Back to GetFilings.com
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, 1999 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
$935,000 of February 29, 2000.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 29, 2000, was 9,440 shares of Class A Common Stock,
$100 par value, and 59,775 shares of Class B Common Stock, $100 par value.
Documents Incorporated by Reference
Document Incorporated as to
-------- ------------------
Notice and Proxy Statement for the Part III, Items 10, 11, 12 and 13
Annual Meeting of Stockholders
to be held May 10, 2000
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................1
Item 2. Properties.........................................................6
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............................................7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8
Item 7a. Quantitative and Qualitative Disclosures About Market Risk........12
Item 8. Financial Statements and Supplementary Data.......................12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................34
PART III
Item 10.* Directors and Executive Officers of the Registrant................34
Item 11.* Executive Compensation............................................34
Item 12.* Security Ownership of Certain Beneficial Owners and Management....34
Item 13.* Certain Relationships and Related Transactions....................34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...34
- ---------------------------------
* 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; 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.
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 1,046 active Member-Dealers and sales of more than $158,000,000 in
1999. 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 43 trailers owned by the Company and 46 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,
1999, Handy Hardware's Member-Dealers were located in Texas, Louisiana,
Oklahoma, Arkansas, Alabama, Mississippi, Florida, 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 large quantity lots,
warehouses the merchandise and resells it in smaller lots to its Member-Dealers.
During the Company's fiscal year ended December 31, 1999, 644 of the Company's
Member-Dealers were located in Texas, 189 in Louisiana, 92 in Oklahoma, 77 in
Arkansas, 14 in Alabama, 13 in Mississippi, 9 in Florida, 6 in Mexico and 2 in
Central America. No individual Member-Dealer accounted for more than 2.4% of the
sales of the Company during fiscal 1999. 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 Member-Dealers accounted
for approximately 39% of the Company's total sales during 1999, 36% in 1998 and
33% in 1997, while warehouse shipments accounted for approximately 61% of total
sales in 1999, 64% in 1998 and 67% in 1997.
The Company's total sales include 14 different major classes of
merchandise. In 1999, 1998 and 1997, the Company's total sales and total
warehouse sales were divided among classes of merchandise listed below.
1
TOTAL SALES(1) WAREHOUSE SALES
CLASS OF MERCHANDISE 1999 1998 1997 1999 1998 1997
- -------------------- ---- ---- ---- ---- ---- ----
Plumbing Supplies 17% 17% 17% 21% 20% 20%
General Hardware 11 12 13 12 12 13
Paint Sundries 11 11 12 14 14 14
Electrical Supplies 10 11 12 13 14 14
Hand Tools 9 9 10 9 9 9
Lawn and Garden Products 8 8 8 10 10 10
Paint 4 4 4 4 4 4
Building Materials 12 11 6 2 2 2
Power Tools 5 5 5 2 2 2
Housewares & Related Supplies 3 3 3 3 3 3
Fasteners 2 2 2 1 1 1
Automotive After Market 2 2 2 3 3 2
Outdoor Products 2 1 2 2 2 2
Miscellaneous 4 4 4 4 4 4
---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ====
- ----------------------------
(1) These amounts include direct sales and warehouse sales. Total sales in
1999 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 0.37% of total sales.
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
In 1999 the Company maintained a 95.0 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 94.8 percent in 1998 and 95.1 percent
in 1997. 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 $766,977 was expended in 1999 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 2,400
vendors supplied merchandise to the Company during 1999. 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 2.1% of the
Company's total purchases during 1999. 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 30 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 in other benefits available
to PRO Group, Inc. members, but is under no obligation to do so. The Company
currently does not participate in such benefits because these benefits 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, 1999, the Company had 265 full-time employees, of
which 50 were in management positions and 215 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 also believes
that the loss of ability to utilize this trade name would not have a material
adverse effect upon the business of the Company.
3
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"), calculated as detailed below. The minimum number of shares
of Class B Common Stock and Preferred Stock to be purchased by a Member-Dealer
is determined pursuant to a formula based upon that Member-Dealer's total
purchases of merchandise 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,
that dealer 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") for the next twelve months, based on (i) the dollar
amount of Class A Common Stock, Class B Common Stock and Preferred Stock, valued
at $100 per share, 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
recorded on the Company's financial statements 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 a particular
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:
AMOUNT OF DESIRED STOCK OWNERSHIP
TOTAL PURCHASES(1) BASED UPON TOTAL PURCHASES(2)
------------------ -----------------------------
$1 to $250,000 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
$250,001 to $500,000 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,001 to $500,000
$500,001 to $750,000 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,001 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,001 to $750,000
$750,001 to $1,000,000 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,001 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,001 to $750,000
+ $1.00 for every $20.00 of Total Purchases from $750,001 to $1,000,000
4
Amount of Desired Stock Ownership
Total Purchases (1) based upon Total Purchases(2)
------------------- -----------------------------
$1,000,001 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 $250,001 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,001 to $750,000
+ $1.00 for every $20.00 of Total Purchases from $750,001 to $1,000,000
+ $1.00 for every $40.00 of Total Purchases over $1,000,000
- -------------------------
(1) Based on the Member-Dealer's total purchases of merchandise from the
Company, measured as of the end of the immediately preceding fiscal
year.
(2) The minimum Desired Stock Ownership in all classes of capital stock is
$10,000.
Example.
In March 2000, the Company determines that a Member-Dealer's Total
Purchases during 1999 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
remaining $50,000 of Total Purchases [$5,000]). Because as of December
31, 1999, that Member-Dealer's Actual Stock Ownership was $32,000,
which is less than his Desired Stock Ownership, the Company will
collect Purchase Funds throughout the period from April 1, 2000 to
March 31, 2001 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 (2.0%) of the Warehouse Purchases invoiced on the statement. The
Subscription Agreement entitles the Company to collect 2.0% of Total Purchases
as Purchase Funds. At present, however, the board of directors has determined to
collect 2.0% of Warehouse Purchases only. The Company will continue to collect
Purchase Funds throughout the April 1 to March 31 period, even if 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
2.0% of Warehouse Purchases.
Repurchases from Overinvested Member-Dealers. During the past nine
years, the Company has 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. In each year of the
repurchase program, the Company has offered to repurchase from each Overinvested
Member-Dealer 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 1999, approximately 11% of the shares
eligible for repurchase from Overinvested Member- Dealers were submitted for
repurchase, for which the Company expended $26,800. 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, 1999, the total amount was $240,400
5
(excluding shares held by the Texas and Louisiana State Treasury Unclaimed
Property Divisions). The overinvested amount 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, 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 nine years of the repurchase program, the Company has repurchased a total of
$379,800 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 vary based on the
timing of events which affect the Company's sales. Traditionally, 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. However, the Company's sales levels
often increase during the trade shows, which, in some years, compensates for the
negative effect of higher direct sales levels. Sales during the fourth quarter
are often lower, as hardware sales are slowest during the winter months
preceding ordering for significant sales for the spring. In most years, however,
this decrease in sales is offset by the corrections to inventory made at
year-end, causing fourth quarter sales to vary from year to year. In addition,
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.
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.
In January 1999 the Company purchased an additional 29.96 acres of land
located across the street from its current warehouse facility. This land has
been used to relocate the Company's retention pond, provide additional parking
facilities and allow for future expansion of the Company's current warehouse
facility. The purchase price for the land was $1,174,774. The purchase was
funded by drawing down on the Company's Chase Bank line of credit. As of
February 29, 2000, the capital expenditures for this first phase of the
Company's expansion project was $2,209,121, of which $1,864,830 (84.4%) was
spent in 1999, primarily for the purchase of the land. The entire amount drawn
on the Company's Chase Bank line of credit during 1999 to fund the expansion
project was repaid by the Company during the year from its cash flow.
6
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 were filed in
the District Court of Harris County, Texas arising out of the accident,
consisting of 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. During the third quarter of 1999, the last of these
three lawsuits was settled. All lawsuits were settled within the Company's
insurance policy limits.
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
1999.
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. 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.
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 29, 2000, was as
follows:
DESCRIPTION NUMBER OF HOLDERS
Class A Common Stock (Voting), $100 par value 944
Class B Common Stock (Non-Voting), $100 par value 788
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.
7
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial information for the
five years ended December 31, 1999, derived from financial statements that have
been examined by independent public accountants. The table should be read in
conjunction with "Management's Discussion and Analysis" below and the financial
statements and the notes thereto included in Item 8.
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATING INCOME DATA:
Total Earnings $159,037,694 $146,925,402 $128,966,073 $121,416,635 $115,802,817
Net Sales 158,066,302 146,009,972 128,112,754 120,698,632 114,885,634
Total Expenses 157,556,139 145,562,723 126,796,355 119,559,309 114,234,183
Net Earnings
after Tax 992,020 893,489 1,408,230 1,206,222 1,016,484
Preferred Stock Dividends
Paid 554,346 682,368 620,812 515,029 401,155
Net Earnings Per Share of $6.24 $3.16 $ 12.71 $12.13 $11.55
Class A and Class B
Common Stock
DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Current Assets $ 27,247,000 $ 26,041,957 $ 24,821,508 $ 22,168,721 $ 18,607,029
Property
(Net of Accumulated
Depreciation) 10,756,483 9,516,835 9,408,768 9,466,577 9,787,350
Other Assets 677,547 483,405 477,010 440,405 386,648
------------ ------------ ------------ ------------ ------------
Total Assets $ 38,681,030 $ 36,042,197 $ 34,707,286 $ 32,075,703 $ 28,781,027
============ ============ ============ ============ ============
Current Liabilities $ 16,969,588 $ 15,894,431 $ 15,705,578 $ 14,131,330 $ 10,835,557
Long Term Liabilities 1,696,595 1,279,968 1,015,855 1,833,508 3,497,845
Stockholders' Equity 20,014,847 18,867,798 17,985,853 16,110,865 14,447,625
------------ ------------ ------------ ------------ ------------
Total Liabilities and
Stockholders' Equity $ 38,681,030 $ 36,042,197 $ 34,707,286 $ 32,075,703 $ 28,781,027
============ ============ ============ ============ ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company maintained its steady growth in 1999 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 1999 increased 8.3% ($12,056,330) over
1998 net sales, compared to a 14.0% growth rate ($17,897,218) of net sales in
1998 over 1997.
While sales grew in 1999, the increase was not as robust as the
increase in 1998. The decline in oil prices during late 1998 and early 1999 led
businesses in our selling territories, especially those dominated by the oil and
gas industry, to restrict their 1999 spending budgets. This reduction in
spending continued throughout 1999, offsetting the effect of increased sales
from a generally strong economy.
8
Net Sales. Strong economic growth, continuing strength in consumer
confidence and a positive response to the Company's lumber and building
materials program have resulted in higher rates of sales growth during 1999 than
experienced in previous periods, evidenced by increased sales in all but one of
the Company's selling territories. Through the building materials program the
Company passes along to Member-Dealers discounts it receives for early payment
to building material vendors. In addition, Member-Dealers receive longer payment
terms from the Company than if they were to order such materials from vendors
directly. These discounts in the traditionally low margin area of building
materials have caused Member-Dealers to significantly increase their orders of
these materials through the Company. Orders of building materials account for
$3,589,585 (approximately 30%) of the increase in net sales between 1998 and
1999.
The following table summarizes the Company's sales during 1999, 1998,
and 1997 by sales territory:
1999 1998 1997
------------------------------------------ ---- ----
% INCREASE
IN SALES % OF % OF % OF
FROM PRIOR TOTAL TOTAL TOTAL
SALES TERRITORY SALES YEAR SALES SALES SALES
- ---------------------------------------- --------------- ----------- ----- ----- -----
Houston Area $ 39,487,169 3% 25.2% 26.6% 26.2%
Victoria, San Antonio, Corpus Christi & 30,574,253 13% 19.5% 18.8% 18.0%
Rio Grande Valley Area*
North Texas, Dallas & Fort Worth Area 17,425,201 (9)% 11.1% 13.2% 13.8%
Austin, Brenham & Central Texas Area 20,115,552 21% 12.8% 11.5% 12.0%
Southern Louisiana Area 20,035,084 12% 12.8% 12.4% 11.7%
Baton Rouge, New Orleans, Mississippi, 12,671,122 10% 8.1% 8.0% 8.8%
Alabama & Florida Area
Arkansas Area 6,289,831 26% 4.0% 3.5% 3.5%
Oklahoma Area 10,198,573 17% 6.5% 6.0% 6.0%
------------ ----- ----- -----
Totals: $ 156,796,785(1) 100.0% 100.0% 100.0%
============= ===== ===== =====
- ---------------------------
* Includes small volume of sales to Mexican and Central American
Member-Dealers.
(1) Total does not include sales to dealers who were no longer
Member-Dealers at December 31, 1999.
Net Material Costs and Rebates. Net material costs during 1999 were
$141,831,398, compared to $130,554,986 in 1998 and $113,213,122 in 1997. Net
material costs for 1999 increased 8.6 percent over those costs in 1998, and
increased 15.3 percent in 1998 compared to 1997. However, net material costs as
a percentage of sales remained steady at 89.7 percent in 1999 as compared to
89.4 percent for 1998 and 88.4 percent in 1997. Sales with no markup increased
from $53,070,157 in 1998 to $61,375,978 in 1999. Sales with a markup ranging
from 0 to 5 percent increased to $76,119,397 in 1999 from $66,319,812 in 1998.
The negative impact of these factors on net material costs as a percentage of
net sales was offset by the positive effect of an increase in factory rebates
which the Company took as a credit against material costs in both 1999 and 1998.
Rebates for 1999 increased $271,939 or 6.0%, (1999-$4,774,250 versus
1998-$4,502,311).
Payroll Costs. With unemployment at a three-decade low, the U.S. labor
market has seldom been tighter. The increase in 1999 payroll costs resulted
primarily from salary increases needed to attract or retain high-quality
employees, offset during the same period by a decrease in overtime payroll costs
of 34.5%. As a result, payroll costs during 1999 increased $352,553, a 4.7%
increase over 1998 levels. In 1998, payroll costs increased $678,607, a 10.0%
increase over 1997 levels. However, these increases remained relatively low when
9
compared to the increases in net sales in the same periods (8.3% in 1999 and
15.3% in 1998). Despite this sustained pressure on wages, payroll costs as a
percentage of each of total expenses and net sales remained fairly constant at
5.0%, 5.1% and 5.3% for 1999, 1998 and 1997, respectively. The continuing
stability in payroll costs has been a result of an ongoing effort to maintain
employee productivity.
Other Operating Costs. In 1999, other operating costs increased
$341,490 (4.6%) over 1998 levels, while in 1998 these costs increased $743,428
(11.0%) over 1997 levels. However, these increases remained relatively low when
compared to the increases in net sales in the same periods (8.3% in 1999 and
15.3% in 1998). The principal reason for the increase in other operating costs
in 1999 was the $439,298 increase in general and administrative expenses. Over
25% of the 1999 increase in general and administrative expenses resulted from
the need to lease additional warehouse space as increased inventory exceeded the
Company's warehouse capacity. Administrative expenses for 1999 included a wide
variety of expenses, most notably, rent expense to lease additional warehouse
space ($110,000), non-recurring legal expenses ($104,446) and property and
franchise tax ($735,664). These increases were offset to some extent by
decreases in other miscellaneous operating costs. Despite the significant
increase in administrative expenses, other operating costs as a whole remained
fairly constant, amounting to 5.0% of each of net sales and total expenses in
1999 as compared to 5.1% in 1998 and 5.3% in 1997.
NET EARNINGS
Net sales for 1999 increased $12,056,330 (8.3%), net material costs
increased $11,276,412 (8.6%) over 1998 levels, and gross margin increased by
$779,918 (5.0%). In addition, less substantial increases in both payroll costs
(4.7%) and in other operating costs (4.6%) led to an increase in pretax net
earnings of 11.3 percent (from $1,387,437 in 1998 to $1,543,855 in 1999) and an
increase in after-tax net earnings of 11.0 percent (from $893,489 in 1998 to
$992,020 in 1999).
The Company's net earnings per share increased significantly in 1999,
from $3.16 per share in 1998 to $6.24 per share in 1999. This substantial
increase in net earnings per share was due to an increase in net earnings as
well as a decline in the dividends paid as a percentage of 1999 net earnings
(55.9% in 1999 as compared to 76.4% in 1998).
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, although this often results
in lower net earnings for the Company. Because these trends benefit the
individual shareholders of the Company, almost all of whom purchase the
Company's merchandise as Member-Dealers, there is no demand from shareholders
that the Company focus greater attention upon earnings per share.
FINANCIAL CONDITION AND LIQUIDITY
In 1999, Handy Hardware maintained its financial condition and its
ability to generate adequate amounts of cash while continuing to make
significant investments in land, inventory, warehouse and computer equipment,
software and delivery equipment to better meet the needs of its Member-Dealers.
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 fall trade show, (ii) payment terms available
to the Company from its suppliers, (iii) payment terms the Company offers to its
Member-Dealers, and (iv) the state of the regional economy in the Company's
selling territories.
During 1999 there was an increase of $60,627 in the Company's cash and
cash equivalents. The Company generated cash flow from operating activities of
$1,928,910 compared to $858,114 of cash from operations during 1998 and
$2,171,548 in 1997. The substantial increase in cash flow in 1999 was
principally attributable to variances in net earnings and accounts payable,
which were offset by the negative effect on cash flow caused by an increase in
inventory and accounts receivable. Net cash provided by financing activities was
$443,170 in 1999 and $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 Chase Bank line of credit.
Between the beginning of 1999 and December 31, 1999, net earnings
increased $992,020, an increase of 11.0%. The increase in net earnings was
mainly due to a strong economy which gave Member-Dealers confidence to make
significant purchases at the fall trade show and productivity which resulted in
proportional increases in expenses.
10
Accounts payable more than doubled over 1998 levels, increasing
$766,875 during 1999. This significant increase is primarily attributable to the
extended dating terms for payment offered to the Company by suppliers.
Inventory increased by 1953 stockkeeping units in 1999, which were
added in response to Member-Dealer demand for more breadth of inventory. The
increase in inventory of $1,041,067 in 1999 was significantly larger than the
increase in 1998 of $710,063 due to the availability of leased warehouse space
during 1999 which provided the Company with an additional 50,000 square feet for
stocking inventory. The Company ended 1999 with approximately 36,763
stockkeeping units.
Accounts receivable increased in 1999 by $295,837, and by $303,400 in
1998. The consistency of the levels of accounts receivable during the last two
years is attributable to a strong economy which gave Member-Dealers the ability
to pay down their accounts.
The Company's continuing ability to generate cash to fund its
activities is highlighted by the relative constancy of 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:
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
---- ---- ----
Working Capital $10,277,412 $10,147,526 $9,115,930
Current Ratio 1.61 to 1 1.64 to 1 1.58 to 1
Debt as Percentage of Capitalization 8.5% 6.8% 5.6%
In 2000, the Company 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
anticipated increased revenues from sales to the new Member-Dealers in Arkansas
and Oklahoma. The Company expects that this expansion in these selling
territories will have a beneficial effect on its ability to generate cash to
meet its funding needs.
CAPITAL RESOURCES
The Company invested $2,284,387 in plant and equipment in 1999. Over
the past five years the Company's investments in plant and equipment have
amounted to more than $8.3 million, and have provided the Company 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 1999, the Company invested $2,284,387 in plant and equipment, of
which $1,864,831 was used to purchase land and begin sitework needed for the
Company's's warehouse expansion project. The remainder was used to upgrade the
Company's computer system and purchase order entry terminals ($188,374), to
purchase office furniture and equipment ($90,964), to upgrade the Company's auto
fleet ($71,063) and to purchase warehouse equipment ($69,427).
In January, 1999 the Company purchased 29.96 acres of land located
across the street from the Company's current warehouse facility for $1,174,774.
The land has been used to relocate the Company's retention pond, provide
additional parking facilities and allow for future expansion of the Company's
current warehouse facility. The purchase was funded by drawing down on the
Company's Chase Bank line of credit. As of February 29, 2000, the total capital
expenditures for this first phase of the Company's expansion project were
$2,209,121, 84.4% of which was spent in 1999, primarily for the purchase of the
land. The entire amount drawn on the Company's Chase Bank line of credit during
1999 to fund the expansion project was repaid by the Company during the year
from its cash flow.
11
In August 1996, Chase Bank of Texas (the "Bank") extended to the
Company an unsecured $7.5 million revolving line of credit, which has been
periodically extended and will currently mature in April 2001. This line is used
from time to time for brief periods for working capital and other financing
needs of the Company. The average daily outstanding balance under this line
during 1999 was $104,515. At December 1999 there was no outstanding balance on
this line of credit.
In March 1999, Deutsche Financial Services extended to the Company a
$5,000,000 credit facility as an inventory financing source. There was no
borrowing under this agreement during 1999.
The Company has budgeted approximately $5,167,000 for year 2000 capital
expenditures. Of this amount, $4,752,000 will be used to expand and upgrade the
Company's current warehouse facility. It is likely that the expense of this
project will be funded through third-party financing, including the Company's
existing credit sources. Approximately $150,000 has been budgeted to upgrade the
Company's warehouse equipment, $115,000 to improve the Company's fleet of
automobiles, $100,000 to upgrade the Company's computer equipment and
approximately $50,000 to upgrade office furniture and equipment.
The Company's cash position of $1,173,749 at December 31, 1999 is
anticipated to be sufficient to fund the budgeted year 2000 capital
expenditures, except for the warehouse expansion project for which the Company
will utilize some third party financing, including the Company's existing credit
sources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
12
HANDY HARDWARE WHOLESALE, INC.
REPORT OF EXAMINATION
DECEMBER 31, 1999
13
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, 1999 and 1998, and the related statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Clyde D. Thomas
--------------------------------------
CLYDE D. THOMAS & COMPANY, P. C.
Certified Public Accountants
February 21, 2000
Pasadena, Texas
14
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
DECEMBER 31,
---------------------------------
1999 1998
---------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 1,173,749 $ 1,113,122
Accounts receivable, net of subscriptions receivable in the
amount of $54,484 for 1999 and $51,735 for 1998 10,631,282 10,335,445
Inventory (Note 1) 15,147,077 14,106,010
Note receivable (Note 2) 12,748 10,174
Prepaid expenses 181,809 371,322
Prepaid income tax 100,335 105,884
------------ ------------
$ 27,247,000 $ 26,041,957
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
At cost, less accumulated depreciation of
$5,162,434 (1999) and $4,517,166(1998) (Note 1) $ 10,756,483 $ 9,516,835
------------ ------------
OTHER ASSETS
Notes receivable (Note 2) $ 232,710 $ 130,362
Deferred compensation funded 429,688 329,084
Prepaid expenses 15,149 23,959
------------ ------------
$ 677,547 $ 483,405
------------ ------------
TOTAL ASSETS $ 38,681,030 $ 36,042,197
------------ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - stock - current portion (Note 3) $ 107,200 $ 26,750
Notes payable - capital leases (Note 5) 41,383 58,308
Accounts payable - trade 15,679,858 14,912,983
Accrued expenses payable 1,141,147 896,390
------------ ------------
$ 16,969,588 $ 15,894,431
------------ ------------
NONCURRENT LIABILITIES
Notes payable - stock - noncurrent portion (Note 3) $ 787,280 $ 521,280
Notes payable - capital leases (Note 5) 25,480 66,864
Notes payable - vendor consignment merchandise 224,872 114,707
Deferred compensation payable 429,688 329,084
Deferred income taxes payable (Notes 1 and 4) 229,275 248,033
------------ ------------
$ 1,696,595 $ 1,279,968
------------ ------------
Total Liabilities $ 18,666,183 $ 17,174,399
------------ ------------
15
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------------
1999 1998
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, Class A, authorized 20,000 shares, $100
par value per share, issued 9,190 and 8,930 shares $ 919,000 $ 893,000
Common stock, Class B, authorized 100,000 shares, $100
par value per share, issued 58,768 and 55,667 shares 5,876,800 5,566,700
Common stock, Class B subscribed, 4,498.24 and
4,309.98 shares 449,824 430,998
Less subscriptions receivable for Class B Common stock (27,242) (25,867)
Preferred stock, 7% cumulative, authorized 100,000 shares $100 par value
per share, issued 61,386.5 and 58,246.5 shares 6,138,650 5,824,650
Preferred stock subscribed, 4,498.24 and 4,309.98 shares 449,824 430,998
Less subscriptions receivable for Preferred stock (27,242) (25,868)
Paid in surplus 363,610 339,238
-------------- -------------
$ 14,143,224 $ 13,433,849
-------------- -------------
Retained earnings exclusive of other comprehensive earnings (Note 10) $ 5,765,441 $ 5,368,885
Retained earnings applicable to other comprehensive earnings (Note 10) 106,182 65,064
-------------- -------------
Total retained earnings $ 5,871,623 $ 5,433,949
-------------- -------------
Total Stockholders' Equity $ 20,014,847 $ 18,867,798
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,681,030 $ 36,042,197
------------------------------------------ ============== =============
See accompanying summary of accounting policies and notes to financial
statements.
16
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF EARNINGS
YEAR ENDED DECMEBER 31,
----------------------------------------------------------
1999 1998 1997
-------------- ------------ ------------
EARNINGS
- --------
Net sales $158,066,302 $146,009,972 $128,112,754
Sundry income 971,392 915,430 853,319
------------ ------------ ------------
TOTAL EARNINGS $159,037,694 $146,925,402 $128,966,073
-------------- ------------ ------------ ------------
EXPENSES
- --------
Net material costs $141,831,398 $130,554,986 $113,213,122
Payroll costs 7,818,586 7,466,033 6,787,426
Other operating costs 7,837,921 7,496,431 6,753,003
Interest expense 68,234 45,273 42,804
------------ ------------ ------------
TOTAL EXPENSES $157,556,139 $145,562,723 $126,796,355
-------------- ------------ ------------ ------------
NET EARNINGS BEFORE PROVISION FOR FEDERAL INCOME TAX
- ---------------------------------------------------- $ 1,481,555 $ 1,362,679 $ 2,169,718
PROVISION FOR FEDERAL INCOME TAX (Note 4) 530,653 485,530 761,515
- ----------------------------------------- ------------ ------------ ------------
NET EARNINGS $ 950,902 $ 877,149 $ 1,408,203
- ------------- ------------ ------------ ------------
OTHER COMPREHENSIVE EARNINGS
- ----------------------------
Unrealized gain on securities (Note 10) $ 62,300 $ 24,758 $ -
Provision for federal income tax (Note 4) 21,182 8,418 -
------------ ------------ ------------
Other comprehensive earnings net of tax 41,118 16,340 -
------------ ------------ ------------
TOTAL COMPREHENSIVE EARNINGS $ 992,020 $ 893,489 $ 1,408,230
- ----------------------------
LESS DIVIDENDS ON PREFERRED STOCK 554,346 682,368 620,812
- --------------------------------- ------------ ------------ ------------
NET EARNINGS APPLICABLE
TO COMMON STOCKHOLDERS $ 437,674 $ 211,121 $ 787,391
---------------------- ============ ============ ============
NET EARNINGS PER SHARE OF COMMON STOCK
CLASS A & CLASS B (Note 1) $ 6.24 $ 3.16 $ 12.71
-------------------------- ============ ============ ============
See accompanying summary of accounting policies and notes to financial
statements.
17
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECMEBER 31,
----------------------------------------------------------
1999 1998 1997
-------------- ------------ ------------
COMMON STOCK, CLASS A $100 PAR VALUE
- ------------------------------------
Balance at January 1, $ 893,000 $ 868,000 $ 822,000
Stock issued 79,000 83,000 80,000
Stock canceled (53,000) (58,000) (34,000)
------------ ------------ ------------
Balance at December 31, $ 919,000 $ 893,000 $ 868,000
------------ ------------ ------------
COMMON STOCK, CLASS B, $100 PAR VALUE
- -------------------------------------
Balance at January 1, $ 5,566,700 $ 5,251,300 $ 4,733,300
Stock issued 702,900 659,000 601,700
Stock canceled (392,800) (343,600) (123,700)
------------ ------------ ------------
Balance at December 31, $ 5,876,800 $ 5,566,700 $ 5,251,300
------------ ------------ ------------
COMMON STOCK, CLASS B, SUBSCRIBED
- ---------------------------------
Balance at January 1, $ 430,998 $ 436,135 $ 403,651
Stock subscribed 687,326 658,663 627,484
Transferred to stock (668,500) (663,800) (595,000)
------------ ------------ -------------
Balance at December 31, $ 449,824 $ 430,998 $ 436,135
Less subscription receivable (27,242) (25,867) (21,725)
------------ ------------ ------------
Total $ 422,582 $ 405,131 $ 414,410
------------ ------------ ------------
PREFERRED STOCK, 7% CUMULATIVE $100 PAR VALUE
- ---------------------------------------------
Balance at January 1, $ 5,824,650 $ 5,500,175 $ 5,021,375
Stock issued 728,925 691,000 619,900
Stock canceled (414,925) (366,525) (141,100)
----------- ----------- ------------
Balance at December 31, $ 6,138,650 $ 5,824,650 $ 5,500,175
----------- ----------- ------------
PREFERRED STOCK, 7% CUMULATIVE SUBSCRIBED
- -----------------------------------------
Balance at January 1, $ 430,998 $ 436,135 $ 403,652
Stock subscribed 687,326 658,663 627,483
Transferred to stock (668,500) (663,800) (595,000)
----------- ----------- ------------
Balance at December 31, $ 449,824 $ 430,998 $ 436,135
Less subscription receivable (27,242) (25,868) (21,726)
----------- ----------- ------------
Total $ 422,582 $ 405,130 $ 414,409
----------- ----------- ------------
PAID IN CAPITAL SURPLUS
- -----------------------
Balance at January 1, $ 339,238 $ 314,731 $ 296,965
Additions 24,372 24,507 17,766
----------- ----------- ------------
Balance at December 31, $ 363,610 $ 339,238 $ 314,731
----------- ----------- ------------
TREASURY STOCK, AT COST
COMMON STOCK, CLASS A, AT COST
- ---------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (53,000) (58,000) (34,000)
Stock canceled 53,000 58,000 34,000
Stock issued - - -
----------- ----------- ------------
Balance at December 31, $ - $ - $ -
----------- ----------- ------------
18
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PAGE 2
YEAR ENDED DECMEBER 31,
----------------------------------------------------------
1999 1998 1997
-------------- ------------ ------------
COMMON STOCK, CLASS B, AT COST
------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (392,800) (343,600) (123,700)
Stock canceled 392,800 343,600 123,700
Stock issued - - -
-------------- ------------ ------------
Balance at December 31, $ - $ - $ -
-------------- ------------ ------------
PREFERRED STOCK, 7% CUMULATIVE AT COST
--------------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (414,925) (366,525) (141,100)
Stock canceled 414,925 366,525 141,100
Stock issued - - -
-------------- ------------ ------------
Balance at December 31, $ - $ - $ -
-------------- ------------ ------------
TOTAL TREASURY STOCK $ - $ - $ -
-------------------- -------------- ------------ ------------
RETAINED EARNINGS
- -----------------
Balance at January 1 $ 5,433,949 $ 5,222,828 $ 4,435,437
Add: Net earnings year ending December 31 950,902 877,149 1,408,203
Other comprehensive earnings (Note 10) 41,118 16,340 -
Deduct: Cash dividends on Preferred Stock (Note 1) 554,346 682,368 620,812
-------------- ------------ ------------
Balance at December 31, $ 5,871,623 $ 5,433,949 $ 5,222,828
-------------- ------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 20,014,847 $ 18,867,798 $ 17,985,853
- -------------------------- ============== ============ ============
See accompanying sumary of accounting policies and notes to financial
statements.
19
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net earnings $ 992,020 $ 893,489 $ 1,408,203
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 1,034,733 1,005,576 947,004
Deferred income tax (18,758) (16,803) (32,937)
(Gain) Loss on sale of property, plant, and equipment (1,232) (10,986) (3,493)
Unrealized gain (increase in fair market value of
securities) (62,300) (24,758) -
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (295,837) (303,400) (825,868)
(Increase) Decrease in notes receivable (104,922) (14,629) (20,063)
(Increase) Decrease in deferred
compensation investment - - (39,791)
(Increase) Decrease in inventory (1,041,067) (710,063) (1,974,820)
(Increase) Decrease in prepaid expenses 203,872 (165,289) 70,665
Increase (Decrease) in note payable for vendor
consignment merchandise 110,165 (2,489) 11,352
Increase (Decrease) in accounts payable 766,875 362,826 2,617,806
Increase (Decrease) in accrued expenses payable 244,757 (154,290) (3,813)
Increase (Decrease) in current income tax payable - (45,253) (22,488)
Increase (Decrease) in deferred
compensation payable 100,604 44,183 39,791
----------- ----------- ------------
Net Cash Provided by (Used for) Operating Activities $ 1,928,910 $ 858,114 $ 2,171,548
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant, and equipment $(2,284,387) $ (1,113,643) $ (896,362)
Investment in deferred compensation funded (9,650) (9,650) -
Sale of property, plant and equipment 11,238 10,986 10,660
Reinvested dividends, interest, and capital gains (28,654) (9,775) -
----------- ------------ ------------
Net Cash Provided by (Used for) Investing Activities $(2,311,453) $ (1,122,082) $ (885,702)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Increase (Decrease) in notes payable - line of credit - - (1,837,424)
Increase (Decrease) in notes payable - lease (58,309) (52,488) (12,632)
Increase (Decrease) in notes payable - stock 346,450 317,280 (3,060)
(Increase) Decrease in subscription receivable (2,749) (8,284) 2,064
Proceeds from issuance of stock 1,572,849 1,447,233 1,384,333
Purchase of treasury stock (860,725) (768,125) (298,800)
Dividends paid (554,346) (682,368) (620,812)
----------- ------------ ------------
Net Cash Provided by (Used for) Financing Activities $ 443,170 $ 253,248 $(1,386,331)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 60,627 $ (10,720) (100,485)
----------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,113,122 1,123,842 1,224,327
- ---------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,173,749 $ 1,113,122 $ 1,123,842
- ---------------------------------------- ============ ============ ============
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest expense paid $ 68,234 $ 45,273 $ 42,804
Income tax payments 565,043 616,635 724,440
See accompanying summary of accounting policies and notes to financial
statements.
20
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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,
1999, the balance of this account amounted to $1,154,052.
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:
LIFE METHOD OF
ASSET IN YEARS DEPRECIATION
------------------------------------------- -------- ------------
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
Property, plant and equipment consists of:
DECEMBER 31,
-------------------------------------
1999 1998
------------ ------------
Land $ 3,202,572 $ 2,027,797
Buildings & improvements 8,549,156 7,859,100
Furniture, computer, warehouse equipment 3,740,954 3,721,832
Transportation equipment 426,235 425,272
------------ ------------
$ 15,918,917 $14,034,001
Less: Accumulated depreciation 5,162,434 4,517,166
------------ -----------
$ 10,756,483 $ 9,516,835
============ ===========
Depreciation expense for the year ended December 31, 1999, amounted to
$1,034,733 compared with $1,005,576 for the year ended December 31,
1998.
21
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------
Changes in Property, Plant, and Equipment for the year ended December 31, 1999,
are shown in the following schedule:
BALANCE ADDITIONS OTHER BALANCE
1-1-99 AT COST RETIREMENTS CHANGES 12-31-99
----------- --------- ----------- ------- ----------
Land $ 2,027,797 $ 1,174,775 $ - $ - $ 3,202,572
Buildings and improvements 7,859,100 690,056 - - 8,549,156
Furniture, computers and
warehouse equipment 3,721,832 348,494 329,372 - 3,740,954
Transportation equipment 425,272 71,063 70,100 - 426,235
----------- ----------- ---------- ------ -----------
$14,034,001 $ 2,284,388 $ 399,472 $ - $15,918,917
=========== ========= ========== ====== ===========
Changes in Property, Plant, and Equipment for the year ended December 31, 1998,
are shown in the following schedule:
BALANCE ADDITIONS OTHER BALANCE
1-1-98 AT COST RETIREMENTS CHANGES 12-31-98
----------- --------- ----------- ------- -----------
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
=========== =========== ========= ====== ===========
Changes in Property, Plant, and Equipment for the year ended December 31, 1997,
are shown in the following schedule:
BALANCE ADDITIONS OTHER BALANCE
1-1-97 AT COST RETIREMENTS CHANGES 12-31-97
----------- --------- ----------- ------- -----------
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
=========== ========== ========== ====== ===========
22
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 1999, are shown in the following schedule:
BALANCE ADDITIONS OTHER BALANCE
1-1-99 AT COST RETIREMENTS CHANGES 12-31-99
------- --------- ----------- ------- --------
Land $ - $ - $ - $ - $ -
Buildings and improvements 2,093,539 263,546 - - 2,357,085
Furniture, computers and
warehouse equipment 2,154,561 670,994 329,372 - 2,496,183
Transportation equipment 269,066 100,193 60,093 - 309,166
----------- ---------- ---------- ------ -----------
$ 4,517,166 $1,034,733 $ 389,465 $ - $ 5,162,434
=========== ========== ========== ====== ===========
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 1998, are shown in the following schedule:
BALANCE ADDITIONS OTHER BALANCE
1-1-98 AT COST RETIREMENTS CHANGES 12-31-98
------- --------- ----------- ------- --------
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
=========== ========== ========== ====== ===========
Changes in Accumulated depreciation for property, plant, and equipment for the
year ended December 31, 1997, are shown in the following schedule:
BALANCE ADDITIONS OTHER BALANCE
1-1-97 AT COST RETIREMENTS CHANGES 12-31-97
--------- --------- ----------- ------- --------
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
=========== ========== ========== ====== ===========
23
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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:
Annual Tax Depreciation Total
Tax Depreciation (over) under Book Accumulation
Over (Under) Book Depreciation for Tax Over Book
Year Depreciation Deleted Assets Depreciation
---- ----------------- ----------------- ---------------
12-31-97 (34,032) 639 1,298,079
12-31-98 (21,873) (5,322) 1,270,884
12-31-99 (22,129) 8,918 1,257,673
2. Deferred compensation is accrued as follows:
Balance, December 31, 1998 $ 329,084
Addition for year ended December 31, 1999 100,604
----------
Balance, December 31, 1999 $ 429,688
==========
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.
DECEMBER 31,
----------------------------------
1999 1998
----------- -----------
Book inventory $15,147,077 $14,106,010
Adjustment for 263A uniform
capitalization costs 296,130 292,008
----------- -----------
Inventory for tax return $15,443,207 $14,398,018
=========== ===========
The Company accounts for any tax credits as a reduction of income tax
expense in the year in which such credits arise.
24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
----------- ---------- ----------
Net Earnings $ 992,020 $ 893,489 $1,408,203
Less: Dividends on preferred stock 554,346 682,368 620,812
----------- ---------- ----------
$ 437,674 $ 211,121 $ 787,391
Weighted average shares of common stock
(Class A and Class B outstanding) 70,101 66,763 61,934
Net Earnings (Loss) per share of
common stock $ 6.24 $ 3.16 $ 12.71
Preferred Stock Dividends
-------------------------
Cash dividends paid on the Company's outstanding preferred stock (par value
$100 per share) were 10% for 1999, 10% for 1998, and 13% for 1997,
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
----------- ------------------ -----
1999 63,662 $ 8.71
1998 60,531 11.27
1997 55,929 11.10
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.
25
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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. In September, 1999,
virtually the same type of deferred payment agreement was put into effect
with Chicago Specialty, a manufacturer of plumbing supplies.
Notes receivable are classified as follows:
December 31,
---------------------------
1999 1998
---------- -----------
Current $ 12,748 $ 10,174
Nonncurrent 232,710 130,362
-------- -------
Total $ 245,458 $ 140,536
========== ===========
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 on outstanding notes currently range
from 5.25% to 7.0%
Notes payable - stock are classified as follows:
December 31,
---------------------------
1999 1998
---------- -----------
Current $ 107,200 $ 26,750
Nonncurrent 787,280 521,280
---------- -----------
Total $ 894,480 $ 548,030
========== ===========
Principal payments applicable to the next five years are as follows:
2000 $ 107,200
2001 57,000
2002 32,800
2003 324,280
2004 373,200
-----------
$ 894,480
==========
26
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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):
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Excess of tax over book depreciation $1,257,673 $1,270,884 $1,298,079
Allowance for bad debts (7,195) (7,195) (7,195)
Inventory - ending inventory adjustment
for tax recognition of Sec. 263A
uniform capitalization costs (296,130) (292,008) (288,788)
Deferred compensation (280,010) (242,173) (223,165)
---------- ---------- ----------
Total $ 674,337 $ 729,508 $ 778,931
Statutory tax rate 34% 34% 34%
---------- ---------- ----------
Cumulative deferred income tax payable $ 229,275 $ 248,033 $ 264,836
========== ========== ==========
Classified as:
Current liability $ - $ - $ -
Noncurrent liability 229,275 248,033 264,836
---------- ---------- ----------
$ 229,275 $ 248,033 $ 264,836
========== ========== ==========
Reconciliation of income taxes on difference between tax and financial
accounting:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
--------- ---------- ----------
Principal components of income tax expense
Federal:
Current
Income tax paid $ 565,043 $ 616,635 $ 724,440
Carryover of prepayment from prior year 105,884 - 24,686
Current income tax payable - - 45,253
---------- ---------- ----------
$ 670,927 $ 616,635 $ 794,379
Carryover to subsequent year 100,335 105,883 -
---------- ---------- ----------
Income tax for tax reporting at statutory rate of 34% $ 570,592 $ 510,752 $ 794,379
Deferred
Adjustments for financial reporting:
Depreciation (4,492) (9,246) (11,354)
263A uniform capitalization costs (1,401) (1,095) (13,447)
Other (12,864) (6,463) (8,063)
---------- ---------- ----------
Provision for federal income tax (U.S.) $ 551,835 $ 493,948 $ 761,515
========== ========== ==========
27
The Company is not exempt from income tax except for municipal bond
interest earned in an amount of $2,177.
Handy is not classified as a nonexempt cooperative under the provisions of
the Internal Revenue Code and is not entitled to deduct preferred dividends
in determining its taxable income.
28
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - LEASES
- ---------------
Operating Leases
----------------
The Company leases certain trucks and trailers under long-term operating
lease agreements. The leases expire in each of the years between 2000 and
2004.
The following is a schedule of future minimum lease payments for operating
leases as of December 31, 1999 and 1998 for the subsequent five years:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
----------- ----------
1999 $ - $ 636,736
2000 644,799 630,288
2001 558,180 488,372
2002 215,282 272,449
2003 112,148 104,740
2004 70,126 -
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,
------------------------------
1999 1998
----------- ----------
Class of Property
Furniture, computers,
and warehouse equipment $ 166,479 $ 168,316
Transportation equipment - -
---------- ----------
$ 166,479 $ 168,316
Less: Accumulated depreciation 140,037 111,445
---------- ----------
$ 26,442 $ 56,871
========== ==========
The following is a schedule by year of future minimum lease payments for
capital leases.
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
----------- -----------
1999 $ - $ 58,308
2000 41,383 41,383
2001 7,889 7,889
2002 17,591 17,592
---------- ----------
TOTAL $ 66,863 $ 125,172
========== ==========
The lease payments at year end 1999 are reflected in the Balance Sheet as
current and noncurrent obligations under capital leases of $41,383 and
$25,480, respectively. The estimated interest rates range from 4% to 9%.
29
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - LEASES (CONTINUED)
- --------------------------
Rental Expenses
---------------
Rental expenses for the preceding three years are:
1999 $1,089,000
1998 1,251,805
1997 1,041,985
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 1999, 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:
1999 $ 551,311
1998 506,812
1997 599,475
30
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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. Although the
Subscription Agreement entitles the Company 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, 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
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 paid to the Member-Dealer immediately at the time of
repurchase.
Stock Repurchase
-----------------
In 1999 and 1998 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 1999 and 1998 the Company repurchased 268 and 284 shares for
$26,800 and $28,400, 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,
1999, 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.
BALANCE BORROWING PAYMENTS BALANCE INTEREST INTEREST
1-01-99 DURING 1999 DURING 1999 12-31-99 RATE PAID
------- ------------ ----------- -------- --------- --------
$ -0- $15,937,543 $15,937,543 $ -0- 6.25 to 6.75% $15,158
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.
In March, 1999 Deutsche Financial Services extended to the Company a
$5,000,000 credit facility as an inventory financing source. There was no
borrowing under this agreement during the year ended December 31, 1999.
32
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 $429,688 on the Balance Sheet
as a non-current asset at December 31, 1999, includes equity securities
classified as investments available for sale in the amount of $376,768 at
fair market value. The $376,768 includes $160,881 unrealized gain on
securities resulting from the increase in fair market value. The cost of
the equity securities is $215,887.
2. Changes in Equity Securities
Year Ended
December 31, 1999 Cumulative
----------------- ----------
Balance, January 1, 1999 $ 279,644 $ -
Purchases 6,170 105,060
Dividends, interest and capital gains 28,654 110,827
Unrealized gains on securities resulting from increase
in fair market value 62,300 160,881
--------- ---------
Balance, December 31, 1999 $ 376,768 $ 376,768
========= =========
3. Components of Comprehensive Earnings
Total Other Comprehensive Net Earnings Exclusive
Comprehensive Earnings - Unrealized of Other
Earnings Gains on Securities Comprehensive Earnings
------------- --------------------- ----------------------
Net earnings before provision for
federal income tax $ 1,543,855 $ 62,300 $ 1,481,555
Provision for federal income tax 551,835 21,182 530,653
----------- ------------ -----------
Net earnings $ 992,020 $ 41,118 $ 950,902
=========== ============ ===========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Applicable to Other Exclusive of Other
Total Comprehensive Earnings Comprehensive Earnings
----------- ---------------------- ----------------------
Balance, January 1, 1999 $ 5,443,949 $ 65,064 $ 5,368,885
Add: Net earnings year ended
December 31, 1999 992,020 41,118 950,902
Deduct: Cash Dividends on
Preferred Stock (554,346) - (554,346)
----------- ------------ -----------
Balance, December 31, 1999 $ 5,871,623 $ 106,182 $ 5,765,441
=========== ============ ===========
33
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 11 - SUBSEQUENT EVENT
- --------------------------
In the latter half of 1999, the Board of Directors approved a warehouse
expansion project currently budgeted for approximately $8,100,000. The
project commenced in the first quarter of 2000. 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, 1999, 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, 1999.
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, Florida, Mexico and Central
America.
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
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 to be held May 10, 2000, which
proxy statement will be filed with the Securities and Exchange Commission within
120 days after the close of the Company's 1999 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.............................................................................. 14
Balance Sheets at December 31,
1999 and 1998............................................................................... 15
Statements of Earnings for the
years ended December 31,
1999, 1998 and 1997 ........................................................................ 17
Statements of Stockholders' Equity
for the years ended December 31,
1999, 1998 and 1997 ........................................................................ 18
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ........................................................... 20
Notes to Financial Statements................................................................. 21
(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.
(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).
35
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).
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.
36
(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.
(Filed as Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December
31, 1995, and incorporated herein by reference).
*10.12 Seventh Amendment to the Employment Agreement, as
amended, between Handy Hardware Wholesale, Inc.
and James D. Tipton dated September 30, 1996.
(Filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996, and incorporated herein by
reference).
*10.13 Eighth Amendment to the Employment Agreement, as
amended, between Handy Hardware Wholesale, Inc.
and James D. Tipton dated December 24, 1997.
(Filed as Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December
31, 1997, and incorporated herein by reference).
*10.14 Ninth Amendment to the Employment Agreement, as
amended, between Handy Hardware Wholesale, Inc.
and James D. Tipton dated December 31, 1998.
(Filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the year ended December
31, 1998, and incorporated herein by reference).
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. (Filed as Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by
reference).
**10.16 Third Amendment to Amendment and Restatement of
Credit Agreement between the Company and Chase
Bank of Texas, National Association dated April
30, 1999.
**10.17 Agreement for Wholesale Financing between the
Company and Deutsche Financial Services dated
March 9, 1999.
**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.
37
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three months ended
December 31, 1999.
(C) EXHIBITS
Listed in Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
Listed in Item 14(a)(2) above.
38
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 23, 2000
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 23, 2000
- ------------------- Officer and Director
/s/ Tina S. Kirbie Chief Financial and March 23, 2000
- ------------------- Accounting Officer
/s/ Weldon D. Bailey Director March 27, 2000
- -------------------
/s/ Norman J. Bering, II Director March 24, 2000
- -------------------
/s/ Susie Bracht-Black Director March 24, 2000
- -------------------
/s/ Virgil H. Cox Director March 24, 2000
- -------------------
/s/ Samuel J. Dyson Director March 24, 2000
- -------------------
/s/ Robert L. Eilers Director March 24, 2000
- -------------------
/s/ Richard A. Lubke Director March 26, 2000
- -------------------
/s/ Jimmy T. Pate Director March 28, 2000
- -------------------
/s/ Leroy Wellborn Director March 23, 2000
- -------------------
39