<PAGE> 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 MARCH 31, 1996
--------------
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.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 59-1380437
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(State of Incorporation) (I.R.S. Employer
Identification Number)
3333 LENOX AVENUE
JACKSONVILLE, FLORIDA 32254
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(Address of Principal Executive Offices) (Zip Code)
(904)384-6530
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(Registrant's Telephone Number Including Area Code)
NOT APPLICABLE
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(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
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13,078,000 shares of Common Stock, $.01 par value, were issued and outstanding
as of May 7, 1996.
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BARNETT INC.
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INDEX TO FORM 10-Q
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PAGE
----
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Statements of Income for the Nine
Months and Three Months Ended March 31, 1996
and 1995..................................................... 3
Condensed Balance Sheets as of March 31, 1996
and June 30, 1995............................................ 4-5
Condensed Statements of Cash Flows for the
Nine Months Ended March 31, 1996 and
1995......................................................... 6
Notes to Condensed Financial
Statements................................................... 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9-14
PART II. OTHER INFORMATION
- - --------------------------
Item 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES
- - ----------
EXHIBIT INDEX
- - -------------
2
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PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
BARNETT INC.
------------
CONDENSED STATEMENTS OF INCOME
------------------------------
(UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
--------- ---------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 93,399 $ 81,091 $ 32,884 $ 28,852
Cost of sales 62,290 53,466 22,032 18,999
------- ------- ------- -------
Gross profit 31,109 27,625 10,852 9,853
Selling, general and
administrative expenses 19,585 17,508 6,830 6,220
Corporate charge 1,342 1,246 451 671
------- ------- ------- -------
Operating income 10,182 8,871 3,571 2,962
Interest expense 1,909 1,578 674 554
------- ------- ------- -------
Income before income taxes 8,273 7,293 2,897 2,408
Provision for income taxes 3,061 2,690 1,059 890
------- ------- ------- -------
Net income $ 5,212 $ 4,603 $ 1,838 $ 1,518
======= ======= ======= =======
Primary and full diluted
earnings per share: $ 0.44 $ 0.39 $ 0.15 $ 0.13
======= ======= ======= =======
Average shares outstanding 11,952 11,952 12,039 12,039
======= ======= ======= =======
PRO FORMA ADJUSTED FOR INITIAL
PUBLIC OFFERING:
Income before income taxes $ 8,273 $ 7,293 $ 2,897 $ 2,408
Add: Corporate charge 1,342 1,246 451 671
Interest expense 1,909 1,578 674 554
Less: Public company costs 150 150 50 50
------- ------- ------- -------
Pro Forma income before income
taxes 11,374 9,967 3,972 3,583
Provision for income taxes 4,208 3,688 1,470 1,326
------- ------- ------- -------
Pro Forma net income $ 7,166 $ 6,279 $ 2,502 $ 2,257
======= ======= ======= ======
Pro Forma primary and fully
diluted earnings per share: $ 0.45 $ 0.40 $ 0.16 $ 0.14
======= ======= ======= ======
Pro Forma average shares outstanding:
Primary 15,840 15,840 15,840 15,840
======= ======= ======= =======
Fully diluted 15,860 15,860 15,860 15,860
======= ======= ======= =======
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
3
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BARNETT INC.
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CONDENSED BALANCE SHEETS
------------------------
MARCH 31, 1996 AND JUNE 30, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,240 $ 1,155
Accounts receivable, net 15,871 14,481
Inventories 24,154 24,515
Prepaid expenses 785 1,005
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Total current assets 42,050 41,156
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PROPERTY AND EQUIPMENT:
Leasehold Improvements 4,285 3,889
Machinery and Equipment 9,906 8,718
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14,191 12,607
Less accumulated depreciation and amortization (7,837) (6,575)
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Property and equipment, net 6,354 6,032
COST OF BUSINESSES IN EXCESS
OF NET ASSETS ACQUIRED, NET 3,612 3,708
OTHER ASSETS 1,334 1,517
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$ 53,350 $ 52,413
======= =======
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
4
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BARNETT INC.
------------
CONDENSED BALANCE SHEETS
------------------------
MARCH 31, 1996 AND JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 14,487 $ 10,765
Accrued liabilities 1,591 1,220
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Total current liabilities 16,078 11,985
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LONG-TERM DEBT 21,917 18,126
PUSH-DOWN BANK DEBT 1,083 4,874
NOTE PAYABLE TO WAXMAN USA INC. 22,000 -
STOCKHOLDERS' EQUITY:
Serial preferred stock, $.10 par value per share: Authorized 10,000 shares;
Issued and outstanding 2,591 shares at March 31, 1996 and June 30, 1995:
Preferred stock, Series A, $.10 par value per share:
Authorized, issued and outstanding 2,591 at
March 31, 1996 and June 30, 1995 259 259
Common stock, $.01 par value per share:
Authorized 40,000 shares; Issued and outstanding
9,318 at March 31, 1996 and June 30, 1995 93 93
Paid-in capital 8,068 8,068
Retained earnings 6,838 20,054
Advances to Waxman Industries, Inc. (22,986) (11,046)
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Total stockholders' (deficit) equity (7,728) 17,428
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$ 53,350 $ 52,413
======= =======
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
5
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BARNETT INC.
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CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
- - -------------------------------------
<S> <C> <C>
Net income $ 5,212 $ 4,603
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,556 1,500
Changes in assets and liabilities:
(Increase) in accounts receivable, net (1,390) (901)
Decrease in inventories 361 612
Decrease (increase) in prepaid expenses 220 (16)
Increase in accounts payable 3,722 1,058
Increase in accrued liabilities 371 298
------- -------
Net Cash Provided by Operating Activities 10,052 7,154
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CASH FLOWS FROM INVESTING ACTIVITIES:
- - -------------------------------------
Capital expenditures, net (1,584) (1,775)
Change in other assets (15) (13)
------- -------
Net Cash (Used in) Investing Activities (1,599) (1,788)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
- - -------------------------------------
Borrowings under credit agreements 97,682 87,510
Repayments under credit agreements (93,891) (84,744)
Push-down debt (3,791) (2,766)
Advances to Waxman Industries, Inc. (11,940) (8,049)
Capital contribution from Waxman
Industries, Inc. 3,572 2,602
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Net Cash (Used in) Financing Activities (8,368) (5,447)
-------- -------
NET INCREASE (DECREASE) IN CASH 85 (81)
BALANCE, BEGINNING OF PERIOD 1,155 834
------- -------
BALANCE, END OF PERIOD $ 1,240 $ 753
======= =======
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
6
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BARNETT INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(UNAUDITED)
MARCH 31, 1996
NOTE 1 - BASIS OF PRESENTATION
---------------------
The condensed financial statements include the accounts of Barnett Inc. (the
"Company"). The condensed statements of income for the nine months and three
months ended March 31, 1996 and 1995, the condensed balance sheet as of March
31, 1996 and the condensed statements of cash flows for the nine months ended
March 31, 1996 and 1995 have been prepared by the Company without audit. In the
opinion of management, these financial statements include all adjustments
necessary to present fairly the financial position, results of operations and
cash flows as of March 31, 1996 and for all periods presented. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed 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
interim financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Form S-1 filed with
the Securities and Exchange Commission with respect to the Public Offering as
explained in Note 7.
NOTE 2 - BUSINESS
--------
The Company is a direct marketer and distributor of an extensive line of
plumbing, electrical and hardware products to a broad base of customers in the
United States. The Company's customer base consists primarily of professional
plumbing and electrical repair and remodeling contractors, independent hardware
stores and maintenance managers; the Company distributes its products to over
41,000 customers.
NOTE 3 - INCOME TAXES
------------
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 utilizes an asset and liability approach and
deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
Commencing July 1, 1994, the Company began participating in a tax sharing
agreement with Waxman Industries, Inc. ("Waxman"), the Company's former indirect
parent. Under this agreement, the Company's federal tax liability was equal to
the lesser of the federal tax liability calculated on a stand-alone basis or
Waxman's federal tax liability. As Waxman had $75.0 million of available
domestic net operating loss carryforwards at June 30, 1995 for income tax
purposes, which will expire through 2010, the Company had no liability for
federal taxes at June 30, 1995. The Company files separate income tax returns in
certain states based on the results of operations within the applicable states.
As a result of the Public Offering, as explained in Note 7, the Company will no
longer be included in Waxman's consolidated tax return. Therefore, Waxman's
remaining net operating loss carryforwards will not be available to offset the
Company's taxable income after April 3, 1996, the consummation date of the
Public Offering. Deferred taxes and amounts
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payable to Waxman are included in Advances to Waxman Industries, Inc. in the
accompanying balance sheets.
NOTE 4 - IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and SFAS No. 123, "Accounting for Stock-Based Compensation."
Management does not anticipate that the adoption of SFAS No. 121 will have a
material impact on the financial statements as the carrying value of long-lived
assets is deemed to be recoverable. Management is currently evaluating the
impact, if any, the adoption of SFAS No. 123 will have on the financial
statements. Management expects to adopt SFAS No. 121 by June 30, 1996 and SFAS
No. 123 when practicable, but no later than the first quarter of fiscal 1997.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the nine months ended March 31, 1996 and 1995 included
income taxes of $0.3 million and $0.2 million and interest of $1.5 million and
$1.2 million, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
--------------------
At June 30, 1995, the Company's capital structure consisted of 3 shares of
authorized common stock, $.01 par value per share, of which .05 shares were
issued and outstanding. In connection with the Public Offering, as explained in
Note 7, the Company (i) filed an Amended and Restated Certificate of
Incorporation which increased the authorized number of shares of common stock to
40,000, (ii) effected a 238,180 for 1 stock split and (iii) authorized 10,000
shares of preferred stock and issued to Waxman USA Inc. ("Waxman USA"), a
subsidiary of Waxman, 2,591 shares of Series A Preferred Stock in exchange for
2,591 shares of common stock held by Waxman USA. This change has been
retroactively reflected in the accompanying condensed balance sheets.
In addition, the Company declared a dividend to Waxman USA on March 22, 1996
evidenced by a $22.0 million note bearing interest at a rate equal to 10% per
annum, payable over a 10-year period and providing for mandatory prepayments in
the event of and with all of the net proceeds of any sale of equity securities
or the incurrence by the Company of any new indebtedness for borrowed money. In
connection with the consummation of the Public Offering on April 3, 1996, all
advances due from Waxman Industries, Inc. were eliminated and charged against
retained earnings. The elimination of advances in excess of retained earnings
was charged to paid-in capital.
NOTE 7 - SUBSEQUENT EVENTS AND RELATED MATTERS
-------------------------------------
On February 1, 1996, the Company filed a registration statement with the
Securities and Exchange Commission with respect to an initial public offering
(the "Public Offering") of its common stock. On March 28, 1996, the registration
statement with respect to the Public Offering was declared effective and on
April 3, 1996 the Public Offering was consummated. In such offering, 7,207
shares, representing approximately 55.1% of the Company's common stock, were
sold in the aggregate by the Company and Waxman USA at an initial public
offering price per share of $14.00 resulting in aggregate net proceeds to the
Company of approximately $48.5 million. As a result of Waxman USA's ownership of
certain convertible non-voting preferred stock of the Company, Waxman USA
beneficially owns approximately 49.9% of the Company's common stock and
approximately a 54% economic interest of the capital stock of the Company.
Of the $48.5 million of net proceeds received by the Company in the Public
Offering, the Company used (i) approximately $23.0 million to repay all of the
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outstanding indebtedness borrowed by it under a secured credit facility
("Operating Companies Revolving Credit Facility"), (ii) $22.0 million to pay a
dividend evidenced by a note payable to Waxman USA and (iii) $3.5 million for
working capital.
In connection with the Public Offering, the Company entered into a revolving
credit agreement with First Union National Bank of Florida ("First Union") for
an unsecured three-year credit facility providing for borrowings of up to $15.0
million including a letter of credit subfacility of $4.0 million. Borrowings
under this facility will bear interest, at the Company's option, at the prime
rate of First Union minus 75 basis points or LIBOR plus 100 basis points. The
credit facility will provide funds for working capital and general corporate
purposes. The credit facility contains customary affirmative and negative
covenants, including certain covenants requiring the Company to maintain debt to
net worth, interest coverage and current ratios, as well as a minimum net worth
test. The Company is not subject to these financial covenants until the fourth
quarter of its fiscal year ending June 30, 1996.
In connection with the Public Offering, the pro forma income statement data and
pro forma earnings per share data present the results of the Company for the
nine months and three months ended March 31, 1996 after giving effect to each of
the following, in each case as if each had occurred as of the beginning of the
period: (i) the elimination of the corporate charge paid to Waxman, (ii) the
sale by the Company of 3,760 shares of common stock offered thereby resulting in
net proceeds of $48.5 million, as described earlier in this note, used primarily
to repay indebtedness of the Company, thereby resulting in the elimination of
interest expense, and (iii) the incurrence of public company costs. The pro
forma income statement data does not include a one-time non-cash extraordinary
charge of $0.7 million (net of applicable income tax of $0.4 million), or $.05
per share, that will be incurred as a result of the write-off of unamortized
debt issuance costs incurred in connection with the Company prepaying its
borrowings under the Operating Companies Revolving Credit Facility, which
indebtedness included push-down bank indebtedness from Waxman USA. The Company
will record this charge in the quarter ending June 30, 1996, the period in which
the Public Offering was consummated. Pro forma primary and fully diluted
earnings per share totaled 15,840 and 15,860, respectively, for the nine months
and three months ended March 31, 1996. Pro forma average shares outstanding
include the issuance of stock options on March 29, 1996 to certain key employees
of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OVERVIEW
- - --------
The Company and Waxman USA successfully completed an initial public offering on
April 3, 1996 resulting in net proceeds of approximately $48.5 million to the
Company. The proceeds were used to repay approximately $23.0 million of
outstanding indebtedness borrowed by it under the Operating Companies Revolving
Credit Facility, to pay a $22.0 million dividend evidenced by a note payable to
Waxman USA and to use approximately $3.5 million for working capital. See Note 7
for a further discussion of the Public Offering.
The Company's ability to fully effectuate its growth strategy was significantly
constrained during the past three years as a result of Waxman's highly leveraged
capital structure. As a consequence of these liquidity constraints, the Company
pursued its growth strategy by utilizing the limited working capital available
to it to support and expand its operations.
The financial statements have been adjusted to reflect push-down adjustments
from Waxman, consisting of certain bank indebtedness which was repaid by the
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Company on April 3, 1996 with $23.0 million of its net proceeds from the Public
Offering and which was secured by the inventories, accounts receivable, general
intangibles and other unencumbered assets of the Company. The push-down bank
indebtedness consisted of $1.1 million and $4.9 million for the nine months
ended March 31, 1996 and 1995, respectively, and creates the appearance of
greater indebtedness than was actually borrowed directly by the Company. Related
interest expense and debt issue costs have also been pushed down having the
effect of creating higher interest expense than was actually paid by the Company
during those periods. Interest expense, including amortization of debt issue
costs totaled $1.9 million and $1.6 million for the nine months ended March 31,
1996 and 1995, respectively, and $0.7 million and $0.6 million for the three
months ended March 31, 1996 and 1995, respectively.
The Company's net income for fiscal 1996 will include the effect of a one-time,
non-cash extraordinary charge of $0.7 million (net of applicable tax of $0.4
million), or $.05 per share, that will be incurred as a result of the write-off
of unamortized debt issuance costs incurred in connection with the Company
prepaying its borrowings under the Operating Companies Revolving Credit
Facility, which indebtedness includes push-down bank indebtedness from Waxman.
The Company will record this charge in the quarter ending June 30, 1996, the
period in which the prepayment occurred.
Management fees charged to the Company by Waxman are included as corporate
charge in the Company's financial statements. Since July 1, 1994, in accordance
with the prior Intercorporate Agreement among the Company, Waxman and certain of
its subsidiaries, the management fees charged to the Company were the lesser of
2% of net sales or the cost of providing services to the Company. In connection
with the Public Offering, the prior Intercorporate Agreement was, with respect
to the Company, replaced by a new Intercorporate Agreement under which Waxman
will provide certain managerial, administrative and financial services to the
Company, for which the Company will pay Waxman the allocable costs of the
salaries and expenses of Waxman's employees rendering such services. The Company
will also reimburse Waxman for actual out-of-pocket disbursements to third
parties by Waxman required for the provision of such services. Subsequent to
March 31, 1996, such payments to Waxman will be reported in the Company's
financial statements as a component of general and administrative expenses.
Pursuant to the new Intercorporate Agreement, the Company will continue to
provide certain services to the operating divisions of WOC Inc., a subsidiary of
Waxman. Waxman will pay to the Company the allocable costs of the salaries and
expenses of the Company's employees rendering such services. Waxman will also
reimburse the Company for all actual out-of-pocket disbursements to third
parties by the Company required for the provision of such services. For a
full-year period, the Company expects that the net effect of the payments to be
made and/or received pursuant to the new Intercorporate Agreement and the
additional expenses of being an independent public company to be an incremental
$200,000 of expenses.
NINE MONTHS ENDED MARCH 31, 1996 COMPARED WITH
----------------------------------------------
NINE MONTHS ENDED MARCH 31, 1995
--------------------------------
NET SALES
- - ---------
Net sales increased $12.3 million, or 15.2%, to $93.4 million in the nine months
ended March 31, 1996 from $81.1 million in the corresponding prior year period.
Approximately 62.1% of the increase in the Company's net sales is attributable
to the Company's telesales operations, primarily resulting from increased sales
by existing telesalespersons and the addition of 15 telesalespersons compared to
the prior year period. Contributing to the overall increase in net sales was a
net increase of 100 products offered by the Company since the beginning of
fiscal 1996, which generated approximately
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$4.6 million of the net sales increase during the period. Additionally, an
increase in active customers to 41,000 from 37,000 in the comparable period
accounted for approximately $3.5 million of the net sales increase during the
nine month period.
Approximately $2.1 million of the Company's net sales increase is attributable
to the Company's inclusion of direct sales in net sales commencing July 1, 1995.
While these products are shipped directly to the customer from the original
equipment manufacturer, the Company provides services to the customer and
supplier including marketing, technical assistance and credit and collection
activities. Prior to July 1, 1995, direct sales were included in the financial
statements as a net reduction to cost of goods sold. On a comparable period to
period basis, the Company's net sales increase for the nine months ended March
31, 1996 is approximately 13.6%.
GROSS PROFIT
- - ------------
Gross profit increased by 12.6% to $31.1 million in the nine months ended March
31, 1996 from $27.6 million in the corresponding prior year period. Gross profit
margin decreased to 33.3% for the nine months ended March 31, 1996 from 34.1%
for the same period last year primarily as a result of the increased revenues
from the above mentioned direct ship programs. Restating the prior year to
include revenues from the direct sales programs, gross profit margin decreased
to 33.3% from 33.6% in the prior year period. The Company's gross profit margin
was also unfavorably impacted by an atypical product mix related to inclement
weather conditions in the Northeastern United States in January 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- - --------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 11.9%, to $19.6
million for the nine months ended March 31, 1996 from $17.5 million for the
comparable prior year period. The increase is primarily due to the increased
fixed costs, comprised mostly of occupancy costs and depreciation relating to
the expansion of several distribution centers in the prior year, as well as
increased variable selling expenses, primarily attributable to personnel costs
related to the above mentioned addition of 15 telesalespersons. The Company's
fixed costs relate primarily to the Company's distribution center network and
catalogs (excluding personnel costs) and its variable costs relate primarily to
personnel and marketing efforts. SG&A expenses represented 21.0% of net sales in
the nine months ended March 31, 1996, compared to 21.6% in the comparable period
of 1995. The decrease in SG&A expenses as a percentage of net sales was
principally due to the inclusion of direct sales in net sales this period and
the leveraging of fixed costs, primarily administrative expenses, over a larger
sales base.
CORPORATE CHARGE
- - ----------------
Corporate charges increased 7.7% to $1.3 million for the nine months ended March
31, 1996 from $1.2 million for the nine months ended March 31, 1995 and as a
percentage of net sales decreased to 1.4% in fiscal 1996 from 1.5% in fiscal
1995. This decrease was primarily due to the decreased proportion of total
corporate overhead allocated to the Company by Waxman. Corporate charges are
allocations of expenses to the Company that Waxman incurs to support its
corporate activities. These allocations will no longer be charged to the Company
after March 31, 1996. As of March 31, 1996 Waxman and the Company entered into a
new Intercorporate Agreement for services pursuant to which charges allocated to
the Company will only include those expenses incurred by Waxman with respect to
the Company which the Company believes will be considerably less than under the
prior Intercorporate Agreement. These expenses will be included as a component
of SG&A expenses beginning April 1, 1996 and are not expected to have a material
impact on the Company's financial position.
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INTEREST EXPENSE
- - ----------------
Interest expense increased to $1.9 million for the nine months ended March 31,
1996 from $1.6 million for the nine months ended March 31, 1995, an increase of
21.0%. This increase was primarily due to an increase in the weighted average
interest rate of 9.4% in fiscal 1996 versus 9.0% in fiscal 1995 on the Company's
outstanding indebtedness under the Operating Companies Revolving Credit Facility
and push-down bank indebtedness. The increase in the weighted average interest
rate was due to the increased amortization of debt issue costs and other
financing fees in fiscal 1996 compared to the prior year period. Additionally,
$0.1 million of the increase in interest expense was due to interest accrued on
the dividend payable to Waxman USA as explained in Note 6.
As a result of the decision to retire the Company's borrowings under the
Operating Companies Revolving Credit Facility with a portion of its net proceeds
from the Public Offering, all periods included in these financial statements
have been adjusted to reflect $23.0 million of borrowings. This amount
represents the principal balance of the Company's borrowings under the Operating
Companies Revolving Credit Facility at the time the Company's borrowings
thereunder were repaid.
PROVISION FOR INCOME TAXES
- - --------------------------
The provision for income taxes increased $0.4 million or 13.8% to $3.1 million
for the nine months ended March 31, 1996 from $2.7 million for the nine months
ended March 31, 1995. The provision for income taxes for both periods
represented approximately 37% of income before provision for income taxes.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH
-----------------------------------------------
THREE MONTHS ENDED MARCH 31, 1995
---------------------------------
NET SALES
- - ---------
Net sales increased $4.0 million, or 14.0%, to $32.9 million for the three
months ended March 31, 1996 from $28.9 million in the corresponding prior year
period, despite adverse weather conditions in the Northeastern United States in
January 1996. Approximately 61.8% of the increase in the Company's net sales is
attributable to the Company's telesales operations, primarily resulting from
increased sales by existing telesalespersons and the addition of 15
telesalespersons compared to the prior year period. Due to capital constraints
of Waxman, the Company was unable to increase its net new product offerings in
the current quarter. However, approximately $1.4 million of the overall increase
in net sales was attributable to sales of new products introduced during the
last twelve months. Additionally, active customers increased to 41,000 from
37,000 in the comparable prior year period, contributing approximately $1.4
million to the net sales increase during the period.
Approximately $0.9 million of the Company's net sales increase for the current
quarter is attributable to the Company's inclusion of direct sales in net sales
commencing July 1, 1995. While these products are shipped directly to the
customer from the original equipment manufacturer, the Company provides services
to the customer and supplier including marketing, technical assistance and
credit and collection activities. Prior to July 1, 1995, direct sales were
included in the financial statements as a net reduction to cost of goods sold.
On a comparable period to period basis, the Company's net sales increase for the
quarter is approximately 12.1%.
12
<PAGE> 13
GROSS PROFIT
- - ------------
Gross profit increased by 10.1% to $10.9 million in the three months ended March
31, 1996 from $9.9 million in the corresponding prior year period. Gross profit
margin decreased to 33.0% for the quarter from 34.2% for the same period last
year primarily as a result of the increased revenues from the above mentioned
direct ship programs. Restating the prior year to include revenues from the
direct sales programs, gross profit margin decreased to 33.0% of net sales for
the quarter from 33.6% in the prior year period resulting primarily from
unfavorable product mix due to inclement weather conditions in the Northeastern
United States in the month of January 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- - --------------------------------------------
SG&A expenses increased 9.8%, to $6.8 million for the three months ended March
31, 1996 from $6.2 million for the comparable prior year period. The increase is
primarily due to the increased fixed costs, comprised mostly of occupancy costs
and depreciation relating to the expansion of several distribution centers in
the prior year, as well as increased variable selling expenses, primarily
attributable to personnel costs related to the above mentioned addition of 15
telesalespersons. The Company's fixed costs relate primarily to the Company's
distribution center network and catalogs (excluding personnel costs) and its
variable costs relate primarily to personnel and marketing efforts. SG&A
expenses represented 20.8% of net sales in the three months ended March 31,
1996, compared to 21.6% in the comparable period of 1995. The decrease in SG&A
expenses as a percentage of net sales was principally due to the inclusion of
direct sales in net sales commencing July 1, 1995 and the leveraging of fixed
costs, primarily administrative expenses, over a larger sales base.
CORPORATE CHARGE
- - ----------------
Corporate charges decreased 32.8% to $0.5 million for the three months ended
March 31, 1996 from $0.7 million for the three months ended March 31, 1995 and
as a percentage of net sales decreased to 1.4% in fiscal 1996 from 2.3% in
fiscal 1995. This decrease was primarily due to the decreased proportion of
total corporate overhead allocated to the Company by Waxman. Corporate charges
are allocations of expenses to the Company that Waxman incurs to support its
corporate activities. These allocations will no longer be charged to the Company
after March 31, 1996. As of March 31, 1996 Waxman and the Company entered into a
new Intercorporate Agreement for services pursuant to which charges allocated to
the Company will only include those expenses incurred by Waxman with respect to
the Company which the Company believes will be considerably less than under the
prior Intercorporate Agreement. These expenses will be included as a component
of SG&A expenses beginning April 1, 1996 and are not expected to have a material
impact on the Company's financial position.
INTEREST EXPENSE
- - ----------------
Interest expense increased to $0.7 million for the three months ended March 31,
1996 from $0.6 million for the three months ended March 31, 1995, an increase of
21.7%. This increase was primarily due to the $0.1 million of accrued interest
recorded on the dividend payable to Waxman USA as explained in Note 6.
As a result of the decision to retire the Company's borrowings under the
Operating Companies Revolving Credit Facility with a portion of its net proceeds
from the Public Offering, all periods included in these financial statements
have been adjusted to reflect $23.0 million of borrowings. This amount
represents the principal balance of the Company's borrowings under the Operating
Companies Revolving Credit Facility at the time the Company's borrowings
thereunder were repaid.
13
<PAGE> 14
PROVISION FOR INCOME TAXES
- - --------------------------
The provision for income taxes increased $0.2 million or 19.0% to $1.1 million
for the three months ended March 31, 1996 from $0.9 million for the three months
ended March 31, 1995. The provision for income taxes for both periods
represented approximately 37% of income before provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Prior to the Public Offering, the Company declared a dividend to Waxman USA
evidenced by a $22.0 million note payable that required mandatory prepayment in
the event of the Company's sale of its equity securities. The net proceeds of
the Public Offering were $93.4 million. The Company used its portion
(approximately $48.5 million) of such net proceeds (i) to repay its borrowings
(approximately $23.0 million) under the Operating Companies Revolving Credit
Facility, (ii) to pay the $22.0 million note payable to Waxman USA and (iii) to
use $3.5 million for working capital.
At March 31, 1996, the Company had working capital of $26.0 million and a
current ratio of 2.6 to 1.
Net cash provided by operating activities totaled $10.1 million for the nine
months ended March 31, 1996 compared to $7.2 million for the nine months ended
March 31, 1995.
Net cash used in investing activities totaled $1.6 million during the nine
months ended March 31, 1996 compared to $1.8 million for the nine months ended
March 31, 1995. These investments related primarily to capital expenditures for
improved management information systems and expansion and/or relocation of
several of the Company's distribution centers to accommodate new product
offerings.
Net cash used in financing activities was $8.4 million for the nine months ended
March 31, 1996 compared to $5.4 million for the nine months ended March 31,
1995. These amounts primarily represent advances to Waxman Industries, Inc. to
satisfy its debt service obligations.
In connection with the Public Offering, the Company entered into a revolving
credit agreement with First Union for an unsecured three-year credit facility
providing for borrowings of up to $15.0 million including a letter of credit
subfacility of $4.0 million. Borrowings under this facility will bear interest,
at the Company's option, at the prime rate of First Union minus 75 basis points
or LIBOR plus 100 basis points. The credit facility will provide funds for
working capital and general corporate purposes. The credit facility contains
customary affirmative and negative covenants, including certain covenants
requiring the Company to maintain debt to net worth, interest coverage and
current ratios, as well as a minimum net worth test. The Company is not subject
to these financial covenants until the fourth quarter of its fiscal year, June
30, 1996.
Historically, cash flow from operations has been sufficient to fund the
Company's growth. The Company believes that funds generated from operations
will continue to be sufficient to fund future growth. These funds, together
with funds available under the bank credit facility discussed above, are
expected to be sufficient to satisfy the Company's liquidity requirements
for the next 18 months.
14
<PAGE> 15
PART II. OTHER INFORMATION
- - --------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) See Exhibit 27.
b) No Reports on Form 8-K were filed.
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 1996, the answer is negative or a response has been
previously reported and an additional report of the information need not be
made, pursuant to the instructions to Part II.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARNETT INC.
------------
REGISTRANT
DATE: MAY 15, 1996 By: /s/ Andrea Luiga
----------------
Andrea Luiga
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE> 16
EXHIBIT INDEX
-------------
EXHIBIT PAPER (P) OR
- - ------- ------------
NUMBER DESCRIPTION ELECTRONIC (E)
- - ------ ----------- --------------
(27) Financial Data Schedule
(submitted to the Securities
and Exchange Commission in
Electronic Format) E
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<NAME> BARNETT INC.
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<PERIOD-END> MAR-31-1996
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259
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