SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 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 June 30, 1998, was 8630 shares of Class A Common Stock, $100 par
value, and 52,415 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 June 30, 1998
and December 31, 1997.......................... 4 - 5
Condensed Statement of Earnings - Six Months
Ended June 30, 1998 and 1997................... 6
Condensed Statement of Cash Flows - Six Months
Ended June 30, 1998 and 1997................... 7
Notes to Condensed Financial Statements.......... 8 - 13
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations............ 14 - 20
Item 3. Quantitative Disclosures About Market Risk....... 20
PART II Other Information
Item 1. Legal Proceedings 21
Items 2.-3. None 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Items 5.-6. None 21
Signatures 22
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,393,140 $ 1,123,842
Accounts Receivable, net of 10,854,069 10,032,045
subscriptions receivable in
the amount of $64,032 for 1998
and $43,451 for 1997
Notes Receivable (Note 3) 7,974 5,394
Inventory 13,775,899 13,395,947
Other Current Assets 233,476 264,280
----------- -----------
$26,264,558 $24,821,508
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
At Cost Less Accumulated Depreciation
of $4,537,080 (1998) and $4,148,927 (1997) $ 9,304,593 $ 9,408,768
----------- -----------
OTHER ASSETS
Notes Receivable (Note 3) $ 125,971 $ 120,513
Deferred Compensation Funded 284,901 284,901
Other Noncurrent Assets 11,462 71,596
----------- -----------
$ 422,334 $ 477,010
----------- -----------
TOTAL ASSETS $35,991,485 $34,707,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable-Stock (Note 4) $ 15,600 $ 7,000
Notes Payable-Capital Leases 47,266 52,488
Accounts Payable-Trade 15,180,873 14,550,157
Other Current Liabilities 1,365,523 1,050,680
Federal Income Taxes Payable(Note 5) -0- 45,253
----------- -----------
$16,609,262 $15,705,578
----------- -----------
NONCURRENT LIABILITIES
Notes Payable-Stock(Note 4) $ 429,310 $ 223,750
Notes Payable-Capital Leases 101,539 125,172
Notes Payable-Vendor 125,234 117,196
Deferred Compensation Payable 284,901 284,901
Deferred Income Taxes Payable (Note 5) 268,818 264,836
----------- -----------
$ 1,209,802 $ 1,015,855
----------- -----------
TOTAL LIABILITIES $17,819,064 $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>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
STOCKHOLDERS' EQUITY
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
8,850 & 8,680 shares $ 885,000 $ 868,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
54,153 & 52,513 shares 5,415,300 5,251,300
Common Stock, Class B
Subscribed 6,123.14 & 4,361.35
shares 612,314 436,135
Less Subscription Receivable (32,016) (21,725)
Preferred Stock 13% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
56,771.75 & 55,001.75 shares 5,677,175 5,500,175
Preferred Stock, Subscribed
6,123.14 & 4,361.35 612,314 436,135
Less Subscription Receivable (32,016) (21,726)
Paid in Surplus 317,761 314,731
----------- -----------
$13,455,832 $12,763,025
Less: Cost of Treasury Stock
1,878 & -0- shares 379,600 -0-
----------- ------------
$13,076,232 $12,763,025
Retained Earnings 5,096,189 5,222,828
----------- -----------
Total Stockholders' Equity $18,172,421 $17,985,853
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $35,991,485 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS
Net Sales $35,351,671 $30,150,047 $73,056,024 $63,269,687
Sundry Income 153,582 176,854 419,479 319,726
----------- ----------- ----------- -----------
TOTAL EARNINGS $35,505,253 $30,326,901 $73,475,503 $63,589,413
----------- ----------- ----------- -----------
EXPENSE
Net Mat'l. Costs $31,327,724 $26,298,716 $65,449,850 $55,841,188
Payroll Costs 1,704,982 1,560,846 3,336,075 3,087,720
Other Operating
Costs 2,201,543 1,945,721 3,816,106 3,509,518
Interest Expense 7,034 12,671 12,689 22,246
----------- ----------- ----------- -----------
TOTAL EXPENSE $35,241,283 $29,817,954 $72,614,720 $62,460,672
----------- ----------- ----------- -----------
NET EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 263,970 $ 508,947 $ 860,783 $ 1,128,741
----------- ----------- ----------- -----------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5) (97,040) (180,019) (305,054) (395,383)
- ------------------ ----------- ------------ ----------- -----------
NET EARNINGS $ 166,930 $ 328,928 $ 555,729 $ 733,358
LESS ACCRUED
DIVIDENDS ON
PREFERRED STOCK (170,592) (155,203) (341,184) (310,406)
----------- ----------- ----------- -----------
NET EARNINGS
APPLICABLE
TO COMMON
STOCKHOLDERS $ (3,662) $ 173,725 $ 214,545 $ 422,952
=========== =========== =========== ===========
NET EARNINGS PER
SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ (0.05) $ 2.81 $ 3.24 $ 6.94
=========== =========== =========== ===========
</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>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net Earnings $ 555,729 $ 733,358
------------ ------------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 425,189 $ 439,459
Increase in Deferred Income Tax 3,982 16,576
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable $ (822,024) $ 178,366
Increase in Notes Receivable (8,038) (9,918)
Increase in Inventory (379,952) (585,256)
Decrease in Other Assets 90,938 177,205
Increase in Notes Payable - Vendor 8,038 9,918
Increase in Accounts Payable 630,716 917,679
Increase in Other Liabilities 314,843 139,640
Decrease in Federal Income Taxes Payable (45,253) (67,741)
------------ ------------
TOTAL ADJUSTMENTS $ 218,439 $ 1,215,928
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 774,168 $ 1,949,286
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures $ (321,014) $ (330,942)
Disposition of Fixed Assets -0- -0-
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES $ (321,014) $ (330,942)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Notes Payable-Stock $ 214,160 $ 9,200
Decrease in Notes Payable-Capital Lease (28,855) (15,764)
Increase in Subscription Receivable (20,581) (8,645)
Proceeds From Issuance of Stock 713,388 664,054
Purchase of Treasury Stock (379,600) (187,800)
Dividends Paid (682,368) (620,812)
------------ ------------
NET CASH USED FOR FINANCING
ACTIVITIES $ (183,856) $ (934,737)
------------ ------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS $ 269,298 $ 683,607
CASH & CASH EQUIVALENTS AT BEGINNING 1,123,842 1,224,327
OF PERIOD ------------ ------------
CASH & CASH EQUIVALENTS AT END OF
PERIOD $ 1,393,140 $ 1,907,934
============ ============
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Interest Expense Paid $ 12,689 $ 22,246
Income Taxes Paid 315,693 402,032
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Calculation of Net Earnings Per Share
of Common Stock
Net Earnings $ 166,930 $ 328,928 $ 555,729 $ 733,358
Less: Accrued Dividends
on Preferred Stock (170,592) (155,203) (341,184) (310,406)
--------- --------- --------- ---------
$ (3,662) $ 173,725 $ 214,545 $ 422,952
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 66,657 61,832 66,296 60,969
Net Earnings Per Share
of Common Stock $ (0.05 $ 2.81 $ 3.24 $ 6.94
========= ========= ========= =========
</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 six months ended June 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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,816,772 7,752,216
Furniture, Computer, Warehouse 3,544,930 3,341,692
Transportation Equipment 452,174 435,990
----------- -----------
$13,841,673 $13,557,695
Less: Accumulated Depreciation (4,537,080) (4,148,927)
----------- -----------
$ 9,304,593 $ 9,408,768
=========== ===========
</TABLE>
<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
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Deferred Agreement $ -0- $ -0- $125,234 $117,196
Steve R. Allen, Stejuan-C.L. Inc. 7,974 5,394 737 3,317
------ ------- -------- ---------
$ 7,974 $ 5,394 $125,971 $120,513
======= ======= ======== ========
</TABLE>
NOTE 4 - NOTES PAYABLE STOCK
The five year, interest bearing notes payable - stock 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 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
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
$15,600 $ 7,000 $429,310 $223,750
</TABLE>
Principal payments due over the next five years are as follows:
1998 $ 7,000
1999 26,750
2000 107,200
2001 57,000
2002 32,800
-------
$230,750
<PAGE>
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
JUNE 30, DECEMBER 31,
1998 1997
------------- -----------
<S> <C> <C>
Excess of tax over book depreciation $ 1,294,816 $ 1,298,079
Allowance for Bad Debt (7,195) (7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (269,013) (288,788)
Deferred Compensation (227,967) (223,165)
----------- -----------
Total $ 790,641 $ 778,931
Statutory Tax Rate 34% 34%
----------- ------------
Cumulative Deferred Income Tax Payable $ 268,818 $ 264,836
=========== ============
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 268,818 264,836
----------- ------------
$ 268,818 $ 264,836
============ ===========
</TABLE>
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------------- -----------
<S> <C> <C>
Principal Components of Income Tax Expense
Federal:
Current
Income tax paid $ 315,693 $ 377,273
Carry-over of prepayment from
prior year -0- 24,759
Refund received for overpayment
from prior year -0- -0-
----------- ------------
$ 315,693 $ 402,032
Federal Income Tax Payable (Receivable) (14,621) (23,225)
Carry-over to subsequent year -0- -0-
----------- ------------
Income tax for tax reporting
at statutory rate of 34% $ 301,072 $ 378,807
Deferred
Adjustments for financial reporting:
Depreciation (1,109) 3,511
263A Uniform Capitalization Costs 6,724 14,765
Other (1,633) (1,700)
----------- -----------
Provisions for federal income tax $ 305,054 $ 395,383
=========== ============
</TABLE>
The Company is not classified as a nonexempt corporation under the provisions of
the Internal Revenue Code and is not entitled to deduct preferred dividends in
determining its taxable income.
<PAGE>
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>
(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 second
quarter of 1998, the Company's total sales were 17.3 percent higher than during
the same quarter in 1997, as compared to a 5.4 percent increase in 1997 over
1996 and a 3.5 percent increase in 1996 over 1995. For the first six months for
each of these periods, sales increased by 15.5 percent, 2.8 percent and 4.1
percent, respectively. These factors have resulted in significant sales growth
in most territories. Sales in the Arkansas sales territory increased 20 percent
in the first six months of 1998 over the same 1997 period while sales in the
Victoria, San Antonio, Corpus Christ and Rio Grande Valley area grew by 23
percent. The Houston territory increased sales by 22 percent. Southern Louisiana
had sales growth of 21 percent, the Austin, Brenham and Central Texas area had
sales growth of 13 percent and the Oklahoma territory had a 15 percent increase
in sales. Sales in the Baton Rouge, New Orleans and Gulf Coast East territory
increased by 6 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 5 percent.
<PAGE>
Sales The following table compares the Company's sales during the first six
months of 1998 to sales during the same period of 1997, by sales territory:
<TABLE>
<CAPTION>
Six Months Six Months
1998 1997
-------------------------- ---------------------------
% Increase
in Sales
From Six % of % of
Month Total Total
Sales Territory Sales 1997 Sales Sales Sales
- --------------- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Houston Area $19,427,149 22% 26.5% $15,952,748 25.3%
Victoria, San Antonio,
Corpus Christ & Rio Grande
Valley Area* 13,611,210 23% 18.5% 11,070,793 17.6%
North Texas, Dallas
& Fort Worth Area 9,899 5% 13.5% 9,402,717 14.9%
Austin, Brenham & Central
Texas Area 8,542,344 13% 11.6% 7,558,861 12.0%
Southern Louisiana Area 8,759,685 21% 11.9% 7,228,656 11.5%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 6,069,377 6% 8.3% 5,748,167 9.1%
Arkansas Area 2,779,272 20% 3.8% 2,320,582 3.8%
Oklahoma Area 4,329,013 15% 5.9% 3,763,747 5.8%
----------- ---- -----------
Totals: $73,417,250 (1) 100.0% $63,046,271 100.0%
============ ====== =========== ======
<FN>
- ----------------------------------
* Includes sales to Mexico, Central America and Saudi Arabia 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 second
quarter and first six months of 1998 were $31,327,724 and $65,449,850,
respectively, compared to $26,298,716 and $55,841,188, respectively, for
the same periods in 1997. Net material costs for the second quarter and
first six months of 1998 increased 19.1 percent and 17.2 percent,
respectively, over the same periods in 1997. Net material costs as a
percentage of sales were 88.5 percent in the second quarter of 1998 as
compared to 87.2 percent for the same period in 1997, while for the first
six months of 1998 and 1997 net material costs as a percentage of sales
were 89.6 percent and 88.3 percent, respectively. The increase of net
material costs as a percentage of sales in the second quarter and first six
months of 1998 over the same period 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 $8,846,454 during the second quarter of 1997 to
$11,591,392, while these sales for the first six months of 1997 and 1998
were $20,569,808 and $25,755,416, respectively. In addition, net material
costs as a percentage of sales were negatively effected by a decrease in
factory rebates which was taken by the Company as a credit against material
costs in both the second quarter and first half of 1998. Second quarter
rebates declined $234,351 or 17.5 percent (1998 - $1,102,142 vs. 1997 -
$1,336,493) while rebates for the first six months declined $267,994 or
10.3 percent (1998 - $2,331,375 vs. 1997 - $2,599,369). 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. 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 1997 were $574,960 as compared to
$301,835 received in the same 1998 period. For the first six months of 1997
and 1998, the PRO Hardware rebates were $820,954 and $578,387 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.
Payroll Costs. Payroll costs during the second quarter and six months
ended June 30, 1998, were $1,704,982 and $3,336,075 respectively, as
compared to $1,560,846 and $3,087,720 for the same period in 1997. Payroll
expense for the second quarter and first six months of 1998 increased 9.2
percent and 8.0 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 second quarter of 1998 constituted 4.8 percent
of both net sales and total expenses, compared to 5.2 percent for the same
quarter in 1997. Payroll costs accounted for 4.6 percent of both sales and
total expenses for the first six 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 second quarter and for the first six
months of 1998 other operating costs increased 13.1 percent and 8.7
percent, respectively, compared to the same periods in 1997. Other
operating expenses for the second quarter of 1998 were $2,201,543 (6.2% of
sales) as compared to $1,945,721 (6.5% of sales) for the same period in
1997. For the six-month period ending June 30, 1998, other operating
expenses were $3,816,106 (5.2% of sales) as compared to $3,509,518 of these
expenses for the same period in 1997 (5.5% of sales).
Other operating costs include a wide variety of expenses related to
the Company. The largest components of other operating costs in the second
quarter and first six months of 1998 were $576,915 and $1,103,518,
respectively, of employee expenses (representing an increase of 7.9 percent
and 9.3 percent over 1997 levels), $559,195 and $952,308, respectively, of
delivery expenses (representing an increase of 26.6 percent and 2.3 percent
over 1997 levels) and $260,550 and $473,407, respectively, of warehouse
expenses (representing a decrease of 25.1 percent and 15.1 percent from
1997 levels).
<PAGE>
Net Earnings and Net Earnings Per Share. While net sales for the second
quarter and first six months of 1998 increased $5,201,624 (17.3%) and $9,786,337
(15.5%) from the corresponding periods in 1997, gross margin increased by
$172,616 (4.5%) for the second quarter and $177,675 (2.4%) for the first six
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 48.1 percent in the second quarter, from
$508,947 for the second quarter of 1997 to $263,970 in the same 1998 period,
while net earnings decreased 49.3 percent. Further, pretax net earnings for the
first six months of 1998 decreased 23.7 percent, from $1,128,741 for the first
six months of 1997 to $860,783 during the same 1998 period. Net earnings
decreased 24.2 percent. Net earnings in the second quarter and first six months
of 1998 decreased primarily due to two factors. First, the change in PRO
Hardware's rebate payment schedule, as previously discussed. Secondly, there was
an increase in sales with no markup.
The Company's net earnings per share decreased almost threefold in the
second quarter of 1998 and 53.3% in the first six months of 1998 as compared to
the same periods of 1997. This decrease was due to an decrease in net earnings
in the second quarter and the first half 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 six months of 1998 represented a larger
percentage of 1998 net earnings than dividends accrued in the first quarter 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, second 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 June 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 six months of 1998 there was a net increase for
the period of $269,298 in the Company's cash and cash equivalents as compared to
an increase of $683,607 for the same period of 1997.
Cash flow from operating activities for the first six months of 1998 was
$774,168 as compared to $1,949,286 in the same six 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 six
months of 1998 as compared to the same period in 1997 consisted principally of
the following differences which had a positive effect on cash flows (i) a
$379,952 increase in inventory in 1998 as compared to a $585,256 increase in
1997 and (ii) a $314,843 increase in other liabilities in 1998 as compared to a
$139,640 increase in 1997. The positive effects on cash flow in the first six
months of 1998 were offset by the following negative effects: (i) a $822,024
increase in accounts receivable in 1998 as compared to a $178,366 decrease in
1997, (ii) an increase in accounts payable of $630,716 in 1998 as compared to a
$917,679 increase in accounts payable in 1997 and (iii) a $90,938 decrease in
other assets in 1998 compared to a $177,205 decrease in 1997.
While inventory increased $379,952 in the first six months of 1998 from the
beginning of the year, the increase was not as significant as the increase of
$585,256 during the same 1997 period. In the first six months of 1998, 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 1997.
Accounts payable increased during the first six months of 1998, but again,
not as significantly as during the same period of 1997. This factor was mostly
the result of (i) a smaller increase in inventory and (ii) a timing difference
in the recognition of payables.
The increase in accounts receivable as compared to a decrease in the same
1997 period was due to an increase in demand because of a strong economy and
high consumer confidence.
In the first six months of 1998, the Company expended a net amount of
$321,014 to purchase fixed assets, which is on par with the $330,942 expended in
the same period in 1997.
<PAGE>
In the first six months of 1998, $183,856 was used for financing
activities, which was substantially lower than the $934,737 used in the first
six months of 1997. The use of cash in the 1998 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 ($379,600 in 1998 vs.$187,800 in 1997). These
increases in the uses of cash were offset by (i) an increase in Notes Payable
Stock ($214,610 in 1998 compared to $9,200 in 1997) and (ii) an increase in the
proceeds from the issuance of stock ($713,388 in 1998 vs. $664,054 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 June 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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
------- ----------- -------
<S> <C> <C> <C>
Working Capital $9,655,296 $9,115,930 $8,159,709
Current Ratio 1.6 to 1 1.6 to 1 1.5 to 1
(Current Assets to
Current Liabilities)
Long-term Debt as Percentage
of Capitalization 6.7 5.6 7.1
</TABLE>
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 six months of 1998, the Company maintained a 95.3 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 95.8 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 quarter of 1998. Inventory turnover was 6.1
times during the first three 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.
<PAGE>
Capital Resources. In the first six month periods ending June 30, 1998, and
June 30, 1997, the Company's investment in capital assets (net of dispositions)
was $321,014 and $330,942, respectively. Approximately 48.2 percent ($154,761)
of the amount expended in the first six months of 1998 was used to purchase
warehouse equipment, 20.1 percent ($64,555) was used for building improvements
including plans for a future warehouse expansion, 16.6 percent ($53,221) was
used to upgrade the Company's fleet of automobiles, 13.0 percent ($41,848) was
used to purchase computer hardware and software and order entry terminals and
2.1 percent ($6,629) was used to purchase office furniture and equipment. By
comparison, 38.6 percent ($127,744) of the amount expended in the first six
months of 1997 was used to upgrade computer hardware equipment and software,
29.3 percent ($96,923) was used to upgrade the Company's catalog and purchase
office equipment, 19.9 percent ($65,848) was used to upgrade warehouse
equipment, 6.5 percent ($21,470) was used to purchase a Company automobile, 3.3
percent ($10,801) was paid for building construction and 2.4 percent ($8,156)
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 ($250,000), computer
equipment ($220,000), office equipment ($25,000), and building improvements
($50,000).
The Company's cash position of $1,393,140 at June 30, 1998, is anticipated
to be sufficient to fund all planned capital expenditures.
QUANTITATIVE & QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
Not Applicable
<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. Two lawsuits have been filed in
the District Court of Harris County, Texas, arising out of the accident, one a
wrongful death action by the parents of two women killed in the accident, and
one a case for damages related to disabling injuries to a third person in the
same accident. This latter case has been settled with insurance proceeds of $6.5
million. It is anticipated that the remaining case will be mediated and that any
liability will be covered by the Company's insurance.
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 -
At the Annual Shareholder Meeting held on May 13, 1998, Weldon Bailey,
Samuel J. Dyson and Jimmy T. Pate were elected to serve as Directors of the
Company for three-year terms. James D. Tipton, President of the Company, was
elected to serve a one-year term. The other Directors continuing to serve are:
Norman Bering, Susie Bracht-Black, Virgil Cox, Robert Eilers, Richard Lubke and
Leroy Welborn.
<TABLE>
<CAPTION>
No. of Votes No. of Votes Nominee
Nominees for Directors For Against Abstain Approval
<S> <C> <C> <C> <C>
Weldon Bailey 4750 40 -0- Yes
Samuel J. Dyson 4750 40 -0- Yes
Jimmy T. Pate 4750 40 -0- Yes
James D. Tipton 4740 50 -0- Yes
</TABLE>
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.
----------------------------------------
JAMES D. TIPTON
President
(Chief Executive Officer)
---------------------------------------
TINA S. KIRBIE
Senior Vice President, Finance
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date
---------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the filer's operations as of June 30, 1998, and is quali-
fied in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,393,140
<SECURITIES> 0
<RECEIVABLES> 10,869,238
<ALLOWANCES> 7,195
<INVENTORY> 13,775,899
<CURRENT-ASSETS> 26,264,558
<PP&E> 9,304,593
<DEPRECIATION> 4,537,080
<TOTAL-ASSETS> 35,991,485
<CURRENT-LIABILITIES> 16,609,262
<BONDS> 0
0
6,073,673
<COMMON> 6,684,798
<OTHER-SE> 5,413,950
<TOTAL-LIABILITY-AND-EQUITY> 35,991,485
<SALES> 73,056,024
<TOTAL-REVENUES> 73,475,503
<CGS> 65,449,850
<TOTAL-COSTS> 65,449,850
<OTHER-EXPENSES> 3,816,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,689
<INCOME-PRETAX> 860,783
<INCOME-TAX> 305,054
<INCOME-CONTINUING> 555,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,729
<EPS-PRIMARY> 3.24
<EPS-DILUTED> 3.24
</TABLE>
