SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 2003.
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
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
------- -------
The number of shares outstanding of each of the Registrant's classes of common
stock as of July 31, 2003, was 10,240 shares of Class A Common Stock, $100 par
value, and 79,556 shares of Class B Common Stock, $100 par value.
HANDY HARDWARE WHOLESALE, INC.
INDEX
-----
PART I Financial Information Page No.
-------
Item 1. Financial Statements
Condensed Balance Sheet June 30, 2003
and December 31, 2002 ....................... 3 - 4
Condensed Statement of Earnings - Six Months
Ended June 30, 2003 and 2002................. 5
Condensed Statement of Cash Flows - Six Months
Ended June 30, 2003 and 2002................. 6
Notes to Condensed Financial Statements........... 7 - 14
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations............ 15 - 21
Item 3. Quantitative & Qualitative Disclosures About
Market Risk.................................... 21
Item 4. Controls and Procedures........................ 21
PART II Other Information
Items 1.-3. None 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information - None 22
Item 6. Exhibits 22
Signatures 23
2
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
------
CURRENT ASSETS
--------------
Cash $ 2,230,357 $ 1,394,324
Accounts Receivable, net of 12,094,172 11,054,401
subscriptions receivable in
the amount of $73,771 for 2003
and $51,120 for 2002
Notes Receivable (Note 3) 866 552
Inventory 20,878,254 18,029,181
Other Current Assets 534,738 122,850
Prepaid Income Tax -0- 115,456
Deferred Compensation Funded 60,134 60,134
----------- -----------
$35,798,521 $30,776,898
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (NOTE 2)
-------------------------------------
At Cost Less Accumulated Depreciation
of $7,510,957(2003) and $7,006,662 (2002) $15,530,140 $15,902,215
----------- -----------
OTHER ASSETS
------------
Notes Receivable (Note 3) $ 257,615 $ 248,460
Deferred Compensation Funded 154,083 180,436
Other Noncurrent Assets 5,664 7,742
----------- -----------
$ 417,362 $ 436,638
----------- -----------
TOTAL ASSETS $51,746,023 $47,115,751
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Notes Payable-Line of Credit $ 2,457,500 $ 0
Notes Payable-Stock (Note 4) 434,840 324,280
Notes Payable-Capital Lease 9,780 9,780
Accounts Payable - Trade 19,519,779 20,214,196
Other Current Liabilities 1,290,619 1,574,647
Deferred Compensation Payable 60,134 60,134
Federal Income Taxes Payable (Note 5) 122,276 -0-
----------- -----------
$23,894,928 $22,183,037
----------- -----------
NONCURRENT LIABILITIES
----------------------
Notes Payable-Line of Credit $ 2,457,500 $ 0
Notes Payable-Stock (Note 4) 259,700 576,520
Notes Payable-Capital Lease 19,566 24,456
Notes Payable-Vendor 257,204 247,463
Deferred Compensation Payable 169,117 180,436
Deferred Income Taxes Payable (Note 5) 270,613 272,837
----------- -----------
$ 3,433,700 $ 1,301,712
----------- -----------
TOTAL LIABILITIES $27,328,628 $23,484,749
----------------- ----------- -----------
The accompanying notes are an integral part of the Condensed Financial Statements.
3
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
STOCKHOLDERS' EQUITY
--------------------
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
10,610 & 10,250 shares $ 1,061,000 $ 1,025,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
79,899 & 75,475 shares 7,989,900 7,547,500
Common Stock, Class B
Subscribed 5,150.97 & 5,099.95
shares 515,097 509,995
Less Subscription Receivable (36,886) (25,560)
Preferred Stock 7% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
82,782 & 78,332 shares 8,278,200 7,833,200
Preferred Stock, Subscribed
5,150.97 & 5,099.95 shares 515,097 509,995
Less Subscription Receivable (36,886) (25,560)
Paid in Surplus 495,432 483,336
----------- -----------
$18,780,954 $17,857,906
Less: Cost of Treasury Stock
2,117.00 & -0- shares (211,700) -0-
------------ ------------
$18,569,254 $17,857,906
Retained Earnings exclusive of other
comprehensive earnings (Note 7) 5,869,308 5,805,131
Retained Earnings applicable to other
comprehensive earnings (Note 7) (21,167) (32,035)
----------- -----------
5,848,141 5,773,096
----------- -----------
Total Stockholders' Equity $24,417,395 $23,631,002
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $51,746,023 $47,115,751
-------------------- =========== ===========
The accompanying notes are an integral part of the Condensed Financial Statements.
4
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
- --------
Net Sales $ 46,362,123 $ 46,936,553 $ 95,336,410 $ 96,191,630
Sundry Income 991,776 886,924 2,626,394 2,255,926
------------ ------------ ------------ ------------
TOTAL REVENUES $ 47,353,899 $ 47,823,477 $ 97,962,804 $ 98,447,556
- -------------- ------------ ------------ ------------ ------------
EXPENSE
- -------
Net Mat'l. Costs $ 40,728,187 $ 41,604,459 $ 84,983,834 $ 86,316,445
Payroll Costs 2,370,202 2,377,733 4,746,634 4,692,962
Other Operating Costs 3,633,635 3,491,181 7,251,328 6,836,470
Interest Expense 34,733 43,235 63,579 92,823
------------ ------------ ------------ ------------
TOTAL EXPENSE $ 46,766,757 $ 47,516,608 $ 97,045,375 $ 97,938,700
- ------------- ------------ ------------ ------------ ------------
EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 587,142 $ 306,869 $ 917,429 $ 508,856
- ----------------- ------------ ------------ ------------ ------------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (NOTE 5 & 7) (209,942) (113,413) (329,059) (188,361)
- ---------------------- ------------ ------------ ------------ ------------
NET EARNINGS $ 377,200 $ 193,456 $ 588,370 $ 320,495
- ------------ ------------
LESS ESTIMATED
DIVIDENDS ON
PREFERRED STOCK (131,048) (122,871) (262,096) (245,742)
- --------------- ------------ ------------ ------------ ------------
NET EARNINGS
APPLICABLE
TO COMMON
STOCKHOLDERS $ 246,152 $ 70,585 $ 326,274 $ 74,753
- ------------ ============ ============ ============ ============
NET EARNINGS
PER SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (NOTE 1) $ 2.64 $ 0.80 $ 3.55 $ 0.86
- --------------- ============ ============ ============ ============
OTHER COMPREHENSIVE EARNINGS (LOSS)
- ----------------------------------
Unrealized Gain (Loss)on
Securities (Note 7) $ 20,501 $ (36,090) $ 16,467 $ (38,256)
Provision for Federal
Income Tax (Note 5) (6,971) 13,425 (5,599) 14,161
------------ ------------ ------------ ------------
Other Comprehensive
Earnings (Loss) Net
of Tax $ 13,530 $ (22,665) $ 10,868 $ (24,095)
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE
EARNINGS (NOTE 7) $ 259,682 $ 47,920 $ 337,142 $ 50,658
- ------------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the Condensed Financial Statements.
5
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITY
- ----------------------------------
Net Earnings Plus Other Comprehensive
Earnings (Note 7) $ 599,238 $ 296,400
------------ ------------
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Amortization $ 441 $ -0-
Depreciation 512,527 632,483
Gain on Sale of Property, Plant & Equipment (8,673) -0-
Increase(Decrease)in Deferred Income Tax (2,224) 851
Unrealized gain (increase) decrease
in fair market value of securities 28,634 98,256
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (1,039,771) $ (571,188)
(Increase) Decrease in Notes Receivable (9,469) 684
Increase in Inventory (2,849,073) $ (2,359,696)
(Increase) Decrease in Other Assets (409,810) 27,117
Decrease in Prepaid Income Tax 115,456 130,706
Increase in Note Payable-Vendor 9,741 -0-
Increase (Decrease) in Accounts Payable (694,417) (1,230,826)
Increase (Decrease) in Other Liabilities (284,028) (35,708)
Increase in Federal Income Taxes Payable 122,276 -0-
Increase (Decrease) in Deferred Compensation Payabe (11,319) (67,777)
------------ ------------
TOTAL ADJUSTMENTS $ (4,519,709) $ (3,375,098)
------------ ------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES $ (3,920,471) $ (3,078,698)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital Expenditures $ (196,669) $ (166,210)
Sale of Property, Plant & Equipment 64,448 -0-
Reinvested dividends, interest & capital gains (2,281) (1,215)
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES $ (134,502) $ (167,425)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Increase Note Payable - Line of Credit $ 4,915,000 $ 3,565,000
Increase (Decrease) in Notes Payable - Stock (206,260) 87,760
Increase (Decrease) in Notes Payable - Capital Lease (4,890) (8,833)
Increase in Subscription Receivable (22,652) (21,750)
Proceeds From Issuance of Stock 945,701 900,474
Purchase of Treasury Stock (211,700) (289,800)
Dividends Paid (524,193) (491,484)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 4,891,006 $ 3,741,367
------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS $ 836,033 $ 495,244
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,394,324 1,41, 096
------------ ------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 2,230,357 $ 1,906,340
============ ============
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest Expense Paid $ 63,579 $ 92,823
Income Taxes Paid 214,606 244,540
The accompanying notes are an integral part of the Condensed Financial Statements.
6
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
(1) DESCRIPTION OF BUSINESS:
-----------------------
Handy Hardware Wholesale, Inc., ("Handy"), was incorporated as a Texas
corporation on January 6, 1961. Its principal executive offices and
warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061.
Handy is owned entirely by its member-dealers and former
member-dealers.
Handy sells to its member-dealers products primarily for retail
hardware, lumber and home center stores. In addition, Handy offers
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, accrued
dividends on Preferred Stock, and treasury stock, as set forth by
Accounting Principles Board Opinion No. 15 as follows:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
CALCULATION OF NET EARNINGS PER SHARE
OF COMMON STOCK
Net Earnings Before Preferred
Dividends $ 377,200 $ 193,456 $ 588,370 $ 320,495
Less: Estimated Dividends
on Preferred Stock (131,048) (122,871) (262,096) (245,742)
--------- --------- --------- ---------
Net Earnings (Loss) Applicable
to Common Shareholders $ 246,152 $ 70,585 $ 326,274 $ 74,753
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 93,131 88,399 91,989 87,363
Net Earnings Per Share
of Common Stock $ 2.64 $ 0.80 $ 3.55 $ 0.86
========= ========= ========= =========
7
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(4) REVENUE RECOGNITION:
-------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. Accordingly, revenues
and expenses are accounted for using the accrual basis of accounting.
Under this method of accounting, revenues and receivables are
recognized when merchandise is shipped or services are rendered, and
expenses are recognized when the liability is incurred.
(5) ACCOUNTING FOR DIVIDENDS ON PREFERRED STOCK
-------------------------------------------
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 (for the three and six month period) an estimated
portion of the dividends to be paid in the first quarter of 2004 based
on the dividends paid in the first quarter of 2003.
When dividends on Preferred Stock are actually paid, there is a
reduction of retained earnings. Retained earnings on the Condensed
Balance Sheet for the six months ended June 30, 2003 contained herein,
therefore, are net of dividends actually paid during the first quarter
of 2003 in the amount of $524,193.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
- ------------------------------------
Property, Plant & Equipment Consists of:
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
Land $ 3,207,866 $ 3,207,866
Building & Improvements 15,490,576 15,478,032
Furniture, Computer, Warehouse 3,816,960 3,715,818
Transportation Equipment 525,695 507,161
----------- -----------
$23,041,097 $22,908,877
Less: Accumulated Depreciation (7,510,957) (7,006,662)
----------- -----------
$15,530,140 $15,902,215
=========== ===========
8
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.
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
----------------------- ------------------------
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
------- ------- ------- -------
2003 2002 2003 2002
---- ---- ---- ----
Deferred Agreements $ -0- $ -0- $257,615 $248,460
Installment Sale Agreements 866 552 -0- -0-
------- ------- -------- --------
$ 866 $ 552 $257,615 $248,460
======= ======= ======== ========
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 3.5% to 6.25%.
Notes payable - stock are classified as follows:
CURRENT PORTION NONCURRENT PORTION
----------------------- ------------------------
JUNE 30, DEC. 31, JUNE 30, DEC. 31,
------- ------- ------- -------
2003 2002 2003 2002
---- ---- ---- ----
$434,840 $324,280 $259,700 $576,520
Principal payments due over the next five years are as follows:
2003 434,840
2004 33,480
2005 41,280
2006 26,600
2007 150,440
Thereafter 7,900
-------
$694,540
========
9
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.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
----------------- -----------------
Excess of tax over book depreciation $ 1,544,057 $ 1,540,784
Allowance for Bad Debt (48,714) (48,714)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (410,316) (400,500)
Deferred Compensation (289,107) (289,107)
----------------- -----------------
Total $ 795,920 $ 802,463
Statutory Tax Rate 34% 34%
----------------- -----------------
Cumulative Deferred Income Tax Payable $ 270,613 $ 272,837
================= =================
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 270,613 272,837
----------------- -----------------
$ 270,613 $ 272,837
================= =================
Reconciliation of income taxes on the difference between tax and financial accounting is as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
----------------- -----------------
Principal Components of Income Tax Expense
Federal:
Current
-------
Income tax paid $ 99,150 $ 42,643
Carry-over of prepayment from
from prior year 115,456 201,897
Refund received for overpayment
from prior year -0- -0-
----------------- -----------------
$ 214,606 $ 244,540
Federal Income Tax Payable (Receivable) 122,276 (71,191)
Carry-over to subsequent year -0- -0-
----------------- -----------------
Income tax for tax reporting
at statutory rate of 34% $ 336,882 $ 173,349
Deferred
--------
Adjustments for financial reporting:
Depreciation 1,113 11,191
263A Uniform Capitalization Costs (3,337) (10,340)
Other -0- -0-
----------------- -----------------
Provision for federal income tax $ 334,658 $ 174,200
================= =================
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.
10
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 per year 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 Handy 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, Handy reviews the amount
of unexpended Purchase Funds being held for each member-dealer. If a
member-dealer has unexpended Purchase Funds of at least $2000, 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 our Class B Common or
Preferred Stock.
11
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.
12
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMPONENTS OF COMPREHENSIVE EARNINGS (LOSS)
- ----------------------------------------------------
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 $214,217 on the Balance Sheet
as a current asset in the amount of $60,134 and as a non-current asset in
the amount of $154,083 at June 30, 2003, includes equity securities
classified as investments available for sale in the amount of $214,217 at
fair market value. The $214,217 includes $77,171 unrealized loss on
securities resulting from the decrease in fair market value. The cost of
the equity securities is $291,388.
2. Changes in Equity securities
SIX MONTHS ENDED
JUNE 30, 2003 CUMULATIVE
---------------- ----------
Beginning Balance-January 1, 2003 $ 240,570 $ -0-
Purchases -0- 117,400
Dividends, interest and capital gains 2,281 173,988
Unrealized gains (losses) on securities
resulting from increase (decrease)
in fair market value (28,634) (77,171)
----------- ----------
Balance-June 30, 2003 $ 214,217 $ 214,217
=========== ==========
3. Components of Net Earnings plus Other Comprehensive Earnings and
Components of Total Comprehensive Earnings for the six months ended
June 30, 2003:
OTHER COMPREHENSIVE NET EARNINGS PLUS OTHER
NET EARNINGS EARNINGS COMPREHENSIVE EARNINGS
------------ -------------------- -----------------------
Earnings Before Provision Unrealized Gain
For Federal Income Tax $917,429 on Securities $16,467 Net Earnings $588,370
Provision for Provision for Other Comprehensive
Federal Income Tax (329,059) Federal Income Tax (5,599) Gain 10,868
-------- ------- --------
Other Comprehensive Net Earnings Plus Other
Net Earnings $588,370 Gain $10,868 Comprehensive Gain $599,238
======== ======= ========
NET EARNINGS APPLICABLE TO OTHER COMPREHENSIVE TOTAL COMPREHENSIVE
COMMON STOCKHOLDERS EARNINGS EARNINGS
-------------------------- ------------------- -------------------
Unrealized Gain Net Earnings Applicable to
Net Earnings $588,370 on Securities $16,467 Common Stockholders $326,274
Less Estimated Dividends Provision for Other Comprehensive
On Preferred Stock (262,096) Federal Income Tax (5,599) Gain 10,868
-------- ------- --------
Net Earnings Applicable Other Comprehensive Total Comprehensive
to Common Stockholders $326,274 Gain $10,868 Earnings $337,142
======== ======= ========
4. Components of Retained Earnings
RETAINED EARNINGS RETAINED EARNINGS
EXCLUSIVE OF OTHER APPLICABLE TO OTHER
COMPREHENSIVE GAIN COMPREHENSIVE LOSS TOTAL
------------------ ------------------- -----
Balance-January 1, 2003 $5,805,131 $ (32,035) $5,773,096
Add: Net earnings (loss)
6 months ended
June 30, 2003 588,370 10,868 599,238
Deduct: Cash Dividends on
Preferred Stock 524,193 -0- 524,193
---------- ---------- ----------
Balance-June 30, 2003 $5,869,308 $ (21,167) $5,848,141
========== ========== ==========
13
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are net of subscriptions receivable and allowance for
doubtful accounts.
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Accounts Receivable $12,216,657 $11,154,235
Subscription Receivable (73,771) (51,120)
Allowance for Doubtful Accounts (48,714) (48,714)
----------- -----------
Accounts Receivable, Net of
Subscription Receivable and
Allowance for Doubtful Accounts $12,094,172 $11,054,401
=========== ===========
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
With the continued weak recovery of the U.S. economy and cautious consumer
confidence, net sales in the second quarter of 2003 decreased 1.2% ($574,430)
from sales during the same period in 2002, compared to an 8.0% growth rate
($3,481,790) in sales in the second quarter of 2002 over 2001's second quarter
sales.
Net sales during the first six months of 2003 decreased 0.9% ($855,220)
from sales during the same period in 2002, compared to a 6.9% increase in sales
($6,178,778) for the same period in 2002 over 2001.
NET SALES. Despite the overall economy and consumer confidence failing to
fully rebound, sales growth during the first six months of 2003 in five of our
nine selling territories was more robust than in the first six months of 2002.
By contrast, four territories, the Houston Territory, the North Texas, Dallas
and Fort Worth territory, the Austin, Brenham and Central Texas territory and
the Oklahoma territory, continue to experience pressure from large retail
warehouses which have eroded the market share of independent hardware stores in
those selling territories. In addition, poor weather conditions, recent purchase
reductions by two multi-store member-dealers, coupled with the loss of two
significant member-dealers during 2002, contributed to the decline in these four
territories. In the Houston area reduced purchases from two multi-store
member-dealers resulted in a $1,339,735 reduction in sales income. In the
Dallas, Fort Worth, North Texas area, sales were reduced by $807,286 due to the
loss of a seven store member-dealer during 2002. In the Austin, Brenham and
Central Texas area, the loss of one dealer during 2002 resulted in a decrease in
sales income of $538,712. Further, sales in the Oklahoma territory appear to be
lagging behind 2002 sales levels due to the poor weather and the lagging economy
in this area.
The following table summarizes sales during the first six months of 2002
and 2003 by sales territory:
First Six Months 2003 First Six Months 2002
----------------------------------------------- --------------------------------
% Increase
(Decrease)
in Sales
Compared to First % of % of
Six Months Total Total
Sales Territory Sales of 2002 Sales Sales Sales
- --------------- ----------- ------------------ ----- ----------- ------
Houston Area $18,655,277 (12.9%) 19.6% $ 21,418,739 22.3%
Victoria, San Antonio,
Corpus Christi & Rio
Grande Valley Area(1) 20,275,199 0.4% 21.3% 20,185,793 21.0%
North Texas, Dallas
& Fort Worth Area 10,162,628 (8.0%) 10.7% 11,051,344 11.5%
Austin, Brenham &
Central Texas Area 11,631,155 (2.8%) 12.2% 11,968,420 12.5%
West Texas, New Mexico
Area 3,781,643 37.4% 4.0% 2,752,623 2.9%
Southern Louisiana Area 7,960,184 7.6% 8.3% 7,401,280 7.7%
Baton Rouge, New Orleans,
Mississippi, Alabama &
Florida Area 8,464,013 11.1% 8.9% 7,615,938 7.9%
Arkansas Area 8,317,774 10.9% 8.7% 7,498,677 7.8%
Oklahoma Area 5,961,303 (3.7%) 6.3% 6,188,242 6.4%
----------- ----- ----------- -----
Totals: $95,209,176 (2) 100.0% $96,081,056(2) 100.0%
=========== ===== =========== =====
(1) Includes sales to Colorado, Mexico and Central America member-dealers.
(2) Total does not include miscellaneous sales to employees.
15
NET MATERIAL COSTS AND REBATES Net material costs for the second quarter
and first six months of 2003 were $40,728,187 and $84,983,834, respectively,
compared to $41,604,459 and $86,316,445, respectively, for the same periods in
2002. Net material costs for the second quarter and first six months of 2003
decreased 2.1 percent and 1.5 percent, respectively, from the same periods in
2002. The decreases in net material costs were slightly greater than the
decreases in net sales for the same periods. As a result, net material costs
were 87.8 percent of net sales in the second quarter of 2003, as compared to
88.6 percent of sales for the same period in 2002, while for the first six
months of 2003 and 2002 net materials costs were 89.1 percent and 89.7 percent
of sales, respectively. The relative stability in net material costs as a
percentage of net sales, was primarily the result of improved warehouse
efficiencies, which resulted in savings for the second quarter and the first six
months of 2003 of $133,520 and $334,816 respectively.
PAYROLL COSTS Payroll costs for the second quarter decreased slightly by
$7,531 while the increase in payroll costs of $53,672 for the first six months
of 2003 resulted from the salary increases needed to attract or retain
high-quality employees. However, this increase for the first half of 2003 was
significantly offset by a $128,102 decline in overtime payroll costs as we
continue to improve efficiencies, particularly in managing sales from our
warehouse facility. As a result, payroll costs for the first six months of 2003
rose only slightly (1.14%) over the costs for the same period in 2002.
Despite the pressure on wages, payroll costs as a percentage of both total
expenses and net sales remained fairly constant. Payroll costs for the second
quarter of 2003 and 2002 constituted 5.0 percent of both net sales and total
expenses. Payroll costs were 4.8 percent of both net sales and total expenses
for the first six months of both 2003 and 2002. The relative stability in
payroll costs has been a result of a continuing effort to maintain employee
productivity.
OTHER OPERATING COSTS During the second quarter and the first six months of
2003, other operating costs increased $142,454 (4.1%) and $414,858 (6.1%),
respectively, compared to the same periods of 2002. Other operating costs also
increased as a percentage of total expenses, accounting for 7.8% of total
expenses in the second quarter of 2003 as compared to 7.3% of total expenses for
the second quarter of 2002. For the six month period ending June 30, 2003, other
operating costs were 7.5% of total expenses as compared to 7.0% of total
expenses during the same period in 2002. The increase in other operating costs
in the second quarter of 2003 can be attributed to an increase in property taxes
of $45,000 and an increase in truck fuel costs of $80,198, while the increase in
other operating costs in the first six months of 2003 resulted from an increase
in the accrual for insurance of $31,559, an increase in the accrual for property
taxes of $126,000 and an increase in truck fuel costs of $250,345.
NET EARNINGS AND EARNINGS PER SHARE
- -----------------------------------
NET EARNINGS - SECOND QUARTER Although net sales for the second quarter of
2003 decreased $574,430 (1.2%), net material costs for the same period decreased
$876,272 (2.1%) compared in both cases to levels in the second quarter of 2002,
resulting in an increase in gross margin of $301,842 (5.7%). The significant
increase in gross margin, as well as the increase in other income of $104,852,
were only partially offset by an increase in other operating costs of $142,454
(4.1%). Thus after tax net earnings increased $183,744 (95.0%), from $193,456 in
the second quarter of 2002 to $377,200 for the same 2003 period. After tax net
earnings, combined with estimated dividends on preferred stock and other
comprehensive gains resulted in total comprehensive earnings for 2003's second
quarter of $259,682, compared to total comprehensive earnings of only $47,920
for the same 2002 period, for an overall increase of $211,762. This five fold
increase was mainly attributable to the increase in net earnings before
estimated dividends in the second quarter of 2003 (2003-$377,200 versus
2002-$193,456).
16
NET EARNINGS - FIRST SIX MONTHS Although net sales for the first six months
of 2003 decreased $855,220 (0.9%), net material costs for the same period
decreased $1,332,611 (1.5%) compared in both cases to levels in the first six
months of 2002, resulting in an increase in gross margin of $477,391 (4.8%). The
increase in gross margin, as well as the substantial increase in other income of
$370,468, were only partially offset by an increase of $53,672 in payroll costs
(1.1%) and a substantial increase in other operating costs of $414,858 (6.1%).
Thus after tax net earnings increased $267,875 (83.6%), from $320,495 in the
first half of 2002 to $588,370 for the same 2003 period. After tax net earnings,
combined with estimated dividends on preferred stock and other comprehensive
gains resulted in total comprehensive earnings for the first half of 2003 of
$337,142, compared to total comprehensive earnings of $50,658 for the same 2002
period, for an overall increase of $286,484. This six fold increase was mainly
attributable to the increase in net earnings before estimated dividends in the
first six months of 2003 (2003-$588,370 versus 2002-$320,495).
EARNINGS PER SHARE Our earnings per share increased more than three fold
in the comparative second quarters and increased more than four fold for the
first six months of 2003 as compared to the same period of 2002, from a net
earnings per share of $0.80 for the 2002 second quarter, to net earnings per
share of $2.64 for the same 2003 periods and an increase in six months earnings
per share from $0.86 per share in the 2002 period to $3.55 per share for the
2003 period. The increase in 2003 is due to the factors previously discussed, as
well as estimated dividends accrued in both the second quarter and first six
months of 2003 representing a smaller percentage of 2003 net earnings than
estimated dividends accrued in the same 2002 periods (second quarter 2003-34.7%
versus second quarter 2002-63.5%; and first six months of 2003-44.5% versus
first six months of 2002-76.7%).
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.
Additionally, net earnings per quarter may vary substantially from year to year
due to the timing difference in the receipt of discounts, rebates or
miscellaneous income, or due to weather conditions and the economic conditions
in our selling territories. For example, during the first and second quarters of
2003, the cumulative effect of the various timing differences, as well as
slightly improved economic conditions in most of our selling territories, caused
a dramatic increase in net earnings for those periods. In addition, 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.
17
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for each
quarterly period beginning September 1, 2001 and ending June 30, 2003:
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended
09-30-01 12-31-01 03-31-02 06-30-02 09-30-02 12-31-02 03-31-03 06-30-03
Sales $45,810,043 $42,680,648 $49,255,077 $46,936,553 $45,337,615 $44,920,202 $48,974,287 $46,362,123
Net
Mat'l
Costs 41,479,089 37,227,446 44,711,986 41,604,459 40,609,542 39,404,595 44,255,647 40,728,187
Gross
Margin 4,330,954 5,453,202 4,543,091 5,332,094 4,728,073 5,515,607 4,718,640 5,633,936
Other
Operating
Expenses(1) 5,817,873 7,671,738 5,710,106 5,382,108 5,229,594 7,840,146 6,022,971 6,038,570
Sundry
Income(1) 1,668,473 2,225,622 1,369,002 356,883 790,345 2,510,195 1,634,618 991,776
Pre-Tax Net
Earnings(2) 181,554 7,086 201,987 306,869 288,824 185,656 330,287 587,142
(1) Historically, sundry income has included income generated from our trade
shows offset by expenses incurred for our trade shows. Starting with the quarter
ended 12/31/02, we began to include expenses incurred for our trade shows in
other operating expenses rather than offsetting sundry income. Therefore, in
order to provide the data for other operating expenses and sundry income using a
consistent calculation method, for each quarter in the table above, we have
included expenses incurred from our trade shows in other operating expenses
rather than offsetting sundry income. This change has no effect on pre-tax net
earnings.
(2) Excludes other comprehensive income/(loss).
TRENDS
- ------
In connection with our business operations, we maintain various types of
insurance coverage. As reflected in our numbers for the first six months of
2003, 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 and insurance company risk assessments. In addition, our property
taxes are continuing to increase and may increase in the future, due to the
completion of our warehouse expansion project and general increases in tax
assessments.
MATERIAL CHANGES IN FINANCIAL CONDITION
- ---------------------------------------
FINANCIAL CONDITION AND LIQUIDITY During the period ending June 30, 2003,
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 office furniture and equipment, to better
meet the needs of our member-dealers. Net cash provided by operating activities
may vary substantially from year to year. These variations result from (i) the
timing of promotional activities such as our spring trade show, (ii) payment
terms available to us from our suppliers, (iii) payment terms offered by us to
our member-dealers, and (iv) the state of the regional economy in our selling
territories.
During the first six months of 2003 our cash and cash equivalents increased
only $324,017 as compared to an increase of $2,356,812 in the first six months
of 2002. During the first six months of 2003, we used cash flow from operating
activities of $3,920,471, as compared to $3,078,698 in the first six months of
2002. This decrease in cash flow in the 2003 period was principally attributable
to a significant increase in inventory, which increased 20.7% compared to the
same 2002 period, as well as accounts receivable increasing more than accounts
payable decreased during the first half of 2003 compared to the first half of
2002.
Inventory had approximately 42,000 stockkeeping units in the period ending
June 30, 2003, which were maintained in response to member-dealer demand for
more breadth of inventory. The increase in inventory of $2,849,073 in the first
six months of 2003, was significantly higher (20.7%) than the increase in
inventory of $2,359,696 in the same period in 2002, due to decreased sales in
the first six months of 2003, as well as additional purchases to increase the
breadth of inventory in order to meet our member-dealers' inventory
requirements.
18
Accounts payable decreased $694,417 during the first six months of 2003 as
compared to a larger decrease of $1,230,826 during the same period in 2002. The
difference in the decreases during these two periods was due primarily to
variations in extended payment terms offered to us by suppliers.
In the first six months of 2003 and 2002, accounts receivable increased
$1,039,771 and $571,188, respectively. For both periods, this variation in
levels of accounts receivable was mainly attributable to differences in extended
payment terms offered to member-dealers at the spring trade shows.
Net cash used for investing activities decreased in the first six months of
2003 as compared to net cash used in the same period in 2002, declining from
$167,425 in the first six months of 2002 to $134,502 for the same period in
2003. The decrease in the first six months of 2003 was due to a timing
difference in purchases of capital equipment, as well as the sale of older
company vehicles which generated $64,448 in cash flow.
Net cash provided by financing activities was $4,891,006 in the period
ending June 30, 2003 as compared to net cash provided by financing activities of
$3,741,367 during the same period in 2002. This considerable difference in the
first halves of 2003 and 2002 was principally attributable to funds being used
during 2002 to support the increases to inventory and to offset the timing
difference in receipt of payments from member-dealers.
Our continuing ability to generate cash for funding our activities is
highlighted by the relative constancy of our working capital and our current
ratio (current assets to current liabilities), as well as the year-to-year
improvement of our long-term debt as a percentage of capitalization, as shown in
the following table:
JUNE 30, DECEMBER 31, JUNE 30,
2003 2002 2002
----------- ------------- ----------
Working Capital $11,903,593 $8,593,861 $10,679,497
Current Ratio 1.5 to 1 1.4 to 1 1.4 to 1
Long-term Debt as Percentage
of Capitalization 14.1% 5.5% 19.8%
During the remainder of 2003, we expect to further expand our existing
customer base in our current selling territories. We will 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 expansion in these selling territories will have
a beneficial effect on our ability to generate cash to meet our funding needs.
In the first six months of 2003, we maintained a 96.2 percent service level
(the measure of our ability to meet member-dealers' orders out of current stock)
as compared to a service level of 95.9 percent for the same period of 2002.
Inventory turnover was 5.9 times during the first six months of 2003 as compared
to 6.1 times during the same 2002 period. This rate of inventory turnover, which
is higher than the industry average of 5.3, is primarily the result of tight
control of the product mix, increase in depth of inventory and continued high
service level.
19
CONTRACTUAL COMMITMENTS AND OBLIGATIONS
- ---------------------------------------
As of June 30, 2003, our contractual obligations for the remainder of 2003
and the next four years and thereafter are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Contractual
Obligation:
Non-cancelable
Operating Leases $ 719,782 $ 701,184 $ 640,014 $429,389 $366,609 -0- $2,856,978
Credit Facility
which expires in
April 2005(1) -- -- 4,915,000 -- -- -- 4,915,000
Notes Payable -
Stock 194,440 358,200 41,280 26,600 150,440 7,900 778,860
Notes Payable -
Vendor
Consignment -0- -0- -0- -0- -0- 247,463 247,463
Non-cancelable
Capital Leases 9,780 9,780 9,780 4,081 -0- -0- 33,421
$ 924,002 $1,069,164 $5,606,074 $460,070 $517,049 $255,363 $8,831,722
========== ========== ========== ======== ======== ======== ==========
(1) The amounts outstanding under our credit facility fluctuate on a daily
basis.
CAPITAL RESOURCES
- -----------------
In the six month periods ending June 30, 2003 and June 30, 2002, our
investment in capital assets was $196,669 and $166,210, respectively.
Approximately 42.2 percent ($82,984) of the amount expended in the first six
months of 2003 was used to purchase company vehicles, 30.8 percent ($60,563) was
used to upgrade warehouse equipment and 12.6 percent ($24,803) was used to
purchase computer equipment. By comparison, of the total amount expended in the
first six months of 2002, $51,152 (30.8%) was used to purchase warehouse
equipment, $49,972 (30.1%)was used to purchase company vehicles, $30,090 (18.1%)
was used to purchase computer equipment and member-dealer order entry terminals,
and $19,852 (11.9%) was used to purchase office furniture and equipment.
In April, 2003, JP Morgan Chase Bank amended the Company's existing unsecured
$10 million revolving line of credit to provide for an April 30, 2005 maturity
date. We use our unsecured $10 million revolving line of credit from time to
time for our working capital and other financing needs. Historically, we
generally have paid amounts outstanding on our line of credit before
contractually obligated to do so. Based on past practice, our balance sheet
reflects one-half of the amount outstanding on our line of credit as a current
liability and one-half as a noncurrent liability. During the first six months of
2003, we borrowed $28,074,000 and repaid $23,159,000 from cash flow, leaving an
outstanding balance under our line of credit of $4,915,000 on June 30, 2003. Our
average outstanding balance on our line of credit for the first six months of
2003 was $1,569,972. We have no off balance sheet arrangements, special purpose
entities, financing partnerships or guarantees.
During the year 2003, we anticipate significant cash outlays for payment of
accounts payable and increased inventory purchases. Additional cash outlays for
capital expenditures anticipated for the remainder of the year include:
approximately $10,000 to make building improvements, $50,000 to purchase
warehouse equipment, $95,000 to upgrade computer equipment, $25,000 to improve
our automobile fleet and $10,000 to purchase office furniture and equipment.
Our cash position of $2,230,357 at June 30, 2003 is anticipated to be sufficient
to fund all planned capital expenditures for the remainder of the year, although
some third party financing, including draws on our line of credit, may be
needed.
20
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies and factors which
relate to inventory, revenue recognition and allowance for doubtful accounts,
and which remain unchanged, see our annual report on Form 10-K for the year
ended December 31, 2002.
FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not historical facts are
forward- looking statement 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, 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.
Item 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable
Item 4. 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act") as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on that evaluation, they have concluded that
such disclosure controls and procedures are effective, in all material
respects, in communicating to them on a timely basis 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 over
financial reporting that occurred during the fiscal quarter covered by this
Quarterly Report that have materially affected, or are reasonably likely to
materially affect such internal controls over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders Meeting held on April 21, 2003, CRAIG
E. BLUM, BEN J. JONES and LEROY WELBORN were elected to serve as
Directors of the Company for three- year terms. Additionally, DON
JAMESON, President of the Company, was elected to serve as
Director for a one-year term. The other Directors continuing to
serve are: DOUG ASHY, JR., WILLIAM R. HILL and JIMMY T. PATE,
whose terms will expire at the Annual Shareholders Meeting to be
held in April 2004, and SUSIE BRACHT-BLACK and SUZANNE ELLIOTT,
whose terms will expire at the Annual Shareholders Meeting in May
2005.
NO. OF VOTES NO. OF VOTES NO. OF VOTES
NOMINEES FOR DIRECTORS FOR AGAINST ABSTAIN APPROVAL
- ---------------------- ------------ ------------ ------------ --------
CRAIG E. BLUM 5540 200 -0- YES
BEN J. JONES 5530 210 -0- YES
LEROY WELBORN 5540 200 -0- YES
DON JAMESON 5530 210 -0- YES
A proposal to amend the Company's bylaws to change the number of directors
from ten to between eight and ten, to classify the board of directors into three
classes of directors and to provide that a vacancy on the board of directors
shall be filled no later than the date of the fourth meeting of the board of
directors following the occurrence of a vacancy was approved by the
shareholders.
NO. OF VOTES NO. OF VOTES NO. OF VOTES
FOR AGAINST ABSTAIN APPROVAL
------------ ------------ ------------ --------
5150 320 270 YES
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
--------------
*10.1 Revolving Promissory Note and Seventh Amendment to Amendment
and Restatement of Credit Agreement between the Company and
JPMorgan Chase Bank dated April 30, 2003
*31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*Filed herewith.
22
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
Executive Vice President
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date: August 14, 2003
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