1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FROM TO
Commission File Number 0-21728
BARNETT INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 59-1380437
(State of Incorporation) (I.R.S. Employer
Identification Number)
3333 LENOX AVENUE
JACKSONVILLE, FLORIDA 32254
(Address of Principal Executive Offices) (Zip Code)
(904)384-6530
(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
16,247,444 shares of Common Stock, $.01 par value, were issued and outstanding
as of October 31, 1999.
1
2
BARNETT INC.
INDEX TO FORM 10-Q
------------------
PAGE
----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and June 30, 1999 3-4
Consolidated Statements of Income for the Three Months Ended September
30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-12
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
- ----------
2
3
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
BARNETT INC.
------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
($ IN THOUSANDS)
ASSETS
SEPT. 30, JUNE 30,
1999 1999
---- ----
(UNAUDITED)
CURRENT ASSETS:
Cash $ 6,830 $ 3,421
Accounts receivable, net 36,462 35,914
Inventories 54,646 52,733
Prepaid expenses 2,323 2,873
--------- ---------
Total current assets 100,261 94,941
--------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements 8,651 8,265
Furniture and fixtures 4,825 4,662
Machinery and equipment 20,595 19,352
Building and improvements 7,285 7,281
--------- ---------
41,356 39,560
Less accumulated depreciation and amortization (17,122) (15,978)
--------- ---------
Property and equipment, net 24,234 23,582
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 27,160 27,353
DEFERRED TAX ASSETS, NET 857 857
OTHER ASSETS 2,747 2,453
--------- ---------
$ 155,259 $ 149,186
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
4
BARNETT INC.
------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 1999 AND JUNE 30, 1999
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPT.30, JUNE 30,
1999 1999
---- ----
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 21,808 $ 20,061
Accrued liabilities 3,286 4,061
Accrued income taxes 1,493 151
Accrued interest 342 342
-------- --------
Total current liabilities 26,929 24,615
-------- --------
Long-Term Debt 33,000 33,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share:
Authorized 40,000 shares; Issued and outstanding
16,237 shares at September 30, 1999 and 16,218 at
June 30, 1999 162 162
Paid-in capital 48,078 47,937
Retained earnings 47,090 43,472
-------- --------
Total stockholders' equity 95,330 91,571
-------- --------
$155,259 $149,186
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
5
BARNETT INC.
------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
1999 1998
---- ----
Net sales $ 67,400 $ 52,391
Cost of sales 45,666 35,215
-------- --------
Gross profit 21,734 17,176
Selling, general and administrative expenses 15,217 11,578
-------- --------
Operating income 6,517 5,598
Interest income (expense) (487) (1)
-------- --------
Income before income taxes 6,030 5,597
Provision for income taxes 2,412 2,156
-------- --------
Net income $ 3,618 $ 3,441
======== ========
Earnings per share:
Basic $ 0.22 $ 0.21
Diluted $ 0.22 $ 0.21
Weighted average shares outstanding:
Basic 16,218 16,212
Diluted 16,219 16,274
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
6
BARNETT INC.
------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
($ IN THOUSANDS)
SEPTEMBER 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 3,618 $ 3,441
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,391 1,040
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable, net (548) 162
Increase in inventories (1,913) (4,298)
Decrease (Increase) in prepaid expenses 550 (388)
Changes in other assets (348) 431
Increase in accounts payable 1,746 2,175
Increase in accrued liabilities 567 1,499
------- -------
Net Cash Provided by Operating Activities 5,063 4,062
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (1,796) (1,718)
------- -------
Net Cash Used in Investing Activities (1,796) (1,718)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements -- 5,618
Repayments under credit agreements -- (6,332)
Net proceeds from issuance of common stock 142 78
------- -------
Net Cash Provided by (Used in) Financing Activities 142 (636)
------- -------
NET INCREASE IN CASH 3,409 1,708
BALANCE, BEGINNING OF PERIOD 3,421 450
------- -------
BALANCE, END OF PERIOD $ 6,830 $ 2,158
======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
6
7
BARNETT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
SEPTEMBER 30, 1999
NOTE 1 - BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of Barnett Inc. (a
Delaware corporation) and its wholly owned subsidiary, U.S. Lock Corporation
(collectively, the "Company"). All material intercompany transactions have been
eliminated.
The consolidated statements of income for the three months ended September 30,
1999 and 1998, the consolidated balance sheet as of September 30, 1999 and the
consolidated statements of cash flows for the three months ended September 30,
1999 and 1998 have been prepared by the Company without audit, while the
consolidated balance sheet as of June 30, 1999 was derived from audited
financial statements. In the opinion of management, these financial statements
include all adjustments, all of which are normal and recurring in nature,
necessary to present fairly the financial position, results of operations and
cash flows as of September 30, 1999 and for all periods presented. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been consolidated or omitted. The Company believes that the disclosures
included are adequate and provide a fair presentation of interim period results.
Interim financial statements are not necessarily indicative of financial
position or operating results for an entire year. It is suggested that these
consolidated interim financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 filed with
the Securities and Exchange Commission.
NOTE 2 - BUSINESS
--------
The Company operates in a single business segment -- the distribution of
plumbing, electrical, hardware and security hardware products, utilizing mail
order catalogs and a telesales program. The Company's various products are
economically similar and do not require separate segment reporting.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1999 and 1998 included
income taxes of $0.2 million and $0.5 million, respectively, and interest of
$525,000 and $15,000, respectively.
NOTE 4 - BUSINESS ACQUISITION
--------------------
On January 8, 1999, Barnett Inc. acquired the U.S. Lock ("U.S. Lock") division
of WOC, Inc., an indirect wholly-owned subsidiary of Waxman Industries, Inc. for
a cash purchase price of approximately $33.0 million and the assumption of
liabilities of approximately $2.0 million. The effective date of the U.S. Lock
acquisition was January 1, 1999.
7
8
The acquisition of U.S. Lock was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based upon their
estimated fair market values. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to approximately $23.0
million. This has been accounted for as goodwill and is being amortized over 40
years using the straight line method.
The following unaudited pro forma information presents a summary of consolidated
results of operations of Barnett Inc. and U.S. Lock as if the acquisition had
occurred at the beginning of fiscal year 1999, with pro forma adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects (dollars
in thousands, except per share data).
Three Months
Ended 9-30-98
- --------------------------------------------------
Net sales $58,940
Net income $3,469
Earnings per share $0.21
- --------------------------------------------------
NOTE 5 - EARNINGS PER SHARE
------------------
Basic earnings per share is calculated based on weighted average number of
shares of common stock outstanding. Diluted earnings per share is calculated
based on the weighted average number of shares of common stock outstanding and
common stock equivalents, consisting of outstanding stock options. Common stock
equivalents are determined using the treasury method for diluted shares
outstanding. The difference between diluted and basic shares outstanding are
common stock equivalents from stock options outstanding in the quarters ended
September 30, 1999 and 1998.
NOTE 6 - IMPACT OF ACCOUNTING STANDARDS
------------------------------
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The statement establishes accounting and reporting
standards for derivative instruments (including certain derivative instruments
embedded in other contracts). SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of this standard is not expected to
have a material impact on reported results of the Company's operations.
NOTE 7 - ACCOUNTING CHANGE
-----------------
In the first quarter of fiscal year 2000, the Company adopted Statement of
Position ("SOP")No. 98-5, "Reporting on the Costs of Start-Up Activities" which
requires expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. The adoption of this SOP resulted in certain
Balance Sheet re-classifications in addition to write-offs charged directly to
operations, of the costs capitalized as of June 30, 1999.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
This Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 that are based
on the beliefs of the Company and its management. When used in this document,
the words "expect", "believe", "intend", "may", "should", "anticipate" and
similar expressions are intended to identify forward looking statements. Such
forward looking 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, the risk that the Company may not be able to
implement its growth strategy in the intended manner, risks associated with
currently unforeseen competitive pressures and risks affecting the Company's
industry such as increased distribution costs 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 these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
OVERVIEW
- --------
The Company is a direct marketer and distributor of an extensive line of
plumbing, electrical, hardware and security hardware products to approximately
73,400 active customers throughout the United States, the Caribbean and South
America. Effective January 1, 1999, the Company acquired U.S. Lock, a division
of WOC, Inc., a wholly-owned subsidiary of Waxman Industries, Inc., for a cash
purchase price of $33.0 million and the assumption of liabilities estimated at
approximately $2.0 million. The Company offers approximately 21,000 name brand
and private label products through its industry-recognized Barnett(R) and U.S.
Lock(R) catalogs and telesales operations. The Company markets its products
through six distinct, comprehensive catalogs that target professional
contractors, independent hardware stores, maintenance managers, liquid propane
gas ("LP Gas") dealers and locksmiths. The Company's staff of over 140
knowledgeable telesales, customer service and technical support personnel work
together to serve customers by assisting in product selection and offering
technical advice. To provide rapid delivery and a strong local presence, the
Company has established a network of 40 distribution centers strategically
located in 34 major metropolitan areas throughout the United States and Puerto
Rico. Through these local distribution centers, approximately 70% of the
Company's orders are shipped to the customer on the same day the order is
received. The remaining 30% of the orders are picked up by the customer at one
of the Company's local distribution centers. The Company's strategy of being a
low-cost, competitively priced supplier is facilitated by its volume of
purchases and offshore sourcing of a significant portion of its private label
products. Products are purchased from over 650 domestic and foreign suppliers.
9
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
---------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
NET SALES
- ---------
Net sales increased $15.0 million, or 28.6% to $67.4 million in the three months
ended September 30, 1999 from $52.4 million in the corresponding prior year
period. Approximately 85.8% of the increase in the Company's net sales was
derived from the Company's telesales operations, primarily resulting from
increased sales by existing telesalespersons and the addition of 11
telesalespersons internally and 24 telesalespersons acquired with U.S. Lock,
compared to the prior year period. The remainder of the net sales increase was
attributable to the Company's outside sales force, integrated account management
teams, factory direct programs and the Company's export division. New customers
garnished from the Company's promotional flyer campaigns contributed
approximately $2.5 million to the net sales increase during the three months
ended September 30, 1999 year. Also contributing to the net sales increase for
three month period was revenue from new product introductions approximating $2.8
million.
As noted above, the Company began an integration of its outside sales force
with its telesales force. The integrated account management provides synergies
with improved customer knowledge, as well as superior customer service and
quicker response times. These integrated account management teams produced
revenue increases in three months ended September 30, 1999 exceeding 21%.
Additionally, the Company's export division, primarily consisting of a small
dedicated international telesales staff, garnished revenue increases in excess
of 30%. Furthermore, the Company continues to invest in its factory direct
programs whereby products are shipped directly to the customer from certain
suppliers and manufacturers. These programs yielded more than 33% revenue
increases in three months ended September 30, 1999.
The Company opened its 33rd distribution center in Birmingham, Alabama in
September 1998 and its 34th distribution center in Parsippany, New Jersey in
March 1999. U.S. Lock opened its 6th distribution center in Dallas, Texas in
March 1999. These three new distribution centers averaged a 38.5% sales increase
over the base business transferred to them in the three months ended September
30, 1999.
GROSS PROFIT
- ------------
Gross profit increased by 26.5% to $21.7 million in the three months ended
September 30, 1999 from $17.2 million in the corresponding prior year period.
Gross profit margin decreased to 32.2% for the three months ended September 30,
1999 from 32.8% for the same period last year, primarily as a result of the
aforementioned increased activity in the Company's direct sales programs, which
typically carry much lower gross profit margins than the Company's warehouse
shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 31.4% to $15.2
million for the three months ended September 30, 1999, from $11.6 million for
the comparable prior year period. The increase is primarily due to combining the
expenses of U.S. Lock along with
10
11
occupancy and other expenses related to the opening of three new distribution
centers in the prior year. Increased expenses also relate to the addition of
eleven telesales personnel and four outside salesmen compared to the prior year
period. Increased wages and training costs related to personnel turnover in
various distribution centers, also contributed to the increased expense level,
as well as the amortization of goodwill related to the U.S. Lock acquisition.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes increased $0.3 million or 11.9% to $2.4 million
for the three months ended September 30, 1999 from $2.2 million for the three
months ended September 30, 1998 primarily as a result of increased operating
income and the non-deductibility of the goodwill amortization.
YEAR 2000
- ---------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or in
miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, to send invoices to
customers, or to engage in similar normal business activities. The Year 2000
issue affects virtually all companies and organizations.
The Company had identified all computer-based systems and applications
(including embedded systems) that are not Year 2000 compliant and determined
what revisions, replacements or updates were needed to achieve compliance.
Management believes that all of the systems are compliant currently.
The Company had put in place project teams dedicated to implementing a Year 2000
solution. The teams have actively worked to achieve the objectives of Year 2000
compliance. The work included the modification of certain existing systems,
replacing hardware and software for other systems, the creation of contingency
plans, and surveying suppliers of goods and services with whom the Company does
business.
The Company used standard methodology with three phases for the Year 2000
compliance project. Phase I included conducting a complete inventory of
potentially affected areas of the business (including information technology and
non-information technology), assessing and prioritizing the information
collected during the inventory, and completing project plans to address all key
areas of the project. Phase II included the remediation and testing of all
mission critical areas of the project, surveying suppliers of goods and services
with whom the Company does business, and the creation of contingency plans to
address potential Year 2000 related problems. Phase III of the project included
the remediation and testing of non- mission critical areas of the project, and
the implementation of contingency plans as may be necessary. The Company has
completed all phases of this project as of September 30, 1999.
The Company used both internal and external resources to reprogram, replace, and
test the software and hardware for Year 2000 compliance. Year 2000 work for
mission critical and most non-mission critical systems and testing of all system
revisions is complete. The expenses associated with this project included both a
reallocation of existing internal resources plus the use of outside services.
Project expenses to date amount to approximately $35,000.
11
12
In addition to addressing internal systems, the Company's Year 2000 project team
has surveyed suppliers of goods and services with whom the Company does
business. This was done to determine the extent to which the Company is
vulnerable to failures by third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies,
including those on which the Company's systems interact, will be timely
converted. A failure to convert by another company on a timely basis or a
conversion by another company that is incompatible with the Company's systems,
may have an adverse effect on the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
(27) Financial Data Schedule
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 1999, the answer is negative or a response has been
previously reported and an additional report of the information need not be made
pursuant to the instructions to Part II.
12
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNETT INC.
REGISTRANT
DATE: NOVEMBER 10, 1999 By: /s/ Andrea Luiga
Andrea Luiga
Chief Financial Officer
(principal financial and
accounting officer)
13