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, 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 October 31, 2003, was 10,220 shares of Class A Common Stock, $100
par value, and 81,637 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 - September 30, 2003
and December 31, 2002...........................................................3 - 4
Condensed Statement of Earnings - Nine Months
Ended September 30, 2003 and 2002............................................... 5
Condensed Statement of Cash Flows - Nine Months
Ended September 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 - 20
Item 3. Quantitative & Qualitative Disclosures About
Market Risk..................................................................... 21
Item 4. Controls and Procedures ................................................................. 21
PART II Other Information
Items 1-5. None ................................................................................ 22
Item 6. Exhibits ................................................................................ 22
Signatures ................................................................................ 23
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
------
CURRENT ASSETS
--------------
Cash $ 2,881,366 $ 1,394,324
Accounts Receivable, net of
subscriptions receivable in the
amount of $114,217 for 2003 and
$51,120 for 2002 17,778,335 11,054,401
Notes Receivable (Note 3) 10,005 552
Inventory 20,228,945 18,029,181
Deferred Compensation Funded 60,134 60,134
Other Current Assets 607,392 122,850
Prepaid Income Tax -0- 115,456
----------- -----------
$41,566,177 $30,776,898
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
-------------------------------------
At Cost Less Accumulated Depreciation
of $7,773,557(2003) and $7,006,662 (2002) $15,349,500 $15,902,215
----------- -----------
OTHER ASSETS
------------
Notes Receivable (Note 3) $ 244,280 $ 248,460
Deferred Compensation Funded 158,584 180,436
Other Noncurrent Assets 9,142 7,742
----------- -----------
$ 412,006 $ 436,638
----------- -----------
TOTAL ASSETS $57,327,683 $47,115,751
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Note Payable-Line of Credit $ 2,400,000 $ -0-
Notes Payable-Stock (Note 4) 344,920 324,280
Notes Payable-Capital Lease 12,244 9,780
Accounts Payable - Trade 24,732,925 20,214,196
Other Current Liabilities 1,391,229 1,574,647
Deferred Compensation Payable 60,134 60,134
Federal Income Taxes Payable (Note 5) 7,508 -0-
----------- -----------
$28,948,960 $22,183,037
----------- -----------
NONCURRENT LIABILITIES
----------------------
Note Payable-Line of Credit $ 2,400,000 $ -0-
Notes Payable-Stock (Note 4) 246,500 576,520
Notes Payable-Capital Lease 25,660 24,456
Notes Payable-Vendor 242,759 247,463
Deferred Compensation Payable 158,584 180,436
Deferred Income Taxes Payable (Note 5) 257,745 272,837
----------- -----------
$ 3,331,248 $ 1,301,712
----------- -----------
TOTAL LIABILITIES $32,280,208 $23,484,749
----------------- ----------- -----------
The accompanying notes are an integral part of the Condensed Financial Statements.
3
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
STOCKHOLDERS' EQUITY
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
10,740 & 10,250 shares $ 1,074,000 $ 1,025,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
82,143 & 75,475 shares 8,214,300 7,547,500
Common Stock, Class B
Subscribed 5,424.37 & 5,099.95
shares 542,437 509,995
Less Subscription Receivable (57,109) (25,560)
Preferred Stock 7% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
85,046 & 78,332 shares 8,504,600 7,833,200
Preferred Stock, Subscribed
5,424.37 & 5,099.95 shares 542,437 509,995
Less Subscription Receivable (57,109) (25,560)
Paid in Surplus 498,973 483,336
------------ ------------
$ 19,262,529 $ 17,857,906
Less: Cost of Treasury Stock
2,739.00 & -0- shares (273,900) -0-
------------ ------------
$ 18,988,629 $ 17,857,906
Retained Earnings exclusive of other
comprehensive earnings (Note 7) 6,077,587 5,805,131
Retained Earnings (loss) applicable to
other comprehensive earnings (Note 7) (18,741) (32,035)
------------ ------------
6,058,846 5,773,096
------------ ------------
Total Stockholders' Equity $ 25,047,475 $ 23,631,002
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 57,327,683 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
- --------
Net Sales $ 49,947,734 $ 45,337,615 $ 145,284,144 $ 141,529,245
Sundry Income 1,705,174 1,434,773 4,331,568 3,690,699
------------- ------------- ------------- -------------
TOTAL REVENUES $ 51,652,908 $ 46,772,388 $ 149,615,712 $ 145,219,944
- -------------- ------------- ------------- ------------- -------------
EXPENSE
- -------
Net Mat'l. Costs $ 44,879,936 $ 40,609,542 $ 129,863,770 $ 126,925,987
Payroll Costs 2,418,962 2,351,562 7,165,596 7,044,524
Other Operating Costs 3,996,158 3,472,111 11,247,486 10,308,581
Interest Expense 31,689 50,349 95,268 143,172
------------- ------------- ------------- -------------
TOTAL EXPENSE $ 51,326,745 $ 46,483,564 $ 148,372,120 $ 144,422,264
- ------------- ------------- ------------- ------------- -------------
NET EARNINGS BEFORE
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX $ 326,163 $ 288,824 $ 1,243,592 $ 797,680
- ------------------- ------------- ------------- ------------- -------------
PROVISIONS FOR
ESTIMATED FEDERAL
INCOME TAX (Note 5 & 7) (117,884) (104,571) (446,943) (292,932)
- ---------------------- ------------- ------------- ------------- -------------
NET EARNINGS $ 208,279 $ 184,253 $ 796,649 $ 504,748
- ------------
LESS ESTIMATED
DIVIDENDS ON
PREFERRED STOCK (131,048) (122,871) (393,144) (368,613)
- --------------- ------------- ------------- ------------- -------------
NET EARNINGS
APPLICABLE
TO COMMON
STOCKHOLDERS $ 77,231 $ 61,382 $ 403,505 $ 136,135
- ------------ ============= ============= ============= =============
NET EARNINGS
PER SHARE OF
COMMON STOCK,
CLASS A &
CLASS B (Note 1) $ 0.81 $ 0.69 $ 4.36 $ 1.55
- ---------------- -============ ============= ============= =============
OTHER COMPREHENSIVE EARNINGS (LOSS)
- ----------------------------------
Unrealized Earnings (Loss)
on Securities (Note 7) $ 3,676 $ (36,690) $ 20,143 $ (74,946)
Provision for Federal
Income Tax (Note 5) (1,250) 11,321 (6,849) 25,482
------------- ------------- ------------- -------------
Other Comprehensive
Earnings (Loss)
Net of Tax $ 2,426 $ (25,369) $ 13,294 $ (49,464)
------------- ------------- ------------- -------------
TOTAL COMPREHENSIVE
EARNINGS (Note 7) $ 79,657 $ 36,013 $ 416,799 $ 86,671
- ------------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the Condensed Financial Statements.
5
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
----------------- ------------
CASH FLOWS FROM OPERATING ACTIVITY
- ----------------------------------
Net Earnings Plus Other Comprehensive
Earnings (Note 7) $ 809,943 $ 455,284
----------- -----------
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Amortization $ 563 $ -0-
Depreciation 780,246 950,075
Gain on Sale of Property, Plant
& Equipment (13,351) -0-
Increase (Decrease) in Deferred
Income Tax (15,092) 1,584
Unrealized loss
In fair market value of securities 24,958 74,946
Changes in Assets and Liabilities
Increase in Accounts Receivable $(6,723,934) $(1,594,068)
(Increase) Decrease in Notes Receivable (5,273) 24,860
Increase in Inventory (2,199,764) (1,205,390)
(Increase)Decrease in Other Assets (486,505) 99,477
Decrease in Prepaid Income Tax 115,456 201,897
Decrease in Note Payable-Vendor (4,704) (25,606)
Increase (Decrease) in Accounts Payable 4,518,729 (1,331,009)
Decrease in Other Liabilities (183,418) (12,999)
Increase in Federal Income Taxes Payable 7,508 21,326
Decrease in Deferred Compensation Payable (21,852) (116,144)
TOTAL ADJUSTMENTS $(4,206,433) $(2,911,051)
----------- -----------
NET CASH USED FOR
OPERATING ACTIVITIES $(3,396,490) $(2,455,767)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital Expenditures $ (316,814) $ (359,288)
Sale of Property, Plant & Equipment 102,634 -0-
Payment From Deferred Compensation Funded -0- 60,000
Reinvested dividends, interest & capital gains (3,106) (1,833)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES $ (217,286) $ (301,121)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Increase Note Payable - Line of Credit $ 4,800,000 $ 5,610,000
Increase (Decrease) in Notes Payable - Stock (309,380) 85,560
Increase (Decrease) in Notes Payable -
Capital Lease 3,668 (24,925)
Increase in Subscription Receivable (63,098) (40,270)
Proceeds From Issuance of Stock 1,467,721 1,342,364
Purchase of Treasury Stock (273,900) (410,600)
Dividends Paid (524,193) (491,484)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 5,100,818 $ 6,070,645
----------- -----------
NET INCREASE
IN CASH & CASH EQUIVALENTS $ 1,487,042 $ 3,313,757
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,394,324 1,411,096
----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 2,881,366 $ 4,724,853
=========== ===========
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest Expense Paid $ 95,268 $ 143,172
Income Taxes Paid 461,376 244,540
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. Handy wholesales hardware to its
member-dealers in Texas, Oklahoma, Louisiana, Alabama, Mississippi,
Arkansas, Florida, Colorado, New Mexico, Tennessee, 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 Handy's 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,
------------------------- -----------------------------
2003 2002 2003 2002
-------- --------- --------- ---------
Calculation of Net Earnings Per Share
of Common Stock
- -------------------------------------
Net Earnings Before Preferred
Dividends $208,279 $ $184,253 $ 796,649 $ 504,748
Less: Estimated Dividends
on Preferred Stock (131,048) (122,871) (393,144) (368,613)
-------- --------- --------- ---------
Net Earnings Applicable
to Common Shareholders $ 77,231 $ 61,382 $ 403,505 $ 136,135
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 95,108 89,588 92,607 87,816
Net Earnings Per Share
of Common Stock $ 0.81 $ 0.69 $ 4.36 $ 1.55
======== ========= ========= =========
7
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 for the three and nine 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 nine months ended September 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:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
Land $ 3,207,866 $ 3,207,866
Building & Improvements 15,490,838 15,478,032
Furniture, Computer, Warehouse 3,897,496 3,715,818
Transportation Equipment 526,857 507,161
----------- -----------
$23,123,057 $22,908,877
Less: Accumulated Depreciation (7,773,557) (7,006,662)
----------- -----------
$15,349,500 $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, as well as amounts
due from former member-dealers on amounts still owing on their accounts.
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, Handy sells member-dealers computer
hardware, the purchase price of which is due and payable by member-dealers to
Handy in thirty-six monthly installments of principal and interest.
As of September 30, 2003, there was one note receivable from a former
member-dealer for amounts owed on its account, which bears interest at an
annualized rate of 10%. Monthly payments on this note, including interest, total
$1,000.00.
Notes Receivable are classified as follows:
CURRENT PORTION NONCURRENT PORTION
------------------------- ---------------------------
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31,
2003 2002 2003 2002
-------- ------- -------- -------
Deferred Agreements $ -0- $ -0- $242,759 $248,460
Installment Sale Agreements 1,064 552 1,521 -0-
Note from Former Member-Dealer 8,941 -0- -0- -0-
-------- ------- -------- --------
$ 10,005 $ 552 $244,280 $248,460
======== ======= ======== ========
NOTE 4 - NOTES PAYABLE STOCK
- ----------------------------
The five year, interest bearing notes payable - stock reflect amounts due from
Handy to former member-dealers to repurchase 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
------------------------- ---------------------------
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31,
2003 2002 2003 2002
-------- ------- -------- -------
$344,920 $324,280 $246,500 $576,520
Principal payments due over the next five years are as follows:
2003 7,000
2004 358,200
2005 41,280
2006 26,600
2007 150,440
Thereafter 7,900
--------
$591,420
========
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 Handy's method of
accounting for income taxes from the deferred method to the liability method.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------- -----------------
Excess of tax over book depreciation $ 1,511,118 $ 1,540,784
Allowance for Bad Debt (48,714) (48,714)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (415,223) (400,500)
Deferred Compensation (289,107) (289,107)
----------------- -----------------
Total $ 758,074 $ 802,463
Statutory Tax Rate 34% 34%
----------------- -----------------
Cumulative Deferred Income Tax Payable $ 257,745 $ 272,837
================= =================
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 257,745 272,837
----------------- -----------------
$ 257,745 $ 272,837
================= =================
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------- -----------------
Principal Components of Income Tax Expense
Federal:
Current
-------
Income tax paid $ 345,920 $ 42,643
Carry-over of prepayment from
prior year 115,456 201,897
----------- -------------
$ 461,376 $ 244,540
Federal Income Tax Payable 7,508 21,326
----------- -------------
Income tax for tax reporting
at statutory rate of 34% $ 468,884 $ 265,866
Deferred
--------
Adjustments for financial reporting:
Depreciation (10,086) 17,094
263A Uniform Capitalization Costs (5,006) (15,510)
Other -0- -0-
----------- ------------
Provision for federal income tax $ 453,792 $ 267,450
=========== ============
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 member-dealer, an independent hardware dealer must enter into a
Subscription Agreement with Handy 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 the Company. There are no
specific restrictions on the transfer of 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 $218,718, reflected on the
Balance Sheet as of September 30, 2003 as a current asset in the amount of
$60,134 and as a non-current asset in the amount of $158,584, includes
equity securities classified as investments available for sale in the
amount of $218,718 at fair market value. The $218,718 includes $73,495
unrealized loss on securities resulting from the decrease in fair market
value. The cost of the equity securities is $292,213.
2. Changes in Equity securities
Nine Months Ended
September 30, 2003 Cumulative
------------------ ----------
Beginning Balance-January 1, 2003 $ 240,570 $ -0-
Purchases -0- 117,400
Dividends, interest and capital gains 3,106 174,813
Unrealized losses on securities resulting
from decrease in fair market value (24,958) (73,495)
----------- ----------
Balance-September 30, 2003 $ 218,718 $ 218,718
=========== ==========
3. Components of Net Earnings plus Other Comprehensive Earnings and Components
of Total Comprehensive Earnings for the nine months ended September 30,
2003:
Other Comprehensive Net Earnings Plus Other
Net Earnings Earnings Comprehensive Earnings
------------ ------------------- -----------------------
Earnings Before Provision for Unrealized Earnings
Federal Income Tax $1,243,592 on Securities $20,143 Net Earnings $796,649
Provision for Provision for Other Comprehensive
Federal Income Tax (446,943) Federal Income Tax (6,849) Earnings 13,294
--------- -------- --------
Other Comprehensive Net Earnings Plus Other
Net Earnings $ 796,649 Earnings $13,294 Comprehensive Earnings $809,943
========= ======= ========
Net Earnings Applicable to Other Comprehensive Total Comprehensive
Common Stockholders Earnings Earnings
-------------------------- ------------------- -------------------
Unrealized Earnings Net Earnings Applicable to
Net Earnings $ 796,649 on Securities $20,143 Common Stockholders $403,505
Less Estimated Dividends Provision for Other Comprehensive
on Preferred Stock (393,144) Federal Income Tax (6,849) Earnings 13,294
-------- ------ --------
Net Earnings Applicable Other Comprehensive Total Comprehensive
to Common Stockholders $403,505 Earnings $13,294 Earnings $416,799
======== ======= ========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Exclusive of Applicable to
Other Comprehensive Other Comprehensive
Earnings Earnings (Loss) Total
------------------- ------------------- -----
Balance-January 1, 2003 $5,805,131 $ (32,035) $5,773,096
Add: Net earnings
9 months ended
September 30, 2003 796,649 13,294 809,943
Deduct: Cash Dividends on
Preferred Stock 524,193 -0- 524,193
---------- ---------- ----------
Balance-September 30, 2003 $6,077,587 $ (18,741) $6,058,846
========== ========== ==========
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.
September 30, 2003 December 31, 2002
------------------ -----------------
Accounts Receivable $17,941,266 $11,154,235
Subscription Receivable (114,217) (51,120)
Allowance for Doubtful Accounts (48,714) (48,714)
----------- -----------
Accounts Receivable, Net of
Subscription Receivable and
Allowance for Doubtful Accounts $17,778,335 $11,054,401
=========== ===========
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
Handy held its biannual trade show earlier in the third quarter of 2003
than it did in 2002, causing a larger portion of trade show sales in 2003 to be
reflected in the third quarter. The timing of the trade show, coupled with a
continuing moderate economic recovery, led net sales in the third quarter of
2003 to increase 10.2% ($4,610,119) compared to sales during the same period in
2002. Net sales during the first nine months of 2003 increased 2.7% ($3,754,899)
over sales during the same period in 2002.
NET SALES. Despite the overall economy and consumer confidence failing to
fully recover, and sustained pressure from retail warehouses, sales growth
during the first nine months of 2003 in six of our ten selling territories was
more robust than in the first nine months of 2002. By contrast, three selling
territories, the North Texas, Dallas and Fort Worth territory, the Houston
territory and the Austin, Brenham and Central Texas territory continue to
experience pressure from large retail warehouses which have eroded the market
share of independent hardware stores in those selling territories. Additionally,
in the Houston area approximately 65.0% of the $2,688,280 decrease in sales is
solely attributable to reduced purchases from two multi-store member-dealers. In
addition, during 2002 we lost a seven store member-dealer in the North Texas,
Dallas and Fort Worth area, and one significant member-dealer in the Austin,
Brenham and Central Texas area, which member-dealers generated sales of
$1,117,996 and $582,506, respectively, during 2002.
The following table summarizes sales during the first nine months of 2003
and 2002 by sales territory:
First Nine Months 2003 First Nine Months 2002
------------------------------------ ------------------------------------------
% Increase
(Decrease)in
Sales Compared
To First % of % of
Nine Months Total Total
Sales Territory Sales of 2002 Sales Sales Sales
- --------------- ------------ -------------- ----- ------- -----
Houston Area $ 28,012,767 (8.8%) 19.3% $ 30,701,047 21.7%
Victoria, San Antonio,
Corpus Christi &
Rio Grande Valley Area(1) 30,930,681 4.3% 21.3% 29,653,588 21.0%
North Texas, Dallas
& Fort Worth Area 15,791,908 (4.0%) 10.9% 16,442,548 11.6%
Austin, Brenham &
Central Texas Area 17,676,418 (0.2%) 12.2% 17,706,082 12.5%
West Texas & New Mexico
Area 5,830,764 41.8% 4.0% 4,112,821 2.9%
Southern Louisiana Area 11,798,241 6.4% 8.1% 11,085,984 7.8%
Baton Rouge, New Orleans,
Southern Mississippi, Southern
Alabama & Florida Area 12,724,016 9.9% 8.8% 11,580,801 8.2%
Arkansas, Northern Louisiana,
Northern Mississippi
& Tennessee Area (2) 13,203,552 17.6% 9.1% 11,227,050 8.0%
Oklahoma Area 9,064,270 2.4% 6.3% 8,849,831 6.3%
Alabama & Central
Mississippi Area (3) 53,692 -- -- -- --
---------- ----- ----- ------------ -----
Totals: $145,086,309(4) 100.0% $141,359,752(4) 100.0%
============ ===== ============ =====
(1) Includes sales to Colorado, Mexico and Central America member-dealers.
(2)The Arkansas Area was expanded and sales commenced in Tennessee beginning in
July of 2003.
(3) Sales for the Alabama & Central Mississippi Area commenced in April of 2003.
(4) Total does not include miscellaneous sales to employees.
15
NET MATERIAL COSTS AND REBATES. Net material costs for the third quarters
of 2003 and 2002 were $44,879,936 and $40,609,542, respectively, (a 10.5%
increase), and were $129,863,770 and $126,925,987, respectively, for the first
nine months of 2003 and 2002 (a 2.3% increase). These increases in net material
costs were commensurate with the increases in net sales for the same periods. As
a result, net material costs were 89.9 percent and 89.6 percent of net sales in
the third quarters of 2003 and 2002, respectively, and were 89.4 percent and
89.7 percent of sales for the first nine months of 2003 and 2002, respectively.
The relative stability in net material costs as a percentage of net sales was
primarily the result of our continuing focus on warehouse efficiencies, which
resulted in savings for the third quarter and the first nine months of 2003 of
$78,582 and $413,398 respectively.
PAYROLL COSTS. Payroll costs for the third quarter and for the first nine
months of 2003 increased by $67,400 and $121,072, respectively, resulting from
salary increases needed to attract or retain high-quality employees. However,
the increase for the first nine months of 2003 was significantly offset by a
$118,436 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 nine months of 2003 rose only slightly
(1.72%) 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 third
quarter of 2003 constituted 4.8 percent of both net sales and total expenses,
compared to 5.2 percent of net sales and 5.1 percent of total expenses for the
same quarter of 2002. Payroll costs were 4.9 percent of net sales and 4.8
percent of total expenses for the first nine months of 2003, as compared to 5.0
percent of net sales and 4.9 percent of total expenses for the same period in
2002. 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 2003, other operating costs increased $524,047 (15.1%) and $938,905 (9.1%),
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 third quarter of 2003 as compared to 7.5% of total expenses for
the third quarter of 2002. For the nine month period ending September 30, 2003,
other operating costs were 7.6% of total expenses as compared to 7.1% of total
expenses during the same period in 2002. The increase in other operating costs
in the third quarter of 2003 can be attributed to an increase in advertising
expenses of $162,518, an increase in truck fuel costs of $89,176, an increase in
accruals for insurance of $73,135, and an increase in warehouse and distribution
expenses of $53,656, while the increase in other operating costs in the first
nine months of 2003 resulted from an increase in truck fuel costs of $339,521,
an increase in advertising expenses of $120,554, an increase in the accrual for
property taxes of $114,500, and an increase in the accrual for insurance of
$93,276.
NET EARNINGS AND EARNINGS PER SHARE
- -----------------------------------
NET EARNINGS - THIRD QUARTER. While net sales for the third quarter of 2003
increased $4,610,119, net material costs for the same period increased only
$4,270,394, compared in both cases to levels in the third quarter of 2002,
resulting in an increase in gross margin of $339,725 (7.2%). However, the
significant increase in gross margin, as well as the increase in other income of
$270,401, were largely offset by an increase in other operating costs of
$524,047 (15.1%). Thus after tax net earnings increased only $24,026 (13.0%),
from $184,253 in the third quarter of 2002 to $208,279 for the same 2003 period.
After tax net earnings, combined with estimated dividends on preferred stock and
other comprehensive earnings resulted in total comprehensive earnings for 2003's
third quarter of $79,657, compared to total comprehensive earnings of only
$36,013 for the same 2002 period, for an overall increase of $43,644.
16
NET EARNINGS - FIRST NINE MONTHS. While net sales for the first nine months
of 2003 increased $3,754,899, net material costs for the same period increased
only $2,937,783, compared in both cases to levels in the first nine months of
2002, resulting in an increase in gross margin of $817,116 (5.6%). The increase
in gross margin, as well as the substantial increase in other income of
$640,869, were partially offset by an increase of $121,072 in payroll costs
(1.7%) and a substantial increase in other operating costs of $938,905 (9.1%).
Thus after tax net earnings increased $291,901 (57.8%), from $504,748 in the
first nine months of 2002 to $796,649 for the same 2003 period. After tax net
earnings, combined with estimated dividends on preferred stock and other
comprehensive earnings resulted in total comprehensive earnings for the first
nine months of 2003 of $416,799, compared to total comprehensive earnings of
$86,671 for the same 2002 period, for an overall increase of $330,128.
EARNINGS PER SHARE. Our earnings per share increased 17.4% in the
comparative third quarters (2003 - $0.81 versus 2002 - $0.69) and more than
doubled for the first nine months of 2003 as compared to the same period of 2002
(2003 - $4.36 versus 2002 - $1.55). The increase in 2003 is due to the factors
previously discussed, as well as estimated dividends accrued in both the third
quarter and first nine months of 2003 representing a smaller percentage of 2003
net earnings than estimated dividends accrued in the same 2002 periods (third
quarter 2003-62.9% versus third quarter 2002-66.7%; and first nine months of
2003-49.3% versus first nine months of 2002-73.0%).
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 and after 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 three quarters of
2003, the cumulative effect of the various timing differences, including a
change in the timing of our third quarter trade show, as well as slightly
improved economic conditions in most of our selling territories, caused a
substantial 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 October 1, 2001 and ending September 30, 2003:
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended
12-31-01 03-31-02 06-30-02 09-30-02 12-31-02 03-31-03 06-30-03 09-30-03
Sales $42,680,648 $49,255,077 $46,936,553 $45,337,615 $44,920,202 $48,974,287 $46,362,123 $49,947,734
Net
Mat'l
Costs 37,227,446 44,711,986 41,604,459 40,609,542 39,404,595 44,255,647 40,728,187 44,879,936
Gross
Margin 5,453,202 4,543,091 5,332,094 4,728,073 5,515,607 4,718,640 5,633,936 5,067,798
Other
Operating
Expenses(1) 7,671,738 5,710,106 5,382,108 5,229,594 7,840,146 6,022,971 6,038,570 6,446,809
Sundry
Income(1) 2,225,622 1,369,002 356,883 790,345 2,510,195 1,634,618 991,776 1,705,174
Pre-Tax Net
Earnings(2) 7,086 201,987 306,869 288,824 185,656 330,287 587,142 326,163
- ----------------------------------
(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 earnings/(loss).
Trends
- ------
In connection with our business operations, we maintain various types of
insurance coverage. As reflected in our financial results for the first nine
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 September 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 biannual 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 2003 our cash and cash equivalents
decreased $1,843,487 as compared to an increase of $324,017 in the first nine
months of 2002. We used cash flow from operating activities of $3,396,490 during
the first nine months of 2003, as compared to $2,455,767 in the same 2002
period. This decrease in cash flow in the 2003 period was principally
attributable to a significant increase in inventory, which increased 82.5%
compared to the same 2002 period, as well as accounts receivable increasing
significantly more than accounts payable during the first nine months of 2003
compared to the first nine months of 2002.
We had approximately 42,000 stockkeeping units in inventory in the period
ending September 30, 2003. The increase in inventory of $2,199,764 in the first
nine months of 2003 was significantly higher (82.5%) than the increase in
inventory of $1,205,390 in the same period in 2002 to prepare us for anticipated
warehouse sales from the fall trade show, which was held earlier in the third
quarter than in the previous year, and to maintain our breadth of inventory.
18
Accounts payable increased $4,518,729 during the first nine months of 2003
as compared to a decrease of $1,331,009 during the same period in 2002. The
difference in these two periods was due primarily to extended payment terms
offered to us by suppliers at our fall trade show.
In the first nine months of 2003 and 2002, accounts receivable increased
$6,723,934 and $1,594,068, respectively. The variation in levels of accounts
receivable for these periods was mainly attributable to our passing extended
terms offered by our suppliers on to our member-dealers.
Net cash used for investing activities decreased in the first nine months of
2003 as compared to net cash used in the same period in 2002, declining from
$301,121 in the first nine months of 2002 to $217,286 for the same period in
2003. The decrease in the first nine 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 $102,634 in cash flow.
Net cash provided by financing activities was $5,100,818 in the period
ending September 30, 2003, as compared to net cash provided by financing
activities of $6,070,645 during the same period in 2002. This considerable
difference was principally attributable to more funds being borrowed during
2002, primarily to support the payments for accounts payable.
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:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2002 2002
------------ ------------ ------------
Working Capital $12,617,217 $8,593,861 $12,179,603
Current Ratio 1.4 to 1 1.4 to 1 1.5 to 1
Long-term Debt as Percentage
of Capitalization 13.3% 5.5% 23.1%
During the remainder of 2003, we expect to further expand our existing
customer base in our current selling territories, including our newest selling
territory in Tennessee. 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.
Comparing the first nine months of 2003 and 2002, our service level (the
measure of our ability to meet member-dealers' orders out of current
stock)improved from 96.0% to 96.3%. Inventory turnover was 5.9 times during the
first nine months of 2003 as compared to 6.0 times during the same 2002 period.
This rate of inventory turnover 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 September 30, 2003, our contractual obligations for the remainder of
2003 and the next four years and thereafter are as follows:
Year Ended December 31,
-----------------------------------------------------------------------------------------------
4th Qtr
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Contractual
Obligation:
Non-cancelable
Operating Leases $179,946 $ 701,184 $ 640,014 $429,389 $366,609 $ -0- $2,317,142
Credit Facility
which expires in
April 2005(1) -- -- 4,800,000 -- -- -- 4,800,000
Notes Payable -
Stock 7,000 358,200 41,280 26,600 150,440 7,900 591,420
Notes Payable -
Vendor
Consignment -0- -0- -0- -0- -0- 247,463 247,463
Non-cancelable
Capital Leases 12,244 9,780 9,780 4,081 -0- -0- 35,885
$199,190 $1,069,164 $5,491,074 $460,070 $517,049 $255,363 $7,991,910
======== ========== ========== ======== ======== ======== ==========
(1) The amounts outstanding under our credit facility fluctuate on a daily
basis.
Capital Resources
- -----------------
In the nine month periods ending September 30, 2003 and September 30, 2002,
our capital expenditures were $316,814 and $359,288, respectively. Approximately
38.6 percent ($122,330) of the amount expended in the first nine months of 2003
was used to purchase company vehicles, 36.7 percent ($116,151) was used to
upgrade warehouse equipment and 13.9 percent ($44,086) was used to purchase
computer equipment. By comparison, of the total amount expended in the first
nine months of 2002, $145,496 (40.5%) was used to purchase warehouse equipment,
$88,437 (29.6%)was used to purchase computer equipment and member-dealer order
entry terminals, $68,245 (19.0%) was used to purchase company vehicles, and
$36,825 (10.3%) was used for building upgrades.
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 nine months
of 2003, we borrowed $46,504,000 and repaid $41,704,000 from cash flow, leaving
an outstanding balance under our line of credit of $4,800,000 on September 30,
2003. Our average outstanding balance on our line of credit for the first nine
months of 2003 was $2,263,553. We have no off balance sheet arrangements,
special purpose entities, financing partnerships or guarantees.
During the fourth quarter of 2003, we anticipate cash outlays for payment
of accounts payable and increased inventory purchases, as well as capital
expenditures of approximately $55,000 to upgrade computer equipment, $10,000 to
purchase warehouse equipment and $5,000 to purchase office furniture and
equipment.
Our cash position of $2,881,366 at September 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, 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 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, or 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 - None
Item 5. Other Information - None
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits
Exhibit Number
--------------
*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 Kirbie
---------------------------------------
TINA S. KIRBIE
Executive Vice President
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Dated: November 12, 2003
-----------------
23