SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended March 31, 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 March 31, 1998, was 8790 shares of Class A Common Stock, $100 par
value, and 53,254 shares of Class B Common Stock, $100 par value.
Page #1 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
Item 1. Financial Statements
Condensed Balance Sheet March 31, 1998
and December 31, 1997 ....................... 3 - 4
Condensed Statement of Earnings - Three Months
Ended March 31, 1998 and 1997................ 5
Condensed Statement of Cash Flows - Three Months
Ended March 31, 1998 and 1997................ 6 - 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 and Qualitative Disclosures
About Market Risk............................ 20
PART II Other Information
Item 1. Legal Proceedings.................................. 21
Items 2-6 None 21
Signatures 22
Page #2 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,882,719 $ 1,123,842
Accounts Receivable, net of 14,951,620 10,032,045
subscriptions receivable in
the amount of $69,012 for 1998
and $43,451 for 1997
Notes Receivable (Note 3) 10,894 5,394
Inventory 15,572,463 13,395,947
Other Current Assets 254,865 264,280
---------- -----------
$34,672,561 $24,821,508
---------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
At Cost Less Accumulated Depreciation
of $4,337,332(1998) and $4,148,927 (1997) $ 9,294,956 $ 9,408,768
----------- -----------
OTHER ASSETS
Notes Receivable (Note 3) $ 134,501 $ 120,513
Deferred Compensation Funded 284,901 284,901
Other Noncurrent Assets -0- 71,596
----------- -----------
$ 419,402 $ 477,010
----------- -----------
TOTAL ASSETS $44,386,919 $34,707,286
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable-Stock (Note 4) $ 7,000 $ 7,000
Notes Payable-Capital Lease 47,266 52,488
Accounts Payable - Trade 24,725,241 14,550,157
Other Current Liabilities 396,667 1,050,680
Federal Income Taxes Payable (Note 5) 211,748 45,253
----------- -----------
$25,387,922 $15,705,578
----------- -----------
NONCURRENT LIABILITIES
Notes Payable-Stock (Note 4) $ 353,590 $ 223,750
Notes Payable-Capital Lease 113,355 125,172
Notes Payable-Vendor 123,940 117,196
Deferred Compensation Payable 284,901 284,901
Deferred Income Taxes Payable (Note 5) 261,102 264,836
----------- -----------
$ 1,136,888 $ 1,015,855
----------- -----------
TOTAL LIABILITIES $26,524,810 $16,721,433
----------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page #3 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 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 4,492.03 & 4,361.35
shares 449,203 436,135
Less Subscription Receivable (34,506) (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
4,492.03 & 4,361.35 shares 449,203 436,135
Less Subscription Receivable (34,506) (21,726)
Paid in Surplus 315,781 314,731
----------- -----------
$13,122,650 $12,763,025
Less: Cost of Treasury Stock
1898 & -0- shares (189,800) -0-
----------- -----------
$12,932,850 $12,763,025
Retained Earnings 4,929,259 5,222,828
----------- -----------
Total Stockholders' Equity $17,862,109 $17,985,853
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $44,386,919 $34,707,286
-------------------- =========== ===========
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page #4 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
EARNINGS
Net Sales $37,704,353 $33,119,640
Sundry Earnings 265,897 142,872
----------- ------------
TOTAL EARNINGS $37,970,250 $33,262,512
-------------- ------------ -----------
EXPENSE
Net Material Costs $34,122,126 $29,542,472
Payroll Costs 1,631,093 1,526,874
Other Operating Costs 1,614,563 1,563,797
Interest Expense 5,655 9,575
----------- -----------
TOTAL EXPENSE $37,373,437 $32,642,718
------------- ----------- -----------
NET EARNINGS BEFORE PROVISIONS
FOR ESTIMATED FEDERAL
INCOME TAX (Note 5) $ 596,813 $ 619,794
------------------
PROVISIONS FOR ESTIMATED
FEDERAL INCOME TAX
(Note 5) (208,014) (215,364)
------- ---------- -----------
NET EARNINGS $ 388,799 $ 404,430
------------
LESS ACCRUAL FOR DIVIDENDS ON
PREFERRED STOCK (170,592) (155,203)
--------------- ---------- -----------
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 218,207 $ 249,227
------------------- ========== ===========
NET EARNINGS PER SHARE OF
COMMON STOCK, CLASS A &
CLASS B (Note 1) $ 3.30 $ 4.12
--------------- =========== ===========
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page #5 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net Earnings $ 388,799 $ 404,430
------------ ------------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 206,336 $ 217,173
Increase (Decrease) in Deferred
Income Tax (3,734) 7,083
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (4,919,575) $ (2,852,343)
Increase in Notes Receivable (19,488) (6,468)
Increase in Inventory (2,176,516) (1,860,571)
Decrease in Other Assets 81,011 158,751
Increase in Note Payable for Vendor 6,744 6,468
Increase in Accounts Payable 10,175,084 7,347,972
Decrease in Other Liabilities (654,013) (501,992)
Increase in Federal Income
Taxes Payable 166,495 140,540
------------ ------------
TOTAL ADJUSTMENTS $ 2,862,344 $ 2,656,613
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 3,251,143 $ 3,061,043
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures $ (92,524) $ (105,706)
Disposition of Fixed Assets -0- -0-
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES $ (92,524) $ (105,706)
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page #6 of 22 Pages
<PAGE>
STATEMENT OF CASH FLOWS (UNAUDITED) Cont.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease Note Payable - Line of Credit $ -0- $ (367,485)
Increase in Notes Payable - Stock 129,840 -0-
Decrease in Notes Payable - Capital Lease (17,039) (15,202)
Increase in Subscription Receivable (25,561) (8,235)
Proceeds From Issuance of Stock 385,186 349,349
Purchase of Treasury Stock (189,800) (52,800)
Dividends Paid (682,368) (620,812)
---------- -----------
NET CASH USED FOR FINANCING
ACTIVITIES $ (399,742) $ (715,185)
----------- -----------
NET INCREASE
IN CASH & CASH EQUIVALENTS $ 2,758,877 $ 2,240,152
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,123,842 1,224,327
----------- -----------
CASH & CASH EQUIVALENTS AT END OF
PERIOD $ 3,882,719 $ 3,464,479
=========== ===========
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Interest Expense Paid $ 5,655 $ 9,575
Income Taxes Paid -0- -0-
</TABLE>
The accompanying notes are an integral part of the
Condensed Financial Statements.
Page #7 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
(1) Description of Business:
Handy Hardware Wholesale, Inc., (the "Company"), was incorporated as a
Texas corporation on January 6, 1961. Its principal executive offices
and warehouse are located at 8300 Tewantin Drive, Houston, Texas
77061. The Company is owned entirely by its Member-Dealers and former
Member-Dealers.
Handy Hardware Wholesale, Inc. sells to its Member-Dealers products
primarily for retail hardware, lumber and home center stores. In
addition, the Company offers advertising and other services to
Member-Dealers.
(2) General Information:
The condensed consolidated financial statements included herein have
been prepared by Handy Hardware Wholesale, Inc. (the "Company"). The
financial statements reflect all adjustments, which were all of a
recurring nature, which are, in the opinion of management, necessary
for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission
(SEC). The Company believes that the disclosures made are adequate to
make the information presented not misleading. The condensed
consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the
latest Form 10-K Annual Report.
(3) 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:
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
Calculation of Net Earnings Per
Share of Common Stock
Net Earnings $ 388,799 $ 404,430
Less: Accrued Dividends
On Preferred Stock (170,592) (155,203)
--------- ---------
$ 218,207 $ 249,227
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 66,076 60,536
Net Earnings Per Share
of Common Stock $ 3.30 $ 4.12
========= =========
Page #8 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(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 three months ended March 31, 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:
MARCH 31, DECEMBER 31,
1998 1997
-------- -----------
Land $ 2,027,797 $ 2,027,797
Building & Improvements 7,752,216 7,752,216
Furniture, Computer, Warehouse 3,399,699 3,341,692
Transportation Equipment 452,576 435,990
----------- -----------
$13,632,288 $13,557,695
Less: Accumulated Depreci (4,337,332) (4,148,927)
----------- -----------
$ 9,294,956 $ 9,408,768
=========== ===========
Page #9 of 22 Pages
<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.
Under the installment sale agreement, the Company sells Member-Dealers computer
hardware, the purchase price of which is due and payable by Member-Dealers to
the Company in thirty-six monthly installments of principal and interest.
Notes Receivable are classified as follows:
CURRENT PORTION NONCURRENT PORTION
--------------- -------------------
MARCH 31, DEC. 31, MARCH 31, DEC. 31,
1998 1997 1998 1997
-------- ------- -------- --------
Deferred Agreement $ -0- $ -0- $123,940 $117,196
Installment Sale Agreement 4,184 -0- 8,560 -0-
Steve R. Allen, Stejuan-C.L. Inc. 6,710 5,394 2,001 3,317
------- ------- -------- --------
$10,894 $ 5,394 $134,501 $120,513
======= ======= ======== ========
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:
CURRENT PORTION NONCURRENT PORTION
--------------- -------------------
MARCH 31, DEC. 31, MARCH 31, DEC. 31,
1998 1997 1998 1997
-------- ------- -------- --------
$ 7,000 $ 7,000 $353,590 $223,750
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 #10 of 22 Pages
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes,"
effective January 1, 1993. 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
MARCH 31, DECEMBER 31,
1998 1997
------------- -----------
<S> <C> <C>
Excess of tax over book depreciation $ 1,289,011 $ 1,298,079
Allowance for Bad Debt ( 7,195) ( 7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs ( 288,788) ( 288,788)
Deferred Compensation ( 225,080) ( 223,165)
----------- ----------
Total $ 767,948 $ 778,931
Statutory Tax Rate 34% 34%
----------- ------------
Cumulative Deferred Income Tax Payable $ 261,102 $ 264,836
=========== ============
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 261,102 264,836
----------- -----------
$ 261,102 $ 264,836
=========== ===========
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
QUARTER ENDED QUARTER ENDED
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
Principal Components of Income Tax Expense
Federal:
Current
Income tax paid $ -0- $ -0-
Carry-over of prepayment from
from prior year -0- 29,529
Refund received for overpayment
from prior year -0- -0-
----------- ------------
$ -0- $ 29,529
Federal Income Tax Payable 211,748 178,752
Carry-over to subsequent year -0- -0-
----------- ------------
Income tax for tax reporting
at statutory rate of 34% $ 211,748 $ 208,281
Deferred
Adjustments for financial reporting:
Depreciation (3,083) 419
263A Uniform Capitalization Costs -0- 7,382
Other (651) (718)
----------- ------------
Provision for federal income tax $ 208,014 $ 215,364
=========== ============
</TABLE>
Page #11 of 22 Pages
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY
(1) Terms of Capital Stock
The holders of Class A Common Stock are entitled to one vote for
each share held of record on each matter submitted to a vote of
shareholders. Holders of Class A Common Stock must be engaged in the
retail sale of goods and merchandise, and may not be issued or retain
more than ten shares of Class A Common Stock at any time. The holders
of Class B Common Stock are not entitled to vote on matters submitted
to a vote of shareholders except as specifically provided by Texas
law.
The holders of Preferred Stock are entitled to cumulative
dividends of not less than 7 percent per year nor more than 20 percent
per year of the par value ($100.00 per share) of the shares of
Preferred Stock, as fixed by the Board of Directors. The Preferred
Stock has a liquidation value of $100 per share. The holders of
Preferred Stock are not entitled to vote on matters submitted to a
vote of shareholders except as specifically provided by Texas law. The
shares of Preferred Stock are not convertible, but are subject to
redemption (at the option of the Company) by vote of the Company's
Board of Directors, in exchange for $100 per share and all accrued
unpaid dividends.
(2) Capitalization
To become a Handy Hardware Member-Dealer, an independent hardware
dealer must enter into a Subscription Agreement with the Company for
the purchase of ten shares of Handy Hardware Class A Common Stock,
$100 par value per share or ten shares of Preferred Stock for any
additional store, with an additional agreement to purchase a minimum
number of shares of Class B Common Stock, $100 par value per share and
Preferred Stock, $100 par value per share. Class B Common Stock and
Preferred Stock are purchased 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 additional charge ("Purchase Funds") of 2 percent of warehouse
purchases until the Member-Dealer's Desired Stock Ownership is
attained. (The Subscription Agreement entitles the Company to collect
2 percent of total purchases. Since May 1, 1983, however, the Board of
Directors has determined to collect 2 percent of warehouse purchases
only.) On a monthly basis, the Company reviews the amount of
unexpended Purchase Funds being held for each Member-Dealer. If a
Member-Dealer has unexpended Purchase Funds of at least $2000, the
Company applies such funds to the purchase of ten shares of Class B
Common Stock and ten shares of Preferred Stock at $100 per share.
(3) Transferability
Holders of Class A Common Stock may not sell those shares to a
third party without first offering to sell them back to the Company.
There are no specific restrictions on the transfer of the Company's
Class B Common or Preferred Stock.
Page #12 of 22 Pages
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
(4) Membership Termination
Following written request, the Company will present to the Board
of Directors a Member-Dealer's desire to have his stock repurchased
and the Member-Dealer's Contract terminated. According to the current
procedures established by the Board of Directors, a Member-Dealer's
stock may be repurchased according to either of two options.
Option - I The Member-Dealer's Class A Common Stock is repurchased at
$100 per share. Any funds remaining in the Member- Dealer's
Purchase Fund Account will be returned at the dollar value
of such account. Twenty percent or $3000, whichever is
greater, of the total value of the Class B Common and
Preferred Stock will be repurchased. The remaining value of
the Class B Common and Preferred Stock is converted to a
five-year interest bearing note. During the first four
years, this note only pays interest. In the fifth year, both
interest and principal are paid. The interest rate is
determined by the Company's Board of Directors at the same
time they approve the repurchase.
Option - II Same as Option I except that the remaining value of the
Class B Common and Preferred Stock is discounted 15 percent
and reimbursed to the Member-Dealer immediately at the time
of repurchase.
Page #13 of 22 Pages
<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 first quarter of 1998, total sales were 13.84 percent higher than during the
same quarter in 1997 compared to a 0.6 percent increase in 1997 over 1996 and a
4.7 percent increase in 1996 over 1995. These factors have resulted in
significant sales growth in most territories.
Sales in the Arkansas sales territory increased 25 percent in the first
quarter of 1998 over the same 1997 period while sales in the Victoria, San
Antonio, Corpus Christi and Rio Grande Valley area grew by 20 percent. The
Houston territory increased sales by 19 percent. Southern Louisiana had sales
growth of 16 percent, the Austin, Brenham and Central Texas area had sales
growth of 14 percent and the Oklahoma territory had an 11 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
declined 1 percent.
Page #14 of 22 Pages
<PAGE>
Sales. The following table compares the Company's sales during the first quarter
of 1998 to sales during the same period of 1997, by sales territory:
<TABLE>
<CAPTION>
First Quarter First Quarter
1998 1997
---------------------------------------------------- -----------------------------
% Increase
in Sales
From First % of % of
Quarter Total Total
Sales Territory Sales 1997 Sales Sales Sales
- --------------- ----- ---------- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Houston Area $ 9,608,176 19% 25.5% $ 8,095,412 24.5%
Victoria, San Antonio,
Corpus Christi &
Rio Grande Valley Area* 7,277,112 20% 19.4% 6,069,127 18.3%
North Texas, Dallas
& Fort Worth Area 4,942,941 -1% 13.1% 4,974,812 15.0%
Austin, Brenham &
Central Texas Area 4,585,611 14% 12.2% 4,022,002 12.2%
Southern Louisiana Area 4,317,114 16% 11.5% 3,707,440 11.2%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 3,055,331 5% 8.1% 2,915,450 8.8%
Arkansas Area 1,596,382 25% 4.2% 1,278,168 3.9%
Oklahoma Area 2,249,885 11% 6.0% 2,022,666 6.1%
----------- ---- ----------- -----
Totals: $37,632,552 (1) 100.0% $33,085,077 100.0%
=========== ===== =========== =====
</TABLE>
- ------------------------------------------------------
* 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.
Page #15 of 22 Pages
<PAGE>
Net Material Costs and Rebates. Net material costs for the first quarter of
1998 were $34,122,126 compared to $29,542,472 for the same period in 1997. Net
material costs for the first quarter increased 15.5 percent over the first
quarter of 1997 which is higher than the 13.8 percent increase in sales for the
same period. Net material costs as a percentage of sales were 90.5 percent in
the first quarter of 1998 as compared to 89.2 percent for the same period in
1997. The slight percentage increase of net material costs as a percentage of
sales in the first quarter 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 a markup ranging from 0 to 2 percent increased from $13,919,330 in
1997 to $16,839,627 in 1998, an increase of 21.0 percent. In addition, material
costs as a percentage of sales were negatively effected by a decline in purchase
discounts of 7.5 percent (1998-$574,827 as compared to 1997-$621,813) and a 2.6
percent decrease in factory rebates (1998-$1,229,232 as compared to $1,262,875
in 1997) both of which were taken by the Company as a credit against material
costs. Both purchase discounts and factory rebates were lower in the first
quarter of 1998 due to the timing of the Company's spring trade show that was
held later in the first quarter of 1998 than in the same 1997 period. 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 quarter ended March 31, 1998,
increased to $1,631,093 from $1,526,874 for the same period in 1997. This
increase of 6.8 percent resulted primarily from regular salary increases.
Payroll costs for the first quarter of 1998 constituted 4.3 percent of net
sales, compared to 4.6 percent for the first quarter of 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 first quarter of 1998, other operating
costs increased $50,766 (3.2%) compared to the same quarter of 1997, but
remained relatively the same as a percentage of sales. First quarter 1998
operating expenses were $1,614,563 (4.3% of sales) as compared to $1,563,797 of
these expenses for the same period of 1997 (4.7% of sales).
Other operating costs include a wide variety of expenses related to the
Company. The largest components of other operating costs in the first quarter of
1998 were $526,603 of employee expenses (representing an increase of $56,600 or
12.0 percent over 1997 levels), $393,113 of delivery expenses (representing a
decrease of $96,364 or 19.7 percent over 1997 levels) and $212,857 of warehouse
expenses (representing an increase of $9,796 or 4.8 percent from 1997 levels).
Page #16 of 22 Pages
<PAGE>
Net Earnings and Earnings Per Share. While net sales for the first quarter
of 1998 increased $4,584,713 (13.8%) and net material costs increased $4,579,654
(15.5%) from the first quarter in 1997, gross margin was approximately equal to
1997 levels. As a result of a flat gross margin and increased payroll and
operating expenses, pretax net earnings decreased 3.7 percent from $619,794 for
the first quarter of 1997 to $596,813 in the same 1998 period, while after-tax
net earnings also decreased by 3.9 percent. Net earnings in the first quarter of
1997 decreased primarily due to two factors. First, the Company generated a
smaller percentage of purchase discounts and rebates during first quarter of
1998 than in the corresponding period in 1997 due to the timing of the spring
trade show. Secondly, there was an increase in sales with markups of 0 to 2
percent.
The Company's earnings per share decreased 19.9 percent in the first
quarter of 1998 as compared to the same period of 1997. This decrease was due to
a decrease in net earnings in the first quarter of 1998 and an increase in the
dividend accrued on preferred stock during the same period. Dividends accrued in
the first quarter 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 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 has been
subject to two primary factors. First and third quarter earnings have been
negatively affected by the increased level of direct sales (with no markup)
resulting from the Company's semiannual trade show always held in the first and
third quarters. Secondly, sales during the fourth quarter traditionally have
been lower, as hardware sales are slowest during winter months preceding
ordering for significant sales for the spring. However, net earnings has 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.
Page #17 of 22 Pages
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION
Liquidity
- ---------
During the period ending March 31, 1998, Handy Hardware improved its
financial condition and its ability to generate adequate amounts of cash while
continuing to make significant investments in inventory, warehouse and computer
equipment, and software to better meet the needs of its Member-Dealers.
Cash Flow. During the first three months of 1998 there was a net increase
for the period of $2,758,877 in the Company's cash and cash equivalents as
compared to an increase of $2,240,152 for the same period of 1997.
Cash flow from operating activities for the first three months of 1998 was
$3,251,143 as compared to $3,061,043 in the same three 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 three
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
$10,175,084 increase in accounts payable in 1998 as compared to a $7,347,972
increase in 1997. The positive effects on cash flow in the first three months of
1998 were offset by the following negative effects: (i) a $4,919,575 increase in
accounts receivable in 1998 as compared to a $2,852,343 increase in 1997, (ii)
an increase in inventory of $2,176,516 in 1998 as compared to a $1,860,571
increase in inventory in 1997, (iii) a $81,011 decrease in other assets in 1998
compared to a $158,751 decrease in 1997 and (iv) a $654,013 decrease in other
liabilities in 1998 as compared to a $501,992 decrease in 1997.
Inventory increased $2,176,516 in the first three months of 1998 from the
beginning of the year. The increase was more significant than the increase of
$1,860,571 during the same 1997 period. In the first three months of 1998 the
Company continued to expand its inventory to meet Member-Dealer demand.
Accounts receivable and accounts payable increased during the first three
months of 1998, again, more significantly than during the same period of 1997
due to a timing difference in the recognition and payment of receivables and
payables generated from the Company's spring trade show. The Company's spring
trade show was held later in the first quarter of 1998 as compared to 1997, with
payments on receivables and payables consequently deferred to a later period.
In the first three months of 1998, the Company expended a net amount of
$92,524 to purchase fixed assets, which is on par with the $105,706 expended in
the same period of 1997.
Page #18 of 22 Pages
<PAGE>
In the first three months of 1998, $399,742 was used for financing
activities, which was substantially lower than the $715,185 used in the first
three months of 1997. The use of cash in the 1998 period consisted principally
of (i) payment of a larger preferred stock dividend in the first quarter of 1998
($682,368 as compared to $620,812 in 1997), and (ii) an increase in the
repurchase of Company stock ($189,800 in 1998 vs. $52,800 in 1997). These
increases in the uses of cash were offset by (i) an increase in Notes
Payable-Stock ($129,840 in 1998 as compared to zero in 1997) and (ii) an
increase in the proceeds from the issuance of stock ($385,186 in 1998 vs.
$349,349 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 (1.5%) or, at
the Company's option, the London Interbank Offering Rate ("LIBOR") plus one and
one-quarter percent (1.25%). Prior to that date the Bank extended the Company a
2 million revolving line of credit at the prime interest rate published by the
Bank. The new line of credit was used to retire the Company's mortgage
($2,449,898) with the Bank 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 March 31, 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:
MARCH 31, DECEMBER 31, MARCH 31,
1998 1997 1997
Working Capital $9,284,639 $9,115,930 $8,061,072
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 6.4 5.6 9.8
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 three months of 1998, the Company maintained a 95.8 percent
service level (the measure of the Company's ability to met Member-Dealers'
orders out of current stock) as compared to a service level of 95.1 percent
Page #19 of 22 Pages
<PAGE>
for the same period of 1997. This increase in service level is the result of an
adequate amount of storage for inventory available since the warehouse expansion
project was completed. Inventory turnover was 6.1 times during the first three
months of 1998 and 6.0 times for the first three months of 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 three month periods ending March 31, 1998, and March 31, 1997, the
Company's investment in capital assets (net of dispositions) was $92,524 and
$105,706, respectively. Approximately 45.1 percent ($41,705) of the amount
expended in the first three months of 1998 was used to purchase warehouse
equipment, 37.3 percent ($34,517) was used to upgrade the Company's fleet of
automobiles and 17.0 percent ($15,720) was used to purchase computer hardware
and software and order entry terminals. By comparison, 73.1 percent ($77,306) of
the amount expended in the first three months of 1997 was used to upgrade
computer hardware equipment and software, 24.7 percent ($26,070) was used to
upgrade warehouse equipment and 2.2 percent ($2,330) was used to purchase office
equipment.
Significant outlays of 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 ($310,000), computer
equipment ($385,000), office equipment ($25,000), automobile fleet ($25,000) and
building improvements ($50,000).
The Company's cash position of $3,882,719 at March 31, 1998, is anticipated
to be sufficient to fund all planned capital expenditures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page #20 of 22 Pages
<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. It is anticipated that these cases will be mediated, possibly as
early during the spring of 1998, 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 - None
Item 5. Other Information - None
Item 6. Exhibits & Reports on Form 8-K - None
Page #21 of 22 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/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
---------------------
Page #22 of 22 Pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the filer's operations as of March 31, 1998, and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,882,719
<SECURITIES> 0
<RECEIVABLES> 15,583,357
<ALLOWANCES> 7,195
<INVENTORY> 15,572,463
<CURRENT-ASSETS> 34,672,561
<PP&E> 9,294,956
<DEPRECIATION> 4,337,332
<TOTAL-ASSETS> 44,386,919
<CURRENT-LIABILITIES> 25,387,922
<BONDS> 0
0
5,997,972
<COMMON> 6,619,097
<OTHER-SE> 5,245,040
<TOTAL-LIABILITY-AND-EQUITY> 44,386,919
<SALES> 37,704,353
<TOTAL-REVENUES> 37,970,250
<CGS> 34,122,126
<TOTAL-COSTS> 34,122,126
<OTHER-EXPENSES> 1,614,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,655
<INCOME-PRETAX> 596,813
<INCOME-TAX> 208,014
<INCOME-CONTINUING> 388,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 388,799
<EPS-PRIMARY> 3.30
<EPS-DILUTED> 3.30
</TABLE>
