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, 1998.
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, 1998, was 8980 shares of Class A Common Stock, $100
par value, and 54,885 shares of Class B Common Stock, $100 par value.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
Item 1. Financial Statements
Condensed Balance Sheet September 30, 1998
and December 31, 1997......................... 3 - 4
Condensed Statement of Earnings - Nine Months
Ended September 30, 1998 and 1997...................5
Condensed Statement of Cash Flows - Nine Months
Ended September 30, 1998 and 1997...................6
Notes to Condensed Financial Statements.............7 - 13
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations ..........14 - 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................None
PART II Other Information
Items 1. Legal Proceedings 22
Item 2.-6. None 22
Signatures 23
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 918,250 $ 1,123,842
Accounts Receivable, net of 14,423,360 10,032,045
subscriptions receivable in
the amount of $76,202 for 1998
and $43,451 for 1997
Notes Receivable (Note 3) 15,627 5,394
Inventory 16,163,855 13,395,947
Other Current Assets 431,455 264,280
----------- -----------
$31,952,547 $24,821,508
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
At Cost Less Accumulated Depreciation
of $4,789,255 (1998) and $4,148,927 (1997) $ 9,513,407 $ 9,408,768
----------- -----------
OTHER ASSETS
Notes Receivable (Note 3) $ 133,605 $ 120,513
Deferred Compensation Funded 284,901 284,901
Other Noncurrent Assets -0- 71,596
----------- -----------
$ 418,506 $ 477,010
----------- -----------
TOTAL ASSETS $41,884,460 $34,707,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable-Stock (Note 4) $ 19,600 $ 7,000
Notes Payable-Capital Leases 63,134 52,488
Accounts Payable-Trade 21,660,404 14,550,157
Other Current Liabilities 589,608 1,050,680
Current Deferred Income Taxes Payable (Note 5) 866 -0-
Federal Income Taxes Payable (Note 5) -0- 45,253
----------- -----------
$22,333,612 $15,705,578
----------- -----------
NONCURRENT LIABILITIES
Notes Payable-Stock (Note 4) $ 521,430 $ 223,750
Notes Payable-Capital Lease 73,854 125,172
Notes Payable-Vendor 121,972 117,196
Deferred Compensation Payable 284,901 284,901
Deferred Income Taxes Payable (Note 5) 274,153 264,836
----------- -----------
$ 1,276,310 $ 1,015,855
----------- -----------
TOTAL LIABILITIES $23,609,922 $16,721,433
----------- -----------
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
STOCKHOLDERS' EQUITY
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
9,350 & 8,680 shares $ 935,000 $ 868,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
57,553 & 52,513 shares 5,755,300 5,251,300
Common Stock, Class B
Subscribed 4,408.99 & 4,361.35
shares 440,899 436,135
Less Subscription Receivable (38,101) (21,725)
Preferred Stock 13% Cumulative, authorized 100,000 shares,
100 par value per share, issued 60,361.75 &
55,001.75 shares 6,036,175 5,500,175
Preferred Stock, Subscribed
4,408.99 & 4,361.35 440,899 436,135
Less Subscription Receivable (38,101) (21,726)
Paid in Surplus 323,419 314,731
----------- -----------
$13,855,490 $12,763,025
Less: Cost of Treasury Stock
5,873 & -0- shares (587,300) (-0-)
----------- -----------
$13,268,190 $12,763,025
Retained Earnings 5,006,348 5,222,828
----------- -----------
Total Stockholders' Equity $18,274,538 $17,985,853
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $41,884,460 $34,707,286
=========== ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED SEPT.30, ENDED SEPT.30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS
Net Sales $39,642,425 $32,300,755 $112,698,449 $95,570,442
Sundry Income 167,405 184,550 586,884 504,276
----------- ----------- ------------ -----------
TOTAL EARNINGS $39,809,830 $32,485,305 $113,285,333 $96,074,718
----------- ----------- ------------ ----------
EXPENSE
Net Mat'l. Costs $36,248,066 $29,069,986 $101,697,916 $84,911,174
Payroll Costs 1,821,775 1,605,160 5,157,850 4,692,880
Other Operating
Costs 1,857,306 1,606,569 5,673,412 5,116,087
Interest Expense 8,743 7,441 21,432 29,687
----------- ----------- ------------ -----------
TOTAL EXPENSE $39,935,890 $32,289,156 $112,550,610 $94,749,828
----------- ----------- ------------ -----------
NET EARNINGS (LOSS) BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ (126,060) $ 196,149 $ 734,723 $ 1,324,890
----------- ----------- ------------ -----------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5) 36,219 (72,081) (268,835) (467,464)
----------- ----------- ------------ -----------
NET EARNINGS (LOSS) $ (89,841) $ 124,068 $ 465,888 $ 857,426
LESS ACCRUAL FOR
DIVIDENDS ON
PREFERRED STOCK (170,592) (155,203) (511,776) (465,609)
----------- ----------- ------------ -----------
NET EARNINGS (LOSS)
APPLICABLE
TO COMMON
STOCKHOLDERS $ (260,433) $ (31, 135) $ (45,888) $ 391,817
=========== =========== ============ ===========
NET EARNINGS (LOSS)
PER SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ (3.86) $ (0.49) $ (0.69) $ 6.38
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net Earnings $ 465,888 $ 857,426
------------ ------------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 677,365 $ 680,648
Increase in Deferred Income Tax 10,183 23,251
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (4,391,315) $ (1,862,655)
(Increase) Decrease in Notes Receivable (23,325) (18,877)
Increase in Inventory (2,767,908) (2,765,512)
(Increase) Decrease in Other Assets (95,579) 105,141
Increase in Notes Payable - Vendor 4,776 9,918
Increase in Accounts Payable 7,110,247 5,680,734
Increase (Decrease) in Other Liabilities (461,072) 201,589
Decrease in Federal Income Taxes Payable (45,253) (67,741)
------------ ------------
TOTAL ADJUSTMENTS $ 18,119 $ 1,986,496
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 484,007 $ 2,843,922
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures $ (782,004) $ (513,131)
Disposition of Fixed Assets -0- -0-
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES $ (782,004) $ (513,131)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Note Payable-Line of Credit $ -0- $ (1,307,470)
Increase in Notes Payable-Stock 310,280 9,200
Increase (Decrease) in Notes Payable-Capital Lease (40,672) 38,089
Increase in Subscription Receivable (32,751) (27,745)
Proceeds From Issuance of Stock 1,125,216 1,044,153
Purchase of Treasury Stock (587,300) (250,200)
Dividends Paid (682,368) (620,812)
------------ ------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES $ 92,405 $ (1,114,785)
------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (205,592) $ 1,216,006
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,123,842 1,224,327
------------ ------------
CASH & CASH EQUIVALENTS AT END OF
PERIOD $ 918,250 $ 2,440,333
============ ============
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Interest Expense Paid $ 21,432 $ 29,687
Income Taxes Paid $ 425,792 $ 492,896
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ----- -----
<S> <C> <C> <C> <C>
Calculation of Net Earnings Per Share
of Common Stock
Net Earnings $ (89,841) $ 124,068 $ 465,888 $ 857,426
Less: Accrued Dividends
on Preferred Stock (170,592) (155,203) (511,776) (465,609)
--------- --------- --------- ---------
$(260,433) $ (31,135) $ (45,888) $ 391,817
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 67,479 63,214 66,527 61,422
Net Earnings Per Share
of Common Stock $ (3.86) $ (0.49) $ (0.69) $ 6.38
========= ========= ========= =========
</TABLE>
<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 1999 based on the
dividends paid in the first quarter of 1998.
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, 1998, contained
herein, therefore, are net of dividends actually paid during the first
quarter of 1998 in the amount of $682,368.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment Consists of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,889,897 7,752,216
Furniture, Computer, Warehouse 3,910,097 3,341,692
Transportation Equipment 474,871 435,990
----------- ----------
$14,302,662 $13,557,695
Less: Accumulated Depreciation (4,789,255) (4,148,927)
----------- -----------
$ 9,513,407 $ 9,408,768
=========== ===========
<PAGE>
NOTE 3 - NOTES RECEIVABLE
Notes receivable reflect amounts due to the Company from its Member-Dealers
under a deferred payment agreement and an installment sale agreement as well as
amounts due from former Member-Dealers for inventory purchases.
Under the deferred 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.
Notes Receivable are classified as follows:
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
SEPT. 30 DEC. 31 SEPT. 30, DEC. 31,
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Installment Sale Agreement $ 7,079 $ -0- $ 11,633 $ -0-
Deferred Agreement -0- -0- 121,972 117,196
Steve R. Allen, Stejuan-C.L. Inc. 8,548 5,394 -0- 3,317
$15,627 $ 5,394 $133,605 $120,513
======= ======= ======== ========
</TABLE>
NOTE 4 - NOTES PAYABLE - STOCK
The five-year, interest bearing notes payable-stock reflects 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 notes, only interest is paid on the outstanding balance of the notes during
the first four years. In the fifth year, both interest and principal are paid.
Interest rates range from 6.0% to 7.0%.
Notes payable - stock are classified as follows:
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31,
1998 1997 1998 1997
-------- ------- --------- ------
<S> <C> <C> <C> <C>
$19,600 $ 7,000 $521,430 $223,750
</TABLE>
Principal payments due over the next five years are as follows:
1998 $ -0-
1999 $ 26,750
2000 $107,200
2001 $ 57,000
2002 $ 32,800
--------
$223,750
<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. The adoption of this standard changed the Company's
method of accounting for income taxes from the deferred method to the liability
method.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ----------
<S> <C> <C>
Excess of tax over book depreciation $1,308,368 $1,298,079
Allowance for bad debt (7,195) (7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (259,126) (288,788)
Deferred Compensation (233,165) (223,165)
---------- ----------
Total $ 808,882 $ 778,931
Statutory Tax Rate 34% 34%
---------- ----------
Cumulative Deferred Income Tax Payable $ 275,019 $ 264,836
========== ==========
Classified as:
Current Liability $ 866 $ -0-
Noncurrent Liability 274,153 264,836
---------- ----------
$ 275,019 $ 264,836
========== ==========
</TABLE>
<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:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Principal Components of Income Tax Expense
Federal:
Current
Income tax paid $ 425,792 $ 377,273
Carry-over of prepayment from
prior year -0- 24,759
Refund received for overpayment
from prior year -0- -0-
--------- ----------
$ 425,792 $ 402,032
Federal Income Tax Payable (Receivable) (167,140) (23,225)
Carry-over to subsequent year -0- -0-
--------- ----------
Income tax for tax reporting
at statutory rate of 34% $ 258,652 $ 378,807
Deferred
Adjustments for financial reporting:
Depreciation 3,498 3,511
263A Uniform Capitalization Costs 10,085 14,765
Other (3,400) (1,700)
--------- --------
Provisions for federal income tax $ 268,835 $ 395,383
========= ==========
</TABLE>
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>
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>
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Strong economic growth and continuing strength in consumer confidence
resulted in a steady increase in sales in the retail hardware industry. During
the third quarter of 1998, the Company's total sales were 22.6 percent higher
than during the same quarter in 1997, as compared to an 11.2 percent increase in
1997 over 1996. For the first nine months for each of these periods, sales
increased 17.9 percent and 5.5 percent. These factors have resulted in
significant sales growth in most territories. Reviewing the trend of sales in
the first nine months of 1998 compared to sales in the same period of 1997 by
each sales territory, sales in the Arkansas territory increased 15 percent while
sales in the Victoria, San Antonio, Corpus Christi and Rio Grande Valley area
grew by 26 percent. The Houston territory increased sales by 21 percent.
Southern Louisiana had sales increases of 22 percent, the Austin, Brenham and
Central Texas area had sales growth of 11 percent and the Oklahoma territory had
a 20 percent increase in sales. Sales in the Baton Rouge, New Orleans and Gulf
Coast East territory increased by 5 percent, which moderate sales growth was a
result of a personnel change in that territory. The North Texas, Dallas and Fort
Worth area continues to feel the pressure from retail warehouses which continues
to erode the market share of independent hardware stores. As a result, sales in
this territory increased moderately by 7 percent.
<PAGE>
Sales The following table compares the Company's sales during the first nine
months of 1998 to sales during the same period of 1997, by sales territory:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
-------------------- -----------------------
% Increase
in Sales
from Nine % of % of
Months Total Total
Sales Territory Sales 1997 Sales Sales Sales
- --------------- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Houston Area $ 29,463,893 21% 26.5% $24,361,747 25.6%
Victoria, San Antonio,
Corpus Christ & Rio Grande
Valley Area* 21,091,098 26% 18.9% 16,692,845 17.5%
North Texas, Dallas
& Fort Worth Area 15,078,790 7% 13.5% 14,132,505 14.9%
Austin, Brenham & Central
Texas Area 12,897,120 11% 11.6% 11,592,229 12.2%
Southern Louisiana Area 13,345,966 22% 12.0% 10,927,715 11.5%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 8,823,943 5% 7.9% 8,368,442 8.8%
Arkansas Area 4,045,615 15% 3.6% 3,522,020 3.7%
Oklahoma Area 6,691,173 20% 6.0% 5,568,395 5.8%
--------- --- ----- ----------- -----
Totals: $111,437,598 (1) 100.0% $95,165,898 100.0%
============ ====== =========== ======
- ----------------------------------
<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>
<PAGE>
Net Material Costs and Rebates. Net material costs for the third quarter
and first nine months of 1998 were $36,248,066 and $101,697,916, respectively,
compared to $29,069,986 and $84,911,174, respectively, for the same periods in
1997. Net material costs for the third quarter and the first nine months of 1998
increased 24.7 percent and 19.8 percent, respectively over the same periods in
1997. Net material costs as a percentage of sales were 91.4 percent in the third
quarter of 1998 as compared to 90.9 percent for the same period in 1997, while
for the first nine months of 1998 and 1997 net material costs as a percentage of
sales were 90.2 percent and 88.8 percent, respectively. The increase of net
material costs as a percentage of sales in the third quarter and first nine
months of 1998 over the same periods of 1997 was the result of an increase in
the number of inventory items sold at a lower gross margin. Sales with no markup
increased from $10,353,580 during the third quarter of 1997 to $15,077,474,
while these sales for the first nine months of 1997 and 1998 were $30,923,388
and $40,832,890, respectively. In addition, net material costs as a percentage
of sales were negatively affected by a decrease in factory rebates which were
taken by the Company as a credit against material costs in both the third
quarter and first nine months of 1998. Third quarter rebates declined $8,042 or
0.8 percent (1998 - $954,266 vs. 1997 - $962,308) while rebates for the first
nine months declined $276,036 or 7.7 percent (1998 - $3,285,641 vs. 1997 -
$3,561,677). The significant decline in 1998 rebate income was a result of a
change in the timing of the PRO Hardware rebates. In the second quarter of 1997
PRO Hardware decreased the time period between receiving a manufacturer's rebate
and its distribution to the Company, resulting in a higher than usual quarterly
rebate accrual. In order to achieve its goal, PRO Hardware made additional
rebate payments in the second quarter of 1997. PRO Hardware rebates received in
the second quarter of 1998 were $301,835 as compared to $574,960 received in the
same 1997 period. For the first nine months of 1998 and 1997, the PRO Hardware
rebates were $802,833 and $1,113,759 respectively. Further, in order to promote
sales of lumber and building materials, the Company is foregoing its
manufacturer's purchase discount by passing on the discount to its
Member-Dealers, resulting in lost income of approximately $76,000.
Payroll Costs. Payroll costs during the third quarter and nine months ended
September 30, 1998, were $1,821,775 and $5,157,850 respectively, as compared to
$1,605,160 and $4,692,880 for the same periods in 1997. Payroll expense for the
third quarter and first nine months of 1998 increased by 13.5 percent and 9.9
percent, respectively. This increase was the result of higher than usual salary
increases made necessary by the tight labor market and an increase in overtime
payroll, resulting from increased sales demands from Member-Dealers.
Payroll costs for the third quarter of 1998 constituted 4.6 percent of both net
sales and total expenses, compared to 5.0 percent for the same quarter in 1997.
Payroll costs accounted for a 4.6 percent of both sales and total expenses for
the first nine months of 1998 as compared to 4.9 percent for the same period in
1997. 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 third quarter and for the first nine
months of 1998 other operating costs increased 15.6 percent and 10.9 percent,
respectively, compared to the same periods in 1997. Other operating expenses for
the third quarter of 1998 were $1,857,306 (4.7% of sales) as compared to
$1,606,569 (5.0% of sales) for the same period in 1997. For the nine-month
period ending September 30, 1998, other operating expenses were $5,673,412 (5.0%
of sales) as compared to $5,116,087 of these expenses for the same period in
1997 (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 third quarter and first
nine months of 1998 were $559,420 and $1,662,938, respectively, of employee
expenses (representing a decrease of 10.2 percent and an increase of 1.9 percent
<PAGE>
over 1997 levels during the same respective periods), $554,323 and $1,506,631
respectively, of delivery expenses (representing an increase of 60.2 percent and
11.2 percent over 1997 levels during the same respective periods) and $343,154
and $816,561, respectively, of warehouse expenses (representing an increase of
29.0 percent and 28.1 percent from 1997 levels during the same respective
periods).
Net Earnings and Net Earnings Per Share. While net sales for the third
quarter and first nine months of 1998 increased $7,341,670 (22.6%) and
$17,128,007 (17.9%) from the corresponding periods in 1997, gross margin
increased by $163,590 (5.1%) for the third quarter and $341,265 (3.2%) for the
first nine months of 1998 over the same 1997 periods. As a result of only a
slight increase in gross margin and more significant increases in payroll and
operating expenses, pretax net earnings decreased 164.3 percent, from $196,149
for the third quarter of 1997 to a loss of $126,060 in the same 1998 period,
while net earnings decreased 172.4 percent when comparing the 1998 third quarter
to that of 1997. Further, pretax net earnings for the first nine months of 1998
decreased 44.5 percent, from $1,324,890 for the first nine months of 1997 to
$734,723 during the same 1998 period. Net earnings decreased 84.0 percent for
the same periods. Net earnings in the third quarter and first nine months of
1998 decreased primarily due to three factors. First, the change in PRO
Hardware's rebate payment schedule, as previously discussed, resulted in higher
than usual quarterly rebate accrued in the second quarter of 1997. Secondly,
there was an increase in sales with no markup, and thirdly, the timing of the
Company's fall trade show which was held earlier in the third quarter of 1998
and resulted in a significant increase in sales sold with no markup.
The Company's net earnings per share decreased almost ninefold in the third
quarter of 1998 and over 100% in the first nine months of 1998 as compared to
the same periods of 1997. This decrease was due to an decrease in net earnings
in the third quarter and the first nine months of 1998, as well as an increase
in the dividend accrued on preferred stock during the same periods. Dividends
accrued in both the second quarter and first nine months of 1998 represented a
larger percentage of 1998 net earnings than dividends accrued in the same
periods of 1997.
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.
While net earnings in the first quarter of 1998 followed traditional seasonality
trends, the first quarters of 1997 and 1996 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 resulted in a higher than usual first quarter net
earnings in these years.
Conversely, both second quarter 1998 net earnings and third quarter 1998 net
earnings deviated from traditional seasonality trends due to the tight labor
market which caused significant increases in payroll and other employee benefits
as well as increases in sales with no markup.
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION
Liquidity. During the period ending September 30, 1998, Handy Hardware
maintained 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 1998 there was a net decrease
for the period of $205,592 in the Company's cash and cash equivalents as
compared to an increase of $1,216,006 for the same period of 1997.
Cash flow from operating activities for the first nine months of 1998 was
$484,007 as compared to $2,843,922 in the same nine month period of 1997. 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 1998 as compared to the same period in 1997 consisted principally of
the following difference which had a positive effect on cash flows (i) a
$7,110,247 increase in accounts payable in 1998 as compared to a $5,680,734
increase in 1997. The positive effects on cash flow in the first nine months of
1998 were offset by the following negative effects: (i) a $4,391,315 increase in
accounts receivable in 1998 as compared to a $1,862,655 increase in 1997, (ii)
net earnings of $465,888 in 1998 as compared to $857,426 in 1997 and (iii) a
$461,072 decrease in other liabilities in 1998 compared to a $201,589 increase
in 1997.
Accounts payable increased during the first nine months of 1998, more
significantly than during the same period of 1997. This factor was mostly the
result of the timing of the Company's fall trade show which was held earlier in
the third quarter of 1998 as compared to the 1997 fall trade show. As a result
of purchases placed at the trade show, a greater number of payables were
recognized in the third quarter of 1998.
Accounts receivable increased $4,391,315 in the first nine months of 1998 from
the beginning of the year, which increase was more significant than the increase
of $1,862,655 during the same 1997 period. The greater increase in accounts
receivable during the first nine months of 1998 was again due to the timing of
the Company's fall trade show as well as increased member-dealer demand because
of a strong economy and high consumer confidence.
Other liabilities decreased during the first nine months of 1998 as compared to
an increase during the same 1997 period. This, too, was the result of the fall
trade show being held earlier in the third quarter of 1998 and thus the earlier
payment of expenses generated from that show.
Net earnings in 1998, have been negatively impacted by a tight labor market
forcing significant increases for contract labor to fill labor needs to meet
member-dealer demands, a timing difference in the recognition of the PRO
Hardware rebate, increased warehouse and delivery expenses arising from
increased member-dealer demand for merchandise, and the timing of the fall trade
show which increased the percentage of sales sold at no markup.
In the first nine months of 1998, the Company expended a net amount of $782,004
to purchase fixed assets, which is $268,873 (52.4%) higher than the $513,131
expended in the same period in 1997.
<PAGE>
In the first nine months of 1998, $92,405 was provided by financing activities,
as compared to $1,114,785 used in the first nine months of 1997. The use of cash
in the1998 period consisted principally of (i) a larger preferred stock dividend
payment in the first quarter of 1998 ($682,368 in 1998 as compared to $620,812
in 1997) and (ii) an increase in the repurchase of Company stock ($587,300 in
1998 vs. $250,200 in 1997). These increases in the uses of cash were offset by
cash provided from (i) an increase in Notes Payable - Stock ($310,280 in 1998
compared to $9,200 in 1997) and (ii) an increase in the proceeds from the
issuance of stock ($1,125,216 in 1998 vs. $1,044,153 in 1997).
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, 1998, there was
no outstanding balance on the line of credit.
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,
1998 1997 1997
---- ---- ----
Working Capital $9,618,933 $9,115,930 $8,458,747
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 7.0 5.6 5.9
Working capital has been principally generated from the sale of stock and cash
provided from operations.
During the remainder of 1998, 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 1998, the Company maintained a 94.4 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 95.1 percent for the same
period of 1997. This slight decrease in service level is the result of short
supplies of garden hoses and sprinklers during the unusual hot and dry weather
experienced in the second and third quarters of 1998. Inventory turnover was 6.1
times during the first nine months of both 1998 and 1997. 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 Resources. In the nine month periods ending September 30, 1998 and
September 30, 1997, the Company's investment in capital assets (net of
dispositions) was $782,004 and $513,131, respectively. Approximately 40.3
percent ($315,276) of the amount expended in the first nine months of 1998 was
used to purchase computer equipment, which equipment is Year 2000 compliant,
31.5 percent ($246,500) was used for warehouse equipment, 17.6 percent
($137,680) was used for building improvements including plans for a future
warehouse expansion, 9.7 percent ($75,917) was used to upgrade the Company's
fleet of automobiles and 0.9 percent ($7,170) was used
<PAGE>
to purchase office furniture and equipment. By comparison, 34.4 percent
($176,615) of the amount expended in the first nine months of 1997 was used to
upgrade computer hardware equipment and software, which are all Year 2000
compliant, 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, and
a 6.4 percent ($32,846) was paid for future warehouse expansion plans.
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 warehouse equipment ($220,000), computer
equipment ($75,000), office equipment ($30,000), building improvements ($25,000)
and a company automobile ($25,000).
In September, 1998 the Company entered into an earnest money contract with
Catellus Development Corporation to purchase 29.96 acres of land located across
the street from the current warehouse facility. The purchase price for the land
is $0.90 per square foot ($1,305,157). The land will be used to relocate the
Company's retention pond, provide additional parking facilities and allow for
future expansion of our current warehouse facility. The closing on the purchase
of the additional acreage is expected to take place in the first quarter of
1999. If consummated, it is likely that this project will be funded through
third party financing.
The Company's cash position of $918,250 at September 30, 1998, is anticipated to
be sufficient to fund all planned capital expenditures.
YEAR 2000. The Year 2000 issue relates to the possible problems associated with
the inability of computer hardware and software to properly recognize the Year
2000. Hardware and software systems which only use a two-digit convention for
keeping track of dates would improperly read "00" as representing the year 1900
instead of the Year 2000. Although the extent of the problem is not yet known,
the ramifications of Year 2000 failures are expected to have a global impact.
The first phase of the Company's Year 2000 compliance program began in 1997 at
which time we outsourced the upgrade of all mainframe software. The upgraded
software has now been presented to our MIS department for testing. Estimates
project that the testing should be completed by the end of the fourth quarter of
1998.
The second phase of the program is estimated to begin in the fourth quarter of
1998, at which time the Company will develop strategies, priorities and
implementation plans, including costs and timelines for both information
technology systems, non-information technology systems and third party
relationships. This implementation phase will include contacting third parties
with whom the Company maintains a material relationship, such as banks,
suppliers, distributors and Member-Dealers to determine their status of Year
2000 compliance. This phase should be completed by the end of the first quarter
of 1999.
<PAGE>
The Company is vulnerable to both internal and external risks presented by the
Year 2000 compliance issue. The internal risks include but are not limited to
the following: unanticipated delays in completing the company's planned Year
2000 remediation, disruption of the Company's purchasing, receiving and
inventory system, inability to deliver adequate quantities of inventory to
Member-Dealers on a timely basis and disruption to our billing and payables
systems. Further, there can be no assurance that third parties (governmental
agencies, Member-Dealers, suppliers, financial institutions, utility companies,
telecommunication service companies, etc.) who provide goods and services
essential to the Company's business activities will not fail to appropriately
address their Year 2000 issues, or will not themselves suffer a Year 2000
business disruption that could have a material adverse effect on the Company's
business, financial condition or operating results.
The third phase which should begin during the first quarter of 1999 will be to
continue to identify all material risk factors and develop contingency plans for
each of these risks. This phase should be completed by the beginning of the
second quarter of 1999.
As of September 30, 1998, the cost for implementing Year 2000 compliance is
$219,000.
The Company has utilized, and will continue to utilize, both internal and
external resources to complete tasks and perform testing necessary to address
the Year 2000 issue.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
In August 1997, a Handy Hardware truck struck two passenger vehicles in a
multi vehicle accident in Harris County, Texas. To date four claims remain open
and six claims have been closed. The closed claims include a $6.5 million
settlement for damages related to disabling injuries. The open claims include a
wrongful death action filed by the parents of two women killed in the accident
and the injuries of two additional persons.
Item 2. Changes in Securities and Use of Proceeds - 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
Item 7. Signatures
<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: November 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the filer's operations as of September 30, 1998, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 918,250
<SECURITIES> 0
<RECEIVABLES> 14,446,182
<ALLOWANCES> 7,195
<INVENTORY> 16,163,855
<CURRENT-ASSETS> 31,952,547
<PP&E> 9,513,407
<DEPRECIATION> 4,789,255
<TOTAL-ASSETS> 41,884,460
<CURRENT-LIABILITIES> 22,333,612
<BONDS> 0
0
6,155,473
<COMMON> 6,789,298
<OTHER-SE> 4,863,879
<TOTAL-LIABILITY-AND-EQUITY> 41,884,460
<SALES> 112,698,449
<TOTAL-REVENUES> 113,285,333
<CGS> 101,697,916
<TOTAL-COSTS> 101,697,916
<OTHER-EXPENSES> 5,673,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,432
<INCOME-PRETAX> 734,723
<INCOME-TAX> 268,835
<INCOME-CONTINUING> 465,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465,888
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
