SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2002.
Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1381875
(State of incorporation) (I.R.S. Employer
Identification No.)
8300 Tewantin Drive, Houston, Texas 77061
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number: (713) 644-1495
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
The number of shares outstanding of each of the Registrant's classes of common
stock as of September 30, 2002, was 10,280 shares of Class A Common Stock, $100
par value, and 75,366 shares of Class B Common Stock, $100 par value.
HANDY HARDWARE WHOLESALE, INC.
FORM 10-Q
Quarter Ended - September 30, 2001
INDEX
PART I Financial Information Page No.
-------
Item 1. Financial Statements
Condensed Balance Sheet September 30, 2002
and December 31, 2001 ....................... 3 - 4
Condensed Statement of Earnings - Three Months &
Nine Months Ended September 30, 2002 and 2001. 5
Condensed Statement of Cash Flows - Nine Months
Ended September 30, 2002 and 2001 ............ 6
Notes to Condensed Financial Statements......... 7 - 13
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations............ 14 - 19
Item 3. Quantitative & Qualitative Disclosures About
Market Risk.................................... 19
Item 4. Controls and Procedures ....................... 19
PART II Other Information
Items 1-4. None 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
Certifications 23 - 24
Page 2 of 24
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 4,724,853 $ 1,411,096
Accounts Receivable, net of
subscriptions receivable and
allowance for doubtful
accounts (Note 8) 13,342,675 11,748,607
Inventory 19,413,081 18,207,690
Notes Receivable (Note 3) 544 935
Other Current Assets 133,776 213,461
Prepaid Income Tax -0- 201,897
Deferred Compensation Funded 61,472 30,736
------------- ------------
$ 37,676,401 $ 31,814,422
------------- ------------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
At Cost Less Accumulated Depreciation
of $7,009,751(2002) and $6,088,346 (2001) $ 16,185,603 $ 16,776,391
------------- ------------
OTHER ASSETS
Notes Receivable (Note 3) $ 309,689 $ 334,157
Deferred Compensation Funded 174,243 338,093
Other Noncurrent Assets 5,970 25,762
------------- ------------
$ 489,902 $ 698,012
------------- ------------
TOTAL ASSETS $ 54,351,906 $ 49,288,825
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable-Line of Credit $ 4,155,000 $ 2,700,000
Notes Payable-Stock (Note 4) 328,880 32,800
Notes Payable-Capital Lease 9,780 27,371
Accounts Payable - Trade 19,703,245 21,034,254
Other Current Liabilities 1,217,095 1,230,094
Federal Income Taxes Payable (Note 5) 21,326 -0-
Deferred Compensation Payable 61,472 30,736
------------- ------------
$ 25,496,798 $ 25,055,255
------------- ------------
NONCURRENT LIABILITIES
Note Payable-Line of Credit $ 4,155,000 $ -0-
Notes Payable-Stock (Note 4) 539,840 750,360
Notes Payable-Capital Lease 26,901 34,235
Notes Payable-Vendor 308,551 334,157
Deferred Compensation Payable 191,213 338,093
Deferred Income Taxes Payable (Note 5) 192,472 190,888
------------- ------------
$ 5,413,977 $ 1,647,733
------------- ------------
TOTAL LIABILITIES $ 30,910,775 $ 26,702,988
------------- ------------
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page 3 of 24
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
STOCKHOLDERS' EQUITY
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
10,820 & 10,510 shares $ 1,082,000 $ 1,051,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
77,118 & 70,753 shares 7,711,800 7,075,300
Common Stock, Class B
Subscribed 5,143.77 & 5,093.62
shares 514,377 509,362
Less Subscription Receivable (42,637) (22,502)
Preferred Stock 7% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
80,097 & 73,622 shares 8,009,700 7,362,200
Preferred Stock, Subscribed
5,143.77 & 5,093.62 shares 514,377 509,362
Less Subscription Receivable (42,637) (22,502)
Paid in Surplus 443,341 426,007
------------- ------------
$ 18,190,321 $ 16,888,227
Less: Cost of Treasury Stock
4,106 & -0- shares (410,600) -0-
------------- ------------
$ 17,779,721 $ 16,888,227
Retained Earnings exclusive of other
comprehensive earnings (Note 7) 5,695,782 5,682,518
Retained Earnings (loss) applicable to
other comprehensive earnings (Note 7) (34,372) 15,092
------------- ------------
5,661,410 5,697,610
------------- ------------
Total Stockholders' Equity $ 23,441,131 $ 22,585,837
------------- ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 54,351,906 $ 49,288,825
============= -===========
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page 4 of 24
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------ -------------------------------
2002 2001 2002 2001
---- ---- ---- -----
REVENUES
Net Sales $ 45,337,615 $ 45,810,043 $141,529,245 $135,822,895
Sundry Income 789,977 774,826 2,029,497 1,899,532
------------ ------------ ------------ ------------
TOTAL REVENUES $ 46,127,592 $ 46,584,869 $143,558,742 $137,722,427
------------ ------------ ------------ ------------
EXPENSE
Net Mat'l. Costs $ 40,609,542 $ 41,479,089 $126,925,987 $123,008,967
Payroll Costs 2,351,562 2,329,542 7,044,524 6,639,127
Other Operating Costs 2,827,315 2,541,067 8,647,379 7,330,926
Interest Expense 50,349 53,617 143,172 139,290
------------ ------------ ------------ ------------
TOTAL EXPENSE $ 45,838,768 $ 46,403,315 $142,761,062 $137,118,310
------------ ------------ ------------ ------------
NET EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 288,824 $ 181,554 $ 797,680 $ 604,117
------------ ------------ ----------- ------------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5 & 7) (104,571) (68,855) (292,932) (225,866)
------------ ------------ ----------- ------------
NET EARNINGS $ 184,253 $ 112,699 $ 504,748 $ 378,251
LESS ESTIMATED
DIVIDENDS ON
PREFERRED STOCK (122,871) (158,933) (368,613) (476,801)
------------ ------------ ----------- ------------
NET EARNINGS (LOSS)
APPLICABLE
TO COMMON
STOCKHOLDERS $ 61,382 $ (46,234) $ 136,135 $ (98,550)
============ ============ ============ ============
NET EARNINGS (LOSS)
PER SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ 0.69 $ (0.56) $ 1.55 $ (1.22)
============ ============ =========== ============
OTHER COMPREHENSIVE EARNINGS (LOSS)
Unrealized Gain (Loss)on
Securities (Note 7) $ (36,690) $ (61,931) $ (74,946) $ (97,927)
Provision for Federal
Income Tax (Note 5) 11,321 21,057 25,482 33,295
----------- ------------ ----------- ------------
Other Comprehensive
Earnings (Loss)
Net of Tax $ (25,369) $ (40,874) $ (49,464) $ (64,632)
----------- ------------ ----------- ------------
TOTAL COMPREHENSIVE
EARNINGS (LOSS) $ 36,013 $ (87,108) $ 86,671 $ (163,182)
(Note 7) ----------- ------------ ----------- ------------
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page 5 of 24
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITY
Net Earnings Plus Other Comprehensive
Earnings (Note 7) $ 455,284 $ 313,619
------------ -----------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation $ 950,075 $ 827,982
Increase (Decrease) in Deferred
Income Tax 1,584 35,539
Unrealized (gain) loss
In fair market value of securities 74,946 97,927
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (1,594,068) $(4,762,855)
(Increase) Decrease in Notes Receivable 24,860 (22,777)
Increase in Inventory (1,205,390) (3,262,158)
Decrease in Other Assets 99,477 87,476
Decrease in Prepaid Income Tax 201,897 -0-
Increase (Decrease) in Note Payable-Vendor (25,606) 28,980
Increase (Decrease) in Accounts Payable (1,331,009) 8,168,198
Increase (Decrease) in Other Liabilities (12,999) 150,737
Increase in Federal Income
Taxes Payable 21,326 4,854
Increase (Decrease) in Deferred Compensation
Payable (116,144) 1,723
------------ -----------
TOTAL ADJUSTMENTS $ (2,911,051) $ 1,355,626
------------ -----------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ (2,455,767) $ 1,669,245
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures $ (359,288) $(4,558,578)
(Investment in)Payment From Deferred
Compensation Funded 60,000 (97,927)
Reinvested dividends, interest & capital gains (1,833) (1,723)
------------ -----------
NET CASH USED FOR
INVESTING ACTIVITIES $ (301,121) $(4,658,228)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase Note Payable - Line of Credit $ 5,610,000 $ 3,960,000
Increase (Decrease) in Notes Payable - Stock 85,560 (11,040)
Increase (Decrease) in Notes Payable -
Capital Lease (24,925) 40,544
Increase in Subscription Receivable (40,270) (31,704)
Proceeds From Issuance of Stock 1,342,364 1,384,944
Purchase of Treasury Stock (410,600) (245,800)
Dividends Paid (491,484) (635,737)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 6,070,645 $ 4,461,207
NET INCREASE
IN CASH & CASH EQUIVALENTS $ 3,313,757 $ 1,472,224
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,411,096 1,221,788
----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 4,724,853 $ 2,694,012
=========== ===========
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Interest Expense Paid $ 143,172 $ 139,290
Income Taxes Paid 244,540 152,178
The accompanying notes are an integral part of the Condensed Financial
Statements.
Page 6 of 24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
(1) Description of Business:
HandyHardware Wholesale, Inc., ("Handy"), was incorporated as a Texas
corporation on January 6, 1961. Its principal executive offices and
warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061. Handy
is owned entirely by its member-dealers and former member-dealers.
Handy sells to its member-dealers products primarily for retail
hardware, lumber and home center stores. In addition, we offer advertising
and other services to member-dealers. The Company wholesales hardware to
its member-dealers in Texas, Oklahoma, Louisiana, Alabama, Mississippi,
Arkansas, Florida, Colorado, New Mexico, Mexico and Belize.
(2) General Information:
The condensed consolidated financial statements included herein have been
prepared by Handy. The financial statements reflect all adjustments, which
were all of a recurring nature, and which are, in the opinion of
management, necessary for a fair presentation. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Handy believes that the disclosures made are adequate to
make the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the latest Form 10-K
Annual Report.
(3) Cash:
For purposes of the statement of cash flows, Handy considers all highly
liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
(4) Inventories:
Inventories are valued at the lower of cost or market method, determined by
the first in, first out method, with proper adjustment having been made for
any old or obsolete merchandise.
(5) Earnings Per Share:
Net earnings per common share (Class A and Class B combined) are based on
the weighted average number of shares outstanding in each period after
giving effect to the stock issued, stock subscribed, estimated dividends on
Preferred Stock, and treasury stock, as set forth by Accounting Principles
Board Opinion No. 15 as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------
2002 2001 2002 2001
---------------------- -------------------
Calculation of Net Earnings Per Share
of Common Stock
Net Earnings Before Preferred
Dividends $ 184,253 $112,699 $504,748 $378,251
Less: Estimated Dividends
on Preferred Stock (122,871) (158,933) (368,613) (476,801)
--------- -------- -------- --------
Net Earnings (Loss) Applicable
to Common Shareholders $ 61,382 $(46,234) $136,135 $(98,550)
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 89,588 83,142 87,816 80,773
Net Earnings(Loss)Per Share
of Common Stock $ 0.69 $ (0.56) $ 1.55 $ (1.22)
========= ======== ======== ========
Page 7 of 24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(6) Revenue Recognition:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. Accordingly, revenues and
expenses are accounted for using the accrual basis of accounting. Under
this method of accounting, revenues and receivables are recognized when
merchandise is shipped or services are rendered, and expenses are
recognized when the liability is incurred.
(7) Accounting for Dividends on Preferred Stock:
Handy pays dividends on Preferred Stock during the first quarter of each
fiscal year. Only holders of Preferred Stock on the record date for the
payment of the dividend are entitled to receive dividends. Dividends are
prorated for the portion of the twelve-month period ending January 31,
during which the Preferred Stock was held.
Because Handy is unable to anticipate the amount of the Preferred Stock
dividends, it does not accrue a liability for the payment of those
dividends on its balance sheet. To more properly reflect net earnings,
however, on the Condensed Statement of Earnings included herein, Handy
shows an estimated portion of the dividends to be paid in the first quarter
of 2003 based on the dividends paid in the first quarter of 2002.
When dividends on Preferred Stock are actually paid, there is a reduction
of retained earnings. Retained earnings on the Condensed Balance Sheet for
the nine months ended September 30, 2002 contained herein, therefore, are
net of dividends actually paid during the first quarter of 2002 in the
amount of $491,484.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment Consists of:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Land $ 3,207,866 $ 3,207,866
Building & Improvements 15,489,101 15,452,276
Furniture, Computer, Warehouse 3,952,287 3,698,071
Transportation Equipment 546,100 506,524
----------- -----------
$23,195,354 $22,864,737
Less: Accumulated Depreciation (7,009,751) (6,088,346)
----------- -----------
$16,185,603 $16,776,391
=========== ===========
Page 8 of 24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - NOTES RECEIVABLE
Notes receivable reflect amounts due to Handy from its member-dealers under
deferred payment agreements and installment sale agreements.
Under the deferred agreement, Handy supplies member-dealers with an initial
order of General Electric Lamps. The payment for this order is deferred so long
as the member-dealer continues to purchase General Electric lamps through Handy.
If a member-dealer ceases to purchase lamp inventory or sells or closes his
business, then General Electric invoices Handy for the member-dealer's initial
order and the member-dealer's note becomes immediately due and payable in full
to Handy. In September 1999, virtually the same type of deferred agreement was
put into effect with Chicago Specialty, a manufacturer of plumbing supplies. As
of September, 2002 Chicago Specialty ceased its operations. To date, we have not
received any demand from Chicago Specialty for payment on the outstanding
invoices of $25,606.
Under the installment sale agreements, we sell member-dealers computer hardware,
the purchase price of which is due and payable by member-dealers to us in
thirty-six monthly installments of principal and interest.
Notes Receivable are classified as follows:
CURRENT PORTION NONCURRENT PORTION
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31,
--------- -------- --------- --------
2002 2001 2002 2001
---- ---- ---- ----
Deferred Agreements $ -0- $ -0- $308,551 $334,157
Installment Sale Agreements 544 935 1,138 -0-
------- ------- -------- --------
$ 544 $ 935 $309,689 $334,157
======= ======= ======== ========
NOTE 4 - NOTES PAYABLE STOCK
The five year, interest bearing notes payable - stock reflect amounts due from
Handy to former member-dealers for our repurchase of shares of Handy stock owned
by these former member-dealers. According to the terms of the notes, only
interest is paid on the outstanding balance of the notes during the first four
years. In the fifth year, both interest and principal are paid. Interest rates
range from 4.00% to 6.25%.
Notes Payable - Stock are classified as follows:
CURRENT PORTION NONCURRENT PORTION
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31,
--------- -------- --------- --------
2002 2001 2002 2001
---- ---- ---- ----
$328,880 $ 32,800 $539,840 $750,360
Principal payments due over the next five years are as follows:
2002 328,880
2003 7,000
2004 358,200
2005 41,280
2006 26,600
Thereafter 106,760
--------
$868,720
========
Page 9 of 24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
Handy adopted FASB Statement No. 109, "Accounting for Income Taxes," effective
January 1, 1993. The adoption of this standard changed our method of accounting
for income taxes from the deferred method to the liability method.
QUARTER ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Excess of tax over book depreciation $ 1,392,628 $ 1,342,353
Allowance for Bad Debt (44,001) (44,001)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (426,487) (380,869)
Deferred Compensation (356,048) (356,048)
----------- -----------
Total 566,092 561,435
Statutory Tax Rate 34% 34%
----------- -----------
Cumulative Deferred Income Tax Payable $ 192,472 $ 190,888
=========== ===========
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 192,472 190,888
----------- -----------
$ 192,472 $ 190,888
=========== ===========
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
QUARTER ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Principal Components of Income Tax Expense
Federal:
Current
Income tax paid $ 42,643 $ 81,395
Carry-over of prepayment
from prior year 201,897 70,783
Refund received for overpayment
from prior year -0- -0-
----------- -----------
$ 244,540 $ 152,178
Federal Income Tax Payable (Receivable) 21,326 4,854
Carry-over to subsequent year - 0 - -0-
----------- -----------
Income tax for tax reporting
at statutory rate of 34% $ 265,866 $ 157,032
Deferred
Adjustments for financial reporting:
Depreciation 17,094 45,038
263A Uniform Capitalization Costs (15,510) (6,099)
Other -0- (3,400)
----------- -----------
Provision for federal income tax $ 267,450 $ 192,571
=========== ===========
Handy is not exempt from income tax except for municipal bond interest
earned in the amount of $1,832.
We are not classified as a nonexempt cooperative under the provisions of
the Internal Revenue Code and are not entitled to deduct preferred dividends in
determining our taxable income.
Page 10 of 24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 6 - STOCKHOLDERS' EQUITY
- -----------------------------
(1) Terms of Capital Stock
----------------------
The holders of Class A Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of shareholders. Holders
of Class A Common Stock must be engaged in the retail sale of goods and
merchandise, and may not be issued or retain more than ten shares of Class
A Common Stock at any time. The holders of Class B Common Stock are not
entitled to vote on matters submitted to a vote of shareholders except as
specifically provided by Texas law.
The holders of Preferred Stock are entitled to cumulative dividends.
Handy's Articles of Incorporation require the Board of Directors to declare
a dividend each year of not less than 7 percent nor more than 20 percent of
the par value ($100.00 per share) of the shares of Preferred Stock. The
Preferred Stock has a liquidation value of $100 per share. The holders of
Preferred Stock are not entitled to vote on matters submitted to a vote of
shareholders except as specifically provided by Texas law. The shares of
Preferred Stock are not convertible, but are subject to redemption (at the
option of Handy) by vote of Handy's Board of Directors, in exchange for
$100 per share and all accrued unpaid dividends.
(2) Capitalization
--------------
To become a member-dealer, an independent hardware dealer must enter into a
Subscription Agreement with us for the purchase of ten shares of Handy
Class A Common Stock, $100 par value per share, or ten shares of Preferred
Stock for any additional store, with an additional agreement to purchase a
minimum number of shares of Class B Common Stock, $100 par value per share,
and Preferred Stock, $100 par value per share. Class B Common Stock and
Preferred Stock are purchased pursuant to a formula based upon total
purchases of merchandise by the member-dealer from Handy, which determines
the "Desired Stock Ownership" for each member-dealer. The minimum Desired
Stock Ownership is $10,000.
Each member-dealer receives from Handy a semimonthly statement listing
total purchases made during the covered billing period, with an additional
charge ("Purchase Funds") equal to 2 percent of the member-dealer's
warehouse purchases until the member-dealer's Desired Stock Ownership is
attained. Although the Subscription Agreement entitles Handy to collect 2
percent of total purchases, since May 1, 1983, the Board of Directors has
determined to collect 2 percent of warehouse purchases only. On a monthly
basis, we review the amount of unexpended Purchase Funds being held for
each member- dealer. If a member-dealer has unexpended Purchase Funds of at
least $2000, Handy applies such funds to the purchase of ten shares of
Class B Common Stock ($1,000) and ten shares of Preferred Stock ($1,000),
each at $100 per share.
(3) Transferability
---------------
Holders of Class A Common Stock may not sell those shares to a third party
without first offering to sell them back to Handy. There are no specific
restrictions on the transfer of Class B Common or Preferred Stock.
Page # 11 of 24 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- -----------------------------------------
(4) Membership Termination
Following written request, Handy will present to the Board of Directors a
member-dealer's desire to have his stock repurchased and the
member-dealer's contract terminated. According to the current procedures
established by the Board of Directors, a member-dealer's stock may be
repurchased according to either of two options.
Option - I The member-dealer's Class A Common Stock is repurchased at
$100 per share. Any funds remaining in the member-dealer's
Purchase Fund Account will be returned at the dollar value
of such account. Twenty percent or $3000, whichever is
greater, of the total value of the Class B Common and
Preferred Stock will be repurchased. The remaining value of
the Class B Common and Preferred Stock is converted to a
five-year interest bearing note. During the first four
years, this note only pays interest. In the fifth year, both
interest and principal are paid. The interest rate is
determined by Handy's Board of Directors at the same time
they approve the repurchase.
Option - II Same as Option I except that the remaining value of the
Class B Common and Preferred Stock is discounted 15 percent
and reimbursed to the member-dealer immediately at the time
of repurchase.
Page # 12 of 24 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 7 - COMPONENTS OF 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 $235,715 on the Balance Sheet
as a current asset in the amount of $61,472 and as a non-current asset in
the amount of $174,243 at September 30, 2002, includes equity securities
classified as investments available for sale in the amount of $235,715 at
fair market value. The $235,715 includes $52,080 unrealized loss on
securities resulting from the decrease in fair market value. The cost of
the equity securities is $287,178.
2. Changes in Equity securities
Quarter Ended
Sept. 30, 2002 Cumulative
-------------- ----------
Beginning Balance-January 1, 2002 $ 308,829 $ -0-
Purchases -0- 117,400
Dividends, interest and capital gains 1,832 170,395
Unrealized gains (losses) on securities
resulting from increase (decrease)
in fair market value (74,946) (52,080)
----------- ----------
Balance-September 30, 2002 $ 235,715 $ 235,715
=========== ==========
3. Components of Net Earnings plus Other Comprehensive Earnings and Components
of Total Comprehensive Earnings for the period ended September 30, 2002.
Other Net Earnings Exclusive Plus Other
Comprehensive Of Other Comprehensive
Earnings (Loss) Comprehensive Earnings Earnings
--------------- ---------------------- -------------
Net Earnings (Loss)
Before Provision for
Federal Income Tax $ (74,946) $ 797,680 $ 722,734
Provision for
Federal Income Tax 25,482 (292,932) (267,450)
--------- --------- ---------
Total $ (49,464) $ 504,748 $ 455,284
========= ========= =========
Other Net Earnings Total
Comprehensive Applicable to Comprehensive
Earnings (Loss) Common Stockholders Earnings
--------------- ------------------- -------------
$ (49,464) $ 504,748 $ 455,284
Less Estimated Dividends
on Preferred Stock -0- (368,613) (368,613)
--------- --------- ---------
Total $ (49,464) $ 136,135 $ 86,671
========= ========= =========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Applicable to Other Exclusive of Other
Comprehensive Earnings Comprehensive Earnings Total
---------------------- ---------------------- -----
Balance-January 1, 2002 $ 15,092 $5,682,518 $5,697,610
Add: Net earnings (loss)
9 months ended
September 30, 2002 (49,464) 504,748 455,284
Deduct: Cash Dividends on
Preferred Stock -0- (491,484) (491,484)
---------- ---------- ----------
Balance-September 30, 2002 $ (34,372) $5,695,782 $5,661,410
========== ========== ==========
NOTE 8 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are net of subscriptions receivable and allowance for
doubtful accounts.
September 30, 2002 December 31, 2001
------------------ -----------------
Accounts Receivable $13,471,950 $11,837,612
Subscription Receivable (85,274) (45,004)
Allowance for Doubtful Accounts (44,001) (44,001)
Accounts Receivable Net of ----------- -----------
Subscription Receivable and $13,342,675 $11,748,607
Allowance for Doubtful Accounts =========== ===========
Page # 13 of 24 Pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
Although a moderate economic recovery began in the first quarter of 2002, a
decline in consumer confidence during the second quarter of 2002 which worsened
in the third quarter of 2002 has thwarted economic growth during the third
quarter of 2002. In addition to the weakened economic conditions, the company
held its biannual trade show later in the third quarter of 2002 than in the
previous year so that a larger portion of those sales will be reflected in the
fourth quarter, rather than in the third quarter of 2002. As a result, net sales
in the third quarter of 2002 decreased 1.0% ($472,428) from sales during the
same period in 2001, compared to a decline of only $32,754 in the third quarter
of 2001 from 2000's third quarter.
However, net sales during the first nine months of 2002 increased 4.2%
($5,706,350) over sales during the same period in 2001, compared to a 2.6%
increase in sales ($3,408,668) for the same period in 2001 compared to that
period in 2000.
NET SALES. Despite the stock market declining below 2001 levels, investor
pessimism spreading, and sustained pressure from retail warehouses, sales growth
during the first nine months of 2002 in seven of our nine selling territories
was more robust than in the first nine months of 2001. By contrast, two selling
territories, the North Texas, Dallas and Fort Worth territory and the Oklahoma
territory continue to experience pressure from large retail warehouses which has
eroded the market share of independent hardware stores in those selling
territories. However, the decrease in sales for these two territories averaged
3.3% and they together represent only 17.9% of our total sales. In the Dallas
area, in particular, retail warehouses have saturated the market, resulting in a
decline in sales of 0.8% in the first nine months of 2002. Further, the economy
in the Oklahoma area appears to be lagging behind our other selling territories,
as nine month 2002 sales in the Oklahoma territory decreased 5.7% as compared to
sales in the first nine months of 2001.
The following table summarizes sales during the first nine months of 2002
and 2001 by sales territory:
First Nine Months 2002 First Nine Months 2001
------------------------------------------------ -----------------------------
% Increase
(Decrease)
in Sales
From First % of % of
Nine Months Total Total
Sales Territory Sales of 2001 Sales Sales Sales
- -------------- ------------ ----------- ------ ------------ ------
Houston Area $ 30,701,047 0.6% 21.7% $ 30,506,636 22.5%
Victoria, San Antonio,
Corpus Christi &
Rio Grande Valley Area* 29,653,588 6.3% 21.0% 27,885,668 20.6%
North Texas, Dallas
& Fort Worth Area 16,442,548 (0.8%) 11.6% 16,567,968 12.2%
Austin, Brenham &
Central Texas Area 17,706,082 6.0% 12.5% 16,699,027 12.3%
West Texas, New Mexico
Area 4,112,821 56.1% 2.9% 2,634,690 1.9%
Southern Louisiana Area 11,085,984 2.4% 7.8% 10,822,947 8.0%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 11,580,801 1.5% 8.2% 11,412,509 8.4%
Arkansas Area 11,227,050 15.3% 8.0% 9,738,488 7.2%
Oklahoma Area 8,849,831 (5.7%) 6.3% 9,383,672 6.9%
------------ ----- ------------ -----
Totals: $141,359,752 (1) 100.0% $135,651,605 (1) 100.0%
============ ===== ============ =====
* Includes sales to Colorado, Mexico and Central America member-dealers.
(1) Total does not include miscellaneous sales to employees.
Page # 14 of 24 Pages
NET MATERIAL COSTS AND REBATES. Net material costs for the third
quarter and first nine months of 2002 were $40,609,542 and $126,925,987,
respectively, compared to $41,479,089 and $123,008,967, respectively, for the
same periods in 2001. Although net material costs for the third quarter of 2002
decreased 2.1%, during the first nine months of 2002 these costs increased 3.2
percent over these costs in the same period in 2001. The third quarter decrease
in net material costs of 2.1% exceeded the 1.0% decrease in sales. In addition,
the 3.2% increase in net material costs for the nine month period ending
September 30, 2002, was lower than the 4.2% increase in net sales for the same
period. Net material costs were 89.6 percent of net sales in the third quarter
of 2002, as compared to 90.5 percent of sales for the same period in 2001, while
for the first nine months of 2002 and 2001 net materials costs were 89.7 percent
and 90.6 percent of sales, respectively. The percentage decrease in net material
costs for the third quarter of 2002 was due primarily to a $16,271 decline in
damaged merchandise and a $12,703 increase in sales of damaged merchandise. The
percentage decrease in net material costs during the first nine months in 2002
compared to 2001 resulted from an increase in factory rebates and purchase
discounts due to a timing difference in the recognition of rebates. Factory
rebates, which were taken as a credit against material costs in the first nine
months of 2002 and 2001, increased $498,223 or 13.8 percent (2002 - $4,107,317
vs. 2001 - $3,609,094). In addition, purchase discounts were $297,483 higher in
the first nine months of 2002 when compared to the first nine months of 2001
(2002 - $2,716,688 vs. 2001 - $2,419,206).
PAYROLL COSTS. With unemployment still relatively low and with the
ongoing shortage of qualified truck drivers, the increases in payroll costs for
the third quarter and first nine months of 2002 resulted from salary increases
needed to attract and retain high-quality employees. These increases in the
third quarter of 2002 were offset by a $57,919 decline in overtime payroll as
the company continues to increase efficiencies particularly in managing sales
from our warehouse facility. As a result, payroll costs for the third quarter of
2002 rose only slightly over third quarter 2001 costs, increasing 0.9 percent.
However, due to a 5.4% increase in warehouse sales in the first nine months of
2002 (2002 - $91,363,375 as compared to 2001 - $86,660,466), and due to new
marketing initiatives which were implemented in the first half of 2002, we
increased the number of employees (350 vs. 331 at September 30 of each year),
particularly in our warehouse, in order to continue to provide goods to our
member- dealers on a timely basis. As a result, payroll costs for the first nine
months of 2002 rose 6.1 percent, over the same period in 2001.
Despite the pressure on wages, payroll costs as a percentage of both total
expenses and net sales remained fairly constant. Payroll costs for the third
quarter of 2002 constituted 5.2 percent of net sales and a 5.1 percent of total
expenses, compared to 5.1 percent of sales and 5.0 percent of total expenses for
the same quarter of 2001. Payroll costs were 5.0 percent of net sales and 4.9
percent of total expenses for the first nine months of 2002 as compared to 4.9
percent of sales and 4.8 percent of total expenses for the same period in 2001.
The relative stability in payroll costs has been a result of a continuing effort
to maintain employee productivity.
OTHER OPERATING COSTS. During the third quarter and the first nine
months of 2002, other operating costs increased $286,248 (11.3%) and $1,316,453
(18.0%), respectively, compared to the same periods of 2001. Other operating
costs also increased as a percentage of total expenses, accounting for 6.2% of
total expenses in the third quarter of 2002 as compared to 5.5% of total
expenses for the third quarter of 2001. For the nine month period ending
September 30, 2002, other operating costs were 6.1% of total expenses as
compared to 5.3% of total expenses during the same period in 2001. The increase
in other operating costs in the third quarter of 2002 can be attributed to an
increase in insurance expense of $82,770, an increase in the accrual for
employee bonuses of $110,000 and an increase in warehouse and delivery expense
of $108,731, while the increase in other operating costs in the first nine
months of 2002 resulted from an increase in the accrual for property taxes of
$186,500 in the first nine months, an increase in insurance expense of $368,171,
an increase in the accrual for employee bonuses of $230,000 and an increase in
warehouse and delivery expenses of $649,673 (an aggregate increase of
$1,434,344).
NET EARNINGS AND EARNINGS PER SHARE Although net sales for the third
quarter of 2002 decreased $472,428, net material costs for the third quarter of
2002 decreased $869,547 from those 2001 levels, resulting in an overall increase
in gross margin of $397,119 (9.2%). This
Page # 15 of 24 Pages
substantial increase in gross margin was offset by a significant increase in
other operating costs of $286,248 (11.3%), although the increase in other
operating costs were partially offset by a less significant unrealized loss on
securities of $36,690 as compared to a loss on securities of $61,931 in the
third quarter of 2001. Thus pretax net earnings more than doubled from $119,623
for the third quarter of 2001 to $252,134 in the same 2002 period, with
after-tax net earnings increasing $87,059, due to factors previously discussed.
Net sales for the first nine months of 2002 increased $5,706,350 (4.2%),
while net material costs increased $3,917,020 (3.2%) from levels in the first
nine months in 2001, resulting in gross margin increasing by $1,789,330 (14.0%).
This increase in gross margin, in addition to a $129,965 (6.8%) increase in
sundry income, was partially offset by a substantial increase in other operating
costs of $1,316,453 (18.0%) and an increase in payroll cost of $405,397. Thus
pretax net earnings increased 42.8 percent, from $216,544 for the first nine
months of 2001 to $506,190 in the same 2002 period, while after-tax net earnings
increased by 45.2 percent, primarily due to factors previously discussed.
Historically, we calculated net earnings applicable to common stockholders
by combining net earnings and other comprehensive earnings, less accrued
preferred stock dividends. In response to a comment from the Securities and
Exchange Commission ("SEC") in the third quarter of 2001, we have changed our
presentation of net earnings per share to no longer include other comprehensive
earnings.
For both the third quarters and first nine months of 2002 and 2001, our
earnings per share more than doubled in both the third quarter and first nine
months of 2002, as compared to the same periods in 2001. Net earnings per share
for the third quarter increased from a net loss per share of $0.56 for the 2001
period, to net earnings per share of $0.69 for the 2002 period. Similarly, net
earnings per share for the first nine months increased from a net loss per share
of $1.22 to net earnings per share of $1.55. The sharp increase in 2002 is due
to the factors previously discussed, as well as estimated dividends for the
third quarter and first nine months of 2002 representing a significantly smaller
percentage of 2002 net earnings than estimated dividends for the third quarter
of 2001 (2002 - 66.7% versus 2001 - 114.4%) and the first nine months of 2001
(2002-73.0% versus 2001-126.1%), respectively.
Quarter-to-quarter variations in our earnings per share (in addition to the
factors discussed above) reflect our commitment to lower pricing of our
merchandise in order to deliver the lowest cost buying program to our
member-dealers, even though this often results in lower net earnings. Because
virtually all of our stockholders are also member-dealers, these trends benefit
our individual stockholders who purchase our merchandise. Therefore, our
shareholders do not demand that we focus greater attention upon earnings per
share.
Seasonality
- -----------
Our quarterly net earnings traditionally vary based on the timing of events
which affect our sales. Traditionally, first and third quarter earnings have
been negatively affected by the increased level of direct sales (with no markup)
resulting from our semiannual trade show always held in the first and third
quarters. However, our overall sales levels often increase during the trade
shows, which, in some years, offsets the effect of increased direct sales. For
the third quarter of 2002, however, the increases in sales from the semiannual
trade show will be reflected in both the third and fourth quarters because the
show was held later in the year than usual. Additionally, net earnings per
quarter may vary substantially from year to year due to the timing difference in
the receipt of discounts, rebates, miscellaneous income, weather conditions and
the economic conditions in our selling territories. For example, during the
first, second and third quarters of 2002, the cumulative effect of the various
timing differences, as well as improved economic conditions in most of our
selling territories, resulted in increased net earnings for those periods.
Secondly, sales during the fourth quarter traditionally have been lower, as
hardware sales are slowest during winter months preceding ordering for
significant sales in the spring. This decrease in sales, however, is offset in
most years by corrections to inventory made at year end, causing net earnings to
vary substantially from year to year in the fourth quarter.
Page # 16 of 24 Pages
QUARTERLY FINANCIAL DATA (Unaudited)
- ------------------------------------
The following is a summary of selected quarterly financial data for each
quarterly period beginning October 1, 2000 and ending September 30, 2002;
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended
12-31-00 03-31-01 06-30-01 09-30-01 12-31-01 03-31-02 06-30-02 09-30-02
Sales $35,693,872 $46,558,089 $43,454,763 $45,810,043 $42,680,648 $49,255,077 $46,936,553 $45,337,615
Net
Mat'l
Costs 31,232,374 42,732,897 38,796,981 41,479,089 37,227,446 44,711,986 41,604,459 40,609,542
Gross
Margin 4,461,498 3,825,192 4,657,782 4,330,954 5,453,202 4,543,091 5,332,094 4,728,073
Other
Operating
Expenses 6,715,146 4,407,462 4,777,655 4,924,226 7,660,480 5,224,109 5,381,740 5,229,226
Sundry
Income 2,199,635 779,454 345,252 774,826 2,214,364 883,005 356,515 789,977
Pre-Tax Net
Earnings (54,013) 197,184 225,379 181,554 7,086 201,987 306,869 288,824
(Excludes
other comp.
income)
Trends
- ------
In connection with our business operations, we maintain various types of
insurance coverage. As reflected in our numbers for the first nine months of
2002, our insurance premium expenses have steadily increased, and are continuing
to rise at a rate faster than experienced in past years. We expect that the
trend toward increased insurance costs will continue for the foreseeable future,
as part of a general nationwide trend in increased insurance premiums as a
result of factors such as the events of September 11, 2001, recent insurance
company losses, insurance company risk assessments and continuing rising medical
costs.
MATERIAL CHANGES IN FINANCIAL CONDITION
- ---------------------------------------
FINANCIAL CONDITION AND LIQUIDITY During the period ending September 30,
2002, we maintained our financial condition and ability to generate adequate
amounts of cash while continuing to make significant investments in inventory,
warehouse and computer equipment, software, and delivery equipment, all to
better meet the needs of our member-dealers. Net cash provided by our operating
activities may vary substantially from year to year. These variations result
from (i) the timing of promotional activities such as our spring and fall trade
shows, (ii) payment terms available to us from our suppliers, (iii) payment
terms offered by us to our member-dealers, and (iv) the state of the regional
economy in our selling territories.
During the first nine months of 2002 our cash and cash equivalents
increased $2,030,841 as compared to the first nine months of 2001, versus a
decrease of $241,634 when comparing the same 2001 period to that of 2000. During
the first nine months of 2002, we used cash flow from operating activities of
$2,455,767, as compared to generating cash flow of $1,669,245 in the first nine
months of 2001. This reversal of cash flow in the 2002 period was principally
attributable to a sizeable decrease in accounts payable, which decreased by over
116.3 percent compared to the same 2001 period, which were only partially offset
by a smaller increase in inventory and accounts receivable in the first nine
months of 2002 than in the first nine months of 2001.
Accounts payable decreased $1,331,009 during the period ended September 30,
2002, as compared to an increase of $8,168,198 during the same period in 2001.
The substantial disparity when comparing these two periods, in the aggregate of
$9,499,207, was due primarily to widespread tightening by vendors in extended
payment terms as reflected in the reduced level of trade accounts payable since
year end.
Page # 17 of 24 Pages
Inventory had approximately 39,500 stockkeeping units in the period ending
September 30, 2002, which were maintained in response to member-dealer demand
for more breadth of inventory. The $1,205,390 increase in inventory for the
first nine months of 2002, was considerably lower (116.3%) than the $3,262,158
increase in inventory for the same period in 2001, due to the leveling off of
inventory purchases, especially the increase in purchases made following the
completion of our warehouse expansion project in June 2001, which is
commensurate with member- dealer demand for product.
In the first nine months of 2002 and 2001, accounts receivable increased
$1,594,068 and $4,762,855, respectively. This variation in levels of accounts
receivable was mainly attributable to differences in extended payment terms
offered to member-dealers.
For the period ended September 30, 2002, net earnings plus other
comprehensive earnings were $455,284, compared to $313,619 for the same 2001
period. This 45% increase during 2002 was mainly attributable to the increase in
gross margin and sundry income. Historically, our total comprehensive earnings
consisted of net earnings plus other comprehensive earnings. However, as
discussed above, in response to a comment from the SEC, we have changed the
presentation of our total comprehensive earnings which now consist of net
earnings, less estimated preferred stock dividends, plus other comprehensive
earnings. Applying this presentation to the first nine months of 2002 and 2001,
total comprehensive earnings for 2002 were $86,671, compared to a total
comprehensive loss of $163,182 for the same 2001 period, for an overall increase
of $249,853 during 2002. This 153% increase was mainly attributable to an
increase in net earnings before dividends in the first nine months of 2002
(2002-$504,748 versus 2001-$378,251), as well as the decrease in dividends
estimated for the 2002 period ($368,613) versus those of the 2001 period
($476,801).
Net cash used for investing activities decreased significantly in the first
nine months of 2002 as compared to the same period in 2001, declining from
$4,658,228 for the period ended September 30, 2001 to $301,121 for the same
period in 2002. The significant decrease in the first nine months of 2002 was
almost entirely due to the completion of our warehouse expansion project during
2001.
Net cash provided by financing activities was $6,070,645 in the period
ending September 30, 2002 as compared to net cash provided by financing
activities of $4,461,207 during the same period in 2001. This difference in the
first nine months of 2002 and 2001 was principally attributable to funds being
provided during 2002 from draws on the Company's line of credit, which were made
to fund our warehouse expansion project and increase inventory, as well as a
decrease in dividends paid to member-dealers during the first quarter of 2002
when compared to the same 2001 quarter (2002 - $491,484 versus 2001 - $635,737).
Our continuing ability to generate cash for funding our 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:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER
2002 2001 2001
------------- ------------ -----------
Working Capital $12,179,603 $6,759,167 $8,275,954
Current Ratio 1.5 to 1 1.3 to 1 1.3 to 1
Long-term Debt as Percentage
of Capitalization 23.1% 7.3% 17.1%
During the remainder of 2002, we expect to further expand our existing
customer base in our current selling territories. We intend to finance our
expansion with anticipated increased revenues from sales to new member-dealers
in these territories, and with receipts from the sale of stock to new and
current member-dealers. We expect that this expansion will have a beneficial
effect on our ability to generate cash to meet our funding needs.
In the first nine months of 2002, we maintained a 96.0 percent service
level (the measure of our ability to meet member-dealers' orders out of current
stock) as compared to a service level of 94.1 percent for the same period of
2001. Inventory turnover was 6.0 times during the first nine months of 2002 as
compared to 6.2 times during the same period of 2001. This rate of inventory
turnover, which is higher than the wholesale hardware buying groups' average of
5.5, is primarily the result of tight control of the product mix, increase in
depth of inventory and continued high service level.
Page # 18 of 24 Pages
Capital Resources
- -----------------
In the nine month periods ending September 30, 2002 and September 30, 2001,
our investment in capital assets (net of dispositions) was $359,288 and
$4,558,578, respectively. Approximately 40.5 percent ($145,496) of the amount
expended in the first nine months of 2002 was used to purchase warehouse
equipment, 24.6 percent ($88,437) was used to purchase computer equipment and
member-dealer order entry terminals, 19.0 percent ($68,245) was used to replace
older company vehicles, 10.3 percent ($36,825) was used for building upgrades
and 5.7 percent ($20,285) was used to purchase office furniture and equipment.
By comparison, of the total amount expended in the first nine months of 2001,
$3,998,660 (87.7%) was used to fund capital expenditures related to our
warehouse expansion project and $394,023 (8.6%)was used for the purchase of
warehouse equipment.
In April, 2002, JP Morgan Chase Bank amended the Company's existing
unsecured $10 million revolving line of credit to provide for an April 30, 2004
maturity date. We use our unsecured $10 million revolving line of credit from
time to time for our working capital and other financing needs. During the first
nine months of 2002, we borrowed $65,493,000 and repaid $57,183,000 from cash
flow, leaving an outstanding balance under our line of credit of $8,310,000 on
September 30, 2002. Our average outstanding balance on our line of credit for
the third quarter and first nine months of 2002 was $5,400,598 and $4,078,560,
respectively.
During the year 2002, we anticipate significant cash outlays for payment of
accounts payable and increased inventory purchases. Additional cash outlays
anticipated for capital expenditures for the remainder of the year include:
approximately $25,000 to make building improvements, $50,000 to purchase
warehouse equipment, $30,000 to upgrade computer equipment, $20,000 to improve
our automobile fleet and $10,000 to purchase office furniture and equipment.
Our cash position of $4,724,853 at September 30, 2002, is anticipated to be
sufficient to fund all planned capital expenditures, although some third party
financing, including draws on our line of credit, may be needed.
QUANTITATIVE & QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
--------------------------------------
Not Applicable
CONTROLS AND PROCEDURES
-----------------------
(a) Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures, as defined in
Rules 13a-14(c) and 15d- 14(c) under the Securities Exchange Act of 1934
(the "Exchange Act") as of a date within 90 days before the filing of this
report. Based on that evaluation, they have concluded that such disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company required under the Exchange
Act to be disclosed in this quarterly report.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls that
could significantly affect such controls subsequent to the date of their
evaluation.
CRITICAL ACCOUNTING POLICIES
----------------------------
For a discussion of our critical accounting policies and factors which may
cause substantial fluctuations in our earnings and cash flows, see our annual
report on Form 10-K for the year ended December 31, 2001.
Page # 19 of 24 Pages
FORWARD-LOOKING STATEMENTS
The statements contained in this 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 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. Interim results are not necessarily
indicative of those for a full year.
Page # 20 of 24 Pages
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Effective October 22, 2002, Richard A. Lubke, resigned as a
director of the Company. His resignation was not due to any
disagreements with the Company on any matter relating to the
Company's operations, policies or practices. Chairman of the
board, Jimmy Pate, along with directors Susie Bracht-Black and
Ben Jones will make recommendations to the full board so that the
board may select a replacement director to fill the remaining
portion of Mr. Lubke's term, which will expire April 2005.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits
Exhibit Number
--------------
*99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*Filed herewith.
Page # 21 of 24 Pages
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ Don Jameson
-----------------------------------------
DON JAMESON
President
(Chief Executive Officer)
/s/ Tina S. Kirbie
-----------------------------------------
TINA S. KIRBIE
Senior Vice President, Finance
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date November 13, 2002
-----------------
Page # 22 of 24 Pages
CERTIFICATIONS
--------------
I, Don Jameson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Handy Hardware
Wholesale, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Don Jameson
----------------- ---------------------------------
President
(Chief Executive Officer)
Page 23 of 24 Pages
CERTIFICATIONS
I, Tina S. Kirbie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Handy Hardware
Wholesale, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Tina S. Kirbie
----------------- ---------------------------------
Senior Vice President, Finance
(Chief Financial Officer),
Secretary and Treasurer
Page 24 of 24 Pages