing repair products from Consumer Products. In the
event Consumer Products were to further lose any of its larger retail accounts
as a customer or one of its larger accounts were to significantly curtail its
purchases from Consumer Products, there would be material short-term adverse
effects until the Company could further modify Consumer Products' cost structure
to be more in line with its anticipated revenue base. Consumer Products would
likely incur significant charges if a materially adverse change in its customer
relationships were to occur.
In fiscal 1999, Consumer Products moved its distribution center from
Bedford Heights, Ohio to a more modern and efficient center in Groveport, Ohio,
a suburb of Columbus. In the fourth quarter of fiscal 2000, Consumer Products
closed its warehouse in Grand Prairie, Texas, and now operates from one national
distribution center in Groveport. Consumer Products also closed its packaging
facility in Tijuana, Mexico. The items previously packaged in Mexico are now
packaged at the Company's overseas operations and, to a lesser extent, by
domestic packagers. The closure of these facilities resulted in a charge of $0.6
million, but Consumer Products has benefited from significant cost savings as a
result of this consolidation.
In the past several years, certain retailers have begun to develop
direct import programs to improve their profitability. Those retailers generally
select certain product categories and import full containers of such products to
their domestic distribution centers. Consumer Products has responded to this
trend by working with the Company's foreign sourcing operations to provide the
products, while Consumer Products provides certain value added services, such as
account management, selling and marketing support and customer service. Due to
the sharing of responsibilities in servicing the domestic retail accounts,
profits are shared by Consumer Products and the foreign operation. The direct
shipment arrangement generally results in lower gross profit margins for the
Company, but also results in lower selling, general and administrative costs.
Consumer Products' marketing strategy includes offering mass
merchandisers and D-I-Y retailers a comprehensive merchandising program, which
includes design, layout and setup of selling areas. Sales and service personnel
assist the retailer in determining the proper product mix in addition to
designing category layouts to effectively display products and optimally utilize
available floor and shelf space. Consumer Products supplies point-of-purchase
displays for both bulk and packaged products, including color-coded product
category signs and color-coordinated bin labels to help identify products and
backup tags to identify products that require reordering. Consumer Products also
offers certain of its customers the option of private label programs for their
plumbing and floor care products. In-house design, assembly and packaging
capabilities enable Consumer Products to react quickly and effectively to
service its customers' changing needs. Consumer Products' products are packaged
and designed for ease of use, with "how to" instructions to simplify
installation, even for the uninitiated D-I-Y consumer. In
3
addition, Consumer Products has sophisticated EDI capabilities, enabling
customers to reduce inventory levels and increase return on investment.
PRODUCTS
The following is a discussion of Consumer Products' principal product
groups:
Plumbing Products. Consumer Products' plumbing repair products include
toilet repair, sink and faucet repair, water supply repair, drain repair, shower
and bath repair, hose and pipe repair, and connection repair. Consumer Products
also offers proprietary lines of faucets under the trade name AquaLife(R) and a
line of shower and bath accessories under the proprietary trade name Spray
Sensations(R). Consumer Products' product line also includes a full line of
valves and fittings, rubber products and tubular products such as traps and
elbows. Many of Consumer Products' plumbing products are sold under the
proprietary trade names Plumbcraft(R) and PlumbKing(R). In addition, Consumer
Products offers certain of its customers the option of private label programs.
Floor and Surface Protective Hardware Products. Consumer Products'
floor and surface protective hardware products include casters, doorstops, and
other floor, furniture, felt and rubber surface protective and wall protective
items. Consumer Products markets a complete line of floor and surface protective
hardware products under the proprietary trade name SoftTouch(TM) and also under
private labels.
New Product and Packaging Introductions. In recent years, as the
consolidation in the United States retail industry has accelerated, decreasing
the number of potential customers in the Company's traditional market, the
Company has placed an emphasis on new product development, product line
extensions and the redesign of existing products and packaging concepts to allow
it to diversify its product offerings to its existing customers and to enable it
to penetrate new customer categories. Consumer Products has several new product
and new packaging initiatives planned.
In the shower category, Consumer Products has repackaged and re-named
its shower product line with eye catching graphics targeted to the female
consumer. In addition, new shower products with the features and functions
desired most by consumers have been added. Consumer Products has also developed
a new line of luxury shower products targeted for placement in home stores and
with mass merchandisers. This line has unique product features with designer
packaging that will command premium yet affordable pricing.
EZ Mount(R), a unique self adhering, non marking, reusable product that
sticks on any surface, will be launched in the fall of 2002. This exciting new
product line with dozens of decorating, mounting and communications uses, has
specifically been targeted for office supply stores, mass retailers, home stores
and specialty toy stores.
EZ Caster(R), is a unique self stick caster that requires no tools for
installation and has a locking mechanism that is designed to fit a number of
surfaces and will not scratch hardwood or vinyl floors. EZ Z9 9 Caster is
targeted for placement in office supply retailers, mass retailers, big box
stores and home stores.
OTHER DOMESTIC OPERATIONS
WAMI Sales
WAMI Sales was started by the Company in July 1997 to distribute pipe
nipples that were manufactured in Tijuana, Mexico by Western American
Manufacturing Inc. ("WAMI"), an operation that was sold effective March 31,
2000. WAMI Sales distributes pipe nipples, fittings and other products to
industrial supply and wholesale operations throughout the United States and, to
a lesser extent, Canada. It distributes approximately 2,680 products to
approximately 650 customers through its own sales force and through outside
sales representative organizations. WAMI Sales has developed relationships with
foreign suppliers, including producers from Asia and with the acquirer of WAMI,
to supply the products it distributes. WAMI Sales' net sales amounted to $3.3
million in fiscal 2002.
Medal
Prior to its sale effective March 31, 2001, Medal was a supplier of
hardware and plumbing products to approximately 600 independent hardware stores
and small independent retailers within a 250 mile radius of its facility in
Sharon, Pennsylvania. Medal was formerly a division of WOC Inc., which also
included U.S. Lock, a full line supplier of security hardware products, until
its sale on January 1, 1999. In fiscal 2001, WOC was renamed Medal of
Pennsylvania, Inc. to reflect its only remaining operation. Medal's net sales
amounted to $3.4 million for the nine-month period it operated in fiscal 2001.
4
FOREIGN OPERATIONS
The Company conducts its foreign operations through TWI, International,
Inc. including TWI in Taiwan and CWI in Mainland China. TWI and CWI manufacture,
package, source and assemble product purchased by Consumer Products and
non-affiliated businesses. These businesses were initially intended to support
Consumer Products and other affiliated companies, but they have also developed
their own base of non-affiliated companies. TWI and Consumer Products have also
responded to the increasing interest by certain retailers in direct import
programs, with the added benefit of domestic account management. For the years
ended June 30, 2002, 2001 and 2000, products purchased from the foreign
operations accounted for approximately 15.9%, 15.1% and 16.8%, respectively, of
the total product purchases made by the Company. For fiscal 2002, the combined
foreign operations had net sales of $35.3 million, of which $7.9 million were
intercompany transactions, which are eliminated in consolidation. Approximately
$13.1 million of the Company's non-retail sales are to Barnett, a former
affiliated company. However, the Company has made significant progress in recent
years in its effort to develop the non-retail customer base served by its
foreign operations.
The Company believes that these facilities give it competitive
advantages in terms of cost and flexibility in sourcing. Both labor and physical
plant costs are significantly below those in the United States. Substantially
all of the other products purchased by the Company are manufactured by third
parties. The Company estimates that it purchases products and materials from
approximately 215 suppliers and is not dependent on any single unaffiliated
supplier for a material portion of its requirements.
Effective March 31, 2000, the Company sold nearly all of the assets and
certain liabilities of WAMI, a company that manufactured galvanized, black,
brass and chrome pipe nipples in Tijuana, Mexico. In June 2000, the Company
closed one of its facilities in China that manufactured faucet components,
resulting in a restructuring charge of $1.2 million to write down assets to
their fair value and provide for two months of costs to close the facility. The
Company will continue to distribute faucets that have been assembled by the
Company, with components being manufactured by outside suppliers.
PRINCIPAL PRODUCT GROUPS
The following table sets forth the approximate percentage of net sales
attributable to the Company's principal product groups.
2002 2001 2000
---- ---- ----
Plumbing 72% 77% 79%
Hardware 28% 23% 21%
---- ----- -----
Total net sales 100% 100% 100%
===== ===== =====
IMPORT RESTRICTIONS AND CUSTOMS ISSUES
Under current United States government regulations, some products
manufactured offshore are subject to import restrictions. The Company currently
imports goods from China and Taiwan. When the Company chooses to directly import
goods purchased outside of the United States, the Company may be subject to
import quota restrictions, depending on the country of origin of assembly. If
the Company cannot obtain the necessary quota, the Company will not be able to
import the goods into the United States. These restrictions may limit the amount
of goods from a particular country that may be imported into the United States
or increase the cost of goods being imported into this country. In fiscal 2002,
the United States imposed a 15% tariff on many imported products made of steel,
including products imported by WAMI Sales. This tariff has increased the cost
structure of this business. Export visas for the goods purchased offshore by the
Company are readily available. As indicated above, many of the Company's
imported goods are of Chinese origin, which was granted most favored nation
status in the spring of 2000. There is no guarantee this will continue to be the
case in the future.
EQUITY INVESTMENT - BARNETT AFFILIATE
Until September 29, 2000, the Company held an equity interest in
Barnett, a direct marketer and distributor of an extensive line of plumbing,
electrical, hardware and security hardware products to professional contractors,
independent hardware stores, maintenance managers, liquid propane gas dealers
and locksmiths throughout the United States. The Company owned 100% of Barnett
prior to an initial public offering in April 1996. A secondary offering in April
1997 reduced the Company's ownership interest to approximately 44.4% of the
Barnett Common Stock. In July 2000, the Company announced that it had reached an
agreement to monetize its Barnett Common Stock for $13.15 per share as part of
the purchase of all of Barnett's outstanding shares by Wilmar Industries, Inc.
(the "Barnett Merger"). In September 2000, the remaining 7,186,530 shares of
Barnett Common Stock
5
were used to raise $94.5 million in proceeds as part of the Company's
comprehensive financial restructuring plan. The Company's equity investment in
Barnett amounted to $44.3 million immediately prior to the sale, including
equity earnings recognized by the Company in the quarter ended September 30,
2000 of $1.4 million. The Company reported a net gain on the sale of Barnett of
$47.5 million, after the write-off of $2.7 million in transaction related costs
and other costs associated with the comprehensive financial restructuring of the
Company. In addition, the Company recognized $7.8 million in deferred gain on
the sale of U.S. Lock in fiscal 2001, which was being recognized as Barnett
amortized the goodwill associated with its purchase of U.S. Lock.
COMPETITION
The Company faces significant competition within each of its product
lines, although it has no competitor offering the range of products in all of
the product lines that the Company offers. The Company believes that its buying
power, extensive inventory, use of technology, emphasis on customer service and
merchandising programs have contributed to its ability to compete successfully
in its various markets. The Company faces significant competition from smaller
companies which specialize in particular types of products and larger companies
which manufacture their own products and have greater financial resources than
the Company. The Company believes that competition in sales to retailers is
primarily based on price, product quality and selection, as well as customer
service, which includes speed of responses for packaging, delivery and
merchandising for retailers.
EMPLOYEES
As of June 30, 2002, the Company employed 405 persons, 117 of whom were
clerical and administrative personnel, 64 of whom were sales and service
representatives and 224 of whom were either production or warehouse personnel.
None of the Company's employees are represented by collective bargaining units.
The Company considers its relations with its employees to be satisfactory.
TRADEMARKS
Several of the trademarks and trade names used by the Company are
considered to have significant value in its business. See "Business -- Consumer
Products - Products"
ENVIRONMENTAL REGULATIONS
The Company is subject to certain federal, state and local
environmental laws and regulations. The Company believes that it is in material
compliance with such laws and regulations applicable to it. To the extent any
subsidiaries of the Company are not in compliance with such laws and
regulations, the Company, as well as such subsidiaries, may be liable for such
non-compliance.
The Company or one of its indirect subsidiaries have been threatened
with litigation by two separate California public interest groups alleging
unlawful discharge of chemicals under California's Safe Drinking Water and Toxic
Enforcement Act of 1986. The Company is researching the merits of the
allegations and intends to contest and vigorously defend itself. Any potential
liability related to this threatened litigation cannot be assessed at this time
as the Company is in the very preliminary stages of its investigation.
SEASONALITY
The Company's sales are generally consistent throughout its fiscal
year, although the third fiscal quarter is generally weaker in sales than the
other quarters.
6
ITEM 2. DESCRIPTION OF PROPERTIES
The following table sets forth, as of the most current date, certain
information with respect to the Company's principal physical properties:
LEASE
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET PURPOSE DATE
-------- ----------- ------- ----
24460 Aurora Road 21,000 Corporate Office Owned
Bedford Hts., OH
24455 Aurora Road 46,000 Consumer Products Corporate 6/30/07
Bedford Hts., OH (1) Office and Distribution Center
5920 Green Pointe Dr. 142,000 Consumer Products 11/1/08
Groveport, OH Office and Distribution Center
24001 Aurora Road 28,000 Consumer Products 9/1/02
Bedford Hts., OH Warehouse
No. 10, 7th Road 55,000 TWI Owned
Industrial Park Office, Packaging
Taichung, Taiwan and Distribution Center
Republic of China
Dan Keng Village 57,000 CWI
Fu Ming County Office, Packaging, Manufacturing Owned
Shenzhen, P.R. China and Distribution Center
9430 Cabot Drive 13,000 WAMI Sales 1/31/03
San Diego, California Office and Distribution Center
4647 Leston Avenue 12,000 WAMI Sales 6/30/04
Dallas, Texas Office and Distribution Center
(1) Aurora Investment Co., a partnership owned by Melvin Waxman, Chairman
of the Board and Co-Chief Executive Officer of the Company, and Armond
Waxman, President and Co-Chief Executive Officer of the Company,
together with certain other members of their families, is the owner and
lessor of this property. In fiscal 2002, Consumer Products leased 9,000
square feet of office space and 20,000 square feet of warehouse space
from Aurora Investment. The remaining 97,000 square feet of warehouse
space in this facility had been subleased to Handl-it, Inc. (see below
for information regarding affiliated ownership) until the lease expired
on June 30, 2002. Rent expense under this lease was $326,716 in fiscal
2002, 2001 and 2000. Effective July 1, 2002, Consumer Products extended
the lease with Aurora Investment for the 9,000 square feet of office
space and 20,000 square feet of warehouse space for five years. In
addition, Consumer Products began subleasing 17,000 square feet of
warehouse space from Handl-it at the same location to consolidate the
warehouse location at 24001 Aurora Road in Bedford Heights that was
previously scheduled to expire in September 2002.
Handl-it Inc., a corporation owned by John S. Peters, a director of and
consultant to the Company, together with another member of his family, and
Melvin Waxman and Armond Waxman, subleased warehouse space from Consumer
Products through June 30, 2002. The sublease by Handl-it allowed Consumer
Products to move to a more efficient national distribution center in Groveport,
Ohio. The Company charged Handl-it, Inc. $191,079, $290,496 and $290,970 in
fiscal 2002, 2001 and 2000, respectively, for subleasing the warehouse in
Bedford Hts., Ohio. However, Handl-it owes the Company for $133,638 of unpaid
rent in fiscal 2002, for which it has signed a note (see Note 10, Related Party
Transactions of the Notes to the Consolidated Financial Statements in this
Annual Report on Form 10-K). In fiscal 2001 and 2000, Handl-it provided Consumer
Products with certain outside transportation services, for which Consumer
Products paid Handl-it Inc. approximately $27,000 and $40,000, respectively.
From July 1, 1999 through April 2001, WAMI Sales utilized Handl-it to provide
all warehousing, labor and shipping functions in Cleveland, Ohio for a fee equal
to a percentage of monthly sales plus other direct costs from this operation.
The charge amounted to $67,000 and $74,000 in fiscal 2001 and 2000,
respectively. Consumer Products also utilizes an outside
7
packaging operation in certain instances where the packaging cannot be performed
by the Company's operations in Asia. This outside packager, which was acquired
by Handl-it, received $377,599, $234,368 and $110,577 for these services in
fiscal 2002, 2001 and 2000, respectively. Consumer Products had been using
Con-Pak Inc. for several years before its acquisition by Handl-it in 1999.
The Company believes that its facilities are suitable for its
operations and provide the Company with adequate productive capacity and that
the related party leases and rental arrangements are on terms comparable to
those that would be available from unaffiliated third parties.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management, the
amount of any ultimate liability with respect to these actions will not
materially affect the financial position or operations of the Company.
As further described in Note 14 of the Notes to the Consolidated
Financial Statements in this Annual Report on Form 10-K, the Company or one of
its indirect subsidiaries have been threatened with litigation by two separate
California public interest groups. The Company is researching the merits of the
allegations and intends to contest and vigorously defend itself. Any potential
liability related to this threatened litigation cannot be assessed at this time
as the Company is in the very preliminary stages of its investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the executive officers of the Company and a
brief description of their business experience. Each executive officer will hold
office until his successor is chosen and qualified.
Mr. Melvin Waxman, age 68, has been the Chairman of the Board and since
August 1976, other than from June 1995 until April 1996, when he was Co-Chairman
of the Board. Mr. Waxman was the Chief Executive Officer from 1962 until May
1988, when he became the Co-Chief Executive Officer of the Company. Mr. Waxman
has been a director of the Company since 1962. Melvin Waxman and Armond Waxman
are brothers.
Mr. Armond Waxman, age 63, is the Co-Chief Executive Officer, President
and Treasurer of the Company. Mr. Waxman became the Co-Chief Executive Officer
in May 1988, and has been the President and Treasurer of the Company since
August 1976, other than from August 1976 to May 1988, when he was the Chief
Operating Officer of the Company. Mr. Waxman has been a director of the Company
since 1962. Armond Waxman and Melvin Waxman are brothers.
Mr. Laurence Waxman, age 45, has been Senior Vice President of the
Company since November 1993 and is also President of Consumer Products, a
position he has held since 1988. Mr. Waxman joined the Company in 1981. Mr.
Waxman has been a director of the Company since July 1996. Mr. Laurence Waxman
is the son of Melvin Waxman.
Mr. Mark Wester, age 47, is a Senior Vice President and Chief Financial
Officer of the Company and a certified public accountant. Mr. Wester joined the
Company in October 1996 as Corporate Controller and in January 1997 became the
Vice President-Finance. In April 1997, Mr. Wester became the Chief Financial
Officer of the Company, and in May 2002, he became a Senior Vice President and
Chief Financial Officer. Mr. Wester provided consulting services to the Company
from May 1996 through September 1996. From March 1992 to April 1996, Mr. Wester
was a limited partner with a privately owned telecommunications company, Capital
Communications Cooperative and the Chief Financial Officer of Progressive
Communications Technologies. From 1978 to 1992, Mr. Wester was employed by The
Fairchild Corporation (formerly, Banner Industries, Inc.), where he held several
positions during his tenure, including Vice President and Corporate Controller.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Over-The-Counter Bulletin
Board ("OTCBB"). On February 20, 2001, the Company effected a 1 for 10 reverse
stock split (the "Reverse Stock Split") for the Company's Common Stock, which
trades under the symbol "WAXM.BB" and Class B Common Stock. From March 22, 1999
until the Reverse Stock Split, the Company's Common Stock traded under the
symbol "WAXX". The Company's Class B Common Stock does not trade in the public
market due to restricted transferability. However, the Class B Common Stock may
be converted into Common Stock on a share-for-share basis at any time.
The following table sets forth the high and low closing quotations as
reported by the OTCBB for fiscal 2002 and 2001 (adjusted for the Reverse Stock
Split).
2002 2001
------ ------
HIGH LOW HIGH LOW
------- ------- ------ ---
First Quarter $2.35 $1.55 $3.44 $1.25
Second Quarter 3.46 1.70 3.50 1.25
Third Quarter 5.00 3.25 3.13 1.50
Fourth Quarter 6.25 4.40 2.05 1.50
HOLDERS OF RECORD
As of August 21, 2002, there were 578 holders of record of the
Company's Common Stock and 97 holders of record of the Company's Class B Common
Stock.
DIVIDENDS
The Company declared no dividends in fiscal 2002 or 2001. Restrictions
contained in the Company's debt instruments currently prohibit the declaration
and payment of cash dividends.
9
ITEM 6. SELECTED FINANCIAL DATA
INCOME STATEMENT DATA:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 (8) 2000 (9) 1999 (10) 1998
--------- --------- --------- --------- ---------
Net sales (1) $ 70,425 $ 71,370 $ 80,710 $ 96,616 $ 105,662
Cost of sales (2) 47,253 49,890 59,259 69,264 69,429
--------- --------- --------- --------- ---------
Gross profit 23,172 21,480 21,451 27,352 36,233
Selling, general and administrative expenses 21,535 21,763 27,094 31,635 30,290
Restructuring and impairment charges (3) -- 350 9,720 2,015 24
--------- --------- --------- --------- ---------
Operating income (loss) 1,637 (633) (15,363) (6,298) 5,919
Gain on sale of Barnett stock, net (4) -- 47,473 -- -- --
Loss on the sale of Medal, net (5) -- (1,105) -- -- --
Loss on sale of WAMI, net (3) (5) -- -- (2,024) -- --
Gain on sale of U.S. Lock, net (5) -- -- -- 10,298 --
Equity earnings of Barnett -- 1,370 6,511 6,744 6,341
Amortization of deferred U.S. Lock gain (6) -- 7,815 202 -- --
Interest expense, net 723 5,414 18,201 17,192 16,031
--------- --------- --------- --------- ---------
Income (loss) from operations before income taxes and
extraordinary items 914 49,506 (28,875) (6,448) (3,771)
(Benefit) provision for income taxes (671) 1,680 (27) 1,029 537
--------- --------- --------- --------- ---------
Income (loss) from operations before extraordinary items 1,585 47,826 (28,848) (7,477) (4,308)
Extraordinary items (7) -- 52,222 -- -- 92
--------- --------- --------- --------- ---------
Net income (loss) $ 1,585 $ 100,048 $ (28,848) $ (7,477) $ (4,500)
========= ========= ========= ========= =========
Average number of shares outstanding 1,215 1,212 1,207 1,206 1,203
========= ========= ========= ========= =========
Basic earnings (loss) per share:
From operations before extraordinary items $ 1.30 $ 39.46 $ (23.91) $ (6.20) $ (3.58)
Extraordinary items -- 43.09 -- -- (.16)
--------- --------- --------- --------- ---------
Net income (loss) per share $ 1.30 $ 82.55 $ (23.91) $ (6.20) $ (3.74)
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
From operations before extraordinary items $ 1.30 $ 39.46 $ (23.91) $ (6.20) $ (3.58)
Extraordinary items -- 43.09 -- -- (.16)
--------- --------- --------- --------- ---------
Net income (loss) per share $ 1.30 $ 82.55 $ (23.91) $ (6.20) $ (3.74)
========= ========= ========= ========= =========
Cash dividends per share:
Common stock $ -- $ -- $ -- $ -- $ --
Class B common stock $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Working capital $ 8,767 $ 7,209 $ (5,725) $ 21,945 $ 15,776
Total assets 40,296 40,832 94,218 100,210 105,743
Total long-term debt 950 532 128,453 128,480 118,314
Stockholders' equity (deficit) 20,786 19,032 (80,543) (52,086) (44,744)
(1) Prior to fiscal 2002, the Company charged off business procurement
charges for inventory repurchases as a contra sale, while reporting
other business procurement costs, such as slotting fees and the cost of
reorganizing a customer's store aisles and displays in order to
accommodate the Company's products, as a separate operating expense
category. Beginning in fiscal 2002, the Company adopted a new Financial
Accounting Standards Board standard, EITF Issue No. 00-25, and began to
report all of these charges as a reduction in net sales. As a result,
net sales for fiscal 2001, 2000 and 1999 were reduced by $2.15 million,
$0.65 million and $2.5 million, respectively, for charges not
previously reported as a contra sale, but there was no impact on
operating income. There were no procurement costs in fiscal 1998 that
had not previously been reported as a reduction in net sales.
10
(2) In the fiscal 2000 fourth quarter, Consumer Products incurred higher
cost of sales for the write off of $1.7 million in packaging material
and other inventory associated with the closure of (i) a distribution
facility in Grand Prairie, Texas, which was consolidated into Consumer
Products' national distribution center near Columbus, Ohio and (ii) a
packaging operation in Tijuana, Mexico that transferred operations to
the Company's operations in Taiwan and China. The Company also reported
a reduction in sales of $0.4 million and additional charges to cost of
sales of $0.5 million for the realizability of receivables and
inventory in the fiscal 2000 fourth quarter for the closure of its
Premier Faucet Company.
(3) In the fiscal 2001 first quarter, the Company recorded a $0.35 million
charge associated with additional restructuring costs for warehouses
closed by Consumer Products in prior years. In the fiscal 2000 second
quarter, the Company recorded a $1.3 million restructuring charge
related to the consolidation of its packaged plumbing products under
the Plumbcraft(R) brand name. In the fiscal 2000 fourth quarter, the
Company recorded a $0.6 million restructuring charge related to (i) the
closure of its Grand Prairie, Texas distribution center, which was
consolidated into Consumer Products' distribution center near Columbus,
Ohio, and (ii) the closure of a packaging operation in Tijuana, Mexico
that was transferred to the Company's operations in Taiwan and China.
In the fourth quarter of fiscal 2000, the Company also recorded an
asset impairment charge of $6.7 million related to the write-off of
goodwill as required by SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Assets to Be Disposed Of", for two product lines
that were acquired by Consumer Products in December 1986 and May 1988.
Also included in restructuring costs is a $1.2 million charge from the
closure of Premier Faucet Corporation in June 2000. In fiscal 1999, the
Company recorded a $2.1 million restructuring charge associated with
the move of one of Consumer Products' warehouses. In fiscal 1998, the
Company recorded an estimated restructuring charge of $24,000 for
warehouse closure costs and other expenses associated with the sale of
LeRan Gas Products.
(4) In September 2000, the Company sold its remaining 7,186,530 shares of
Barnett common stock as part of its comprehensive debt restructuring,
recognizing a net gain of $47.5 million.
(5) The sale of significantly all of the assets and certain liabilities of
these operations are detailed in Note 5 to the Consolidated Financial
Statements, including the $1.1 million loss on the March 31, 2001 sale
of Medal, the $2.0 million loss on the March 31, 2000 sale of Western
American Manufacturing, Inc. and the $10.3 million gain on the January
1, 1999 sale of U.S. Lock.
(6) The Company deferred $8.1 million of the gain on the sale of U.S. Lock
in fiscal 1999 due to its continued ownership interest in Barnett. The
gain was being amortized as Barnett wrote-off the goodwill associated
with the U.S. Lock purchase. In fiscal 2001, the Company recognized the
remaining $7.8 million in deferred gain on the U.S. Lock sale due to
the disposal of its remaining interest in Barnett. See Notes 2 and 5 to
the Consolidated Financial Statements.
(7) Fiscal 2001 amounts reflect the extraordinary gain on the defeasance of
debt at a discount, net of the write-off of deferred financing costs
(see Note 6 to the Consolidated Financial Statements). Fiscal 1998
extraordinary charges represents the write-off of deferred financing
costs resulting from the repayment and refinancing of debt, as further
described in Notes 2 and 7 to the Consolidated Financial Statements.
(8) The results of Medal were consolidated by the Company until its sale,
which was effective March 31, 2001. As a result of the sale, fiscal
2001 includes results for Medal for nine months, while the previous
fiscal years include results for twelve months. See Note 5 to the
Consolidated Financial Statements for further discussion of the sale of
Medal. Fiscal 2001 also includes equity earnings for Barnett through
September 2000, when the remaining Barnett stock was sold. Prior
periods presented include equity earnings from Barnett for the full
fiscal year.
(9) The results of WAMI were consolidated by the Company until its sale,
which was effective March 31, 2000. As a result of the sale, fiscal
2000 only includes nine months of WAMI's results while the previous
fiscal years include results for twelve months. See Note 5 to the
Consolidated Financial Statements for further discussion of the sale of
WAMI.
(10) The results of U.S. Lock were consolidated by the Company until its
sale, which was effective January 1, 1999. As a result of the sale,
fiscal 1999 includes only six months of U.S. Lock's results while the
previous fiscal years include results for twelve months.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company operates in two business segments -- the distribution of
specialty plumbing and hardware products to retailers and the distribution of
plumbing and other products to non-retail businesses. Distribution of plumbing
and hardware products to retailers is primarily conducted through domestic
operations, but is also conducted through direct import programs from the
foreign sourcing, manufacturing and packaging operations. In fiscal 2002,
approximately 22.3% of the Company's foreign operations' sales were to the
Company's domestic wholly-owned operations, respectively, which are eliminated
in consolidation.
SIGNIFICANT DEVELOPMENTS
CURRENT YEAR DEVELOPMENTS
The Company has been a supplier to Kmart for approximately 15 years.
For fiscal 2002, Kmart accounted for $6.3 million, or approximately 8.9 percent
and 13.6 percent of the Company's and Consumer Products' net sales,
respectively. On January 22, 2002, Kmart filed for Chapter 11 bankruptcy
protection. The Company had adequate reserves to account for the loss of its
outstanding account receivable that were not covered by credit insurance at the
time of Kmart's Chapter 11 filing.
In connection with the Chapter 11 filing, Kmart reviewed its vendor
relationships, including the financial commitments required of suppliers. The
Company also assessed the issues associated with maintaining certain of its
supply arrangements with Kmart, including the cost of retaining and supporting
these programs and the cash flow implications of such programs, the risk/reward
profile of each of such programs and the potential opportunities with other
customers. The Company will continue to provide Kmart with approximately $2.2
million in floor and surface protection products in fiscal 2003. The Company is
working to expand its sales to Kmart to include some products in plumbing
repair, a program that ended in June 2002. Although the Company expects a
decrease in monthly revenue initially, we believe that increases in sales with
other customers will ultimately offset any loss of Kmart revenue. However, there
can be no assurances as to whether the Company will continue to supply Kmart
with all of the existing product lines, the level, if any, of future purchases
or the terms and conditions applicable to any future supply relationship.
The Company is evaluating the possible reduction or loss of the
remaining Kmart revenue base and ways to reduce its cost structure to be more in
line with a potentially smaller revenue base. The Company believes that
increases in sales with other customers will ultimately offset any potential
loss of Kmart revenue, however, in the short term it may not be able to absorb
all of the expenses due to this revenue loss.
PRIOR YEAR STRATEGIC AND RESTRUCTURING DEVELOPMENTS
In fiscal 2001, the Company completed its comprehensive financial
restructuring plan (See Note 3 of the Notes to Consolidated Financial Statements
in this Form 10-K), disposing of 7,186,530 shares of Barnett Common Stock and
using the $94.5 million in proceeds as follows:
- paid or reserved for payment approximately $1.35 million for
state and federal taxes associated with the sale of the
Barnett shares.
- reduced its borrowings under its working capital credit
facility by approximately $10 million.
- retired all of its approximately $35.9 million principal
amount of Senior Notes plus accrued interest.
- paid approximately $6.0 million in semi-annual interest due on
June 1, 2000 to the holders of its Deferred Coupon Notes.
- funded a dedicated account with the remaining gross proceeds
of approximately $39.0 million, which was used for the full
satisfaction of the Deferred Coupon Notes, including accrued
interest, upon confirmation of the Joint Plan (as defined
below).
The sale of the Barnett Common Stock and payments outlined above were
made subsequent to the Company and an ad hoc committee representing a
controlling portion of the Deferred Coupon Notes and Senior Notes developing a
jointly sponsored, prepackaged plan of reorganization in advance of its filing
with the United States Bankruptcy Court (the "Joint Plan"). The Joint Plan
received the approval of the holders of approximately 97% of the Deferred Coupon
Notes. Under the Joint Plan, the holders of the Deferred Coupon Notes were the
only impaired class of creditors; none of the Company's operating subsidiaries
or operating divisions were included in the filing and they paid their trade
creditors, employees and other liabilities under normal conditions. On October
2, 2000, the Company filed a petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the United States Court for the District of Delaware. On
November 14, 2000, the Company's Joint Plan was approved by the Court and on
March 14, 2001, the Court closed the Chapter 11 case, and the Company emerged
from bankruptcy.
A historic overview of other strategic and restructuring developments
includes:
12
Effective March 31, 2001, the Company sold nearly all of the assets and
certain liabilities of Medal, which sold a wide range of products to small
independent hardware stores and other independent retailers in a 250-mile radius
of Sharon, Pennsylvania. Over the past several years, Medal's customer base and
operating results had deteriorated due to competitive pressures.
In September 2000, the Company sold its remaining 7,186,530 shares of
Barnett Common Stock for $94.5 million, resulting in a net pre-tax gain of $47.5
million. Barnett was a wholly-owned subsidiary until April 1996, when the
Company completed an initial public offering of Barnett (see Note 2 for
additional information related to Barnett stock transactions). The sale of the
Barnett Common Stock enabled the Company to complete its comprehensive financial
restructuring.
In June 2000, the Company closed its Premier Faucet Corporation
facility in China that manufactured faucets and faucet components, resulting in
a restructuring charge of $1.2 million to write down assets to their fair value
and provide for costs to close the facility. The closure of this operation also
resulted in an additional loss in gross profit of $0.9 million due to the
reduction in sales of $0.4 million and additional charges to cost of sales of
$0.5 million for the realizability of receivables and inventory. The Company
will continue to distribute faucets that have been assembled by the Company,
with components manufactured by outside suppliers.
In the fourth quarter of fiscal 2000, Consumer Products consolidated
certain operations to improve its efficiencies, including the closure of
Consumer Product's Grand Prairie distribution center and packaging operations in
Tijuana, Mexico. Distribution operations for Consumer Products will be conducted
from a national distribution center near Columbus, Ohio, while the packaging
operations will be conducted at the Company's operations in China and Taiwan.
Effective March 31, 2000, the Company sold nearly all of the assets and
certain liabilities of Western American Manufacturing Inc., a company that
manufactured galvanized, black, brass, and chrome pipe nipples in Tijuana,
Mexico, for $1.8 million in cash.
The Company continues to evaluate its operations, including various
options to further streamline its operations, reduce expenses and improve
margins, while distributing high quality products at a fair value to retailers.
The Company intends to examine means to further develop an international
customer base to further utilize the capabilities of the Asian sourcing,
manufacturing and packaging operations.
RESULTS OF OPERATIONS
The following table sets forth certain items reflected in the Company's
consolidated statements of operations as a percentage of net sales:
FISCAL YEAR ENDED JUNE 30,
--------------------------
2002 2001 2000
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 67.1% 69.9% 73.4%
Gross profit 32.9% 30.1% 26.6%
Selling, general and administrative expenses 30.6% 30.5% 33.6%
Restructuring and impairment charges -- 0.5% 12.0%
Operating income (loss) 2.3% (0.9%) (19.0%)
Gain on sale of Barnett, net -- 66.5% --
Loss on sale of Medal, net -- (1.5%) --
Loss on sale of WAMI, net -- -- (2.5%)
Equity earnings of Barnett -- 1.9% 8.1%
Amortization of deferred U.S. Lock gain -- 10.9% 0.3%
Interest expense, net 1.0% 7.5% 22.6%
Income (loss) before income taxes and
extraordinary items 1.3% 69.4% (35.7%)
(Benefit) provision for income taxes (1.0%) 2.4% 0.0%
Income (loss) before extraordinary items 2.3% 67.0% (35.7%)
Extraordinary items -- 73.2% --
Net income (loss) 2.3% 140.2% (35.7%)
13
YEAR ENDED JUNE 30, 2002 VS. JUNE 30, 2001
NET SALES
Net sales for the continuing operations for fiscal 2002 totaled $70.4
million, an increase of $2.4 million as compared to $68.0 million for the same
continuing operations in fiscal 2001. Fiscal 2001 net sales, including Medal, an
operation sold on March 31, 2001, would have been $71.4 million. Net sales for
continuing operations were stronger earlier this fiscal year due to the
expansion of product offerings at certain retailers, an increase in the number
of retail stores served of other retailers and other promotion programs, and
stronger sales by the foreign operations.
The Company adopted a new financial accounting standard in the fiscal
2002 first quarter ended September 30, 2001, resulting in $2.4 million in
slotting fees and other business procurement charges being recorded as a
contra-sale for fiscal 2002. Net sales for the comparable period in fiscal 2001
have been restated, resulting in $3.1 million being recorded as a contra sale,
including $0.9 million of additional business procurement costs originally
reported in operating expenses.
Net sales to retailers amounted to $52.6 million and $54.8 million for
fiscal 2002 and 2001, respectively. The fiscal 2001 net sales to retailers
included $3.4 million of sales from Medal, which was sold in fiscal 2001.
Excluding Medal's net sales, sales to retailers improved in fiscal 2002 due to
strong sales to certain other retailers, primarily WalMart and Lowes, which
offset lower sales to Kmart. Non-retail sales amounted to $25.6 million and
$24.2 million for fiscal 2002 and 2001, respectively.
GROSS PROFIT
Gross profit in fiscal 2002 was $23.2 million, with a gross profit
margin of 32.9%, as compared to the prior year gross profit of $20.7 million and
a gross profit margin of 30.4% for businesses continuing in fiscal 2002.
Including Medal through March 31, 2001, the date it was sold, gross profit for
fiscal 2001 would have been $21.5 million and gross profit margin would have
been 30.1%. The increase in the gross profit and gross profit margin is
primarily attributable to the improved sales to retailers from our domestic
operations, which typically have higher profit margins than sales from our
foreign operations. In addition, the mix of products sold domestically
contributed to the improvement. While domestic retail sales have higher gross
margins than direct import sales and other industrial sales from our foreign
operations, they also have higher SG&A expenses due to the level of additional
support and services provided to customers. The gross profit margin for fiscal
2002 also improved due to the exclusion of sales for Medal, which historically
reported lower profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses for continuing
businesses amounted to $21.5 million and $20.6 million for fiscal 2002 and 2001,
respectively. SG&A expenses as a percentage of net sales decreased to 30.5% for
fiscal 2002 from 30.4% for fiscal 2001. SG&A expenses for fiscal 2001, including
Medal, were $21.8 million for fiscal 2001, or 30.5% of sales. Included in fiscal
2002 SG&A expenses is $0.2 million in fees paid to Congress Financial
Corporation when the Company terminated the bank facility prior to its
expiration and replaced it with a new bank facility from PNC Bank. Also
affecting fiscal 2002 SG&A expenses are foreign exchange losses from the
Company's foreign operations of $0.2 million as compared to a gain of $0.4
million in fiscal 2001 due to the weakness in the US Dollar. The $0.6 million
change in SG&A expenses from the foreign exchange loss accounts for a
significant portion of the increase in expense between years.
RESTRUCTURING CHARGES
There were no restructuring charges in fiscal 2002. In fiscal 2001,
Consumer Products recorded $350,000 in restructuring charges for costs
associated with its closed warehouse facilities. Based on current estimates, the
Company believes it has provided for all remaining costs to be incurred in
connection with the closing of these facilities.
EQUITY EARNINGS OF BARNETT
The Company recorded equity earnings from its ownership interest in
Barnett of $1.4 million for the quarter ended September 30, 2000. As detailed in
Notes 2 and 3 of the Consolidated Financial Statements in this Form 10K, the
Company sold its equity investment in Barnett on September 29, 2000 as part of
its comprehensive financial restructuring.
GAIN ON SALE OF EQUITY INVESTMENT, AMORTIZATION OF DEFERRED GAIN ON SALE OF U.S.
LOCK AND LOSS ON SALE OF AN OPERATION
In fiscal 2001, the Company sold its 7,186,530 shares of Barnett Common
Stock for $13.15 per share in connection with the Barnett Merger, receiving
gross proceeds from the sale of $94.5 million. The Company's equity investment
in Barnett amounted to $44.3 million immediately prior to the sale. The Company
reported a net gain on the sale of Barnett of $47.5 million, after the write-off
of $2.7
14
million in transaction related costs associated with the Barnett sale
and other costs associated with the comprehensive financial restructuring of the
Company.
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million being recognized in the fiscal 1999 third quarter. The remaining
deferred gain was carried on the Company's consolidated balance sheet and was
amortized as Barnett amortized the goodwill associated with the U.S. Lock
acquisition. As a result of the sale of its remaining interest in Barnett, the
Company recognized the remaining $7.8 million of unamortized deferred gain in
the quarter ended September 30, 2000.
Effective March 31, 2001, the Company sold substantially all of the
assets and certain liabilities of Medal to Medal USA Inc. for approximately $0.8
million in cash and the assumption of certain liabilities. The sale of Medal
resulted in a net pretax loss of $1.1 million in the quarter ended March 31,
2001.
INTEREST EXPENSE
In fiscal 2002, net interest expense totaled $0.7 million, as compared
to $5.4 million in fiscal 2001. Average borrowings for fiscal 2002 amounted to
$9.4 million, with a weighted average interest rate of 6.2%, as compared to
fiscal 2001 average borrowings of $44.9 million at a weighted average interest
rate of 11.9%. The Company benefited from the reduction in the prime lending
rate over the past 18 months, as well as the reduction in the working capital
borrowings, which have resulted lower interest expense for fiscal 2002. In
addition, the Company completed its comprehensive financial restructuring in
fiscal 2001 and eliminated the Company's Senior Notes and Deferred Coupon Notes,
thereby significantly reducing the Company's average borrowings for fiscal 2002.
PROVISION FOR INCOME TAXES
In fiscal 2002, the Company's recorded a net tax benefit of $0.7
million, which includes a tax benefit of approximately $0.8 million, partially
offset by a provision for various state and foreign taxes. The tax benefit was
the result of a change in tax law in March 2002, allowing the Company to utilize
its net operating loss carryforward to fully offset its alternative minimum
taxable income for fiscal 2001. The difference between the effective and
statutory tax rates in fiscal 2002 is primarily due to the aforementioned change
in the tax law and a lower tax rate on foreign earnings compared to the domestic
statutory tax rate.
The provision for income taxes amounted to $1.7 million for fiscal
2001. The Company's tax provision for fiscal 2001 provided for federal taxes
based on the alternative minimum tax method and for state and various foreign
taxes. The Company utilized its net operating loss carryforwards to offset its
federal tax due based on the regular method of computing tax liability and taxes
on the debt defeasance income were not provided due to favorable tax treatment
allowed in a bankruptcy.
EXTRAORDINARY CHARGE
The Company did not have any extraordinary items in fiscal 2002. In
fiscal 2001, the Company reported net extraordinary income of $52.2 million from
the retirement of the Company's Deferred Coupon Notes, net of the write-off of
$1.9 million of deferred loan costs associated with the Deferred Coupon Notes
and costs incurred as part of the restructuring process of $2.4 million. In the
quarter ended September 30, 2000, the Company recorded an extraordinary loss of
$57,000, net of a tax benefit of $38,000, to write-off deferred loan costs
associated with the retirement of the Senior Notes.
NET INCOME
The Company reported net income of $1.6 million, or $1.30 per basic and
diluted share, in fiscal 2002. In fiscal 2001, the Company reported significant
transaction related gains and reported net income of $100.0 million, or $82.55
per basic and diluted share. The fiscal 2001 results include the $47.5 million
net gain on the sale of the Barnett Common Stock, the $52.2 million
extraordinary gain, or $43.09 per share, from the defeasance of debt at a
discount, the recognition of $7.8 million of deferred gain from the sale of U.S.
Lock and the loss of $1.1 million on the sale of Medal.
YEAR ENDED JUNE 30, 2001 VS. JUNE 30, 2000
NET SALES
Net sales for fiscal 2001 totaled $71.4 million, as compared to $80.7
million for fiscal 2000. Included in the prior year were $8.3 million in net
sales for WAMI, which was sold effective March 31, 2000, and Premier Faucet,
which was closed in June 2000, and Medal, which was sold effective March 31,
2001. Excluding the results of disposed or closed businesses, net sales for
fiscal 2001 amounted to $68.0 million as compared to $72.4 million in fiscal
2000. The results were lower due to weak sales to retailers in the first half of
fiscal 2001.
15
Net sales for the continuing businesses in fiscal 2001, while 6.1%
lower than fiscal 2000, improved in the second half of fiscal 2001. The
reduction for the fiscal year was due to weaker than anticipated sales to
retailers for the first six months of fiscal 2001, including sales made through
the direct import program from our Asian operations. In part, this reduction was
due to the closure of certain retailers served by the Company. The largest
retailer closing that affected the Company was the loss of Associated
Distributors, Inc., which closed all but 11 of its stores in August 2000. The
Company believes that Associated Distributors, which accounted for nearly $2.2
million of Consumer Products' net sales in fiscal 2000, has changed its strategy
for its remaining stores and has discontinued the distribution of plumbing
products.
Retail sales amounted to $54.8 million and $60.3 million for fiscal
2001 and 2000, respectively. The reduction was primarily the result of the
exclusion of sales for WAMI and Premier Faucet in the fiscal 2001 results, the
inclusion of Medal for only nine months in fiscal 2001 and lower sales to
Barnett.
In fiscal 2002, the Company adopted the Financial Accounting Standards
Board ("FASB") EITF Issue No. 00-25 relating to the accounting for up-front
"slotting fees" charged by retailers for the right to shelf space and has
reclassified financial statements for prior periods. Prior to the adoption of
the new pronouncement, the Company expensed charges of this nature as a separate
expense category, while the new pronouncement recommended the classification as
a contra-sale. Accordingly, fiscal 2001 and 2000 net revenues were restated to
reflect a business procurement charge of $2.15 million and $0.65 million,
respectively, which were previously included in a separate expense category.
Effective March 31, 2001, the Company sold substantially all of the
assets, net of certain liabilities, of Medal. Medal's results of operations have
been included in the operating results of the Company through March 31, 2001,
including $3.4 million and $4.7 million in net sales for fiscal 2001 and fiscal
2000, respectively.
Effective March 31, 2000, the Company sold substantially all of the
assets, net of certain liabilities, of WAMI, excluding trade receivables, trade
payables and certain other liabilities, which were retained by the Company. The
net sales of $2.9 million and an operating loss of $0.4 million for WAMI have
been consolidated in the results of operations through March 31, 2000.
GROSS PROFIT
The gross profit margin for fiscal 2001 improved to 30.1% from 26.6%
for fiscal 2000. The improvement was due to a favorable mix of product sold and
the sale and closure of WAMI and Premier Faucet, respectively, which had lower
gross profit levels. The gross profit for fiscal 2001 and fiscal 2000 were
approximately the same at $21.5 million.
Gross profit for fiscal 2000 was impacted by a $1.7 million fourth
quarter charge in cost of sales at Consumer Products to write-off packaging
material and other inventory associated with the move of its packaging facility
to Asia, and the consolidation of its Grand Prairie, Texas facility into its
National Distribution Center in Groveport, Ohio. In addition, the June 2000
closure of Premier Faucet Corporation resulted in a reduction in gross profit of
$0.9 million due to the reduction in sales of $0.4 million and additional
charges to cost of sales of $0.5 million for the realizability of receivables
and inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses decreased to $21.8 million for fiscal 2001 from $27.1
million for fiscal 2000. Approximately $1.4 million of the prior year SG&A
expenses were attributed to WAMI and Premier Faucet. SG&A expenses for
continuing operations amounted to $20.6 million in fiscal 2001 as compared to
$24.3 million in the prior fiscal year. The majority of the improvement in the
expenses was due to the consolidation of Consumer Product's distribution
operations into one national center, the relocation of its packaging operations
to the Company's facilities overseas and cost improvements at the Company's
foreign operations. In addition, the percentage of SG&A expenses to net sales
improved to 30.5% in fiscal 2001 from 33.6% in the prior fiscal year.
RESTRUCTURING AND IMPAIRMENT CHARGES
In fiscal 2001, Consumer Products recorded $0.35 million in
restructuring charges in the quarter ended September 30, 2000 for costs
associated with its closed warehouse facilities. Based on current estimates, the
Company believes it has provided for all remaining costs to be incurred in
connection with the closing of these facilities.
In fiscal 2000, Consumer Products recorded $9.7 million in
non-recurring charges, including $1.3 million for the consolidation of its
packaged plumbing products under the Plumbcraft(R) brand name, $0.6 million for
the completion of its plan to create a National Distribution Center and
consolidate its Grand Prairie, Texas warehouse into the Groveport, Ohio facility
and the move of the packaging operations from Tijuana, Mexico to the Company's
operations in China, which should reduce certain packaging costs. In the fourth
quarter of fiscal 2000, Consumer Products also recorded an asset impairment
charge of $6.7 million related to the write-off of goodwill as required by SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets to Be
Disposed Of",
16
for two product lines that were acquired by Consumer Products in December 1986
and May 1988. In addition, in June 2000 the Company closed its Premier Faucet
Corporation facility in China that manufactured faucets and faucet components,
resulting in a restructuring charge of $1.2 million to write down assets to
their fair value and provide for costs to close the facility. The closure of
this operation also resulted in an additional loss in gross profit of $0.9
million due to the reduction in sales of $0.4 million and additional charges to
cost of sales of $0.5 million for the realizablity of receivables and inventory.
The Company continues to distribute faucets that have been assembled by the
Company, with components manufactured by outside suppliers.
OPERATING LOSSES:
For fiscal 2001, the Company reported a loss of $0.6 million, as
compared to the loss of $15.4 million for fiscal 2000. The fiscal 2001 loss
included $2.15 million of business procurement charges and $0.35 million of
restructuring charges, while the large loss in fiscal 2000 included $0.65
million of business procurement charges, $9.75 million of restructuring and
impairment charges and higher cost of sales and SG&A expenses for the
realizability of accounts receivable and inventory from the closure of the
Company's Premier Faucet business in fiscal 2000.
EQUITY EARNINGS OF BARNETT
As a result of the sale of the Company's interest in Barnett in
September 2000, the Company only reported equity earnings for the fiscal 2001
first quarter, which amounted to $1.4 million. The Company recorded equity
earnings from its ownership interest in Barnett of $6.5 million for fiscal 2000.
GAIN ON SALE OF EQUITY INVESTMENT AND AMORTIZATION OF DEFERRED GAIN ON SALE OF
U.S. LOCK
On July 10, 2000, the Company announced that it has reached an
agreement to monetize its 7,186,530 shares of Barnett Common Stock for $13.15
per share in connection with the Barnett Merger. On September 1, 2000, as part
of the agreement on the Barnett Merger, the Company sold to Barnett 160,723
shares the Barnett Common Stock to fund the interest payment on its Senior
Notes. The Barnett Merger was approved by Barnett's shareholders on September
27, 2000, and the Company's remaining shares of Barnett Common Stock were sold
on September 29, 2000. The gross proceeds from the sale of the 7,186,530 shares
of Barnett Common Stock amounted to $94.5 million. The Company's equity
investment in Barnett amounted to $44.3 million immediately prior to the sale.
The Company reported a net gain on the sale of Barnett of $47.5 million, after
the write-off of $2.7 million in transaction related costs associated with the
Barnett Sale and other costs associated with the comprehensive financial
restructuring of the Company.
Effective January 1, 1999, the Company sold U.S. Lock to Barnett for
$33.0 million in cash, before certain adjustments and expenses. The sale of U.S.
Lock resulted in a net pretax gain of $18.3 million, with approximately $10.2
million being recognized in the fiscal 1999 third quarter. The remaining $8.1
million was originally reported as a deferred gain in the Company's consolidated
balance sheet due to the Company's continued ownership of 44.2% of Barnett, the
acquirer of U.S. Lock. Until the sale of its remaining interest in Barnett, the
Company recognized the deferred gain as the goodwill generated by the purchase
of U.S. Lock was amortized by Barnett, resulting in an amortization of the
deferred gain of $0.2 million in fiscal 2000. As a result of the sale of its
remaining interest in Barnett, the Company recognized the remaining $7.8 million
of unamortized deferred gain in the quarter ended September 30, 2000.
LOSS ON SALE OF OPERATION, NET
In April 2001, the Company sold substantially all of the assets and
certain liabilities of Medal to Medal USA Inc. for approximately $0.80 million
in cash and the assumption of certain liabilities (the "Medal Sale"). The Medal
Sale was effective March 31, 2001, resulting in a net pretax loss of $1.1
million in the quarter ended March 31, 2001. This operation, which served the
small, independent hardware stores within a 250 mile radius of Sharon,
Pennsylvania, had been losing a significant share of its customer base over the
past several years to the larger do-it-yourself retailers that established
operations throughout the area served by Medal.
Effective March 31, 2000, the Company sold substantially all of the
assets and certain liabilities of WAMI to Niples Del Norte, S.A. de C.V. for
approximately $1.8 million in cash, resulting in a net pretax loss of $2.0
million, including a write-off of approximately $1.0 million of goodwill.
INTEREST EXPENSE
Net interest expense for fiscal 2001 totaled $5.4 million, as compared
to $18.2 million in fiscal 2000. The significant decrease in interest was due to
the use of proceeds from the September 2000 sale of the Barnett Common Stock to
retire the Senior Notes in September 2000, reduce working capital debt and to
retire the Deferred Coupon Notes in November 2000. In addition, the reduction in
the prime rate was also a factor in reducing interest expense. Average
borrowings for fiscal 2001 amounted to $44.9 million, with a weighted average
interest rate of 11.9%, as compared to $140.8 million in fiscal 2000, with a
weighted average interest rate of 12.3%.
17
Included in net interest expense for fiscal 2001 was interest income of $0.3
million earned on the proceeds from the sale of Barnett until they were used to
satisfy the Deferred Coupon Notes.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $1.7 million for fiscal
2001. The Company utilized a portion of its net operating loss carryforwards to
offset its federal tax due based on the regular method of computing tax
liability. The Company's tax provision for fiscal 2001 provides for federal
taxes based on the alternative minimum tax method and for state and various
foreign taxes.
In fiscal 2000, the Company recognized a state tax benefit due to a
refund from a prior year payment, which offset various state and foreign taxes
and resulted in a net tax benefit of $27,000.
EXTRAORDINARY ITEM
In fiscal 2001, the Company reported net extraordinary income of $52.2
million from the retirement of the Company's Deferred Coupon Notes, after the
write-off of $1.9 million of deferred loan costs associated with the Deferred
Coupon Notes and costs incurred as part of the restructuring process of $2.4
million. In addition, in the quarter ended September 30, 2000, the Company
recorded an extraordinary loss of $57,000, net of a tax benefit of $38,000, to
write-off deferred loan costs associated with the retirement of the Senior
Notes.
NET INCOME (LOSS)
The Company's net income for fiscal 2001 amounted to $100.0 million, or
$82.55 per basic and diluted share, as compared to the net loss of $28.8
million, or $23.91 per basic and diluted share, in fiscal 2000. The fiscal 2001
results include the $47.5 million net gain on the sale of the Barnett Common
Stock, the $52.2 million extraordinary gain, or $43.09 per share, from the
defeasance of debt at a discount, the recognition of $7.8 million of deferred
gain from the sale of U.S. Lock and the loss on the sale of Medal.
The Company's fiscal 2000 net loss amounted to $28.8 million, or $23.91
per basic and diluted share. The fiscal 2000 results were affected by $10.4
million of restructuring, impairment and procurement charges, $1.7 million in
costs for the consolidation of the KF(R) packaged plumbing line and $2.0 million
from the loss on the sale of WAMI.
LIQUIDITY AND CAPITAL RESOURCES
In February 2002, the Company refinanced the Loan and Security
Agreement with Congress Financial Corporation, which was scheduled to expire on
June 18, 2002 and replaced it with a working capital and term loan facility from
PNC Bank, NA. The PNC Revolving Credit, Term Loan and Security Agreement ("PNC
Bank Facility") is between Waxman Industries, Inc., Consumer Products, WAMI
Sales and Waxman USA, as borrowers (the "Borrowers"). The PNC Bank Facility
provides, among other things, for revolving credit advances of up to $15.0
million. The Term Loan facility provided an initial loan on the Company's
corporate office building of $1,155,000, to be amortized over 7 years. As of
June 30, 2002, the Company had $7.3 million in borrowings under the revolving
credit line of the facility and had approximately $2.4 million available under
such facility.
The PNC Bank Facility provides for revolving credit advances of (a) up
to 85.0% of the amount of eligible accounts receivable and (b) up to the lesser
of (i) $7.5 million or (ii) 60% of the amount of eligible raw and finished goods
inventory. Revolving credit advances bear interest at a rate equal to the higher
of (a) the PNC Bank, NA base prime rate plus 0.5% or (b) Federal Funds Rate plus
1.0%. The Term Loan advance bears interest at a rate equal to the higher of (a)
the PNC Bank, NA base prime rate plus 1.0% or (b) Federal Funds Rate plus 1.5%.
The PNC Bank Facility includes a letter of credit subfacility of $1.0 million,
with none outstanding at June 30, 2002. Borrowings under the PNC Revolving
Credit Loan are secured by the accounts receivable, inventories, certain general
intangibles, and unencumbered fixed assets of Waxman Industries, Inc., Consumer
Products, WAMI Sales, and a pledge of 65% of the stock of various foreign
subsidiaries. The PNC Bank Facility requires the Borrowers to maintain cash
collateral accounts into which all available funds are deposited and applied to
service the facility on a daily basis. The PNC Bank Facility prevents dividends
and distributions by the Borrowers except in certain limited instances
including, so long as there is no default or event of default and the Borrowers
are in compliance with certain financial covenants, and contains customary
negative, affirmative and financial covenants and conditions. The Company was in
compliance with all loan covenants at June 30, 2002. The PNC Bank Facility also
contains a material adverse condition clause, which allows PNC Bank, NA to
terminate the Agreement under certain circumstances.
In fiscal 2001, the Company completed its comprehensive financial
restructuring plan (see Note 3 of the Notes to Consolidated Financial Statements
in this Form 10K and Management's Discussion and Analysis - Significant
Developments - Prior Year Strategic and Restructuring Developments section in
this Form 10-K for a discussion of the Company's sale of its interest in Barnett
as part of a comprehensive financial reorganization), disposing of 7,186,530
shares of Barnett Common Stock and using the $94.5 million in proceeds as
follows:
18
- paid or reserved for payment approximately $1.35 million for
state and federal taxes associated with the sale of the
Barnett shares.
- reduced its borrowings under its working capital credit
facility by approximately $10 million.
- retired all of its approximately $35.9 million principal
amount of Senior Notes, plus accrued interest.
- paid approximately $6.0 million in semi-annual interest due on
June 1, 2000 to the holders of its Deferred Coupon Notes.
- funded a dedicated account with the remaining gross proceeds
of approximately $39.0 million, which was used for the full
satisfaction of the Deferred Coupon Notes, including accrued
interest, upon confirmation of the Joint Plan.
As part of its comprehensive financial restructuring plan, on October
2, 2000, the Company filed its Chapter 11 Joint Plan of Reorganization with the
courts. On October 4, 2000, the First Day Orders were approved and, based on the
overwhelming support of the holders of 97% of the Deferred Coupon Notes, the
date of November 14, 2000 was set for the confirmation hearing to effectuate
terms of the Joint Plan. The approval of the Joint Plan, along with the
retirement of the Senior Notes and reduction of its bank working capital debt,
improved the Company's financial condition significantly, as well as reduced its
interest expense by approximately $17 million per year.
The Company relies primarily on Consumer Products for cash flow.
Consumer Products' customers include D-I-Y warehouse home centers, home
improvement centers, mass merchandisers and hardware stores. Consumer Products
may be adversely affected by prolonged economic downturns or significant
declines in consumer spending. There can be no assurance that any such prolonged
economic downturn or significant decline in consumer spending will not have a
material adverse impact on Consumer Products' business and its ability to
generate cash flow. Furthermore, Consumer Products has a high proportion of its
sales with a concentrated number of customers. Sales to Consumer Products'
larger customers for fiscal 2002, 2001 and 2000, respectively, were as follows;
Wal-Mart accounted for 29.0%, 25.0% and 13.6%; Lowes accounted for 16.1%, 8.4%
and 5.8%; and Kmart accounted for 13.6%, 11.3% and 16.7%.
The Company has been a supplier to Kmart for approximately 15 years.
For fiscal 2002, Kmart accounted for $6.3 million, or approximately 8.9 percent
and 13.6 percent of the Company's and Consumer Product's net sales,
respectively. On January 22, 2002, Kmart filed for Chapter 11 bankruptcy
protection. The Company had adequate reserves to account for the loss of its
outstanding accounts receivable that were not covered by credit insurance at the
time of Kmart's Chapter 11 filing.
In connection with the Chapter 11 filing, Kmart reviewed its vendor
relationships, including the financial commitments required of suppliers. The
Company also assessed the issues associated with maintaining certain of its
supply arrangements with Kmart, including the costs of retaining and supporting
these programs and the cash flow implications of such programs, the risk/reward
profile of each of such programs and the potential opportunities with other
customers. As a result of these reviews, the Company will retain its floor and
surface protection program with Kmart. However, the continuation of the plumbing
repair program, which generated $4.6 million in sales in fiscal 2002 has been
discontinued until such time that the Company and Kmart can agree to the level,
terms and conditions of any future plumbing supply relationship. The Company
believes its relationship with Kmart is good, however, there can be no
assurances as to the level, if any, of future purchases or the terms and
conditions applicable to any future supply relationship.
The Company is evaluating the possible reduction or loss of the
remaining Kmart revenue base and ways to reduce its cost structure to be more in
line with a potentially smaller revenue base. The Company believes that
increases in sales with other customers will ultimately offset any potential
loss of Kmart revenue, however, in the short-term it may not be able to absorb
all of the expenses due to this additional revenue loss. In the event Consumer
Products were to lose one of its large retail accounts as a customer or one of
its largest accounts were to significantly curtail its purchases from Consumer
Products, there would be material adverse effects until the Company could
further modify Consumer Products' cost structure to be more in line with its
anticipated revenue base. Consumer Products would likely incur significant
charges if additional material adverse changes in its customer relationships
were to occur.
The Company paid $0.2 million and $1.2 million in income taxes in
fiscal 2002 and 2001, respectively. At June 30, 2002, the Company had $17.4
million of available domestic net operating loss carryforwards for income tax
purposes, which will expire in 2010 through 2022.
The Company has total future lease commitments for various facilities
and other leases totaling $4.4 million, of which approximately $0.9 million
relates to fiscal 2003. The Company does not have any other commitments to make
substantial capital expenditures. The fiscal 2003 capital expenditure plan
includes expenditures to improve the efficiencies of the Company's operations,
to continue developing our operations with technology and to provide for certain
expansion plans for the Company's foreign operations.
At June 30, 2002, the Company had working capital of $8.8 million and a
current ratio of 1.5 to 1.
19
DISCUSSION OF CASH FLOWS
Net cash provided by operations was $4.6 million for fiscal 2002,
principally due to the decrease in inventories and the income generated during
the period, which was offset by the decrease in accounts payable and accrued
liabilities. Cash flow used for investments, which primarily represented capital
expenditures, totaled $1.8 million. Cash flow used in financing activities
totaled approximately $2.1 million, comprised primarily of reductions in the
Company's working capital bank facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The U.S. dollar is the functional currency for a significant portion of
the Company's 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Begins on Following Page)
20
MANAGEMENT'S REPORT
The management of Waxman Industries, Inc. has the responsibility for
preparing the accompanying financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally
accepted accounting principles. The financial statements include amounts
that are based on management's best estimates and judgments. Management
also prepared the other information in the annual report and is responsible
for its accuracy and consistency with the financial statements.
The Corporation's financial statements have been audited by Meaden & Moore
Ltd., independent auditors. Management has made available to Meaden & Moore
all of the Corporation's financial records and related data, as well as the
minutes of shareholders' and directors' meetings. Furthermore, management
believes that all representations made to Meaden & Moore Ltd. during its
audit were valid and appropriate.
The Corporation maintains a system of internal accounting controls designed
to provide reasonable assurance that the books and records properly reflect
the transactions of the Company, and that assets are safeguarded against
unauthorized acquisition, use or disposition. The design, monitoring and
revision of internal accounting controls involve, among other things,
management's judgments with respect to the relative cost and the expected
benefits of specific control measures. The Company management reviews and
evaluates internal accounting and operating controls. The Company's
management and the Audit Committee of the Board of Directors also
coordinates with Meaden & Moore Ltd. on the audit of the Company's
financial statements. Meaden & Moore Ltd. also discusses the internal
control procedures with management and communicates with the Audit
Committee of their understanding and adequacy of internal control
procedures.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees of the Company and a majority of directors
who are independent, meets with management periodically and the independent
auditors to ensure that each is carrying out its responsibilities. The
Audit Committee consists of Irving Friedman (chairman) and Mark
Reichenbaum. As part of the new corporate governance provisions established
by the Sarbanes-Oxley Act of 2002, the Audit Committee will (i) hire and
oversee the work of the auditors, (ii) establish procedures for the
handling of anonymous submissions from employees regarding questionable
accounting practices, (iii) provide at least one member who is a "financial
expert", (iv) not accept consulting, advisory or other compensatory fees
from the company and (v) receive reports from the auditors regarding the
company's critical accounting policies and material communications between
the auditors and company management. The independent auditors have full and
free access to the Audit Committee.
Melvin Waxman, Co-Chief Executive Officer and Chairman of the Board
Armond Waxman, Co-Chief Executive Officer and President
Mark Wester, Senior Vice President and Chief Financial Officer
Irving Friedman, Director and Chairman of the Audit Committee
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Waxman Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Waxman
Industries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
June 30, 2002 and 2001, and the related consolidated statement of operations,
stockholders' equity and cash flows for the years ended June 30, 2002 and 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of TWI, International Taiwan, Inc. and CWI International China, Ltd.
two wholly owned subsidiaries for 2002, which statements reflect total assets of
$15,042,000 as of June 30, 2002, and total revenues of $35,236,000, for the year
then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for TWI, International Taiwan and CWI International China, Ltd., is
based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Waxman Industries, Inc. and
Subsidiaries as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
Meaden & Moore, Ltd.
Cleveland, Ohio,
August 9, 2002.
To the Stockholders and Board of Directors of Waxman Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Waxman
Industries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
June 30, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flow for the year ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Waxman Industries, Inc. and
Subsidiaries as of June 30, 2000, and the results of their operations and their
cash flow for the year ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring losses from operations, has not paid its interest payment on its
Deferred Coupon Notes, has a net stockholders' deficit and plans to file a
pre-negotiated consensual joint plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 14 to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result should the Company be unable to continue as a going concern.
Arthur Andersen LLP
Cleveland, Ohio,
August 28, 2000.
22
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(IN THOUSANDS)
ASSETS
2002 2001
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 1,420 $ 740
Trade receivables, net 11,529 12,592
Other receivables 1,979 1,400
Inventories 10,497 11,895
Prepaid expenses 1,902 1,850
-------- --------
Total current assets 27,327 28,477
-------- --------
PROPERTY AND EQUIPMENT:
Land 554 551
Buildings 4,662 4,318
Equipment 11,427 10,415
-------- --------
16,643 15,284
Less accumulated depreciation and
amortization (8,302) (6,996)
-------- --------
Property and equipment, net 8,341 8,288
-------- --------
CASH SURRENDER VALUE OF OFFICERS LIFE
INSURANCE POLICIES 3,265 2,934
UNAMORTIZED DEBT ISSUANCE COSTS, NET 315 142
NOTES RECEIVABLE FROM RELATED PARTIES 548 452
OTHER ASSETS 500 539
-------- --------
$ 40,296 $ 40,832
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
23
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
-------- --------
CURRENT LIABILITIES:
Short-term borrowings $ 7,596 $ 9,870
Current portion of long term debt 235 175
Accounts payable 6,754 6,932
Accrued liabilities 3,975 4,291
-------- --------
Total current liabilities 18,560 21,268
-------- --------
TERM DEBT - LONG-TERM PORTION 935 --
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION
15 532
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value per share:
authorized and unissued 2,000 shares -- --
Common stock, $0.01 par value per share:
22,000 shares authorized; 1,003 and 998
shares issued and outstanding, respectively 99 99
Class B common stock, $.01 par value per
share: 6,000 shares authorized; 214 issued and
outstanding in each year 21 21
Paid-in capital 21,760 21,752
Retained deficit (123) (1,708)
-------- --------
21,757 20,164
Accumulated other comprehensive loss (971) (1,132)
-------- --------
Total stockholders' equity 20,786 19,032
-------- --------
$ 40,296 $ 40,832
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
24
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Net sales $ 70,425 $ 71,370 $ 80,710
Cost of sales 47,253 49,890 59,259
--------- --------- ---------
Gross profit 23,172 21,480 21,451
Selling, general and administrative expenses 21,535 21,763 27,094
Restructuring and impairment charges (Note 4) -- 350 9,720
--------- --------- ---------
Operating income (loss) 1,637 (633) (15,363)
Gain on sale of Barnett, net (Note 2) -- 47,473 --
Loss on sale of Medal, net (Note 5) -- (1,105) --
Loss on sale of WAMI, net (Note 5) -- -- (2,024)
Equity earnings of Barnett -- 1,370 6,511
Amortization of deferred U.S. Lock gain -- 7,815 202
Interest expense 723 5,414 18,201
--------- --------- ---------
Income (loss) before extraordinary item and income
taxes and extraordinary loss 914 49,506 (28,875)
(Benefit) provision for income taxes (671) 1,680 (27)
--------- --------- ---------
Income (loss) before extraordinary gain 1,585 47,826 (28,848)
Extraordinary gain -- 52,222 --
--------- --------- ---------
Net income (loss) $ 1,585 $ 100,048 $ (28,848)
========= ========= =========
Other comprehensive income (loss):
Foreign currency translation adjustment 161 (473) 370
--------- --------- ---------
Comprehensive income (loss) $ 1,746 $ 99,575 $ (28,478)
========= ========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
25
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JUNE 30,
------------------------------
2002 2001 2000
---- ---- ----
Basic income (loss) per share:
Income (loss) before extraordinary gain $ 1.30 $ 39.46 $ (23.91)
Extraordinary gain -- 43.09 --
--------- --------- ---------
Net income (loss) $ 1.30 $ 82.55 $ (23.91)
========= ========= =========
Diluted income (loss) per share:
Income (loss) before extraordinary gain $ 1.30 $ 39.46 $ (23.91)
Extraordinary gain -- 43.09 --
--------- --------- ---------
Net income (loss) $ 1.30 $ 82.55 $ (23.91)
========= ========= =========
Weighted average number of common shares
outstanding 1,215 1,212 1,207
========= ========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
26
] WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDING JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS)
Accumulated Total
Class B Other Stockholders'
Common Common Paid-in Retained Comprehensive (Deficit)
Stock Stock Capital Deficit Income (Loss) Equity
--------- --------- --------- --------- --------- ---------
Balance June 30, 1999 $ 98 $ 21 $ 21,732 $ (72,908) $ (1,029) $ (52,086)
Net loss -- -- -- (28,848) -- (28,848)
Employee Stock Purchase Plan purchases 1 -- 20 -- -- 21
Currency translation adjustment -- -- -- -- 370 370
--------- --------- --------- --------- --------- ---------
Balance June 30, 2000 99 21 21,752 (101,756) (659) (80,543)
Net income -- -- -- 100,048 -- 100,048
Currency translation adjustment -- -- -- -- (473) (473)
--------- --------- --------- --------- --------- ---------
Balance June 30, 2001 99 21 21,752 (1,708) (1,132) 19,032
Net income -- -- -- 1,585 -- 1,585
Conversions of Class B common stock -- -- -- -- -- --
Employee Stock Purchase Plan purchases -- -- 8 -- -- 8
Currency translation adjustment -- -- -- -- 161 161
--------- --------- --------- --------- --------- ---------
Balance June 30, 2002 $ 99 $ 21 $ 21,760 $ (123) $ (971) $ 20,786
========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
27
WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED JUNE 30,
--------------------------
Cash From (Used For): 2002 2001 2000
--------- --------- ---------
Operations:
Net income (loss) $ 1,585 $ 100,048 $ (28,848)
Adjustments to reconcile net income (loss) to net cash used for
operations:
Extraordinary item - debt defeasance -- (52,222) --
Non-cash restructuring and impairment charges -- 1,050 11,677
Gain on sale of Barnett stock, net -- (47,473) --
Loss on sale of Medal -- 1,105 --
Loss on sale of WAMI -- -- 2,024
Non-cash interest 182 83 250
Amortization of deferred U.S. Lock gain -- (7,815) (203)
Equity earnings of Barnett -- (1,3