SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 2000.
Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1381875
(State of incorporation) (I.R.S. Employer
Identification No.)
8300 Tewantin Drive, Houston, Texas 77061
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number: (713) 644-1495
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------
The number of shares outstanding of each of the Registrant's classes of common
stock as of June 30, 2000, was 9,780 shares of Class A Common Stock, $100 par
value, and 60,954 shares of Class B Common Stock, $100 par value.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
-------
Item 1. Financial Statements
Condensed Balance Sheet June 30, 2000
and December 31, 1999 ............................3-4
Condensed Statement of Earnings - Three Months &
Six Months Ended June 30, 2000 and 1999.............5
Condensed Statement of Cash Flows - Six Months
Ended June 30, 2000 and 1999........................6
Notes to Condensed Financial Statements................7-13
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations.............14-18
Item 3. Quantitative & Qualitative Disclosures About
Market Risk........................................19
PART II Other Information
Items 1-3 None.............................................. 19
Item 4 Submission of Matters to a Vote of Security Holders......19
Items 5-6 None...............................................19
Signatures...........................................................20
<PAGE>
<TABLE>
<CAPTION>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
--------------
Cash $ 1,871,736 $ 1,173,749
Accounts Receivable, net of
subscriptions receivable in
the amount of $67,294 for 2000
and $54,484 for 1999 11,986,814 10,631,282
Notes Receivable (Note 3) 11,305 12,748
Inventory 16,521,031 15,147,077
Other Current Assets 436,882 181,809
Prepaid Income Tax -0- 100,335
----------- -----------
$30,854,768 $27,247,000
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (NOTE 2)
--------------------------------------
At Cost Less Accumulated Depreciation
of $5,609,323 (2000) and $5,162,434 (1999) $11,647,292 $10,756,483
----------- -----------
OTHER ASSETS
------------
Notes Receivable (Note 3) $ 310,758 $ 232,710
Deferred Compensation Funded 475,322 429,688
Other Noncurrent Assets -0- 15,149
----------- -----------
$ 786,080 $ 677,547
----------- -----------
TOTAL ASSETS $43,288,140 $38,681,030
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Note Payable-Line of Credit $ 125,000 $ -0-
Notes Payable-Stock (Note 4) 83,000 107,200
Notes Payable-Capital Lease 9,764 41,383
Accounts Payable-Trade 19,223,021 15,679,858
Other Current Liabilities 1,150,101 1,141,147
Federal Income Taxes Payable (Note 5) 110,385 -0-
----------- -----------
$20,701,271 $16,969,588
----------- -----------
NONCURRENT LIABILITIES
----------------------
Note Payable-Line of Credit $ 125,000 $ -0-
Notes Payable-Stock(Note 4) 804,560 787,280
Notes Payable-Capital Lease 21,536 25,480
Notes Payable-Vendor 307,753 224,872
Deferred Compensation Payable 475,322 429,688
Deferred Income Taxes Payable (Note 5) 244,481 229,275
----------- -----------
$ 1,978,652 $ 1,696,595
----------- -----------
TOTAL LIABILITIES $22,679,923 $18,666,183
----------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
STOCKHOLDERS' EQUITY
--------------------
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
10,000 & 9,190 shares $ 1,000,000 $ 919,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
62,670 & 58,768 shares 6,267,000 5,876,800
Common Stock, Class B
Subscribed 4,576.41 & 4,498.24
shares 457,641 449,824
Less Subscription Receivable (33,647) (27,242)
Preferred Stock 10% Cumulative, authorized 100,000 shares,
$100 par value per share, issued 65,508.50 &
61,386.50 shares 6,550,850 6,138,650
Preferred Stock, Subscribed
4,576.41 & 4,498.24 shares 457,641 449,824
Less Subscription Receivable (33,647) (27,242)
Paid in Surplus 393,355 363,610
------------ ------------
$ 15,059,193 $ 14,143,224
Less: Cost of Treasury Stock
3,827.50 & -0- shares 382,750 -0-
------------ ------------
$ 14,676,443 $ 14,143,224
Retained Earnings exclusive of other
comprehensive earnings (Note 7) 5,798,246 5,765,441
Retained Earnings applicable to other
Comprehensive earnings (Note 7) 133,528 106,182
------------ ------------
5,931,774 5,871,623
------------ ------------
Total Stockholders' Equity $ 20,608,217 $ 20,014,847
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 43,288,140 $ 38,681,030
-------------------- ============ ============
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
QUARTER NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
--------
Net Sales $ 40,213,024 $ 37,604,020 $ 86,571,430 $ 81,063,817
Sundry Income 388,070 201,898 972,399 677,616
------------- ------------- ------------- -------------
TOTAL REVENUES $ 40,601,094 $ 37,805,918 $ 87,543,829 $ 81,741,433
-------------- ------------- ------------- ------------- --------------
EXPENSE
-------
Net Mat'l. Costs $ 35,693,890 $ 33,417,040 $ 77,732,930 $ 73,110,516
Payroll Costs 1,907,047 1,776,319 3,840,337 3,548,542
Other Operating Costs 2,603,243 2,185,199 4,960,635 4,287,751
Interest Expense 34,790 13,767 49,859 32,770
------------- ------------- ------------- -------------
TOTAL EXPENSE $ 40,238,970 $ 37,392,325 $ 86,583,761 $ 80,979,579
------------- ------------- ------------- ------------- -------------
NET EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 362,124 $ 413,593 $ 960,068 $ 761,854
------------------- ------------- ------------- ------------- -------------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (NOTE 5) (132,598) (147,907) (341,338) (272,694)
------------------- ------------- ------------- ------------- -------------
NET EARNINGS $ 229,526 $ 265,686 $ 618,730 $ 489,160
------------
OTHER COMPREHENSIVE EARNINGS
----------------------------
Unrealized Gain (Loss)on
Securities (Note 7) $ (24,840) $ 22,450 $ 41,433 $ 23,513
Provision for Federal
Income Tax (Note 5) 8,446 (7,633) (14,087) (7,994)
------------- ------------- ------------- -------------
Other Comprehensive
Earnings Net of Tax $ (16,394) $ 14,817 $ 27,346 $ 15,519
------------- ------------- ------------- -------------
TOTAL COMPREHENSIVE
EARNINGS $ 213,132 $ 280,503 $ 646,076 $ 504,679
------------------- ------------- ------------- ------------- -------------
LESS ACCRUED
DIVIDENDS ON
PREFERRED STOCK (146,481) (138,586) (292,962) (277,173)
--------------- ------------- ------------- ------------- -------------
NET EARNINGS
APPLICABLE
TO COMMON
STOCKHOLDERS $ 66,651 $ 141,917 $ 353,114 $ 227,506
------------ ============= ============= ============= =============
NET EARNINGS PER
SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (NOTE 1) $ 0.90 $ 2.01 $ 4.80 $ 3.27
---------------- ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITY
----------------------------------
Net Earnings $ 646,076 $ 489,160
------------ -----------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 491,147 $ 494,117
Increase (Decrease) in Deferred
Income Tax 15,206 (2,845)
Unrealized gain (increase in fair
market value of securities) (41,433) 15,519
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (1,355,532) $(1,602,123)
Increase in Notes Receivable (76,605) (4,285)
Increase in Inventory (1,373,954) (815,062)
Decrease in Other Assets (166,589) 241,581
Increase in Note Payable-Vendor 82,881 6,420
Increase in Accounts Payable 3,543,163 1,838,060
Increase in Other Liabilities 8,954 222,184
Increase in Federal Income
Taxes Payable 110,385 -0-
Increase in Deferred Compensation
Payable 45,634 24,603
------------ -----------
TOTAL ADJUSTMENTS $ 1,283,257 $ 418,169
------------ -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 1,929,333 $ 907,329
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Capital Expenditures $ (1,381,956) $(1,441,743)
Investment in Deferred Compensation Funded (3,085) (24,603)
Disposition of Fixed Assets -0- -0-
Reinvested dividends, interest & capital gains (1,116) -0-
------------ -----------
NET CASH USED FOR
INVESTING ACTIVITIES $ (1,386,157) $(1,466,346)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Increase Note Payable - Line of Credit $ 250,000 $ 890,000
Increase (Decrease) in Notes Payable - Stock (6,920) 326,120
Decrease in Notes Payable - Capital Lease (35,563) (23,633)
Increase in Subscription Receivable (12,810) (15,189)
Proceeds From Issuance of Stock 928,779 822,200
Purchase of Treasury Stock (382,750) (588,525)
Dividends Paid (585,925) (554,346)
------------ -----------
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES $ 154,811 $ 856,627
------------ -----------
NET INCREASE
IN CASH & CASH EQUIVALENTS $ 697,987 $ 297,610
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,173,749 1,113,122
------------ -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 1,871,736 $ 1,410,732
============ ===========
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
-------------------------------------------------------------
Interest Expense Paid $ 49,859 $ 32,770
Income Taxes Paid 450,604 295,979
</TABLE>
The accompanying notes are an integral part of the Condensed Financial
Statements.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
(1) DESCRIPTION OF BUSINESS:
------------------------
Handy Hardware Wholesale, Inc., ("Handy"), 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 is owned entirely by its member-dealers and former
member-dealers.
Handy sells to its member-dealers products primarily for retail
hardware, lumber and home center stores. In addition, we offer
advertising and other services to member-dealers.
(2) GENERAL INFORMATION:
--------------------
The condensed consolidated financial statements included herein have
been prepared by Handy. The financial statements reflect all
adjustments, which were all of a recurring nature, and which are, in
the opinion of management, necessary for a fair presentation. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Handy believes that the
disclosures made are adequate to make the information presented not
misleading. The condensed consolidated financial statements should be
read in conjunction with the audited financial statements and the notes
thereto included in the latest Form 10-K Annual Report.
(3) CASH:
-----
For purposes of the statement of cash flows, Handy considers all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
(4) 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.
(5) EARNINGS PER SHARE:
-------------------
Net earnings per common share (Class A and Class B combined) are based
on the weighted average number of shares outstanding in each period
after giving effect to the stock issued, stock subscribed, accrued
dividends on Preferred Stock, and treasury stock, as set forth by
Accounting Principles Board Opinion No. 15 as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CALCULATION OF NET EARNINGS PER SHARE
OF COMMON STOCK
-------------------------------------
Net Earnings $ 213,132 $280,503 $646,076 $504,679
Less: Accrued Dividends
on Preferred Stock (146,481) (138,586) (292,962) (277,173)
--------- --------- --------- ---------
$ 66,651 $141,917 $353,114 $227,506
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 74,226 70,447 73,497 69,677
Net Earnings Per Share
of Common Stock $ 0.90 $ 2.01 $ 4.80 $ 3.27
========= ====== ====== ========
</TABLE>
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(6) 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.
(7) ACCOUNTING FOR DIVIDENDS ON PREFERRED STOCK:
--------------------------------------------
Handy pays dividends on Preferred Stock during the first quarter of each
fiscal year. Only holders of Preferred Stock on the record date for the
payment of the dividend are entitled to receive dividends. Dividends are
prorated for the portion of the twelve-month period ending January 31,
during which the Preferred Stock was held.
Because Handy is unable to anticipate the amount of the Preferred Stock
dividends, it does not accrue a liability for the payment of those
dividends on its balance sheet. To more properly reflect net earnings,
however, on the Condensed Statement of Earnings included herein, Handy
shows an estimated portion of the dividends to be paid in the first
quarter of 2001 based on the dividends paid in the first quarter of 2000.
When dividends on Preferred Stock are actually paid, there is a reduction
of retained earnings. Retained earnings on the Condensed Balance Sheet for
the six months ended June 30, 2000 contained herein, therefore, are net
of dividends actually paid during the first quarter of 2000 in the amount
of $585,925.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
------------------------------------
Property, Plant & Equipment Consists of:
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
Land $ 3,207,866 $ 3,202,572
Building & Improvements 9,376,877 8,549,156
Furniture, Computer, Warehouse 4,012,050 3,740,954
Transportation Equipment 659,822 426,235
----------- -----------
$17,256,615 $15,918,917
Less: Accumulated Depreciation (5,609,323) (5,162,434)
----------- -----------
$11,647,292 $10,756,483
=========== ===========
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - NOTES RECEIVABLE
-------------------------
Notes receivable reflect amounts due to Handy from its member-dealers under a
deferred payment agreement and an installment sale agreement.
Under the deferred payment agreement, Handy 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 Handy. If a member-dealer ceases to purchase lamp inventory or sells or
closes his business, then General Electric bills Handy for the member-dealer's
initial order and the note becomes immediately due and payable in full to Handy.
In September 1999, virtually the same type of deferred agreement was put into
effect with Chicago Specialty, a manufacturer of plumbing supplies.
Under the installment sale agreement, we sell member-dealers computer hardware,
the purchase price of which is due and payable by member-dealers to us in
thirty-six monthly installments of principal and interest.
Notes Receivable are classified as follows:
<TABLE>
<CAPTION>
CURRENT PORTION NONCURRENT PORTION
------------------------- ---------------------------
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
------- ------- ------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deferred Agreements $ -0- $ -0- $307,753 $224,871
Installment Sale Agreement 11,305 12,748 3,005 7,839
------- ------- -------- --------
$11,305 $12,748 $310,758 $232,710
======= ======= ======== ========
</TABLE>
NOTE 4 - NOTES PAYABLE STOCK
----------------------------
The five year, interest bearing notes payable - stock reflect amounts due from
Handy to former member-dealers for the repurchase of shares of Handy 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 5.25% to 6.25%.
Notes Payable - Stock are classified as follows:
CURRENT PORTION NON-CURRENT PORTION
--------------------- ----------------------
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
------- -------- ------- --------
2000 1999 2000 1999
---- ---- ---- ----
$83,000 $107,200 $804,560 $787,280
Principal payments due over the next five years are as follows:
2000 $ 72,000
2001 57,000
2002 32,800
2003 324,280
2004 363,200
--------
$849,280
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
---------------------
Handy adopted FASB Statement No. 109, "Accounting for Income Taxes," effective
January 1, 1993. The adoption of this standard changed our 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>
QUARTER ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
------------ -----------
<S> <C> <C>
Excess of tax over book depreciation $ 1,309,457 $ 1,257,673
Allowance for Bad Debt (7,195) (7,195)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (298,191) (296,130)
Deferred Compensation (285,010) (280,010)
----------- ------------
Total 719,061 674,337
Statutory Tax Rate 34% 34%
----------- -----------
Cumulative Deferred Income Tax Payable $ 244,481 $ 229,275
=========== ===========
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 244,481 229,275
----------- -----------
$ 244,481 $ 229,275
=========== ===========
</TABLE>
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Principal Components of Income Tax Expense
Federal:
Current
-------
Income tax paid $ 350,269 $ 190,095
Carry-over of prepayment
from prior year 100,335 105,884
Refund received for overpayment
from prior year -0- -0-
----------- -----------
$ 450,604 $ 295,979
Federal Income Tax Payable (110,385) (12,446)
Carry-over to subsequent year -0- -0-
----------- -----------
Income tax for tax reporting
at statutory rate of 34% $ 340,219 $ 283,533
Deferred
--------
Adjustments for financial reporting:
Depreciation 17,607 (598)
263A Uniform Capitalization Costs (701) (547)
Other (1,700) (1,700)
----------- -----------
Provision for federal income tax $ 355,425 $ 280,688
=========== ===========
</TABLE>
<PAGE>
Handy is not exempt from income tax except for municipal bond interest
earned in the amount of $1,116.
We are not classified as a nonexempt cooperative under the provisions
of the Internal Revenue Code and are not entitled to deduct preferred dividends
in determining our taxable income.
NOTE 6 - STOCKHOLDERS' EQUITY
-----------------------------
(1) TERMS OF CAPITAL STOCK
----------------------
The holders of Class A Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of
shareholders. Holders of Class A Common Stock must be engaged in the
retail sale of goods and merchandise, and may not be issued or retain
more than ten shares of Class A Common Stock at any time. The holders
of Class B Common Stock are not entitled to vote on matters submitted
to a vote of shareholders except as specifically provided by Texas
law.
The holders of Preferred Stock are entitled to cumulative dividends.
Handy's Articles of Incorporation require the Board of Directors to
declare a dividend each year of not less than 7 percent nor more than
20 percent of the par value ($100.00 per share) of the shares of
Preferred Stock. 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 Handy)
by vote of Handy's Board of Directors, in exchange for $100 per share
and all accrued unpaid dividends.
(2) CAPITALIZATION
--------------
To become a member-dealer, an independent hardware dealer must enter
into a Subscription Agreement with us for the purchase of ten shares
of Handy Class A Common Stock, $100 par value per share, or ten shares
of Preferred Stock for any additional store, with an additional
agreement to purchase a minimum number of shares of Class B Common
Stock, $100 par value per share, and Preferred Stock, $100 par value
per share. Class B Common Stock and Preferred Stock are purchased
pursuant to a formula based upon total purchases of merchandise by the
member-dealer from Handy, which determines the "Desired Stock
Ownership" for each member-dealer. The minimum Desired Stock Ownership
is $10,000.
Each member-dealer receives from Handy a semimonthly statement listing
total purchases made during the covered billing period, with an
additional charge ("Purchase Funds") equal to 2 percent of the
member-dealer's warehouse purchases until the member-dealer's Desired
Stock Ownership is attained. Although the Subscription Agreement
entitles Handy to collect 2 percent of total purchases, since May 1,
1983, the Board of Directors has determined to collect 2 percent of
warehouse purchases only. On a monthly basis, we review the amount of
unexpended Purchase Funds being held for each member- dealer. If a
member-dealer has unexpended Purchase Funds of at least $2000, Handy
applies such funds to the purchase of ten shares of Class B Common
Stock and ten shares of Preferred Stock at $100 per share.
(3) TRANSFERABILITY
---------------
Holders of Class A Common Stock may not sell those shares to a third
party without first offering to sell them back to Handy. There are no
specific restrictions on the transfer of Class B Common or Preferred
Stock.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
-----------------------------------------
(4) MEMBERSHIP TERMINATION
----------------------
Following written request, Handy will present to the Board of Directors a
member-dealer's desire to have his stock repurchased and the
member-dealer's Contract terminated. According to the current procedures
established by the Board of Directors, a member-dealer's stock may be
repurchased according to either of two options.
Option I The member-dealer's Class A Common Stock is repurchased at
$100 per share. Any funds remaining in the member-dealer's
Purchase Fund Account will be returned at the dollar value
of such account. Twenty percent or $3000, whichever is
greater, of the total value of the Class B Common and
Preferred Stock will be repurchased. The remaining value of
the Class B Common and Preferred Stock is converted to a
five-year interest bearing note. During the first four
years, this note only pays interest. In the fifth year, both
interest and principal are paid. The interest rate is
determined by Handy's Board of Directors at the same time
they approve the repurchase.
Option II Same as Option I except that the remaining value of the
Class B Common and Preferred Stock is discounted 15 percent
and reimbursed to the member-dealer immediately at the time
of repurchase.
<PAGE>
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - 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 $475,322 on the Balance
Sheet as a non-current asset at June 30, 2000, includes equity securities
classified as investments available for sale in the amount of $422,402 at
fair market value. The $422,402 includes $202,314 unrealized gain on
securities resulting from the increase in fair market value. The cost of
the equity securities is $220,088.
2. Changes in Equity securities
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 Cumulative
---------------- ----------
<S> <C> <C>
Beginning Balance-January 1, 2000 $ 376,768 $ -0-
Purchases 3,085 108,145
Dividends, interest and capital gains 1,116 111,943
Unrealized gains on securities
resulting from increase in
fair market value 41,433 202,314
----------- ----------
Balance-June 30, 2000 $ 422,402 $ 422,402
=========== ==========
</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 $ 1,001,501 $ 41,433 $ 960,068
Provision for
Federal Income Tax (355,425) (14,087) (341,338)
------------ ---------- ---------
Net Earnings $ 646,076 $ 27,346 $ 618,730
============ ========== =========
</TABLE>
4. Components of Comprehensive Earnings
<TABLE>
<CAPTION>
RETAINED EARNINGS RETAINED EARNINGS
APPLICABLE TO OTHER EXCLUSIVE OF OTHER
TOTAL COMPREHENSIVE EARNINGS COMPREHENSIVE EARNINGS
----- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Balance-January 1, 2000 $5,871,623 $ 106,182 $5,765,441
Add: Net earnings six months
Ended June 30, 2000 646,076 27,346 618,730
Deduct: Cash Dividends on
Preferred Stock 585,925 -0- 585,925
---------- ---------- ----------
Balance-June 30, 2000 $5,931,774 $ 133,528 $5,798,246
========== ========== ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SECOND QUARTER AND FIRST SIX MONTHS OF 2000
-------------------------------------------------------------------------
We maintained our steady growth in the second quarter of 2000 while
continuing to meet our goal of providing quality goods to our member-dealers at
our cost plus a reasonable mark-up charge. Net sales in the second quarter of
2000 increased 6.9% ($2,609,004) over sales during the same period in 1999,
compared to a 6.4% growth rate ($2,252,349) in the second quarter of 1999 over
1998's second quarter.
Net sales during the first six months of 2000 increased 6.8% ($5,507,613)
over sales during the same period in 1999,compared to an 11.0% increase in sales
($8,007,793) for the same period in 1999 over 1998.
While sales growth in the second quarters of 2000 and 1999 remained
relatively constant, sales growth during the first six months of 1999 was
significantly higher than the sales growth for the same 2000 period due to
extremely robust sales in the first quarter of 1999.
NET SALES. Although the overall economy continues to experience economic
growth and consumer confidence remains strong, the sales growth during the first
six months of 2000 in several of our selling territories was not as robust as in
the first six months of 1999. The softening sales can be attributed to the
decrease in purchases of several significant member-dealers in various selling
territories due to the continuing dry weather conditions, labor and material
shortages in the building industry and pressure from retail warehouses in these
markets.
The following table summarizes our sales during the first six months of
1999 and 2000 by sales territory:
<TABLE>
<CAPTION>
First Six Months 2000 First Six Months 1999
----------------------------------------------- ---------------------------
% Increase
in Sales
From First % of % of
Six Months Total Total
Sales Territory Sales of 1999 Sales Sales Sales
--------------- ----- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Houston Area $21,262,156 -0% 24.6% $21,260,424 26.2%
Victoria, San Antonio,
Corpus Christ &
Rio Grande Valley Area* 17,196,934 12% 19.9% 15,365,706 19.0%
North Texas, Dallas
& Fort Worth Area 10,583,804 21% 12.2% 8,728,584 10.8%
Austin, Brenham &
Central Texas Area 10,624,978 4% 12.3% 10,190,153 12.6%
Southern Louisiana Area 10,182,552 2% 11.8% 10,015,221 12.4%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 6,815,207 -2% 7.9% 6,970,789 8.6%
Arkansas Area 4,096,539 25% 4.7% 3,268,153 4.0%
Oklahoma Area 5,686,737 10% 6.6% 5,164,837 6.4%
West Texas Area(2) 22,685 N/A N/A N/A N/A
----------- ---- ----- ----------- -----
Totals: $86,471,592 (1) 100.0% $80,963,867(1) 100.0%
=========== ===== =========== -----
</TABLE>
------------------------------------------------------
* Includes sales to Mexico and Central America member-dealers.
(1) Total does not include miscellaneous sales to employees.
(2) Sales for the West Texas Area commenced in June of 2000.
<PAGE>
During the first six months of 2000 the Houston territory and the
Southern Louisiana territory experienced a decrease in sales due to several
larger member-dealers reducing their purchases during this period. These Houston
territory member-dealers collectively generated $2,321,224 more in sales and
these Southern Louisiana territory member-dealers collectively generated
$541,550 more in sales during the first six months of 1999 than they did in the
same 2000 period. In addition, continuing dry weather conditions and significant
declines in new home construction negatively affected sales growth in the
Austin, Brenham and Central Texas territory, while independent hardware stores
in the Baton Rouge, New Orleans and Gulf Coast East territory are beginning to
feel the pressure from retail warehouses in their market area.
Despite the reductions in purchases by member-dealers in some sales
territories, during the second quarter and the first six months of 2000, we
added twice as many new member-dealers as we added in the same 1999 periods.
These additions in both our current selling territories and in our recently
added territories of West Texas and New Mexico continue to offset the decreased
levels of purchases by some of our longer-term member-dealers.
NET MATERIAL COSTS AND REBATES Net material costs for the second
quarter and first six months of 2000 were $35,693,890 and $77,732,930,
respectively, compared to $33,417,040 and $73,110,516, respectively, for the
same periods in 1999. Net material costs for the second quarter and first six
months of 2000 increased 6.8 percent and 6.3 percent, respectively, over the
same periods in 1999, which increases were slightly less than the increases in
net sales for the same periods (6.9% increase for the second quarter of 2000 and
6.8% increase for the first six months of 2000). Net material costs were 88.8
percent of sales in the second quarter of 2000 as compared to 88.9 percent of
sales for the same period in 1999, while for the first six months of 2000 and
1999 net materials costs were 89.8 percent and 90.2 percent of sales,
respectively. These slight decreases during these periods in 2000 compared to
1999 resulted from an increase during 2000 in the number of inventory items sold
at a higher gross margin. Sales with a markup of 9 percent increased from
$20,323,063 in the second quarter of 1999 to $22,122,641 during the second
quarter of 2000, while these sales for the first six months of 1999 and 2000
were $41,438,792 and $45,263,876, respectively. Further, factory rebates which
we took as a credit against material costs in both the second quarters and first
halves of 2000 increased over amounts credited for the same 1999 period. Second
quarter rebates increased $70,010 or 6.0 percent (2000 - $1,233,792 vs. 1999 -
$1,163,782) while rebates for the first six months increased $126,937 or 5.0
percent (2000 - $2,658,533 vs. 1999 - $2,531,596).
PAYROLL COSTS. With unemployment at a three decade low, the U.S. labor
market has seldom been tighter. The increases in payroll costs for the second
quarter and first six months of 2000 resulted from salary increases needed to
attract or retain high- quality employees. As a result, payroll costs for the
second quarter and first six months of 2000 increased 7.4 percent and 8.2
percent, respectively, over the same periods in 1999.
Despite the pressure on wages, payroll costs as a percentage of both
total expenses and net sales remained fairly constant. Payroll costs for the
second quarter of 2000 constituted 4.6 percent of both net sales and total
expenses, compared to 4.7 percent of each for the same quarter of 1999. Payroll
costs were 4.4 percent of both net sales and total expenses for the first six
months of 2000 and 1999. The relative stability in payroll costs has been a
result of a continuing effort to maintain employee productivity.
OTHER OPERATING COSTS. During the second quarter and for the first six
months of 2000 other operating costs increased 19.1 percent and 15.7 percent,
respectively, compared to the same periods of 1999. Other operating costs were
6.5% of total expenses in the second quarter of 2000 as compared to 5.8% of
total expenses for the second quarter of 1999. For the six month period ending
June 30, 2000, other operating costs were 5.7% of total expenses as compared to
5.3% of total expenses during the same period in 1999. In both comparisons,
other operating costs have increased by a larger percentage than the percentage
growth in net sales and total expenses.
<PAGE>
More than 68.5% of the 2000 second quarter increases and more than
70.7% of the first six months increases in other operating costs resulted from
increases in delivery expenses. Delivery expenses increased from $560,360 in the
second quarter of 1999 to $846,870 in the same 2000 period, an increase of
$286,510. Further, delivery expenses increased from $1,121,619 in the first six
months of 1999 to $1,597,553 for the same period in 2000, an increase of
$475,934 over 1999 levels. In particular, increases in gasoline prices,
additions to our delivery routes and increases in the number of member-dealer
locations have resulted in a 63.0% and a 51.3% increase in fuel costs in the
second quarter and first six months of 2000 as compared to the same periods in
1999. In addition, these conditions resulted in a 61.6% and a 47.5% increase in
rental truck expenses for the same periods due to increased delivery demands.
NET EARNINGS AND EARNINGS PER SHARE. While net sales for the second
quarter of 2000 increased $2,609,004 (6.9%) and net material costs for the
second quarter of 2000 increased $2,276,850 (6.8%) from levels of net sales and
net material costs in the second quarter in 1999, gross margin increased by
$332,154 (7.9%). This increase in gross margin, in addition to a $186,172
(92.2%) increase in other income during the same period, was offset by the
increase in payroll costs of $130,728 (7.4%) and the substantial increase in
other operating costs of $418,044 (19.1%). Thus pretax net earnings decreased
22.6 percent, from $436,043 for the second quarter of 1999 to $337,284 in the
same 2000 period, while after-tax net earnings decreased by 24.0 percent. Net
earnings in the second quarter of 2000 decreased primarily due to an increase in
other operating costs, as previously discussed, as well as an unrealized loss on
securities in the second quarter of 2000 of $24,840 compared to a $22,450
unrealized gain on securities in the same 1999 period.
Net sales for the first six months of 2000 increased $5,507,613 (6.8%)
and net material costs increased $4,622,414 (6.3%) from levels in the first six
months in 1999, resulting in gross margin increasing by $885,199 (11.1%). This
increase in gross margin was offset by increases in payroll costs (8.2%) and in
other operating costs (15.7%). Thus pretax net earnings increased 27.5 percent,
from $785,367 for the first six months of 1999 to $1,001,501 in the same 2000
period, while after-tax net earnings increased by 28.0 percent. Net earnings in
the first six months of 2000 increased primarily due to an increase in sales
with markups of 9 percent as previously discussed, with fewer sales occurring
with markups of 5 percent or less.
Our net earnings per share decreased significantly in the second
quarter of 2000, as compared to the same period of 1999. This decrease was due
to a decrease in net earnings in the second quarter of 2000 compared to that
period of 1999, as well as an increase in the dividends accrued. Therefore,
dividends accrued increased as a percentage of second quarter net earnings in
2000 compared to 1999, resulting in a decrease in net earnings per share.
However, in the first six months of 2000 total comprehensive earnings increased
significantly over the 1999 level, causing dividends accrued to represent a
smaller percentage of 2000 net earnings than dividends accrued in the first six
months of 1999 represented (45.3% in 2000 as compared to 54.9% in 1999). Thus
net earnings per share for the six month period ending June 30, 2000 increased
46.8% from the period ending June 30, 1999.
Quarter-to-quarter variations in our earnings per share (in addition to
the factors discussed above) reflect our commitment to lower pricing of our
merchandise in order to deliver the lowest cost buying program to our
member-dealers, even though this often results in lower net earnings. Because
virtually all of our stockholders are also member-dealers, these trends benefit
our individual stockholders who purchase our merchandise. Therefore, our
shareholders do not demand that we focus greater attention upon earnings per
share.
SEASONALITY. Our quarterly net earnings traditionally vary based on
the timing of events which affect our sales. First and third quarter earnings
have been negatively affected by the increased level of direct sales (with no
markup) resulting from our semiannual trade show always held in the first and
third quarters. However, net earnings per quarter may vary substantially from
year to year due to the timing difference in the receipt of discounts, rebates
and miscellaneous income which can positively affect net earnings. Secondly,
sales during the fourth quarter traditionally have been lower, as hardware sales
are slowest during winter months preceding ordering for significant sales in the
spring. This decrease in sales, however, is offset in most years by corrections
to inventory made at year end, causing net earnings to vary substantially from
year to year in the fourth quarter.
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. During the period ending June 30, 2000, we maintained our
financial condition and ability to generate adequate amounts of cash while
continuing to make significant investments in inventory, warehouse and computer
equipment, software, and delivery equipment to better meet the needs of our
member- dealers. Net cash provided by our operating activities may vary
substantially from year to year. These variations result from (i) the timing of
promotional activities such as our spring trade show, (ii) payment terms
available to us from our suppliers, (iii) payment terms offered by us to our
member-dealers, and (iv) the state of the regional economy in our selling
territories.
During the first six months of 2000 there was an increase of
$1,173,749 in our cash and cash equivalents as compared to an increase of
$1,113,122 in the same 1999 period. During this period, we generated cash flow
from operating activities of $1,929,333, as compared to $907,329 in the first
six month of 1999. This increase in cash flow in the 2000 period was principally
attributable to an increase in accounts payable and a smaller increase in
accounts receivable, offset significantly by a larger increase in inventory in
the first six months of 2000 than in the first six months of 1999. Further, net
earnings increased during these same periods by $156,916 (2000 - $646,076 versus
1999 - $489,160).
Accounts payable increased $3,543,163 during the first six months of
2000 as compared to an increase of $1,838,060 during the same period in 1999.
This increase was due primarily to extended payment terms offered to us by
suppliers.
In the first six months of 2000 and 1999, accounts receivable
increased $1,355,532 and $1,602,123, respectively. For both periods, these
increases of accounts receivable were mainly attributable to the strong economy
which gave member-dealers confidence to make significant purchases at the spring
trade show and to extended payment terms offered to member-dealers at this trade
show.
Inventory had 37,266 stockkeeping units in the period ending June 30,
2000, which were maintained in response to member-dealer demand for more breadth
of inventory. The increase in inventory of $1,373,954 in the first six months of
2000, was significantly larger than the increase in inventory of $815,062 in the
same period in 1999, due to the availability of leased warehouse space which
provided us with an additional 50,000 square feet for stocking inventory.
Net cash used for investing activities increased in the first six
months of 2000 and 1999 by $1,386,157 and $1,466,346, respectively. The
warehouse expansion project accounted for approximately 60% and 78% of cash used
for capital investments for the first six months of 2000 and 1999, respectively.
Net cash used for financing activities was $154,811 in the period
ending June 30, 2000 as compared to net cash used for financing activities of
$856,627 during the same period in 1999. The decrease of net cash used in the
2000 period as compared to the same period in 1999 was principally attributable
to differences in borrowings on our line of credit to meet short term cash
requirements, as well as an increase of proceeds from the issuance of stock and
a decrease in amounts used to repurchase shares from retiring member-dealers
during the 2000 period. In the periods ending June 30, 2000 and June 30, 1999,
short term borrowing was $250,000 and $890,000, respectively, while proceeds
from the issuance of stock was $928,779 and $822,200, respectively for the same
periods. In addition the repurchase of $382,750 of stock from retiring
member-dealers in the first six months of 2000 had a positive effect on cash
flow of $205,775, when compared to the $588,525 used to repurchase stock in the
same 1999 period.
<PAGE>
Our continuing ability to generate cash to fund our activities is
highlighted by the relative constancy of our three key liquidity measures -
working capital, current ratio (current assets to current liabilities) and
long-term debt as a percentage of capitalization, as shown in the following
table:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Working Capital $10,153,497 $10,277,412 $10,125,844
Current Ratio 1.5 to 1 1.6 to 1 1.5 to 1
Long-term Debt as Percentage
of Capitalization 9.6% 8.5% 10.7%
</TABLE>
During the remainder of 2000, we expect to further expand our existing
customer base in Oklahoma and Arkansas, as well as expand further west in Texas
and into eastern New Mexico. We will finance this expansion and related delivery
and other operating costs with receipts from the sale of stock to new and
current member-dealers and with anticipated increased revenues from sales to
member-dealers in Oklahoma, Arkansas, West Texas and New Mexico. We expect that
this expansion will have a beneficial effect on our ability to generate cash to
meet our funding needs.
In the first six months of both 2000 and 1999, we maintained a 95.0
percent service level (the measure of our ability to meet member-dealers' orders
out of current stock). Inventory turnover was 6.1 times during the first six
months of 2000 and 6.0 times for the first six months of 1999. This rate of
inventory turnover, which is higher than the national industry average of 3.8,
is primarily the result of tight control of the product mix, increase in depth
of inventory and continued high service level.
CAPITAL RESOURCES In the six month periods ending June 30, 2000, and
June 30, 1999, our investment in capital assets (net of dispositions) was
$1,386,157 and $1,466,346, respectively. Approximately 59.7 percent ($827,721)
of the amount expended in the first six months of 2000 was used to construct an
employee parking lot and to fund other capital expenditures related to the
future expansion of our warehouse. In addition, 10.7 percent ($148,373) was used
to purchase trailers, 9.6% ($133,660) was used to purchase warehouse equipment,
9.6% ($132,574) was used to upgrade our fleet of automobiles and 7.6% ($105,863)
was used to purchase computer equipment. By comparison, of the total amount
expended in the first six months of 1999, $1,143,772 was used to complete the
purchase of thirty acres of land for future warehouse expansion and $136,304 was
used to purchase computer hardware and software.
In January, 1999 we purchased 29.96 acres of land located across the
street from our current warehouse facility for $1,174,774. The land has been
used to relocate our retention pond, provide additional parking facilities and
allow for future expansion of our current warehouse facility. The purchase was
funded by drawing down on our line of credit which has since been entirely
repaid from our cash flow. During 2000 we expect to continue our expansion
project, expending approximately $3,215,800 to prepare the site and begin
construction on an expansion to our current warehouse facility.
Under our unsecured $10 million revolving line of credit with Chase Bank
of Texas, used from time to time for our working capital and other financing
needs, $250,000 was outstanding on June 30, 2000.
During the year 2000, we anticipate significant cash outlays for
payment of accounts payable, increased inventory purchases and our expansion
project. Additional cash outlays anticipated for the remainder of the year
include: $50,000 to purchase warehouse equipment, $35,000 to upgrade computer
equipment, $50,000 to purchase office furniture and equipment and $40,000 to
improve our automobile fleet.
Our cash position of $1,871,736 at June 30, 2000, is anticipated to be
sufficient to fund all planned capital expenditures, although some third party
financing, including draws on our line of credit, may be needed to fund all or a
portion of the expansion project.
<PAGE>
QUANTITATIVE & QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
--------------------------------------
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders Meeting held on May 10, 2000, VIRGIL H.
COX, LEROY WELBORN and BEN JONES were elected to serve as Directors
of the Company for three-year terms. JAMES D. TIPTON, President of
the Company, was elected to serve a one-year term. The other
Directors continuing to serve are: NORMAN J. BERING, WELDON BAILEY,
SAMUEL J. DYSON and JIMMY T. PATE whose terms will expire at the
Annual Shareholders Meeting to be held in May 2001 and NORMAN J.
BERING, SUSIE BRACHT-BLACK and RICHARD A. LUBKE whose terms will
expire at the Annual Shareholders Meeting in May 2002.
<TABLE>
<CAPTION>
NO. OF VOTES NO. OF VOTES NO. OF VOTES
NOMINEES FOR DIRECTORS FOR AGAINST ABSTAIN APPROVAL
---------------------- ------------ ------------ ------- --------
<S> <C> <C> <C> <C>
VIRGIL H. COX 4900 -0- -0- YES
LEROY WELBORN 4890 10 -0- YES
BEN JONES 4890 10 -0- YES
JAMES D. TIPTON 4890 10 -0- YES
</TABLE>
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K - NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ James D. Tipton
------------------------------
JAMES D. TIPTON
President
(Chief Executive Officer)
/s/ Tina S. Kirbie
------------------------------
TINA S. KIRBIE
Senior Vice President, Finance
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date: August 10, 2000
------------------
