SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 1996.
Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1381875
(State of incorporation) (I.R.S. Employer
Identification No.)
8300 Tewantin Drive, Houston, Texas 77061
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number: (713) 644-1495
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 90 days.
Yes X No
------- -------
The number of shares outstanding of each of the Registrant's classes of common
stock as of June 30, 1996, was 8000 shares of Class A Common Stock, $100 par
value, and 45,775 shares of Class B Common Stock, $100 par value.
Page # 1 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
Item 1. Financial Statements
Condensed Balance Sheet June 30, 1996
and December 31, 1995........................ 3 - 4
Condensed Statement of Income - Six Months
Ended June 30, 1996 and 1995................. 5
Condensed Statement of Cash Flows - Six Months
Ended June 30, 1996 and 1995................. 6 - 7
Notes to Condensed Financial Statements............ 8 - 12
Item 2. Management's Discussion & Analysis of
Financial Condition and Results of
Operations .................................. 13 - 18
PART II Other Information
Items 1.- 6. 19
Signatures 20
Page # 2 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
- --------------
Cash $ 1,770,289 $ 1,266,915
Accounts Receivable, net of 7,555,508 6,564,773
subscriptions receivable in
the amount of $54,284 for 1996
and $34,316 for 1995
Inventory 12,130,280 10,455,070
Other Current Assets 238,577 320,271
------------ -----------
$ 21,694,654 $18,607,029
------------ -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
- --------------------------------------
At Cost Less Accumulated Depreciation
of $3,536,405 (1996) and $3,124,646
(1995) $ 9,576,674 $ 9,787,350
------------ -----------
OTHER ASSETS
- ------------
Notes Receivable (Note 3) $ 119,182 $ 109,483
Deferred Compensation Funded 214,384 214,384
Other Noncurrent Assets -0- 62,781
------------ -----------
$ 333,566 $ 386,648
----------- -----------
TOTAL ASSETS $31,604,894 $28,781,027
- ------------ =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
- -----------------------------
CURRENT LIABILITIES
- -------------------
Mortgage Payable $ 308,204 $ 308,204
Notes Payable-Capital Leases 79,674 92,783
Accounts Payable - Trade 11,869,290 9,519,737
Other Current Liabilities 1,104,087 914,833
Current Deferred Income Taxes
Payable (Note 5) 32,034 -0-
Federal Income Taxes Payable
(Note 5) 41,521 -0-
----------- -----------
$13,434,810 $10,835,557
----------- -----------
NONCURRENT LIABILITIES
- ----------------------
Mortgage Payable $ 2,264,189 $ 2,515,102
Notes Payable-Stock(Note 4) 185,810 176,810
Notes Payable-Capital Lease 157,837 169,126
Notes Payable-Vendor 118,182 108,013
Deferred Compensation Payable 214,384 214,384
Deferred Income Taxes Payable
(Note 5) 296,312 314,410
----------- -----------
$ 3,236,714 $ 3,497,845
----------- -----------
TOTAL LIABILITIES $16,671,524 $14,333,402
- ----------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page # 3 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
STOCKHOLDERS' EQUITY
- --------------------
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
8,160 & 7,960 shares $ 816,000 $ 796,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
46,276 & 43,149 shares 4,627,600 4,314,900
Common Stock, Class B
Subscribed 3,912.59 & 3,915.35
shares 391,259 391,535
Less Subscription Receivable (27,142) (17,158)
Preferred Stock 12% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
48,796.50 & 45,634.50 shares 4,879,650 4,563,450
Preferred Stock, Subscribed
3,912.59 & 3,915.35 391,259 391,535
Less Subscription Receivable (27,142) (17,158)
Paid in Surplus 287,050 280,277
----------- -----------
$11,338,534 $10,703,381
Less: Cost of Treasury Stock
1,302.75 & -0- shares 130,275 -0-
----------- -----------
$11,208,259 $10,703,381
Retained Earnings 3,725,111 3,744,244
----------- -----------
Total Stockholders' Equity $14,933,370 $14,447,625
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $31,604,894 $28,781,027
- -------------------- =========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page # 4 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------ ------------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME
------
Net Sales $28,611,449 $27,654,540 $61,546,124 $59,098,268
Sundry Income 136,780 129,882 279,488 277,859
----------- ----------- ----------- -----------
TOTAL INCOME $28,748,229 $27,784,422 $61,825,612 $59,376,127
------------ ----------- ----------- ----------- -----------
EXPENSE
-------
Net Mat'l. Costs $25,139,565 $24,095,677 $54,716,948 $52,450,741
Payroll Costs 1,461,676 1,419,943 2,926,949 2,946,895
Other Operating
Costs 1,825,489 1,746,253 3,303,222 3,149,323
Interest Expense 54,426 58,700 109,787 117,756
----------- ----------- ----------- -----------
TOTAL EXPENSE $28,481,156 $27,320,573 $61,056,906 $58,664,715
------------- ----------- ----------- ----------- -----------
INCOME BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 267,073 $ 463,849 $ 768,706 $ 711,412
-----------------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5) (98,021) (164,651) (272,810) (252,793)
------------------ ----------- ----------- ----------- -----------
NET INCOME $ 169,052 $ 299,198 $ 495,896 $ 458,619
----------
LESS ACCRUED
DIVIDENDS ON
PREFERRED STOCK $ (128,757) $ (100,288) $ (257,514) $ (200,577)
--------------- ----------- ----------- ----------- -----------
NET INCOME
APPLICABLE
TO COMMON
STOCKHOLDERS $ 40,295 $ 198,910 $ 238,382 $ 258,042
------------ =========== =========== =========== ===========
EARNINGS PER
SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ 0.71 $ 3.73 $ 4.26 $ 4.90
--------------- =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page # 5 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
- ----------------------------------
Net Income $ 495,896 $ 458,619
----------- -----------
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Depreciation $ 431,077 $ 427,469
Increase in Deferred Income Tax 13,936 3,461
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (990,735) $ (683,852)
Increase in Notes Receivable (9,699) (29,043)
(Increase) Decrease in Inventory (1,675,210) 1,320,671
Decrease in Other Assets 144,476 34,032
Increase in Notes Payable - Vendor 10,169 29,291
Increase (Decrease)in Accounts Payable 2,349,553 (31,604)
Increase in Other Liabilities 189,254 611,033
Increase in Federal Income Taxes Payable 41,521 -0-
----------- -----------
TOTAL ADJUSTMENTS $ 504,342 $ 1,681,458
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 1,000,238 $ 2,140,077
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital Expenditures $ (239,718) $(1,967,100)
Disposition of Fixed Assets 19,317 -0-
----------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES $ (220,401) $(1,967,100)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page # 6 of 20 Pages
<PAGE>
STATEMENT OF CASH FLOWS (UNAUDITED) Cont.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Decrease in Mortgage Payable $ (250,913) $ (154,103)
Increase in Notes Payable-Stock 9,000 22,000
Increase (Decrease) in Notes Payable-Capital Lease (24,398) 68,842
(Increase) Decrease in Subscription Receivable (19,968) (352)
Proceeds From Issuance of Stock 655,120 665,749
Purchase of Treasury Stock (130,275) (326,750)
Dividends Paid (515,029) (401,155)
----------- -----------
NET CASH USED FOR FINANCING
ACTIVITIES $ (276,463) $ (125,769)
----------- -----------
NET INCREASE IN
CASH AND CASH EQUIVALENTS $ 503,374 $ 47,208
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,266,915 688,935
----------- -----------
CASH & CASH EQUIVALENTS AT END OF
PERIOD $ 1,770,289 $ 736,143
----------- -----------
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest Expense Paid $ 109,787 $ 117,756
Income Taxes Paid 217,353 281,949
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page # 7 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
(1) General Information:
The condensed consolidated financial statements included herein have
been prepared by Handy Hardware Wholesale, Inc. (the "Company"). The
financial statements reflect all adjustments, which were all of a
recurring nature, which are, in the opinion of management, necessary
for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission
(SEC). The Company believes that the disclosures made are adequate to
make the information presented not misleading. The condensed
consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the
latest Form 10-K Annual Report.
(2) Earnings Per Share:
Earnings per common share (Class A and Class B Combined) are based on
the weighted average number of shares outstanding in each period after
giving effect to the stock issued, stock subscribed, accrued dividends
on preferred stock, and treasury stock as set forth by Accounting
Principles Board Opinion No. 15 as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ -------------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Calculation of Earnings Per Share
of Common Stock
Net Income $ 169,052 $ 299,198 $ 495,896 $ 458,619
Less: Accrued Dividends
on Preferred Stock (128,757) (100,288) (257,514) (200,577)
----------- ----------- ----------- -----------
$ 40,295 $ 198,910 $ 238,382 $ 258,042
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 56,818 53,313 55,948 52,703
Income Per Share
of Common Stock $ 0.71 $ 3.73 $ 4.26 $ 4.90
=========== =========== =========== ===========
</TABLE>
Page # 8 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(3) Revenue Recognition:
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. Accordingly, revenues
and expenses are accounted for using the accrual basis of accounting.
Under this method of accounting, revenues are recognized when a
receivable exists and expenses are recognized when the liability is
incurred.
(4) Accounting for Dividends on Preferred Stock:
The Company pays dividends on Preferred Stock during the first quarter
of each fiscal year. Only Shareholders of Preferred Stock on the
record date for the payment of the dividends are entitled to receive
dividends. Dividends are prorated for the portion of the twelve-month
period ending January 31, during which the Preferred Stock was held.
Because the Company is unable to anticipate the amount of the
Preferred Stock dividends, it does not accrue a liability for the
payment of those dividends on its balance sheet. To more properly
reflect income, however, on the Condensed Statement of Income included
herein, the Company has accrued an estimated portion of the dividends
to be paid in the first quarter of 1997 based on the dividends paid in
the first quarter of 1996.
When dividends on Preferred Stock are actually paid, there is a
reduction of retained earnings. Retained earnings on the Condensed
Balance Sheet for the six months ended June 30, 1996, contained
herein, therefore, are net of dividends actually paid during the first
quarter of 1996 in the amount of $515,029.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
- ------------------------------------
Property, Plant & Equipment Consists of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,462,592 7,450,391
Furniture, Computer, Warehouse 3,126,775 2,960,102
Transportation Equipment 495,915 473,706
----------- -----------
$13,113,079 $12,911,996
Less: Accumulated Depreciation (3,536,405) (3,124,646)
----------- -----------
$ 9,576,674 $ 9,787,350
=========== ===========
</TABLE>
Page # 9 of 20 Pages
<PAGE>
NOTE 3 - NOTES RECEIVABLE
- -------------------------
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
--------------------------- ---------------------------
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
DEBTOR COLLATERAL 1996 1995 1996 1995
- ------ ---------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Alamo Heights Hdwe. - $ -0- $ -0- $ 5,893 $ 5,893
Breed & Co. Inc. - -0- -0- 3,090 3,089
Broadway Hdwe. - -0- -0- 21,333 21,333
Casey's Supply - -0- -0- 1,303 -0-
Commerce Hdwe. - -0- -0- 3,053 -0-
Decatur Hdwe. - -0- -0- 2,340 2,340
Doug Ashy Bldg. Mt'l. - -0- -0- 1,912 1,912
Grandbury Farm
& Ranch - -0- -0- 1,219 1,219
Handyman Hdwe. - -0- -0- 13,165 13,165
Henckel's Hwy. 6
Ace Home Ctr. - -0- -0- 5,446 5,446
Island Hdwe. - -0- -0- 2,807 2,807
J & B Auto Supply & Hdwe. - -0- -0- 2,171 2,171
Jackson Hdwe.
& Supply Co. - -0- -0- 2,297 2,297
Karl Obst Feed Sales - -0- -0- 825 -0-
Katy Mason Hdwe. - -0- -0- 3,427 3,427
Kilgore Hdwe. - -0- -0- 3,556 3,556
King Feed & Hdwe. - -0- -0- 4,255 4,255
Liberty Auto Parts & Hdwe. - -0- -0- 2,880 2,880
Marchand's Inc. - -0- -0- 2,830 2,830
Mardis Auto Parts & Hdwe. - -0- -0- 2,619 2,619
Max Squires - -0- -0- 1,000 1,471
Mike's Hdwe. - -0- -0- 1,511 1,511
Overall Lumber - -0- -0- 3,362 3,362
A. Peterson Co. - -0- -0- 1,992 -0-
Pitts Hdwe. - -0- -0- 1,772 1,772
RBC Hdwe. - -0- -0- 2,549 2,549
Rusty's Plumbing & Hdwe. - -0- -0- 1,291 -0-
Sawyer Brothers Hdwe. - -0- -0- 4,840 4,840
Sealy Ace Hdwe. - -0- -0- 4,920 4,920
Stifter Lbr. - -0- -0- 3,087 3,087
Trahan Hdwe. - -0- -0- 1,372 1,372
Wagner Hdwe. - -0- -0- 3,360 3,360
Wichita Hdwe. - -0- -0- 1,705 -0-
----- -------- -------- --------
$ -0- $ -0- $119,182 $109,483
===== ======== ======== ========
</TABLE>
The notes reflected in the above table (except the note due from Max Squires)
reflect amounts due to the Company from its Member-Dealers under a deferred
payment agreement with the Company. Under this agreement, the Company supplies
Member-Dealers with an initial order of General Electric lamps. The payment for
this order is deferred so long as the Member-Dealer continues to purchase
General Electric lamps through the Company. If a Member-Dealer ceases to
purchase lamp inventory or sells or closes his business, then General Electric
bills the Company for the Member-Dealer's initial order and the note becomes
immediately due and payable in full to the Company.
Page # 10 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - NOTES PAYABLE - STOCK
- ------------------------------
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
---------------------- -------------------------
INTEREST MATURITY JUNE 30, DEC. 31. JUNE 30, DEC. 31,
PAYEE RATE COLLATERAL DATE 1996 1995 1996 1995
- ----- ----- ---------- ---- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Alamo Lbr. 6.25% None 2000 $ -0- $ -0- $ 3,000 $ 3,000
Arlington Hdwe. 6.25% None 2000 -0- -0- 56,400 56,400
Beere Hdwe. 6.00% None 1997 -0- -0- 1,100 1,100
Cleveland Hdwe. 6.00% None 1997 -0- -0- 21,760 21,760
Community Hdwe. 6.25% None 2000 -0- -0- 6,400 6,400
Company Store 6.25% None 2000 -0- -0- 9,600 9,600
D.A.D.S.Whsle,Inc. 6.25% None 2000 -0- -0- 5,000 5,000
Dan's Home Ctr. 6.00% None 1999 -0- -0- 8,600 8,600
Eagle Lake Farm &
Home Supply 6.25% None 2001 -0- -0- 9,000 -0-
Gulfway Lbr. Co. 6.25% None 2000 -0- -0- 12,800 12,800
Hawkins Hdwe. 6.00% None 1999 -0- -0- 2,150 2,150
Hometown Hdwe. 6.00% None 1997 -0- -0- 1,000 1,000
J & B Builders 6.00% None 1998 -0- -0- 7,000 7,000
Ken's Hdwe. 6.00% None 1999 -0- -0- 5,000 5,000
Patterson Hdwe. 6.00% None 1999 -0- -0- 12,000 12,000
Rockdale Bldg. Ctr. 6.25% None 2000 -0- -0- 3,000 3,000
Space City Hdwe. 6.00% None 1999 -0- -0- 9,000 9,000
Swan Lake Hdwe. 6.25% None 2000 -0- -0- 5,000 5,000
Yeager Hdwe. 6.00% None 1999 -0- -0- 2,000 2,000
Yeager Hdwe. 7.00% None 2000 -0- -0- 6,000 6,000
----- ----- -------- --------
$ -0- $ -0- $185,810 $176,810
===== ===== ======== ========
</TABLE>
The five-year, interest bearing notes listed in the above table reflect amounts
due from the Company to former Member-Dealers for the Company's repurchase of
shares of Company stock owned by these former Member-Dealers. According to the
terms of the note, only interest is paid on the outstanding balance of the note
during the first four years. In the fifth year, both interest and principal are
paid.
Principal payments due over the next five years are as follow:
1996 $ -0-
1997 $ 23,860
1998 $ 7,000
1999 $ 38,750
2000 $111,200
--------
$176,810
Page # 11 of 20 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
- ---------------------
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes,"
effective January 1, 1993, on a prospective basis. The major categories of
deferred income tax provisions are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Excess of tax over book depreciation $ 1,320,324 $ 1,313,050
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (169,847) (208,561)
Deferred Compensation (184,754) (179,754)
----------- -----------
Total $ 965,723 $ 924,735
Statutory Tax Rate 34% 34%
----------- -----------
Cumulative Deferred Income Tax Payable $ 328,346 $ 314,410
=========== ===========
Classified as:
Current Liability $ 32,034 $ -0-
Noncurrent Liability 296,312 314,410
----------- -----------
$ 328,346 $ 314,410
=========== ===========
</TABLE>
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
JUNE 30, JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
Principal components of income tax expense Federal:
Current
Income tax paid $ 110,275 $ 281,743
Carry-over of prepayment from
prior year 107,078 93,583
Refund received for overpayment
from prior year -0- (93,377)
----------- -----------
$ 217,353 $ 281,949
Federal Income Tax Payable (Receivable) 41,521 (32,617)
Carry-over to subsequent year -0- -0-
----------- -----------
Income tax for tax reporting
at statutory rate of 34% $ 258,874 $ 249,332
Deferred
Adjustments for financial reporting:
Depreciation 2,473 9,958
263A Uniform Capitalization
Costs 13,163 (4,797)
Other (1,700) (1,700)
----------- -----------
Provisions for federal income tax $ 272,810 $ 252,793
=========== ===========
</TABLE>
Page # 12 of 20 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
During the second quarter of 1996, total sales were 3.5 percent higher than
during the same quarter in 1995, as compared to a 5.4 percent increase in 1995
over 1994 and a 12.1 percent increase in 1994 over 1993. For the first six
months for each of these periods, sales increased by 4.1 percent, 7.8 percent
and 10.7 percent, respectively. Since the beginning of the fourth quarter 1995,
retail sales have been suppressed by high consumer debt. Additional factors that
have suppressed sales include an unusually late spring, significantly lower than
normal rainfall and continued pressure from retail warehouses, particularly in
the Houston and Dallas territories. These factors have resulted in only moderate
or no sales growth in most territories other than the Central Texas, Louisiana
and the eastern Gulf Coast regions. In addition, sales in the Rio Grande Valley
area have been negatively effected by the monetary and political unrest in
Mexico. Sales in the Austin, Brenham and Central Texas territory, Southern
Louisiana territory and the Baton Rouge, New Orleans and East Gulf Coast East
territory, however, showed significant increases of 22 percent, 15 percent and
11 percent, respectively, during the first six months of 1996 over the first six
months of 1995. These increases have resulted primarily from increased marketing
efforts by Company employees in those territories. The Company believes that an
increase in promotional sales activities and inventory available for orders,
plus low-cost dealer buying programs were also big elements of the Company's
sales growth in these territories.
Sales. The following table compares the Company's sales during the first
six months of 1996 to sales during the same period of 1995, by sales territory:
<TABLE>
<CAPTION>
Six Months Six Months
1996 1995
--------------------------------------------- -------------------------------
% Increase
in Sales
from Six % of % of
Month Total Total
Sales Territory Sales 1995 Sales Sales Sales
- ------------------------------ ----------- ----- ------ ----------- ------
<S> <C> <C> <C> <C> <C>
Houston Area $15,842,770 0% 25.8% $15,808,864 27.0%
Victoria, San Antonio,
Corpus Christi & Rio Grande
Valley Area* 11,019,342 -2% 17.9% 11,273,954 19.3%
North Texas, Dallas
& Fort Worth Area 9,816,558 0% 16.0% 9,825,049 16.8%
Austin, Brenham & Central
Texas Area 6,792,993 22% 11.1% 5,584,136 9.5%
Southern Louisiana Area 7,216,565 15% 11.8% 6,263,707 10.7%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 5,749,203 11% 9.4% 5,177,942 8.9%
Oklahoma & Arkansas Area 4,939,358 9% 8.0% 4,538,690 7.8%
----------- ----- ----------- -----
Totals: $61,376,789 (1) 100.0% $58,472,342 (1) 100.0%
=========== ===== =========== =====
</TABLE>
- ----------------------------------
* Includes sales to Mexico dealers
(1) Total does not include sales to dealers who were no longer Member-
Dealers at end of period.
Page # 13 of 20 Pages
<PAGE>
Net Material Costs and Rebates. Net material costs for the second quarter
and the first six months of 1996 were $25,139,565 and $54,716,948, respectively,
compared to $24,095,677 and $52,450,741, respectively, for the same periods in
1995. The increase of 4.3 percent in net material costs for the first six months
of 1996 parallels the increase of 4.1 percent in sales for the same period.
Net material costs as a percentage of sales remained stable: 88.9 percent in the
first six months of 1996 and 88.8 percent for the same period in 1995. Net
material costs for the second quarter of 1996 increased 4.3 percent over the
second quarter of 1995, which is higher than the 3.5 percent increase in sales
for the same periods. Net material costs as a percentage of sales were 87.9
percent in the second quarter of 1996 as compared to 87.1 percent for the same
period in 1995. The increase of net material costs as a percentage of sales in
the second quarter of 1996 over the second quarter of 1995 was the result of a
corporate decision to forego higher margins on selected inventory in order to
provide Member-Dealers with more competitive buying programs.
The relative stability of net material costs as a percentage of sales is
supported, in part, by the relative stability of purchase discounts and factory
rebates as a percentage of net material costs. Both were taken by the Company as
credits against material costs. Purchase discount income during the first six
months of 1996 was $1,300,469 (2.4% of material costs) as compared to $1,195,056
(2.3% of material costs) during the same 1995 period. Factory rebate income
during the same two periods was $1,983,871 (3.6% of material costs) and
$1,967,972 (3.7% of material costs), respectively.
Payroll Costs. Payroll costs during the second quarter and six months
ended June 30, 1996, were $1,461,676 and $2,926,949 respectively, as compared to
$1,419,943 and $2,946,895 for the same period in 1995. Payroll expense for the
first six months of 1996 declined by $19,946, a decrease of 0.7 percent. This
decline was a result of a 32.6 percent decline in overtime payroll ($160,970 in
the first six months of 1996 as compared to $238,909 in the first six months of
1995) and a 1.2 percent decline in the number of employees (249 in the first six
months of 1996 as compared to 254 in the first six months of 1995), offset by
regular salary increases. During 1995, due to the lack of adequate storage space
for inventory, the Company was forced to lease additional warehouse space in an
offsite facility. The lack of proximity of the additional space to the offices
of the Company resulted in an increase in payroll costs. During the second
quarter of 1996, payroll costs increased by 2.9 percent due to regular salary
increases and a 3.3 percent increase in overtime payroll. Overtime payroll
increased from $74,712 in the second quarter of 1995 to $77,158 in the same
period in 1996 due to increased demand from Member-Dealers as a result of the
later than usual spring in 1996.
Payroll costs for the second quarter of 1996 constituted 5.1 percent of both net
sales and total expenses, compared to 5.1 percent and 5.2 percent, respectively,
for the same quarter in 1995. Payroll costs accounted for 4.8 percent of both
sales and total expenses for the first six months of 1996 as compared to 5.0
percent for the same period in 1995.
Page # 14 of 20 Pages
<PAGE>
Other Operating Costs. During the second quarter and for the first six
months of 1996, other operating costs increased 4.5 percent and 4.9 percent,
respectively, compared to the same periods in 1995.
Other operating expenses for the second quarter of 1996 were $1,825,489 (6.4% of
sales) as compared to $1,746,253 (6.3% of sales) for the same period in 1995.
For the six-month period ending June 30, 1996, other operating expenses were
$3,303,222 (5.4% of sales) as compared to $3,149,323 of these expenses for the
same period in 1995 (5.3% of sales).
The increase in other operating costs is the result of increased accruals for
employee benefits and property taxes and an increase in franchise tax. In the
fourth quarter of 1995, the Harris County Appraisal District ("HCAD") notified
the Company that as a result of a clerical error regarding the size of the
Company's warehouse, the Company's real property was undervalued. Following a
hearing with the HCAD, the value of the Company's real property was increased
from approximately $1.1 million to approximately $3.5 million for the years 1991
through 1995. In April 1996, the Company filed a lawsuit against HCAD and the
Harris County Appraisal Review Board contesting their authority to increase the
appraised value of the property. The lawsuit is based, in part, on the fact that
the Company's property was correctly described on the appraisal roll for each of
years 1991 through 1995. Pending the outcome of this lawsuit, however, the
Company is accruing property tax monthly based on the $3.5 million appraisal.
In addition, following a second meeting with HCAD which resulted in an
approximate reduction of $73,000 in HCAD's appraisal of the Company's property
value, the Company's legal counsel submitted a request to set a court date for
the hearing to protest the tax rendition and also to protest the 1996 property
valuation. (The Company's property valuation increased from $16 a square foot in
1995 to $19.95 a square foot in 1996.) The Company's protest is based, in part,
on the fact that in 1995 property values in the surrounding area ranged from $11
a square foot to $18.36 a square foot, which is well below the Company's 1996
valuation.
Net Income and Earnings Per Share. As a result of a decrease in gross
margin and an increase in payroll and other operating costs, pretax net income
declined 42.4 percent, from $463,849 for the second quarter of 1995 to $267,073
in the same 1996 period, while net income decreased 43.5 percent. However, due
to a strong first quarter of 1996, pretax income for the first six months of
1996 increased 8.1 percent, from $711,412 for the first six months of 1995 to
$768,706 during the same 1996 period. Net income increased 8.1 percent.
The decrease in the Company's earnings per share in the second quarter and first
six months of 1996 as compared to the same period of 1995 was due to a decrease
in gross margin in the second quarter of 1996 and an increase in the dividend
paid on preferred stock in the first quarter of 1996. Dividends accrued in the
first six months of 1996 represented a larger percentage of 1996 net income than
dividends accrued in the first six months of 1995 and contributed to an 81.0
percent and a 13.1 percent decrease, respectively, in earnings per share for the
second quarter and first six months of 1996.
Page # 15 of 20 Pages
<PAGE>
Quarter-to-quarter variations in the Company's earnings per share reflect (in
addition to the factors discussed above) the Company's pricing of its
merchandise in order to deliver the lowest cost buying program for
Member-Dealers (who own all of the stock of the Company), although this often
results in lower net income for the Company. Because these trends benefit the
individual stockholders of the Company who purchase its merchandise, there is no
demand from shareholders that the Company focus greater attention upon earnings
per share.
Seasonality. The Company's quarterly net income traditionally has been
subject to two primary factors. First and third quarter earnings have been
negatively affected by the increased level of direct sales (with no markup)
resulting from the Company's semiannual trade show always held in the first and
third quarters. Secondly, sales during the fourth quarter traditionally have
been lower, as hardware sales are slowest during the winter months preceding
ordering for significant sales for the spring. However, net income has varied
substantially from year to year in the fourth quarter as a result of corrections
to inventory made at year-end.
Second quarter income, which in the past has been one of the Company's strongest
quarters, was negatively effected in 1996 by a severe drought in the Company's
selling territories in Texas. Because of the economic impact of the drought on
Member-Dealer sales, the Company offered more competitive buying programs
thereby decreasing its gross margin. The Texas territories generate
approximately 71% of the Company's sales volume.
FINANCIAL CONDITION AND LIQUIDITY
During the period ending June 30, 1996, Handy Hardware further improved its
ability to generate adequate amounts of cash while continuing to make
significant investments in inventory, warehouse and data processing equipment,
delivery equipment, and software to better meet the needs its Member-Dealers.
The completion of the Company's warehouse expansion project in the third quarter
of 1995 has resulted in the Company's ability to increase the depth of inventory
to better meet Member-Dealer needs since approximately 97,000 square feet of
additional warehouse space is now available.
Cash Flow. There was a significant net increase of $1,770,289 in the
Company's cash and cash equivalents in the first six months of 1996 compared to
the same period in 1995. The improvement in the Company's cash position is a
result of the fact that the Company expended a net amount of $220,401 in the
first six months of 1996 to purchase fixed assets, which is significantly less
than the $1,967,100 ($1,597,881 of which was expended on the warehouse expansion
project) expended in the same period of 1995. The increase in cash flow from
operating activities from the beginning to the end of the period, although
significantly less than the increase that occurred in the first half of 1995,
still supported a positive net cash flow of $1,000,238. This increase is the
result of (i) a $2,349,553 increase in accounts payable in 1996 as compared to a
$31,604 decrease in accounts payable for the same period in 1995, resulting from
an increase in inventory and a timing difference on datings offered by
manufacturers on inventory purchases, (ii) an increase in net income
Page # 16 of 20 Pages
<PAGE>
to $495,896 in the first six months of 1996 from $458,619 for the same period in
1995 and (iii) a $144,476 decrease in other assets in the first half of 1996 as
compared to a $34,032 decrease in the first half of 1995. These cash inflows
during the first six months of 1996 were offset by (i) a $1,675,210 increase in
inventory in the period ending June 30, 1996, as compared to a decrease in
inventory of $1,320,671 during the same period in 1995,(ii) a $990,735 increase
in accounts receivable in the first six months of 1996 as compared to a $683,852
increase during the same period in 1995 and (iii) a $189,254 increase in other
liabilities in the first half of 1996 as compared to a $611,033 increase in the
first half of 1995.
The significant increase in inventory during the first six months of
1996 consisted of the addition of approximately 1,700 stock keeping units (i.e.
products), which were added in response to Member-Dealer demand for more depth
of inventory. The increase in inventory was made possible by the increase in the
availability of warehouse space following the completion of the Company's
warehouse expansion project. Conversely, during the same period in 1995,
inventory decreased because of the lack of inventory stocking areas
during the construction phase of the Company's warehouse expansion.
In the first six months of 1996, $276,463 of cash was used for financing
activities, which was 119.8 percent higher than the $125,769 used in the first
six months of 1995. The cash used for financing activities in the first six
months of 1996 was increased over the same period in 1995 by (i) a larger
preferred stock dividend payment in the first quarter of 1996 ($515,029) than in
the same period in 1995 ($401,155) because of an increase in the dividend rate
from 10 percent to 12 percent, (ii) a decrease in notes payable for capital
leases ($24,398) as compared to an increase of $68,842 in the same period in
1995, (iii) a smaller increase in notes payable from stock repurchases ($9,000
vs $22,000), (iv) a larger decrease in mortgage payable ($250,913 as compared to
$154,103 in the same period in 1995), and (v) a decline in proceeds from the
issuance of stock ($655,120 vs $665,749), which increases were offset by a
decrease in the repurchase of Company stock ($130,275 vs $326,750.)
Working Capital. The Company's continuing ability to generate cash to
meet its needs for funding its activities is illustrated by three key liquidity
measures shown in the following table:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
Working Capital $7,771,472 $7,771,472 $7,961,703
Current Ratio 1.7 to 1 1.7 to 1 1.6 to 1
(Current Assets to
Current Liabilities)
Long-term Debt as Percentage
of Capitalization 21.7 24.2 26.1
</TABLE>
Working capital has been principally generated from the sale of stock and cash
provided from operations. The major component of the Company's long-term debt is
bank indebtedness resulting from the Company's financing of the original
construction of its warehouse facility in 1986.
Page # 17 of 20 Pages
<PAGE>
Texas Commerce Bank, Houston, Texas, currently extends to the Company a
$2,000,000 unsecured revolving line of credit. The Company is not currently
utilizing this line, and has entered into negotiations with Texas Commerce Bank
to replace this line of credit with one for up to $7,500,000 with more favorable
terms. The new line of credit, if consummated, will be used for the purpose of
working capital and other financing needs of the Company, which may include, for
instance, reducing the other outstanding debt of the Company with Texas Commerce
Bank.
During the remainder of 1996 Handy Hardware expects to further expand its
existing customer base in Oklahoma and Arkansas as a result of adding an
additional retail sales manager who will concentrate his efforts solely on the
Arkansas territory, which in turn will allow the retail sales manager previously
assigned to both territories to concentrate his efforts solely in the Oklahoma
territory. The Company will finance this expansion with receipts from the sale
of stock to new and current Member-Dealers and with anticipated increased
revenues from sales to Member-Dealers in Oklahoma and Arkansas. The Company is
optimistic that this expansion will have a beneficial effect on its ability to
generate cash to meet its funding needs.
In the first six months of 1996, the Company maintained a 94.5 percent service
level (the measure of the Company's ability to meet Member- Dealers' orders out
of current stock) as compared to a service level of 92.3 percent for the same
period in 1995. This increase in service level is the result of an adequate
amount of storage for inventory available since the warehouse expansion project
was completed. Inventory turnover was 6.2 times during the first six months of
1996 and 5.9 times for the first six months of 1995. This high rate of inventory
turnover, which is higher than the national industry average of 3.8%, is
primarily the result of tight control of the product mix, increase in depth of
inventory, a continued high service level, and increased warehouse sales.
The Company has an outstanding mortgage note payable to Texas Commerce Bank with
a principal balance as of June 30, 1996, of approximately $2,572,393. The note
is a result of a refinancing that occurred in 1993 and has a five-year fixed
rate of interest of 7.2 percent. Although the note is payable in full on March
31, 1998, the Company anticipates refinancing the principal balance on or before
that date.
The Company originally secured financing for the warehouse facility expansion
project in the form of a revolving line of credit through NationsBank, evidenced
by a Credit Agreement and Promissory Note which provided for a maximum amount of
$3,500,000. The Company was, however, able to fund the warehouse expansion costs
($3,122,824) out of cash flow. Inasmuch as the Company had made no use of this
line of credit, it was rescinded at the request of the Company in the second
quarter of 1996 without payment of any commitment fee.
Capital Expenditures. In the six month period ending June 30, 1996, and
June 30, 1995, the Company's investment in capital assets (net of dispositions)
was $220,401 and $1,967,100, respectively. Approximately 65.5 percent ($144,290)
of the amount expended in the first six months of 1996 was used to upgrade
warehouse equipment and
Page # 18 of 20 Pages
<PAGE>
18.8 percent was used to purchase two automobiles ($41,526). Of the amount
expended in the first six months of 1995, $1,597,881 (81.2 percent), was used to
finance the costs of the 96,715 square foot addition to the Company's existing
warehouse facility and $262,697 (13.4 percent) was invested in upgrading the
warehouse equipment.
Significant outlays of cash or cash equivalents anticipated by the Company for
the remainder of 1996 include the payment of accounts payable generated by the
spring trade show and increased inventory purchases. Additional cash outlays
anticipated for the remainder of the year include: the purchase of an upgraded
catalog system ($125,000), printing equipment ($70,000), Company automobiles
($60,000), data processing equipment ($45,000), warehouse and material handling
improvements ($45,000), delivery vehicles and warehouse equipment ($25,000) and
office equipment ($5,000).
The Company's cash position of $1,770,289 at June 30, 1996, is anticipated to be
sufficient to fund all planned capital expenditures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - At the
Annual Shareholder Meeting held on May 8, 1996, Norman Bering,
Susie Bracht-Black and Phil Grothues were elected to serve as
Directors of the Company for a three-year term. Larry Ward was
elected to serve as a Director of the Company for a two-year
term and James D. Tipton, President of the Company, was elected
to serve a one-year terms. The other Directors continuing to
serve are: Weldon Bailey, Virgil Cox, Jeff Dyson, Robert Eilers,
and Leroy Welborn.
<TABLE>
<CAPTION>
No. of Votes No. of Votes No. of Votes Nominee
Nominees for Directors For Against Abstain Approval
- ------------------------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C>
Norman Bering 4820 90 -0- Yes
Susie Bracht-Black 4810 100 -0- Yes
Phil Grothues 4820 90 -0- Yes
Larry Ward 4820 90 -0- Yes
James D. Tipton 4810 100 -0- Yes
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits & Reports on Form 8-K - None
Page # 19 of 20 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ James D. Tipton
-------------------------------
JAMES D. TIPTON
President
(Chief Executive Officer)
/s/ Tina S. Kirbie
-------------------------------
TINA S. KIRBIE
Senior Vice President, Finance
Secretary and Treasurer
(Chief Financial and Accounting
Officer)
Date: August 14, 1996
Page # 20 of 20 Pages
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
filer's operations as of June 30, 1996, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000354053
<NAME> Handy Hardware Wholesale, Inc.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,770,289
<SECURITIES> 0
<RECEIVABLES> 7,555,508<F1>
<ALLOWANCES> 0
<INVENTORY> 12,130,280
<CURRENT-ASSETS> 21,694,654
<PP&E> 9,576,674<F2>
<DEPRECIATION> 3,536,405
<TOTAL-ASSETS> 31,604,894
<CURRENT-LIABILITIES> 13,434,810
<BONDS> 2,264,189<F3>
0
5,212,267<F4>
<COMMON> 5,776,017<F5>
<OTHER-SE> 4,012,161<F6>
<TOTAL-LIABILITY-AND-EQUITY> 31,604,894
<SALES> 61,546,124
<TOTAL-REVENUES> 61,825,612
<CGS> 54,716,948
<TOTAL-COSTS> 54,716,948
<OTHER-EXPENSES> 3,303,222<F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,787
<INCOME-PRETAX> 768,706
<INCOME-TAX> 272,810
<INCOME-CONTINUING> 495,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 495,896
<EPS-PRIMARY> 4.26
<EPS-DILUTED> 4.26
<FN>
<F1>Accounts Receivable and Current Notes Receivable.
<F2>Net of depreciation.
<F3>Long-term mortgage payable.
<F4>Preferred Stock and Subscription for Preferred Stock less Subscription
receivables for Preferred Stock.
<F5>Class A Common Stock and Class B Common Stock less Treasury Stock plus
Subscription for Class B Common Stock less Subscription Receivables for Common
Stock.
<F6>Paid in Surplus and Retained Earnings.
<F7>Other Operating Expenses (does not include cost of goods sold, payroll costs
or interest).
</FN>
</TABLE>
