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 March 31, 1997.
Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1381875
(State of (I.R.S. Employer
Incorporation) 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 March 31, 1997, was 8340 shares of Class A Common Stock, $100 par
value, and 49,089 shares of Class B Common Stock, $100 par value.
Page 1 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
Item 1. Financial Statements
Condensed Balance Sheet March 31, 1997
and December 31, 1996 ........................... 3 - 4
Condensed Statement of Income - Three Months
Ended March 31, 1997 and 1996.................... 5
Condensed Statement of Cash Flows - Three Months
Ended March 31, 1997 and 1996.................... 6 - 7
Notes to Condensed Financial Statements.............. 8 - 12
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations.................. 13 - 17
PART II Other Information
Items 1-6 None 18
Signatures 19
Page 2 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
- --------------
Cash $ 3,464,479 $ 1,224,327
Accounts Receivable, net of subscriptions receivable in 12,058,520 9,206,177
the amount of $53,750 for 1997 and $45,515 for 1996
Inventory 13,281,698 11,421,127
Other Current Assets 247,790 317,090
------------ -----------
$ 29,052,487 $22,168,721
------------ -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
- --------------------------------------
At Cost Less Accumulated Depreciation
of $3,592,678(1997) and $3,380,058 (1996) $ 9,355,110 $ 9,466,577
------------ -----------
OTHER ASSETS
- ------------
Notes Receivable (Note 3) $ 112,312 $ 105,844
Deferred Compensation Funded 245,110 245,110
Other Noncurrent Assets -0- 89,451
------------ -----------
$ 357,422 $ 440,405
------------ -----------
TOTAL ASSETS $ 38,765,019 $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 Lease 61,644 67,002
Accounts Payable - Trade 19,280,323 11,932,351
Other Current Liabilities 552,501 1,054,493
Current Deferred Income Taxes Payable (Note 5) 13,265 -0-
Federal Income Taxes Payable (Note 5) 208,281 67,741
------------ -----------
$ 20,991,415 $14,131,330
------------ -----------
NONCURRENT LIABILITIES
- ----------------------
Note Payable-Line of Credit $ 618,398 $ 851,541
Notes Payable-Stock (Note 4) 209,950 209,950
Notes Payable-Capital Lease 113,446 123,290
Notes Payable-Vendor 112,312 105,844
Deferred Compensation Payable 245,110 245,110
Deferred Income Taxes Payable (Note 5) 291,591 297,773
------------ -----------
$ 1,590,807 $ 1,833,508
------------ -----------
TOTAL LIABILITIES $ 22,582,222 $15,964,838
- ----------------- ============ ===========
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page 3 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ----------
<S> <C> <C>
STOCKHOLDERS' EQUITY
--------------------
Common Stock, Class A, authorized 20,000 shares, $100
par value per share, issued 8,410 & 8,220 shares $ 841,000 $ 822,000
Common Stock, Class B, authorized 100,000 shares, $100
par value per share, issued 49,293 & 47,733 shares 4,929,300 4,773,300
Common Stock, Class B Subscribed 4,081.03 & 4,036.51 shares 408,103 403,651
Less Subscription Receivable (26,875) (22,757)
Preferred Stock 13% Cumulative, authorized 100,000 shares, $100
par value per share, issued 51,823.75 & 50,213.75 shares 5,182,375 5,021,375
Preferred Stock, Subscribed 4,081.03 & 4,036.52 shares 408,103 403,652
Less Subscription Receivable (26,875) (22,758)
Paid in Surplus 301,411 296,965
----------- -----------
$12,016,542 $11,675,428
Less: Cost of Treasury Stock 528 & -0- shares (52,800) -0-
----------- -----------
$11,963,742 $11,675,428
Retained Earnings 4,219,055 4,435,437
----------- -----------
Total Stockholders' Equity $16,182,797 $16,110,865
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $38,765,019 $32,075,703
---------------------------------------- =========== ===========
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page 4 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1996
------------ -----------
<S> <C> <C>
INCOME
------
Net Sales $ 33,119,640 $32,934,675
Sundry Income 142,872 142,708
------------ -----------
TOTAL INCOME $ 33,262,512 $33,077,383
------------ ------------ -----------
EXPENSE
-------
Net Material Costs $ 29,542,472 $29,577,383
Payroll Costs 1,526,874 1,465,273
Other Operating Costs 1,563,797 1,477,733
Interest Expense 9,575 55,361
------------ -----------
TOTAL EXPENSE $ 32,642,718 $32,575,750
------------- ------------ -----------
INCOME BEFORE PROVISIONS FOR ESTIMATED FEDERAL
----------------------------------------------
INCOME TAX (Note 5) $ 619,794 $ 501,633
------------------
PROVISIONS FOR ESTIMATED FEDERAL INCOME TAX
-------------------------------------------
(Note 5) (215,364) (174,789)
-------- ------------ -----------
NET INCOME $ 404,430 $ 326,844
----------
LESS ACCRUED DIVIDENDS ON
PREFERRED STOCK (155,203) (128,757)
------------------------- ------------ -----------
NET INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 249,227 $ 198,087
------------------------ ============ ===========
EARNINGS PER SHARE OF
COMMON STOCK, CLASS A &
CLASS B (Note 1) $ 4.12 $ 3.57
----------------------- ============ ===========
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page 5 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net Income $ 404,430 $ 326,844
----------- -----------
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Depreciation $ 217,173 $ 212,262
Increase in Deferred Income Tax 7,083 8,837
Changes in Assets and Liabilities
Increase in Accounts Receivable $(2,852,343) $(5,260,527)
Increase in Notes Receivable (6,468) (4,993)
Increase in Inventory (1,860,571) (2,779,228)
Decrease in Other Assets 158,751 144,037
Increase in N/P-Vendor 6,468 5,169
Increase in Accounts Payable 7,347,972 9,476,236
Decrease in Other Liabilities (501,992) (217,298)
Increase in Federal Income
Taxes Payable 140,540 58,874
----------- -----------
TOTAL ADJUSTMENTS $ 2,656,613 $ 1,643,369
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 3,061,043 $ 1,970,213
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures $ (105,706) $ (58,381)
Disposition of Fixed Assets -0- -0-
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES $ (105,706) $ (58,381)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page 6 of 19 Pages
<PAGE>
STATEMENT OF CASH FLOWS (UNAUDITED) Cont.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease Note Payable - Line of Credit $ (367,485) $ -0-
Decrease in Mortgage Payable -0- (77,051)
Increase in Notes Payable - Stock -0- 9,000
Decrease in Notes Payable - Capital Lease (15,202) (16,024)
Increase in Subscription Receivable (8,235) (18,566)
Proceeds From Issuance of Stock 349,349 341,792
Purchase of Treasury Stock (52,800) (63,200)
Dividends Paid (620,812) (515,029)
----------- -----------
NET CASH USED FOR FINANCING ACTIVITIES $ (715,185) $ (339,078)
----------- -----------
NET INCREASE IN CASH & CASH EQUIVALENTS $ 2,240,152 $ 1,572,754
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,224,327 1,266,915
----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 3,464,479 $ 2,839,669
=========== ===========
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Interest Expense Paid $ 9,575 $ 55,361
Income Taxes Paid -0- -0-
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page 7 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
(1) General Information:
The condensed consolidated financial statements included herein have
been prepared by Handy Hardware Wholesale, Inc. (the "Company"). The
financial statements reflect all adjustments, which were all of a
recurring nature, which are, in the opinion of management, necessary
for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission
(SEC). The Company believes that the disclosures made are adequate to
make the information presented not misleading. The condensed
consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the
latest Form 10-K Annual Report.
(2) Earnings Per Share:
Earnings per common share (Class A and Class B Combined) are based on
the weighted average number of shares outstanding in each period after
giving effect to the stock issued, stock subscribed, accrued dividends
on preferred stock, and treasury stock as set forth by Accounting
Principles Board Opinion No. 15 as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Calculation of Earnings Per Share of Common Stock
Net Income $ 404,430 $ 326,844
Less: Accrued Dividends
On Preferred Stock (155,203) (128,757)
---------- ----------
$ 249,227 $ 198,087
Weighted Average
Shares of Common Stock (Class A & Class B) outstanding 60,536 55,514
Income Per Share of Common Stock $ 4.12 $ 3.57
========== ==========
</TABLE>
Page 8 of 19 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(3) Revenue Recognition:
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. Accordingly, revenues
and expenses are accounted for using the accrual basis of accounting.
Under this method of accounting, revenues and receivables are
recognized when merchandise is shipped or services are rendered and
expenses are recognized when the liability is incurred.
(4) Accounting for Dividends on Preferred Stock
The Company pays dividends on Preferred Stock during the first quarter
of each fiscal year. Only 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 income,
however, on the Condensed Statement of Income included herein, the
Company has accrued an estimated portion of the dividends to be paid in
the first quarter of 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 three months ended March 31, 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>
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,479,697 7,479,697
Furniture, Computer, Warehouse 2,976,441 2,875,288
Transportation Equipment 463,853 463,853
----------- -----------
$12,947,788 $12,846,635
Less: Accumulated Depreciation (3,592,678) (3,380,058)
----------- -----------
$ 9,355,110 $ 9,466,577
=========== ===========
</TABLE>
Page 9 of 19 Pages
<PAGE>
NOTE 3 - NOTES RECEIVABLE
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
----------------------------- --------------------------
MARCH 31, DEC. 31, MARCH 31, 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
Grandbury Farm & Ranch - -0- -0- 1,219 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 Hardware - -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- $112,312 $105,844
==== ==== ======== ========
</TABLE>
The notes 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 10 of 19 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 MARCH 31, DEC. 31, MARCH 31, 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
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 $209,950 $209,950
</TABLE>
The five-year, interest bearing notes listed in the above table reflect amounts
due from the Company to former Member-Dealers for the Company's repurchase of
shares of Company stock owned by these former Member-Dealers. According to the
terms of the note, only interest is paid on the outstanding balance of the note
during the first four years. In the fifth year, both interest and principal are
paid.
Principal payments due over the next five years are as follows:
1997 $ 23,860
1998 $ 7,000
1999 $ 38,750
2000 $ 107,200
2001 $ 57,000
---------
$ 233,810
Page 11 of 19 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
MARCH 31, DECEMBER 31,
1997 1996
------------- ----------
<S> <C> <C>
Excess of tax over book depreciation $1,332,704 $1,331,472
Allowance for Bad Debt (7,195) (7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (227,527) (249,239)
Deferred Compensation (201,348) (199,235)
----------- ----------
Total $ 896,634 $ 875,803
Statutory Tax Rate 34% 34%
----------- ----------
Cumulative Deferred Income Tax Payable $ 304,856 $ 297,773
=========== ==========
Classified as:
Current Liability $ 13,265 $ 0
Noncurrent Liability 291,591 297,773
----------- ----------
$ 304,856 $ 297,773
=========== ==========
</TABLE>
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
1997 1996
------------- ----------
<S> <C> <C>
Principal Components of Income Tax Expense
Federal:
Current
-------
Income tax paid $ 0 $ 0
Carry-over of prepayment from prior year 29,529 107,078
Refund received for overpayment from prior year 0 0
----------- ----------
$ 29,529 $ 107,078
Federal Income Tax payable 178,752 58,874
Carry-over to subsequent year 0 0
----------- ----------
Income tax for tax reporting
at statutory rate of 34% $ 208,281 $ 165,952
Deferred
Adjustments for financial reporting:
Depreciation 419 2,974
263A Uniform Capitalization Costs 7,382 6,581
Other (718) (718)
----------- ----------
Provision for federal income tax $ 215,364 $ 174,789
=========== ==========
</TABLE>
Page 12 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the first quarter of 1997 total sales were 0.60 percent higher than
during the same quarter of 1996, as compared to a 4.74 percent increase in 1996
over 1995 and a 9.96 percent increase in 1995 over 1994. Sales in the retail
hardware industry in the first quarter 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 only moderate sales growth or a decline
in most territories other than the Austin, Brenham, and Central Texas area and
the Oklahoma & Arkansas region. The significant increase of 14 percent in sales
in the Austin, Brenham and Central Texas area has resulted from increased
marketing efforts by the Company's employees in that area. The 20 percent
increase in sales 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 $254,536
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 effected by the
same territory reorganization. Without considering the effect of the territory
reorganization on the two sales areas, sales in Oklahoma and Arkansas area
increased approximately 11 percent and sales in the North Texas, Dallas and Fort
Worth area decreased approximately 4 percent. The Company believes that an
increase in promotional sales activities and inventory available for orders,
plus low-cost dealer buying programs were also key elements of the Company's
sales growth in these territories.
Sales. The following table compares the Company's sales during the
first quarter of 1997 to sales during the same period of 1996, by sales
territory:
<TABLE>
<CAPTION>
First Quarter First Quarter
1997 1996
-------------------------------------------------- ------------------------
% Increase in % of
Sales From First % of Total
Sales Territory Sales Quarter 1996 Total Sales Sales Sales
--------------- ---------- ------------ ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Houston Area $8,095,412 -1% 24.5% $ 8,157,056 24.8%
Victoria, San Antonio,
Corpus Christi & Rio
Grande Valley Area* 6,069,127 1% 18.3% 6,013,870 18.3%
North Texas, Dallas &
Fort Worth Area 4,974,812 -9% 15.0% 5,460,625 16.6%
Austin, Brenham &
Central Texas Area 4,022,002 14% 12.2% 3,524,868 10.7%
Southern Louisiana
Area 3,707,440 -5% 11.2% 3,884,976 11.8%
Baton Rouge, New
Orleans, Mississippi,
Alabama & Florida
Area 2,915,450 -7% 8.8% 3,123,622 9.5%
Oklahoma & Arkansas
Area 3,300,834 20% 10.0% 2,749,285 8.3%
---------- ----- ----------- ------
Totals: $33,085,077(1) 100.0% $32,914,302 100.0%
=========== ===== =========== =====
</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.
Page 13 of 19 Pages
<PAGE>
Net Material Costs and Rebates. Net material costs for the first
quarter of 1997 were $29,542,472, compared to $29,577,383 during the first
quarter of 1996. Net material costs as a percentage of sales were 89.2 percent
in 1997 as compared to 89.8 percent in 1996. The slight decline in net material
costs as a percentage of sales was a result of a 12.7 percent increase in
purchase discounts and a 26.2 percent increase in factory rebates, both of which
were taken by the Company as a credit against material costs in the first
quarter of 1997. As a result of increased purchases of inventory, purchase
discount income during the first quarter of 1997 was $621,813 as compared to
$551,832 during the same 1996 period, an increase of $69,981. Additionally,
rebate income during the same two periods was $1,262,875 and $1,000,344,
respectively, an increase of $262,531.
Payroll Costs. Payroll costs during the quarter ended March 31, 1997,
increased to $1,526,874 from $1,465,273 for the same period in 1996. This
increase of 4 percent resulted primarily from regular salary increases. Payroll
costs for the first quarter of 1997 constituted 4.6 percent of net sales,
compared to 4.4 percent for the first quarter of 1996. The relative stability in
payroll costs has been a result of a continuing effort to maintain employee
productivity as sales and expenses have grown.
Other Operating Costs. During the first quarter of 1997, other operating
costs increased $86,064 (5.8%) compared to the same quarter of 1996, but
remained relatively the same as a percentage of sales. First quarter 1997
operating expenses were $1,563,797 (4.7% of sales) as compared to $1,477,733 of
these expenses for the same period of 1996 (4.5% of sales).
Other operating costs include a wide variety of expenses related to the Company.
The largest components of other operating costs in the first quarter of 1997
were $474,576 of employee expenses, an amount approximately equal to 1996
levels, $470,284 of delivery expenses (representing an increase of $43,759 or
9.8 percent over 1996 levels) and $203,061 of warehouse expenses (representing a
decrease of $8,523 or 4.0 percent from 1996 levels).
Net Income and Earnings Per Share. While net sales for the first
quarter of 1997 increased $184,965 (0.6 percent) and net material costs declined
$34,911 (0.1 percent) from the first quarter in 1996, gross margin increased 6.5
percent. As a result of an increase in gross margin, pretax net income increased
23.6 percent from $501,633 for the first quarter of 1996 to $619,794 in the same
1997 period while after-tax net income also increased by 23.7 percent. Net
income in the first quarter of 1997 increased primarily due to three factors.
First, the Company was able to generate a larger percentage of purchase
discounts and rebates during the first quarter of 1997 than in the corresponding
period in 1996. Secondly, a timing difference in the receipt of spring trade
show invoices from vendors resulted in a decline in direct sales as a percentage
of total sales. Lastly, interest expense decreased from $55,361 in the first
quarter of 1996 to $9,575 in the same 1997 period. This decline was the result
of utilizing the Company's line of credit with a 6.75 percent interest rate to
retire the Company's mortgage with a 7.2 percent interest rate.
The Company's earnings per share increased 15.4 percent in the first quarter of
1997 as compared to the same period of 1996. This increase was due to an
increase in net income in the first quarter of 1997 offset by an increase in the
Page 14 of 19 Pages
<PAGE>
dividend accrued on preferred stock during the same period. Dividends accrued
in the first quarter of 1997 represented a smaller percentage of 1997 net income
than dividends accrued in the first quarter of 1996.
Quarter-to-quarter variations in the Company's earnings per share reflect (in
addition to the factors discussed above) the Company's pricing of its
merchandise in order to deliver the lowest cost buying program for
Member-Dealers (who own all of the stock of the Company), although this often
results in lower net income for the Company. Because these trends benefit the
individual stockholders of the Company who purchase its merchandise, there is no
demand from shareholders that the Company focus greater attention upon earnings
per share.
Seasonality. The Company's quarterly net income traditionally has been
subject to two primary factors. First and third quarter earnings have been
negatively affected by the increased level of direct sales (with no markup)
resulting from the Company's semiannual trade show always held in the first and
third quarters. Secondly, sales during the fourth quarter traditionally have
been lower, as hardware sales are slowest during winter months preceding
ordering for significant sales for the spring. However, net income has varied
substantially from year to year in the fourth quarter as a result of corrections
to inventory made at year-end.
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 period in
the previous years. This timing difference in the receipt of such resulted in a
higher than usual first quarter net income in these years.
FINANCIAL CONDITION AND LIQUIDITY
During the period ending March 31, 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 three months of 1997 there was a net increase
for the period of $2,240,152 in the Company's cash and cash equivalents as
compared to an increase of $1,572,754 for the same period of 1996.
Cash flow from operating activities from the beginning to the end of the first
quarter of 1997 was $2,656,613 as compared to $1,643,369 in the same quarter 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 quarter 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 income to $404,430 in 1997 from $326,844 in 1996, (ii) an increase to
$140,540 in federal income taxes payable in 1997 from $58,874 payable in 1996,
(iii) a $2,852,343 increase in accounts receivable in 1997 as compared to a
$5,260,527 increase in 1996 and (iv) an increase of $1,860,571 in inventory in
1997 as compared to a $2,779,228 increase in inventory in 1996. The positive
effects on cash flow in the first quarter of 1997 over the first quarter of 1996
were offset by the following negative effects: (i) a $7,347,972 increase in
accounts payable in 1997 as compared to a $9,476,236 increase in accounts
payable in 1996 and (ii) a $501,992 decrease in other liabilities as compared to
a decrease of $217,298 in other liabilities in 1996.
While inventory increased $1,860,571 in the first three months of 1997 from the
beginning of the year, the increase was not as significant as the increase of
$2,779,228 during the same 1996 period. During the first quarter 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 the third quarter of
1995.
Page 15 of 19 Pages
<PAGE>
In the first quarter of 1997, while the Company continues to expand its
inventory to meet Member-Dealer demand, the expansion is not as significant as
in the first quarter of 1996.
Accounts payable increased during the first three 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 generated from the Company's spring trade show.
The increase in accounts receivable, too, was not as significant in the first
quarter of 1997 as in the same period in 1996 due to (i) a decrease in demand
because of the unusually wet spring and (ii) a timing difference in recognition
of receivables generated from the Company's spring trade show.
In the first quarter of 1997, the Company expended a net amount of $105,706 to
purchase fixed assets, which is $47,325 (81%) higher than the $58,381 expended
in the same period of 1996.
In the first three months of 1997, $715,185 was used for financing activities
which was substantially higher than the $339,078 used in the first three 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 and (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, which increases were offset by a
decrease in mortgage payable of $77,051.
In August 1996, Texas Commence 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 (1.5%) 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 and may also be used for working capital and other
financing needs of the Company. On March 31, 1997, the outstanding balance on
the line of credit was $1,469,939, resulting from the initial draw on the line
of credit of $2,449,898 net of total payments of $979,959 on the line of credit.
On March 31, 1997, the interest rate on the line of credit was 6.75%.
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>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Working Capital $8,061,072 $8,037,391 $7,971,504
Current Ratio 1.4 to 1 1.6 to 1 1.4 to 1
(Current Assets to Current Liabilities)
Long-term Debt as Percentage
of Capitalization 9.8 11.4 23.5
</TABLE>
Working capital has been principally generated from the sale of stock and
capital 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.
Page 16 of 19 Pages
<PAGE>
In the first quarter 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 93.6 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 quarter of 1997
and 6.2 times for the first quarter of 1996. This high rate of inventory
turnover, which is higher than the national industry average of 3.8, is
primarily the result of tight control of the product mix, increase in depth of
inventory, continued high service level, and increased warehouse sales.
Capital Expenditures. In the three month periods ending March 31, 1997,
and March 31, 1996, the Company's investment in capital assets (net of
dispositions) was $105,706 and $58,381, respectively. Approximately 73.1 percent
($77,306) of the amount expended in the first three months of 1997 was used to
purchase computer hardware and software, 24.7 percent ($26,070) was used to
upgrade warehouse equipment and 2.2 percent ($2,330) was used to purchase office
equipment. By comparison, 96.3 percent ($56,209) of the amount expended in the
first three months of 1996 was used to upgrade warehouse equipment.
Significant outlays of cash or cash equivalents foreseen by the Company for the
remainder of the year include the payment of accounts payable generated by the
spring trade show and increased inventory purchases. Additional cash outlays
anticipated for the remainder of the year include: the purchase of delivery
vehicles and warehouse equipment ($325,000), computer equipment ($75,000), an
upgraded catalog system ($75,000), Company automobiles ($60,000) and office
equipment ($25,000).
The Company's cash position of $3,464,479 at March 31, 1997, is anticipated to
be sufficient to fund all planned capital expenditures.
Page 17 of 19 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 - None
Item 6. Exhibits & Reports on Form 8-K - None
Page 18 of 19 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/S/ James D. Tipton
----------------------------------------
JAMES D. TIPTON
President
(Chief Executive Officer)
/S/ Tina S. Kirbie
----------------------------------------
TINA S. KIRBIE
Senior Vice President, Finance
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date: May 14, 1997
Page 19 of 19 Pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
filer's operations as of March 31, 1997, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,464,479
<SECURITIES> 0
<RECEIVABLES> 12,058,520<F1>
<ALLOWANCES> 7,195
<INVENTORY> 13,281,698
<CURRENT-ASSETS> 29,052,487
<PP&E> 9,355,110<F2>
<DEPRECIATION> 3,592,678
<TOTAL-ASSETS> 38,765,019
<CURRENT-LIABILITIES> 20,991,415
<BONDS> 1,590,807<F3>
0
5,538,203<F4>
<COMMON> 6,124,128<F5>
<OTHER-SE> 4,520,466<F6>
<TOTAL-LIABILITY-AND-EQUITY> 38,765,019
<SALES> 33,119,640
<TOTAL-REVENUES> 33,262,512
<CGS> 29,542,472
<TOTAL-COSTS> 29,542,472
<OTHER-EXPENSES> 1,563,797<F7>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,575
<INCOME-PRETAX> 619,794
<INCOME-TAX> 215,364
<INCOME-CONTINUING> 404,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 404,430
<EPS-PRIMARY> 4.12
<EPS-DILUTED> 4.12
<FN>
<F1>Accounts Receivable and Current Notes Receivable.
<F2>Net of depreciation.
<F3>Total noncurrent liabilities.
<F4>Preferred Stock less Treasury Stock and Subscription for Preferred Stock
less Subscription receivables for Preferred Stock.
<F5>Class A Common Stock and Class B Common Stock less Treasury Stock plus
Subscription for Class B Common Stock less Subscription Receivables for Common
Stock.
<F6>Paid in Surplus and Retained Earnings.
<F7>Other Operating Expenses (does not include cost of goods sold, payroll costs
or other interest).
</FN>
</TABLE>
