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, 1997.
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, 1997, was 8290 shares of Class A Common Stock, $100 par
value, and 49,160 shares of Class B Common Stock, $100 par value.
Page #1 of 21 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
Item 1. Financial Statements
Condensed Balance Sheet June 30, 1997
and December 31, 1996..........................3 - 4
Condensed Statement of Earnings - Six Months
Ended June 30, 1997 and 1996..................... 5
Condensed Statement of Cash Flows - Six Months
Ended June 30, 1997 and 1996........................6
Notes to Condensed Financial Statements.............7 - 14
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations ......... 15 - 20
PART II Other Information
Items 1.- 3. None....................................................21
Item 4. Submission of Matters to a Vote of Security Holders.....21
Item 5. None....................................................21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits...........................................21
Signatures...........................................................22
Page #2 of 21 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,907,934 $ 1,224,327
Accounts Receivable, net of 9,027,811 9,206,177
subscriptions receivable in
the amount of $54,160 for 1997
and $45,515 for 1996
Inventory 12,006,383 11,421,127
Other Current Assets 229,336 317,090
----------- -----------
$23,171,464 $22,168,721
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
At Cost Less Accumulated Depreciation
of $3,800,164 (1997) and $3,380,058 (1996) $ 9,358,060 $ 9,466,577
----------- -----------
OTHER ASSETS
Notes Receivable (Note 3) $ 115,762 $ 105,844
Deferred Compensation Funded 245,110 245,110
Other Noncurrent Assets -0- 89,451
----------- -----------
$ 360,872 $ 440,405
----------- -----------
TOTAL ASSETS $32,890,396 $32,075,703
- ------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable-Line of Credit $ 851,541 $ 985,883
Notes Payable-Stock (Note 4) 23,860 23,860
Notes Payable-Capital Leases 70,926 67,002
Accounts Payable-Trade 12,850,030 11,932,351
Other Current Liabilities 1,194,133 1,054,493
Current Deferred Income Taxes Payable (Note 5) 21,265 -0-
Federal Income Taxes Payable(Note 5) -0- 67,741
----------- -----------
$15,011,755 $14,131,330
----------- -----------
NONCURRENT LIABILITIES
Note Payable-Line of Credit $ 210,913 $ 851,541
Notes Payable-Stock(Note 4) 219,150 209,950
Notes Payable-Capital Lease 103,602 123,290
Notes Payable-Vendor 115,762 105,844
Deferred Compensation Payable 245,110 245,110
Deferred Income Taxes Payable (Note 5) 293,084 297,773
----------- -----------
$ 1,187,621 $ 1,833,508
----------- -----------
TOTAL LIABILITIES $16,199,376 $15,964,838
- ----------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #3 of 21 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
STOCKHOLDERS' EQUITY
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
8,480 & 8,220 shares $ 848,000 $ 822,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
49,953 & 47,733 shares 4,995,300 4,773,300
Common Stock, Class B
Subscribed 4,917.51 & 4,036.51
shares 491,751 403,651
Less Subscription Receivable (27,080) (22,757)
Preferred Stock 13% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
52,493.75 & 50,213.75 shares 5,249,375 5,021,375
Preferred Stock, Subscribed
4,917.51 & 4,036.52 491,751 403,652
Less Subscription Receivable (27,080) (22,758)
Paid in Surplus 308,820 296,965
----------- ------------
$12,330,837 $ 11,675,428
Less: Cost of Treasury Stock
1,878 & -0- shares (187,800) -0-
----------- ------------
$12,143,037 $ 11,675,428
Retained Earnings 4,547,983 4,435,437
----------- ------------
Total Stockholders' Equity $16,691,020 $ 16,110,865
----------- ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $32,890,396 $ 32,075,703
-------------------- =========== ============
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #4 of 21 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------------- ---------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
EARNINGS
Net Sales $30,150,047 $28,611,449 $63,269,687 $61,546,124
Sundry Income 176,854 136,780 319,726 279,488
----------- ----------- ----------- -----------
TOTAL EARNINGS $30,326,901 $28,748,229 $63,589,413 $61,825,612
- -------------- ----------- ----------- ----------- -----------
EXPENSE
Net Mat'l. Costs $26,298,716 $25,139,565 $55,841,188 $54,716,948
Payroll Costs 1,560,846 1,461,676 3,087,720 2,926,949
Other Operating
Costs 1,945,721 1,825,489 3,509,518 3,303,222
Interest Expense 12,671 54,426 22,246 109,787
----------- ----------- ----------- -----------
TOTAL EXPENSE $29,817,954 $28,481,156 $62,460,672 $61,056,906
- ------------- ----------- ----------- ----------- -----------
NET EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 508,947 $ 267,073 $ 1,128,741 $ 768,706
- ---------- ----------- ----------- ----------- -----------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5) (180,019) (98,021) (395,383) (272,810)
- ------------------ ----------- ----------- ----------- -----------
NET EARNINGS $ 328,928 $ 169,052 $ 733,358 $ 495,896
- ------------
LESS ACCRUED
DIVIDENDS ON
PREFERRED STOCK (155,203) (128,757) (310,406) (257,514)
- --------------- ----------- ------------ ----------- -----------
NET EARNINGS
APPLICABLE
TO COMMON
STOCKHOLDERS $ 173,725 $ 40,295 $ 422,952 $ 238,382
- ------------ =========== ============ =========== ===========
NET EARNINGS PER
SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ 2.81 $ 0.71 $ 6.94 $ 4.26
- --------------- =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #5 of 21 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net Earnings $ 733,358 $ 495,896
---------- -----------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 439,459 $ 431,077
Increase in Deferred Income Tax 16,576 13,936
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable $ 178,366 $ (990,735)
Increase in Notes Receivable (9,918) (9,699)
Increase in Inventory (585,256) (1,675,210)
Decrease in Other Assets 177,205 144,476
Increase in Notes Payable - Vendor 9,918 10,169
Increase in Accounts Payable 917,679 2,349,553
Increase in Other Liabilities 139,640 189,254
Increase (Decrease) in Federal Income Taxes Payable (67,741) 41,521
---------- ----------
TOTAL ADJUSTMENTS $1,215,928 $ 504,342
---------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $1,949,286 $ 1,000,238
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures $ (330,942) $ (239,718)
Disposition of Fixed Assets -0- 19,317
---------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES $ (330,942) $ (220,401)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Note Payable-Line of Credit $ (774,970) $ -0-
Decrease in Mortgage Payable -0- (250,913)
Increase in Notes Payable-Stock 9,200 9,000
Decrease in Notes Payable-Capital Lease (15,764) (24,398)
Increase in Subscription Receivable (8,645) (19,968)
Proceeds From Issuance of Stock 664,054 655,120
Purchase of Treasury Stock (187,800) (130,275)
Dividends Paid (620,812) (515,029)
---------- -----------
NET CASH USED FOR FINANCING
ACTIVITIES $ (934,737) $ (276,463)
---------- -----------
NET INCREASE IN
CASH AND CASH EQUIVALENTS $ 683,607 $ 503,374
CASH & CASH EQUIVALENTS AT BEGINNING 1,224,327 1,266,915
---------- -----------
OF PERIOD
CASH & CASH EQUIVALENTS AT END OF
PERIOD $1,907,934 $ 1,770,289
---------- -----------
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Interest Expense Paid $ 22,246 $ 109,787
Income Taxes Paid 402,032 217,353
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #6 of 21 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
(1) Description of Business:
Handy Hardware Wholesale, Inc., (the "Company"), was incorporated as a
Texas corporation on January 6, 1961. Its principal executive offices
and warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061.
The Company is owned entirely by its Member-Dealers and former
Member-Dealers.
Handy Hardware Wholesale, Inc. sells to its Member-Dealers products
primarily for retail hardware, lumber and home center stores. In
addition, the Company offers advertising and other services to
Member-Dealers.
(2) 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.
(3) Net Earnings Per Share:
Net 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,
------------------------ ------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Calculation of Net Earnings Per Share
of Common Stock
Net Earnings $ 328,928 $ 169,052 $ 733,358 $ 495,896
Less: Accrued Dividends
on Preferred Stock (155,203) (128,757) (310,406) (257,514)
--------- --------- --------- ---------
$ 173,725 $ 40,295 $ 422,952 $ 238,302
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 61,832 56,818 60,969 55,948
Net Earnings Per Share
of Common Stock $ 2.81 $ 0.71 $ 6.94 $ 4.26
========= ========= ========= =========
</TABLE>
Page #7 of 21 Pages
<PAGE>
(4) 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 and receivables are
recognized when merchandise is shipped or services are rendered and
expenses are recognized when the liability is incurred.
(5) Accounting for Dividends on Preferred Stock:
The Company pays dividends on Preferred Stock during the first quarter
of each fiscal year. Only holders of Preferred Stock on the record
date for the payment of the dividend 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 net earnings, however, on the Condensed Statement of Earnings
included herein, the Company shows an estimated portion of the
dividends to be paid in the first quarter of 1998 based on the
dividends paid in the first quarter of 1997.
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, 1997, contained
herein, therefore, are net of dividends actually paid during the first
quarter of 1997 in the amount of $620,812.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment Consists of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,498,654 7,479,697
Furniture, Computer, Warehouse 3,165,803 2,875,288
Transportation Equipment 465,970 463,853
----------- -----------
$13,158,224 $12,846,635
Less: Accumulated Depreciation (3,800,164) (3,380,058)
----------- -----------
$ 9,358,060 $ 9,466,577
=========== ===========
</TABLE>
Page #8 of 21 Pages
<PAGE>
NOTE 3 - NOTES RECEIVABLE
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
----------------------------- --------------------------
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
DEBTOR COLLATERAL 1997 1996 1997 1996
- ------------------------ ---------- ----- ---- -------- --------
<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 1,303
Commerce Hdwe. - -0- -0- 3,053 3,053
Decatur Hdwe. - -0- -0- 2,340 2,340
Doug Ashy Bldg. Mt'l. - -0- -0- 5,422 1,912
Goodwood Hdwe. - -0- -0- 4,669 -0-
Grandbury Farm
& Ranch - -0- -0- -0- 1,219
Grogan Bldg. Supply Co. - -0- -0- 824 -0-
Handyman Hdwe. - -0- -0- 13,165 13,165
Henckel's Hwy. 6
Ace Home Ctr. - -0- -0- 5,446 5,446
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- 825 825
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
Mike's Hdwe. - -0- -0- 1,511 1,511
Motes Lbr. - -0- -0- 2,231 -0-
Overall Lumber - -0- -0- 3,362 3,362
A. Peterson Co. - -0- -0- 1,993 1,993
Pitts Hdwe. - -0- -0- 1,772 1,772
Rusty's Plumbing & Hdwe. - -0- -0- 1,291 1,291
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- 3,262 3,360
Wichita Hdwe. - -0- -0- 1,706 1,706
----- ---- -------- --------
$ -0- $-0- $115,762 $105,844
===== ==== ======== ========
</TABLE>
The notes reflected in the above table 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 #9 of 21 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 1997 1996 1997 1996
- ------------------ ----- ---------- ---- -------- -------- --------- --------
<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 1,100 1,100 -0- -0-
Cleveland Hdwe. 6.00% None 1997 21,760 21,760 -0- -0-
Community Hdwe. 6.25% None 2000 -0- -0- 6,400 6,400
Company Store 6.25% None 2000 -0- -0- 9,600 9,600
Cypress Creek Hdwe. 6.25% None 2001 -0- -0- 14,400 14,400
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 9,000
Gulfway Lbr. 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 1,000 1,000 -0- -0-
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
King Copeland
Lbr. Co. 6.25% None 2001 -0- -0- 14,240 14,240
McGinty's Hdwe. 6.25% None 2001 -0- -0- 19,360 19,360
Patterson Hdwe. 6.00% None 1999 -0- -0- 12,000 12,000
Pierre Part Store,
Inc. 6.25% None 2002 -0- -0- 3,000 -0-
Riley Bldg. Supply
Inc. 6.25% None 2002 -0- -0- 6,200 -0-
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
------- -------- -------- --------
$23,860 $ 23,860 $219,150 $209,950
======= ======== ======== ========
</TABLE>
Page #10 of 21 Pages
<PAGE>
NOTE 4 - NOTES PAYABLE (CONTINUED)
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:
1997 $ 23,860
1998 $ 7,000
1999 $ 38,750
2000 $107,200
2001 $ 57,000
--------
$233,810
========
Page #11 of 21 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,
1997 1996
----------- -----------
<S> <C> <C>
Excess of tax over book depreciation $ 1,341,797 $ 1,331,472
Allowance for bad debt (7,195) (7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (205,814) (249,239)
Deferred Compensation (204,235) (199,235)
----------- ------------
Total $ 924,553 $ 875,803
Statutory Tax Rate 34% 34%
----------- ------------
Cumulative Deferred Income Tax Payable $ 314,349 $ 297,773
=========== ============
Classified as:
Current Liability $ 21,265 $ -0-
Noncurrent Liability 293,084 297,773
----------- -----------
$ 314,349 $ 297,773
=========== ===========
</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,
1997 1996
----------- --------------
<S> <C> <C>
Principal Components of Income Tax Expense
Federal:
Current
Income tax paid $ 377,273 $ 110,275
Carry-over of prepayment from
prior year 24,759 107,078
Refund received for overpayment
from prior year -0- -0-
----------- --------------
$ 402,032 $ 217,353
Federal Income Tax Payable (Receivable) (23,225) 41,521
Carry-over to subsequent year -0- -0-
----------- --------------
Income tax for tax reporting
at statutory rate of 34% $ 378,807 $ 258,874
Deferred
Adjustments for financial reporting:
Depreciation 3,511 2,473
263A Uniform Capitalization Costs 14,765 13,163
Other (1,700) (1,700)
----------- ---------------
Provisions for federal income tax $ 395,383 $ 272,810
=========== ===============
</TABLE>
The Company is not classified as a nonexempt corporation under the
provisions of the Internal Revenue Code and is not entitled to deduct preferred
dividends in determining its taxable income.
Page #12 of 21 Pages
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY
(1) Terms of Capital Stock
The holders of Class A Common Stock are entitled to one
vote for each share held of record on each matter submitted to a
vote of shareholders. Holders of Class A Common Stock must be
engaged in the retail sale of goods and merchandise, and may not
be issued or retain more than ten shares of Class A Common Stock
at any time. The holders of Class B Common Stock are not
entitled to vote on matters submitted to a vote of shareholders
except as specifically provided by Texas law.
The holders of Preferred Stock are entitled to
cumulative dividends of not less than 7 percent per year nor
more than 20 percent per year of the par value ($100.00 per
share) of the shares of Preferred Stock, as fixed by the Board
of Directors. The Preferred Stock has a liquidation value of
$100 per share. The holders of Preferred Stock are not entitled
to vote on matters submitted to a vote of shareholders except as
specifically provided by Texas law. The shares of Preferred
Stock are not convertible, but are subject to redemption (at the
option of the Company) by vote of the Company's Board of
Directors, in exchange for $100 per share and all accrued unpaid
dividends.
(2) Capitalization
To become a Handy Hardware Member-Dealer, an independent
hardware dealer must enter into a Subscription Agreement with
the Company for the purchase of ten shares of Handy Hardware
Class A Common Stock, $100 par value per share or ten shares of
Preferred Stock for any additional store, with an additional
agreement to purchase a minimum number of shares of Class B
Common Stock, $100 par value per share and Preferred Stock, $100
par value per share. Class B Common Stock and Preferred Stock
are purchased pursuant to a formula based upon total purchases
of merchandise by the Member-Dealer from the Company, which
determines the "Desired Stock Ownership" for each Member-Dealer.
The minimum Desired Stock Ownership is $10,000.
Each Member-Dealer receives from the Company a
semimonthly statement of Total Purchases made during the covered
billing period and an additional charge ("Purchase Funds") of 2
percent of warehouse purchases until the Member-Dealer's Desired
Stock Ownership is attained. (The Subscription Agreement
entitles the Company to collect 2 percent of total purchases. At
present, however, the Board of Directors has determined to
collect 2 percent of warehouse purchases only.) On a monthly
basis, the Company reviews the amount of unexpended Purchase
Funds being held for each Member-Dealer. If a Member-Dealer has
unexpended Purchase Funds of at least $2000, the Company applies
such funds to the purchase of ten shares of Class B Common Stock
and ten shares of Preferred Stock at $100 per share.
(3) Transferability
Holders of Class A Common Stock may not sell those
shares to a third party without first offering to sell them back
to the Company. There are no specific restrictions on the
transfer of the Company's Class B Common or Preferred Stock.
Page #13 of 21 Pages
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
(4) Membership Termination
Following written request, the Company will present to
the Board of Directors a Member-Dealer's desire to have his
stock repurchased and the Member-Dealer's Contract terminated.
According to the current procedures established by the Board of
Directors, a Member-Dealer's stock may be repurchased according
to either of two options.
Option - I The Member-Dealer's Class A Common Stock is
repurchased at $100 per share. Any funds
remaining in the Member-Dealer's Purchase Fund
Account will be returned at the dollar value of
such account. Twenty percent or $3000, whichever
is greater, of the total value of the Class B
Common and Preferred Stock will be repurchased.
The remaining value of the Class B Common and
Preferred Stock is converted to a five-year
interest bearing note. During the first four
years this note only pays interest. In the fifth
year both interest and principal are paid. The
interest rate is determined by the Company's
Board of Directors at the same time they approve
the repurchase.
Option - II Same as Option I except that the remaining value
of the Class B Common and Preferred Stock is
discounted 15 percent and reimbursed to the
Member-Dealer immediately at the time of
repurchase.
Page #14 of 21 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
During the second quarter of 1997, total sales were 5.4 percent higher than
during the same quarter in 1996, as compared to a 3.5 percent increase in 1996
over 1995 and a 5.4 percent increase in 1995 over 1994. For the first six months
for each of these periods, sales increased by 2.8 percent, 4.1 percent and 7.8
percent, respectively. Sales in the retail hardware industry in the first six
months of 1997 mirrored sales in the retail industry in general. 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 wet spring and pressure from retail warehouses which continues to
erode the market share of independent hardware stores. These factors have
resulted in no significant sales growth in most territories other than the
Austin, Brenham, and Central Texas area and the Oklahoma & Arkansas region. The
significant increase of 11 percent in sales for the first half of 1997 in the
Austin, Brenham and Central Texas area has resulted from increased marketing
efforts by the Company's employees in that area. The 23 percent increase in
sales during the same period in the Oklahoma and Arkansas area was the result of
two significant factors (i) the increased marketing efforts by the Company's
employees in that area and (ii) the positive result of a territory
reorganization which transferred the sales of ten Member-Dealers with $454,938
in sales from the North Texas, Dallas and Fort Worth area to this territory. The
North Texas, Dallas and Fort Worth area sales were negatively affected by the
same territory reorganization. Without the territory reorganization, sales in
Oklahoma and Arkansas area would have increased approximately 14 percent and
sales in the North Texas, Dallas and Fort Worth area would have increased
slightly by approximately 0.4 percent.
Page #15 of 21 Pages
<PAGE>
Sales The following table compares the Company's sales during the first
six months of 1997 to sales during the same period of 1996, by sales territory:
<TABLE>
<CAPTION>
Six Months Six Months
1997 1996
--------------------------------- ----------------------------
% Increase
in Sales
from Six % of % of
Month Total Total
Sales Territory Sales 1996 Sales Sales Sales
- --------------- ----------- -------- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
Houston Area $15,952,748 1% 25.3% $15,842,770 25.8%
Victoria, San Antonio,
Corpus Christi & Rio Grande
Valley Area* 11,070,793 0% 17.6% 11,019,342 17.9%
North Texas, Dallas
& Fort Worth Area 9,402,717 -4% 14.9% 9,816,558 16.0%
Austin, Brenham & Central
Texas Area 7,558,861 11% 12.0% 6,792,993 11.1%
Southern Louisiana Area 7,228,656 0% 11.5% 7,216,565 11.8%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 5,748,167 0% 9.1% 5,749,203 9.4%
Oklahoma & Arkansas Area 6,084,329 23% 9.6% 4,939,358 8.0%
----------- ----- ----------- ----
Totals: $63,046,271 (1) 100.0% $61,376,789 100.0%
=========== ====== =========== =====
</TABLE>
- ----------------------------------
* Includes sales to Mexico and Central America Dealers
(1) Total does not include sales to dealers who were no longer Member-Dealers
at end of period.
Net Material Costs and Rebates. Net material costs for the second
quarter and first six months of 1997 were $26,298,716 and $55,841,188,
respectively, compared to $25,139,565 and $54,716,948, respectively, for the
same periods in 1996. Net material costs for the second quarter increased 4.6
percent over the second quarter of 1996, which is lower than the 5.4 percent
increase in sales for the same period. Net material costs as a percentage of
sales were 87.2 percent in the second quarter of 1997 as compared to 87.9
percent for the same period in 1996. The slight decline of net material costs as
a percentage of sales in the second quarter of 1997 over the same period of 1996
was the result of a 3.2 percent increase in purchase discounts and a 35.9
percent increase in factory rebates.
The increase of 2.1 percent in net material costs for the first six
months of 1997 parallels the increase of 2.8 percent in sales for the same
period. Net material costs as a percentage of sales remained stable: 88.3
percent in the first six months of 1997 and 88.9 percent for the same period in
1996. The slight decline of net material costs as a percentage of sales for the
first six months of 1997 as compared to the same 1996 period was the result of a
7.2 percent increase in purchase discounts and a 31.0 percent increase in
factory rebates.
Payroll Costs. Payroll costs during the second quarter and six months
ended June 30, 1997, were $1,560,846 and $3,087,720 respectively, as compared to
$1,461,676 and $2,926,949 for the same period in 1996. Payroll expense for the
second quarter of 1997 increased by $99,170. This 6.8 percent increase was the
result of regular
Page #16 of 21 Pages
<PAGE>
salary increases and an increase in overtime payroll. A decline in productivity
in the Company's shipping department due to high employee turnover resulted in a
30 percent increase in overtime, 37 percent of which was generated from the
shipping department. Payroll expense for the first half of 1997 increased 5.5
percent over the same period in 1996 due to regular salary increases and a 29
percent increase in overtime, 50 percent of which was generated in the second
quarter of 1997 and 36 percent of which was a result of overtime in the shipping
department.
Payroll costs for the second quarter of 1997 constituted 5.2 percent of
both net sales and total expenses, compared to 5.1 percent for the same quarter
in 1996. Payroll costs accounted for 4.9 percent of both sales and total
expenses for the first six months of 1997 as compared to 4.8 percent for the
same period in 1996.
Other Operating Costs. During the second quarter and for the first six
months of 1997 other operating costs increased 6.6 percent and 6.2 percent,
respectively, compared to the same periods in 1996. Other operating expenses for
the second quarter of 1997 were $1,945,721 (6.5% of sales) as compared to
$1,825,489 (6.4% of sales) for the same period in 1996. For the six-month period
ending June 30, 1997, other operating expenses were $3,509,518 (5.5% of sales)
as compared to $3,303,222 of these expenses for the same period in 1996 (5.4% of
sales).
Other. operating costs include a wide variety of expenses related to
the Company. The largest components of other operating costs in the second
quarter and first six months of 1997 were $534,703 and $1,009,279, respectively,
of employee expenses (representing an increase of 7.5 percent and 3.9 percent
over 1996 levels), $441,844 and $931,321, respectively, of delivery expenses
(representing an increase of 20.9 percent and 14.8 percent over 1996 levels) and
$208,235 and $411,296, respectively, of warehouse expenses (representing a
decrease of 11.5 percent and 8.0 percent from 1996 levels).
Net Earnings and Net Earnings Per Share. As a result of an increase in
gross margin, pretax net earnings increased 90.6 percent, from $267,073 for the
second quarter of 1996 to $508,947 in the same 1997 period, while net earnings
increased 94.6 percent. Further, due to this strong second quarter of 1997,
pretax net earnings for the first six months of 1997 increased 46.8 percent,
from $768,706 for the first six months of 1996 to $1,128,741 during the same
1997 period. Net earnings increased 47.9 percent.
Net earnings in the second quarter and first six months of 1997
increased primarily due to two factors. First, the Company was able to generate
a larger percentage of purchase discounts and rebates during the second quarter
and first half of 1997 (which increased by $376,853 and $709,365, respectively)
than the corresponding period in 1996. Secondly, interest expense decreased from
$54,426 and $109,787 in the second quarter and first six months of 1996,
respectively, to $12,671 and $22,246 in the same 1997 periods. This decline was
the result of utilizing a line of credit as opposed to a mortgage which allowed
the Company to apply excess cash to reduce the balance owing on the line of
credit on a daily basis, consequently reducing interest.
The Company's net earnings per share increased almost threefold in the
second quarter of 1997 and 62.9% in the first six months of 1997 as compared to
the same periods of 1996. This increase was due to an increase in net earnings
in the second quarter and the first half of 1997, offset by an increase in the
dividend accrued on preferred stock during the same periods. Dividends accrued
in both the second quarter and first six months of 1997 represented a smaller
percentage of 1997 net earnings than dividends accrued in the first quarter of
1996.
Page #17 of 21 Pages
<PAGE>
Quarter-to-quarter variations in the Company's net 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 earnings 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 earnings traditionally have been
subject to two primary factors. First and third quarter net 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 earnings have varied
substantially from year to year in the fourth quarter as a result of corrections
to inventory made at year-end.
In the first quarters of 1997 and 1996, traditional seasonality trends
deviated from the norm. Purchase discount and factory rebate credits increased
$332,512 and $199,335, respectively, in these periods from the corresponding
periods in the previous years. This timing difference in the receipt of such
discounts and rebates resulted in higher than usual first quarter net earnings
in these years.
FINANCIAL CONDITION AND LIQUIDITY
During the period ending June 30, 1997, Handy Hardware improved its
financial condition and its ability to generate adequate amounts of cash while
continuing to make significant investments in inventory, warehouse and computer
equipment, and software to better meet the needs of its Member-Dealers.
Cash Flow. During the first six months of 1997 there was a net increase for
the period of $683,607 in the Company's cash and cash equivalents as compared to
an increase of $503,374 for the same period of 1996.
Cash flow from operating activities for the first six months of 1997 was
$1,949,286 as compared to $1,000,238 in the same six month period of 1996. As
illustrated by these figures, net cash provided by the Company's operating
activities may vary substantially from year to year. These variations result
from (i) the timing of promotional activities, (ii) payment terms available to
the Company from its suppliers, (iii) payment terms offered by the Company to
its Member-Dealers and (iv) the state of the regional economy.
The variance between cash flow from operating activities in the first six
months of 1997 as compared to the same period in 1996 consisted principally of
the following differences which had a positive effect on cash flows (i) an
increase in net earnings to $733,358 in 1997 from $495,896 in 1996, (ii) a
$178,366 decrease in accounts receivable in 1997 as compared to a $990,735
increase in 1996 and (iii) an increase of $585,256 in inventory in 1997 as
compared to a $1,675,210 increase in inventory in 1996. The positive effects on
cash flow in the first six months of 1997 over the first six months of 1996 were
offset by the following negative effects: (i) a $917,679 increase in accounts
payable in 1997 as compared to a $2,349,553 increase in accounts payable in
1996, (ii) a $139,640 increase in other liabilities as compared to an increase
of $189,254 in other liabilities in 1996 and (iii) a $67,741 decrease in federal
income taxes payable in 1997 as compared to an increase of $41,521 payable in
1996.
Page #18 of 21 Pages
<PAGE>
While inventory increased $585,256 in the first six months of 1997 from the
beginning of the year, the increase was not as significant as the increase of
$1,675,210 during the same 1996 period. During the first six months of 1996, the
Company was still in the process of increasing the depth and breadth of
inventory made possible by the increase in warehouse space following the
completion of the Company's warehouse expansion project in third quarter of
1995. In the first six months of 1997, while the Company continued to expand its
inventory to meet Member-Dealer demand, the expansion was not as significant as
in the same period of 1996.
Accounts payable increased during the first six months of 1997, but again,
not as significantly as during the same period of 1996. This factor was mostly
the result of (i) a smaller increase in inventory and (ii) a timing difference
in the recognition of payables.
The decrease in accounts receivable as compared to an increase in the same
1996 period was due to (i) a decrease in demand because of the unusually wet
spring and (ii) aggressive competition at the wholesale and retail level which
had an adverse effect on sales.
In the first six months of 1997, the Company expended a net amount of
$330,942 to purchase fixed assets, which is $110,541 (50%) higher than the
$220,401 expended in the same period of 1996.
In the first six months of 1997, $934,737 was used for financing
activities, which was substantially higher than the $276,463 used in the first
six months of 1996. The use of cash in the 1997 period consisted principally of
(i) payments made to reduce the balance owing on a line of credit extended to
the Company, (ii) a larger preferred stock dividend payment in the first quarter
of 1997 ($620,812 as compared to $515,029 in 1996) because of an increase in the
dividend rate to 13 percent from 12 percent and (iii) an increase in the
repurchase of Company stock ($187,800 vs. $130,275).
In August 1996, Texas Commerce Bank ("the Bank") extended to the Company an
unsecured $7.5 million revolving line of credit with an April 30, 1998, maturity
date at an interest rate of prime minus one and one-half percent (l.5%) or, at
the Company's option, the London Interbank Offering Rate ("LIBOR") plus one and
one-quarter percent (1.25%). Prior to that date the Bank extended the Company a
$2 million revolving line of credit at the prime interest rate published by the
Bank. The new line of credit was used to retire the Company's mortgage
($2,449,898) with the Bank in August 1996; and may also be used for working
capital and other financing needs of the Company. In April 1997 the maturity
date on the line of credit was extended to April 30, 1999. On June 30, 1997, the
outstanding balance on the line of credit was $1,062,454, resulting from the
initial draw on the line of credit of $2,449,898 (net of total payments of
$1,387,444 on the line of credit during the last 12 months). On June 30, 1997,
the interest rate on the line of credit was 7 percent.
Working Capital. The Company's continuing ability to generate cash to meet
its needs for funding its activities is highlighted by comparing three key
liquidity measures shown in the following table:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Working Capital $8,159,709 $8,037,391 $7,771,472
Current Ratio 1.5 to 1 1.6 to 1 1.7 to 1
(Current Assets to
Current Liabilities)
Long-term Debt as Percentage
of Capitalization 7.1 11.4 21.7
</TABLE>
Page #19 of 21 Pages
<PAGE>
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 recent use of
its line of credit to pay off its mortgage.
During the remainder of 1997, Handy Hardware expects to further expand
its existing customer base in Oklahoma and Arkansas. 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.
In the first six months of 1997, the Company maintained a 95.2 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 94.5 percent for
the same period of 1996. 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 6.0 times during the first six
months of 1997 and 6.2 times for the first six months of 1996. This 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, continued high service level, and increased warehouse sales.
Capital Expenditures. In the six month period ending June 30, 1997,and
June 30, 1996, the Company's investment in capital assets (net of dispositions)
was $330,942 and $220,401, respectively. Approximately 38.6 percent ($127,744)
of the amount expended in the first six months of 1997 was used to purchase
computer hardware and software, 29.3 percent ($96,923) was used to upgrade the
Company's catalog and purchase office equipment, 19.9 percent ($65,848) was used
to upgrade warehouse equipment, 6.5 percent ($21,470) was used to purchase a
Company automobile, 3.3% ($10,801) was paid for building construction and 2.4
percent ($8,156) was paid for future warehouse expansion plans. By comparison,
65.5 percent ($144,290) of the amount expended in the first six months of 1996
was used to upgrade warehouse equipment and 18.8 percent ($41,526) was used to
purchase two automobiles.
Significant outlays of cash or cash equivalents foreseen by the Company
for the remainder of the year include the payment of accounts payable and
increased inventory purchases. Additional cash outlays anticipated for the
remainder of the year include: the purchase of delivery vehicles and warehouse
equipment ($210,000), computer equipment ($55,000), Company automobiles
($40,000), and office equipment ($20,000).
The Company's cash position of $1,907,934 at June 30, 1997, is
anticipated to be sufficient to fund all planned capital expenditures.
Page #20 of 21 Pages
<PAGE>
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 14, 1997, Virgil Cox,
Robert Eilers and Leroy Welborn were elected to serve as Directors
of the Company for three-year terms. James D. Tipton, President of
the Company, was elected to serve a one-year term. The other
Directors continuing to serve are: Weldon Bailey, Norman Bering,
Susie Bracht-Black, Jeff Dyson, Phil Grothues and Larry Ward.
<TABLE>
<CAPTION>
No. of Votes No. of Votes Nominee
Nominees for Directors For Against Abstain Approval
- ---------------------- ---- ------- ------- --------
<S> <C> <C> <C> <C>
Virgil Cox 4760 60 -0- Yes
Robert Eilers 4760 60 -0- Yes
Leroy Welborn 4760 60 -0- Yes
James D. Tipton 4760 60 -0- Yes
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits & Reports on Form 8-K - None
(a) Exhibit 10 - Material Contracts.
Amended Loan Agreement with Texas Commerce Bank National Association
dated April 30, 1997.
Page #21 of 21 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)
Dated: August 14, 1997
Page #22 of 21 Pages
<PAGE>
REVOLVING PROMISSORY NOTE
U.S. $7,500,000.00 April 30, 1997 ("Date")
FOR VALUE RECEIVED, HANDY HARDWARE WHOLESALE, INC. ("Borrower"), a Texas
corporation, promises to pay to the order of TEXAS COMMERCE BANK NATIONAL
ASSOCIATION ("Bank") on or before April 30, 1999, (the "Termination Date"), at
its banking house at 712 Main Street, Houston, Harris County, Texas, or at such
other location as Bank may designate, in lawful money of the United States of
America, the lesser of: (i) the principal sum of SEVEN MILLION FIVE HUNDRED
THOUSAND AND NO/100THS UNITED STATES DOLLARS (U.S. $7,500,000.00)(the "Maximum
Loan Total"); or (ii) the aggregate unpaid principal amount of all loans made by
Bank (each such loan being a "Loan"), which may be outstanding on the
Termination Date. Each Loan shall be due and payable on the maturity date agreed
to by Bank and Borrower with respect to such Loan (the "Maturity Date"). In no
event shall any Maturity Date fall on a date after the Termination Date. Subject
to the terms and conditions of this Note and the Loan Documents, Borrower may
borrow, repay and reborrow all or any part of the credit provided for herein at
any time before the Termination Date, there being no limitation on the number of
Loans made so long as the total unpaid principal amount at any time outstanding
does not exceed the Maximum Loan Total.
"Board" means the Board of Governors of the Federal Reserve System of the United
States.
"Borrowing Date" means any Business Day on which Bank shall make a Loan
hereunder.
"Business Day" means a day: (i) on which Bank and commercial banks in Houston
are generally open for business; and (ii) with respect to LIBOR Loans, on which
dealings in United States Dollar deposits are carried out in the interbank
markets.
"Highest Lawful Rate" means the maximum nonusurious rate of interest from time
to time permitted by applicable law. If Texas law determines the Highest Lawful
Rate, Bank has elected the "indicated" (weekly) ceiling as defined in the Texas
Credit Code or any successor statute. Bank may from time to time, as to current
and future balances, elect and implement any other ceiling under such Texas
Credit Code and/or revise the index, formula or provisions of law used to
compute the rate on this open-end account by notice to Borrower, if and to the
extent permitted by, and in the manner provided in such Texas Credit Code.
"Interest Period" means the period commencing on the Borrowing Date and ending
on the Maturity Date, consistent with the following provisions. The duration of
each Interest Period shall be: (a) in the case of a Prime Rate Loan, a period of
up to the Termination Date unless any portion thereof is converted to a LIBOR
Loan hereunder; and (b) in the case of a LIBOR Loan, a period of up to one, two,
three or six months; in each case as selected by Borrower and agreed to by Bank.
Borrower's choice of Interest Period is subject to the following limitations:
(i) No Interest Period shall end on a date after the Termination Date; and (ii)
If the last day of an Interest Period would be a day other than a Business Day,
the Interest Period shall end on the next succeeding Business Day (unless the
Interest Period relates to a LIBOR Loan and the next succeeding Business Day is
in a different calendar month than the day on which the Interest Period would
otherwise end, in which case the Interest Period shall end on the next preceding
Business Day).
"LIBOR Loan" means a Loan which bears interest at a rate determined by reference
to the LIBOR Rate.
"LIBOR Rate" means a per annum interest rate determined by Bank by dividing: (i)
the average rate per annum (rounded upwards, if necessary, to the next 1/16 of
1%) of the rates per annum at which United States dollar deposits in an amount
comparable to the principal amount of the LIBOR Loan to which such LIBOR Rate is
applicable for a term equal to or substantially equal to the Interest Period are
offered by the principal office of The Chase Manhattan Bank to prominent banks
in the London interbank market at approximately 11:00 a.m., London time, two
Business Days prior to the commencement of the applicable Interest Period; by
(ii) Statutory Reserves.
"Loan Documents" means this Note and any document or instrument evidencing or
given in connection with this Note, including, but not limited to that certain
Amendment and Restatement of Credit Agreement dated April 30, 1996 executed by
and between Borrower and Bank (as amended from time to time, the "Agreement").
"Obligations" means all principal, interest and other amounts which are or
become owing under this Note or any other Loan Document.
"Prime Rate" means the rate determined from time to time by Bank as its prime
rate. The Prime Rate shall change automatically from time to time without notice
to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT
BE BANK'S LOWEST RATE.
"Prime Rate Loan" means a Loan which bears interest at a rate determined by
reference to the Prime Rate.
"Statutory Reserves" means the difference (expressed as a decimal) of the number
one minus the aggregate of the maximum reserve percentages (including, without
limitation, any marginal, special, emergency, or supplemental reserves)
expressed as a decimal established by the Board and any other banking authority
to which Bank is subject to, with respect to the LIBOR Rate, for Eurocurrency
Liabilities (as defined in Regulation D of the Board). Such reserve percentages
shall include, without limitation, those imposed under such Regulation D. LIBOR
Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall
be deemed to be subject to such reserve requirements without benefit of or
credit for proration, exceptions or offsets which may be available from time to
time to any bank under such Regulation D. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
Loans may be either Prime Rate Loans or LIBOR Loans. Borrower shall pay
interest on the unpaid principal amount of each Prime Rate Loan at a rate per
annum equal to the lesser of: (i) the Prime Rate in effect from time to time
MINUS one and one-half percent (1.50%)(the "Effective Prime Rate"); or (ii) the
Highest Lawful Rate. Accrued interest on each Prime Rate Loan is due and payable
on the last day of each month and at the Maturity Date. Borrower shall pay
interest on the unpaid principal amount of each LIBOR Loan for the Interest
Period with respect thereto at a rate per annum equal to the lesser of: (i) the
LIBOR Rate PLUS one and one-quarter percent (1.25%) (the "Effective LIBOR
Rate"); or (ii) the Highest Lawful Rate. Accrued interest on each LIBOR Loan is
due on the last day of each Interest Period applicable thereto, and in the case
of an Interest Period in excess of three months, on each day which occurs every
three months after the initial date of such Interest Period, and on any
prepayment (on the amount prepaid).
If at any time the effective rate of interest which would otherwise be
payable on any Loan evidenced by this Note exceeds the Highest Lawful Rate, the
rate of interest to accrue on the unpaid principal balance of such Loan during
all such times shall be limited to the Highest Lawful Rate, but any subsequent
reductions in such interest rate shall not become effective to reduce such
interest rate below the Highest Lawful Rate until the total amount of interest
accrued on the unpaid principal balance of such Loan equals the total amount of
interest which would have accrued if the Effective Prime Rate, or Effective
LIBOR Rate, whichever is applicable, had at all times been in effect.
Each LIBOR Loan shall be in an amount not less than $250,000.00 and an
integral multiple of $10,000.00. Each Prime Rate Loan shall be in an amount not
less than $25,000.00 and an integral multiple of $5,000.00. Interest shall be
computed on the basis of the actual number of days elapsed and a year comprised
of 360 days, unless such calculation would result in a usurious interest rate,
in which case such interest shall be calculated on the basis of a 365 or 366 day
year, as the case may be.
The unpaid principal balance of this Note at any time will be the total
amounts advanced by Bank, less the amount of all payments or prepayments of
principal. Absent manifest error, the records of Bank will be conclusive as to
amounts owed; in the event of any discrepancy in the amount shown due in the
Bank's records and the Borrower's records, however, the Bank agrees to allow the
Borrower a reasonable amount of time to resolve the discrepancy.
Loans shall be made on Borrower's irrevocable notice to Bank, given not
later than 12:00 P.M. (noon) (Houston time) on, in the case of LIBOR Loans, the
second Business Day prior to the proposed Borrowing Date or, in the case of
Prime Rate Loans, the Business Day of the proposed Borrowing Date. Each notice
of a requested borrowing (a "Notice of Requested Borrowing") under this
paragraph may be oral or written, and shall specify: (i) the requested amount;
(ii) proposed Borrowing Date; (iii) whether the requested Loan is to be a Prime
Rate Loan or LIBOR Loan; and (iv) Interest Period for the LIBOR Loan. If any
Notice of Requested Borrowing shall be oral, Borrower shall deliver to Bank via
facsimile not less than two (2) Business Days prior to the Borrowing Date in the
case of a LIBOR Loan and not later than 12:00 noon on the Business Day in the
case of a Prime Rate Loan, a confirmatory written Notice of Requested Borrowing.
Borrower may on any Business Day prepay the outstanding principal
amount of any Prime Rate Loan, in whole or in part. Partial prepayments shall be
in multiples of $5,000.00. Borrower shall have no right to prepay any LIBOR Loan
until the end of the applicable Interest Period.
Provided that no Event of Default has occurred and is continuing,
Borrower may elect to continue all or any part of any LIBOR Loan beyond the
expiration of the then current Interest Period relating thereto by providing
Bank at least two Business Day's written or telecopy notice of such election,
specifying the Loan or portion thereof to be continued and the Interest Period
therefor and whether it is to be a Prime Rate Loan or LIBOR Loan provided that
any continuation as a LIBOR Loan shall not be less than $250,000.00 and shall be
in an integral multiple of $10,000.00. If an Event of Default shall have
occurred and be continuing, the Borrower shall not have the option to elect to
continue any such LIBOR Loan or to convert Prime Rate Loans into LIBOR Loans.
Provided that no Event of Default has occurred and is continuing, Borrower may
elect to convert any Prime Rate Loan at any time or from time to time to a LIBOR
Loan by providing Bank at least two Business Day's written or telecopy notice of
such election, specifying each Interest Period therefor. Any conversion of Prime
Rate Loans shall not result in a borrowing of LIBOR Loans in an amount less than
$250,000.00 and in integral multiples of $10,000.00.
If at any time Bank determines in good faith (which determination shall
be conclusive) that any change in any applicable law, rule or regulation or in
the interpretation, application or administration thereof makes it unlawful, or
any central bank or other governmental authority asserts that it is unlawful,
for Bank or its foreign branch or branches to maintain any LIBOR Loan by means
of dollar deposits obtained in the London interbank market (any of the above
being described as a "LIBOR Event"), then, at the option of Bank, the aggregate
principal amount of all LIBOR Loans outstanding shall be prepaid; however the
prepayment may be made at the sole option of the Bank with a Prime Rate Loan.
Upon the occurrence of any LIBOR Event, and at any time thereafter so long as
such LIBOR Event shall continue, the Bank may exercise its aforesaid option by
giving written notice thereof to Borrower.
Borrower will indemnify Bank against, and reimburse Bank on demand for,
any reasonable loss, cost or expense incurred or sustained by Bank (including
without limitation any loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by Bank to fund
or maintain LIBOR Loans) as a result of: (a) any payment or prepayment (whether
permitted by Bank or required hereunder or otherwise) of all or a portion of any
LIBOR Loan on a day other than the Maturity Date of such Loan; (b) any payment
or prepayment, whether required hereunder or otherwise, of any LIBOR Loan made
after the delivery of a Notice of Requested Borrowing but before the applicable
Borrowing Date if such payment or prepayment prevents the proposed Loan from
becoming fully effective; or (c) the failure of any LIBOR Loan to be made by
Bank due to any action or inaction of Borrower. Such funding losses and other
costs and expenses shall be calculated and billed by Bank and such bill shall,
as to the costs incurred, be conclusive absent manifest error.
All past-due principal and interest on this Note, will bear interest at
a rate per annum equal to the Prime Rate plus two percent (2%); not to exceed,
however, the Highest Lawful Rate.
In addition to all principal and accrued interest on this Note,
following an Event of Default, Borrower agrees to pay: (a) all reasonable costs
and expenses incurred by Bank and all owners and holders of this Note in
collecting this Note through probate, reorganization, bankruptcy or any other
proceeding; and (b) reasonable attorney's fees if and when this Note is placed
in the hands of an attorney for collection.
Borrower and Bank intend to conform strictly to applicable usury laws.
Therefore, the total amount of interest (as defined under applicable law)
contracted for, charged or collected under this Note will never exceed the
Highest Lawful Rate. If Bank contracts for, charges or receives any excess
interest, it will be deemed a mistake. Bank will automatically reform the
contract or charge to conform to applicable law, and if excess interest has been
received, Bank will, at its discretion, either refund the excess to Borrower or
credit the excess on the unpaid principal amount of this Note. All amounts
constituting interest will be spread throughout the full term of this Note in
determining whether interest exceeds lawful amounts.
If any Event of Default (as defined in the Agreement) occurs, then
Bank may do any or all of the following: (i) cease making Loans hereunder; (ii)
declare the Obligations to be immediately due and payable, without notice of
acceleration or of intention to accelerate, presentment and demand or protest or
notice of any kind, all of which are hereby expressly waived; (iii) set off, in
any order, against the Obligations any debt owing by Bank to Borrower,
including, but not limited to, any deposit account, which right is hereby
granted by Borrower to Bank; and (iv) exercise any and all other rights under
the Loan Documents, at law, in equity or otherwise.
No waiver of any default is a waiver of any other default. Bank's delay
in exercising any right or power under any Loan Document is not a waiver of such
right or power.
Except as provided in the Agreement, Borrower waives notice, demand,
presentment for payment, notice of nonpayment, notice of intent to accelerate,
notice of acceleration, protest, notice of protest, and the filing of suit and
diligence in collecting this Note and all other demands and notices, and
consents and agrees that its liabilities and obligations will not be released or
discharged by any or all of the following, whether with or without notice to it
and whether before or after the stated maturity hereof: (i) extensions of the
time of payment; (ii) renewals; and (iii) acceptances of partial payments.
Borrower agrees that acceptance of any partial payment will not constitute a
waiver and that waiver of any default will not constitute waiver of any prior or
subsequent default.
Where appropriate the neuter gender includes the feminine and the
masculine and the singular number includes the plural number.
Borrower represents and agrees that: all Loans evidenced by this Note
are and will be for business, commercial, investment or other similar purpose
and not primarily for personal, family, or household use as such terms are used
in Chapter One of the Texas Credit Code. Borrower represents and agrees that
each of the following statements is true: (i) No advances will be used primarily
for agricultural purposes as such term is used in the Texas Credit Code. (ii) No
advances will be used for the purpose of purchasing or carrying any margin stock
as that term is defined in Regulation U of the Board. Notwithstanding anything
contained herein or in any other Loan Document, if this is a consumer credit
obligation (as defined or described in 12 C.F.R. 227, Regulation AA, promulgated
by the Board), the security for this credit obligation will not extend to any
non-possessory security interest in household goods (as defined in Regulation
AA) other than a purchase money security interest, and no waiver of any notice
contained herein or therein will extend to any waiver of notice prohibited by
Regulation AA.
Chapter 15 of the Texas Credit Code shall not apply to this Note or to
any Loan evidenced by this Note.
This Note is given in part to renew, modify and extend that one certain
revolving promissory note dated April 30, 1996, executed by Borrower and payable
to the order of the Bank in the principal amount of $7,500,000.00 (said note,
together with all prior promissory notes of which it renews, modifies or
extends, the "Renewed Note"). There is as of April 30, 1997, an outstanding
principal balance of $1,347,443.88 on this Note.
This Note is governed by Texas law. If any provision of this Note is
illegal or unenforceable, that illegality or unenforceability will not affect
the remaining provisions of this Note. BORROWER AND BANK AGREE THAT HARRIS
COUNTY, TEXAS IS PROPER VENUE FOR ANY ACTION OR PROCEEDING BROUGHT BY BORROWER
OR BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY ACTION OR PROCEEDING
AGAINST BORROWER MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT IN SUCH COUNTY TO
THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE EXTENT PERMITTED BY
APPLICABLE LAW BORROWER HEREBY IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM.
For purposes of this Note, any assignee or subsequent holder of this
Note will be considered the "Bank," and each successor to Borrower will be
considered the "Borrower."
Borrower represents that if it is not a natural person, it is duly
organized and validly existing and in good standing under the laws of the state
of its incorporation or organization; has full power to own its properties and
to carry on its business as now conducted; is duly qualified to do business and
is in good standing in each jurisdiction in which the nature of the business
conducted by it makes such qualification desirable; and has not commenced any
dissolution proceedings. Borrower represents that if it conducts business under
an assumed business or professional name it has properly filed Assumed Name
Certificate(s) in the office(s) required by Chapter 36 of the Texas Business and
Commerce Code. Each of the persons signing below on behalf of Borrower
represents that he/she has full requisite power and authority to execute and
deliver this Note to Bank on behalf of the party for whom he/she signs and to
bind such party to the terms and conditions of this Note and that this Note is
enforceable against such party.
NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF
PERFORMANCE, NO TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE
USED TO CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT.
THIS NOTE AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, Borrower has executed this Note effective the day,
month and year first aforesaid.
BORROWER: HANDY HARDWARE WHOLESALE, INC.
By: /s/ James D. Tipton
--------------------------------
Name: James D. Tipton
Title: President C.E.O.
(Bank's signature is provided as its acknowledgment of the above as the final
written agreement between the parties)
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: /s/ Carlos Valdez, Jr.
-----------------------------------
Name: Carlos Valdez, Jr.
Title: Vice-President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
filer's operations as of June 30, 1997, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,907,934
<SECURITIES> 0
<RECEIVABLES> 9,027,811<F1>
<ALLOWANCES> 7,195
<INVENTORY> 12,006,393
<CURRENT-ASSETS> 23,171,464
<PP&E> 9,358,060<F2>
<DEPRECIATION> 3,800,164
<TOTAL-ASSETS> 32,890,396
<CURRENT-LIABILITIES> 15,011,755
<BONDS> 210,913<F3>
0
5,624,546<F4>
<COMMON> 6,209,671<F5>
<OTHER-SE> 4,856,803<F6>
<TOTAL-LIABILITY-AND-EQUITY> 32,890,396
<SALES> 63,269,687
<TOTAL-REVENUES> 63,589,413
<CGS> 55,841,188
<TOTAL-COSTS> 55,841,188
<OTHER-EXPENSES> 3,509,518<F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,246
<INCOME-PRETAX> 1,128,741
<INCOME-TAX> 395,383
<INCOME-CONTINUING> 733,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 733,358
<EPS-PRIMARY> 6.94
<EPS-DILUTED> 6.94
<FN>
<F1>Accounts Receivable and Current Notes Receivable.
<F2>PP&E - Net of depreciation.
<F3>Long-term portion of line of credit.
<F4>Preferred Stock and Subscription for Preferred Stock less Subscription
Receivable for Preferred Stock less Preferred Treasury Stock.
<F5>Class A Common Stock and Class B Common Stock less Treasury Stock plus
Subscription for Class B Common Stock less Subscription Receivable for Class B
Common Stock.
<F6>Paid in Surplus and Retained Earnings.
<F7>Other Operating Costs (does not include payroll costs of $3,087,720.00).
</FN>
</TABLE>
