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UNITED STATES
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, 1999
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 0-21728
BARNETT INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-1380437
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3333 LENOX AVENUE, JACKSONVILLE, FLORIDA 32254
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (904) 384-6530
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(TITLE OF EACH CLASS)
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 the 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
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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 NASDAQ
National Market on September 21, 1999: $82,527,077
Number of shares of Common Stock outstanding as of September 21, 1999:
16,217,769
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement in connection with its 1999 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Annual Report on
Form 10-K from the date such document is filed.
PART I
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, as well as
assumptions made by and information currently available to 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, the risk that the Company may not be able to implement its growth
strategy in the intended manner, price competition, 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 these
described herein as anticipated, believed, estimated, expected or intended.
ITEM 1. BUSINESS
OVERVIEW
Barnett Inc. (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 20,300 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 145 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
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private label products. Products are purchased from over 650 domestic and
foreign suppliers.
The Company believes that its distinctive business model has enabled it
to become a high-volume, cost-efficient direct marketer of competitively priced
plumbing, electrical, hardware and security hardware products. The Company's
approximately 1,000-page catalogs offer an extensive selection of products in an
easy to use format enabling customers to consolidate purchases with a single
vendor. The Company provides an updated version of its catalogs to its customers
an average of three times a year. To attract new customers and offer special
promotions to existing customers, the Company supplements its catalogs with
monthly promotional flyers. The Company's experienced and knowledgeable inbound
telesales staff, located at the Company's centralized headquarters in
Jacksonville, Florida, uses the Company's proprietary information systems to
take customer orders as well as offer technical advice. The Company's highly
trained outbound telesales staff maintains frequent customer contact, makes
telesales presentations, encourages additional purchases and solicits new
customers. The Company's high in-stock position and extensive network of local
distribution centers enable it to fulfill approximately 94% of the items
included in each customer order and provide rapid delivery. As a result of its
emphasis on customer service, the Company's customer retention rate (i.e.,
customers who place orders in the following year) has consistently remained in
the 80% range for the past three years.
The Company has actively pursued increased sales of its private label
products sourced primarily from foreign suppliers. During the fiscal year ended
June 30, 1999, approximately 28.0% of the Company's net sales were attributable
to sales of private label products. Many of the Company's private label products
provide the customer with lower cost, high quality alternatives to brand name
products, as well as providing the Company with higher profit margins. The
Company's private label products are sold under brand names such as
Premier(R),ProPlus(R),Barnett(R),Legend(TM),Electracraft(R),Lumina(TM),U.S.
Lock(R), and Big Duty Deadbolt(R).
INDUSTRY OVERVIEW
The Company competes in a large and highly fragmented industry. The
Company broadly defines its industry as the sale of plumbing, electrical,
hardware and security hardware products primarily to plumbing and electrical
repair and remodeling contractors, maintenance managers, independent hardware
stores, LP Gas dealers and locksmiths. Plumbing and electrical contractors are
primarily responsible for making repairs on a daily basis and generally do not
have time to shop with multiple vendors. Plumbing and electrical contractors,
therefore, value extensive product selection, convenient ordering, reliable,
rapid delivery and other value-added services. In addition, such contractors
typically operate with limited working capital, making competitive pricing
important. Plumbing, electrical and hardware contractors have traditionally
purchased supplies through a variety of distribution channels including:
Local or Regional Broad-Line Suppliers. There are numerous broad-line
suppliers offering product categories similar to those found in the Company's
catalogs. Most of these suppliers are local or regional in scope. Although these
competitors typically use a direct sales force, often supported by a
manufacturer's catalog, they are smaller and therefore tend to offer brand name
products only, and fewer services than offered by the Company. However, many of
these suppliers offer a greater breadth of products than the Company.
Specialty Suppliers. Specialty suppliers focus on a single product
category, such as plumbing or electrical supplies, and often offer a greater
number of products
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within their product categories. Specialty suppliers are typically local or
regional in scope and cannot provide the one-stop shopping sought by many of the
Company's customers.
Industrial Suppliers. There are a few industrial suppliers that include
a limited selection of plumbing, electrical and hardware products in their
merchandise mix but do not focus on the Company's target markets.
Mail Order Distributors. There are several mail order catalog
distributors that offer a broad selection of repair and maintenance products,
have multiple distribution centers and offer rapid delivery services. However,
these companies generally do not have a significant telesales staff or the
Company's geographic scope and typically focus on fewer customer segments.
BUSINESS STRENGTHS
The Company's strategy is to continue to be a high-volume, cost
efficient direct marketer of competitively priced plumbing, electrical, hardware
and security hardware products, providing superior customer service. The Company
believes that the following business strengths are the key elements of this
strategy:
Direct Marketing Sales Approach. The Company displays and promotes its
products through six comprehensive catalogs: The Barnett Professional Catalog,
Maintenance USA, Hardware Express, Barnett of the Caribbean, LeRan Gas Products
and U.S. Lock. These catalogs are targeted, respectively, to such major customer
groups as professional plumbing and electrical repair and remodeling
contractors, maintenance managers, hardware stores, LP Gas dealers and
locksmiths. The Company mailed its first catalog in 1958 and currently mails its
principal catalog to the 73,400 active customers on its proprietary mailing
list. These mailings are supplemented with direct mail promotional flyers to
existing and potential customers on a monthly basis. Typical catalogs mailed by
the Company contain over 11,900 items in the Barnett catalogs and 8,400 in the
U.S. Lock catalog and are approximately 1,000 pages in length. The Company's
objective is to leverage its direct sales experience to sell a broader array of
products to a larger number of customers. The Company's comprehensive catalogs
provide its customers with the opportunity to purchase a substantial portion of
their plumbing, electrical, hardware and security hardware supplies from a
single vendor.
Sophisticated Data Based Telesales. During fiscal 1999, approximately
66.3% of the Company's net sales were generated through the Company's 146
outbound and inbound telesalespersons. Outbound telesalespersons are assigned
account management responsibilities for existing customers with an emphasis on
customer service, new product introductions and new product lines. Inbound
telesalespersons are trained to quickly process orders from existing customers.
All telesalespersons are highly knowledgeable and are required to go through
extensive product and sales training before they begin to work with customers.
The Company's proprietary telesales software provides the telesales staff with
detailed customer profiles and information about products, pricing, promotions
and competition. This data enables the Company to segment its customer base,
analyze mailing effectiveness on a weekly basis, closely track and manage
inventory on a real-time basis and quickly react to, and capitalize on, business
opportunities.
National Network of Distribution Centers. To provide more 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. The distribution centers enable
the Company to be closer to many of its customers for faster product delivery
and to generate incremental over-the-counter sales. The Company's experience
indicates that many of its customers
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prefer to purchase from local suppliers and often choose to pick up their orders
in person. Approximately 30% of the Company's orders are picked up by the
customer at one of the Company's local distribution centers.
Superior Customer Service. As a result of its large in-stock inventory,
the Company is typically able to fulfill approximately 94% of the items included
in each customer order, and, in almost all cases, ships the order within the
same day of receipt of the order. In addition, as a result of its large number
of distribution centers, the Company is able to provide its customers with more
rapid delivery to markets within the continental United States, the Caribbean
and South America. In an effort to maximize sales and increase customer
retention, the Company has structured its telesales staff to create regular
contact between the Company's telesales personnel and each active customer. The
Company's customer retention rate (i.e., customers who place orders in the
following year) has consistently remained in the 80% range for the past three
years.
Competitive Pricing and Private Label Products. Due to the Company's
size, volume of purchases, substantial vendor base and offshore sourcing
capabilities, the Company is frequently able to obtain purchase terms that the
Company believes are more favorable than those available to its competition.
This enables the Company to offer prices that are generally lower than those
available from its competitors. Many of the Company's private label products
provide the customer with lower-cost, high quality alternatives to name brand
products, as well as providing the Company with higher profit margins. During
fiscal 1999, approximately 28.0% of the Company's net sales were attributable to
sales of private label products.
Centralized Management Information Systems. The Company's proprietary
integrated centralized management information systems provide the Company with
real-time information for managing telesales, distribution, customer service,
inventory control and financial controls. The management information systems
also enable the Company to effectively coordinate its purchasing, marketing,
outbound telesales, order entry, shipping and billing. The current system has
enabled the Company to enhance its levels of customer service and increase the
productivity and profitability of its telesales operations, as well as enabling
management to make well informed business decisions. The system can be easily
and cost-effectively upgraded as the Company grows.
MARKETING AND DISTRIBUTION
The Company markets its products nationwide and internationally to
existing and potential customers through regular catalog and promotional
mailings, supported by a telesales operation. Products are shipped from a
network of 40 distribution centers allowing for shipment to and pick up by
customers generally the same day the order is received. The outbound telesales
operation is utilized to make telephonic sales presentations to existing and
potential customers that have received written promotional materials. The
Company's inbound telesalespersons provide customer assistance and take customer
orders. The Barnett outbound and inbound telesales operations are centralized in
Jacksonville, Florida and the U.S. Lock operations are centralized in Long
Island, New York.
Catalogs
The Company's six approximately 1000-page catalogs containing
approximately 20,300 plumbing, electrical, hardware and security hardware
products are mailed to its approximately 73,400 active customers. These catalogs
are supplemented by monthly promotional flyers. The Company's targeted customers
include professional contractors, independent hardware stores, maintenance
managers, LP Gas dealers and
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locksmiths. The Company has been distributing its principal catalog since 1958
and believes that both the Barnett(R) and U.S. Lock(R) names have achieved a
very high degree of recognition among the Company's customers and suppliers.
The Company makes its initial contact with potential customers
primarily through promotional flyers. The Company obtains the names of
prospective customers through the purchase and rental of mailing lists from
outside marketing information services and other sources. Sophisticated
proprietary information systems are used to analyze the results of individual
catalog and promotional flyer mailings. The information derived from these
mailings, as well as information obtained from the Company's telesales
operations, is used to create and/or supplement individual customer profiles and
to target future mailings. The Company updates its mailing lists frequently to
delete inactive customers.
The Company believes that due, in part, to the continuing expansion of
its product offerings in conjunction with continuing its expanded promotional
flyer campaigns, it has the opportunity to market its products to attract new
customers. In fiscal 1999, approximately 18,000 new customers contributed
approximately $21.7 million to net sales.
The Company's in-house art department produces the design and layout
for its catalogs and promotional mailings. The catalogs are indexed and
illustrated, provide simplified pricing and highlight new product offerings.
Telesales
During fiscal 1999, approximately 66.3% of the Company's net sales were
generated through the Company's telesales operation. The Company's telesales
operation has been designed to make ordering its products as convenient and
efficient as possible, thereby enabling the Company to provide superior customer
service. The Company offers its customers a nationwide toll-free telephone
number that currently is staffed by approximately 146 telesales, customer
service and technical support personnel who utilize the Company's proprietary,
on-line order processing system. This sophisticated software provides the
telesales staff with detailed customer profiles and information about products,
pricing, promotions and competition. This data enables the Company to segment
its customer base, analyze mailing effectiveness on a weekly basis, closely
track and manage inventory on a real-time basis and quickly react to and
capitalize on market opportunities.
The Company divides its telesales staff into outbound and inbound
groups. The Company's experience indicates that customer loyalty is bolstered by
the ability of the telesales staff to develop an ongoing personal relationship
with their customers. The Company's highly trained outbound telesales staff
maintains frequent customer contact, makes telesales presentations and
encourages additional purchases. Inbound telesalespersons are trained to quickly
process orders from existing customers, provide technical support, expedite and
process new customer applications as well as handle all customer service. They
endeavor to increase sales by informing customers of price breaks for larger
orders, companion items and replacement items with higher margins. Outbound
telesales persons are also utilized to make telephonic sales presentations to
both potential and existing customers. Also, for several months prior to the
opening of new distribution centers, the Company utilizes its telesales
operation to generate awareness of the Company, its product offerings and the
upcoming opening of new distribution centers located near the target customers.
The Company conducts a customized, in-depth six week training course
for new telesales employees. Training includes the use of role playing and
videotape analysis. Upon satisfactory completion of their training, new
telesales personnel are
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provided with a dedicated, experienced associate who serves as a "coach" for the
next year. In order to better assure high telesales service levels, telesales
supervisors regularly monitor telesales calls.
The direct marketing channel primarily uses product catalogs and
promotional materials to target small to mid-size customers. Barnett markets its
full line catalogs to its existing customer base and mails flyers and other
promotional material to prospective customers and also as supplemental mailings
to existing customers.
Export business
The Company believes that many opportunities for direct marketing to
the Company's existing target markets exist in foreign locations including South
America, the Caribbean and Europe. In October 1997, the Company opened its first
offshore distribution center in Puerto Rico. Although the Company does not
intend to commit material resources to international expansion during the next
few years, the Company has begun to, and intends to continue to, access these
markets through its existing telesales operations and increased mailings of its
promotional flyers. The Company believes that customers in these international
areas are receptive to mail order purchasing and that potential customers would
be attracted to the breadth of the Company's product lines and its competitive
pricing.
Factory Direct Programs
During fiscal 1999, the Company significantly enhanced its factory
direct programs. Factory direct programs represent products shipped directly to
the Company's customers from certain suppliers and manufacturers. The Company
now offers approximately 2,000 factory direct items in its various catalogs.
Distribution Center Network
The Company has established a network of 40 local distribution centers
strategically located in 34 major metropolitan areas throughout the United
States and Puerto Rico. This network enables the Company to provide rapid and
complete product delivery and provides a strong local presence.
The Company's distribution centers range in size from approximately
17,000 square feet to 60,000 square feet. Distribution centers are typically
maintained under operating leases in commercial or industrial centers.
Distribution centers primarily consist of warehouse and shipping facilities, but
also include "city sales counters". These city sales counters typically occupy
approximately 900 square feet, where customers can pick up orders or browse
through a limited selection of promotional items. The Company is often able to
generate incremental sales from customers who pick up their orders.
Over the next few years, the Company plans to add two to four new
distribution centers in major metropolitan areas and has identified ten to
twelve potential locations. The Company opened new distribution centers in
Birmingham, Alabama in September 1998, and Parsippany, New Jersey in March 1999
and is expected to open in Phoenix, Arizona and Orlando, Florida in October
1999. The addition of new distribution centers in new geographic areas, as well
as in geographic areas in which the Company has existing distribution centers,
has increased, and is expected to continue to increase, the Company's overall
level of business. New distribution centers enhance marketing efforts, heighten
the Company's name recognition, generate new over-the-counter business and allow
for faster product delivery.
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The factors considered in site selection include the number of
prospective customers in the local target area, the existing sales volume in
such area and the availability and cost of warehouse space, as well as other
demographic information. The Company has substantial expertise in distribution
center site selection, negotiating leases, reconfiguring space to suit its
needs, and stocking and opening new distribution centers. The average investment
required to open a distribution center is approximately $1,000,000, including
approximately $600,000 for inventory.
PRODUCTS
The Company markets an extensive line of approximately 20,300 plumbing,
electrical, hardware and security hardware products, many of which are sold
under its proprietary trade names and trademarks. This extensive line of
products allows the Company to serve as a single source supplier for many of its
customers. Many of these products are higher margin products bearing the
Company's proprietary trade names and trademarks. In addition, proprietary
products are often the customers' higher margin product offerings.
The Company tracks sales of new products the first year they are
offered and new products that fail to meet specified sales criteria are
discontinued. The Company believes that its customers respond favorably to the
introduction of new product lines in areas that allow the customers to realize
additional cost savings and to utilize the Company's catalogs as a means of
one-stop shopping for many of their needs.
The Company plans to increase its new product offerings by 1,200 to
1,500 items per year over the next three years, which will deepen the Company's
existing product lines and establish new product categories. The Company's name
and reputation have enabled the Company to successfully market a trusted line of
private label products, and accordingly, a significant portion of new product
additions will be private label products. Private label products offer customers
high quality, lower-cost alternatives to the brand name products the Company
sells. The Company's catalogs and monthly promotional flyers emphasize the
comparative value of the Company's private label products. During fiscal 1999,
approximately 28.0% of the Company's net sales were generated by the sale of the
Company's private label products. The Company believes that the introduction of
new product lines will expand the Company's total potential target market.
Examples of new product lines recently introduced include builder's hardware,
heating, venting and air conditioning repair parts and appliance repair parts.
The Company's products are generally covered by a one year warranty, and
returns, which require prior authorization from the Company, have historically
been immaterial in amount.
The following is a discussion of the Company's principal product
groups:
Plumbing Products. The Company sells branded products of leading
plumbing supply manufacturers including Delta(R), Moen(R) and Price Pfister(R).
The Company's private label plumbing products are also sold under its
Barnett(R), Premier(R) and ProPlus(R) trademarks.
Electrical Products. The Company sells branded products of leading
electrical supply manufacturers including Phillips(R), Westinghouse(R),
Honeywell(R) and General Electric(R). Certain of the Company's private label
electrical products are sold under its own proprietary trademarks including
Barnett(R), Premier(R), Electracraft(R) and Lumina(TM).
Hardware Products. The Company sells hardware products of leading
hardware product manufacturers including DAP(R) sealants and caulks,
Rust-oleum(R) paints and
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Milwaukee(R) power tools. Certain of the Company's hardware products are also
sold under its own proprietary Legend(TM) trademark.
Security Hardware Products. The Company sells a full line of security
hardware products including locksets, door closers and locksmith tools including
Kwikset(R) and Schlage(R). Certain of the Company's security hardware products
are also sold under its own proprietary U.S. Lock(R), Legend(TM) and Rx(TM)
trademarks.
HVAC/R Products. The Company began selling a limited number of brand
name HVAC/R products in July 1997 and intends to continue expanding this product
line.
SOURCING
The products sold by the Company are purchased from approximately 600
domestic and 50 foreign suppliers. Domestically manufactured products are
shipped directly to the Company's 40 distribution centers. Products manufactured
abroad are initially shipped to the Company's 5 regional distribution centers
and subsequently redistributed to each of the remaining local distribution
centers. The Company is not dependent upon any single supplier for any of its
requirements. Due to the volume of the Company's purchases and its utilization
of over 650 vendors, it is able to obtain purchase terms it believes to be more
favorable than those available to most local suppliers of plumbing, electrical
and hardware products. Approximately 72.5% of the Company's purchases for the
year ended June 30, 1999 were from domestic manufacturers and 27.5% were from
foreign manufacturers, primarily located in Asia. During fiscal 1999, the
Company purchased approximately 11.6% of its products through Waxman Industries
entities. Although the Company intends to continue to purchase products through
Waxman Industries entities in the future, the Company is not committed to
purchase any products from Waxman Industries.
MANAGEMENT INFORMATION SYSTEMS
The Company has integrated all of its operating units into its
state-of-the-art management information system. This system encompasses all of
the Company's major business functions and was designed to enable the Company to
receive and process orders, manage inventory, verify credit and payment history,
invoice customers, receive payments and manage the Company's proprietary mail
order customer lists. In addition, all of the Company's local distribution
centers are linked to the Company's computer system to provide real-time access
to all necessary information, including inventory availability, order tracking,
and customer creditworthiness. The system can be easily and cost-effectively
upgraded as the Company grows. The Company has adopted procedures to protect the
data in its computer systems and to provide for recovery in the event of
equipment failures. All data systems are backed up to tape daily with backup
tapes stored off-site. End of month tapes, tape archives and production software
kept on-site are stored in a fire-proof safe. Additionally, the Company
maintains a geographically remote "hot site" computer system that is able to
communicate with all of the Company's distribution centers in the event of a
failure of the Company's primary system.
The Company's customers can place orders directly via mail, facsimile,
telephone or through an electronic data interchange ("EDI") transmission.
Utilizing EDI, the Company's customers can send electronic purchase orders
directly to the Company's order entry systems. The Company makes this ordering
process simple for its customers by providing well-developed computer media
containing the Company's product information including item number, product
description, price, package quantity and UPC codes to be loaded directly into
the customer's purchasing system. The Company
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automatically edits and processes EDI orders and sends the majority of EDI
orders received directly to shipping. The few EDI orders that need editing are
sent immediately to a sales representative for review. Through EDI, the Company
can provide faster order turnaround, thereby further fostering customer
satisfaction.
The Company is in the process of developing a fully functional
e-commerce and supply chain website. This website will house most of the
Company's catalogs on-line and provide vendor links, which the Company believes
will strengthen its competitive position in the marketplace. The Company expects
this system to be fully functional at the end of its first fiscal 2000 quarter.
To address the Year 2000 ("Y2K") issues, the Company has identified all
computer-based systems and applications (including embedded systems) that are
not Year 2000 compliant and has determined what revisions, replacements or
updates are needed to achieve compliance. As of August 1, 1999, all necessary
system modifications have been made and implemented except for the remediation
and testing of non-mission critical areas, with an expected completion date of
September 30, 1999.
Costs associated with bringing the systems into compliance have been
immaterial, approximating $35,000, as the Company has not incorporated material
revisions or updates to the current systems to bring them 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 is creating a formal contingency plan for dealing
with a failure by either the Company or its third party vendors to achieve Y2K
compliance.
COMPETITION
The market in which the Company competes is highly fragmented
consisting of many regional and local distributors of plumbing, electrical and
hardware products. The Company believes that competition is primarily based on
price, product quality and selection, as well as service, which includes rapid
order turnaround. The Company believes that its operating strategy positions it
to be an effective competitor in its markets. The Company's major competitors
include local and regional broad line suppliers, specialty suppliers, industrial
suppliers, direct mail distributors and warehouse home centers.
SEASONALITY
The Company's sales are generally consistent throughout the year.
ENVIRONMENTAL REGULATIONS
The Company's facilities are subject to certain federal, state and
local environmental laws and regulations. The Company believes that it is in
compliance with all environmental laws and regulations applicable to it.
EMPLOYEES
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As of June 30, 1999, the Company employed 771 individuals, 187 of whom
were clerical and administrative personnel, 168 of whom were telesales and sales
representatives and 416 of whom were either production or warehouse personnel.
The Company's employees are not unionized. The Company considers its relations
with its employees to be good.
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ITEM 2. PROPERTIES
The Company's headquarters and largest distribution center are located at
3333 Lenox Avenue, Jacksonville, Florida. The building in which the headquarters
are located is leased by the Company through October 31, 2003, and contains
approximately 47,000 square feet of warehouse space and 19,000 square feet of
offices. The Company has built a new 38,000 square foot telesales center in
Jacksonville, Florida, which it occupied in May 1998. This new telesales center
has enabled the Company to continue expanding its telesales staff, and has
enabled the Company to either terminate or consolidate existing leased spaces.
As part of the U.S. Lock acquisition, the Company owns a 59,400 square foot
building in Long Island, New York which houses the U.S. Lock management team and
telesales center, as well as its largest distribution center.
The Company's 40 distribution centers utilize leased space ranging from
17,000 to 60,000 square feet and are all located in the United States and Puerto
Rico. The leases expire at various dates from April 2000 to November 2009. The
Company believes that its distribution facilities are adequate for its current
needs and does not anticipate that it will have any problem leasing additional
space when needed.
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 have a material
impact on the financial position, liquidity or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
11
<PAGE> 13
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the names, ages, positions and offices with the
Company held by the present executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE PRESENTLY HELD
- ---- --- ----------------------------------
<S> <C> <C>
William R. Pray 52 President, Chief Executive Officer and Director
David R. Janosz 53 Vice President--Marketing
Andrea M. Luiga 42 Vice President--Finance, Chief Financial Officer
Alfred C. Poindexter 47 Vice President--Operations
</TABLE>
Mr. William R. Pray was elected President, Chief Executive Officer and
a Director of the Company in February 1993. Mr. Pray was elected President and
Chief Operating Officer of Waxman Industries in June 1995, and resigned these
positions in April 1996, upon consummation of the Company's initial public
offering, (the "Initial Public Offering"). From February 1991 to February 1993,
Mr. Pray was Senior Vice President-- President of Waxman Industries' U.S.
Operations, after serving as President of the Mail Order/Telesales Group (which
included the Company) since 1989. He joined the Company in 1978 as Regional
Sales Manager, became Vice President of Sales and Marketing in 1984 and was
promoted to President in 1987. Mr. Pray is a Director of Waxman Industries.
Mr. David R. Janosz was appointed Vice President--Marketing of the
Company in October 1998. He joined the Company in that position at the same
time. Mr Janosz's previous experience includes tenure in executive positions in
the automotive and industrial distribution industries.
Ms. Andrea M. Luiga was elected Vice President--Finance, Chief
Financial Officer of the Company in February 1993. Ms. Luiga was elected Vice
President and Chief Financial Officer of Waxman Industries in August 1995, and
resigned these positions in April 1996 upon consummation of the Initial Public
Offering. From September 1991 to February 1993, Ms. Luiga was Vice
President--Group Controller of the Mail Order Group of Waxman Industries (which
included the Company) after serving as Group Controller of the Mail Order Group
since October 1989. Ms. Luiga joined the Company in March 1988 as Controller.
Mr. Alfred C. Poindexter was elected Vice President--Operations of the
Company in February 1993. From September 1988 to February 1993, Mr. Poindexter
served as Vice President--Operations of the Company after serving as Director of
Operations of the Company since 1987. He joined the Company in 1983 as
Purchasing Manager.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the NASDAQ National Market
under the symbol "BNTT". The following table sets forth the high and low sales
prices for the Common Stock for each quarter during the past two fiscal years,
as reported by NASDAQ.
High Low
---- ---
Fiscal 1999
First Quarter $ 22.75 $ 8.38
Second Quarter 14.88 7.88
Third Quarter 17.63 8.44
Fourth Quarter 11.13 7.50
Fiscal 1998
First Quarter $ 26.25 $ 19.25
Second Quarter 22.75 17.25
Third Quarter 25.25 21.50
Fourth Quarter 22.50 16.50
HOLDERS OF RECORD
As of September 17, 1999, there were approximately 252 holders of record
of the Common Stock.
DIVIDENDS
The Company presently retains all of its earnings to finance the
expansion of its business and does not anticipate paying cash dividends on its
common stock in the foreseeable future. Any determination to pay cash dividends
in the future will be at the discretion of the Board of Directors after taking
into account various factors, including the Company's financial condition,
results of operations, current and anticipated cash needs and plans for
expansion. In addition, the Company's current credit facility limits the amount
of cash dividends payable on the common stock in any one year to the Company's
net income for such year.
SALE OF UNREGISTERED SECURITIES
On July 1, 1997, the Company acquired certain of the assets of LeRan
Gas Products, an operating unit of Waxman Industries. The acquisition price was
$3.8 million, of which $3.2 million was paid in cash and the remainder was paid
by the issuance of 24,730 shares of the common stock of the Company. The
issuance of shares to the Company's former parent Corporation, Waxman
Industries, Inc., was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 as a transaction not involving a public offering.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the last five fiscal years
through 1999 has been derived from the financial statements of the Company for
such years, which have been audited by Arthur Andersen LLP, independent
certified public accountants, whose report is included elsewhere herein. All
such information is qualified by reference to the Financial Statements included
elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
( Amounts in Thousands, except per share amounts )
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales (1) $241,374 $199,578 $160,068 $127,395 $109,107
Cost of sales 161,183 132,135 105,376 84,748 71,815
-------- -------- -------- -------- --------
Gross profit 80,191 67,443 54,692 42,647 37,292
Selling , general and administrative
expenses 53,906 44,061 35,068 26,877 23,772
Corporate charge -- -- -- 1,342 1,862
-------- -------- -------- -------- --------
Operating income 26,285 23,382 19,624 14,428 11,658
Interest expense 1,217 157 59 1,921 2,139
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item 25,068 23,225 19,565 12,507 9,519
Provision for income taxes 9,853 8,948 7,530 4,625 3,500
-------- -------- -------- -------- --------
Income before extraordinary item 15,215 14,277 12,035 7,882 6,019
Extraordinary loss on early
retirement of debt, net of
tax benefit (2) -- -- -- 724 --
-------- -------- -------- -------- --------
Net income $ 15,215 $ 14,277 $ 12,035 $ 7,158 $ 6,019
======== ======== ======== ======== ========
Earnings per common share:
Basic $ 0.94 $ 0.88 $ 0.76 $ 0.55 $ 0.65
Diluted $ 0.94 $ 0.87 $ 0.75 $ 0.55 $ 0.65
Weighted average shares
outstanding:(3)
Basic 16,195 16,179 15,785 12,914 9,318
Diluted 16,200 16,341 15,987 12,914 9,318
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
( Amounts in Thousands, except per share amounts )
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital $ 70,326 $ 52,431 $ 44,867 $ 30,744 $ 29,171
Total Assets 149,186 95,784 77,015 58,300 52,413
Total long-term debt, excluding
push-down bank debt 33,000 0 0 0 18,126
Push-down bank debt (4) 0 0 0 0 4,874
Stockholders' equity 91,571 76,161 60,611 41,324 17,428
</TABLE>
(1) Prior to July 1, 1995, the Company recorded shipments delivered directly
to the customer from certain suppliers (factory direct) as contributed
margin (net reduction of cost of goods sold). Beginning on July 1, 1995,
the Company began to record these shipments as net sales resulting in an
increase in net sales of $2,979 for the fiscal year ended June 30, 1996.
(2) In accordance with certain Securities and Exchange Commission rules, the
financial statements have been adjusted to reflect push-down adjustments
from Waxman, comprised of certain bank indebtedness ("push-down debt")
which was repaid by the Company with the net proceeds of the Initial
Public Offering. The Company incurred a one-time, non-cash extraordinary
charge of $724 (net of applicable tax benefit of $426) which was a result
of the write-off of unamortized debt issuance costs incurred in connection
with the Company prepaying its borrowings under a secured revolving credit
facility, which indebtedness included push-down bank indebtedness from
Waxman. This charge was recorded in the quarter ended June 30, 1996.
(3) The historical shares outstanding for fiscal years ended 1996 and 1995,
were prior to the Initial Public Offering which changed the Company's
capitalization structure.
(4) Pursuant to certain Securities and Exchange Commission rules, the
Company's historic financial statements for periods prior to the Initial
Public Offering have been adjusted to reflect the push-down of certain
bank indebtedness from Waxman USA that was secured by the accounts
receivable, inventory, certain general intangibles and unencumbered fixed
assets of the Company, WOC and Waxman Consumer Products Group Inc., a
wholly owned indirect subsidiary of Waxman. The push-down bank debt was
retired upon the consummation of the Initial Public Offering and the
application of the net proceeds therefrom.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including but not limited to the
Year 2000 Issue (subsequently defined) constitute 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. The Company offers approximately 20,300 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, locksmiths and maintenance managers. The Company's staff of
over 145 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.
Commensurate with the Company's Initial Public Offering on April 3, 1996
and its secondary stock offering on April 18, 1997, Waxman USA Inc.,("Waxman"),
currently owns 7.2 million shares or 44.3% of the issued and outstanding stock
of the Company.
On July 1, 1997, the Company acquired certain of the assets of LeRan Gas
Products, an operating unit of Waxman. 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 24,730 shares of the common stock of the Company. The
operations related to these assets are not material to the Company's financial
statements.
Effective January 1, 1999, the Company acquired U.S. Lock, a division of
WOC, Inc., a wholly-owned subsidiary of Waxman, for a cash purchase price of
approximately $33.0 million and the assumption of liabilities estimated at
approximately $2.0 million. 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
16
<PAGE> 18
$23.0 million. This has been accounted for as goodwill and is being amortized
over 40 years using the straight line method.
RESULTS OF OPERATIONS
The following table shows the percentage relationship to net sales of items
derived from the Statements of Income.
Percentage of
Net Sales
Fiscal years ended June 30,
1999 1998 1997
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 66.8 66.2 65.8
----- ----- -----
Gross Profit 33.2 33.8 34.2
Selling, general and
administrative expense 22.3 22.1 21.9
----- ----- -----
Operating income 10.9 11.7 12.3
Interest expense 0.5 0.1 0.1
----- ----- -----
Income before income
taxes 10.4 11.6 12.2
Provision for income taxes 4.1 4.4 4.7
----- ----- -----
Net Income 6.3% 7.2% 7.5%
===== ===== =====
FISCAL 1999 VERSUS FISCAL 1998
NET SALES
The Company's net sales for fiscal 1999 totaled $241.4 million compared with
$199.6 million in fiscal 1998, an increase of 20.9%. Net sales from the
acquisition of U.S. Lock accounted for $14.2 million of the revenue increase.
Approximately 77.4% 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 20 telesalespersons internally and
25 telesalespersons acquired with U.S. Lock, compared to the prior year. 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. As a result of the Company's promotional flyer
campaign, the Company added approximately 18,000 new customers during the fiscal
year, and these new customers contributed approximately $21.7 million to the net
sales increase during the year. Also contributing to the net sales increase for
fiscal 1999 was revenue from new product introductions approximating $10.8
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 fiscal 1999 exceeding 24%. Additionally, the Company's
export division, primarily consisting of a small dedicated
17
<PAGE> 19
international telesales staff, garnished revenue increases in excess of 21%.
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 67% revenue increases in fiscal
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 34.4% sales increase
over the base business transferred to them.
GROSS PROFIT
Gross profit increased 18.9% to $80.2 million in fiscal 1999 from $67.4
million in fiscal 1998. Gross profit margins decreased to 33.2% in fiscal 1999
from 33.8% in fiscal 1998 primarily as a result of a higher mix of the
aforementioned factory direct shipments which carry much lower gross profit
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $9.8
million, or 22.3%, to $53.9 million for fiscal 1999 from $44.1 million for
fiscal 1998. The increase was primarily due to the increased sales volume which
required additional staffing and support. Additionally, combining the expenses
of U.S Lock, along with the full year effect of occupancy and other expenses
related to the opening of three new distribution centers in the prior year, and
the opening of three new distribution centers in fiscal 1999 also played
contributing roles to the overall expense increase. 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. SG&A expenses represented 22.3%
of net sales in fiscal 1999 compared to 22.1% of net sales in fiscal 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $0.9 million or 10.1% to $9.9
million for fiscal 1999 from $8.9 million for fiscal 1998. The provision for
income taxes as a percentage of income before provision for income taxes
represents approximately 39.3% for fiscal 1999 and 38.5% for fiscal 1998.
FISCAL 1998 VERSUS FISCAL 1997
NET SALES
The Company's net sales for fiscal 1998 totaled $199.6 million compared with
$160.1 million in fiscal 1997, an increase of 24.7%. Approximately 73.2% 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 7 telesalespersons compared to the prior
year. The remainder of the net sales increase was attributable to the outside
sales force, the Company's export division and the acquisition of LeRan Gas
Products. Contributing to the overall increase in net sales was a net increase
of 1,680 in the total number of products offered by the Company over the past
twelve months which contributed approximately $15.6 million to the net sales
increase during the year. Additionally, as a result of an expanded promotional
flyer campaign, the number of active customers increased to 65,000 from 51,000
in the prior year, and these new customers contributed approximately $19.8
million to the net sales increase during the year.
As noted above, contributing to the Company's net sales increase was a 51.3%
increase in export sales, representing a net sales increase of approximately
$4.2 million for the year. This increase in international sales, which currently
represents approximately 6.2% of net sales, was primarily attributable to the
Company's establishment of a small, dedicated international telesales staff in
the prior year to complement the Company's international promotional flyer
mailings. Also, the Company opened its first off-shore distribution center
18
<PAGE> 20
in Puerto Rico in October 1997 which significantly contributed to the export
sales increase in fiscal 1998. Puerto Rico represented the Company's 31st
distribution center; the Company opened its 30th Distribution center in
Milwaukee, Wisconsin in July, 1997 and its 32nd distribution center in
Nashville, Tennessee in December, 1997. These three new distribution centers
averaged a 48.8% sales increase over the base business transferred to them.
GROSS PROFIT
Gross profit increased 23.3% to $67.4 million in fiscal 1998 from $54.7
million in fiscal 1997. Gross profit margins decreased to 33.8% in fiscal 1998
from 34.2% in fiscal 1997 primarily as a result of the acquisition of LeRan Gas
Products, whose historical margins have been lower due to product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $9.0
million, or 25.6%, to $44.1 million for fiscal 1998 from $35.1 million for
fiscal 1997. The increase was primarily due to the increased sales volume which
required additional staffing and support. Increased promotional flyer mailings
during the year, as well as increased freight and delivery costs associated with
the United Parcel Service strike in the first quarter of the fiscal year, also
played contributing roles to the overall expense increase. Occupancy costs
associated with the expansion of several distribution centers in the prior year
combined with occupancy costs and start up costs related to the three new
distribution centers this fiscal year are also primary reasons for the increased
expense level. SG&A expenses represented 22.1% of net sales in fiscal 1998
compared to 21.9% of net sales in fiscal 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $1.4 million or 18.8% to $8.9
million for fiscal 1998 from $7.5 million for fiscal 1997. The provision for
income taxes as a percentage of income before provision for income taxes
represents approximately 38.5% for fiscal 1998 and fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1999, the Company had working capital of $70.3 million and
a current ratio of 3.9 to 1.
Net cash provided by operating activities totaled $10.5 million for the
year ended June 30, 1999 compared to $7.6 million for the year ended June 30,
1998.
Net cash used in investing activities totaled $40.0 million for the
year ended June 30, 1999 compared to $13.0 million for the year ended June 30,
1998. These investments related primarily to the acquisition of U.S. Lock,
improved management information systems and the expansion and/or relocation of
several of the Company's distribution centers to accommodate new product
offerings.
Net cash provided by financing activities was $32.5 million for the
year ended June 30, 1999 compared to $1.4 million for the year ended June 30,
1998. Net cash provided by financing activities in fiscal 1999 represents a term
loan received in connection with the U.S. Lock acquisition.
In April 1996, 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 borrowings of up to $15.0 million,
including a letter of credit subfacility of $4.0 million. On January 6, 1999, in
connection with the acquisition of U.S. Lock, (See Note 10 to the accompanying
financial statements) the Company entered into an amended and restated credit
agreement, the ("credit agreement"), with First Union. The credit agreement
provides for an unsecured revolving credit facility and letter of credit
facility providing borrowings of up to $15.0 million expiring December 31, 2001,
and a seven year term loan of $33.0 million, proceeds of which were used to
purchase U.S. Lock. Borrowings under the revolving
19
<PAGE> 21
credit facility bear interest at LIBOR plus 75 basis points. The Company is
required to pay a commitment fee of 0.1% per annum on the unused commitment. The
Company entered into an interest rate swap to minimize the risk and costs
associated with changes in interest rates. The swap agreement is a contract to
exchange the variable rate of three-month LIBOR + .825% on its term loan for
fixed interest payments of 6.29%, payable quarterly. The interest rate swap has
a notional amount of $33.0 million and a maturity date of December 31, 2005,
corresponding with the term loan. The interest rate swap had a fair value of
$1.0 million at June 30, 1999. The outstanding principal balance of the term
loan is payable in 19 equal and consecutive quarterly payments of 1/20th of the
original outstanding balance of the term loan commencing on April 30, 2001. All
remaining unpaid principal and all accrued and unpaid interest thereon is due
and payable in full on December 31, 2005.
The credit agreement 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 was in compliance with all covenants at June 30, 1999. At June
30, 1999, there were $0 of borrowings under the revolving credit agreement and
there were $3.2 million of letters of credit outstanding.
Generally, cash flow from operations has been sufficient to fund the
Company's growth. The Company believes that funds generated from operations,
together with funds available under the credit facility discussed above, will be
sufficient to fund the Company's current and foreseeable operational needs and
growth strategy. The Company has budgeted capital expenditures in fiscal 2000 of
approximately $8.0 million, which the Company expects to fund out of cash flow
from operations. These capital expenditures are primarily for (i) expansion and
reprofiling of several of the Company's existing distribution centers and (ii)
enhancements to management information systems.
20
<PAGE> 22
YEAR 2000 ISSUE
- ---------------
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 has identified all computer-based systems and applications
(including embedded systems) that are not Year 2000 compliant and has determined
what revisions, replacements or updates are needed to achieve compliance.
Management believes that most of the systems are compliant currently.
The Company has 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 is using standard methodology with three phases for the
Year 2000 compliance project. Phase I includes 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 includes 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 includes
the remediation and testing of non-mission critical areas of the project, and
the implementation of contingency plans as may be necessary. The Company
completed Phase I and Phase II. Phase III is in process with an expected
completion date of September 30, 1999.
The Company has 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
include both a reallocation of existing internal resources plus the use of
outside services. Project expenses to date amount to an estimated $35,000. The
total remaining expenses associated with the Year 2000 project are estimated to
be between $5,000 - $10,000. These project expenses will be funded through the
Company's operating cash flows.
In addition to addressing internal systems, the Company's Year 2000
project team is surveying suppliers of goods and services with whom the Company
does business. This is being 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.
As part of Phase II of the Year 2000 project, the Company is creating
contingency plans to address potential Year 2000 related problems with key
business processes. These plans are expected to address risks to the Company's
systems as well as risks from third party suppliers, customers, and others with
whom the Company does business. It is recognized that while the Company cannot
eliminate all potential risks, the effect of the risks on the business can be
partially mitigated by creating and testing contingency plans where appropriate.
INFLATION
- ---------
21
<PAGE> 23
The Company does not believe inflation has had a material impact on
earnings during the past several years. Although substantial increases in
product costs, labor, and other operating expenses could adversely affect the
operations of the Company and the home repair and remodeling supply market,
management believes it can recover such increases by increasing prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result
of its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and operations. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. In seeking to minimize the risks
and/or costs associated with such activities, the Company manages its exposure
to such risk through its regular financing activities and by entering into an
interest rate swap (See Note 3 in Item 14a). The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are listed in Item 14(a) and are included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 10, 11, 12 and 13 will be contained
in the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended June 30, 1999
and such information is incorporated herein by reference. Certain information
concerning the executive officers of the Company is set forth in Part I under
the caption "Executive Officers of the Registrant."
22
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The following financial statements and schedules of the Company are included as
Part II, Item 8 of this Form 10-K:
- --------------------------------------------------------------------------------
(1) Consolidated Financial Statements Page
--------------------------------- ----
Report of Independent Certified Public F-1
Accountants
- --------------------------------------------------------------------------------
Consolidated Balance Sheets - June 30, F-2 to F-3
1999 and June 30, 1998
- --------------------------------------------------------------------------------
Consolidated Statements of Income for the F-4
years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1999,
1998 and 1997 F-5
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for
the years ended June 30, 1999, 1998 and
1997 F-6
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-7 to F-14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2) Supplementary Financial Information F-15
-----------------------------------
- --------------------------------------------------------------------------------
(b) Financial Statement Schedule II, Valuation and Qualifying Accounts and
Reserves for each of the three years ended June 30, 1999.
(C) Exhibits:
Exhibit Number Exhibits
- -------------- --------
3.2(2) Amended and Restated Certificate of Incorporation of Barnett
Inc.
3.4(3) Amended and Restated By-Laws of Barnett Inc.
10.1(1) Tax sharing agreement dated May 20, 1994 among Barnett Inc.,
Waxman USA Inc., Waxman Industries, Inc., each member of the
Waxman Group (as defined therein) and each member of the Waxman
USA Group (as defined therein).
10.3(4) Intercorporate Agreement dated March 28, 1996 among Barnett
Inc., Waxman Industries Inc., Waxman Consumer Products Group
Inc., WOC Inc. and TWI, International, Inc.
10.4(4) Registration Rights Agreement dated March 28, 1996 by and
between Barnett Inc. and Waxman Industries, Inc.
10.5(1) Trademark License Agreement dated May 20, 1994 by and between
Barnett Inc. and Waxman Consumer Products Group Inc.
*10.7(3) Amended and Restated Employment Agreement dated March 8, 1996
between Barnett Inc. and William R. Pray.
*10.8(2) Omnibus Incentive Plan of Barnett Inc.
*10.9(2) Stock Purchase Plan of Barnett Inc.
10.10 Amended Revolving Credit Agreement dated January 6, 1999
between Barnett Inc. and First Union National Bank of Florida.
*10.11(5) 1996 Stock Option Plan for Non-Employee Directors of Barnett
Inc.
10.12(4) Standstill Agreement dated March 28, 1996, between Waxman
Industries, Inc., and Barnett Inc.
*10.13(6) Barnett Inc. Profit Sharing and 401(K) Retirement Plan.
23
<PAGE> 25
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
1 Incorporated by reference to the exhibit of the same number contained in
the Company's Registration Statement on Form S-1 (the "Registration
Statement"), Registration No. 333- 829, filed with Securities and Exchange
Commission (the "SEC") on February 1, 1996.
2 Incorporated by reference to the exhibit of the same number contained in
Amendment No. 1 to the Company's Registration Statement, Registration No.
333-829, filed with SEC on March 5, 1996.
3 Incorporated by reference to the exhibit of the same number contained in
Amendment No. 3 to the Company's Registration Statement, Registration No.
333-829, filed with the SEC on March 25, 1996.
4 Incorporated by reference to the exhibit of the same number contained in
the Company's Annual Report on Form 10-K for the year ended June 30, 1996.
5 Incorporated by reference to the exhibit of the same number contained in
the Company's Registration Statement on Form S-1, Registration No.
333-22453, filed with the SEC on February 27, 1997.
6 Incorporated by reference to Exhibit 4.1 contained in the Company's
Registration Statement on Form S-8, Registration No. 333-30485, filed with
the SEC on June 30, 1997.
* Management contract or compensatory plan or arrangement.
(d) Reports on Form 8-K
None
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ WILLIAM R. PRAY
---------------------------
William R. Pray
Dated: September 22, 1999 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ WILLIAM R. PRAY President, Chief Executive Officer and Director September 22, 1999
- ---------------------- (Principal Executive Officer)
William R. Pray
/s/ ANDREA M. LUIGA Vice President - Finance and Chief Financial September 22, 1999
- ---------------------- Officer (Principal Financial and Accounting
Andrea M. Luiga Officer)
/s/ MELVIN WAXMAN Chairman of the Board and Director September 22, 1999
- ----------------------
Melvin Waxman
/s/ ARMOND WAXMAN Vice-Chairman of the Board and Director September 22, 1999
- ----------------------
Armond Waxman
/s/ SHELDON ADELMAN Director September 22, 1999
- ----------------------
Sheldon Adelman
/s/ MORRY WEISS Director September 22, 1999
- ----------------------
Morry Weiss
</TABLE>
25
<PAGE> 27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Barnett Inc.and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Barnett
Inc. (a Delaware corporation) and subsidiaries, as of June 30, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Barnett Inc. and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 8, Financial
Statements and Supplementary Data, is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, based on our audits, fairly states in all material aspects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
August 16, 1999
F-1
<PAGE> 28
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
June 30,
--------
1999 1998
---- ----
Current Assets:
Cash $ 3,421 $ 450
Accounts receivable, net 35,914 28,866
Inventories 52,733 40,599
Prepaid expenses 2,873 2,139
--------- ---------
Total current assets 94,941 72,054
--------- ---------
Property and Equipment:
Machinery and equipment 19,352 15,252
Furniture and fixtures 4,662 3,378
Leasehold improvements 8,265 6,620
Building and improvements 7,281 3,668
--------- ---------
39,560 28,918
Less accumulated depreciation
and amortization (15,978) (11,876)
--------- ---------
23,582 17,042
--------- ---------
Cost of Businesses in Excess of Net
Assets Acquired, net 27,353 4,815
Deferred Tax Assets, net 857 716
Other Assets 2,453 1,157
--------- ---------
$ 149,186 $ 95,784
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-2
<PAGE> 29
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
--------
1999 1998
---- ----
Current Liabilities:
Accounts payable $ 20,061 $ 16,247
Accrued liabilities 4,061 2,297
Accrued income taxes 151 365
Accrued interest 342 --
Short - term debt -- 714
-------- --------
Total current liabilities 24,615 19,623
-------- --------
Commitments and Contingencies (Notes
3,5,6,7,8, and 9)
Long - Term Debt 33,000 --
Stockholders' Equity:
Serial preferred stock, $ 0.10 par value,
10,000 shares authorized, 0 shares
issued and outstanding at June 30, 1999
and 1998 -- --
Common stock, $ 0.01 par value,
40,000 shares authorized, 16,218 and
16,194 issued and outstanding at
June 30, 1999 and 1998, respectively 162 161
Paid-in capital 47,937 47,743
Retained earnings 43,472 28,257
-------- --------
91,571 76,161
-------- --------
$149,186 $ 95,784
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-3
<PAGE> 30
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
---- ---- ----
Net sales $241,374 $199,578 $160,068
Cost of sales 161,183 132,135 105,376
-------- -------- --------
Gross profit 80,191 67,443 54,692
Selling, general and administrative
expenses 53,906 44,061 35,068
-------- -------- --------
Operating income 26,285 23,382 19,624
Interest expense, net 1,217 157 59
-------- -------- --------
Income before provision for
income taxes 25,068 23,225 19,565
Provision for income taxes 9,853 8,948 7,530
-------- -------- --------
Net income $ 15,215 $ 14,277 $ 12,035
======== ======== ========
Earnings per common share:
Basic $ 0.94 $ 0.88 $ 0.76
Diluted $ 0.94 $ 0.87 $ 0.75
Weighted average shares used:
Basic 16,195 16,179 15,785
Diluted 16,200 16,341 15,987
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-4
<PAGE> 31
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
SERIAL STOCK-
PREFERRED COMMON PAID-IN RETAINED HOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 127 $ 143 $ 39,109 $ 1,945 $ 41,324
Net income 12,035 12,035
Net proceeds from issuance
of common stock 4 6,649 6,653
Conversion of 1,271 shares of
preferred stock to common
stock (127) 13 114 --
Common stock issued for:
Exercise of options 184 184
Employee stock plans 415 415
-------- -------- -------- -------- --------
Balance June 30, 1997 -- 160 46,471 13,980 60,611
Net income 14,277 14,277
Common stock issued for:
Acquisition of LeRan Gas Products 600 600
Exercise of options 1 415 416
Employee stock plans 195 195
Tax benefits related to
stock option plans 62 62
-------- -------- -------- -------- --------
Balance June 30, 1998 -- 161 47,743 28,257 76,161
Net income 15,215 15,215
Common stock issued for:
Exercise of options 1 79 80
Employee stock plans 49 49
Tax benefits related to
stock option plans 66 66
-------- -------- -------- -------- --------
Balance June 30, 1999 $ -- $ 162 $ 47,937 $ 43,472 $ 91,571
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-5
<PAGE> 32
BARNETT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS:
Net income $ 15,215 $ 14,277 $ 12,035
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 4,933 3,813 2,406
Deferred taxes (141) (365) 149
Changes in assets and liabilities
(net of businesses acquired):
Accounts receivable, net (4,160) (6,186) (4,157)
Inventories (5,944) (4,840) (6,410)
Prepaid expenses (791) (753) (262)
Other assets (1,213) (295) (1,373)
Accounts payable 2,088 2,258 (574)
Accrued liabilities 516 (292) 2
-------- -------- --------
Net cash provided by operations 10,503 7,617 1,816
-------- -------- --------
INVESTMENTS:
Capital expenditures, net (7,013) (9,783) (6,346)
Acquisition of LeRan Gas Products -- (3,200) --
Acquisition of U.S. Lock (33,000) -- --
-------- -------- --------
Net cash used for investments (40,013) (12,983) (6,346)
-------- -------- --------
FINANCING:
Net proceeds from issuance of Common Stock 195 673 7,252
Borrowings under credit agreement 48,727 39,414 30,592
Payments under credit agreement (49,441) (38,700) (30,592)
Borrowings in connection with acquisition
of U.S. Lock 33,000 -- --
-------- -------- --------
Net cash provided by
financing 32,481 1,387 7,252
-------- -------- --------
Net increase (decrease) in cash 2,971 (3,979) 2,722
Balance, beginning of period 450 4,429 1,707
-------- -------- --------
Balance, end of period $ 3,421 $ 450 $ 4,429
======== ======== ========
</TABLE>
F-6
<PAGE> 33
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
BARNETT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
----------------------------------------------------------------------
A. Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Barnett Inc.(a Delaware corporation) and its wholly owned
subsidiaries (collectively, the "Company"). All intercompany accounts
and transactions have been eliminated.
B. 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.
C. Accounts Receivable
The Company's trade receivables are exposed to credit risk. The
majority of the market served by the Company is comprised of numerous
individual accounts, none of which is individually significant. The
Company monitors the creditworthiness of its customers on an ongoing
basis and provides a reserve for estimated bad debt losses. The Company
had allowances for doubtful accounts of $1,980 and $1,231 for June 30,
1999 and 1998, respectively. Bad debt expense totaled $872 in fiscal
1999, $616 in fiscal 1998, and $621 in fiscal 1997.
D. Inventories
At June 30, 1999 and 1998, inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. The Company regularly
evaluates its inventory carrying value, with appropriate consideration
given to any excess and/or slow-moving inventories.
E. Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, machinery and equipment and furniture and fixtures are
depreciated on a straight-line basis over their estimated useful lives
of 5 to 7 years. Leasehold improvements are amortized over the life of
the improvement or remaining period of the lease, whichever is shorter.
Building and improvements are depreciated on a straight-line basis over
their estimated useful life of 39 years. Expenditures for maintenance
and repairs are charged against income as incurred. Betterments which
increase the value or materially extend the life of the assets are
capitalized and amortized over the period which the life is extended.
For income tax purposes, accelerated methods are used. Depreciation and
amortization expense totaled $4,144 in fiscal 1999, $3,183 in fiscal
1998 and $2,278 in fiscal 1997.
F. Cost of Businesses in Excess of Net Assets Acquired
Cost of businesses in excess of net assets acquired is being amortized
over 40 years, using the straight-line method. Management has evaluated
its accounting for goodwill, considering such factors as historical
profitability and future undiscounted operating cash flows, and
believes that the asset is realizable and the amortization period is
appropriate. Goodwill amortization expense totaled $470 in fiscal 1999,
$173 in fiscal 1998 and $128 fiscal 1997. The accumulated amortization
of goodwill at June 30, 1999 and 1998 was $2,183 and $1,713,
respectively. The Company periodically assesses all long-lived assets,
including goodwill, to determine if there is impairment. Based on these
evaluations, there were no adjustments in the carrying value of the
long-lived assets for fiscal 1999 and 1998.
G. Deferred Advertising
F-7
<PAGE> 34
Costs of producing and distributing sales catalogs and promotional
flyers are capitalized and charged to expense in the periods in which
the related sales occur. Total advertising expense capitalized was $752
and $802 in fiscal years 1999 and 1998, respectively. Total advertising
expenses were $2,922, $2,313 and $1,214 in fiscal years 1999, 1998 and
1997, respectively.
H. Deferred Start-Up Costs
Costs of establishing local distribution centers are capitalized and
charged to expense over a 12 month period. Total capitalized start-up
costs were $207, $148 and $283 in fiscal years 1999, 1998, and 1997,
respectively. Amortization expense totaled $319, $456, and $96 in
fiscal years 1999, 1998, and 1997, respectively. Statement of Position
("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities",
which is effective for fiscal years beginning after December 15, 1998,
requires all start-up and organizational costs to be expensed as
incurred. The Company adopted this statement on July 1, 1999.
I. Income Taxes
The Company uses the asset and liability method in accounting for
income taxes. Deferred income taxes result from the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
J. Revenue Recognition
The Company records sales as orders are shipped to or picked up by the
customer.
K. 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 years ended
June 30, 1999, 1998, and 1997. The earnings per share calculations for
fiscal 1997 additionally assume the conversion of outstanding
convertible preferred stock.
L. Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
M. Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash, trade receivables, and accounts payable, approximate their fair
values due to the short-term nature of these assets and liabilities.
N. Stock-Based Compensation
The Company accounts for its stock-based compensation plan using the
intrinsic value approach of Accounting Principles Board ("APB")
Statement No. 25 "Accounting for Stock-Based Compensation". The Company
has adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation". In accordance with SFAS No. 123, for
footnote disclosure purposes only, the Company computes its earnings
and earnings per share on a pro forma basis as if the fair value method
had been applied.
O. Statements of Cash Flows
The Company's investing and financing activities were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Business Acquisitions
Fair value of identifiable asset acquired $12,015 $ 3,500 --
Liabilities assumed 2,023 996 --
Issuance of common stock -- 600 --
Tax benefit related to stock options 66 62 $ 184
</TABLE>
F-8
<PAGE> 35
F-9
<PAGE> 36
P. Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," to be effective for financial statements issued for fiscal
years beginning after December 31, 1997. SFAS 130 requires companies to
display the components of comprehensive income with the same prominence
as the other financial statements for all periods presented. The
Company does not have any comprehensive income items as of June 30,
1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," to be effective for
financial statements issued for fiscal years beginning after December
15, 1997. The statement establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports to shareholders. The Company operates in a single business
segment so no additional disclosures are required.
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 imbedded in other contracts).
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The adoption of this standard is not expected to have a material
impact on reported results of the Company's operations.
2. SALE OF COMMON STOCK
--------------------
In April 1997, the Company consummated a secondary public offering
pursuant to which 425 and 1,300 shares were sold by the Company and its
former parent, Waxman USA Inc. ("Waxman"), respectively, resulting in
net proceeds of approximately $6.7 million to the Company. The Company
used approximately $3.1 million to repay borrowings under its credit
facility and the remainder for working capital. Subsequent to the
secondary public offering, Waxman converted the remainder of the
convertible non-voting preferred stock of the Company to common stock.
As a result of the secondary offering and the subsequent conversion of
preferred stock, Waxman owned 44.3% of the Company's common stock as of
June 30, 1999 and 44.4% as of June 30, 1998.
3. DEBT
----
In April 1996, 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 borrowings of up to
$15.0 million, including a letter of credit subfacility of $4.0
million. On January 6, 1999, in connection with the acquisition of U.S.
Lock, (See Note 10 to the accompanying financial statements) the
Company entered into an amended and restated credit agreement, the
("credit agreement"), with First Union. The credit agreement provides
for an unsecured revolving credit facility and letter of credit
facility providing borrowings of up to $15.0 million expiring December
31, 2001, and a seven year term loan of $33.0 million, proceeds of
which were used to purchase U.S. Lock. Borrowings under the revolving
credit facility bear interest at LIBOR plus 75 basis points. The
Company is required to pay a commitment fee of 0.1% per annum on the
unused commitment. The Company entered into an interest rate swap to
minimize the risk and costs associated with changes in interest rates.
The swap agreement is a contract to exchange the variable rate of
three-month LIBOR + .825% on its term loan for fixed interest rate
payments of 6.29%, payable quarterly. The interest swap has a notional
amount of $33.0 million and a maturity date of December 31, 2005,
corresponding with the term loan. The interest rate swap had a fair
value of $1.0 million at June 30, 1999. The outstanding principal
balance of the term loan is payable in 19 equal and consecutive
quarterly payments of 1/20th of the original outstanding balance of the
term loan commencing on April 30, 2001. All remaining unpaid principal
and all accrued and unpaid interest thereon is due and payable in full
on December 31, 2005.
The credit agreement 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. At June 30, 1999, there were $0 of
borrowings under the revolving credit agreement and there were $3.2
million of letters of credit outstanding.
The Company made interest payments of $891 in fiscal 1999, $164 in
fiscal 1998 and $116 in fiscal 1997.
4. INCOME TAXES
------------
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes
an asset and liability approach and
F-10
<PAGE> 37
deferred taxes are determined based on the estimated future tax effects
of differences between the financial and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The
provisions for income taxes are detailed as follows:
F-11
<PAGE> 38
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
---- ---- ----
Current:
U.S. Federal $ 8,690 $ 8,095 $ 6,697
State 1,304 1,218 684
------- ------- -------
9,994 9,313 7,381
Deferred (141) (365) 149
------- ------- -------
$ 9,853 $ 8,948 $ 7,530
======= ======= =======
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The deferred tax
assets and liabilities are as follows:
JUNE 30,
--------
1999 1998
---- ----
Inventories $ 970 $ 781
Accounts receivable 476 539
Accrued benefits 242 176
Other 292 214
------- -------
Deferred tax assets 1,980 1,710
------- -------
Property (733) (628)
Deferred costs (390) (366)
------- -------
Deferred tax liabilities (1,123) (994)
------- -------
$ 857 $ 716
======= =======
The following table reconciles the U.S. statutory rate applied to
pretax income to the Company's provision for income taxes:
FISCAL YEAR ENDED JUNE 30,
1999 1998 1997
---- ---- ----
U.S. Statutory rate applied
to pretax income $ 8,776 $ 8,129 $ 6,848
State taxes, net 848 792 650
Goodwill amortization 181 49 44
Other 48 (22) (12)
------- ------- -------
Provision for income taxes $ 9,853 $ 8,948 $ 7,530
======= ======= =======
All deferred tax accounts are considered to be realizable due to
assumed future taxable income; thus, no valuation allowance has been
recorded against the deferred tax assets.
The Company made federal income tax payments of $8,972, $7,876 and
$7,250 in fiscal 1999, 1998 and 1997, respectively, and state income
tax payments of $2,025, $1,496 and $719 in fiscal 1999, 1998 and 1997,
respectively.
5. LEASE COMMITMENTS
-----------------
F-12
<PAGE> 39
The Company leases its distribution centers and office facilities as
well as certain equipment under operating lease agreements, which
expire at various dates through 2009 with, in some cases, options to
extend the terms of the leases.
Future minimum payments, by year and in the aggregate, consist of the
following at June 30, 1999:
2000 $4,517
2001 4,475
2002 4,069
2003 3,216
2004 2,352
Thereafter 5,181
-----
Total future minimum lease $23,810
payments =======
Total rent expense was $4,104 in fiscal 1999, $3,458 in fiscal 1998 and
$2,503 in fiscal 1997.
6. BENEFIT PLANS
-------------
During fiscal 1997, the Company established a 401(k) retirement plan
for employees. Employees are able to contribute up to 15% of pretax
compensation and control the investment options for their entire
account. Employees vest in Company contributions ratably over 5 years
of service.
Company contributions to the 401(k) plan are discretionary and may be
changed each year as determined by the Board of Directors. In fiscal
1999 and 1998, the Company contributed $251 and $209, respectively, in
matching contributions to the Company's 401(k) plan. The Board of
Directors approved a 50% match of up to 4% of employee contributions
for fiscal 2000.
The Company offers no other post-retirement or post-employment benefits
to its employees.
7. EMPLOYEE STOCK PLANS
--------------------
The Company has established an Omnibus Incentive Plan (the "Omnibus
Plan") and an Employee Stock Purchase Plan ("ESPP") under which an
aggregate of 1,500 shares of common stock may be subject to awards.
Under the Omnibus Plan, awards may be granted for no consideration and
consist of stock options and other stock based awards. The Omnibus Plan
was designed to provide an incentive to the officers and other key
employees of the Company by making available to them an opportunity to
acquire a proprietary interest in the Company.
In fiscal 1999, 1998 and 1997, the Company granted options to employees
which vest over four years and are exercisable for a ten year period.
The following table sets forth stock options granted, exercised,
canceled, expired and outstanding for each of the fiscal years ended
1999, 1998 and 1997:
F-13
<PAGE> 40
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 937.4 $18.02 780.0 $16.91 507.5 $14.04
Granted 152.5 $13.71 215.0 $21.80 303.5 $21.43
Exercised (5.7) $14.00 (26.2) $14.00 (13.0) $14.04
Canceled / Expired (49.0) $18.17 (31.4) $19.63 (18.0) $14.04
------- ----- -----
Outstanding at end of 1,035.2 $17.39 937.4 $18.02 780.0 $16.91
year ======= ===== =====
Exercisable at end of 497.6 $16.86 276.7 $15.97 109.9 $14.04
year
Weighted average fair
value of options
granted during the
year $ 7.18 $9.51 $9.84
</TABLE>
As of June 30, 1999, 785 shares of common stock are available for
issuance under the plan. The information relating to the different
ranges of exercise prices of stock options as of June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Options Options Exercisable
------- -------------------
Outstanding
-----------
Weighted
Number of Average Weighted Number of
Options Remaining Average Options
Actual Range of Outstanding Contractual Exercise Exercisable Weighted Average
Exercise Prices at 6/30/99 Life Price at 6/30/99 Exercise Price
--------------- ---------- ---- ----- ---------- --------------
<S> <C> <C> <C> <C> <C>
$ 8.50 to $12.75 47.0 9.5 $10.25 0
$13.25 to $19.75 519.5 7.2 $14.27 309.4 $14.04
$20.25 to $27.25 468.7 7.6 $21.56 188.2 $21.49
------- -----
$ 8.50 to $27.25 1,035.2 7.5 $17.39 497.6 $16.86
======= =====
</TABLE>
The Company has chosen to continue to account for its options under the
provisions of APB Statement No. 25 "Accounting for Stock Issued to
Employees" and thus has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option plans, as
the exercise price of options granted were equal to the fair value at
the date of grant. Pro forma net income and net income per share for
the fiscal years ended 1999, 1998, and 1997, assuming the Company had
accounted for the plans as defined in SFAS No. 123, are as follows:
1999 1998 1997
---- ---- ----
Net Income-as reported $15,215 $14,277 $12,035
Net Income-pro forma $13,297 $12,422 $10,783
Basic Net Income per
share- as reported $ 0.94 $ 0.88 $ 0.76
Basic Net Income per
share- pro forma $ 0.82 $ 0.77 $ 0.68
Diluted Net Income per
F-14
<PAGE> 41
share-as reported $0.94 $0.87 $0.75
Diluted Net Income per
share- pro forma $0.82 $0.76 $0.67
The assumptions regarding the stock options issued to executives in
fiscal 1999 and fiscal 1998 are that the options vest equally over four
years. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions. In fiscal 1999: dividend yield of 0.0%; expected
volatility of 55.0%; risk free interest rate of 4.63%; turnover rate of
10% for employees and 0% for executives; and expected life of options
of 5 years. In fiscal 1998: dividend yield of 0.0%; expected volatility
of 38.4%; risk free interest rate of 6.05%; turnover rate of 10% for
employees and 0% for executives; and expected life of options of 5
years. In fiscal 1997: dividend yield of 0.0%; expected volatility of
42.0%; risk free interest rate of 6.31%; turnover rate of 10% for
employees and 0% for executives; and expected life of options of 5
years.
The ESPP enables employees of the Company to subscribe for shares of
common stock on annual offering dates at a purchase price which is 85%
of the fair market value of the shares on the first day of the annual
period. Employee contributions to the ESPP were $49, $195, and $415 for
fiscal 1999, 1998, and 1997, respectively. Pursuant to the ESPP, 6, 11,
and 35 shares were issued to employees during fiscal 1999, 1998, and
1997, respectively.
8. RELATED PARTY TRANSACTIONS
--------------------------
The Company engages in business transactions with Waxman Industries and
its subsidiaries. Products purchased for resale from Waxman Industries
and its subsidiaries totaled $18,176 in fiscal 1999, $15,307 in fiscal
1998 and $13,702 in fiscal 1997. Sales to these entities totaled $79 in
fiscal 1999, $517 in fiscal 1998 and $140 in fiscal 1997. The Company
also entered into a five year rental agreement with Waxman Industries
in fiscal 1998 for the leasing of a warehouse facility in the normal
course of business. The Company prepaid all rent totaling $500. This
warehouse facility was purchased as part of the U.S. Lock acquisition
(See Note 10) and any unamortized prepaid rent was reduced from the
purchase price of the acquisition. See Note 10 for the acquisition of
LeRan Gas Products and US Lock Corporation.
The Company and Waxman Industries provide to, and receive from each
other certain selling, general and administrative services,("S,G&A")
expenses, and reimburse each other for out-of-pocket disbursements
related to those services. The Company charged Waxman and was
reimbursed for $293, $431 and $1,056 for S,G&A expenses in each of
fiscal 1999, 1998 and 1997. The Company was charged by and reimbursed
Waxman $65, $0 and $217 for S,G&A expenses in each of fiscal 1999, 1998
and 1997.
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
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 Company's financial position, liquidity or
results of operations.
10. ACQUISITIONS
------------
On July 1, 1997, the Company acquired substantially all of the assets
of LeRan Gas Products, an operating unit of Waxman Industries,
accounted for using the purchase method of accounting. 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 shares of the common
stock of the Company. The operations related to these assets, which are
not material to the Company's financial statements, have been included
in the results of the Company since the date of 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.
F-15
<PAGE> 42
The acquisition of U.S. Lock was accounted for as a purchase.
Accordingly, the purchase price was allocated to the net identifiable
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 1998, 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).
<TABLE>
<CAPTION>
- -------------------------- ----------- ------------ -------------- --- ---------------
Fiscal Year Fiscal Year
- -------------------------- ----------- ------------ Ended 6-30-99 --- Ended 6-30-98
- -------------------------- ----------- ------------ -------------- --- ---------------
<S> <C> <C> <C> <C>
Net sales $254,736 $222,339
- -------------------------- ----------- ------------ -------------- --- ---------------
Net income $ 15,281 $ 14,092
- -------------------------- ----------- ------------ -------------- --- ---------------
Diluted earnings per share $ 0.94 $ 0.86
- -------------------------- ----------- ------------ -------------- --- ---------------
</TABLE>
F-16
<PAGE> 43
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Results of Operations:
The following is a summary of the unaudited quarterly results of
operations for the fiscal years ended June 30, 1999 and 1998 (in thousands,
except per share amounts)
- ---------- --------------- ---------------- ------------ --------------
Diluted
- ---------- --------------- ---------------- ------------ --------------
Earnings
- ---------- --------------- ---------------- ------------ --------------
Net Gross Net Per
- ---------- --------------- ---------------- ------------ --------------
Sales Profit Income share
----- ------ ------ -----
- ---------- --------------- ---------------- ------------ --------------
1999
- ---------- --------------- ---------------- ------------ --------------
Fourth $66,984 $22,131 $3,882 $0.24
- ---------- --------------- ---------------- ------------ --------------
Third 63,879 21,606 3,827 0.24
- ---------- --------------- ---------------- ------------ --------------
Second 58,120 19,278 4,065 0.25
- ---------- --------------- ---------------- ------------ --------------
First 52,391 17,176 3,441 0.21
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
1998
- ---------- --------------- ---------------- ------------ --------------
Fourth $51,577 $17,445 $3,872 $0.24
- ---------- --------------- ---------------- ------------ --------------
Third 49,465 16,618 3,301 0.20
- ---------- --------------- ---------------- ------------ --------------
Second 51,767 17,660 3,821 0.23
- ---------- --------------- ---------------- ------------ --------------
First 46,769 15,720 3,283 0.20
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
- ---------- --------------- ---------------- ------------ --------------
F-17
<PAGE> 44
BARNETT INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNT AND RESERVES
SCHEDULE II
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Additions Charged to Balance
Balance at Charged to Other at End of
Beginning Costs and Deductions Accounts Period
of Period Expenses (A) (B)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Fiscal Year Ended June 30, 1999 $1,231 872 (766) 643 $1,980
Fiscal Year Ended June 30, 1998 $ 864 616 (668) 419 $1,231
Fiscal Year Ended June 30, 1997 $ 722 621 (479) 0 $ 864
</TABLE>
(A) Uncollectible accounts written off, net of recoveries
(B) Allowance for doubtful accounts resulting from the acquisitions of U.S. Lock
in fiscal 1999 and LeRan Gas Products in fiscal 1998.
F-18
<PAGE> 1
Exhibit 10.10
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
CREDIT AGREEMENT
among
BARNETT, INC.,
U.S. LOCK CORPORATION
and
FIRST UNION NATIONAL BANK
as of January 6, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Preliminary Statement...........................................................................................1
ARTICLE I DEFINITIONS...........................................................................................1
ARTICLE II TERM LOAN............................................................................................8
2.1 Availability of Term Loan...................................................................8
2.2 Term Loan Interest..........................................................................8
2.3 Term Loan Principal.........................................................................9
2.4 Purpose of Term Loan........................................................................9
2.5 Indemnification and Additional Costs........................................................9
ARTICLE III LINE OF CREDIT.....................................................................................10
3.1 Line of Credit.............................................................................10
3.2 Letters of Credit; Bank Acceptances........................................................10
3.3 Line of Credit Interest....................................................................12
3.4 Repayment of Line of Credit................................................................13
3.5 Line of Credit Advances....................................................................13
3.6 Purpose of Line of Credit Loans............................................................13
3.7 Reductions in Availability.................................................................13
3.8 Fees.......................................................................................14
3.9 Indemnification and Additional Costs.......................................................14
ARTICLE IV ADDITIONAL PROVISIONS RELATING TO THE LOANS.........................................................14
4.1 Interest Rate Limitation...................................................................14
4.2 Payments to Principal Office...............................................................15
4.3 Default Rate...............................................................................15
4.4 Limitation of All Advances.................................................................15
4.5 Indebtedness...............................................................................15
4.6 Special Loan Account.......................................................................15
4.7 Prepayments................................................................................15
4.8 Unavailability of Interest Rate............................................................16
ARTICLE V CONDITIONS TO LOANS..................................................................................16
5.1 Representations and Warranties.............................................................16
5.2 Execution of Credit Documents..............................................................16
5.3 Performance of Obligations.................................................................16
5.4 Documentation..............................................................................16
5.5 Payment of Commitment Fee..................................................................17
5.6 Events of Default or Unmatured Events of Default...........................................17
5.7 Closing of Acquisition.....................................................................17
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VI REPRESENTATIONS AND WARRANTIES......................................................................17
6.1 Incorporation..............................................................................17
6.2 Power and Authority........................................................................18
6.3 Indebtedness...............................................................................18
6.4 Litigation.................................................................................18
6.5 Tax Returns................................................................................18
6.6 Contract or Restriction....................................................................19
6.7 ERISA Requirement..........................................................................19
6.8 Possession of Franchises and Licenses......................................................19
6.9 Governmental Authorization.................................................................19
6.10 Financial Condition; Capital Expenditures..................................................19
6.11 Compliance with Laws.......................................................................20
6.12 Regulation U...............................................................................20
6.13 Material Facts.............................................................................20
6.14 Claims and Offsets.........................................................................21
6.15 Intent and Effect of Transactions..........................................................21
6.16 U.S. Lock Liabilities......................................................................21
ARTICLE VII COVENANTS..........................................................................................21
7.1 Reports, Certificates and Other Information................................................22
7.2 Use of Loan Proceeds.......................................................................23
7.3 Maintenance of Business and Properties.....................................................23
7.4 Insurance..................................................................................23
7.5 Notices....................................................................................23
7.6 Inspections................................................................................24
7.7 Debt.......................................................................................24
7.8 Liens......................................................................................24
7.9 Dividends..................................................................................24
7.10 Merger, Sale, Etc..........................................................................24
7.11 Loans and Other Investments................................................................25
7.12 Change in Business.........................................................................25
7.13 Transactions with Affiliates...............................................................25
7.14 No Sale, Leaseback.........................................................................25
7.15 Margin Stock...............................................................................25
7.16 Payment of Taxes, Etc......................................................................25
7.17 Subordination..............................................................................25
7.18 Compliance; Hazardous Substances...........................................................26
7.19 Subsidiaries...............................................................................26
7.20 Withholding Taxes..........................................................................26
7.21 Deposit Accounts...........................................................................26
7.22 ERISA......................................................................................26
7.23 Financial Covenants........................................................................27
7.24 Management; Control........................................................................28
7.25 Further Assurances.........................................................................28
7.26 Maintain Existence and Rights..............................................................28
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VIII EVENTS OF DEFAULT.................................................................................28
8.1 Events of Default..........................................................................28
8.2 Remedies...................................................................................30
ARTICLE IX MISCELLANEOUS.......................................................................................31
9.1 Waiver of Default..........................................................................31
9.2 Amendments and Waivers.....................................................................31
9.3 Notices....................................................................................31
9.4 No Waiver; Cumulative Remedies.............................................................33
9.5 Survival of Representations, Warranties and Agreements.....................................33
9.6 Set Off by Bank............................................................................33
9.7 Entire Agreement...........................................................................33
9.8 Enforceability.............................................................................33
9.9 Reimbursement of Expenses..................................................................33
9.10 Execution of Counterparts..................................................................34
9.11 Stamp or Other Taxes.......................................................................34
9.12 Waiver of Jury Trial; Arbitration..........................................................34
9.13 Governing Law..............................................................................35
</TABLE>
-iii-
<PAGE> 5
EXHIBITS
--------
Exhibit 1.1(A) Permitted Debt
Exhibit 1.1(B) Permitted Liens
Exhibit 7.13 Transactions with Affiliates
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
This Amended and Restated Credit Agreement made and entered into as of
January 6, 1999 (together with any renewals, extensions, amendments,
modifications, restatements and/or supplements hereto, this "Agreement"), among
BARNETT, INC., a Delaware corporation (the "Borrower"), U.S. LOCK CORPORATION, a
newly-formed Delaware corporation (the "Co-Borrower") and FIRST UNION NATIONAL
BANK, a national banking association (the "Bank").
PRELIMINARY STATEMENT
---------------------
WHEREAS, Borrower and Bank are parties to that certain Revolving Credit
Agreement dated April 3, 1996 (the "Existing Agreement"), pursuant to which Bank
made available to Borrower a US$15,000,000 line of credit (the "Line of
Credit"); and
WHEREAS, Borrower and Co-Borrower have requested that Bank (i) make
available a term loan to finance Co-Borrower's acquisition of the assets of the
U.S. Lock division of WOC Inc., from WOC Inc. (the "Term Loan") and (ii) to
extend the maturity of the Line of Credit until December 31, 2001.
WHEREAS, subject to the terms and conditions set forth herein, Bank has
agreed to make available the Term Loan and to extend the maturity of the Line of
Credit;
NOW, THEREFORE, for good and valuable consideration, the sufficiency
and receipt of which are hereby acknowledged by each of Borrower, Co-Borrower
and Bank, and subject to the terms and conditions set forth herein, the parties
hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
For purposes of this Agreement, all terms used herein without
definition that are defined in the Uniform Commercial Code, as enacted and in
force from time to time in the State of Florida (the "Uniform Commercial Code"),
have the same meanings
-iv-
<PAGE> 6
herein as they have in the Uniform Commercial Code. In addition, the following
terms have the following meanings:
1.1 "ACQUISITION PURCHASE PRICE" means the cash purchase price paid by
Borrower plus the amount of the liabilities assumed by Co-Borrower in connection
with the acquisition (the "Acquisition") of the assets of U.S. Lock, a division
of WOC Inc., from WOC Inc., such purchase price to be supported by documentation
acceptable to Bank and to be due and payable at the closing of the Acquisition.
1.2 "ADVANCE" or "ADVANCES" (as the context may require) means an
advance of loan monies to Borrower and Co-Borrower pursuant to this Agreement on
any given Business Day.
1.3 "AFFILIATE" or "AFFILIATES" (as the context may require) means, as
to any Person, (i) any individual related by blood or marriage and (ii) any
corporation or other Person directly or indirectly owned or controlled by,
owning or controlling or under common ownership or control with such Person.
"Control" shall be deemed to include, but shall not be limited to, the power,
directly or indirectly, to direct or cause the direction of the management or
policies of another Person, whether through ownership, common directors,
trustees or officers, by contract or otherwise.
1.4 "BANKRUPTCY CODE" means Bankruptcy Reform Act of 1978, as amended,
11 U.S.C. Section 101, ET SEQ.
1.5 "BORROWER" means Barnett, Inc., a Delaware corporation.
1.6 "BUSINESS DAY" means a day on which Bank's Principal Office is open
for business; and "LONDON BUSINESS DAY" means any Business Day that is also a
day on which banking institutions in London, England are open for business.
1.7 "CO-BORROWER" means U.S. Lock Corporation, a Delaware corporation.
1.8 "CREDIT DOCUMENT" or "CREDIT DOCUMENTS" (as the context may
require) means this Agreement, the Notes, and all other affidavits, documents,
instruments, certificates or agreements to be delivered pursuant to the terms
hereof or otherwise evidencing the Loans or any other indebtedness of Borrower
or Co-Borrower to Bank, other than swap agreements (as defined in 11 U.S.C.
Section 101) with Bank or its Affiliates.
1.9 "ERISA" means the Employee Retirement Income Security Act of 1974,
together with all amendments from time to time thereto, including any rules or
regulations promulgated thereunder.
1.10 "EVENT OF DEFAULT" shall have the meaning specified in ARTICLE
VIII hereof.
<PAGE> 7
1.11 "EXECUTIVE OFFICER" means any one of the chief executive officer,
executive vice president, the chief financial officer or the chief operating
officer of Borrower or Co-Borrower.
1.12 "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means the then
prevailing principles and practices of the accounting profession conforming to
the standards of the American Institute of Certified Public Accountants.
1.13 "INDEBTEDNESS" of a Person means all indebtedness including,
without limitation, (a) indebtedness for borrowed money; indebtedness for (or
deferred purchase price in connection with) the acquisition of property or
assets; indebtedness obligations evidenced by debentures, notes or other similar
instruments; reimbursement or other similar obligations arising in connection
with letters of credit (whether drawn or undrawn), surety bonds or reimbursement
obligations therefor; and indebtedness of third parties secured by any lien,
pledge or other encumbrance on the property or assets of the Person in question,
whether or not such indebtedness is assumed; (b) all liability by way of
endorsements (other than for collection or deposit in the ordinary course of
business); (c) all guarantees of indebtedness (including any agreement,
contingent or otherwise, to purchase any obligation representing such
indebtedness or property constituting security therefor, or to advance or supply
funds for such purpose or to maintain working capital or any other balance sheet
or income statement condition, or otherwise to assure a creditor against loss in
respect of indebtedness or obligations of others, or any other arrangement in
substance affecting any of the foregoing); (d) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of ERISA; and (e)
obligations as lessee under leases which shall have been or should be, in
accordance with Generally Accepted Accounting Principles, recorded or classified
as capital leases or financing leases.
1.14 "INTEREST PERIOD" means (i) in the case of Advances bearing
interest calculated on the basis of the LIBOR Market Index Rate, one (1) month,
and (ii) in the case of Advances bearing interest calculated on the basis of the
LIBOR Rate, any one of (1) month, three (3) months, or six (6) months, as
selected by Borrower on the date of the initial Advance hereunder and,
thereafter, on the third Business Day immediately preceding the last day of each
Interest Period, PROVIDED, FURTHER, that all of the foregoing provisions
relating to Interest Periods are subject to the following:
(a) If any Interest Period otherwise would end on a day
which is not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day; and
(b) Any Interest Period that begins on the last Business Day
of a calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on the
last Business Day of a calendar month.
-2-
<PAGE> 8
1.15 "IRC" means the Internal Revenue Code of 1986, as amended from
time to time.
1.16 "LIBOR MARKET INDEX RATE," for any day, means the rate (rounded to
the next higher 1/100 of 1%) for one-month United States dollar-denominated
deposits as reported (or if not so reported, then as determined by Bank from
another recognized source of interbank quotation) on Telerate page 3750 as of
11:00 a.m., London time, for such day; PROVIDED that if such day is not a London
Business Day, then for the immediately preceding London Business Day.
1.17 "LIBOR RATE", for any day, means the rate (rounded to the next
higher 1/100 of 1%) for United States dollar-denominated deposits of that many
months' maturity as reported (or if not so reported, then as determined by Bank
from another recognized source of interbank quotation) on Telerate page 3750 as
of 11:00 a.m., London time, on the second London Business Day before the
relevant Interest Period begins, adjusted for reserves by dividing that rate by
1.00 minus the LIBOR Reserve.
1.18 "LIBOR RESERVE" means the maximum percentage reserve requirements
(rounded to the next higher 1/100 of 1% and express as a decimal) in effect for
any day during the Interest Period under the Federal Reserve Board's Regulation
D for Euro currency Liabilities as defined therein.
1.19 "LIENS" means any mortgage, pledge, encumbrance, statutory lien or
other lien arising by operation of law, security interest, trust arrangement,
financing, lease, collateral assignment or other encumbrance, or any segregation
of assets or revenues (whether or not constituting a security interest) with
respect to any present or future assets, revenues or rights to the receipt of
income of the Person referred to in the context in which the term is used.
1.20 "LINE OF CREDIT" means the line of credit in the original
principal amount of US$15,000,000 made available hereunder to finance general
working capital needs of Borrower and Co-Borrower, the terms of borrowing for
which are set forth in ARTICLE III of even date herewith.
1.21 "LINE OF CREDIT NOTE" means that certain promissory note made by
Borrower and Co-Borrower to and in favor of Bank in the original principal
amount of US$15,000,000, evidencing the obligations of Borrower and Co-Borrower
arising with respect to the Line of Credit together with any renewals,
modifications, restatements, supplements, extensions or amendments thereto.
1.22 "LOANS" means collectively, the loans from Bank to Borrower and
Co-Borrower evidenced by the Notes and the other Credit Documents.
-3-
<PAGE> 9
1.23 "MATURITY DATE" means (i) with respect to the Term Loan, December
31, 2005 and, (ii) with respect to the Line of Credit, December 31, 2001;
PROVIDED, HOWEVER, that Bank may, on one or more occasions and in its sole and
absolute discretion, extend the Maturity Date in effect with respect to the Line
of Credit for an additional one year period by providing written notice to
Borrower of each such election to extend the Maturity Date.
1.24 "MAXIMUM LINE OF CREDIT COMMITMENT" means US$15,000,000 LESS the
amount of all Optional Reductions made pursuant to SECTION 3.7.
1.25 "NOTE" or "NOTES" (as the context may require) means either or
both of the Term Loan Note and the Line of Credit Note.
1.26 "OPTIONAL REDUCTION" or "OPTIONAL REDUCTIONS" (as the context may
require) means any or all permanent reductions in the Line of Credit pursuant to
SECTION 3.7.
1.27 "PERMITTED DEBT" means (a) all obligations now or hereafter owed
to Bank by Borrower or Co-Borrower under the terms of the Credit Documents, or
arising out of the transaction described herein; and (b) any other Indebtedness
listed on EXHIBIT 1.1(A) hereto, and any extensions, renewals, replacements,
modifications and refundings of any such Indebtedness if, and to the extent,
permitted by EXHIBIT 1.1(A); PROVIDED, HOWEVER, that the principal amount of
such Indebtedness may not be increased from the amount permitted by such
exhibit; and (c) such other Indebtedness as Bank may consent to in writing from
time to time.
1.28 "PERMITTED INVESTMENTS" means:
(a) Purchases of direct obligations of the federal
government or obligations unconditionally guaranteed by the federal government;
(b) Deposits in federally-insured commercial banks having
capital and surplus exceeding $250 million;
(c) Commercial paper of any U.S. corporation having the
highest rating then given by Moody's Investors Service, Inc. or Standard & Poors
Corporation;
(d) Endorsement of negotiable instruments for collection in
the ordinary course of business;
(e) Investments in bona fide interest rate and currency
hedging agreements to the extent reasonably necessary to eliminate or reduce
interest rate and/or foreign exchange risk;
(f) Reputable money market funds;
-4-
<PAGE> 10
(g) Loans and advances to employees for relocation expenses
and other needs not to exceed $250,000 at any time outstanding in the aggregate;
(h) Investments in entities (including Subsidiaries and
joint ventures) not exceeding, in aggregate book value, ten percent (10%) of the
Tangible Net Worth of Borrower measured at the time of each such investment; and
(i) Purchase of the assets of U.S. Lock, a division of WOC
Inc.
1.29 "PERMITTED LIENS" means:
(a) Liens for taxes and other statutory Liens, Liens of
carriers, warehousemen, landlords, mechanics, materialmen, laborers, employees
or suppliers, and similar Liens arising out of operation of law so long as the
obligations secured thereby are not past due or are being contested as permitted
herein;
(b) Liens described on EXHIBIT 1.1(B) hereto;
(c) Liens arising in the ordinary course of business in
favor of custom and revenue authorities to secure payment of custom duties;
(d) Security for payment of worker's compensation or other
insurance or social security obligations;
(e) Security for performance of tenders, contracts (other
than contracts for the payment of moneys) or leases entered into in the ordinary
course of business;
(f) Deposits for sewer, public or statutory obligations, or
in lieu of surety, performance or appealed bonds entered into in the ordinary
course of business; and
(g) Such other Liens as Bank may consent to in writing from
time to time.
1.30 "PERSON" means any individual, firm, corporation, company,
partnership, trust, trustee, agent, employee, organization, association or
entity.
1.31 "PRIME RATE" means the rate of interest per annum announced by
Bank from time to time to be its commercial prime rate, IT BEING UNDERSTOOD that
such rate is one of several rates used by Bank and is not represented or
intended necessarily to be the lowest or most favorable rate for any particular
type or category of customer or loan; and IT BEING FURTHER UNDERSTOOD that any
change in the Prime Rate shall be effective as of the Business Day on which such
change is announced.
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1.32 "PRINCIPAL OFFICE" means the office of Bank at First Union
National Bank Building, 214 Hogan Street, Jacksonville, Florida 32202, or such
other address as Bank may from time to time designate by notice to Borrower.
1.33 "REVOLVING CREDIT PERIOD" means the period commencing on the date
of this Agreement and terminating on the Maturity Date.
1.34 "SALE" means any sale, transfer, assignment, or other disposition,
whether or not for value or for fair value, and regardless of the consideration
(cash, property or otherwise), if any, transferred therefor.
1.35 "SUBSIDIARY" means any corporation, partnership or other Person in
which Borrower (or other Person as the context may require), directly or
indirectly, through ownership of other entities or otherwise, owns more than
fifty percent (50%) of any class of stock, capital or income interest, equity
interest or other beneficial interest, or which is effectively controlled by
Borrower or such other Person.
1.36 "TANGIBLE NET WORTH" means THE EXCESS OF total assets OVER total
liabilities, with total assets and Total Liabilities each to be determined in
accordance with Generally Accepted Accounting Principles consistently applied,
EXCLUDING, HOWEVER, from the determination of total assets (a) all assets that
would be classified as intangibles under Generally Accepted Accounting
Principles, including, without limitation, goodwill (whether representing the
excess of cost over book value of assets acquired or otherwise), organizational
expenses, trademarks, trade names, copyrights, service marks, brand names,
patents, patent applications, franchises, other intellectual property rights and
licenses and rights in any thereof, (b) treasury stock, [(c) reserves for
depreciation, depletion, obsolescence or amortization of properties of Borrower,
(d) additions to net worth arising from revaluation of fixed or intangible
assets of Borrower,]* (e) amounts owed to Borrower by any Affiliate and (f)
deferred charges, including without limitation unamortized debt discount and
expense, experimental expenses and developmental expenses.
1.37 "TAX" or "TAXES" (as the context may require) of a Person means
any federal, state, county, local, or other tax (including, without limitation,
income, profits, estimated, excise, sales, use, occupancy, gross receipts,
franchise, ad valorem, severance, production, transfer, withholding, employment
and payroll-related, real estate and property taxes, import duties, alternative
minimum tax and other similar governmental charges and assessments) due from or
in respect of such Person, and including interest, additions to tax or interest,
and penalties with respect thereto.
1.38 "TAXING AUTHORITY" means any governmental or regulatory body with
jurisdiction over matters relating to the payment of Taxes.
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1.39 "TERM LOAN" means the term loan in the original principal amount
of the lesser of (i) the Acquisition Purchase Price, and (ii) US$33,000,000, the
terms of borrowing for which are set forth in ARTICLE II.
* This provision was in the original agreement. Consider its
applicability for any transactions utilizing this Agreement as a model
form.
1.40 "TERM LOAN NOTE" means that certain promissory note of even date
herewith made by Borrower and Co-Borrower to and in favor of Bank in the
original principal amount of US$33,000,000, evidencing the obligations of
Borrower and Co-Borrower arising with respect to the Term Loan, together with
any renewals, modifications, restatements, supplements, extensions or amendments
thereto.
1.41 "TOTAL LIABILITIES" means all liabilities of Borrower, including
Indebtedness, capitalized leases, synthetic leases, and all reserves for
deferred taxes and other deferred sums appearing on the liabilities side of the
balance sheet, in accordance with Generally Accepted Accounting Principles
applied on a consistent basis, but excluding debt fully subordinated to Bank, on
terms and conditions acceptable to Bank.
1.42 "UNMATURED EVENT OF DEFAULT" means the occurrence of any event
that with the giving of notice, the lapse of time or both would constitute an
Event of Default.
1.43 "WAXMAN" means Waxman USA Inc. and/or Waxman Industries, Inc.
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<PAGE> 13
ARTICLE II
TERM LOAN
2.1 AVAILABILITY OF TERM LOAN. Upon and subject to the conditions of
this Agreement and the other Credit Documents, Bank agrees to make available to
Borrower and Co-Borrower a term loan in an aggregate amount of the lesser of (i)
thirty-three million and no/100 United States dollars (US$33,000,000.00) and
(ii) the Acquisition Purchase Price. The Term Loan shall be advanced
contemporaneously with the closing of the Acquisition upon delivery of a written
request signed by an Executive Officer of Borrower and Co-Borrower specifically
requesting such Advance under the Term Loan and certifying that, to the best of
their knowledge after due inquiry, (1) no Event of Default and no Unmatured
Event of Default has occurred or is continuing under the terms of any Credit
Document, and (2) all representations and warranties contained in the Credit
Documents are true and correct as of the date of such requested Advance, and all
Obligations to be performed by Borrower and Co-Borrower under the Credit
Documents have been fully performed. Such request shall be given to Bank
together with substantiation of the Acquisition Purchase Price, satisfactory to
Bank, not later than 12:00 noon, Eastern Standard Time, at least one (1)
Business Day prior to the Business Day upon which the Advance is requested to be
advanced and (a) shall state the amount and date of the requested advance (which
date shall be the date of the closing of the Acquisition), (b) shall be, and
shall state that it is, requested for the purpose of paying the Acquisition
Purchase Price, and (c) shall be confirmed and verified to Bank's satisfaction.
Only one such Advance shall be made under the Term Loan.
2.2 TERM LOAN INTEREST.
(a) Borrower and Co-Borrower shall pay accrued and unpaid
interest on the outstanding principal amount of the term loan at a per annum
rate equal to the LIBOR Rate PLUS .825 percent (82 1/2 basis points). Interest
on the outstanding principal balance of the Term Loan Note shall be payable
quarterly on the last day of each January, April, July and October, commencing
January 31, 1999 and continuing thereafter until the entire principal balance is
paid in full; and
(b) Interest shall be calculated on the outstanding
principal balance of the Term Loan Note and shall be computed on the basis of a
year of three hundred sixty (360) days, calculated for the actual number of days
elapsed. The LIBOR Rate of interest shall be fixed for the Interest Period
selected by Borrower and Co- Borrower. On the date of the initial Advance
hereunder and on the third Business Day immediately preceding the last day of
each Interest Period, Borrower and Co-Borrower shall notify the Bank of their
selection of the duration of the Interest Period (either one month, three months
or six months), IT BEING UNDERSTOOD that if Borrower and Co-Borrower fail to
notify Bank in writing of their selection of such duration, then
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<PAGE> 14
Borrower and Co-Borrower shall be deemed to have selected the one month LIBOR
Rate as the basis upon which the rate of interest hereunder shall thereafter be
calculated. During each Interest Period, the rate of interest so selected shall
apply continuously.
2.3 TERM LOAN PRINCIPAL. The outstanding principal balance of the Term
Loan Note (the amount advanced contemporaneously with the closing of the
Acquisition) shall be payable in 19 equal and consecutive quarterly payments of
1/20th of the original outstanding balance of the Term Loan commencing April 30,
2001 and continuing thereafter on the last day of each January, April, July and
October. All remaining unpaid principal of the Term Loan and all accrued and
unpaid interest thereon shall be due and payable in full on December 31, 2005.
2.4 PURPOSE OF TERM LOAN. The proceeds of the Term Loan shall be used
solely to purchase the assets of the U.S. Lock division of WOC Inc., from WOC
Inc. and to pay liabilities assumed in connection with the Acquisition.
2.5 INDEMNIFICATION AND ADDITIONAL COSTS. (a) INDEMNIFICATION. Borrower
indemnifies Bank against Bank's loss or expense in employing deposits as a
consequence (a) of Borrower's failure to make any payment when due under this
Agreement or the Note or (b) of any payment, prepayment or conversion of any
Advance on a date other than the last day of an Interest Period ("Indemnified
Loss or Expense"). The amount of such Indemnified Loss or Expense shall be
determined by Bank based upon the assumption that Bank funded 100% of the Loan
in the London interbank market. Any prepayment shall include accrued and unpaid
interest to the date of prepayment on the principal amount prepaid and all other
sums due and payable hereunder. All payments received on this Note may be
applied in such order as Bank in its sole discretion shall determine. The
quarterly principal installment shall not be reamortized following a partial
prepayment.
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ARTICLE III
LINE OF CREDIT
--------------
3.1 LINE OF CREDIT. Upon the terms and subject to the conditions of
this Agreement and the other Credit Documents, and so long as no Event of
Default or Unmatured Event of Default shall have occurred and be continuing,
Bank agrees to make available to Borrower and Co-Borrower, during the Revolving
Credit Period, Advances under the Line of Credit in an aggregate amount not
exceeding at any time the sum of Fifteen Million and No/100 United States
Dollars (US $15,000,000). So long as no Event of Default or Unmatured Event of
Default shall have occurred and be continuing, Borrower and Co-Borrower may,
subject to the terms and conditions contained in the Credit Documents, borrow,
pay, reborrow and repay extensions of credit in respect of the Line of Credit
Note, any such payment or repayment to be made in immediately available funds.
Advances made to Borrower and Co-Borrower under the Line of Credit shall be
evidenced by the Line of Credit Note, which Borrower and Co-Borrower have
delivered on the date hereof. Pursuant to the Line of Credit Loan, Borrower and
Co-Borrower may borrow from Bank on a revolving basis, from time to time, during
the Revolving Credit Period, such aggregate amounts as Borrower and Co-Borrower
may request in accordance with the requirements of this Agreement; PROVIDED,
HOWEVER, that the aggregate principal sum of all amounts so requested and
outstanding at any one time under the Line of Credit Note shall never exceed
$15,000,000 LESS the amount of all Optional Reductions made pursuant to SECTION
3.7 and the amount of letters of credit or banker's acceptances issued pursuant
to SECTION 3.2. Upon the termination of the Revolving Credit Period, no
additional Advances will be made under the Line of Credit and the Line of Credit
Note shall be due and payable in full. Advances outstanding on the date hereof
under the Existing Agreement shall be deemed outstanding under this Agreement
and shall be subject to all of the terms and conditions hereof.
3.2 LETTERS OF CREDIT; BANK ACCEPTANCES.
(a) So long as no Event of Default occurs and is continuing
and subject to the limitations set forth herein, Bank will from time to time up
to and including the day which is three Business Days prior to the last day of
the Revolving Credit Period, issue, extend or renew documentary letters of
credit and/or banker's acceptances for the account of Borrower or Co-Borrower to
facilitate the purchase of inventory by Borrower or Co-Borrower; PROVIDED that
the maximum aggregate obligations of Bank under all letters of credit and
banker's acceptances plus the outstanding principal amount of the Line of Credit
shall not exceed the Maximum Loan Commitment. The availability of Advances under
the Line of Credit shall be reduced by outstanding obligations of Bank under any
letters of credit and banker's acceptances. All payments made by Bank under any
such letters of credit and banker's acceptances (whether or not Borrower or
Co-Borrower is the account party) and all fees, commissions, discounts and other
amounts owed to Bank in connection
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<PAGE> 16
therewith, shall be deemed to be Advances under the Line of Credit Note.
Borrower and Co-Borrower shall complete and sign such applications and
supplemental agreements and provide such other documentation as Bank may
require. The form and substance of all letters of credit and banker's
acceptances, including expiration dates, shall be subject to Bank's approval.
Bank may charge a fee or commission for issuance, transfer, renewal or extension
of a letter of credit and banker's acceptance. If the Line of Credit shall
mature, including maturity upon acceleration, Borrower and Co-Borrower shall, on
demand, deliver to Bank good funds equal to 100% of Bank's maximum liability
under all outstanding letters of credit and banker's acceptances, to be held as
cash collateral for Borrower's and Co-Borrower's reimbursement obligations and
other Indebtedness.
(b) In order to induce Bank to issue letters of credit and
banker's acceptances, Borrower and Co-Borrower agree that neither Bank nor its
correspondents or agents shall be liable or responsible for, and Borrower's or
Co- Borrower's unconditional obligation to reimburse Bank for the obligations
shall not be affected by, any event or circumstance, including without
limitation: (i) the validity, enforceability, genuineness or sufficiency of
documents or of any endorsement thereon existing in connection with any letter
of credit or banker's acceptance, even if such documents should in fact prove in
any or all respects to be invalid, unenforceable, insufficient, fraudulent or
forged; (ii) any breach of contract or other dispute between Borrower or
Co-Borrower and any beneficiary of a letter of credit or holder of a draft
accepted by Bank; (iii) payment by Bank upon presentation of a draft or
documents which do not comply in any respect with the terms of such letter of
credit or draft; (iv) loss of or damage to any collateral; (v) the invalidity or
insufficiency of any endorsements; (vi) delay in giving or failure to give
notice of arrival or any other notice; (vii) failure of any instrument to bear
any reference or adequate reference to the letter of credit or draft or to
documents to accompany any instrument at negotiation; or (viii) failure of any
person to note the amount of any payment on the reverse of the letter of credit
or to surrender or take up the letter of credit or to forward documents in the
manner required by the letter of credit; or (ix) any other matter whatsoever
excepting only with respect to each of the foregoing items the gross negligence
(or negligence as to (iii) above), bad faith or willful misconduct of Bank or
its agent. Borrower and Co-Borrower agree that any action taken or permitted to
be taken by Bank or its agent under or in connection with any letter of credit
or banker's acceptance, including related drafts, documents, or property, unless
constituting gross negligence (or negligence as to (iii) above), bad faith or
willful misconduct on the part of Bank or its agent, shall be binding on
Borrower and Co-Borrower and shall not create any resulting liability to the
Borrower or Co-Borrower on the part of Bank or its agent. Borrower and
Co-Borrower will immediately examine (a) a copy of the letter of credit (and of
any amendments thereof) sent to them by Bank or its agent, and (b) all drafts,
instruments and documents delivered to them from time to time by Bank or its
agents, and Borrower and Co-Borrower will immediately notify Bank in writing of
any claim or irregularity.
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<PAGE> 17
(c) Any letter of credit issued hereunder shall be governed
by the Uniform Customs of Practice for Documentary Credit (1993 Rev.),
International Chamber of Commerce Publication No. 500, as revised from time to
time, except to the extent that the terms of such publication would limit or
diminish rights granted to Bank hereunder or in any other Loan Document.
(d) Any letter of credit issued hereunder shall expire not
more than one year from the date it is first issued and, in any event, not later
than the Business Day immediately preceding the last day of the Revolving Credit
Period.
3.3 LINE OF CREDIT INTEREST.
(a) Borrower and Co-Borrower shall pay accrued and unpaid
interest on the outstanding principal amount of Advances under the Line of
Credit at a per annum rate equal to either (i) the LIBOR Rate PLUS .75% (75
basis points) or (ii) the LIBOR Market Index Rate PLUS .75% (75 basis points),
as the LIBOR Market Index Rate may change from day to day, as selected by
Borrower and Co-Borrower on the date of the initial closing of this Agreement
and from time to time in accordance herewith. Interest on the outstanding
principal balance of the Line of Credit Note shall be payable monthly on the
last day of each month, commencing January 31, 1999 and continuing thereafter
until maturity;
(b) On the date of the initial Advance hereunder and on the
third Business Day immediately preceding the last day of each Interest Period,
Borrower and Co-Borrower shall select either the LIBOR Market Index Rate or the
LIBOR Rate as the basis on which the rate of interest applicable to Advances
outstanding shall be calculated, IT BEING UNDERSTOOD that if Borrower and
Co-Borrower fail to notify Bank in writing of its selection of the basis (either
LIBOR Market Index Rate or LIBOR Rate) upon which the rate of interest hereunder
shall be calculated, upon the expiration of the then current Interest Period,
Borrower and Co-Borrower shall be deemed to have selected the LIBOR Market Index
Rate as the basis upon which the rate of interest hereunder shall thereafter be
calculated. If Borrower and Co-Borrower shall at any time select the LIBOR Rate
as the basis on which the rate of interest applicable to Advances outstanding
shall be calculated, then Borrower and Co-Borrower shall also notify the Bank of
its selection of the duration of the Interest Period (either one month, three
months or six months), IT BEING UNDERSTOOD that if Borrower and Co-Borrower fail
to notify Bank in writing of their selection of such duration, then Borrower and
Co-Borrower shall be deemed to have selected the one month LIBOR Rate as the
basis upon which the rate of interest hereunder shall thereafter be calculated.
During each Interest Period, the rate of interest so selected shall apply
continuously; and
(c) Interest shall be calculated on the outstanding
principal balance of the Line of Credit Note and shall be computed on the basis
of a year of three hundred sixty (360) days, calculated for the actual number of
days elapsed. When the LIBOR Market Index Rate is selected as the basis upon
which the rate of interest on
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<PAGE> 18
outstanding Advances is to be calculated, such rate of interest shall be
adjusted daily to reflect the LIBOR Market Index Rate, and the LIBOR Market
Index Rate will continue as the basis upon which such rate of interest is
calculated until Borrower and Co-Borrower shall otherwise indicate in writing to
Bank. When the LIBOR Rate is selected as the basis upon which the rate of
interest on outstanding Advances is to be calculated, such rate of interest
shall be fixed for the Interest Period, IT BEING UNDERSTOOD that if Borrower and
Co-Borrower fail to notify Bank in writing of its selection of the LIBOR Rate as
the continuing basis upon which the rate of interest hereunder shall be
calculated, upon the expiration of such Interest Period, Borrower and
Co-Borrower shall be deemed to have selected the LIBOR Market Index Rate as the
basis upon which the rate of interest hereunder shall thereafter be calculated.
3.4 REPAYMENT OF LINE OF CREDIT. Unless due sooner pursuant to the
terms of ARTICLE VIII, Borrower and Co-Borrower shall make payment in full of
the entire outstanding principal amount of the Line of Credit Note and all
accrued and unpaid interest thereon on the Maturity Date.
3.5 LINE OF CREDIT ADVANCES. Any request for an Advance under the Line
of Credit Note shall be signed by an Executive Officer of Borrower and
Co-Borrower, and shall specifically request a borrowing of funds under the Line
of Credit and certify that, to the best of his or her knowledge after due
inquiry (1) no Event of Default and no Unmatured Event of Default has occurred
or is continuing under the terms of any of the Credit Documents, and (2) all
representations and warranties contained in the Credit Documents are true and
correct as of the date of such requested Advance, and all obligations to be
performed by Borrower and Co-Borrower under the Credit Documents have been duly
performed. Any request for an Advance shall be given to Bank not later than
12:00 noon, Eastern Standard Time, on the Business Day upon which the Advance is
requested to be advanced, (b) shall state the amount and date of the requested
Advance, (c) shall be, and shall state that it is, requested for a purpose that
is permitted by this Agreement, and (d) shall be confirmed and verified to
Bank's satisfaction.
3.6 PURPOSE OF LINE OF CREDIT LOANS. Any Advances made to Borrower and
Co-Borrower hereunder shall be used by Borrower and Co-Borrower solely to
provide working capital in the normal operation of Borrower's and Co-Borrower's
business. Without limiting the generality of the foregoing, Borrower and
Co-Borrower shall not use, and shall not allow any Affiliate to use, any of such
funds for any impermissible purpose.
3.7 REDUCTIONS IN AVAILABILITY. The principal amount available under
the Line of Credit may be permanently reduced, in whole or in part, at the
written request of Borrower and Co-Borrower (an "Optional Reduction"), PROVIDED
that the principal amount then outstanding under the Line of Credit Note shall
be equal to or less than the amount available under the Line of Credit as so
reduced.
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3.8 FEES. On the last day of each March, June, September and December,
commencing March 31, 1999, Borrower and Co-Borrower shall pay Bank an
availability fee equal to .10% (10 basis points) per annum on the average daily
unused available principal under the Line of Credit Note for the preceding
calendar quarter or portion thereof. Such fee shall be computed on the basis of
a year of three hundred sixty (360) days and calculated for the actual number of
days elapsed. The unused available principal under the Line of Credit Note for
any particular day shall be the Maximum Line of Credit Commitment less (i) the
outstanding advances under the Line of Credit Note, and (ii) the aggregate
amounts of letters of credit or banker's acceptances issued, pursuant to SECTION
3.2, and outstanding on such day.
3.9 INDEMNIFICATION AND ADDITIONAL COSTS. (a) INDEMNIFICATION. Borrower
and Co-Borrower indemnify Bank against Bank's loss or expense in employing
deposits as a consequence (a) of Borrower's or Co-Borrower's failure to make any
payment when due under this Agreement or the Note or (b) of any payment,
prepayment or conversion of any Advance on a date other than the last day of an
Interest Period ("Indemnified Loss or Expense"). The amount of such Indemnified
Loss or Expense shall be determined by Bank based upon the assumption that Bank
funded 100% of the Loan in the London interbank market. Any prepayment shall
include accrued and unpaid interest to the date of prepayment on the principal
amount prepaid and all other sums due and payable hereunder. All payments
received on this Note may be applied in such order as Bank in its sole
discretion shall determine.
ARTICLE IV
ADDITIONAL PROVISIONS RELATING TO THE LOANS
-------------------------------------------
4.1 INTEREST RATE LIMITATION. Notwithstanding anything to the contrary
contained in any of the Credit Documents, if any specified interest rate shall
exceed the maximum rate permitted by applicable law as in effect from time to
time, Borrower and Co-Borrower shall pay interest at the highest permissible
rate, which rate shall change as and when the highest permissible rate shall
change. If Borrower or Co-Borrower makes an interest payment under any of the
Credit Documents that exceeds the maximum amount of interest permitted by
applicable law, the excess of such payment above the maximum amount that
lawfully may be paid shall be refunded to Borrower or Co-Borrower, together with
interest thereon at the maximum lawful rate in effect at the time that such
interest was collected or, at Borrower's or Co-Borrower's option, credited
toward the payment of principal due under such Credit Document (as directed by
Borrower or Co-Borrower); or, if Borrower or Co-Borrower makes an interest
payment that exceeds the maximum amount of interest permitted by applicable law
and all principal thereunder shall have been previously or thereby paid in full,
such payment shall be deemed to have been the result of mathematical error and
Bank shall refund to Borrower or Co-Borrower, as applicable, the amount of such
payment that is in excess of the amount that lawfully may be paid.
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4.2 PAYMENTS TO PRINCIPAL OFFICE. Each payment of principal (including
any prepayment), interest and any other amount required to be paid to Bank
pursuant to this Agreement or in any other Credit Document shall be made to Bank
at its Principal Office, in immediately available funds constituting legal
tender in the United States of America for the payment of public and private
debts, on or before 1:00 p.m. Jacksonville, Florida, time on the date such
payment is due. IN CASE ANY SUCH PAYMENT IS NOT SO MADE, BANK IS HEREBY
AUTHORIZED TO, BUT SHALL NOT BE OBLIGATED TO, DEBIT THE AMOUNT OF SUCH PAYMENT
FROM ANY ONE OR MORE ACCOUNTS OF BORROWER OR CO-BORROWER WITH BANK.
4.3 DEFAULT RATE. In the event that any payment of principal of,
interest on or other amount with respect to this Agreement, the Notes or any of
the other Credit Documents is not made when due, such amount shall continue to
be an obligation of Borrower and Co-Borrower hereunder and shall bear interest
from the due date thereon until paid in full in the manner provided in SECTION
4.2 hereof, at a rate of interest per annum equal to the lesser of five percent
(5%) IN EXCESS OF the rate specified in the applicable Note or the highest rate
of interest permitted by law.
4.4 LIMITATION OF ALL ADVANCES. Notwithstanding any other provision of
this Agreement, no Advance hereunder shall be made if the conditions precedent
contained herein and in the other Credit Documents have not been fully satisfied
and performed. Bank shall not be obligated to honor any request for an Advance
if an Event of Default or an Unmatured Event of Default shall have occurred or
be continuing. In addition, Bank shall not be obligated to fund any amount in
excess of its lending limitation as determined by applicable law; IT BEING
UNDERSTOOD that the aggregate amount presently being lent to Borrower and
Co-Borrower, pursuant to this Agreement and under the circumstances presently
encompassing Borrower, Co- Borrower and Bank, is in compliance with the lending
limitations as are applicable to Bank. In the event that Bank is unable to honor
any request for an Advance under the Line of Credit as a result of lending
limitations imposed upon Bank, for purposes of calculating the availability fee
payable pursuant to SECTION 3.8, the unused available principal under the Line
of Credit Note shall be reduced by the amount of the Line of Credit that Bank is
unable to fund as a result of such limitation.
4.5 INDEBTEDNESS. At the time of each Advance made under or pursuant to
this Agreement, Borrower and Co-Borrower shall immediately become indebted to
Bank for the amount of such Advance, which Advance shall be made in immediately
available funds.
4.6 SPECIAL LOAN ACCOUNT. Bank may deposit the proceeds of the Loans
into an account of Borrower maintained with Bank.
4.7 PREPAYMENTS. Any prepayment of the Loans shall not affect
Borrower's or Co-Borrower's obligation to continue making payments under any
swap agreement
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(as defined in 11 U.S.C. Section 101) with Bank or its affiliates which will
remain in full force and effect notwithstanding any such prepayment.
4.8 UNAVAILABILITY OF INTEREST RATE. If, at any time, (a) Bank shall
determine that, by reasons of circumstances affecting foreign exchange and
interbank markets generally, LIBOR deposits in the applicable amounts are not
being offered to Bank, or (b) a new, or a revision in any existing, law or
interpretation or administration (including reversals) thereof by any government
authority, central bank or comparable agency shall make it unlawful or
impossible for Bank to honor its obligations under this Agreement, then (i)
Bank's obligation to make, maintain or convert into a LIBOR Rate shall be
suspended; and (ii) the applicable LIBOR Rate shall immediately be converted to
the Prime Rate for the remainder of the Interest Period.
ARTICLE V
CONDITIONS TO LOANS
-------------------
The obligation of Bank to make the Loans hereunder is subject to the
following conditions precedent, which must be satisfied at the time each Advance
is to be made hereunder:
5.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties
made by Borrower and Co-Borrower in the Credit Documents or in any list,
schedule, document or certificate delivered to Bank in connection herewith or
therewith shall have been true as of the time made and shall be true on the date
of each Advance.
5.2 EXECUTION OF CREDIT DOCUMENTS. Borrower and Co-Borrower shall have
delivered all Credit Documents not previously executed and delivered to Bank,
duly executed by all of the parties thereto.
5.3 PERFORMANCE OF OBLIGATIONS. Borrower and Co-Borrower shall have
performed all of their obligations under the Credit Documents to be performed on
or before the date of the Advance, including, establishing and maintaining the
demand deposit account pursuant to SECTION 4.6.
5.4 DOCUMENTATION. All instruments and documents incident to the
issuance and delivery of the Credit Documents shall be satisfactory in form and
substance to Bank and counsel for Bank; and Bank shall have received:
(1) Two executed counterparts of each of the Credit
Documents not previously executed and delivered to
Bank (other than the Notes, as to which only one
counterpart shall be executed and delivered to
Bank);
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(2) Certified copies of the Articles of Incorporation,
By-Laws and resolutions of Borrower and Co-Borrower
authorizing the transactions contemplated by the
Credit Documents;
(3) Good standing certificate of Borrower and
Co-Borrower, certified by the Delaware Secretary of
State dated as of a date not more than fifteen (15)
days prior to the date hereof;
(4) UCC searches reasonably requested by Bank;
(5) All other documents that it may reasonably request;
and
(6) With respect only to the initial closing of this
Agreement, the favorable opinion of counsel for
Borrower and Co-Borrower, in form and substance
reasonably satisfactory to Bank and its counsel, as
to such matters as Bank may reasonably request.
5.5 PAYMENT OF COMMITMENT FEE. Borrower and Co-Borrower shall have paid
to Bank, in immediately available funds, a non-refundable commitment fee in the
amount of $82,500.00.
5.6 EVENTS OF DEFAULT OR UNMATURED EVENTS OF DEFAULT. No Event of
Default or Unmatured Event of Default shall exist.
5.7 CLOSING OF ACQUISITION. As to the Advance under the Term Loan only,
the Acquisition shall have been closed, subject only to the payment of the
purchase price by Co-Borrower with the proceeds of such Advance, and Bank shall
have received documentation with respect to such closing, and the use of such
proceeds, satisfactory to Bank in its reasonable discretion.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce Bank to enter into this Agreement and to commit to
make the Advances hereunder, Borrower and Co-Borrower hereby represent and
warrant to Bank (which representations and warranties shall survive the delivery
of the Credit Documents and the making of the Advances) as follows:
6.1 INCORPORATION. Each of Borrower and Co-Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, has the corporate power to own its properties and to carry on
its business as now being conducted, is duly qualified as a foreign corporation
to do business in
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every jurisdiction in which the nature of its business makes such qualification
necessary, and is in good standing in all such jurisdictions.
6.2 POWER AND AUTHORITY. Each of Borrower and Co-Borrower has the legal
capacity and right, and is duly authorized under all applicable provisions of
law, to execute, deliver and perform each of the Credit Documents, and all
corporate and other action on the part of Borrower and Co-Borrower required for
the lawful execution, delivery and performance thereof has been duly taken. Each
of the Credit Documents, upon execution and delivery thereof, will be a valid
and binding obligation of Borrower and Co-Borrower, respectively, enforceable in
accordance with its respective terms. Neither the execution or delivery of the
Credit Documents, nor the fulfillment of or compliance with their provisions and
terms, will conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a violation of or default under any applicable law,
regulation, order, writ or decree, the Certificate of Incorporation or Bylaws of
Borrower or Co-Borrower, or any agreement or instrument to which Borrower or
Co-Borrower is now or hereafter becomes a party, or create any lien, charge or
encumbrance upon any of Borrower's or Co-Borrower's property or assets pursuant
to the terms of any agreement or instrument to which Borrower or Co-Borrower is
a party or by which Borrower or Co-Borrower or any of their properties are
bound.
6.3 INDEBTEDNESS. Neither Borrower nor Co-Borrower has any Indebtedness
other than or in excess of the amounts set forth in its most recent financial
statements or in EXHIBIT 1.1A hereto.
6.4 LITIGATION. There are no pending or, to the best of Borrower's or
Co- Borrower's knowledge, threatened actions or proceedings before any court,
arbitrator or governmental or administrative body or agency that could
materially adversely affect the properties, business or condition, financial or
otherwise, of Borrower or Co-Borrower, or in any way adversely affect or call
into question the power or authority of Borrower or Co-Borrower to enter into or
perform any of the Credit Documents or the validity or enforceability of any of
the Credit Documents.
6.5 TAX RETURNS. Borrower and Co-Borrower have filed all Tax returns,
statements, reports and forms (collectively, the "Returns") required to be filed
by it with any Taxing Authority in accordance with all applicable laws. Borrower
and Co-Borrower have timely paid or made provision for (in accordance with
Generally Accepted Accounting Principles) all Taxes shown as due and payable on
the Returns that have been filed, and will timely pay or make provisions for all
Taxes shown to be due on the Returns. There are no liens or other encumbrances
for Taxes upon the assets or properties of Borrower or Co-Borrower. There are no
outstanding agreements or waivers extending the statutory period of limitation
applicable to any Return required to be filed with respect to Borrower or
Co-Borrower. So long as any amounts are outstanding under the Notes, neither
Borrower nor Co-Borrower will request any extension of time to file any Return
unless such extension is not requested
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<PAGE> 24
as a result of or in connection with a materially adverse event or circumstances
affecting Borrower that has not been previously disclosed to Bank in writing.
All Taxes which are required to be withheld or collected by Borrower or
Co-Borrower have been duly withheld or collected and, to the extent required,
have been paid to the proper Taxing Authority or properly deposited as required
by applicable law.
6.6 CONTRACT OR RESTRICTION. Neither Borrower nor Co-Borrower is a
party to or bound by any contract or agreement or is subject to any charter or
other corporate restrictions that could materially and adversely affect the
business, properties or condition, financial or otherwise, of Borrower or
Co-Borrower or adversely affect or call into question the power or authority of
Borrower or Co-Borrower to enter into or perform any of the Credit Documents or
the validity or enforceability of any of the Credit Documents.
6.7 ERISA REQUIREMENT. Neither Borrower nor Co-Borrower has incurred
any material accumulated funding deficiency within the meaning of ERISA or
incurred any material liability to the Pension Benefit Guaranty Corporation
established under ERISA (or any successor thereto under ERISA) in connection
with any employee pension benefit plan established or maintained by it or by any
Person under common control with it (within the meaning of Section 424(c) of the
IRC or of Section 4001(b) of ERISA), or in which its employees are entitled to
participate. No Reportable Event or prohibited transaction (each as defined in
ERISA) in connection with any such plan has occurred and is continuing, Borrower
and Co-Borrower are in compliance with all requirements of ERISA and there are
no circumstances that could cause the loss of any such plan's qualification
under Section 401(a) of ERISA.
6.8 POSSESSION OF FRANCHISES AND LICENSES. Borrower and Co-Borrower
possess all franchises, certificates, licenses, permits and other authorizations
from governmental subdivisions or regulatory authorities, free from
restrictions, that are necessary in any material respect for the ownership,
maintenance or operation of their properties and the conduct of their business
as presently conducted, and neither Borrower nor Co-Borrower is in violation of
any thereof.
6.9 GOVERNMENTAL AUTHORIZATION. No authorization, consent, approval,
exemption, franchise, permit, license or action of or filing with any
governmental or public body or authority is required to authorize, or is
required in connection with, the execution, delivery and performance by Borrower
and Co-Borrower of any of the Credit Documents or the performance of any of the
transactions contemplated hereby or thereby.
6.10 FINANCIAL CONDITION; CAPITAL EXPENDITURES. The financial
statements of Borrower as of September 30, 1998, as previously delivered to
Bank, have been prepared in accordance with Generally Accepted Accounting
Principles consistently applied, subject to year-end adjustments and footnotes,
and accurately reflect the financial condition of Borrower as of that date.
Since that date, there has not been
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<PAGE> 25
any materially adverse change in the business, operations or financial condition
of Borrower, and Borrower has incurred no material liabilities other than those
incurred in the ordinary course of business.
6.11 COMPLIANCE WITH LAWS. Borrower and Co-Borrower are in compliance
in all material respects with all laws, statutes, rules, regulations, orders and
decisions of all governmental authorities that apply to the conduct of their
business, their properties or their assets, including without limitation
statutes, regulations or ordinances, relating to (a) the handling, storage,
discharge, leakage, emission, escape or release of any substance or material
that may be considered a hazardous or toxic substance, waste or material under
any governmental statute, regulation or ruling; (b) the discharge, release or
emission of any pollutant on or into the soil, air or water; (c) wages, hours,
hiring, non-discrimination, promotion, retirement, benefits, pensions and
working conditions; (d) land use requirements; and (e) trade and antitrust
regulations. Borrower and Co-Borrower have all permits, consents and approvals
required by any governmental authority and are in compliance with all
requirements, conditions and limitations contained in or imposed by such
permits.
6.12 REGULATION U. No part of the proceeds of any Advance will be or
has been used to purchase or carry, or to reduce or retire any loan incurred to
purchase or carry, any margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System) or to extend credit to others
for the purpose of purchasing or carrying any such margin stock. Neither
Borrower nor Co-Borrower is engaged as one of its important activities in
extending credit for the purpose of purchasing or carrying such margin stock. If
requested by Bank, Borrower and Co-Borrower will furnish to Bank, in connection
with any Advance, a statement in conformance with the requirements of Federal
Reserve Form U-1 referred to in Regulation U. In addition, no part of the
proceeds of any Advance will be used for the purchase of commodity future
contracts (or margins therefor for short sales) or any commodity. Neither the
making of the Advances nor the use of the proceeds thereof will violate or be
inconsistent with the provisions of Regulations G, T, U or X issued by the Board
of Governors of the Federal Reserve System, in each case as now in effect or as
the same may hereafter be in effect.
6.13 MATERIAL FACTS. Neither any of the Credit Documents nor any
affidavit, document, instrument, certificate or statement furnished to Bank by
or on behalf of Borrower or Co-Borrower in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading. There is no fact known to Borrower or Co-Borrower
that has not been disclosed to Bank in writing that materially and adversely
affects, or in the future may materially and adversely affect, the business,
operations, properties or assets or the condition, financial or otherwise, of
Borrower or Co-Borrower.
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<PAGE> 26
6.14 CLAIMS AND OFFSETS. No Event of Default or Unmatured Event of
Default exists and there is no defense, set off or counterclaim against payment
of principal of or interest under the Notes or against any other amounts due or
that may become due under the Credit Documents. All defenses, setoffs,
counterclaims or claims against Bank and all affiliated persons and entities,
and all of its past, present and future officers, directors, shareholders,
agents, attorneys and employees, and their respective successors, assigns, heirs
and legal representatives, of any nature, if any, held by Borrower or
Co-Borrower, whether known or unknown, that relate to or arise out of the
existing loan documents or the administration or enforcement thereof, are hereby
forever waived, released and discharged.
6.15 INTENT AND EFFECT OF TRANSACTIONS. The transactions provide for
herein:
(a) Are not made or incurred with the intent to hinder,
delay or defraud any Person to whom Borrower or Co-Borrower has been, is now or
may hereafter become indebted;
(b) Do not render Borrower or Co-Borrower insolvent, nor is
Borrower or Co-Borrower insolvent at the time the transactions provided for
herein and the other Credit Documents are entered into;
(c) Do not leave Borrower or Co-Borrower with unreasonably
small capital with which to engage in their business, or in any business or
transaction in which they intend to engage; and
(d) Are not entered into with the intent to incur, or with
the belief that Borrower or Co-Borrower would incur, debts that would be beyond
their ability to pay as such debts mature.
6.16 U.S. LOCK LIABILITIES. Pursuant to the terms of the Acquisition,
Co-Borrower will assume all of the liabilities of the U.S. Lock division of WOC
Inc. Each of such liabilities that are not paid at the closing of the
Acquisition will be paid in a timely manner as they become due.
ARTICLE VII
COVENANTS
---------
Borrower and Co-Borrower covenant and agree that, so long as any
portion of the Loans or any of Borrower's or Co-Borrower's liabilities to Bank
remain unpaid or outstanding, Borrower, Co-Borrower and each Subsidiary:
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<PAGE> 27
7.1 REPORTS, CERTIFICATES AND OTHER INFORMATION. Shall furnish to Bank:
(a) ANNUAL FINANCIALS. Within one hundred twenty (120) days
after the end of each fiscal year of Borrower, a copy of the audited financial
statements of Borrower, prepared in accordance with Generally Accepted
Accounting Principles, consistently applied, together with an unqualified letter
of an independent certified public accounting firm selected by Borrower and
acceptable to Bank. Such statements shall include a balance sheet, a statement
of income and expenses, a statement of cash flow and such other and further
reports and schedules as may reasonably be requested by Bank, including but not
limited to verification of Borrower's compliance with the financial covenants
set forth in this Agreement. Such statements shall be consolidated, and if
requested by Bank, consolidating form for Borrower and its Subsidiaries, and
shall be certified as to their correctness by an Executive Officer of Borrower.
(b) TAX RETURNS. If requested by Bank in writing, within two
hundred seventy (270) days after the end of each fiscal year of Borrower, or, if
an extension for filing such return with the Internal Revenue Service is
requested, promptly after the timely filing of such return, a copy of Borrower's
federal income tax return including all schedules and attachments thereto,
certified as to its correctness and completeness by an Executive Officer of
Borrower.
(c) QUARTERLY FINANCIALS. Within sixty (60) days after the
end of each fiscal quarter of Borrower, a copy of unaudited management-prepared
quarterly financial statements of Borrower, prepared in accordance with
Generally Accepted Accounting Principles, consistently applied. Such statements
shall include a balance sheet, a statement of income and expenses, a statement
of cash flow and such other and further reports and schedules as may reasonably
be requested by Bank, and verification of Borrower's compliance with the
financial covenants set forth in this Agreement. Such statements shall be
certified as to their correctness by a principal financial officer of Borrower.
(d) CERTIFICATES. Contemporaneously with the furnishing of a
copy of each annual report and each Quarterly Report provided for in this
SECTION 7.1, a certificate dated the date of each such report, signed by an
Executive Officer of Borrower, to the effect that (i) such report provides a
fair presentation of the financial position of the Company as of the date of
such report, and the results of
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operations for the periods so presented, and (ii) no Event of Default or
Unmatured Event of Default has occurred and is continuing, or, if there is any
such event, describing it and the steps, if any, being taken to cure it. Such
certificate shall be in the form of the certificates previously delivered to
Bank pursuant to the Existing Agreement, or in such other form reasonably
requested by Bank.
(e) MANAGEMENT LETTER. Within ten (10) days after delivery
to Borrower, any management letter or similar report from Borrower's Independent
auditors.
(f) SEC REPORTS. Promptly after they become publicly
available, copies of all periodic reports and proxy or information statements
filed by Borrower with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, or distributed to its stockholders.
(g) OTHER INFORMATION. From time to time such other
information concerning Borrower or Co-Borrower as Bank may reasonably request.
7.2 USE OF LOAN PROCEEDS. Shall use the proceeds of the Loan only for
the commercial purposes permitted herein or otherwise permitted by Bank and
furnish Bank all evidence that it may reasonably require with respect to such
use.
7.3 MAINTENANCE OF BUSINESS AND PROPERTIES. Shall at all times
maintain, preserve and protect all of its material property used or useful in
the conduct of its business, and keep the same in good repair, working order and
condition (ordinary wear and tear excepted), and from time to time make, or
cause to be made, all material necessary repairs, renewals, replacements,
betterments and improvements thereto so that the business carried on in
connection therewith may continue to be conducted properly and in accordance
with standards generally accepted in businesses of a similar type and size at
all times, and maintain and keep in full force and effect all licenses and
permits necessary to the proper conduct of its business.
7.4 INSURANCE. Shall maintain such liability insurance, workers'
compensation insurance, business interruption insurance and casualty insurance
as may be required by law, as may be customary and usual for prudent businesses
in its industry or as may be reasonably required by Bank and shall insure and
keep insured all such properties with good and reputable insurance companies and
satisfactory to Bank. All hazard insurance shall be in amounts and shall contain
co-insurance and deductible provisions approved by Bank, and shall not be
terminable except upon 30 days' written notice to Bank.
7.5 NOTICES. Shall provide to Bank immediate written notice of (a) the
occurrence of an Event of Default or an Unmatured Event of Default; (b) any
litigation or material changes in existing litigation which, if determined
adversely to such Person, would likely result in a loss of $500,000 or more (in
excess of insurance proceeds available with respect thereof, if any) or
$1,000,000 regardless of insurance coverage; (c) any damage or loss to property
involving a loss of $500,000 or more (in excess of insurance proceeds available
with respect thereto, if any) or $1,000,000 regardless of insurance coverage or
any judgment against Borrower or any Subsidiary of $500,000 or more (in excess
of insurance proceeds available with respect thereto, if any) or $1,000,000
regardless of insurance coverage; (d) any notice from taxing
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authorities as to claimed deficiencies or any tax Lien or any notice relating to
alleged ERISA violations which, if determined adversely to such Person, would
likely result in a loss of $500,000 or more; (e) any Reportable Event, as
defined in ERISA; (f) any loss or threatened loss of licenses or permits if the
result would be a loss of $500,000 or more; (g) any change of or decision to
change Borrower's independent accountants; (h) if Borrower learns that any of
its representations herein are untrue in any material respect; and (i) any
notice or claim of violation or suspected violation of any laws, regulations or
ordinances relating to hazardous or toxic materials, which, if determined
adversely to such Person, would likely result in a loss of $500,000 or more.
7.6 INSPECTIONS. Shall permit inspections, reviews and audits of its
properties and records at such times and in such manner as may be reasonably
required by Bank; provided that such inspections shall be limited to no more
than two per year unless an Event of Default or an Unmatured Event of Default
shall have occurred and is continuing. The cost of such audits, reviews and
inspections shall be borne by Borrower if an Event of Default or an Unmatured
Event of Default shall have occurred and is continuing or if they reveal the
existence of an Event of Default or an Unmatured Event of Default.
7.7 DEBT. Shall not create or permit to exist any Indebtedness,
including any guaranties or other contingent obligations, except Permitted Debt.
7.8 LIENS. Shall not create or permit to exist any Liens on any of its
property except Permitted Liens.
7.9 DIVIDENDS. Shall not pay or declare any dividends (other than stock
dividends) or other distributions or purchase, redeem or otherwise acquire any
stock or other equity interests (collectively, "DISTRIBUTION") unless (a) after
giving effect thereto, there shall be no Event of Default or Unmatured Event of
Default hereunder; (b) after giving effect thereto, Borrower's Tangible Net
Worth (as calculated in SECTION 7.23 ("FINANCIAL COVENANTS")) would not be less
than that required by this Agreement; and (c) the aggregate Distributions with
respect to any four consecutive fiscal quarters would not exceed Borrower's net
income for such period or Borrower's net income for any fiscal year after March
31, 1996, whichever is less; PROVIDED however, that any Subsidiary may pay
dividends to Borrower or another Subsidiary wholly-owned by Borrower.
7.10 MERGER, SALE, ETC. Shall maintain its corporate existence, good
standing and necessary qualifications to do business and shall not reorganize,
merge or consolidate with or into any Person or acquire all or substantially all
of the assets of, or 50% or more of any class of equity interest of, any Person
except for Permitted Investments, or sell, lease, assign or otherwise dispose of
any Subsidiaries or any substantial portion of its assets (other than sales of
obsolete or worn-out equipment, sales of inventory in the ordinary course of
business and sales of assets (including stock of Subsidiaries) which constitute
Permitted Investments and which do not, in the
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aggregate, have a book value of more than 5 % of the Tangible Net Worth of
Borrower measured at the time of each sale or disposition).
7.11 LOANS AND OTHER INVESTMENTS. Shall not make or permit to exist any
advances or loans to, or guarantee or become contingently liable, directly or
indirectly, in connection with the obligations, leases, stock or dividends of,
or own, purchase or make any commitment to purchase any stock, bonds, notes,
debentures or other securities of, or any interest in, or make any capital
contributions to (all of which are sometimes collectively referred to herein as
"INVESTMENTS") any Person except for Permitted Investments.
7.12 CHANGE IN BUSINESS. Shall not enter into any business which is
substantially different from the business or businesses in which it is presently
engaged.
7.13 TRANSACTIONS WITH AFFILIATES. Shall not directly or indirectly
purchase, acquire or lease any property from, or sell, transfer or lease any
property to, or become partners or joint venturers with, or otherwise deal with,
in the ordinary course of business or otherwise, any Affiliate (other than a
Subsidiary); PROVIDED, HOWEVER, that the transactions described on EXHIBIT 7.13
are approved as described in such Exhibit; and further provided that additional
transactions that do not involve liability, Investments or obligations of
Borrower and its Subsidiaries in excess of $250,000 at any time outstanding or
payments by Borrower or its Subsidiaries in excess of $250,000 in any 12-month
period shall be permitted after written notice to Bank if such transactions are
not materially less advantageous to Borrower or such Subsidiaries than would be
the case if no such affiliation existed.
7.14 NO SALE, LEASEBACK. Shall not enter into any sale-and-leaseback or
similar transaction.
7.15 MARGIN STOCK. Shall not use any proceeds of the Loans to purchase
or carry any margin stock (within the meaning of Regulation U of the Board of
Governors of Federal Reserve System) or extend credit to others for the purpose
of purchasing or carrying any margin stock.
7.16 PAYMENT OF TAXES, ETC. Shall pay before delinquent all of its
material obligations, debts and taxes, except payment of taxes may, after
written notice to Bank, be contested in good faith by appropriate proceedings
provided adequate reserves are established as required by GAAP and further
provided that neither Borrower nor any Subsidiary nor their respective assets
are subject to any Liens for the nonpayment of such taxes or other onerous
condition.
7.17 SUBORDINATION. Shall cause all debt and other obligations now or
hereafter owed to any Affiliate to be subordinated in right of payment and
security to the Loans in accordance with subordination agreements satisfactory
to Bank.
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<PAGE> 31
7.18 COMPLIANCE; HAZARDOUS SUBSTANCES. Shall strictly comply with all
laws, regulations, ordinances and other legal requirements, specifically
including, without limitation, ERISA, all securities laws and all environmental
and safety laws. Unless approved in writing by Bank, Borrower nor any Subsidiary
shall engage in the storage, manufacture, disposition, processing, handling, use
or transportation of any Hazardous Substances, whether or not in compliance with
applicable laws and regulations except for ordinary and necessary amounts of
solvents, paints, cleaning material and similar substances used, stored or sold
by Borrower or its Subsidiaries in the ordinary courses of business and in
strict compliance with all applicable laws and regulations.
7.19 SUBSIDIARIES. Shall not acquire or form any Subsidiaries (except
Subsidiaries which are Permitted Investments) or permit any Subsidiary to issue
capital stock except to its parent. Any Subsidiary acquired or formed by
Borrower shall join in this Agreement as co-borrower and shall be released from
obligations hereunder if all of Borrower's interest in such Subsidiary is sold
or otherwise disposed of in accordance with this Agreement and no Default exists
or would exist after such transaction.
7.20 WITHHOLDING TAXES. Shall pay as and when due all employee
withholding, FICA and other payments required by federal, state and local
governments with respect to wages paid to employees, except payment of taxes
may, after written notice to Bank, be contested in good faith by appropriate
proceedings provided adequate reserves are established as required by GAAP and
further provided that neither Borrower nor any Subsidiary nor their respective
assets are subject to any Liens for the nonpayment of such taxes or other
onerous condition.
7.21 DEPOSIT ACCOUNTS. Shall maintain its primary operating accounts
with Bank.
7.22 ERISA. Borrower shall cause each employee benefit plan qualified
on the date hereof or hereafter qualified to remain qualified under Section
401(a) of the IRC and remain in compliance with the provisions of ERISA. With
respect to any such plan, Borrower shall not cause or permit to be caused any
material accumulated funding deficiency (as described in SECTION 6.7 hereof),
any material liability to the Pension Benefit Guaranty Corporation, any
Reportable Event or prohibited transaction (as described in SECTION 6.7 hereof),
or any action, the effect of which could result in the loss of a Plan's
compliance with ERISA or qualification under Section 401(a) of the IRC. Borrower
shall furnish directly to Bank (i) as soon as possible, and in any event within
30 days after any executive officer of Borrower or any ERISA Affiliate either
knows or has reason to know that any Reportable Event has occurred that alone or
together with any other Reportable Event could reasonably be expected to result
in liability of Borrower to the PBGC in an aggregate amount exceeding $250,000,
a statement of the president or chief financial officer setting forth details as
to such Reportable Event and the action proposed to be taken with respect
thereto, together
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<PAGE> 32
with a copy of the notice, if any, of such Reportable Event given to the PBGC,
(ii) promptly after receipt thereof, a copy of any notice Borrower or any ERISA
Affiliate may receive from the PBGC relating to the intention of the PBGC to
terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate
which is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of
Section 412 of the Internal Revenue Code) or to appoint a trustee to administer
any Plan or Plans, (iii) within 10 days after the due date for filing with the
PBGC pursuant to Section 412(n) of the Internal Revenue Code of a notice of
failure to make a required installment or other payment with respect to a Plan,
a statement of the president or chief financial officer setting forth details as
to such failure and the action proposed to be taken with respect thereto,
together with a copy of such notice given to the PBGC and (iv) promptly and in
any event within 30 days after receipt thereof by Borrower or any ERISA
Affiliate from the sponsor of a Multiemployer Plan, a copy of notice received by
Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal
Liability or (B) a determination that a Multiemployer Plan is, or is expected to
be, terminated or in reorganization, in each case within the meaning of Title IV
of ERISA.
7.23 FINANCIAL COVENANTS. Comply with the following financial covenants
on a consolidated basis:
(a) The Tangible Net Worth of Borrower shall not be less
than $48,000,000 PLUS 50% of Borrower's net income from September 30, 1998
through the date of such determination;
(b) The ratio of Total Liabilities of Borrower to Tangible
Net Worth of Borrower shall not be more than:
(i) 1.20: 1.00, from the date hereof through June
30, 1999;
(ii) 1.10: 1.00, from July 1, 1999 through June 30,
2000; and
(iii) 1.00: 1.00, after June 30, 2000.
(c) The ratio (the "Fixed Charge Ratio") of Borrower's net
income before interest expense, income taxes, depreciation, amortization and
rent expense and less dividends paid by the Company, to the sum of its interest
expense, current maturities of long-term debt and rent expense shall not be less
than:
(i) 5.00: 1.00, from the date hereof through June
30, 1999;
(ii) 4.00: 1.00, from July 1, 1999 through June 30,
2000; and
(iii) 3.00: 1.00, after June 30, 2000;
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<PAGE> 33
The Fixed Charge Ratio shall be calculated at each fiscal quarter end, based
upon the four consecutive fiscal quarters last ended.
7.24 MANAGEMENT; CONTROL. Any change in the chief executive officer of
Borrower shall be subject to Bank's approval, not to be unreasonably withheld.
Borrower shall not issue stock or options to Waxman or take any action which
would cause or allow Borrower to become a direct or indirect Subsidiary of
Waxman or to become subject to any covenants or restrictions in any trust
indentures or other agreements to which Waxman or its Subsidiaries are parties
or by which their assets are bound.
7.25 FURTHER ASSURANCES. Shall take such further action and provide to
Bank such further assurances as may be reasonably requested to ensure compliance
with the intent of this Agreement and the other Credit Documents.
7.26 MAINTAIN EXISTENCE AND RIGHTS. Shall cause to be done all things
necessary to preserve and keep in full force and effect its corporate existence,
rights and franchises and to comply with all laws applicable to it, shall be
qualified to do business and in good standing in the State of Delaware and every
other jurisdiction in which the nature of its business makes such qualification
necessary and shall not suffer or permit its dissolution or liquidation, in
whole or in part, or conveyance of any of its stock.
ARTICLE VIII
EVENTS OF DEFAULT
-----------------
8.1 EVENTS OF DEFAULT. If any one or more of the following events
(herein called "Events of Default") shall occur, an Event of Default shall be
deemed to have occurred:
(a) PAYMENT. If Borrower, Co-Borrower or any Subsidiary
defaults in the payment of any principal of or interest on the Notes (or fails
to pay such principal or interest in the manner set forth herein) or of any
other amount payable hereunder or under any of the other Credit Documents, that
is not cured within five (5) days thereafter, or under any other Indebtedness to
Bank, that is not cured within any grace period provided in the document or
instrument evidencing such Indebtedness), either by the terms hereof or thereof
or otherwise as herein or therein provided; or
(b) PAYMENT OF OTHER OBLIGATIONS. If Borrower, Co-Borrower
or any Subsidiary defaults in the payment of principal of or interest on any
other Indebtedness that is in excess of $250,000 (other than taxes being
contested as permitted by this Agreement), or in excess of $500,000 with respect
to disputed amounts owed to vendors outside the United States, beyond any period
of grace provided with respect
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<PAGE> 34
thereto, or in the performance of any other agreement, term or condition
contained in any agreement or instrument under which any such Indebtedness is
created if the effect of such default in payment or performance is to cause, or
permit the holder or holders of such obligation (or a trustee on behalf of such
holder or holders) to cause, such obligation to become due prior to its stated
maturity; or
(c) REPRESENTATIONS AND WARRANTIES. If any representation,
warranty, report or certification made by or on behalf of Borrower or
Co-Borrower herein or in any of the other Credit Documents or in any writing
furnished in connection with or pursuant to this Agreement or any of the other
Credit Documents shall be false or misleading in any material respect (i) on the
date as of which made or reaffirmed or (ii) at any other time; or
(d) SALE OF ASSETS OR STOCK. If Borrower or Co-Borrower
sells a material portion of its assets; or there is a material change in the
ownership of or effective control of Borrower or Co-Borrower from the date
hereof; or Borrower or Co-Borrower shall consent to, record or otherwise suffer
to exist any change in the ownership of more than 5% of the outstanding capital
stock of Borrower or Co-Borrower without Bank's prior consent; or
(e) OTHER COVENANTS. If Borrower, Co-Borrower or any
guarantor defaults in the performance or observance of any agreement, covenant,
term or condition binding on them contained in the Credit Documents and, except
with respect to defaults in the performance of the covenants contained in any of
SECTIONS 7.2, 7.6, 7.7, 7.8, 7.9, 7.10, 7.13, and 7.24 hereof (as to which there
is no cure period), and SECTION 7.1 hereof (as to which an Event of Default
shall occur if Borrower or Co-Borrower should fail to deliver to Bank any such
required report, certificate or information within the time period set forth
therein, and shall fail to cure such default within five days of notice thereof
from Bank), such default is not remedied within thirty (30) days after its
occurrence; or
(f) DEFAULT UNDER CREDIT DOCUMENTS. If a default or event of
default shall occur under any of the other Credit Documents or under any swap
agreement (as defined in 11 U.S.C. Section 101) with Bank or its affiliates; or
(g) LIQUIDATION, DISSOLUTION OR BANKRUPTCY. If Borrower,
Co-Borrower or any Subsidiary shall Liquidate or dissolve or suspend operation
of their business; or shall file a voluntary petition or an answer, or an
involuntary petition that is not dismissed within sixty (60) days is filed
against Borrower, Co-Borrower or any Subsidiary seeking reorganization,
arrangement, readjustment of any of their debts or for any other relief under
Bankruptcy Code or under any other insolvency act or law, state or federal, now
or hereafter existing, or any other action is taken by Borrower, Co-Borrower or
any Subsidiary indicating their consent to, approval of or acquiescence in any
such petition or proceeding; or if Borrower, Co-Borrower or any Subsidiary
applies for, or a receiver, trustee or custodian is appointed for Borrower,
Co-Borrower or any Subsidiary or for all or a substantial part of any of their
property; or if Borrower,
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<PAGE> 35
Co-Borrower or any Subsidiary enters into an assignment for the benefit of
creditors; or if Borrower, Co-Borrower or any Subsidiary is unable, or admits in
writing its inability to pay any of its debts as they mature; or a warrant of
attachment, execution or similar process against any substantial part of the
property of Borrower, Co-Borrower or any Subsidiary is issued that is not
dismissed within thirty (30) days and which attachment, warrant or process
relates to a claim in excess of $500,000 either alone or when aggregated with
all other such warrants, attachments, and processes; or
(h) JUDGMENT. If a final judgment in excess of $500,000
shall be rendered against Borrower, Co-Borrower or any Subsidiary and if, within
thirty (30) days after entry thereof, such judgment shall not have been
discharged or execution thereon stayed pending appeal, or if within thirty (30)
days after the expiration of any such stay, such judgment shall not have been
discharged; or
(i) INVALIDITY OF CREDIT DOCUMENTS. If (i) any of the Credit
Documents shall be deemed invalid or unenforceable for any reason; or (ii) any
Person shall contest the validity of any of the Credit Documents, PROVIDED Bank
reasonably believes that such Person's claim may be valid and such invalidity or
unenforceability could have a material adverse effect on the condition
(financial or otherwise) of Borrower or Co-Borrower, or on Bank's position
vis-a-vis, this Agreement or either of the Notes.
(j) CONTROL BY WAXMAN. Waxman should acquire, directly or
through intermediaries, more than 49.9% of any class of voting securities of
Borrower or any Subsidiary of Borrower or Borrower or any Subsidiary should
become subject to any covenant or restriction contained in any trust indenture
or other agreement to which Waxman or any of its Subsidiaries is a party or by
which its assets are bound.
8.2 REMEDIES. Upon the occurrence of any Event of Default (but after
the expiration of any grace period provided herein with respect to such Event of
Default) and at any time thereafter Bank may, at its option, declare the Loans
and all or any portion of the obligations owing by Borrower and/or Co-Borrower
to Bank under the Credit Documents to be forthwith due and payable, whereupon
(or otherwise upon the occurrence of any event described in SECTION 8.1(g)
hereof, whether or not such declaration shall be made) the Advances and any
other such obligations shall forthwith become due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
expressly waived, anything contained herein or in the other Credit Documents to
the contrary notwithstanding (other than grace periods and/or notice provisions
provided for herein) and in addition, Bank may immediately proceed to foreclose
its mortgages or liens on or security interest in any collateral that it may
hold and to exercise its rights under and to do all other things provided for by
law or by the terms of the Credit Documents. Borrower and Co- Borrower
acknowledge the unconditional right of Bank to pledge or transfer the Notes to
any third party ten (10) days after providing notice of such sale to Borrower
and Co-Borrower, during which
-30-
<PAGE> 36
ten (10) days Borrower and Co-Borrower shall have the right to purchase, or
cause to be purchased by parties of its choosing, the Notes under the terms
offered by the third party selected by Bank; PROVIDED, HOWEVER, that Bank shall
have an unconditional right to pledge or transfer the Notes to any party at any
time following an Event of Default contained in SECTIONS 8.1(a) or 8.1(g)
hereof. Borrower and Co-Borrower hereby grant to Bank the right to disclose to
any prospective purchaser(s) of the Notes any information requested by such
prospective purchaser(s); PROVIDED, THAT, prior to disclosing any material,
non-public information regarding Borrower, Bank shall obtain a confidentiality
agreement from the prospective purchaser in substance reasonably satisfactory to
Borrower. Other than such permitted disclosures to any such prospective
purchasers, Bank shall not disclose to any Person any confidential information
regarding the financial condition of Borrower or Co-Borrower except (i) as
required by law, or court or administrative order, (ii) information otherwise
publicly available or freely usable or obtained from another public source,
(iii) basic and general information regarding the level of lending activity and
deposit activity and account status, given in response to an inquiry from a
creditor of Borrower or Co-Borrower, or (iv) with the consent of Borrower or Co-
Borrower.
ARTICLE IX
MISCELLANEOUS
-------------
9.1 WAIVER OF DEFAULT. Bank may, by written notice to Borrower or Co-
Borrower at any time and from time to time, waive any default in the performance
or observance of any condition, covenant or other term hereof or any Event of
Default that shall have occurred hereunder and its consequences. Any such waiver
shall be for such period and subject to such conditions as shall be specified in
any such notice. In the case of any such waiver, Borrower, Co-Borrower and Bank
shall be restored to their former positions and rights hereunder and under the
other Credit Documents, and any Event of Default so waived, whether or not in
writing, shall be deemed to be cured and not continuing, but no such waiver
shall extend to any subsequent or other Event of Default or impair any right
consequent thereon.
9.2 AMENDMENTS AND WAIVERS. Bank, Borrower and Co-Borrower may, subject
to the provisions of this Section, from time to time enter into written
agreements for the purpose of adding any provisions to this Agreement or the
other Credit Documents or changing in any manner the rights of Bank, Borrower or
Co-Borrower hereunder or under the other Credit Documents. No such amendment,
modification or supplement shall be established by custom, conduct or course of
dealing, but solely by an instrument in writing duly executed by the party to be
charged therewith.
9.3 NOTICES. All notices and other communications required or permitted
hereunder or under any of the other Credit Documents shall be in writing
(including telex, telefax or telegraphic communication) and shall be delivered
personally, telexed
-31-
<PAGE> 37
(with appropriate answerback received), telefaxed (with confirmation of receipt
immediately thereafter by telephone), telegraphed, sent by nationally recognized
overnight courier (marked for overnight delivery), or sent by registered,
certified or express mail, postage prepaid, return receipt requested, addressed
as follows or to such other address as may be hereafter designated in writing
hereunder by the respective parties:
Borrower Barnett, Inc.
or 801 W. Bay Street
Co-Borrower: Jacksonville, FL 32204
Attention: Andrea M. Luiga
Phone:
Fax:
With a copy to: Foley & Lardner
200 N. Laura Street
Jacksonville, Florida 32202
Attention: Charles V. Hedrick, Esq.
Phone: 904-359-2000
Fax: 904-359-8700
Bank: First Union National Bank
214 Hogan Street - FL0011
Jacksonville, Florida 32202
Attention: Richard P. Silva
Senior Vice President
Phone: 904-489-1641
Fax: 904-489-4461
With a copy to: LeBoeuf, Lamb, Greene & MacRae, LLP
50 North Laura Street, Suite 2800
Jacksonville, Florida 32202-3650
Attention: Pamela K. Phillips, Esq.
Phone: 904-354-8000
Fax: 904-353-1673
All such notices and communications shall (i) when delivered in person on any
Business Day between the hours of 9:00 AM to 5:00 PM. (local time), be effective
when delivered (or if delivered after 5:00 PM, be effective on the next Business
Day to occur), (ii) when telexed (provided the correct answerback has been
received) or telefaxed (provided receipt is immediately thereafter confirmed by
telephone) or telegraphed, in each case on any Business Day between the hours of
9:00 AM to 5:00 PM (Eastern Standard time), be effective when telexed, telefaxed
or delivered to the telegraph company for immediate transmittal, respectively
(or if telexed, telefaxed or delivered to the telegraph company after 5:00 PM,
be effective on the next Business
-32-
<PAGE> 38
Day to occur), or (iii) if mailed, be effective three (3) Business Days after
the same has been deposited in the mails, postage prepaid, by registered or
certified mail, return receipt requested, or (iv) if sent by a nationally
recognized overnight courier service, be effective one (1) Business Day after
the same has been delivered to such courier service marked for overnight
delivery; in each case addressed as aforesaid.
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9.4 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise or delay in
exercising, on the part of Bank, any right, power or privilege hereunder or
under any of the other Credit Documents shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder or
thereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies provided herein
and in the other Credit Documents are cumulative and not exclusive of any other
rights or remedies provided by law.
9.5 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
agreements, representations and warranties made herein shall survive the
delivery of the Notes and the other Credit Documents and the making and any
renewal of the Loans, notwithstanding any investigation thereof made by Bank or
its agents.
9.6 SET OFF BY BANK. UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT, BANK
IS HEREBY AUTHORIZED AT ANY TIME AND FROM TIME TO TIME, WITHOUT NOTICE TO
BORROWER OR CO-BORROWER, TO SET OFF, APPROPRIATE AND APPLY ANY OR ALL ITEMS
HEREINABOVE REFERRED TO AGAINST ALL INDEBTEDNESS OF BORROWER AND CO-BORROWER TO
BANK, UNDER THE CREDIT DOCUMENTS OR OTHERWISE, WHETHER NOW EXISTING OR HEREAFTER
ARISING.
9.7 ENTIRE AGREEMENT. This Agreement, together with the other Credit
Documents and other documents executed in connection herewith or contemplated
hereby, contains the entire agreement of the parties regarding the subject
matter hereof. The parties acknowledge that Bank has made no promises,
agreements, conditions, undertakings, warranties or representations that are not
specifically set forth in such agreements.
9.8 ENFORCEABILITY. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable as to one or more of the
parties, all other provisions nevertheless shall remain effective and binding on
the parties hereto.
9.9 REIMBURSEMENT OF EXPENSES. Borrower and Co-Borrower shall reimburse
Bank on demand (a) for all costs and out-of-pocket expenses (including without
limitation reasonable attorneys' fees, accounting fees, recording fees, the
costs of any appraisal, survey, environmental assessments, engineering,
inspections, searches, and other reasonable expenses), directly or indirectly
incurred in connection
-33-
<PAGE> 39
with the preparation, execution, delivery, modification, waiver and amendment of
this Agreement and the other Credit Documents and (b) for all expenses incurred
by Bank (including without limitation reasonable attorneys' fees, court costs
and other expenses, whether or not incurred in trials, appeals, bankruptcy
actions or otherwise) in the enforcement of this Agreement or the other Credit
Documents or in the collection of any indebtedness or other amounts owing under
this Agreement or the other Credit Documents.
9.10 EXECUTION OF COUNTERPARTS. The Credit Documents may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which together
shall constitute one and the same instrument.
9.11 STAMP OR OTHER TAXES. Borrower and Co-Borrower shall pay any and
all stamp, documentary, excise and intangible taxes and recording fees now or
hereafter payable in respect of this Agreement, the Notes, and the other Credit
Documents or any modification(s) thereof, and shall hold Bank harmless with
respect thereto. Bank may, but shall not be obligated to, at any time or from
time to time, debit any deposit account of Borrower or Co-Borrower at Bank for
the amount of any such taxes.
9.12 WAIVER OF JURY TRIAL; ARBITRATION. EACH OF BANK, BORROWER AND
CO-BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER
CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANK TO
ENTER INTO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS. Upon demand of either
party hereto, whether made before or after institution of any judicial
proceeding, any dispute, claim or controversy arising out of, connected with or
relating to this Agreement and other Credit Documents ("Disputes") between
parties to this Agreement shall be resolved by binding arbitration as provided
herein. Institution of a judicial proceeding by a party does not waive the right
of that party to demand arbitration hereunder. Disputes may include, without
limitation, tort claims, counterclaims, disputes as to whether a matter is
subject to arbitration, claims brought as class actions, claims arising from
Credit Documents executed in the future, or claims arising out of or connected
with the transaction reflected by this Agreement.
Arbitration shall be conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in the city of the Principal Office. The
expedited procedures set forth in
-34-
<PAGE> 40
Rule 51 ET SEQ. of the Arbitration Rules shall be applicable to claims of less
than $1,000,000.00. All applicable statutes of limitation shall apply to any
Dispute. A judgment upon the award may be entered in any court having
jurisdiction. The panel from which all arbitrators are selected shall be
comprised of licensed attorneys. The single arbitrator selected for expedited
procedure shall be a retired judge from the highest court of general
jurisdiction, state or federal, of the state where the hearing will be conducted
or if such person is not available to serve, the single arbitrator may be a
licensed attorney. Notwithstanding the foregoing, this arbitration provision
does not apply to disputes under or related to swap agreements.
9.13 GOVERNING LAW. This Agreement and the other Credit Documents
issued hereunder shall be governed in all respects by the laws of the State of
Florida.
IN WITNESS WHEREOF, Borrower, Co-Borrower and Bank have caused this
Agreement to be duly executed under seal as of the day and year first above
written.
BARNETT, INC.
By
--------------------------------------
Name: Andrea M. Luiga
Title: Vice President-Finance and
Chief Financial Officer
U.S. LOCK CORPORATION
By
--------------------------------------
Name: Andrea M. Luiga
Title:
FIRST UNION NATIONAL BANK
By
--------------------------------------
Richard P. Silva
Senior Vice President
-35-
<PAGE> 41
EXHIBIT 1.1(A)
PERMITTED DEBT
--------------
The following shall be additional Permitted Debt:
1. Indebtedness in the outstanding amount not to exceed two million
dollars incurred to purchase tangible assets to be used in Borrower's business,
provided that the principal amount of such Indebtedness shall not at any time
exceed the purchase price of the assets so purchased.
2. Indebtedness subordinated and right of payment and security to the
Loans in accordance with subordination agreements approved in writing by Bank.
3. Indebtedness payable to suppliers and other trade creditors in the
ordinary course of business on ordinary and customary trade terms.
4. Indebtedness of any Subsidiary to Borrower or another subsidiary.
<PAGE> 42
EXHIBIT 1.1(B)
PERMITTED LIENS
---------------
The following shall be additional Permitted Liens:
1. Deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance, social security and similar laws.
2. Attachment, judgment and other similar non-tax Liens not exceeding
$250,000, in the aggregate, at any one time outstanding arising in connection
with court proceedings but only if and for so long as (a) the execution or
enforcement of such Liens is and continues to be effectively stayed and bonded
on appeal, (b) the validity and/or amount of the claims secured thereby are
being actively contested in good faith by appropriate legal proceedings and (c)
such Liens do not, in the aggregate, materially detract from the value of the
assets of the Person whose assets are subject to such Lien or materially impair
the use thereof in the operation of such Person's business.
3. Liens securing Permitted Debt incurred solely for the purpose of
financing the acquisition of tangible assets provided that such Lien does not
secure more than the purchase price of such assets and does not encumber
property other than the purchased assets.
4. Liens reflected on Annex A to this Exhibit 1.1(B).
<PAGE> 43
EXHIBIT 7.13
TRANSACTIONS WITH AFFILIATES
----------------------------
1. Intercorporate Agreement in substantially the form appended to the
Registration Statement of Borrower on Form S-1 which was filed with the
Securities and Exchange Commission on march 5, 1996 (the "Registration
Statement").
2. Trade payables/receivables generated in the ordinary course of business
of Borrower and its Subsidiaries.
3. Registration rights agreement in favor of Waxman in substantially the
form appended to the Registration Statement.
4. Trademark License Agreement in substantially the form appended to the
Registration Statement.
<PAGE> 44
LINE OF CREDIT
NOTE
US $15,000,000.00 _________________, Georgia
January 6, 1999
FOR VALUE RECEIVED, BARNETT, INC., a Delaware corporation, and U.S.
LOCK CORPORATION, a Delaware corporation (collectively, the "Borrower") hereby,
jointly and severally, promise to pay to the order of FIRST UNION NATIONAL BANK
(the "Lender"), at the offices of First Union National Bank located at 225 Water
Street, Jacksonville, Florida, 32202 (or at such other place or places as the
Lender may designate), at the times and in the manner provided in the Credit
Agreement dated January 6, 1999 between Borrower and Lender (the "Credit
Agreement"), the principal sum of FIFTEEN MILLION AND 00/100 DOLLARS (US
$15,000,000.00), or, if less, the aggregate principal amount of all Advances
outstanding under the terms and conditions of this Line of Credit Note (the
"Line of Credit Note") and the Credit Agreement. Capitalized terms used herein
and not otherwise defined shall have the same meanings as those ascribed to such
terms in the Credit Agreement. The Borrower also unconditionally promises to pay
interest on the aggregate unpaid principal amount of this Line of Credit Note at
times, in a manner and rates of interest determined in accordance with terms and
conditions set forth in the Credit Agreement.
This Line of Credit Note is one of the promissory notes referred to in
the Credit Agreement and is issued to evidence the Line of Credit Loan made
available by the Lender pursuant to the Credit Agreement. Any holder of this
Line of Credit Note is entitled to the benefits of, and remedies provided in,
the Credit Agreement and the other Credit Documents. Reference is made to the
Credit Agreement for provisions relating to the interest rate, maturity,
payment, prepayment and acceleration of this Line of Credit Note.
In the event of an acceleration of the maturity of this Line of Credit
Note, this Line of Credit Note shall become immediately due and payable, without
presentation, demand, protest or notice of any kind, all of which are hereby
waived by the Borrower.
In the event this Line of Credit Note is not paid when due at any
stated or accelerated maturity, the Borrower agrees to pay, in addition to the
principal and interest, all costs of collection, including reasonable attorneys'
fees.
This Line of Credit Note shall be governed by and construed in
accordance with the internal laws and judicial decisions of the State of
Florida. The Borrower hereby submits to the nonexclusive jurisdiction and venue
of the federal and state courts
<PAGE> 45
located in Jacksonville, Florida, although the Lender shall not be limited to
bringing an action in such courts.
IN WITNESS WHEREOF, the Borrower has caused this Line of Credit Note to
be executed under seal by their duly authorized corporate officers as of the day
and year first above written.
BARNETT, INC.
By: ___________________________________
Name: Andrea M. Luiga
Title: Vice President-Finance and
Chief Financial Officer
U.S. LOCK CORPORATION
By: ___________________________________
Name: Andrea M. Luiga
Title:
2
<PAGE> 46
TERM LOAN NOTE
US $33,000,000.00 ________________, Georgia
January 6, 1999
FOR VALUE RECEIVED, BARNETT, INC., a Delaware corporation, and U.S.
LOCK CORPORATION, a Delaware corporation, (collectively, the "Borrower"),
hereby, jointly and severally, promise to pay to the order of FIRST UNION
NATIONAL BANK (the "Lender"), at the offices of First Union National Bank
located at 225 Water Street, Jacksonville, Florida, 32202 (or at such other
place or places as the Lender may designate), at the times and in the manner
provided in the Credit Agreement dated January 6, 1999 between Borrower and
Lender (the "Credit Agreement"), the principal sum of THIRTY THREE MILLION AND
00/100 DOLLARS (US $33,000,000.00) or, if less, the aggregate principal amount
of all Advances outstanding under the terms and conditions of this term loan
note (the "Term Loan Note") and the Credit Agreement. Capitalized terms used
herein and not otherwise defined shall have the same meanings as those ascribed
to such terms in the Credit Agreement. The Borrower also unconditionally
promises to pay interest on the aggregate unpaid principal amount of this Term
Loan Note at times, in a manner and rates of interest determined in accordance
with terms and conditions set forth in the Credit Agreement.
This Term Loan Note is one of the promissory notes referred to in the
Credit Agreement and is issued to evidence the Term Loan made available by the
Lender pursuant to the Credit Agreement. Any holder of this Term Loan Note is
entitled to the benefits of, and remedies provided in, the Credit Agreement and
the other Credit Documents. Reference is made to the Credit Agreement for
provisions relating to the interest rate, maturity, payment, prepayment and
acceleration of this Term Loan Note.
In the event of an acceleration of the maturity of this Term Loan Note,
this Term Loan Note shall become immediately due and payable, without
presentation, demand, protest or notice of any kind, all of which are hereby
waived by the Borrower.
In the event this Term Loan Note is not paid when due at any stated or
accelerated maturity, the Borrower agrees to pay, in addition to the principal
and interest, all costs of collection, including reasonable attorneys' fees.
This Term Loan Note shall be governed by and construed in accordance
with the internal laws and judicial decisions of the State of Florida. The
Borrower hereby
<PAGE> 47
submits to the nonexclusive jurisdiction and venue of the federal and state
courts located in Jacksonville, Florida, although the Lender shall not be
limited to bringing an action in such courts.
IN WITNESS WHEREOF, the Borrower has caused this Term Loan Note to be
executed under seal by their duly authorized corporate officers as of the day
and year first above written.
BARNETT, INC.
By ___________________________________
Name: Andrea M. Luiga
` Title: Vice President-Finance and
Chief Financial Officer
U.S. LOCK CORPORATION
By ___________________________________
Name: Andrea M. Luiga
Title:
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K into Barnett Inc.'s
previously filed Registration statement on Form S-8 File No. 333-23431.
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,421
<SECURITIES> 0
<RECEIVABLES> 37,894
<ALLOWANCES> (1,980)
<INVENTORY> 52,733
<CURRENT-ASSETS> 94,941
<PP&E> 39,560
<DEPRECIATION> (15,978)
<TOTAL-ASSETS> 149,186
<CURRENT-LIABILITIES> 24,615
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 91,409
<TOTAL-LIABILITY-AND-EQUITY> 149,186
<SALES> 241,374
<TOTAL-REVENUES> 241,374
<CGS> 161,183
<TOTAL-COSTS> 161,183
<OTHER-EXPENSES> 53,906
<LOSS-PROVISION> 872
<INTEREST-EXPENSE> 1,217
<INCOME-PRETAX> 25,068
<INCOME-TAX> 9,853
<INCOME-CONTINUING> 15,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,215
<EPS-BASIC> .94
<EPS-DILUTED> .94
</TABLE>
