SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact Name of Registrant)
TEXAS 74-1381875
(State of incorporation (I.R.S. Employer
or organization) Identification Number)
8300 Tewantin Drive
Houston, Texas 77061
(713) 644-1495
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $100.00 par value
(Title of Class)
Class B Common Stock, $100.00 par value
(Title of Class)
Preferred Stock, $100.00 par value
(Title of Class)
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
--- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part Ill of this Form 10-K or in any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (computed by reference to the price at which the stock was sold) was
$894,000 of February 28, 1999.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 28, 1999, was 9,030 shares of Class A Common Stock,
$100 par value, and 56,459 shares of Class B Common Stock, $100 par value.
Documents Incorporated by Reference
Document Incorporated as to
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Notice and Proxy Statement for the Part III, Items 10, 11, 12 and 13
Annual Meeting of Stockholders
to be held May 12, 1999
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................1
Item 2. Properties.........................................................7
Item 3. Legal Proceedings..................................................7
Item 4. Submission of Matters to a Vote of Security Holders................7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................7
Item 6. Selected Financial Data............................................8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk........13
Item 8. Financial Statements and Supplementary Data.......................13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................35
PART III
Item 10.* Directors and Executive Officers of the Registrant................35
Item 11.* Executive Compensation............................................35
Item 12.* Security Ownership of Certain Beneficial Owners and Management....35
Item 13.* Certain Relationships and Related Transactions....................35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...35
- ---------------------------------
* Included in the Company's proxy statement to be delivered to the
Company's shareholders within 120 days following the Company's fiscal year end.
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts are forward-looking statements as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, and therefore involve a number of risks and uncertainties. Such
forward-looking statements may be or may concern, among other things, sales
levels, the general condition of retail markets, levels of costs and margins,
capital expenditures, liquidity, and competition. Such forward-looking
statements generally are accompanied by words such as "plan," "budget,"
"estimate," "expect," "predict," "anticipate," "projected," "should," "believe,"
or other words that convey the uncertainty of future events or outcomes. Such
forward-looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by or on behalf of the Company, including those
regarding the Company's financial results, levels of revenues, capital
expenditures, and capital resource activities. Among the factors that could
cause actual results to differ materially are: fluctuations of the prices
received for or demand for the Company's goods, amounts of goods sold for
reduced or no mark-up, a need for additional labor or transportation costs for
delivery of goods, requirements for capital; general economic conditions or
specific conditions in the retail hardware business; weather conditions;
competition; unanticipated events related to the Year 2000; as well as the risks
and uncertainties discussed in this Annual Report, including, without
limitation, the portions referenced above and the uncertainties set forth from
time to time in the Company's other public reports, filings, and public
statements.
<PAGE>
PART I
Item 1. Business
General Development of Business
Handy Hardware Wholesale, Inc. ("Handy Hardware" or 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.
Handy Hardware was formed by 13 independent hardware dealers in response to
competitive pressure from larger businesses and chain discount stores. The
purpose of the Company is to provide the warehouse facilities and centralized
purchasing services that allow participating independent hardware dealers
("Member-Dealers") to compete more effectively in areas of price and service.
Handy Hardware has grown from 13 Member-Dealers and sales of $150,000 in 1961 to
1,024 active Member-Dealers and sales of more than $146,000,000 in 1998. The
Company is owned entirely by its Member-Dealers and former Member-Dealers.
Handy Hardware is currently engaged in the sale to its Member-Dealers of
products used in retail hardware, lumber and home center stores as well as in
plant nurseries, industrial and automotive stores. In addition, the Company
offers advertising and other services to Member-Dealers. The Company utilizes a
central warehouse and office facility located in Houston, Texas, and maintains a
fleet of 40 trailers owned by the Company and 47 leased power units and trailers
which are used for merchandise delivery. The Company offers merchandise to its
Member-Dealers at its cost plus a markup charge, resulting generally in a lower
price than an independent dealer can obtain on its own. Member- Dealers may buy
merchandise from any source they desire, and Member-Dealers are not required to
make any minimum levels of purchases from Handy Hardware. As of December 31,
1998, Handy Hardware's Member-Dealers were located in Texas, Louisiana,
Mississippi, Alabama, Florida, Oklahoma, Arkansas, Mexico and Central America.
Information as to revenues, operating profit and identifiable assets of the
Company's single industry segment is presented under "Item 6. Selected Financial
Data."
Products and Distribution
The Company buys merchandise from vendors in quantity lots, warehouses the
merchandise and resells it in smaller lots to its Member-Dealers. During the
Company's fiscal year ended December 31, 1998, 636 of the Company's
Member-Dealers were located in Texas, 190 in Louisiana, 91 in Oklahoma, 60 in
Arkansas, 16 in Alabama, 14 in Mississippi, 10 in Florida, 6 in Mexico and 1 in
Central America. No individual Member-Dealer accounted for more than 2.5% of the
sales of the Company during fiscal 1998. The loss of a single customer or
several customers would not have a material adverse effect on the Company.
Often Member-Dealers may desire to purchase products that are not
warehoused by the Company. In this instance, Handy Hardware will, when
requested, purchase the product from the vendor and have it shipped directly to
the Member-Dealer. Direct shipments from the vendor to the Member-Dealer
accounted for approximately 36% of Company sales during 1998, 33% in 1997 and
32% in 1996, while warehouse shipments accounted for approximately 64% of total
net sales in 1998, 67% of total net sales in 1997 and 68% in 1996.
The Company's total sales include 14 different major classes of
merchandise. In 1998, 1997 and 1996, the Company's total sales and total
warehouse sales were divided among classes of merchandise listed below.
1
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<TABLE>
<CAPTION>
Total Sales(1) Warehouse Sales
Class of Merchandise 1998 1997 1996 1998 1997 1996
- -------------------- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Plumbing Supplies 17% 17% 18% 20% 20% 20%
General Hardware 12 13 14 12 13 13
Paint Sundries 11 12 12 14 14 14
Electrical Supplies 11 12 12 14 14 14
Hand Tools 9 10 10 9 9 9
Lawn and Garden Products 8 8 8 10 10 10
Paint 4 4 4 4 4 4
Building Materials 11 6 5 2 2 2
Power Tools 5 5 5 2 2 3
Housewares & Related Supplies 3 3 3 3 3 3
Fasteners 2 2 2 1 1 1
Automotive After Market 2 2 2 3 2 2
Outdoor Products 1 2 1 2 2 1
Miscellaneous 4 4 4 4 4 4
-- --- --- --- --- ----
100% 100% 100% 100% 100% 100%
=== === === === === ===
- -----------
<FN>
These amounts include direct sales and warehouse sales. Total sales in 1998
generated from sales of store supplies, catalogs, office supplies, and special
purchases from vendors of goods not part of the Company's regular inventory
represented less than 0.40% of total sales.
</FN>
</TABLE>
Warehouse sales normally carry a markup of 9%, excluding any purchase
discounts and manufacturer's rebates. As an incentive to Member-Dealers to make
direct sale purchases, since June 1, 1989, direct sales have been sold at the
Company's cost with no markup, excluding purchase discounts and manufacturers'
rebates. The Company maintains a list of price-sensitive, high volume items on
which the markup is reduced from 9 percent to 2 or 4 percent. This program was
developed in order to allow Handy Hardware Member-Dealers to become more
competitive in the markets they serve. The price-sensitive items are reviewed
every six months and additions and deletions are made based on Member-Dealer
input and as the market dictates. Because the primary purpose of the Company is
to provide its Member-Dealers with a low cost buying program, markups are kept
as low as possible, although at a level sufficient to provide adequate capital
to pay the expenses of the Company, improve the quality of services provided to
the Member-Dealers and finance the increased inventory and warehouse capacity
required to support the growth of the Company.
Most Member-Dealers have a computer terminal at their hardware store that
provides a direct link to the offices of the Company. Each Member-Dealer is
assigned a day of the week on which it is to transmit its orders through the
computer terminal. Orders placed by Member-Dealers go directly into the Company
computer where they are compiled and processed on the day received. The
appropriate merchandise is gathered from the warehouse during the day following
receipt of each order and on the next day, the merchandise leaves the warehouse
for delivery to the Member- Dealer. Generally, the merchandise arrives at
individual stores on the day that it is shipped from the Company's warehouse.
2
<PAGE>
In 1998 the Company maintained a 94.8 percent service level (the measure of
the Company's ability to meet Member-Dealer orders out of current stock), as
compared to service levels of 95.1 percent and 94.6 percent in 1997 and 1996,
respectively. No policy of inventory shrinkage has been implemented or is
planned.
Dealer Services and Advertising
The Company employs a staff of eight full time account representatives who
visit Member-Dealers to advise them on display techniques, record keeping,
inventory control, promotional sales, advertising programs and other dealer-
related services available to them by and through the Company.
The Company has participated in newspaper advertising programs, and has
assisted in the preparation and distribution of sales circulars utilized by
Member-Dealers. The Company has a computerized circular program which allows the
retail dealer to customize its own unique advertising circular utilizing its
individual inventory and targeting its particular market. In addition, the
system tracks available vendor cooperative funds, allowing the dealer to deduct
such cooperative claims from the cost of the circular program. The Company
estimates that approximately $889,239 was expended in 1998 for dealer
advertising activities. These advertising costs were completely offset by
contributory payments by participating Member-Dealers and cooperative
advertising allowances by participating manufacturers.
Suppliers
The Company purchases merchandise from various vendors, depending upon
product specifications and Member-Dealer requirements. Approximately 1,400
vendors supplied merchandise to the Company during 1998. The Company has no
significant long-term contract with any vendor. Most of the merchandise
purchased by the Company is available from several vendors and manufacturers,
and no single vendor or manufacturer accounted for more than 2.0% of the
Company's total purchases during 1998. The Company has not in the past
experienced any significant difficulties in obtaining merchandise and does not
anticipate any such difficulty in the foreseeable future.
The Company is a member of PRO Group, Inc., of Englewood, Colorado, an
independent hardware merchandising group. PRO Group, Inc. is a merchandising
organization with 45 wholesale hardware distributors as members. The size of the
organization generally provides greater buying power than that of any individual
member. The Company became a member of PRO Group, Inc. in order to take
advantage of this buying power, which gives PRO Group, Inc. and its members
access to potentially lower prices, bigger discounts, extended terms and other
purchasing advantages. The Company may participate at its option in other
benefits available to PRO Group, Inc. members, but is under no obligation to do
so and currently does not participate in such benefits because they generally
are already provided by the Company to its Member-Dealers.
All of the Company's products are warranted to various levels by the
manufacturers, whose warranties are passed on to the Member-Dealers. In
addition, the Company maintains product liability insurance which the Company
believes is sufficient to meet its needs.
Employees
As of December 31, 1998, the Company had 261 full-time employees, of which
47 were in management positions and 214 in warehouse, office or delivery
operations. Company employees are not represented by any labor unions. The
Company believes its employee relations are satisfactory and it has experienced
no work stoppage as a result of labor disputes.
Trade Names
The Company has a trade name, "Handy Hardware Stores," that it licenses to
Member-Dealers at no additional charge. This trade name has been registered in
all the states in which the Company's Member-Dealers are located. This trade
name is displayed by many of the Member-Dealers on storefronts and inside stores
and is used in advertising programs organized by Handy Hardware. The Company
believes that this trade name is useful to its operations, but that the loss of
ability to utilize this trade name would not have a material adverse effect upon
the business of the Company.
3
<PAGE>
Capitalization by Member-Dealers
In order to become a Handy Hardware Member-Dealer, an independent hardware
dealer must enter into a Dealer Contract with the Company. In addition, a
Member-Dealer must enter into a Subscription Agreement with the Company for the
purchase of 10 shares of Handy Hardware Class A Common Stock, $100 par value per
share ("Class A Common Stock"), with an additional agreement to purchase a
minimum number of shares of Class B Common Stock, $100 par value per share
("Class B Common Stock"), and Preferred Stock, $100 par value per share
("Preferred Stock"), as detailed below. The Class A Common Stock and Class B
Common Stock are collectively referred to herein as the "Common Stock." 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. All shares
of the Company's stock have a purchase price of $100 per share.
Purchase of Class A Common Stock
At the time an independent hardware dealer becomes a Member-Dealer, he is
required to purchase, in cash, 10 shares of Class A Common Stock at $100 per
share.
Purchases of Class B Common Stock and Preferred Stock
General. In approximately March of each fiscal year, the Company calculates
the minimum desired level of stock ownership for each Member-Dealer ("Desired
Stock Ownership"), based on (i) the dollar amount of Class A Common Stock, Class
B Common Stock and Preferred Stock owned by the Member-Dealer as of December 31
of the preceding fiscal year ("Actual Stock Ownership") and (ii) the
Member-Dealer's total purchases of merchandise from the Company during that
preceding fiscal year ("Total Purchases"), as detailed below. The minimum
Desired Stock Ownership for a Member-Dealer is $10,000. If the Member-Dealer's
Actual Stock Ownership is less than his Desired Stock Ownership, then throughout
the period from April 1 of the current fiscal year to March 31 of the following
fiscal year, the Company will collect funds from the Member-Dealer for the
purchase of additional Class B Common Stock and Preferred Stock ("Purchase
Funds"). The Purchase Funds are recognized by the Company as Class B Common,
subscribed, and Preferred Stock, subscribed. Until such time as the Purchase
Funds are applied to purchase Class B Common and Preferred Stock for a
Member-Dealer, such Purchase Funds are used by the Company for working capital
and general corporate purposes. The period of time for which Purchase Funds are
held by the Company varies, depending on the amount of Warehouse Purchases by
the Member-Dealer. See "--Collection of Purchase Funds."
Calculation of Desired Stock Ownership. Each Member-Dealer's Desired Stock
Ownership is calculated as set forth in the following table:
<TABLE>
<CAPTION>
Actual Stock
Ownership(1) Desired Stock Ownership(2)
- --------------------------------- ------------------------------------------------------
<S> <C>
$1 to $31,249 $1.00 for every $8.00 of Total Purchases
$31,250 to $56,249 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases over $250,000
$56,250 to $74,999 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,000 to $500,000
+ $1.00 for every $13.33 of Total Purchases over $500,000
$75,000 to $87,499 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,000 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,000 to $750,000
+ $1.00 for every $20.00 of Total Purchases over $750,000
4
<PAGE>
$87,500 and above $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,000 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,000 to $750,000
+ $1.00 for every $20.00 of Total Purchases from $750,000 to $1,000,000
+ $1.00 for every $40.00 of Total Purchases over $1,000,000
- -----------
<FN>
(1) Including all Class A Common Stock, Class B Common Stock and Preferred
Stock owned by the Member-Dealer.
(2) The minimum Desired Stock ownership aggregated over all classes of capital
stock, is $10,000. In each case "Total Purchases" are measured as of the
end of the immediately preceding fiscal year.
</FN>
</TABLE>
Example.
In March 1999, the Company calculates that as of December 31, 1998, a
Member-Dealer's Actual Stock Ownership was $32,000 and his Total
Purchases during 1998 were $300,000. The Member-Dealer's Desired Stock
Ownership will be $36,250 ($1.00 for each $8.00 of the first $250,000
of Total Purchases [$31,250] plus $1.00 for each $10.00 of the next
$50,000 of Total Purchases [$5,000]). Because the Member-Dealer's
Actual Stock Ownership is less than his Desired Stock Ownership, the
Company will collect Purchase Funds throughout the period from April 1,
1999 to March 31, 2000 for the purchase of additional Class B Common
Stock and Preferred Stock.
Collection of Purchase Funds. Each Member-Dealer receives from the Company
a semi-monthly statement of the Total Purchases made by the Member-Dealer during
the covered billing period. Total Purchases include purchases of inventory from
the Company's warehouse ("Warehouse Purchases") and purchases of inventory by
the Member-Dealer directly from the manufacturer which are billed through the
Company. If the Company has determined that Purchase Funds are to be collected
from a Member-Dealer for a particular April 1 to March 31 period, then each
statement sent to that Member-Dealer during that period will contain an
additional charge for Purchase Funds, in an amount equal to two percent (2%) of
the Warehouse Purchases invoiced on the statement. The Subscription Agreement
entitles the Company to collect 2% of Total Purchases as Purchase Funds. At
present, however, the board of directors has determined to collect 2% of
Warehouse Purchases only. The Company will continue to collect Purchase Funds
throughout the April 1 to March 31 period, even though the Member-Dealer attains
his Desired Stock Ownership during the course of the period. On a monthly basis,
the Company reviews the amount of unexpended Purchase Funds then being held for
each Member-Dealer. If a Member-Dealer has unexpended Purchase Funds in an
amount of at least $2,000, the Company applies $2,000 to the purchase of 10
shares of Class B Common Stock and 10 shares of Preferred Stock at $100 per
share.
Overinvested Member-Dealers. If at the end of any fiscal year a
Member-Dealer's Actual Stock Ownership exceeds his Desired Stock Ownership (an
"Overinvested Member-Dealer"), he will not be required to pay any Purchase Funds
during the following April 1 to March 31 period. An Overinvested Member-Dealer
may voluntarily continue to make additional purchases of Class B Common Stock
and Preferred Stock by paying Purchase Funds to the Company in amounts equal to
2% of Warehouse Purchases.
Repurchases from Overinvested Member-Dealers. In 1998 the Company
repurchased certain shares of Class B Common Stock and Preferred Stock from
Overinvested Member-Dealers whose Actual Stock Ownership exceeded their Desired
Stock Ownership by $4,000 or more. The amount the Company offered to repurchase
during the year from each Overinvested Member-Dealer was equal to one-fourth of
the excess amount, equally divided between shares of Class B Common Stock and
Preferred Stock. The repurchases were made at the full initial sale price of
$100 per share. In 1998, approximately 11% of the shares eligible for repurchase
from Overinvested Member-Dealers were submitted for repurchase, for which the
Company expended $28,400. When the Company began the repurchase program in 1991,
the total overinvested amount for all Member-Dealers was $93,600 and as of
December 31, 1998, the total amount was $243,800 (excluding shares held by the
Texas and Louisiana State Treasury Unclaimed Property Divisions). The amount
overinvested varies over time due to repurchases and additional Member-Dealers
becoming overinvested because of additional stock purchases. Additionally,
because stock purchases are based on each Member-Dealer's Desired Stock
Ownership, which fluctuates depending on the total dollar amount of annual
purchases of merchandise from the Company,
5
<PAGE>
some Member-Dealers who were overinvested in one year may no longer be
overinvested in the following year because of an increase in purchases of
merchandise. Over the eight years of the repurchase program, the Company has
repurchased a total of $353,000 of shares from Member-Dealers. The Company
currently intends, but is not required, to repurchase from Overinvested
Member-Dealers their entire overinvested amounts. The Company's ability to
conduct such repurchases, however, will depend upon the Company's future results
of operations, liquidity, capital needs and other financial factors.
Affiliated Member-Dealers
If one or more individuals who control an existing Member-Dealer open a new
store which will also be a Member-Dealer, the new Member-Dealer is required to
make an initial purchase of 10 shares of Preferred Stock rather than 10 shares
of Class A Common Stock. In all other respects, however, the Company will treat
the new Member- Dealer as an entirely separate entity for purposes of
determining required stock purchases. The Company will calculate a separate
Desired Stock Ownership for the new Member-Dealer and will maintain a separate
account for Purchase Funds paid by the new Member-Dealer.
Competition
The wholesale hardware industry in which the Company operates is highly
competitive. The Company competes primarily with other dealer-owned wholesalers,
cooperatives and independent wholesalers. The business of the Company is
characterized by a small number of national companies that dominate the market,
and a larger number of regional and local companies that compete for a limited
share of the market. The Company considers itself a regional competitor.
Competition is based primarily on price, delivery service, product performance
and reliability. The Company's management believes that it competes effectively
in each of these areas, and that proximity to the markets it serves is of
special importance to its ability to attract business in those regions.
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 have traditionally been lower, as
hardware sales are slowest during the 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.
For the past three years traditional seasonality trends deviated from the
norm. In 1998, the recognition of increased revenues generated from the spring
market ($244,858), a reimbursement for environmental cleanup expenses from the
Texas National Resource Conservation Commission ($65,822) and the refund of
revalued 1991 property taxes from the Harris County Appraisal District ($36,036)
resulted in higher than usual first quarter net earnings. In 1997 and 1996,
purchase discounts and factory rebate credits in the first quarter increased
$332,512 and $199,335, respectively. This timing difference in the receipt of
such discounts and rebates resulted in higher than usual first quarter net
earnings in those years, which may become a long-term change in first quarter
seasonality.
Environmental Matters
In 1990, the Company detected soil contamination apparently associated with
the underground petroleum storage systems for its fleet of trucks located at its
warehouse facility. The Company believes the contamination resulted from
overfill and/or spillage prior to the installation of spill containment and
overfill protection equipment. The Company has implemented corrective measures
to mitigate any possible future environmental impact, including installation of
a recovery well, daily removal of contaminants using a dual-pump product
recovery system and in-place closure of two underground storage tanks.
Pursuant to a remedial action plan submitted to the Texas Natural Resource
Conservation Commission ("TNRCC"), (formerly the Texas Water Commission) in
1992, the Company proposed vacuum extraction of contaminants, enhanced
bioremediation and on-site remediation of soils previously generated during
subsurface drilling. At December 31, 1998, the Company had expended $431,738 on
these measures, of which the TNRCC had reimbursed $382,521 to the Company
pursuant to a reimbursement application submitted by the Company for all
6
<PAGE>
potentially allowable expenses. Further, the Company submitted an additional
reimbursement application with the TNRCC and anticipates reimbursement of the
remaining balance due. Total expense for 1999 is expected to be approximately
$50,000. Site closure may be obtained by late 1999.
Item 2. Properties
The Company's warehouse facility and administrative and marketing offices
are located on 20 acres of land in Houston, Texas. The facility is 317,000
square feet with approximately 297,000 square feet utilized for warehouse space
and the remainder used for offices. The building is of tilt wall construction.
The Company also owns 5.2 acres of vacant land adjoining the Company's property,
which is to be used for future expansion.
Further, in January 1999, the Company purchased approximately 30 acres of
land across the street from the current warehouse facility. The land will
initially be used for additional employee parking, additional outside storage
and the relocation of a retention pond. The total cost of the 30 acres is
$1,174,774.
The Company's property has convenient access to the major freeways
necessary for the shipment of products to and from the warehouse facility.
Management believes that the current facility will be sufficient to serve the
needs of the Company for the foreseeable future.
Item 3. Legal Proceedings
In August 1997 a Handy Hardware truck struck two passenger vehicles in a
multi-vehicle accident in Harris County, Texas. Three lawsuits have been filed
in the District Court of Harris County, Texas, arising out of the accident, two
wrongful death actions by the parents of two women killed in the accident, and
one case for damages related to disabling injuries to a third person in the same
accident. All but one of the wrongful death actions have been settled within
insurance limits. The remaining wrongful death suit is scheduled to go to trial
in March or April 1999.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for any class of Handy
Hardware's capital stock. Upon becoming a Member-Dealer of Handy Hardware, the
Member-Dealer enters into a Subscription Agreement with the Company whereby it
purchases 10 shares of Class A Common Stock or, in certain cases, 10 shares of
Preferred Stock, from the Company. In addition, the Member-Dealer agrees to
purchase a minimum number of shares of Class B Common Stock and Preferred Stock
pursuant to a formula based upon merchandise purchased by the Member-Dealer from
Handy Hardware. See "Item 1. Business -- Capitalization by Member-Dealers"
above. Holders of Class A Common Stock may not transfer those shares to a third
party without first offering to sell them back to the Company. There are no
restrictions on the transfer of the Company's Class B Common Stock or Preferred
Stock; however, all shares of the equity securities of the Company are, to the
best knowledge of the Company, owned by Member-Dealers or former Member-Dealers
of the Company or affiliates of such Member-Dealers. In the past the Company has
acquired all the stock that former Member-Dealers have offered back to the
Company, paying par value in cash for the Class A Common Stock and acquiring
Class B Common Stock and Preferred Stock at par value on an installment sale
basis. There is no assurance that Handy Hardware will maintain such practices,
which could be discontinued without notice at any time. Other than as described
above, the Company is not aware of the existence of a trading market for any
class of its equity securities.
7
<PAGE>
Shares of Class A Common Stock are the only shares of capital stock with
voting rights and are entitled to one vote per share. The number of record
holders of each class of the Company's Common Stock at February 28, 1999, was as
follows:
Description Number of Holders
----------- -----------------
Class A Common Stock (Voting), $100 par value 903
Class B Common Stock (Non-Voting), $100 par value 755
The Company has never paid cash dividends on either class of its Common
Stock and does not intend to do so in the foreseeable future. For information
concerning dividends paid on the Company's Preferred Stock, see Items 6 and 8
below.
Item 6. Selected Financial Data
The following table provides selected financial information for the five
years ended December 31, 1998, derived from financial statements that have been
examined by independent public accountants. The table should be read in
conjunction with the financial statements and the notes thereto included in Item
8.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Income Data:
Total Earnings $146,950,160 $128,966,073 $121,416,635 $115,802,817 $109,282,083
Net Sales 146,009,972 128,112,754 120,698,632 114,885,634 108,766,633
Total Expenses 145,562,723 126,796,355 119,559,309 114,234,183 108,394,298
Net Earnings from
Operations after Tax 893,489 1,408,203 1,206,222 1,016,484 571,710
Preferred Stock Dividends
Paid 682,368 620,812 515,029 401,155 438,654
Net Earnings Per Share of
Class A and Class B
Common Stock $ 3.16 $ 12.71 $ 12.13 $ 11.55 $ 2.71
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current Assets $ 26,041,957 $ 24,821,508 $ 22,168,721 $ 18,607,029 $ 21,219,403
Property (Net of
Accumulated Depreciation) 9,516,835 9,408,768 9,466,577 9,787,350 7,334,774
Other Assets 483,405 477,010 440,405 386,648 281,151
------------ ------------ ------------ ------------ ------------
Total Assets $ 36,042,197 $ 34,707,286 $ 32,075,703 $ 28,781,027 $ 28,835,328
============ ============ ============ ============ ============
Current Liabilities $ 15,894,431 $ 15,705,578 $ 14,131,330 $ 10,835,557 $ 12,090,327
Long Term Liabilities 1,279,968 1,015,855 1,833,508 3,497,845 3,580,174
Stockholders' Equity 18,867,798 17,985,853 16,110,865 14,447,625 13,164,827
------------ ------------ ------------ ------------ ------------
Total Liabilities and
Stockholders' Equity $ 36,042,197 $ 34,707,286 $ 32,075,703 $ 28,781,027 $ 28,835,328
============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company maintained its steady growth in 1998 while continuing to meet
its goal of providing quality goods to its Member-Dealers at its cost plus a
reasonable mark-up charge. Net sales in 1998 increased 14.0% ($17,897,218) over
1997 net sales, compared to a 6.1% growth rate ($7,414,122) of net sales in 1997
over 1996.
Net Sales. Strong economic growth, continuing strength in consumer
confidence and the introduction of a new lumber and building materials drop
shipment program have resulted in much higher rates of sales growth during 1998
than in previous periods, which affected all but one territory. The new building
materials program passes along to Member-Dealers discounts the Company receives
for early payment to building material vendors, in addition to allowing
Member-Dealers longer payment terms than if they were to order such materials
directly. These discounts in the traditionally low margin area of building
materials have caused a significant increase in the ordering of these materials
from the Company. Orders of building materials account for $7,351,267 of the
increase in net sales, which is approximately 41% of the increase between 1997
and 1998.
The following table summarizes the Company's sales during 1996, 1997,
and 1998 by sales territory:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------- ------ ------
% Increase
in Sales % of % of % of
from Prior Total Total Total
Sales Territory Sales Year Sales Sales Sales
--------------- ----- ------------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Houston Area $ 38,416,259 18% 26.6% 26.2% 26.0%
Victoria, San Antonio, Corpus Christi & 27,130,001 21% 18.8% 18.0% 18.0%
Rio Grande Valley Area*
North Texas, Dallas & Fort Worth Area 19,060,997 11% 13.2% 13.8% 14.6%
Austin, Brenham & Central Texas Area 16,599,855 11% 11.5% 12.0% 11.5%
Southern Louisiana Area 17,933,575 24% 12.4% 11.7% 11.6%
Baton Rouge, New Orleans, Mississippi, 11,499,074 5% 8.0% 8.8% 9.1%
Alabama & Florida Area
Arkansas Area 5,004,667 15% 3.5% 3.5% 3.2%
Oklahoma Area 8,707,928 16% 6.0% 6.0% 6.0%
------------- --- ---- ------ ------
Totals: $144,352,356(1) 100.0% 100.0% 100.0%
============= ====== ====== ======
<FN>
- -------------------------
* Includes small volume of sales to Mexican and Central American dealers.
(1) Total does not include sales to dealers who were no longer
Member-Dealers at December 31, 1998.
</FN>
</TABLE>
Net Material Costs and Rebates. Net material costs during 1998 were
$130,554,986, compared to $113,213,122 in 1997 and $106,732,258 in 1996. Net
material costs for 1998 increased 15.3 percent over those costs in 1997, and
increased 6.1 percent in 1997 compared to 1996. Net material costs as a
percentage of sales were 89.4 percent in 1998 as compared to 88.4 percent for
both 1997 and 1996. The increase of net material costs as a percentage of sales
in 1998 was the result of an increase in the number of inventory items sold at a
lower gross margin. Sales with no markup increased from $42,370,341 in 1997 to
$53,070,157 in 1998. In addition, net material costs as a percentage of sales
were negatively affected by a decrease in factory rebates, which are taken by
the Company as a credit against material costs. Rebates for 1998 declined
$92,419 or 2.1 percent (1998 -- $4,502,311 versus 1997 -- $4,594,730). 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 an acceleration of receipt of both
9
<PAGE>
1996 and 1997 rebates during 1997. For 1998 and 1997, the PRO Hardware rebates
were $1,130,439 and $1,385,365, respectively. Further, in order to promote sales
of lumber and building materials, the Company passed on to Member-Dealers its
manufacturer's purchase discount, resulting in lost income of approximately
$107,000.
Payroll Costs. With unemployment at a three-decade low, the U.S. labor
market has seldom been tighter. The increase in 1998 payroll costs resulted
primarily from salary increases needed to attract or retain high-quality
employees. As a result, payroll costs during 1998 increased $678,607, a 10.0%
increase over 1997 levels. In 1997, payroll costs increased $397,107, a 6.2%
increase over 1996 levels. Despite this pressure on wages, payroll costs as a
percentage of both total expenses and net sales remained fairly constant at
5.1%, 5.3% and 5.3% for 1998, 1997 and 1996, respectively. The stability in
payroll costs as a percentage of total expenses has been a result of a
continuing effort to maintain employee productivity.
Other Operating Costs. In 1998, other operating costs increased $743,428
(11.0%) over 1997 levels, while in 1997 these costs increased $488,754 (7.8%)
over 1996 levels. Over 32.3% of the 1998 increase in other operating costs
resulted from an increase in warehouse expenses, while another 25% of the
increase is the result of delivery cost increases. Other operating costs include
a wide variety of expenses related to the Company. The principal reasons for the
increase in other operating costs in 1998 were increases in delivery expenses
(an increase of $193,046 over 1997 levels) and warehouse expenses (an increase
of $243,714 over 1997 levels). Virtually all of the increase in warehouse
expense and 42.9% of the increase in delivery expense can be attributed to an
increase in contract labor expense due to the tight labor market. In addition in
1997, the Company started palletizing orders in response to Member-Dealers'
request to make it easier to unload their merchandise from our trucks. This
resulted in a decline in the optimizing of the space of each trailer and in turn
increased the number of trucks that needed to be leased. In 1998, rental truck
expense increased $202,207. These increases were offset to some extent by
decreases in other miscellaneous operating costs.
Net Earnings
Net earnings for 1998 decreased 36.6% to $893,489 from $1,408,230 in 1997.
This decrease was primarily due to the increase in payroll costs and the
increase in other operating costs. In 1998 and 1997, the earnings per share of
common stock were $3.61 and $12.71, respectively. The decrease in earnings per
share in 1998 from 1997 is due to the decrease in net earnings of $514,741, as
well as a moderate increase of $61,556 in dividends paid to preferred
stockholders.
The variation in the Company's earnings per share from year to year results
from the Company's attempts to price 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 shareholders of the Company who
purchase its merchandise, there is no demand from shareholders that the Company
focus greater attention upon earnings per share.
Financial Condition and Liquidity
In 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 and
delivery equipment to better meet the needs of its Member-Dealers.
The Company's operating activities provided net cash of $858,114 in 1998,
$2,171,548 in 1997, and $1,113,103 in 1996. As illustrated by these figures, net
cash provided by the Company's operating activities may vary substantially from
year to year. These variations result from (i) the timing of promotional
activities such as the Company's Spring and Fall trade shows, (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.
During 1998 there was a minor decrease of $10,720 in the Company's cash and
cash equivalents as compared to a decrease of $101,485 in 1997. Cash flow from
operating activities decreased during 1998 to $858,114, as compared to
$2,171,548 in 1997. This decrease in cash flow was attributable to a decrease in
net earnings of $514,714 in 1998 plus changes in assets and liabilities,
principally the much smaller growth of accounts payable in 1998 as compared to
1997, offset by smaller changes in inventory and accounts receivable in 1998.
Inventory increased by 2,544 stockkeeping units in 1998, which were added
in response to Member-Dealer demand for more breadth of inventory. The Company
ended the 1998 year with approximately 34,800 stockkeeping units.
10
<PAGE>
The increase in inventory in 1998, although significant, was not as large as in
1997 due to the constraints of the availability of warehouse space. In addition,
in 1998 the increase in accounts receivable, although large, was not as great as
in 1997. This was mainly attributable to a strong economy which gave
Member-Dealers sufficient cash flow to pay down their accounts. Further, the
1998 modest increase in accounts payable is the result of two factors: (i) a
less significant increase in inventory in 1998 and (ii) the timing of supplier
payment terms.
Net cash provided by financing activities was $253,248 in 1998, as compared
to net cash used for financing activities of $1,386,331 in 1997. This difference
was principally attributable to the Company's using $1,837,424 of cash flow in
1997 to retire the outstanding balance of its bank line of credit.
In August 1996, Chase Bank of Texas ("the Bank") extended to the company an
unsecured $7.5 million revolving line of credit with an April 30, 1998, maturity
date. In April 1998, the commitment was extended to mature in April 2000 at an
interest rate of prime minus one and one-half percent (1.5%) or the London
Interbank Offering Rate ("LIBOR") plus one and one-quarter percent (1.25%). The
line was used from time to time for brief periods for working capital and other
financing needs of the Company. The average daily outstanding balance under the
line during 1998 was $68,167. At December 1998 there was no outstanding balance
due on the line of credit.
The Company's ability to generate cash sufficient to meet its needs for
funding its activities is highlighted by comparing three key liquidity measures
- -- working capital, current ratio (current assets to current liabilities) and
long term debt as a percentage of capitalization, as shown below:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Working Capital $10,147,526 $9,115,930 $8,037,391
Current Ratio 1.64 to 1 1.58 to 1 1.57 to 1
Debt as Percentage of Capitalization 6.9% 5.6% 11.4%
</TABLE>
In 1999, Handy Hardware expects to further expand its existing customer
base in Arkansas and Oklahoma. The Company will finance this expansion with
receipts from sales of stock to new and current Member-Dealers and with
increased revenues from sales to the new Member-Dealers in Arkansas and
Oklahoma. The Company anticipates that this expansion will have a beneficial
effect on its ability to generate cash to meet its funding needs.
Capital Resources
The Company invested $1,113,643 in plant and equipment in 1998. Over the
past five years the Company's investments in plant and equipment have amounted
to more than $6.9 million, and have provided Handy Hardware with the capacity
for growth to meet the increasing demand for merchandise and expanded services.
Management intends to continue to invest prudently at levels commensurate with
the anticipated market expansion and needs of current Member-Dealers.
During 1998, approximately 44.9% ($500,032) of the $1,113,643 amount
invested in plant and equipment was used to purchase warehouse equipment, 32.5%
was invested in upgrading the Company's computer system and used to purchase
order entry terminals. The remainder was used for building improvements
($106,883), in upgrading the Company's auto fleet ($98,417) and to purchase
office fixtures and equipment ($46,988).
The Company has budgeted approximately $3,930,000 for 1999 capital
expenditures. Of this amount, $1,143,771 already has been spent in 1999 to
purchase 30 acres of land for future expansion (plus $31,003 spent in 1998). It
is likely that the remainder of the expenses of this project will be funded
through third-party financing, including its existing line of credit.
Approximately $2,626,000 will be used to decommission and relocate the Company's
current retention pond, construct additional parking and outside storage as well
as prepare the site and begin construction on an expansion to our current
warehouse facility. Approximately $35,000 has been allocated to upgrading the
Company's computer equipment, which upgrades are either programmed to address
the Year 2000 or are not date sensitive. Approximately $25,000 has been
allocated to upgrading the Company's warehouse equipment. The Company has also
11
<PAGE>
allocated approximately $60,000 for improving the automobile fleet and
approximately $40,000 for a printing press. The Company expects to fund the
budgeted capital expenditures described herein from working capital and
utilization of the Company's line of credit.
Year 2000
The Year 2000 issue relates to the problems associated with the inability
of computer programs, computer hardware and other equipment to properly
calculate, store or use data after December 31, 1999. Hardware and software
systems which only use a two-digit convention for keeping track of dates would
improperly interpret the Year 2000 as the Year 1900. Errors of this type can
result in system failures, miscalculations and the disruption of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business. Although the extent of the
problem is not yet known, the ramification of Year 2000 failures are expected to
have a global impact. In response to the Year 2000 issues, the Company has
developed a strategic plan divided into the following phases: assessment of
in-house systems and review of vendor representations, in-house testing and
implementation of remedial actions, third party communications and development
of a contingency plan, as needed.
The first phase of the Company's Year 2000 assessment program began in 1997
at which it out-sourced the upgrade of all accounting software. In addition, the
Company upgraded its midrange hardware platform and midrange software. To date,
all such software has been upgraded and installed, and the licensor of the
Company's software systems has certified that such software is programmed to
properly address Year 2000 scenarios. In addition, the Company's department of
Management Information Systems (the "MIS department") is continuing to evaluate
the Company's information and non-information technology systems. This review is
enabling the MIS department to identify in-house software and non-information
technology or equipment that is date sensitive and should be forwarded for
testing.
After upgrading the Company's accounting software and midrange hardware
platform, the Company began conducting its in-house testing phase. In 1998 all
upgraded midrange software, recently purchased software and other operating
systems identified for testing were presented to its MIS department. The MIS
department completed a portion of the testing phase during the fourth quarter of
1998. The Company did not encounter any material system disruption as a result
of the Year 2000 during testing, and therefore, the Company expects that the
performance of such systems will not be substantially disrupted when addressing
the Year 2000.
During the initial review and testing phase, the Company determined to take
certain actions to reduce the effects of Year 2000 related disruptions on the
Company's activities. Beginning with upgrading the accounting software in 1997,
the Company is continuing to take preventive measures to address issues which
are identified by its MIS department during testing. The testing of accounting
and midrange software is estimated to be completed by the first quarter of 1999
followed by implementation of any remedial actions during the second quarter of
1999. In addition, testing of warehouse management software is expected to begin
during the second quarter of 1999, followed by remedial actions in the same
quarter. Remedial actions may include upgrading or replacing software or other
technology before the end of 1999.
In 1998 the Company began a third phase, which consists of informal
communications with its Member-Dealers, third party suppliers, service providers
and distributors to evaluate the status of their Year 2000 compliance programs.
The Company has received and is relying on Year 2000 readiness reports and
statements periodically issued by third parties, such as telephone service
carriers, insurance carriers, financial services providers and various vendors
of the Company's software programs. In addition, the Company's MIS department
responds to all third party requests for information concerning the status of
the Company's Year 2000 review. All such third party communications are expected
to be completed during the third quarter of 1999. While there can be no
guarantee that the systems of other companies on which the Company relies will
be timely converted or that the conversion will be compatible with the Company's
systems, based on the representations received to date, the Company does not
foresee material disruptions in the Company's business as a result of Year 2000
issues involving third parties.
12
<PAGE>
Although the Company cannot predict with certainty all effects of Year 2000
issues, the Company has developed contingency plans to the extent necessary to
continue business functions in the event an unforeseen material disruption
occurs. The Company believes that such event, at most, will require employees to
manually complete otherwise automated tasks or calculations, such as receiving,
filling and shipping customer orders. The Company does not expect that any
additional training would be required to perform these tasks on a manual basis,
although performing such tasks may require additional time or personnel. The
Company has determined an alternate method for Member-Dealers to forward
purchase orders via telecopier, having received favorable Year 2000 readiness
reports from all third parties involved in providing telecopier service to the
Company. In addition, the Company is continuing to identify, to the extent
possible, other vendors, purchasers or third party contractors to provide
services in order to maintain normal business operations.
The Company's core business activities consist of purchasing and
warehousing hardware inventory which is sold and shipped to Member-Dealers. The
Company maintains a computer system through which Member-Dealers transmit orders
for goods directly to the Company. In addition Company software catalogs
inventory, receives purchase orders, performs accounting functions and tracks
shipping of inventory. Because the Company's "mission critical" equipment
consists mainly of computer software and hardware, the most reasonably likely
worst case Year 2000 scenario for the Company would involve either a failure of
operating systems to properly address Year 2000 scenarios or a prolonged
disruption of power sources on which these systems rely. Such events could
result in a business interruption that could materially affect the Company's
operations, liquidity or capital resources. The Company is continuing to test
operating systems to predict and reduce the effects of Year 2000 disruptions.
However, no economically feasible contingency plan has been developed for
maintaining a separate and duplicate secondary power supply for every major
component of the Company's core equipment. The Company is relying upon
representations by these third parties that no material disruption of services
are anticipated as a result of the Year 2000.
As of December 31, 1998, the cost for implementing the Company's Year 2000
program is $350,000. The Company will continue to utilize both internal and
external resources to anticipate and address the effects of Year 2000 scenarios.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
13
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
REPORT OF EXAMINATION
DECEMBER 31, 1998
14
<PAGE>
[Clyde D. Thomas & Company, P.C. Letterhead]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Handy Hardware Wholesale, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Handy Hardware Wholesale,
Inc., as of December 31, 1998 and 1997, and the related statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Handy Hardware Wholesale, Inc., as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Clyde D. Thomas & Company, P.C.
--------------------------------------
CLYDE D. THOMAS & COMPANY, P. C.
Certified Public Accountants
February 18, 1999
Pasadena, Texas
15
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECMEBER 31,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 1,113,122 $ 1,123,842
Accounts receivable, net of subscriptions receivable in the
amount of $51,735 for 1998 and $43,451 for 1997 10,335,445 10,032,045
Inventory (Note 1) 14,106,010 13,395,947
Note receivable (Note 2) 10,174 5,394
Prepaid expenses 371,322 264,280
Prepaid income tax 105,884 -
------------ ------------
$ 26,041,957 $ 24,821,508
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
At cost, less accumulated depreciation of
$4,517,166 (1998) and $4,148,927 (1997) (Note 1) $ 9,516,835 $ 9,408,768
------------ ------------
OTHER ASSETS
- ------------
Notes receivable (Note 2) $ 130,362 $ 120,513
Deferred compensation funded 329,084 284,901
Prepaid expenses 23,959 71,596
------------ ------------
$ 483,405 $ 477,010
------------ ------------
TOTAL ASSETS $ 36,042,197 $ 34,707,286
------------ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Notes payable - Stock - Current portion (Note 3) $ 26,750 $ 7,000
Notes payable - Capital Leases (Note 5) 58,308 52,488
Accounts payable - Trade 14,912,983 14,550,157
Accrued expenses payable 896,390 1,050,680
Current income tax payable - 45,253
------------ ------------
$ 15,894,431 $ 15,705,578
------------ ------------
NONCURRENT LIABILITIES
- ----------------------
Notes payable - Stock - Noncurrent portion (Note 3) $ 521,280 $ 223,750
Notes payable - Capital Leases (Note 5) 66,864 125,172
Notes payable - Vendor consignment merchandise 114,707 117,196
Deferred compensation payable 329,084 284,901
Deferred income taxes payable (Notes 1 and 4) 248,033 264,836
------------ ------------
$ 1,279,968 $ 1,015,855
------------ ------------
Total Liabilities $ 17,174,399 $ 16,721,433
------------ ------------
</TABLE>
16
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECMEBER 31,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
STOCKHOLDERS' EQUITY
- --------------------
Common stock, Class A, authorized 20,000 shares, $100
par value per share, issued 8,930 and 8,680 shares $ 893,000 $ 868,000
Common stock, Class B, authorized 100,000 shares, $100
par value per share, issued 55,667 and 52,513 shares 5,566,700 5,251,300
Common stock, Class B subscribed, 4,309.98 and
4,361.35 shares 430,998 436,135
Less subscriptions receivable (25,867) (21,725)
Preferred stock, 7% cumulative, authorized 100,000
shares $100 par value per share, issued 58,246.50
and 55,001.75 shares 5,824,650 5,500,175
Preferred stock subscribed, 4,309.98 and 4,361.35 shares 430,998 436,135
Less subscriptions receivable (25,868) (21,726)
Paid in surplus 339,238 314,731
------------ ------------
$ 13,433,849 $ 12,763,025
------------ ------------
Retained earnings exclusive of other comprehensive earnings (Note 10) $ 5,368,885 $ -
Retained earnings applicable to other comprehensive earnings (Note 10) 65,064 -
------------ ------------
Total retained earnings $ 5,433,949 $ 5,222,828
------------ ------------
Total Stockholders' Equity $ 18,867,798 $ 17,985,853
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,042,197 $ 34,707,286
------------------------------------------ ============ =============
</TABLE>
See accompanying notes.
17
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECMEBER 31,
----------------------------------------------------------
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
EARNINGS
- --------
Net sales $146,009,972 $128,112,754 $120,698,632
Sundry income 915,430 853,319 718,003
------------ ------------ ------------
TOTAL EARNINGS $146,925,402 $128,966,073 $121,416,635
-------------- ------------ ------------ ------------
EXPENSES
- --------
Net material costs $130,554,986 $113,213,122 $106,732,258
Payroll costs 7,466,033 6,787,426 6,390,319
Other operating costs 7,496,431 6,753,003 6,264,249
Interest expense 45,273 42,804 172,483
------------ ------------ ------------
TOTAL EXPENSES $145,562,723 $126,796,355 $119,559,309
-------------- ------------ ------------ ------------
NET EARNINGS BEFORE PROVISION FOR FEDERAL INCOME TAX
- ---------------------------------------------------- $ 1,362,679 $ 2,169,718 $ 1,857,326
PROVISION FOR FEDERAL INCOME TAX (Note 4) 485,530 761,515 651,104
- ----------------------------------------- ------------ ------------ ------------
NET EARNINGS $ 877,149 $ 1,408,203 $ 1,206,222
- ------------- ------------ ------------ ------------
OTHER COMPREHENSIVE EARNINGS
- ----------------------------
Unrealized gain on securities (Note 10) $ 24,758 $ - $ -
Provision for federal income tax (Note 4) 8,418 - -
------------ ------------ ------------
Other comprehensive earnings net of tax 16,340 - -
------------ ------------ ------------
TOTAL COMPREHENSIVE EARNINGS $ 893,489 $ 1,408,230 $ 1,206,222
- ----------------------------
LESS DIVIDENDS ON PREFERRED STOCK 682,368 620,812 515,029
- --------------------------------- ------------ ------------ ------------
NET EARNINGS APPLICABLE
TO COMMON STOCKHOLDERS $ 211,121 $ 787,391 $ 691,193
---------------------- ============ ============ ============
NET EARNINGS PER SHARE OF COMMON STOCK
CLASS A & CLASS B (Note 1) $ 3.16 $ 12.71 $ 12.13
-------------------------- ============ ============ ============
</TABLE>
See accompanying notes.
18
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECMEBER 31,
----------------------------------------------------------
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCK, CLASS A $100 PAR VALUE
- ------------------------------------
Balance at January 1, $ 868,000 $ 822,000 $ 796,000
Stock issued 83,000 80,000 65,000
Stock canceled (58,000) (34,000) (39,000)
------------ ------------ ------------
Balance at December 31, $ 893,000 $ 868,000 $ 822,000
------------ ------------ ------------
COMMON STOCK, CLASS B, $100 PAR VALUE
- -------------------------------------
Balance at January 1, $ 5,251,300 $ 4,773,300 $ 4,314,900
Stock issued 659,000 601,700 591,700
Stock canceled (343,600) (123,700) (133,300)
------------ ------------ ------------
Balance at December 31, $ 5,566,700 $ 5,251,300 $ 4,773,300
------------ ------------ ------------
COMMON STOCK, CLASS B, SUBSCRIBED
- ---------------------------------
Balance at January 1, $ 436,135 $ 403,651 $ 391,535
Stock subscribed 658,663 627,484 596,416
Transferred to stock (663,800) (595,000) (584,300)
------------ ------------ -------------
Balance at December 31, $ 430,998 $ 436,135 $ 403,651
Less subscription receivable (25,867) (21,725) (22,757)
------------ ------------ ------------
Total $ 405,131 $ 414,410 $ 380,894
------------ ------------ ------------
PREFERRED STOCK, 7% CUMULATIVE $100 PAR VALUE
- ---------------------------------------------
Balance at January 1, $ 5,500,175 $ 5,021,375 $ 4,563,450
Stock issued 691,000 619,900 606,300
Stock canceled (366,525) (141,100) (148,375)
----------- ----------- ------------
Balance at December 31, $ 5,824,650 $ 5,500,175 $ 5,021,375
----------- ----------- ------------
PREFERRED STOCK, 7% CUMULATIVE SUBSCRIBED
- -----------------------------------------
Balance at January 1, $ 436,135 $ 403,652 $ 391,535
Stock subscribed 658,663 627,483 596,417
Transferred to stock (663,800) (595,000) (584,300)
----------- ----------- ------------
Balance at December 31, $ 430,998 $ 436,135 $ 403,652
Less subscription receivable (25,868) (21,726) (22,758)
----------- ----------- ------------
Total $ 405,130 $ 414,409 $ 380,894
----------- ----------- ------------
PAID IN CAPITAL SURPLUS
- -----------------------
Balance at January 1, $ 314,731 $ 296,965 $ 280,277
Additions 24,507 17,766 16,688
----------- ----------- ------------
Balance at December 31, $ 339,238 $ 314,731 $ 296,965
----------- ----------- ------------
TREASURY STOCK, AT COST
COMMON STOCK, CLASS A, AT COST
- ---------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (58,000) (34,000) (39,000)
Stock canceled 58,000 34,000 39,000
Stock issued - - -
----------- ----------- ------------
Balance at December 31, $ - $ - $ -
----------- ----------- ------------
19
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PAGE 2
YEAR ENDED DECMEBER 31,
----------------------------------------------------------
1998 1997 1996
-------------- ------------ ------------
COMMON STOCK, CLASS B, AT COST
------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (343,600) (123,700) (133,300)
Stock canceled 343,600 123,700 133,300
Stock issued - - -
-------------- ------------ ------------
Balance at December 31, $ - $ - $ -
-------------- ------------ ------------
PREFERRED STOCK, 7% CUMULATIVE AT COST
--------------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (366,525) (141,100) (148,375)
Stock canceled 366,525 141,100 148,375
Stock issued - - -
-------------- ------------ ------------
Balance at December 31, $ - $ - $ -
-------------- ------------ ------------
TOTAL TREASURY STOCK $ - $ - $ -
-------------------- -------------- ------------ ------------
RETAINED EARNINGS
- -----------------
Balance at January 1 $ 5,222,828 $ 4,435,437 $ 3,744,244
Add: Net earnings year ending December 31 877,149 1,408,203 1,206,222
Other comprehensive earnings (Note 10) 16,340 - -
Deduct: Cash dividends on Preferred Stock (Note 1) 682,368 620,812 515,029
-------------- ------------ ------------
Balance at December 31, $ 5,433,949 $ 5,222,828 $ 4,435,437
-------------- ------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 18,867,798 $ 17,985,853 $ 16,110,865
- -------------------------- ============== ============ ============
</TABLE>
See accompanying notes.
20
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net earnings $ 893,489 $ 1,408,203 $ 1,206,222
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 1,005,576 947,004 933,983
Deferred income tax (16,803) (32,937) (16,637)
(Gain) Loss on sale of property, plant, and equipment (10,986) (3,493) (1,000)
Unrealized gain (increase in fair market value of
securities) (24,758) - -
Changes in assets and liabilities:
(Increase) Decrease in Accounts Receivable (303,400) (825,868) (2,641,404)
(Increase) Decrease in Notes Receivable (14,629) (20,063) 3,639
(Increase) Decrease in Deferred
Compensation Investment - (39,791) (30,726)
(Increase) Decrease in Inventory (710,063) (1,974,820) (966,057)
(Increase) Decrease in Prepaid Expenses (165,289) 70,665 (23,489)
Increase (Decrease) in Note Payable for Vendor
Consignment Merchandise (2,489) 11,352 (2,169)
Increase (Decrease) in Accounts Payable 362,826 2,617,806 2,412,614
Increase (Decrease) in Accrued Expenses Payable (154,290) (3,813) 139,660
Increase (Decrease) in Current Income Tax Payable (45,253) (22,488) 67,741
Increase (Decrease) in Deferred
Compensation Payable 44,183 39,791 30,726
----------- ----------- ------------
Net cash provided by (used for) operating activities $ 858,114 $ 2,171,548 $ 1,113,103
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant, and equipment $(1,113,643) $ (896,362) $ (617,062)
Investment in deferred compensation funded (9,650) - -
Sale of property, plant and equipment 10,986 10,660 4,852
Reinvested dividends, interest, and capital gains (9,775) - -
----------- ------------ ------------
Net cash provided by (used for) investing activities $(1,122,082) $ (885,702) $ (612,210)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Increase (Decrease) in Mortgage Payable $ - $ - $(2,823,306)
Increase (Decrease) in Notes Payable - Line of Credit - (1,837,424) 1,837,424
Increase (Decrease) in Notes Payable - Lease (52,488) (12,632) (71,617)
Increase (Decrease) in Notes Payable - Stock 317,280 (3,060) 57,000
(Increase) Decrease in Subscription Receivable (8,284) 2,064 (11,199)
Proceeds from issuance of stock 1,447,233 1,384,333 1,303,921
Purchase of Treasury Stock (768,125) (298,800) (320,675)
Dividends paid (682,368) (620,812) (515,029)
----------- ------------ ------------
Net Cash provided by (used for) financing activities $ 253,248 $ (1,386,331) $ (543,481)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (10,720) $ (100,485) (42,588)
----------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,123,842 1,224,327 1,266,915
- ---------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,113,122 $ 1,123,842 $ 1,224,327
- ---------------------------------------- ============ ============ ============
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest expense paid $ 45,273 $ 42,804 $ 172,483
Income tax payments 616,635 724,440 492,922
</TABLE>
See accompanying notes.
21
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ACCOUNTING POLICIES
Nature 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.
Cash
----
For purposes of the statement of cash flows, Handy Hardware Wholesale,
Inc., the Company, considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. The
company maintains a checking account which, at times, exceeds the FDIC
coverage of $100,000 normally extended to such accounts. At December 31,
1998, the balance of this account amounted to $1,096,571.
Inventories
-----------
Inventories are valued at the lower of cost or market method, determined
by the first in, first out method, with proper adjustment having been
made for any old or obsolete merchandise.
Property, Plant, and Equipment
------------------------------
Property, plant, and equipment are carried at cost. Depreciation of
property accounts for financial statement presentation is based on
estimated useful lives and methods as follows:
<TABLE>
<CAPTION>
LIFE METHOD OF
ASSET IN YEARS DEPRECIATION
------------------------------------------- -------- ------------
<S> <C> <C>
Building 30-39 Straight Line
Furniture and warehouse equipment including
computer and data processing equipment 3-7 Straight Line/MACRS
Transportation equipment 3-5 Straight Line
</TABLE>
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land $ 2,027,797 $ 2,027,797
Buildings & improvements 7,859,100 7,752,216
Furniture, computer, warehouse equipment 3,721,832 3,341,692
Transportation equipment 425,272 435,990
------------ ------------
$ 14,034,001 $13,557,695
Less: Accumulated depreciation 4,517,166 4,148,927
------------ -----------
$ 9,516,835 $ 9,408,768
============ ===========
</TABLE>
Depreciation expense for the year ended December 31, 1998, amounted
to $1,005,576 compared with $947,004 for the year ended December 31, 1997.
22
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 2
DECEMBER 31, 1998
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------
Changes in Property, Plant, and Equipment for the year ended December 31, 1998,
are shown in the following schedule:
<TABLE>
<CAPTION>
BALANCE ADDITIONS OTHER BALANCE
1-1-98 AT COST RETIREMENTS CHANGES 12-31-98
----------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Land $ 2,027,797 $ - $ - $ - $ 2,027,797
Buildings and improvements 7,752,216 106,884 - - 7,859,100
Furniture, Computers and
warehouse equipment 3,341,692 908,343 528,203 - 3,721,832
Transportation equipment 435,990 98,416 109,134 - 425,272
----------- ----------- ---------- ------ -----------
$13,557,695 $ 1,113,643 $ 637,337 $ - $14,034,001
=========== ========= ========== ====== ===========
</TABLE>
Changes in Property, Plant, and Equipment for the year ended December 31, 1997,
are shown in the following schedule:
<TABLE>
<CAPTION>
BALANCE ADDITIONS OTHER BALANCE
1-1-97 AT COST RETIREMENTS CHANGES 12-31-97
----------- --------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
Land $ 2,027,797 $ - $ - $ - $ 2,027,797
Buildings and improvements 7,479,697 279,710 7,191 - 7,752,216
Furniture, Computers and
warehouse equipment 2,875,288 528,004 61,600 - 3,341,692
Transportation equipment 463,853 88,648 116,511 - 435,990
----------- ----------- ---------- ------ -----------
$12,846,635 $ 896,362 $ 185,302 $ - $13,557,695
=========== =========== ========= ====== ===========
</TABLE>
Changes in Property, Plant, and Equipment for the year ended December 31, 1996,
are shown in the following schedule:
<TABLE>
<CAPTION>
BALANCE ADDITIONS OTHER BALANCE
1-1-96 AT COST RETIREMENTS CHANGES 12-31-96
----------- --------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
Land $ 2,027,797 $ - $ - $ - $ 2,027,797
Buildings and improvements 7,450,391 29,305 - - 7,479,697
Furniture, Computers and
warehouse equipment 2,960,102 483,291 568,105 - 2,875,288
Transportation equipment 473,706 104,465 114,318 - 463,853
----------- ---------- ---------- ------ -----------
$12,911,996 $ 617,061 $ 682,423 $ - $12,846,635
=========== ========== ========== ====== ===========
</TABLE>
23
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 3
DECEMBER 31, 1998
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Changes in Accumulated Depreciation for Property, Plant, and Equipment for the
year ended December 31, 1998, are shown in the following schedule:
<TABLE>
<CAPTION>
BALANCE ADDITIONS OTHER BALANCE
1-1-98 AT COST RETIREMENTS CHANGES 12-31-98
------- --------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Land $ - $ - $ - $ - $ -
Buildings and improvements 1,836,818 256,721 - - 2,093,539
Furniture, Computers and
warehouse equipment 2,041,174 641,590 528,203 - 2,154,561
Transportation equipment 270,935 107,265 109,134 - 269,066
----------- ---------- ---------- ------ -----------
$ 4,148,927 $1,005,576 $ 637,337 $ - $ 4,517,166
=========== ========== ========== ====== ===========
</TABLE>
Changes in Accumulated Depreciation for Property, Plant, and Equipment for the
year ended December 31, 1997, are shown in the following schedule:
<TABLE>
<CAPTION>
BALANCE ADDITIONS OTHER BALANCE
1-1-97 AT COST RETIREMENTS CHANGES 12-31-97
------- --------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Land $ - $ - $ - $ - $ -
Buildings and improvements 1,602,694 241,315 7,191 - 1,836,818
Furniture, Computers and
warehouse equipment 1,497,560 605,214 61,600 - 2,041,174
Transportation equipment 279,804 100,475 109,344 - 270,935
----------- ---------- ---------- ------ -----------
$ 3,380,058 $ 947,004 $ 178,135 $ - $ 4,148,927
=========== ========== ========== ====== ===========
</TABLE>
Changes in Accumulated Depreciation for Property, Plant, and Equipment for the
year ended December 31, 1996, are shown in the following schedule:
<TABLE>
<CAPTION>
BALANCE ADDITIONS OTHER BALANCE
1-1-96 AT COST RETIREMENTS CHANGES 12-31-96
--------- --------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Land $ - $ - $ - $ - $ -
Buildings and improvements 1,364,782 237,912 - - 1,602,694
Furniture, Computers and
warehouse equipment 1,464,406 601,259 568,105 - 1,497,560
Transportation equipment 295,458 94,812 110,466 - 279,804
----------- ---------- ---------- ------ -----------
$ 3,124,646 $ 933,983 $ 678,571 $ - $ 3,380,058
=========== ========== ========== ====== ===========
</TABLE>
24
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 4
DECEMBER 31, 1998
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------
Income Taxes
------------
Deferred income taxes are provided to reflect the tax effect of temporary
differences between financial statement and federal tax reporting arising
from the following:
1. Depreciation for federal income tax purposes is computed under the
Straight Line Method for assets acquired prior to December 31, 1986
and the Modified Accelerated Cost Recovery System for assets acquired
after December 31, 1986. For financial statement purposes the Straight
Line Method and Modified Accelerated Cost Recovery System are being
used. The following chart indicates the difference in the depreciation
calculations:
<TABLE>
<CAPTION>
Annual Tax Depreciation Total
Tax Depreciation (over) under Book Accumulation
Over (Under) Book Depreciation for Tax Over Book
Year Depreciation Deleted Assets Depreciation
---- ----------------- ----------------- ---------------
<S> <C> <C> <C>
12-31-96 23,003 (4,582) 1,331,472
12-31-97 (34,032) 639 1,298,079
12-31-98 (21,873) (5,322) 1,270,884
</TABLE>
2. Deferred compensation is accrued as follows:
Balance, December 31, 1997 $ 284,901
Addition for year ended December 31, 1998 44,183
----------
Balance, December 31, 1998 $ 329,084
==========
The deferred compensation has not been deducted for income tax
purposes.
3. Internal Revenue Code Section 263A requires certain costs to be
capitalized for inventory purposes. The following schedule shows the
amount reported on the tax return.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Book inventory $14,106,010 $13,395,947
Adjustment for 263A Uniform
Capitalization costs 292,008 288,788
----------- -----------
Inventory for tax return $14,398,018 $13,684,735
=========== ===========
</TABLE>
The Company accounts for any tax credits as a reduction of income tax
expense in the year in which such credits arise.
25
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 5
DECEMBER 31, 1998
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Earnings Per Share of Common Stock
----------------------------------
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 stock issued, stock subscribed, dividends on preferred stock, and
treasury stock as set forth by Accounting Principles Board Opinion No. 15
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net Earnings $ 893,489 $1,408,203 $1,206,222
Less: Dividends on Preferred Stock 682,368 620,812 515,029
----------- ---------- ----------
$ 211,121 $ 787,391 $ 691,193
Weighted average shares of common stock
(Class A and Class B outstanding) 66,763 61,934 56,984
Net Earnings (Loss) per share of
common stock 3.16 12.71 12.13
</TABLE>
Preferred Stock Dividends
-------------------------
Cash dividends paid on the Company's outstanding preferred stock (par value
$100 per share) were 13% for 1998, 13% for 1997, and 12% for 1996,
pro-rated for the portion of a twelve month period (ending January 31)
during which the preferred stock was held. The weighted average number of
preferred shares outstanding during each 12 month period was used to
calculate the per share cash dividends on preferred stock as reflected
below. Cash dividends have never been paid and are not anticipated to be
paid in the future on either class of the Company's outstanding common
stock.
SCHEDULE OF PREFERRED STOCK DIVIDENDS
During the
Year Ended Weighted Average Per
December 31 Shares Outstanding Share
----------- ------------------ -----
1998 60,531 $11.27
1997 55,929 11.10
1996 51,277 10.04
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.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
26
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 6
DECEMBER 31, 1998
NOTE 2 - NOTES RECEIVABLE
- -------------------------
Notes receivable reflect amounts due to the Company from its Member-Dealers
under a deferred payment agreement and an installment sales 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:
December 31,
---------------------------
1998 1997
---------- -----------
Current $ 10,174 $ 5,394
Nonncurrent 130,362 120,513
-------- -------
Total $ 140,536 $ 125,907
========== ===========
NOTE 3 - 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 5.75% to 7.0%.
Notes payable - stock are classified as follows:
December 31,
---------------------------
1998 1997
---------- -----------
Current $ 26,750 $ 7,000
Nonncurrent 521,280 223,750
---------- -----------
Total $ 548,030 $ 230,750
========== ===========
Principal payments applicable to the next five years are as follows:
1999 $ 26,750
2000 107,200
2001 57,000
2002 32,800
2003 324,280
-----------
$ 548,030
==========
27
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 7
DECEMBER 31, 1998
NOTE 4- 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.
The major categories of deferred income tax provisions are as follows
(based on FASB 109):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Excess of tax over book depreciation $1,270,884 $1,298,079 $1,331,472
Allowance for bad debts (7,195) (7,195) (7,195)
Inventory - ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (292,008) (288,788) (249,239)
Deferred compensation (242,173) (223,165) (199,235)
---------- ---------- ----------
Total $ 729,508 $ 778,931 $ 875,803
Statutory tax rate 34% 34% 34%
---------- ---------- ----------
Cumulative deferred income tax payable $ 248,033 $ 264,836 $ 297,773
========== ========== ==========
Classified as:
Current liability $ - $ - $ -
Noncurrent liability 248,033 264,836 297,773
---------- ---------- ----------
$ 248,033 $ 264,836 $ 297,773
========== ========== ==========
</TABLE>
Reconciliation of income taxes on difference between tax and financial
accounting:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Principal components of income tax expense Federal:
Current
Income tax paid $ 616,635 $ 724,440 $ 492,922
Carryover of prepayment from prior year - 24,686 107,078
Current income tax payable - 45,253 67,741
---------- ---------- ----------
$ 616,635 $ 794,379 $ 667,741
Carryover to subsequent year 105,883 - -
---------- ---------- ----------
Income tax for tax reporting at statutory rate of 34% $ 510,752 $ 794,379 $ 667,741
Deferred
Adjustments for financial reporting:
Depreciation (9,246) (11,354) 6,263
263A Uniform capitalization costs (1,095) (13,447) (13,831)
Other (6,463) (8,063) (9,069)
---------- ---------- ----------
Provision for federal income tax (U.S.) $ 493,948 $ 761,515 $ 651,104
========== ========== ==========
</TABLE>
The Company is not exempt from income tax except for municipal bond
interest earned in an amount of $1,985.
28
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 8
DECEMBER 31, 1998
NOTE 5 - LEASES
- ---------------
Operating Leases
----------------
The Company leases certain trucks and trailers under long-term operating
lease agreements. The leases expire in 2000, 2001, 2002, 2003, and 2004.
The following is a schedule of future minimum lease payments for operating
leases as of December 31, 1998 and 1997 for the subsequent five years:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
----------- ----------
1998 $ - $ 543,843
1999 636,736 543,843
2000 630,288 537,394
2001 488,372 359,056
2002 272,449 102,192
2003 104,740 -
Capital Leases
--------------
The Company leases equipment as a capital lease. The following is an
analysis of the leased property under capital leases by major class:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
----------- ----------
Class of Property
Furniture, computers,
and warehouse equipment $ 168,316 $ 473,164
Transportation equipment - 39,971
---------- ----------
$ 168,316 $ 513,135
Less: Accumulated depreciation 111,445 369,089
---------- ----------
$ 56,871 $ 144,046
========== ==========
The following is a schedule by year of future minimum lease payments for
capital leases.
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
1998 $ - $ 52,488
1999 58,308 58,308
2000 41,383 41,383
2001 7,889 7,889
2002 17,592 17,592
---------- ----------
TOTAL $ 125,172 $ 177,660
========== ==========
The lease payments are reflected in the Balance Sheet as current and
noncurrent obligations under capital leases of $58,308 and $66,864,
respectively. The estimated interest rates range from 4% to 9%.
29
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 9
DECEMBER 31, 1998
NOTE 5 - LEASES (CONTINUED)
- --------------------------
Rental Expenses
---------------
Rental expenses for the preceding three years are:
1998 $1,251,805
1997 1,041,985
1996 909,912
NOTE 6 - RELATED PARTY TRANSACTIONS
- -----------------------------------
None
The Company is owned entirely by its dealers and former dealers. No
shareholder is the beneficial owner of more than five percent of any class
of the Company's voting securities. Substantially all sales are made to the
Member-Dealers (Owners) of the Company.
NOTE 7 - RETIREMENT PLAN - HANDY HARDWARE WHOLESALE, INC. 401(K) PROFIT SHARING
PLAN
- --------------------------------------------------------------------------------
During 1997, the Company transferred the former Profit Sharing and Savings
Plan to a 401(K)Profit Sharing Plan to help employees achieve financial
security during their retirement years. Employees are eligible to
participate in the plan if they have attained age 21 and have completed one
year of service with the Company. The Plan includes a 401(K) arrangement to
allow employees to contribute to the Plan a portion of their compensation,
known as elective deferrals. Each year, the Company will make matching
contributions in the amount determined by the Board of Directors at its
discretion. The Board of Directors may choose not to make matching
contributions to the Plan for a particular year. During 1998, the employees
could contribute up to 6% of their gross annual compensation with 50% of
such contribution matched by the Company. In addition, the employees could
contribute an additional 9% with no Company matching contribution.
Employees are 100% vested at all times for elective deferrals in the Plan.
The Plan permits the Company to contribute a discretionary amount for a
plan year designated as qualified nonelective contributions. Company
qualified nonelective contributions are allocated to employees in the same
proportion that the number of points per employee bears to the total points
of all participants. Employees receive one point for each $1,000 of
compensation and one point for each year of service. Employees' interests
in the value of the contributions made to their account first partially
vest after three years of service at 20% and continue to vest an additional
20% each year until fully vested after seven years of service.
Participating employees who reach age 65 are fully vested without regard to
their number of years of service. Benefits are paid to eligible employees
under the plan in lump sum upon retirement, or at the direction of the
employee, pursuant to the terms of an annuity plan selected by the
employee. The amount of cost recognized during the years ended December 31,
is as follows:
1998 $ 506,812
1997 599,475
1996 561,318
30
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 10
DECEMBER 31, 1998
NOTE 8 - STOCKHOLDERS' EQUITY
- -----------------------------
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.
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 and for any additional store, ten shares of Preferred Stock, 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
$2,000, the Company applies $2,000 to the purchase of ten shares of Class B
Common Stock and ten shares of Preferred Stock at $100 per share.
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.
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 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.
31
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 11
DECEMBER 31, 1998
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------
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 $3,000, 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.
Stock Repurchase
-----------------
In 1998 and 1997 the Board approved the continuation of its program of
repurchasing certain shares from those shareholders who are over-invested
in the Company's capital stock by $4,000 or more. The amount repurchased
was the amount of stock (based on purchase price of $100 per share) equal
to one fourth of the over-invested amount, equally divided between shares
of Preferred Stock and Class B Common Stock. In connection with the
repurchase, the minimum required investment in the Company's capital stock
is $10,000. In 1998 and 1997 the Company repurchased 284 and 348 shares for
$28,400 and $34,800, respectively.
NOTE 9 - LINE OF CREDIT
- -----------------------
In August 1996, Chase Bank of Texas ("the Bank") extended to the Company an
unsecured $7.5 million revolving line of credit with an April 30, 1998,
maturity date. In April, 1998, the commitment was extended to mature in
April, 2000, at an interest rate of prime minus one and one-half percent
(1.5%) or the London Interbank Offering Rate ("LIBOR") plus one and
one-quarter percent (1.25%). The line was used from time to time for
working capital and other financing needs of the Company. At December,
1998, there was no outstanding balance due on the line of credit. Borrowing
against and payments of the line of credit during the year were as follows.
<TABLE>
<CAPTION>
BALANCE BORROWING BALANCE INTEREST INTEREST
1-01-98 1998 PAYMENTS 12-31-98 RATE PAID
------- ----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ -0- $ 4,320,000 $ 4,320,000 $ -0- 7%/6.25% $ 4,838
</TABLE>
Terms of the line of credit require monthly payments of accrued interest
with the balance, if any, of the loan to be repaid on April 30, 2000.
32
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 12
DECEMBER 31, 1998
NOTE 10 - COMPREHENSIVE EARNINGS
- --------------------------------
The following disclosures include those required by FASB 115 for financial
statements beginning after December 15, 1997.
1. Deferred compensation funded in the amount of $329,084 on the Balance
Sheet as a non-current asset at December 31, 1998, includes equity
securities classified as investments available for sale in the amount of
$279,644 at fair market value. The $279,644 includes $98,581 unrealized
gain on securities resulting from the increase in fair market value.
2. Changes in equity securities
<TABLE>
<CAPTION>
Year Ended
December 31, 1998 Cumulative
----------------- ----------
<S> <C> <C>
Balance, Beginning $ 238,941 $ -
Purchases 6,170 98,890
Dividends, interest and capital gains 9,775 82,173
Unrealized gains on securities resulting from increase
in fair market value 24,758 98,581
--------- ---------
Balance, December 31, 1998 $ 279,644 $ 279,644
========= =========
</TABLE>
3. Components of Comprehensive Earnings
<TABLE>
<CAPTION>
Total Other Comprehensive Net Earnings Exclusive
Comprehensive Earnings - Unrealized of Other
Earnings Gains on Securities Comprehensive Earnings
------------- --------------------- ----------------------
<S> <C> <C> <C>
Net Earnings Before Provision for
Federal Income Tax $ 1,387,437 $ 24,758 $ 1,362,679
Provision for Federal Income Tax 493,948 8,418 485,530
----------- ------------ -----------
Net Earnings $ 893,489 $ 16,340 $ 877,149
=========== ============ ===========
</TABLE>
4. Components of Retained Earnings
<TABLE>
<CAPTION>
Retained Earnings Retained Earnings
Applicable to Other Exclusive of Other
Total Comprehensive Earnings Comprehensive Earnings
----------- ---------------------- ----------------------
<S> <C> <C> <C>
Balance, January 1, 1998 $ 5,222,828 $ 48,724 $ 5,174,104
Add: Net earnings year ended
December 31, 1998 893,489 16,340 877,149
Deduct: Cash Dividends on
Preferred Stock 682,368 - 682,368
----------- ------------ -----------
Balance, December 31, 1998 $ 5,433,949 $ 65,064 $ 5,368,885
=========== ============ ===========
</TABLE>
33
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 13
DECEMBER 31, 1998
NOTE 11 - SUBSEQUENT EVENT
- --------------------------
The Company purchased approximately 30 acres of land on January 25, 1999 in
the amount of $1,174,264 to be used for expansion. This project may be
funded through third party financing including borrowing on the Company's
existing line of credit.
NOTE 12 - LITIGATION
- --------------------
In the opinion of the Company, at December 31, 1998, there was no pending
or threatened litigation that would have a material effect on the financial
position or results of operations of the Company at December 31, 1998.
NOTE 13 - OTHER DISCLOSURES
- ---------------------------
1. Costs incurred for advertising are expensed when incurred.
2. The Company wholesales hardware to its dealers in Texas, Oklahoma,
Louisiana, Alabama, Mississippi, Arkansas, and Florida.
3. The Company is not a party to any legal proceedings or environmental
clean-up actions that it believes will have a material adverse effect
on its financial position or results of operations.
34
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Items 10-13 are incorporated by reference to the Company's Proxy Statement
for its annual stockholders' meeting which will be subsequently filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report
Page
(1) Financial Statements Reference
-------------------- ---------
Auditor's Report........................................... 15
Balance Sheets at December 31,
1998 and 1997............................................ 16
Statements of Earnings for the
years ended December 31,
1998, 1997 and 1996 ..................................... 18
Statements of Stockholders' Equity
for the years ended December 31,
1998, 1997 and 1996 ..................................... 19
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ........................ 21
Notes to Financial Statements.............................. 22
(2) Financial Statement Schedules
-----------------------------
Schedule V has been omitted because none of the items
reflected thereon was in excess of 1% of total sales for the
periods covered.
All other schedules are omitted because the information is not
required or because the information required is in the
financial statements or notes thereto.
35
<PAGE>
(3) Exhibits
Exhibit
Number
-------
3.1 Articles of Incorporation of Handy Hardware Wholesale, Inc.,
as amended (Filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995, and incorporated herein by reference).
3.2 Bylaws of Handy Hardware Wholesale, Inc. (Filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1983, and incorporated herein by
reference).
4.1 Specimen copy of certificate representing Class A Common
Stock (Filed as Exhibit 4.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1983, and
incorporated herein by reference).
4.2 Specimen copy of certificate representing Class B Common
Stock (Filed as Exhibit 4.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1983, and
incorporated herein by reference).
4.3 Specimen copy of certificate representing Preferred Stock
(Filed as Exhibit 4.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1983, and incorporated
herein by reference).
4.4 Form of Subscription to Shares of Handy Hardware Wholesale,
Inc. for Class A Common Stock, Class B Common Stock and
Preferred Stock (Filed as Exhibit 4.4 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991, and incorporated herein by reference).
*10.1 Employment Agreement, as amended, between Handy Hardware
Wholesale, Inc. and James D. Tipton (Filed as Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1983, and incorporated herein by
reference).
*10.2 Second Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated July 19, 1985 (Filed as Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1985, and incorporated herein by reference).
*10.3 Third Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated December 16, 1988 (Filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by reference).
*10.4 Fourth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated September 20, 1991 (Filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
10.5 Split-Dollar Agreement dated November 13, 1991 between the
Company and James D. Tipton (Filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
10.6 Form of Dealer Contract (Alabama, Arkansas, Florida,
Louisiana, Oklahoma and Texas) (Filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
36
<PAGE>
10.7 Form of Dealer Contract (Mississippi) (Filed as Exhibit 10.7
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, and incorporated herein by
reference).
*10.8 Fifth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated September 7, 1993. (Filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and incorporated herein by reference.)
10.9 Loan Agreement dated March 30, 1993, between Texas Commerce
Bank, N.A., and Handy Hardware Wholesale, Inc. (filed as
Exhibit I to the Company's Quarterly Report on Form 10- Q
for the quarter ended June 30, 1993, and incorporated herein
by reference).
*10.10 Amendment and Restatement of Credit Agreement between Handy
Hardware Wholesale, Inc. and Texas Commerce Bank, N.A.,
dated as of April 30, 1996. (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 and incorporated herein by
reference).
*10.11 Sixth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated November 14, 1995.
*10.12 Seventh Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated September 30, 1996.
*10.13 Eighth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated December 24, 1997.
*,->10.14 Ninth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated December 31, 1998.
->10.15 Second Amendment to Amendment and Restatement of Credit
Agreement between the Company and Chase Bank of Texas,
National Association dated April 30, 1998.
->11.1 Statement re computation of per share earnings.
- --------------------------------------
* Management Contract
- ->Filed herewith.
The Company will furnish to any requesting shareholder a copy of any
exhibit upon payment of $.40 per page to cover the expense of furnishing such
copies. Requests should be directed to Tina S. Kirbie, Secretary and Treasurer,
Handy Hardware Wholesale, Inc., 8300 Tewantin Drive, Houston, Texas 77061.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
December 31, 1998.
(c) Exhibits
Listed in Item 14(a)(3) above.
(d) Financial Statement Schedules
Listed in Item 14(a)(2) above.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Handy Hardware Wholesale, Inc., 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 and Chief Executive Officer
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, Handy Hardware Wholesale, Inc., and in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James D. Tipton President, Chief Executive March 26, 1999
- ------------------- Officer and Director
/s/ Tina S. Kirbie Chief Financial and March 26, 1999
- ------------------- Accounting Officer
/s/ Weldon D. Bailey Director March 26, 1999
- -------------------
/s/ Norman J. Bering, II Director March 26, 1999
- -------------------
/s/ Susie Bracht-Black Director March 26, 1999
- -------------------
/s/ Virgil H. Cox Director March 26, 1999
- -------------------
/s/ Samuel J. Dyson Director March 26, 1999
- -------------------
/s/ Robert L. Eilers Director March 26, 1999
- -------------------
/s/ Richard A. Lubke Director March 26, 1999
- -------------------
/s/ Jimmy T. Pate Director March 26, 1999
- -------------------
/s/ Leroy Wellborn Director March 26, 1999
- -------------------
38
Exhibit 10.14
Ninth Amendment to Employment Agreement
Reference is made to an Employment Agreement (hereinafter called
"Agreement") dated July 9, 1980, between Handy Hardware Wholesale, Inc., a Texas
corporation (therein and hereinafter called "Employer"), and James D. Tipton
(therein and hereinafter called "Employee"), the First Amendment to the
Agreement, dated August 18, 1980 (the "First Amendment"), the Second Amendment
to the Agreement, dated July 18, 1985 (the "Second Amendment"), the Third
Amendment to the Agreement, dated December 6, 1988 (the "Third Amendment"), the
Fourth Amendment to the Agreement, dated September 20, 1991 (the "Fourth
Amendment"), the Fifth Amendment to the Agreement, dated September 7, 1993 (the
"Fifth Amendment"), the Sixth Amendment to the Agreement, dated November 14,
1995 (the "Sixth Amendment"), the Seventh Amendment to Employment Agreement,
dated September 30, 1996 (the "Seventh Amendment") and the Eighth Amendment to
Employment Agreement, dated December 24, 1997 (the "Eighth Amendment").
At this time, Employer and Employee wish to amend the Agreement, the First
Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the
Fifth Amendment, Sixth Amendment, the Seventh Amendment and the Eighth Amendment
as herein set forth:
NOW THEREFORE, in consideration of the premises, the agreements herein
contained and other good and valuable considerations, Employer and Employee
hereby amend the Agreement, the First Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the
Seventh Amendment and the Eighth Amendment as follows:
1. Paragraph 3.a. is hereby amended to read as follows:
"a. The term of employment by Employer shall mean the period
commencing August 18, 1980, and terminating December 31, 2000, unless
sooner terminated in accordance with the terms and conditions
hereinafter set forth, provided, however, in the event of the death of
Employee, the term of employment shall end the 60th day after the date
of the death of Employee."
Except as amended above, the Agreement, the First Amendment, the Second
Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the
Sixth Amendment, the Seventh Amendment and the Eighth Amendment remain unchanged
and continue in full force and effect.
This Ninth Amendment is executed in multiple counterparts, each of which
shall have the force and effect of an original, this 31st day of December, 1998.
HANDY HARDWARE WHOLESALE, INC.
/s/ James D. Tipton By: /s/ Virgil H. Cox
-------------------------- --------------------------
James D. Tipton Chairman of the Board
EMPLOYEE EMPLOYER
EXHIBIT 10.15
SECOND AMENDMENT TO AMENDMENT AND RESTATEMENT OF
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDMENT AND RESTATEMENT OF CREDIT AGREEMENT (this
"Amendment") dated effective as of April 30, 1998 (the "Effective Date"), is by
and between HANDY HARDWARE WHOLESALE, INC. ("Borrower"), and CHASE BANK OF
TEXAS, NATIONAL ASSOCIATION, formerly known as Texas Commerce Bank National
Association, a national banking association, whose principal office is located
in Houston, Texas ("Bank").
PRELIMINARY STATEMENT. Bank and Borrower have entered into an Amendment and
Restatement of Credit Agreement dated as of April 30, 1996 ("Credit Agreement")
as amended by a First Amendment to Amendment and Restatement of Credit Agreement
dated as of April 30, 1997. The "Agreement", as used in the Credit Agreement,
shall also refer to the Credit Agreement as amended by this Amendment. All
capitalized terms defined in the Credit Agreement and not otherwise defined
herein shall have the same meanings herein as in the Credit Agreement. Bank and
Borrower have agreed to amend the Credit Agreement to the extent set forth
herein, and in order to, among other things, renew, modify and extend the
Commitment.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, Bank and Borrower hereby agree as follows:
Section 1. Revolving Credit Note. Section 1.1 of the Credit Agreement is amended
by substituting the following for the Section 1.1 of the Credit Agreement:
" Subject to the terms and conditions hereof, Bank agrees to make loans
("Loan" or "Loans") to Borrower from time to time before the Termination
Date, not to exceed at any one time outstanding $7,500,000.00 (the
"Commitment?). Borrower has the right to borrow, repay and reborrow. Each
Loan must be at least the minimum amount required in the Note or the
balance of the Commitment, whichever is less and each repayment must be at
least the amount required in the Note or the principal balance of the Note,
whichever is less. The Loans may only be used for capital expenditures and
working capital. Chapter 346 of the Texas Finance Code will not apply to
this Agreement, the Note or any Loan. The Loans will be evidenced by, and
will bear interest and be payable as provided in, the promissory note of
Borrower dated the Effective Date (together with any and all renewals,
extensions, modifications and replacements thereof and substitutions
therefor, the "Note"), which is given in renewal, modification and
extension of that certain promissory note dated April 30, 1997 in the
original principal amount of $7,500,000.00 (including all prior notes of
which said note represents a renewal, extension, modification, increase,
substitution, rearrangement or replacement thereof, the "Renewed Note").
The parties hereto agree that there is as of the Effective Date an
outstanding principal balance of $0.00 under the Note leaving a balance as
of the Effective Date of $7,500,000.00 under the Commitment available for
Loans subject to the terms and conditions of this Agreement. The "Note" as
used in the Credit Agreement shall also refer to the "Note" as used in this
Amendment. "Termination Date" means the earlier of: (a) April 30, 2000; or
(b) the date specified by Bank pursuant to Section 6.1 hereof."
Section 2. Exhibit B of the Credit Agreement is hereby amended by replacing
prior Exhibit B with the Exhibit B attached hereto and hereby incorporated into
this Amendment and the Credit Agreement for all purposes.
1
<PAGE>
Section 3. Borrower hereby represents and warrants to the Bank that after giving
effect to the execution and delivery of this Amendment: (a) the representations
and warranties set forth in the Credit Agreement are true and correct on the
date hereof as though made on and as of such date; and (b) to the best of the
undersigned's knowledge after reasonable investigation performed in good faith,
no default or Event of Default has occurred under the Agreement and is
continuing as of the date hereof.
Section 4. This Amendment shall become effective as of the Effective Date upon
its execution and delivery by each of the parties named in the signature lines
below.
Section 5. Borrower further acknowledges that each of the other Loan Documents
is in all other respects ratified and confirmed, and all of the rights, powers
and privileges created thereby or thereunder are ratified, extended, carried
forward and remain in full force and effect except as the Credit Agreement is
amended by this Amendment.
Section 6. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
Section 7. This Amendment shall be included within the definition of "Loan
Documents" as used in the Agreement.
Section 8. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES
OF AMERICA.
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE CODE,
AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed effective as of the Effective Date.
BORROWER: HANDY HARDWARE WHOLESALE, INC.
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
Address: 8300 Tewantin, Houston, Texas 77061
BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
Address:
------------------------------------------
2
<PAGE>
EXHIBIT 11.1
Computation of Per Share Earnings
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Earnings $ 893,489 $1,408,203 $1,206,222
Dividends Paid (682,368) (620,812) (515,029)
---------- ---------- ----------
$ 211,121 $ 787,391 $ 691,193
Weighted Average Shares Outstanding 66,763 61,934 56,984
Earnings Per Share of Common Stock $ 3.16 $ 12.71 $ 12.13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
filer's operations as of December 31, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000354053
<NAME> Handy Hardware Wholesale, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,113,122
<SECURITIES> 0
<RECEIVABLES> 10,352,814
<ALLOWANCES> 7,195
<INVENTORY> 14,106,010
<CURRENT-ASSETS> 26,041,957
<PP&E> 9,516,835
<DEPRECIATION> 4,517,166
<TOTAL-ASSETS> 36,042,197
<CURRENT-LIABILITIES> 15,894,431
<BONDS> 0
0
6,178,045
<COMMON> 6,813,096
<OTHER-SE> 5,773,187
<TOTAL-LIABILITY-AND-EQUITY> 36,042,197
<SALES> 146,009,972
<TOTAL-REVENUES> 146,925,402
<CGS> 130,554,986
<TOTAL-COSTS> 130,554,986
<OTHER-EXPENSES> 7,496,431<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,273
<INCOME-PRETAX> 1,362,679
<INCOME-TAX> 485,530
<INCOME-CONTINUING> 877,149
<DISCONTINUED> 0
<EXTRAORDINARY> 16,340
<CHANGES> 0
<NET-INCOME> 893,489
<EPS-PRIMARY> 3.16
<EPS-DILUTED> 3.16
<FN>
<F1> Does not include payroll costs of $7,466,033.
</FN>
</TABLE>
