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 September 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 September 30, 1997, was 8580 shares of Class A Common Stock, $100
par value, and 51,076 shares of Class B Common Stock, $100 par value.
Page #1 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
-----
PART I Financial Information Page No.
Item 1. Financial Statements
Condensed Balance Sheet September 30, 1997
and December 31, 1996............................ 3 - 4
Condensed Statement of Earnings - Nine Months
Ended September 30, 1997 and 1996.....................5
Condensed Statement of Cash Flows - Nine Months
Ended September 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.-4.None ....................................................21
Item 5. Other Information.........................................21
Item 6. None......................................................21
Signatures .........................................................22
Page #2 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 2,440,333 $ 1,224,327
Accounts Receivable, net of 11,068,832 9,206,177
subscriptions receivable in
the amount of $73,259.78 for 1997
and $45,515 for 1996
Notes Receivable (Note 3) 4,440 0
Inventory 14,186,639 11,421,127
Other Current Assets 301,400 317,090
----------- -----------
$28,001,644 $22,168,721
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
At Cost Less Accumulated Depreciation
of $3,985,219 (1997) and $3,380,058 (1996) $ 9,299,060 $9,466,577
----------- ----------
OTHER ASSETS
Notes Receivable (Note 3) $120,281 $105,844
Deferred Compensation Funded 245,110 245,110
Other Noncurrent Assets 0 89,451
-------- --------
$365,391 $440,405
-------- --------
TOTAL ASSETS $37,666,095 $32,075,703
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable-Line of Credit $ 529,954 $ 985,883
Notes Payable-Stock (Note 4) 23,860 23,860
Notes Payable-Capital Leases 91,070 67,002
Accounts Payable-Trade 17,613,085 11,932,351
Other Current Liabilities 1,256,082 1,054,493
Current Deferred Income Taxes Payable (Note 5) 28,846 0
Federal Income Taxes Payable(Note 5) 0 67,741
---------- -----------
$19,542,897 $14,131,330
----------- -----------
NONCURRENT LIABILITIES
Note Payable-Line of Credit $ 0 $ 851,541
Notes Payable-Stock(Note 4) 219,150 209,950
Notes Payable-Capital Lease 137,311 123,290
Notes Payable-Vendor 115,762 105,844
Deferred Compensation Payable 245,110 245,110
Deferred Income Taxes Payable (Note 5) 292,178 297,773
---------- ----------
$1,009,511 $1,833,508
---------- ----------
TOTAL LIABILITIES $20,552,408 $15,964,838
----------- -----------
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #3 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
STOCKHOLDERS' EQUITY
- --------------------
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
8,830 & 8,220 shares $ 883,000 $ 822,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
52,130 & 47,733 shares 5,213,000 4,773,300
Common Stock, Class B
Subscribed 4,419.45 & 4,036.51
shares 441,945 403,651
Less Subscription Receivable (36,630) (22,757)
Preferred Stock, authorized 100,000
shares, $100 par value per share,
issued 54,722.75 & 50,213.75 shares 5,472,275 5,021,375
Preferred Stock, Subscribed
4,419.45 & 4,036.52 441,945 403,652
Less Subscription Receivable (36,630) (22,758)
Paid in Surplus 312,931 296,965
------------ ------------
$ 12,691,836 $ 11,675,428
Less: Cost of Treasury Stock
2,502 & -0- shares (250,200) 0
------------ ------------
$ 12,441,636 $ 11,675,428
Retained Earnings 4,672,051 4,435,437
------------ ------------
Total Stockholders' Equity $ 17,113,687 $ 16,110,865
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 37,666,095 $ 32,075,703
- -------------------- ============ ============
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #4 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
QUARTER NINE MONTHS
ENDED SEPT.30, ENDED SEPT.30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
EARNINGS
- --------
Net Sales $32,300,755 $29,042,616 $95,570,442 $90,588,740
Sundry Income 184,550 136,761 504,276 416,249
----------- ----------- ----------- -----------
TOTAL EARNINGS $32,485,305 $29,179,377 $96,074,718 $91,004,989
- -------------- ----------- ----------- ----------- -----------
EXPENSE
- -------
Net Mat'l. Costs $29,069,986 $25,908,048 $84,911,174 $80,624,996
Payroll Costs 1,605,160 1,527,951 4,692,880 4,454,900
Other Operating
Costs 1,606,569 1,516,645 5,116,087 4,819,867
Interest Expense 7,441 40,700 29,687 150,487
----------- ---------- ----------- -----------
TOTAL EXPENSE $32,289,156 $28,993,344 $94,749,828 $90,050,250
- ------------- ----------- ----------- ----------- -----------
NET EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 196,149 $ 186,033 $ 1,324,890 $ 954,739
- ---------- ----------- ----------- ----------- -----------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5) (72,081) (68,071) (467,464) (340,881)
- ------------------ ------------ ------------ ------------ -----------
NET EARNINGS $ 124,068 $ 117,962 $ 857,426 $ 613,858
- ------------
LESS ACCRUAL FOR
DIVIDENDS ON
PREFERRED STOCK (155,203) (128,757) (465,609) (386,271)
- --------------- ------------ ------------ ---------- -----------
NET EARNINGS
APPLICABLE
TO COMMON
STOCKHOLDERS $ ( 31,135) $ ( 10,795) $ 391,817 $ 227,587
- ------------ ============ ============ ============ ===========
NET EARNINGS PER
SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ (0.49) $ (0.18) $ 6.38 $ 4.03
- ---------------- ============ ============ =========== ===========
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #5 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPT. 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITY
- ----------------------------------
Net Earnings $ 857,426 $ 613,858
----------- ------------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 680,648 $ 664,472
Increase in Deferred Income Tax 23,251 19,147
Changes in Assets and Liabilities
Increase in Accounts Receivable $(1,862,655) $(2,676,540)
(Increase)Decrease in Notes Receivable (18,877) 3,640
Increase in Inventory (2,765,512) (3,486,150)
Decrease in Other Assets 105,141 7,593
Increase (Decrease)in Notes Payable - Vendor 9,918 (2,169)
Increase in Accounts Payable 5,680,734 5,636,208
Increase in Other Liabilities 201,589 524,811
Increase (Decrease) in Federal Income Taxes
Payable (67,741) 0
------------ ------------
TOTAL ADJUSTMENTS $ 1,986,496 $ 691,012
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 2,843,922 $ 1,304,870
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital Expenditures $ (513,131) $ (416,798)
Disposition of Fixed Assets 0 0
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES $ (513,131) $ (416,798)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Increase (Decrease)in Note Payable-Line of Credit $(1,307,470) $ 2,204,908
Decrease in Mortgage Payable 0 (2,823,306)
Increase in Notes Payable-Stock 9,200 37,640
Increase (Decrease)in Notes Payable-Capital Lease 38,089 (54,818)
Increase in Subscription Receivable (27,745) (32,772)
Proceeds From Issuance of Stock 1,044,153 986,692
Purchase of Treasury Stock (250,200) (176,075)
Dividends Paid (620,812) (515,029)
------------ -------------
NET CASH USED FOR FINANCING
ACTIVITIES $(1,114,785) $ ( 372,760)
------------ ------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS $ 1,216,006 $ 515,312
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,224,327 1,266,915
------------ ------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 2,440,333 $ 1,782,227
------------ ------------
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT
OF CASH FLOWS
- -------------
Interest Expense Paid $ 29,687 $ 150,487
Income Taxes Paid $ 492,896 $ 397,980
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page #6 of 22 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:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
Calculation of Net Earnings Per Share
of Common Stock
Net Earnings $124,068 $117,962 $857,426 $613,858
Less: Accrued Dividends
on Preferred Stock (155,203) (128,757) (465,609) (386,271)
--------- --------- --------- ---------
$(31,135) $(10,795) $391,817 $227,587
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 63,214 58,680 61,422 56,483
Net Earnings Per Share
of Common Stock $ (0.49) $ (0.18) $ 6.38 $ 4.03
========= ========== ========= =======
Page #7 of 22 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 nine months ended September 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:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,512,543 7,479,697
Furniture, Computer, Warehouse 3,274,091 2,875,288
Transportation Equipment 469,848 463,853
------------ ------------
$13,284,279 $12,846,635
Less: Accumulated Depreciation (3,985,219) (3,380,058)
------------ -----------
$ 9,299,060 $ 9,466,577
=========== ===========
Page #8 of 22 Pages
<PAGE>
NOTE 3 - NOTES RECEIVABLE
CURRENT PORTION NONCURRENT PORTION
SEPT.30, DEC.31, SEPT. 30, DEC. 31,
DEBTOR COLLATERAL 1997 1996 1997 1996
- ------ ---------- ---- ---- ---- ----
Alamo Heights Hdwe -- $0 $0 $5,893 $ 5,893
Allen's Hardware -- 4,440 0 4,519 0
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
------ ----- -------- -------
$4,440 $0 $120,281 $105,844
===== ====== ======== ========
The notes reflected in the above table (except for Allen's Hardware) 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 22 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 SEPT.30, DEC. 31, SEPT.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 22 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
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:
QUARTER ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
Excess of tax over book depreciation $ 1,344,720 $ 1,331,472
Allowance for bad debt (7,195) (7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (184,102) (249,239)
Deferred Compensation (209,235) (199,235)
------------ -----------
Total $ 944,188 $ 875,803
Statutory Tax Rate 34% 34%
----------- ----------
Cumulative Deferred Income Tax Payable $ 321,024 $ 297,773
=========== ==========
Classified as:
Current Liability $ 28,846 $ 0
Noncurrent Liability 292,178 297,773
----------- -----------
$ 321,024 $ 297,773
=========== ==========
Page #11 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
Principal Components of Income Tax Expense
Federal:
Current
Income tax paid $468,137 $290,902
Carry-over of prepayment from
prior year 24,759 107,078
Refund received for overpayment
from prior year 0 0
-------- --------
$492,896 $397,980
Federal Income Tax Payable (Receivable) (48,683) (76,246)
Carry-over to subsequent year 0 0
-------- --------
Income tax for tax reporting
at statutory rate of 34% $444,213 $321,734
Deferred
Adjustments for financial reporting:
Depreciation 4,504 2,803
263A Uniform Capitalization Costs 22,147 19,744
Other (3,400) (3,400)
-------- --------
Provisions for federal income tax $467,464 $340,881
======== ========
The Company is not classified as a nonexempt cooperative under the provisions of
the Internal Revenue Code and is not entitled to deduct preferred dividends in
determining its taxable income.
Page #12 of 22 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. Since May 1,
1983, 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 22 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 22 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
During the third quarter of 1997, total sales were 11.2 percent higher than
during the same quarter in 1996, as compared to a 6.4 percent decrease in 1996
from 1995 and a 12.7 percent increase in 1995 over 1994. For the first nine
months for each of these periods, sales increased by 5.5 percent, 0.5 percent
and 9.4 percent, respectively.
Since the beginning of the fourth quarter 1995, retail sales have been
suppressed by high consumer debt. Sales in the retail hardware industry in the
first five months of 1997 mirrored sales in the retail industry in general.
Additional factors that suppressed sales in early 1997 include an unusually wet
spring and pressure from retail warehouses, which continues to erode the market
share of independent hardware stores. However, beginning in June, 1997 as
consumer confidence and the economy strengthened, sales began a steady increase.
Sales for June, 1997 through September, 1997 increased 14.7 percent, 8.4
percent, 10.0 percent and 14.6 percent, respectively, over the same periods in
1996. These factors have resulted in moderate sales growth in most territories.
Other factors have resulted in flat sales in the Baton Rouge, New Orleans
and Gulf Coast East territory and significant increases in the Austin, Brenham
and Central Texas area and in the Arkansas territory. Sales in the Baton Rouge,
New Orleans and Gulf Coast East territory were on par with sales for the same
nine month period in 1996. This was a result of a personnel change in that
territory. The significant increase of 15 percent in sales for the first nine
months of 1997 in the Austin, Brenham and Central Texas area has resulted from
increased marketing efforts by the Company's employees in that territory. The 39
percent increase in sales during the same period in the 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 increased by only 5 percent due to
the same territory reorganization. Without the territory reorganization, sales
in the Arkansas area would have increased approximately 21 percent and sales in
the North Texas, Dallas and Fort Wortharea would have increased approximately 9
percent.
Page #15 of 22 Pages
<PAGE>
Sales The following table compares the Company's sales during the first
nine months of 1997 to sales during the same period of 1996, by sales territory:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nine Months Nine Months
Ended Ended
September 30, 1997 September 30, 1996
------------------ ------------------
% Increase
in Sales
from Nine % of % of
Months Total Total
Sales Territory Sales 1996 Sales Sales Sales
- --------------- ----- ---- ----- ----- -----
Houston Area $24,361,747 4% 25.6% $23,383,353 26.0%
Victoria, San Antonio,
Corpus Christi & Rio Grande
Valley Area* 16,692,845 3% 17.5% 16,228,936 18.0%
North Texas, Dallas
& Fort Worth Area 14,132,505 5% 14.8% 13,415,412 14.9%
Austin, Brenham & Central
Texas Area 11,592,229 15% 12.2% 10,121,715 11.2%
Southern Louisiana Area 10,927,715 5% 11.5% 10,413,987 11.6%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 8,368,442 0% 8.8% 8,401,090 9.3%
Arkansas Area 3,522,020 39% 3.7% 2,531,105 2.8%
Oklahoma Area 5,568,395 0% 5.9% 5,589,250 6.2%
----------- ---- ------ ----------- ------
Totals: $95,165,898 (1) 100.0% $90,084,848 100.0%
=========== ====== =========== ======
- -----------------------
<FN>
* 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.
</FN>
</TABLE>
Net Material Costs and Rebates. Net material costs for the third quarter
and first nine months of 1997 were $29,069,986 and $84,911,174, respectively,
compared to $25,908,048 and $80,624,996, respectively, for the same periods in
1996. Net material costs for the third quarter increased 12.2 percent over the
third quarter of 1996, which is higher than the 11.2 percent increase in sales
for the same period. Net material costs as a percentage of sales were 90.9
percent in the third quarter of 1997 as compared to 89.2 percent for the same
period in 1996. The slight increase of net material costs as a percentage of
sales in the third quarter of 1997 over the same period of 1996 was the result
of an increase in the number of inventory items sold at a lower gross margin.
Sales with a markup ranging from 2% to 5% increased from $2,599,734 in 1996 to
$3,215,175 in 1997, an increase of 23.7 percent.
The increase of 5.3 percent in net material costs for the first nine months
of 1997 parallels the increase of 5.5 percent in sales for the same period. Net
material costs as a percentage of sales remained stable: 88.8 percent in the
first nine months of 1997 and 89.0 percent for the same period in 1996. The
slight decline of net material costs as a percentage of sales for the first nine
months of 1997 as compared to the same 1996 period was the result of a 3.3
percent increase in purchase discounts and a 19.3 percent increase in factory
rebates.
Payroll Costs. Payroll costs during the third quarter and nine months ended
September 30, 1997, were $1,605,160 and $4,692,880 respectively, as compared to
$1,527,951 and $4,454,900 for the same period in 1996. Payroll expense for the
third quarter of 1997 increased by $77,209. This 5.1 percent increase was the
Page #16 of 22 Pages
<PAGE>
result of regular salary increases. Payroll expense for the first nine months of
1997 increased 5.3 percent over the same period in 1996 due to regular salary
increases and a 17 percent increase in overtime, 49 percent of which was
generated in the second quarter of 1997 and 32 percent of which was a result of
overtime in the shipping department resulting from high employee turnover and
the corresponding decline in productivity.
Payroll costs for the third quarter of 1997 constituted 5.0 percent of both
net sales and total expenses, compared to 5.3 percent for the same quarter in
1996. Payroll costs were 4.9 percent of both sales and total expenses for the
first nine months of both 1997 and 1996.
Other Operating Costs. During the third quarter and for the first nine
months of 1997 other operating costs increased 5.9 percent and 6.1 percent,
respectively, compared to the same periods in 1996. Other operating expenses for
the third quarter of 1997 were $1,606,569 (5.0% of sales) as compared to
$1,516,645 (5.2% of sales) for the same period in 1996. For the nine-month
period ending September 30, 1997, other operating expenses were $5,116,087 (5.4%
of sales) as compared to $4,819,867 of these expenses for the same period in
1996 (5.3% of sales).
Other operating costs include a wide variety of expenses related to the Company.
The largest components of other operating costs in the third quarter and first
nine months of 1997 were $622,982 and $1,632,261, respectively, of employee
expenses (representing an increase of 19.3 percent and 9.3 percent over 1996
levels), $346,024 and $1,355,303 respectively, of delivery expenses
(representing an increase of 63.5 percent and 14.6 percent over 1996 levels) and
$266,075 and $637,371, respectively, of warehouse expenses (representing an
increase of 23.2 percent and a decrease of 3.9 percent from 1996 levels).
Net Earnings and Net Earnings Per Share. As a result of an increase in
gross margin and a decline in interest expense, net earnings increased 5.2
percent, from $117,962 for the third quarter of 1996 to $124,068 in the same
1997 period. Further, due to the strong second quarter of 1997, net earnings for
the first nine months of 1997 increased 39.7 percent, from $613,858 for the
first nine months of 1996 to $857,426 during the same 1997 period.
Net earnings in the third quarter and first nine months of 1997 increased
primarily due to a decrease in interest expense which declined from $40,700 and
$150,487 in the third quarter and first nine months of 1996, respectively, to
$7,441 and $29,687 in the same 1997 periods. This decline was the result of
utilizing a line of credit to replace the Company's mortgage, thus allowing the
Company to apply excess cash to reduce the balance owing on the line of credit
on a daily basis, consequently reducing interest. In addition, net earnings for
the first nine months of 1997 increased due to the Company's ability to generate
a larger percentage of purchase discounts and rebates (which increased by
$640,429) than in the corresponding period in 1996.
The Company's net earnings per share declined 172 percent in the third quarter
of 1997 and increased 68.7% in the first nine months of 1997 as compared to the
same periods of 1996. The decrease in net earnings per share in the third
quarter of 1997 as compared to the same 1996 period resulted from a slight
increase in net earnings offset by a larger reduction for dividends accrued on
preferred stock during the same period. Dividends accrued in the third quarter
of 1997 represented a larger percentage of net earnings than dividends accrued
in the same 1996 period. Conversely, the increase in per share earnings in the
nine month period ending September 30, 1997 was due to an increase in net
earnings, offset to a degree by an increase in the dividends accrued on
preferred stock during the same period. Dividends accrued in the first nine
months of 1997 represented a smaller percentage of 1997 net earnings than
dividends accrued in the first nine months of 1996.
Page #17 of 22 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 September 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 nine months of 1997 there was a net increase
for the period of $1,216,006 in the Company's cash and cash equivalents as
compared to an increase of $515,312 for the same period of 1996.
Cash flow from operating activities for the first nine months of 1997 was
$2,843,922 as compared to $1,304,870 in the same nine month period of 1996. 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 nine
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 $857,426 in 1997 from $613,858 in 1996, (ii) a
$1,862,655 increase in accounts receivable in 1997 as compared to a $2,676,540
increase in 1996, (iii) an increase of $2,765,512 in inventory in 1997 as
compared to a $3,486,150 increase in inventory in 1996, and (iv) a $105,141
decrease in other assets in 1997 as compared to a $7,593 decrease in 1996.
The positive effects on cash flow in the first nine months of 1997 were offset
by the following negative effects: (i) a $201,589 increase in other liabilities
as compared to an increase of $524,811 in other liabilities in 1996 and (ii) a
$67,741 decrease in federal income taxes payable in 1997 as compared to no
decrease in 1996.
Page #18 of 22 Pages
<PAGE>
While inventory increased $2,765,512 in the first nine months of 1997 from the
beginning of the year, the increase was not as significant as the increase of
$3,486,150 during the same 1996 period. During the first nine 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 nine 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 receivable increased during the first nine months of 1997, but again,
not as significantly as during the same period of 1996, due to a timing
difference in the recognition of receivables generated from the Company's Fall
trade show. Accounts payable increased during the first nine months of 1997,
again as a result of better payment terms provided by vendors at the Company's
fall trade show and a timing difference in the recognition of payables.
In the first nine months of 1997, the Company expended a net amount of $513,131
to purchase fixed assets, which is $96,333 (23%) higher than the $416,798
expended in the same period of 1996.
In the first nine months of 1997, $1,114,785 was used for financing activities,
which was substantially higher than the $372,760 used in the first nine 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) payment of a larger preferred stock dividend 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 ($250,200 vs. $176,075).
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 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 September 30, 1997, the
outstanding balance on the line of credit was $529,954, resulting from the
initial draw on the line of credit of $2,449,898 and total re-payments of
$1,919,944 on the line of credit. On September 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:
SEPTEMBER 30 DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
---- ---- ----
Working Capital $8,458,747 $8,037,391 $8,640,467
Current Ratio 1.4 to 1 1.6 to 1 1.5 to 1
(Current Assets to
Current Liabilities)
Long-term Debt as Percentage
of Capitalization 5.9 11.4 20.7
Page #19 of 22 Pages
<PAGE>
Working capital has been principally generated from the sale of stock and cash
provided from operations.
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 nine months of 1997, the Company maintained a 95.1 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 6.1 times during the first nine months of
1997 and 6.2 times for the first nine 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 nine month period ending September 30, 1997,
and September 30, 1996, the Company's investment in capital assets (net of
dispositions) was $513,131 and $416,798, respectively. Approximately 33.1
percent ($170,075) of the amount expended in the first nine months of 1997 was
used to purchase computer hardware and software, 20.7 percent ($106,477) was
used to upgrade the Company's catalog and purchase office equipment, 22.6
percent ($115,712) was used to upgrade warehouse equipment, 15.9 percent
($81,481) was used to purchase Company automobiles, 6.4 percent ($32,846) was
paid for future warehouse expansion plans and 1.3 percent ($6,540) was used to
purchase dealer order entry terminals. By comparison, 37.1 percent ($154,440) of
the amount expended in the first nine months of 1996 was used to upgrade
warehouse equipment, 21.5 percent ($89,435) was used to purchase printing and
other office equipment and 19.5 percent ($81,243) was used to purchase four
Company cars.
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
($256,000), computer equipment ($16,000), and office equipment ($5,000).
The Company's cash position of $2,440,333 at September 30, 1997, is
anticipated to be sufficient to fund all planned capital expenditures.
Page #20 of 22 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 - None
Item 5. Other Information - On October 22, 1997 at a regular meeting of the
Board of Directors, Director Phil Grothues informed the Board that he
had sold his hardware stores, and in conjunction with the Company's
policy on repurchase of the shares of Member-Dealers who sell their
stores, he tendered his resignation as a Director. In accordance with
the provisions of the Bylaws of the Company, at the next Board
meeting scheduled December 12, 1997 the Directors will fill the
vacancy created by his resignation for his unexpired term ending May
1999.
Item 6. Exhibits & Reports on Form 8-K - None
Page #21 of 22 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.
---------------------------------------
JAMES D. TIPTON
President
(Chief Executive Officer)
---------------------------------------
TINA S. KIRBIE
Senior Vice President, Finance
Secretary and Treasurer
Chief Financial and Accounting Officer)
Date November 13, 1997
-----------------
Page #22 of 22 Pages
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
filer's operations as of September 30, 1997, and is qualified in its
entirty by reference to such financial statements.
</LEGEND>
<CIK> 0000354053
<NAME> Jenkens & Gilchrist
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,440,333
<SECURITIES> 0
<RECEIVABLES> 11,068,832
<ALLOWANCES> 7,195
<INVENTORY> 14,186,639
<CURRENT-ASSETS> 28,001,644
<PP&E> 9,299,060
<DEPRECIATION> 3,985,219
<TOTAL-ASSETS> 37,666,095
<CURRENT-LIABILITIES> 19,542,897
<BONDS> 0
0
5,757,790
<COMMON> 6,370,915
<OTHER-SE> 4,984,982
<TOTAL-LIABILITY-AND-EQUITY> 37,666,095
<SALES> 95,570,442
<TOTAL-REVENUES> 96,074,718
<CGS> 84,911,174
<TOTAL-COSTS> 84,911,174
<OTHER-EXPENSES> 5,116,087
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,687
<INCOME-PRETAX> 1,324,890
<INCOME-TAX> 467,464
<INCOME-CONTINUING> 857,426
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 857,426
<EPS-PRIMARY> 6.80
<EPS-DILUTED> 6.80
</TABLE>
