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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998
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
16,211,891 shares of Common Stock, $.01 par value, were issued and outstanding
as of October 31, 1998.
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BARNETT INC.
<TABLE>
<CAPTION>
INDEX TO FORM 10-Q
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PAGE
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PART I. FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and June 30, 1998 3-4
Condensed Statements of Income for the Three Months Ended September
30, 1998 and 1997 5
Condensed Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997 6
Notes to Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES
- ----------
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2
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PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
BARNETT INC.
------------
CONDENSED BALANCE SHEETS
------------------------
SEPTEMBER 30, 1998 AND JUNE 30, 1998
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
SEPT. 30, JUNE 30,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,158 $ 450
Accounts receivable, net 28,704 28,866
Inventories 44,897 40,599
Prepaid expenses 2,527 2,139
--------- ---------
Total current assets 78,286 72,054
--------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements 6,813 6,620
Furniture and fixtures 3,553 3,378
Machinery and equipment 16,182 15,252
Building and improvements 4,088 3,668
--------- ---------
30,636 28,918
Less accumulated depreciation and amortization (12,875) (11,876)
--------- ---------
Property and equipment, net 17,761 17,042
COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 4,774 4,815
DEFERRED TAX ASSETS, NET 716 716
OTHER ASSETS 726 1,157
--------- ---------
$ 102,263 $ 95,784
========= =========
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
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<TABLE>
<CAPTION>
BARNETT INC.
------------
CONDENSED BALANCE SHEETS
------------------------
SEPTEMBER 30, 1998 AND JUNE 30, 1998
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPT.30, JUNE 30,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 18,422 $ 16,247
Accrued liabilities 2,165 2,297
Accrued income taxes 1,996 365
Short-term debt 0 714
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Total current liabilities 22,583 19,623
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share:
Authorized 40,000 shares; Issued and outstanding 16,212 shares
at September 30, 1998 and 16,194 at June 30, 1998 161 161
Paid-in capital 47,821 47,743
Retained earnings 31,698 28,257
-------- --------
Total stockholders' equity 79,680 76,161
-------- --------
$102,263 $ 95,784
======== ========
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
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<TABLE>
<CAPTION>
BARNETT INC.
------------
CONDENSED STATEMENTS OF INCOME
------------------------------
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 52,391 $ 46,769
Cost of sales 35,215 31,049
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Gross profit 17,176 15,720
Selling, general and administrative expenses 11,578 10,394
-------- --------
Operating income 5,598 5,326
Interest income (expense) (1) 15
-------- --------
Income before income taxes 5,597 5,341
Provision for income taxes 2,156 2,058
-------- --------
Net income $ 3,441 $ 3,283
======== ========
Earnings per share:
Basic $ 0.21 $ 0.20
Diluted $ 0.21 $ 0.20
Weighted average shares outstanding:
Basic 16,212 16,171
Diluted 16,274 16,361
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
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<TABLE>
<CAPTION>
BARNETT INC.
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CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
-----------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
($ IN THOUSANDS)
SEPTEMBER 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
<S> <C> <C>
Net income $ 3,441 $ 3,283
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,040 751
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable, net 162 (1,124)
(Increase) in inventories (4,298) (3,357)
(Increase) in prepaid expenses (388) (995)
Changes in other assets 431 92
Increase in accounts payable 2,175 2,460
Increase in accrued liabilities 1,499 1,354
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Net Cash Provided by Operating Activities 4,062 2,464
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CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures, net (1,718) (2,929)
Acquisition of LeRan Gas Products -- (3,200)
------- -------
Net Cash Used In Investing Activities (1,718) (6,129)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under credit agreements 5,618 89
Repayments under credit agreements (6,332) (89)
Net proceeds from issuance of common stock 78 86
------- -------
Net Cash Provided by (Used In) Financing Activities (636) 86
------- -------
NET INCREASE (DECREASE) IN CASH 1,708 (3,579)
BALANCE, BEGINNING OF PERIOD 450 4,429
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BALANCE, END OF PERIOD $ 2,158 $ 850
======= =======
</TABLE>
The accompanying Notes to Condensed Financial Statements
are an integral part of these statements.
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BARNETT INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 - BASIS OF PRESENTATION
---------------------
The condensed financial statements include the accounts of Barnett Inc. (the
"Company"). The condensed statements of income for the three months ended
September 30, 1998 and 1997, the condensed balance sheet as of September 30,
1998 and the condensed statements of cash flows for the three months ended
September 30, 1998 and 1997 have been prepared by the Company without audit,
while the condensed balance sheet as of June 30, 1998 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, 1998 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 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
condensed interim financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998 filed with the
Securities and Exchange Commission.
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 and Puerto Rico. The Company's customer base consists primarily of
professional plumbing and electrical repair and remodeling contractors,
independent hardware stores, maintenance managers and liquid propane gas
dealers. The Company distributes its products to approximately 65,000 active
customers.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash payments during the three months ended September 30, 1998 and 1997 included
income taxes of $0.5 million for each period. Interest payments totaled $15,000
and $0 for the three months ended September 30, 1998 and 1997, respectively.
NOTE 4 - BUSINESS ACQUISITION
--------------------
On July 1, 1997, the Company acquired certain of the assets of LeRan Gas
Products, an operating unit of Waxman Industries, Inc. The acquisition price was
$3.8 million, of which $3.2 million was paid in cash and the remainder was paid
by the issuance to Waxman of 25,000 shares of the common stock of the Company.
The operations related to these assets are not material to the Company's
financial statements.
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NOTE 5 - IMPACT OF ACCOUNTING STANDARDS
------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No.
128 replaces the presentation of Primary Earnings Per Share with a presentation
of Basic Earnings Per Share, which represents net income divided by the weighted
average number of common shares outstanding. Diluted Earnings Per Share
continues to utilize the weighted average number of common shares outstanding
and common stock equivalents, which include outstanding stock options and
warrants. The Company adopted SFAS No. 128 during the second quarter of fiscal
1998. All prior period earnings per share amounts have been restated to comply
with SFAS No. 128.
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 and hardware products to approximately 65,000 active
customers throughout the United States and Puerto Rico. The Company offers
approximately 11,300 name brand and private label products through its
industry-recognized Barnett(R) catalogs and telesales operations. The Company
markets its products through five distinct, comprehensive catalogs that target
professional contractors, independent hardware stores, maintenance managers and
liquid propane gas ("LP GAS") dealers. The Company's staff of approximately 105
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 33 distribution centers strategically
located in 33 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 400 domestic and foreign suppliers.
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On July 1, 1997, the Company acquired certain of the assets of LeRan Gas
Products, an operating unit of Waxman Industries, Inc. The acquisition price was
$3.8 million, of which $3.2 million was paid in cash and the remainder was paid
by the issuance to Waxman of 25,000 shares of the common stock of the Company.
The operations related to these assets are not material to the Company's
financial statements.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH
---------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
NET SALES
- ---------
Net sales increased $5.6 million, or 12.0%, to $52.4 million in the three months
ended September 30, 1998 from $46.8 million in the corresponding prior year
period. Approximately 79.6% 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. A significant portion of the
revenue increases derived from the telesales group was in the direct sales
sector of the business. Direct sales represent products that are shipped
directly to the customer from the original equipment manufacturer. The Company
vastly widened these "non-stock" product offerings in its September 1998
catalog. Direct sales grew at a rate of 88.3% over the prior year quarter,
contributing approximately $1.2 million to the revenue increase for the quarter.
Also contributing to the overall increase in net sales was a net increase of 115
in the total number of products offered by the Company over the past twelve
months. In the current three month period, 214 new products were introduced.
Sales from new product introductions over the last twelve months contributed
approximately $3.3 million to the net sales increase during the period.
Additionally, as a result of the Company's promotional flyer campaign, active
customers grew to 65,000 from 60,000 in the comparable prior year period and
contributed approximately $2.4 million to the net sales increase during the
three month period. Also, the Company opened its thirty-third distribution
center in Birmingham, Alabama on September 1, 1998. The sales contribution from
this new distribution center was not significant for the current three month
period.
GROSS PROFIT
- ------------
Gross profit increased by 9.3% to $17.2 million in the three months ended
September 30, 1998 from $15.7 million in the corresponding prior year period.
Gross profit margin decreased to 32.8% for the three months ended September 30,
1998 from 33.6% for the same period last year, primarily as a result of
competitive pricing pressures across some of the Company's imported product
lines. Also, 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, was a contributing factor to the gross profit
margin erosion.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 11.4% to $11.6
million for the three months ended September 30, 1998, from $10.4 million for
the comparable prior year period. The increase is primarily due to occupancy and
other expenses related to the opening
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of three new distribution centers in the prior year, and the opening of the
Birmingham distribution center in September 1998. These expenses were partially
offset by decreased promotional flyer mailings versus the same period a year ago
and lower warehouse and delivery costs as a result of the increased direct sales
activity.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes increased $0.1 million or 4.8% to $2.2 million
for the three months ended September 30, 1998 from $2.1 million for the three
months ended September 30, 1997 primarily as a result of increased operating
income.
YEAR 2000
- ---------
The Company has identified all computer-based systems and applications
(including embedded systems) that are not Year 2000 ("Y2K") compliant and has
determined what revisions, replacements or updates are needed to achieve
compliance. Management believes that most of the systems are compliant
currently and expects the remainder to be compliant by the end of fiscal 1999.
Any costs associated with bringing the systems into compliance have been
immaterial, as the Company has not incorporated material revisions or updates
to the current systems to bring them into Y2K compliance. The Company has
budgeted approximately $20,000 to bring the remainder of the systems into Y2K
compliance.
As part of the Y2K review, the Company is examining its relationship with
certain key vendors and others with whom it has significant business
relationships to determine to the extent practical the degree of such parties'
Y2K compliance and their effect on the Company's operations. The Company does
not have a relationship with any third party vendor which is material to the
operations of the Company, and thus believes that the failure of any such party
to be Y2K compliant would not have a material adverse effect on the Company.
To date, the Company has not established a formal contingency plan for dealing
with a failure by either the Company or its third party vendors to achieve Y2K
compliance.
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, 1998, 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.
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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 12, 1998 By: /s/ Andrea Luiga
Andrea Luiga
Chief Financial Officer
(principal financial and
accounting officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,158
<SECURITIES> 0
<RECEIVABLES> 29,928
<ALLOWANCES> (1,224)
<INVENTORY> 44,897
<CURRENT-ASSETS> 78,286
<PP&E> 30,636
<DEPRECIATION> (12,875)
<TOTAL-ASSETS> 102,263
<CURRENT-LIABILITIES> 22,583
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 79,519
<TOTAL-LIABILITY-AND-EQUITY> 102,263
<SALES> 52,391
<TOTAL-REVENUES> 52,391
<CGS> 35,215
<TOTAL-COSTS> 35,215
<OTHER-EXPENSES> 11,578
<LOSS-PROVISION> 158
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 5,597
<INCOME-TAX> 2,156
<INCOME-CONTINUING> 3,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,441
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
