Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact Name of Registrant)
TEXAS 74-1381875
(State of incorporation or organization) (I.R.S. Employer Identification Number)
8300 Tewantin Drive
Houston, Texas 77061
(713) 644-1495
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $100.00 par value
(Title of Class)
Class B Common Stock, $100.00 par value
(Title of Class)
Preferred Stock, $100.00 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part Ill of this Form 10-K or in any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common stock held
by nonaffiliates of the Registrant as of June 30, 2003 (computed by reference to
the price at which the stock was sold) was $1,027,000 for Class A Common Stock
and $7,405,200 for Class B Common Stock.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 29, 2004, was 10,300 shares of Class A Common Stock,
$100 par value, and 83,691 shares of Class B Common Stock, $100 par value.
Documents Incorporated by Reference
Document Incorporated as to
-------- ------------------
Notice and Proxy Statement for the Part III, Items 10, 11, 12, 13 and 14
Annual Meeting of Stockholders
to be held April 19, 2004
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................................................1
Item 2. Properties...........................................................................................4
Item 3 Legal Proceedings....................................................................................4
Item 4. Submission of Matters to a Vote of Security Holders..................................................4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................4
Item 6. Selected Financial Data..............................................................................6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................7
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........................................10
Item 8. Financial Statements and Supplementary Data.........................................................10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................32
Item 9a. Controls and Procedures.............................................................................32
PART III
Item 10. *Directors and Executive Officers of the Registrant..................................................32
Item 11. *Executive Compensation..............................................................................32
Item 12. *Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......32
Item 13. *Certain Relationships and Related Transactions......................................................32
Item 14. *Principal Accountant Fees and Services..............................................................32
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................32
- ------------------
* Included in the Company's proxy statement to be delivered to the Company's shareholders within 120 days following
the Company's fiscal year end.
FORWARD LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts are forward-looking statements as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, and therefore involve a number of risks and uncertainties. Such
forward-looking statements may be or may concern, among other things, sales
levels, the general condition of retail markets, levels of costs and margins,
capital expenditures, liquidity, and competition. Such forward-looking
statements generally are accompanied by words such as "plan," "budget,"
"estimate," "expect," "predict," "anticipate," "projected," "should," "believe,"
or other words that convey the uncertainty of future events or outcomes. Such
forward-looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by or on behalf of the Company, including those
regarding the Company's financial results, levels of revenues, capital
expenditures, and capital resource activities. Among the factors that could
cause actual results to differ materially are: fluctuations of the prices
received for or demand for the Company's goods, amounts of goods sold for
reduced or no mark-up, a need for additional labor or transportation costs for
delivery of goods, requirements for capital; general economic conditions or
specific conditions in the retail hardware business; weather conditions;
competition; as well as the risks and uncertainties discussed in this Annual
Report, including, without limitation, the portions referenced above and the
uncertainties set forth from time to time in the Company's other public reports,
filings, and public statements.
PART I
Item 1. Business
General Development of Business
Handy Hardware Wholesale, Inc. ("Handy Hardware" or the "Company") was
incorporated as a Texas corporation on January 6, 1961. Its principal executive
offices and warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061.
The purpose of the Company is to provide the warehouse facilities and
centralized purchasing services that allow participating independent hardware
dealers ("Member-Dealers") to compete more effectively in areas of price and
service. The Company is owned entirely by its Member-Dealers and former
Member-Dealers.
Handy Hardware is currently engaged in the sale to its Member-Dealers of
products used in retail hardware, building material and home center stores as
well as in plant nurseries, marine, industrial and automotive stores. In
addition, the Company offers advertising and other services to Member-Dealers.
The Company utilizes a central warehouse and office facility located in Houston,
Texas, and maintains a fleet of trailers owned by the Company and leased power
units and trailers which are used for merchandise delivery. The Company offers
merchandise to its Member-Dealers at its cost plus a markup charge, resulting
generally in a lower price than an independent dealer can obtain on its own.
However, Member-Dealers may buy merchandise from any source they desire. Over
93% of the Company's Member-Dealers are located in Texas and abutting states.
Products and Distribution
The Company buys merchandise from vendors in large quantity lots,
warehouses the merchandise and resells it in smaller lots to its Member-Dealers.
No individual Member-Dealer accounted for more than 2.0% of the sales of the
Company during fiscal 2003. The loss of a single Member-Dealer or several
Member-Dealers would not have a material adverse effect on the Company.
Often Member-Dealers may desire to purchase products that are not
warehoused by the Company. In this instance, Handy Hardware will, when
requested, purchase the product from the vendor and have it shipped directly to
the Member-Dealer. Direct shipments from the vendor to Member-Dealers accounted
for approximately 34% of the Company's total sales during 2003 and 35% in 2002,
while warehouse shipments accounted for approximately 66% of total sales in 2003
and 65% in 2002.
The Company's total sales include 14 different major classes of
merchandise. In 2003, 2002 and 2001, the Company's total sales and total
warehouse sales were divided among classes of merchandise listed below.
Total Sales(1) Warehouse Sales
Class of Merchandise 2003 2002 2001 2000 2003 2002 2001 2000
- -------------------- ---- ---- ---- ---- ---- ---- ---- ----
Plumbing Supplies 19% 19% 18% 19% 23% 23% 22% 23%
Building Materials 12 12 12 12 3 3 2 2
General Hardware 10 10 11 11 11 11 12 12
Paint Sundries 11 11 11 10 13 13 13 13
Electrical Supplies 10 10 10 10 12 12 13 13
Hand Tools 8 8 8 9 7 7 7 8
Lawn and Garden Products 8 8 8 8 10 10 10 10
Paint 4 4 4 3 5 5 4 4
Power Tools 4 4 4 4 2 2 2 2
Housewares & Related Supplies 3 3 3 3 4 4 4 3
Fasteners 2 2 2 2 1 1 1 1
Automotive After Market 3 3 2 2 3 3 3 3
Outdoor Products 2 2 2 2 2 2 2 1
Miscellaneous 4 4 5 5 4 4 5 5
--- --- --- --- --- --- --- ---
100% 100% 100% 100% 100% 100% 100% 100%
(1) These amounts include direct sales and warehouse sales.
Because the primary purpose of the Company is to provide its Member-Dealers
with a low cost buying program, markups are kept as low as possible, although at
a level sufficient to provide adequate capital to pay the expenses of the
Company, improve the quality of services provided to the Member-Dealers and
finance the increased inventory and warehouse capacity required to support the
growth of the Company. We have a program for Member-Dealers to make direct sale
purchases from our vendors at the Company's cost with no markup, excluding
purchase discounts and manufacturers' rebates.
Most Member-Dealers have a computer terminal at their hardware store that
provides a direct link to the offices of the Company. Orders placed by
Member-Dealers go directly into the Company computer where they are compiled and
processed on the day received. The appropriate merchandise is gathered from the
warehouse for delivery to the Member-Dealer.
In 2003 the Company maintained a 96.3 percent service level (the measure of
the Company's ability to meet Member-Dealer orders out of current stock), as
compared to service levels of 95.9 percent in 2002 and 94.5 percent in 2001.
This slight increase in service level in 2003 can be attributed to a continuing
emphasis on improving inventory controls and delivery methods. Inventory
turnover was 5.8 times during 2003, 6.0 times in 2002 and 6.3 times in 2001.
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. No policy of inventory shrinkage has been implemented or is planned.
2
Member-Dealer Services and Advertising
The Company employs a staff of twelve full-time account representatives who
visit Member-Dealers to advise them on display techniques, location surveying,
inventory control, promotional sales, advertising programs and other
Member-Dealer services available to them through the Company.
The Company offers Member-Dealers an electronic ordering system that can
assist them in placing orders, receiving price changes, tracking promotions and
processing invoice transactions electronically. In addition, the Company
provides Member-Dealers with an inventory catalog which is available in paper or
CD-ROM format.
The Company has participated in newspaper advertising programs, and has
assisted in the preparation and distribution of sales circulars utilized by
Member-Dealers. The Company has a computerized circular program which allows the
Member-Dealer to customize its own unique advertising circular, utilizing its
individual inventory and targeting its particular market. In addition, the
system tracks available vendor cooperative funds, allowing the Member-Dealer to
deduct such cooperative claims from the cost of the circular program.
Suppliers
The Company purchases merchandise from various vendors, depending upon
product specifications and Member-Dealer requirements. Approximately 1,700
vendors supplied merchandise to the Company during 2003. The Company has no
significant long-term contract with any vendor. Most of the merchandise
purchased by the Company is available from several vendors and manufacturers,
and no single vendor or manufacturer accounted for more than 2.9% of the
Company's total purchases during 2003. The Company has not in the past
experienced any significant difficulties in obtaining merchandise and does not
anticipate any such difficulty in the foreseeable future.
The Company is a member of PRO Group, Inc., of Englewood, Colorado, an
independent hardware merchandising group. PRO Group, Inc. is a merchandising
organization with 27 wholesale hardware distributors as members. The size of the
organization generally provides greater buying power than that of any individual
member. The Company became a member of PRO Group, Inc. in order to take
advantage of this buying power, which gives PRO Group, Inc. and its members
access to potentially lower prices, bigger discounts, extended terms and other
purchasing advantages. The Company may participate in other benefits available
to PRO Group, Inc. members, but is under no obligation to do so.
All of the Company's products are warranted to various levels by the
manufacturers, whose warranties are passed on to the Member-Dealers. In
addition, the Company maintains product liability insurance which the Company
believes is sufficient to meet its needs.
Employees
As of December 31, 2003, the Company had 371 full-time employees, of which
62 were in management or administrative positions and 309 in warehouse, office
or delivery operations. Company employees are not represented by any labor
unions. The Company believes its employee relations are satisfactory and it has
experienced no work stoppage as a result of labor disputes.
Trade Names
The Company has a trade name, "Handy Hardware Stores," that it licenses to
Member-Dealers at no additional charge. This trade name has been registered in
all the states in which the Company's Member-Dealers are located. This trade
name is displayed by many of the Member-Dealers on storefronts and inside stores
and is used in advertising programs organized by Handy Hardware. The Company
believes that this trade name is useful to its operations, but also believes
that the loss of ability to utilize this trade name would not have a material
adverse effect upon the business of the Company.
Capitalization by Member-Dealers
In order to become a Handy Hardware Member-Dealer, an independent hardware
dealer must enter into a Dealer Contract with the Company. In addition, a
Member-Dealer must enter into a Subscription Agreement with the Company for the
purchase of 10 shares of Handy Hardware Class A Common Stock, $100 par value per
share ("Class A Common Stock"), with an additional agreement to purchase a
minimum number of shares of Class B Common Stock, $100 par value per share
("Class B Common Stock"), and Preferred Stock, $100 par value per share
("Preferred Stock"). All shares of the Company's stock have a purchase price of
$100 per share.
In order to collect funds from Member-Dealers to purchase the required
Class B Common Stock and Preferred Stock, an additional charge equal to 2% of
the Member-Dealer's warehouse purchases from the Company's inventory is invoiced
on each statement. The Company accumulates the funds from this 2% charge for
each Member-Dealer to use for its purchase of Class B Common Stock and Preferred
Stock. On an annual basis, the Company calculates each Member-Dealer's desired
stock ownership level; however, if a Member-Dealer `s actual stock ownership at
year-end is equal to or exceeds its desired stock ownership level, the
Member-Dealer is exempt from the 2% charge for a one year period.
3
Affiliated Member-Dealers
If one or more individuals who control an existing Member-Dealer open a new
store which will also be a Member-Dealer, the new Member-Dealer is required to
make an initial purchase of 10 shares of Preferred Stock rather than 10 shares
of Class A Common Stock. In all other respects, however, the Company will treat
the new Member-Dealer as an entirely separate entity for purposes of determining
required stock purchases. The Company will calculate a separate desired stock
ownership for the new Member-Dealer and will maintain a separate account for
purchase funds paid by the new Member-Dealer.
Competition
The wholesale hardware industry in which the Company operates is highly
competitive. The Company competes primarily with other dealer-owned wholesalers,
cooperatives and independent wholesalers. The business of the Company is
characterized by a small number of national companies that dominate the market,
and a number of regional and local companies that compete for a limited share of
the market. The Company considers itself a regional competitor. Competition is
based primarily on price, delivery service, product performance and reliability.
The Company's management believes that it competes effectively in each of these
areas, and that proximity to the markets it serves is of special importance to
its ability to attract business in those regions.
Seasonality
The Company's quarterly net earnings traditionally vary based on the timing
of events which affect the Company's sales. Traditionally, first and third
quarter earnings have been negatively affected by the increased level of direct
sales (with no markup) resulting from the Company's semiannual trade show always
held in the first and third quarters. However, the Company's overall sales
levels increase during the trade shows, which typically offsets the negative
effect of the increased level of direct sales. In addition, the timing
difference in the receipt of discounts, rebates and miscellaneous income, as
well as changes in the weather and economic conditions in the Company's selling
territories, can cause the Company's net earnings per quarter to vary
substantially from year to year. For example, during 2003 the cumulative effect
of timing differences of purchase discounts, as well as slightly improved
economic conditions in most of our selling territories, contributed to the
increase in 2003 net earnings. Sales during the fourth quarter are often lower,
as hardware sales are slowest during the winter months preceding ordering for
significant sales in the spring. In most years, however, this decrease in sales
is partially offset by the corrections to inventory made at year-end, causing
fourth quarter net earnings to vary from year to year.
Item 2. Properties
The Company's warehouse and administrative and marketing offices are
located on 25.2 acres of land in Houston, Texas. The Company's property has
convenient access to the major freeways necessary for the shipment of products
to and from the warehouse facility. Management believes that the current
facility will be sufficient to serve the needs of the Company for the
foreseeable future.
In January 1999 the Company purchased an additional 29.96 acres of land
located across the street from its warehouse facility. This land was used to
relocate the Company's retention pond, to provide additional parking facilities
and to allow for the Company's warehouse expansion project. The warehouse
expansion project increased the size of the warehouse from 297,000 square feet
to 538,000 square feet.
Item 3. Legal Proceedings
To the Company's knowledge, there are no pending or threatened legal
proceedings which would have a material effect on the Company's financial
position, results of operation or its assets.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for any class of Handy
Hardware's capital stock. Each Member-Dealer enters into a Subscription
Agreement with the Company whereby it purchases 10 shares of Class A Common
Stock or, in certain cases, 10 shares of Preferred Stock, from the Company. In
addition, the Member-Dealer agrees to purchase a minimum number of shares of
Class B Common Stock and Preferred Stock pursuant to a formula based upon
merchandise purchased by the Member-Dealer from Handy Hardware. Holders of Class
A Common Stock may not transfer those shares to a third party without first
offering to sell them back to the Company. There are no restrictions on the
transfer of the Company's Class B Common Stock or Preferred Stock. All shares of
4
the equity securities of the Company are, to the best knowledge of the Company,
owned by Member-Dealers or former Member-Dealers of the Company or affiliates of
such Member-Dealers. In the past the Company has acquired all the stock that
former Member-Dealers have offered back to the Company, paying par value in cash
for the Class A Common Stock and acquiring Class B Common Stock and Preferred
Stock at par value on an installment sale basis. There is no assurance that
Handy Hardware will maintain such practices, which could be discontinued without
notice at any time. Other than as described above, the Company is not aware of
the existence of a trading market for any class of its equity securities.
Shares of the Company's Class A Common Stock are the only shares of capital
stock with voting rights. A Member-Dealer receives one vote for each share of
Class A Common Stock it owns. The number of record holders of each class of the
Company's Common Stock at February 29, 2004, was as follows:
Description Number of Holders
----------- -----------------
Class A Common Stock (Voting), $100 par value 1,030
Class B Common Stock (Non-Voting), $100 par value 989
The Company has never paid cash dividends on either class of its Common
Stock and does not intend to do so in the foreseeable future. For information
concerning dividends paid on the Company's Preferred Stock, see Items 6 and 8
below.
5
Item 6. Selected Financial Data
The following table provides selected financial information for the five
years ended December 31, 2003, derived from financial statements that have been
examined by independent public accountants. The table should be read in
conjunction with "Management's Discussion and Analysis" below and the financial
statements and the notes thereto included in Item 8.
Year Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Operating Income Data:
Net Sales $189,068,660 $186,449,447 $178,503,543 $168,108,099 $158,066,302
Total Revenue 194,093,467 190,989,139 182,617,439 171,826,695 161,375,588
Total Expenses 192,765,454 190,005,803 182,006,236 170,655,442 159,894,033
Net Earnings 851,077 614,096 389,075 749,664 950,902
Preferred Stock
Dividends Paid 524,193 491,484 635,737 585,925 554,346
Net Earnings (Loss)
Applicable to Common
Stockholders 326,884 122,612 (246,662) 163,739 396,556
Net Earnings (Loss) Per
Share of Class A and
Class B Common Stock 3.51 1.39 (3.03) 2.20 5.66
Total Comprehensive
Earnings (Loss) $ 351,315 $ 75,486 $ (292,937) $ 118,924 $ 437,674
Year Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Current Assets $ 33,559,671 $ 30,776,898 $ 31,814,422 $ 27,290,088 $ 27,247,000
Property 15,106,190 15,902,215 16,776,391 13,204,168 10,756,483
(Net of Accumulated
Depreciation)
Other Assets 432,282 436,638 698,012 753,462 677,547
------------ ------------ ------------ ------------ ------------
Total Assets $ 49,098,143 $ 47,115,751 $ 49,288,825 $ 41,247,718 $ 38,681,030
============ ============ ============ ============ ============
Current Liabilities $ 22,646,478 $ 22,183,037 $ 25,055,255 $ 18,137,338 $ 16,969,588
Noncurrent Liabilities 998,391 1,301,712 1,647,733 1,716,416 1,696,595
Stockholders' Equity 25,453,274 23,631,002 22,585,837 21,393,964 20,014,847
------------ ------------ ------------ ------------ ------------
Total Liabilities and
Stockholders' Equity $ 49,098,143 $ 47,115,751 $ 49,288,825 $ 41,247,718 $ 38,681,030
============ ============ ============ ============ ============
6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
In 2003, Handy Hardware accomplished several goals in a year of moderate
sales increase. The Company has been widening its offering of products in order
to give Member-Dealers more variety in what they can offer to their customers.
The Company also is looking into expanding its presence geographically. As a
result of a strong, but competitive economy in 2003, the Company had a moderate
net sales increase and plans to increase the number of Member-Dealers to
continue the growth of net sales. The most important factor in Handy's 2003
financial results was a net sales increase of over $2,600,000 in 2003. Overall,
in 2003 the Company was able to maintain its steady growth while continuing to
meet its goals of providing quality goods to its Member-Dealers.
Material Changes in Results of Operations
Net Sales. With a modest economic recovery underway, the Company's net
sales growth continued throughout 2003. Net sales in 2003 increased 1.4%
($2,619,213) over 2002 net sales, compared to a 4.5% growth rate ($7,945,904) of
net sales in 2002 over 2001 levels.
Net sales growth during 2003 was mainly attributable to marketing
initiatives to help Member-Dealers maintain their competitiveness in their
selling territories. The number of Member-Dealers for the past three years has
declined slightly, with 1,159 Member-Dealers in 2003, 1,174 Member-Dealers in
2002 and 1,187 Member-Dealers in 2001. No single Member-Dealer represents more
than 2% of our net sales. The recent lack of growth in the number of
Member-Dealers can be attributed to the Company tightening its membership
standards. The Company is developing a strategic plan to increase the number of
its Member-Dealers, as well as increase the sales from its current
Member-Dealers.
Although the Company's annual sales growth has been relatively steady for
the past three years, sales growth varies from territory to territory in any
given period. During 2003, sales in six of our ten selling territories were more
robust than in the same period in 2002. By contrast, three of our Texas
metropolitan selling territories continue to experience significant pressure
from retail warehouses, which has eroded the market share of independent
hardware stores and resulted in lower sales numbers in these selling
territories. While net sales for 2003 decreased a combined 11.8% in these three
selling territories, almost three quarters of the decrease can be attributed
solely to the Houston territory. Moreover, the decrease in sales in these
metropolitan territories can be attributed to only a handful of Member-Dealers.
Our four largest territories, all located in Texas, represent approximately
63% of net sales and had mixed results in 2003, with a decrease in net sales in
the Houston area, a small increase in net sales in the Victoria, San Antonio
area, and small decreases in net sales in the Austin and North Texas
territories. On a Company-wide basis, however, the growth in the West Texas area
and the Arkansas territory in 2003 more than made up for the decreases in the
Texas territories described above.
Net Material Costs and Rebates. Net material costs during 2003 were
$168,166,289, compared to $166,330,582 in 2002 and $160,236,413 in 2001. Net
material costs for 2003 increased only 1.1% over the level of those costs in
2002, compared to an increase in net material costs in 2002 of 3.8% over 2001
levels. For 2003, the percentage increase in net material costs (1.1%) remained
lower than the percentage increase in net sales (1.4%), while the percentage
increase in net material costs during 2002 (3.8%) compared to 2001 levels was
also lower than the percentage increase in net sales (4.5%). Net material costs
as a percentage of net sales have remained fairly constant: 89.9% of net sales
in 2003, 89.2% of 2002 net sales and 89.8% of 2001 net sales. The factor
primarily responsible for the increase in net material costs as a percentage of
net sales for 2003 was a slight decrease in factory rebates.
Payroll Costs. Payroll costs during 2003 increased $409,129, a 4.1%
increase over 2002 levels, compared to an increase in payroll costs of $333,604
(2.5%) during 2002 over 2001 levels. The 2003 increase was primarily due to
salary increases needed to attract or retain high-quality employees. Payroll
costs as a percentage of each of total expenses and net sales remained fairly
constant for 2003, 2002 and 2001.
Other Operating Costs. In 2003, other operating costs increased $591,183
(4.3%) from 2002 levels compared to a substantially higher increase of
$1,564,649 (13.0%) in 2002 from 2001 levels. The less significant increase in
2003 can be attributed primarily to a smaller increase in warehouse and delivery
expenses and in property taxes.
Net Earnings
While net sales for 2003 increased $2,619,213 (1.4%) over net sales in
2002, net material costs for 2003 grew by $1,835,707 (1.1%) over 2002 levels,
causing gross margin for 2003 to increase by $783,506 (3.9%), as compared to the
increase in gross margin for 2002 of $1,851,735 (10.4%). In addition, sundry
income for 2003 increased $485,115 (10.7%) over 2002 levels. During 2003,
however, a rise in payroll costs and an increase in other operating costs
7
partially offset the increase in gross margin and sundry income. After-tax net
earnings, combined with dividends on preferred stock and other comprehensive
earnings resulted in total comprehensive earnings of $351,315 in 2003, compared
to a total comprehensive earnings of $75,486 in 2002, a difference of $275,829.
Net earnings per share for 2003 increased 152.5% from 2002 levels, with net
earnings per share increasing from $1.39 in 2002 to $3.51 in 2003, a $2.12
increase per share. The 2003 level of net earnings per share is primarily due to
net earnings being approximately 38.6% higher than net earnings in 2002, offset
by a $32,709 increase in dividends paid in 2003 over 2002 levels. In 2003, net
earnings exceeded dividends by $326,884 (38.4%), resulting in net earnings
applicable to the common shareholders. By comparison, net earnings exceeded
dividends by $122,612 (24.9%) in 2002.
The variation in the Company's earnings per share from year to year results
from the Company's commitment to price its merchandise in order to deliver the
lowest cost buying program for Member-Dealers, which often results in lower net
earnings for the Company. Because virtually all of the Company shareholders are
also Member-Dealers, these trends benefit the individual shareholders of the
Company who purchase the Company's merchandise. Therefore, there is no demand
from shareholders that the Company focus greater attention upon earnings per
share.
Material Changes in Financial Condition and Liquidity
In 2003, Handy Hardware maintained its financial condition and its ability
to generate adequate amounts of cash while continuing to make significant
investments in inventory, warehouse facilities, delivery equipment and computer
software and hardware to better meet the needs of its Member-Dealers. However,
net cash provided by the Company's operating activities may vary substantially
from year to year. These variations result from (i) the state of the regional
economy in the Company's selling territories, (ii) payment terms the Company
offers to its Member-Dealers, (iii) payment terms available to the Company from
its suppliers, and (iv) the timing of promotional activities such as the
Company's fall trade show.
During 2003 there was a decrease of $327,645 in the Company's cash and cash
equivalents. The Company used $3,018,459 of cash flow for operating activities,
compared to cash flow provided by operating activities in 2002 and 2001 of
$2,550,654 and $1,528,266 respectively. The decrease in cash flow in 2003 was
principally attributable to a significant increase in inventory and a sizeable
decrease in accrued expenses payable as compared to 2002. These negative
influences on cash flow were only partially offset by the positive effects on
cash flow from an increase in net earnings and other comprehensive earnings. Net
cash provided by financing activities was $3,070,384 in 2003, as compared to net
cash used for financing activities of $2,131,535 in 2002 and net cash provided
by financing activities of $3,554,799 in 2001. This difference was principally
attributable to increased borrowings on the Company's line of credit, increased
proceeds from the issuance of stock and a decrease in the purchase of treasury
stock.
In 2003, net earnings and other comprehensive earnings combined were
$308,538 more than the combined total in 2002 (2003 - $875,508 vs. 2002 -
$566,970). This 54.4% increase was mainly attributable to a 3.9% increase in
gross margin and a 10.7% increase in sundry income.
In 2003 inventory increased $2,523,184 compared to a decrease of $178,509
in 2002. This increase resulted from management's strategy to increase the
breadth and depth of inventory to better meet the needs of our Member-Dealers.
The Company ended 2003 with approximately 42,300 stockkeeping units, compared to
approximately 40,100 stockkeeping units at the end of 2002.
Accounts receivable in 2003 increased by $519,425 as compared to a decrease
of $694,206 in 2002, a net variance of $1,213,631. The increase in accounts
receivable levels during the last year is attributable to variances in extended
payment terms offered to Member-Dealers at the fall trade show.
Accounts payable decreased $894,900 during 2003 compared to a decrease of
$829,058 in 2002. This disparity when comparing these two periods is primarily
attributable to more constant extended payment terms offered by vendors.
In 2003, accrued expenses payable decreased $1,121,652 as compared to an
increase of $344,553 in 2002. The significant decline in accrued expenses can be
attributed to a timing difference in the payment of accrued property taxes and
an accrual for health premiums payable. In 2002, property taxes of $925,140 were
not paid until January 2003. In contrast, 2003 property taxes were paid in
December 2003. Further, in 2002 the Company's health insurance was self-funded.
An accrual for future benefits to be paid of $174,590 was recognized in 2002. In
2003, the Company's health insurance was converted to a fully insured program.
8
The Company's continuing ability to generate cash to fund its activities is
highlighted by three key liquidity measures -- working capital, current ratio
(current assets to current liabilities) and long-term debt as a percentage of
capitalization, as shown in the following table:
DECEMBER 31,
---------------------------------------------------------
2003 2002 2001
---- ---- ----
Working Capital $10,913,193 $8,593,861 $6,759,167
Current Ratio 1.48 to 1 1.39 to 1 1.27 to 1
Long-Term Debt as Percentage of 3.9% 5.5% 7.3%
Capitalization
These key liquidity measures have remained relatively constant over the
past few years. However, in 2001, these ratios were negatively affected by the
capital expenditures and borrowings on our line of credit for completion of our
warehouse expansion project.
In 2003, the Company expects to further expand its existing customer base
in its non-core selling territories. The Company will finance this expansion
with anticipated growth in revenues from sales to the new Member-Dealers in
these selling territories and with receipts from sales of stock to new and
current Member-Dealers. The Company expects that expansion in these selling
territories will have a beneficial effect on its ability to generate cash to
meet its funding needs.
Contractual Commitments and Obligations
Our contractual obligations for the next five years and thereafter are as
follows:
Year Ended December 31,
------------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
---------- --------- --------- -------- --------- -------- ----------
Contractual
Obligation: (1)
Non-cancelable
Operating Leases $1,035,888 $ 943,271 $ 744,595 $646,648 $ 487,086 $399,838 $4,257,326
Credit Facility
which expires in
April 2005 (1) (2) (2) -- -- -- -- --
Notes Payable -
Stock 358,200 41,280 26,600 150,440 17,500 --
Notes Payable -
Vendor
Consignment -0- -0- -0- -0- -0- 242,759 242,759
Non-cancelable
Capital Leases 12,244 12,444 6,545 2,464 1,140 -0- 34,637
---------- --------- --------- -------- --------- -------- ----------
$1,406,332 $ 996,795 $ 777,740 $799,552 $ 505,726 $642,597 $5,128,742
========== ========= ========= ======== ========= ======== ==========
- -------------------------
1. Excludes any obligation to repurchase shares which is discussed above in
Item 5. "Market for Registrant's Common Equity and Related Stockholder
Matters" and below in Footnote 3 to the Financial Statements.
2. There was $2,430,000 outstanding on the Company's credit facility at
December 31, 2003 and $1,700,000 outstanding on March 3, 2004. The amounts
outstanding under the credit facility fluctuate on a daily basis.
Capital Resources
Over the past five years, the Company's investments in plant and equipment
have amounted to more than $11.5 million and have provided the Company with the
capacity for growth to meet Member-Dealers' increasing demand for merchandise
and expanded services. Management intends to continue to invest prudently at
levels commensurate with the anticipated market expansion and needs of current
Member-Dealers.
9
During 2003, the Company invested $395,995 in plant and equipment, with
$142,517 (36.0%) used to purchase warehouse equipment. The remainder was used to
upgrade the Company's auto fleet ($122,330), to upgrade computer equipment and
purchase order entry terminals ($70,413), to purchase office furniture and
equipment ($47,929) and to remodel and upgrade the Company's building facility
($12,806).
In April 2003, JPMorgan Chase Bank amended the Company's existing unsecured
$10,000,000 revolving line of credit to extend the maturity date to April 2005.
This line is used from time to time for brief periods for working capital and
other financing needs of the Company. At December 31, 2003, there was $2,430,000
outstanding under the line of credit.
The Company has budgeted approximately $725,000 for 2004 capital
expenditures. Of this amount, the Company will use approximately $400,000 to
purchase warehouse equipment, $100,000 to improve the Company's fleet of
automobiles, $200,000 to upgrade the Company's computer equipment and $25,000 to
upgrade office furniture and equipment.
The Company's cash position of $1,066,679 at December 31, 2003 is
anticipated to be sufficient to fund budgeted 2004 capital expenditures. The
Company may, however, utilize some third party financing, including the
Company's existing credit sources, to increase inventory throughout the year to
meet Member-Dealer needs.
Off-Balance Sheet Arrangements
As of December 31, 2003, the Company did not have any off-balance sheet
arrangements, as defined by Item 303(a)(4) of Regulation S-K promulgated by the
Securities and Exchange Commission.
Critical Accounting Policies
The following summarizes several of the Company's critical accounting
policies. The Company's significant accounting policies are also included in
Note 1 to the Company's Consolidated Financial Statements.
Inventories. Inventories are valued at the lower of cost or market,
determined on a first in, first out basis, with proper adjustments made for old
or obsolete merchandise, which adjustments have been immaterial in the past.
Revenue Recognition. The Company recognizes revenues and receivables when
merchandise is shipped or services are rendered, and expenses are recognized
when the liability is incurred.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is
based upon a three year average of bad debt expense recognized by the Company in
the most recent three fiscal years.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
10
HANDY HARDWARE WHOLESALE, INC.
FINANCIAL STATEMENTS
December 31, 2003
11
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Handy Hardware Wholesale, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Handy Hardware Wholesale,
Inc., as of December 31, 2003 and 2002, and the related statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Handy Hardware Wholesale, Inc., as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Clyde D. Thomas & Company, P.C.
---------------------------------------
CLYDE D. THOMAS & COMPANY, P. C.
Certified Public Accountants
February 6, 2004
Pasadena, Texas
12
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
December 31,
----------------------------------
2003 2002
------------- -----------
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 1,066,679 $ 1,394,324
Accounts receivable - trade, net of subscriptions receivable and
allowance for doubtful accounts 11,573,826 11,054,401
Inventory 20,552,365 18,029,181
Note receivable 9,099 552
Prepaid expenses 100,754 122,850
Prepaid income tax 183,205 115,456
Deferred compensation funded 73,743 60,134
------------- ------------
Total Current Assets 33,559,671 30,776,898
------------- ------------
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
At cost, less accumulated depreciation of
$7,508,201 (2003) and $7,006,662 (2002) 15,106,190 15,902,215
------------- ------------
OTHER ASSETS
Notes receivable 244,002 248,460
Deferred compensation funded 147,485 180,436
Prepaid expenses 31,814 1,874
Intangible asset, less accumulated amortization of
$724 (2003) and $237 (2002) 8,981 5,868
------------- ------------
432,282 436,638
------------- ------------
TOTAL ASSETS
------------ $ 49,098,143 $ 47,115,751
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Notes payable - line of credit $ 2,430,000 $ -
Notes payable - stock - current portion 358,200 324,280
Notes payable - capital leases 12,244 9,780
Accounts payable - trade 19,319,296 20,214,196
Accrued expenses payable 452,995 1,574,647
Deferred compensation payable - current 73,743 60,134
------------- ------------
Total Current Liabilities 22,646,478 22,183,037
------------- ------------
NONCURRENT LIABILITIES
- ----------------------
Notes payable - stock - noncurrent portion 235,820 576,520
Notes payable - capital leases 22,393 24,456
Notes payable - vendor consignment merchandise 242,759 247,463
Deferred compensation payable 147,485 180,436
Deferred income taxes payable 349,934 272,837
------------- ------------
998,391 1,301,712
Total Liabilities ------------- ------------
$ 23,644,869 $ 23,484,794
------------- ------------
13
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
December 31,
-----------------------------------
2003 2002
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, Class A, authorized 20,000 shares, $100
par value per share, issued 10,200 and 10,250 shares $ 1,020,000 $ 1,025,000
Common stock, Class B, authorized 100,000 shares, $100
par value per share, issued 82,762 and 75,475 shares 8,276,200 7,547,500
Common stock, Class B subscribed, 5,174.65 and
5,099.95 shares 517,465 509,995
Less subscriptions receivable for Class B Common stock (32,938) (25,560)
Preferred stock, 7% cumulative, authorized 100,000 shares, $100 par value
per share, issued 85,550
and 78,332 shares 8,555,000 7,833,200
Preferred stock subscribed 5,174.65 and 5,099.95 shares 517,465 509,995
Less subscriptions receivable for Preferred stock (32,938) (25,560)
Paid in surplus 508,609 483,336
------------- ------------
19,328,863 17,857,906
Retained earnings exclusive of other comprehensive earnings 6,132,015 5,805,131
Retained earnings applicable to other comprehensive earnings (7,604) (32,035)
------------- ------------
Total retained earnings 6,124,411 5,773,096
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 25,453,274 23,631,002
-------------------------- ------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,098,143 $ 47,115,751
------------------------------------------ ============= ============
See accompanying summary of accounting policies and notes to financial statements.
14
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF EARNINGS
Years Ended December 31,
---------------------------------------------------------
2003 2002 2001
------------ -------------- -------------
REVENUE
- -------
Net sales $189,068,660 $ 186,449,447 $ 178,503,543
Sundry income 5,024,807 4,539,692 4,113,896
------------ -------------- -------------
Total Revenue $194,093,467 $ 190,989,139 $ 182,617,439
------------ -------------- -------------
EXPENSES
- --------
Net material costs 168,166,289 166,330,582 160,236,413
Payroll costs 10,302,744 9,893,615 9,560,011
Other operating costs 14,213,097 13,621,914 12,057,265
Interest expense 83,324 159,692 152,547
------------ -------------- -------------
Total Expenses 192,765,454 190,005,803 182,006,236
------------ -------------- -------------
EARNINGS BEFORE PROVISION FOR FEDERAL
INCOME TAX 1,328,013 983,336 611,203
- -------------------------------------
PROVISION FOR FEDERAL INCOME TAX 476,936 369,240 222,128
- -------------------------------- ------------ -------------- -------------
NET EARNINGS 851,077 614,096 389,075
- ------------
LESS DIVIDENDS ON PREFERRED STOCK 524,193 491,484 635,737
- --------------------------------- ------------ -------------- -------------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 326,884 $ 122,612 $ (246,662)
--------------------------- ============ ============== =============
NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
CLASS A & CLASS B $ 3.51 $ 1.39 $ (3.03)
------------------ ============ ============== =============
OTHER COMPREHENSIVE EARNINGS (LOSS)
- ----------------------------------
Unrealized gain (loss) on securities 37,017 (71,403) (70,113)
Provision for federal income tax 12,586 24,277 23,838
------------ -------------- -------------
Other comprehensive earnings (loss) net of tax 24,431 (47,126) (46,275)
------------ -------------- -------------
TOTAL COMPREHENSIVE EARNINGS (LOSS) $ 351,315 $ 75,486 $ (292,937)
- ----------------------------------- ============ ============== =============
See accompanying summary of accounting policies and notes to financial statements.
15
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31,
---------------------------------------------------------
2003 2002 2001
------------ -------------- -------------
COMMON STOCK, CLASS A $100 PAR VALUE
- ---------------------------------------
Balance at January 1, $ 1,025,000 $ 1,051,000 $ 1,002,000
Stock issued (year 2003 - 630 shares) 63,000 39,000 91,000
Stock canceled (year 2003 - 680 shares) (68,000) (65,000) (42,000)
----------- ----------- -----------
Balance at December 31, 1,020,000 1,025,000 1,051,000
----------- ----------- -----------
COMMON STOCK, CLASS B, $100 PAR VALUE
- -------------------------------------
Balance at January 1, 7,547,500 7,075,300 6,405,300
Stock issued (year 2003 - 8,988 shares) 898,800 846,500 807,700
Stock canceled (year 2003 - 1,701 shares) (170,100) (374,300) (137,700)
----------- ----------- -----------
Balance at December 31, 8,276,200 7,547,500 7,075,300
----------- ----------- -----------
COMMON STOCK, CLASS B, SUBSCRIBED
- ---------------------------------
Balance at January 1, 509,995 509,362 480,489
Stock subscribed 877,170 839,233 831,173
Transferred to stock (869,700) (838,600) (802,300)
----------- ----------- -----------
Balance at December 31, 517,465 509,995 509,362
Less subscription receivable (32,938) (25,560) (22,502)
----------- ----------- -----------
Total 484,527 484,435 486,860
----------- ----------- -----------
PREFERRED STOCK, 7% CUMULATIVE $100 PAR VALUE
- ---------------------------------------------
Balance at January 1, 7,833,200 7,362,200 6,682,600
Stock issued (year 2003 - 9,044 shares) 904,400 858,500 825,700
Stock canceled (year 2003 - 1,826 shares) (182,600) (387,500) (146,100)
----------- ----------- -----------
Balance at December 31, 8,555,000 7,833,200 7,362,200
----------- ----------- -----------
PREFERRED STOCK, 7% CUMULATIVE SUBSCRIBED
- -----------------------------------------
Balance at January 1, 509,995 509,362 480,489
Stock subscribed 877,170 839,233 831,173
Transferred to stock (869,700) (838,600) (802,300)
----------- ----------- -----------
Balance at December 31, 517,465 509,995 509,362
Less subscription receivable (32,938) (25,560) (22,502)
----------- ----------- -----------
Total 484,527 484,435 486,860
----------- ----------- -----------
PAID IN CAPITAL SURPLUS
- -----------------------
Balance at January 1, $ 483,336 $ 426,007 $ 403,489
Additions 25,273 57,329 22,518
----------- ----------- -----------
Balance at December 31, $ 508,609 $ 483,336 $ 426,007
----------- ----------- -----------
TREASURY STOCK, AT COST
COMMON STOCK, CLASS A, AT COST
- ---------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (68,000) (65,000) (42,000)
Stock canceled 68,000 65,000 42,000
Stock issued - - -
----------- ----------- -----------
Balance at December 31, $ - $ - $ -
----------- ----------- -----------
16
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Page 2
Years Ended December 31,
---------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
COMMON STOCK, CLASS B, AT COST
Balance at January 1, $ - $ - $ -
Stock reacquired (170,100) (374,300) (137,700)
Stock canceled 170,100 374,300 137,700
Stock issued - - -
------------ ------------ ------------
Balance at December 31, - - -
------------ ------------ ------------
PREFERRED STOCK, 7% CUMULATIVE AT COST
Balance at January 1, - - -
Stock reacquired (182,600) (387,500) (146,100)
Stock canceled 182,600 387,500 146,100
Stock issued - - -
------------ ------------ ------------
Balance at December 31, - - -
------------ ------------ ------------
TOTAL TREASURY STOCK - - -
-------------------- ------------ ------------ ------------
RETAINED EARNINGS
Balance at January 1 5,773,096 5,697,610 5,990,547
Add: Net earnings year ending December 31 851,077 614,096 389,075
Other comprehensive earnings (loss) 24,431 (47,126) (46,275)
Deduct: Cash dividends on Preferred Stock 524,193 491,484 635,737
------------ ------------ ------------
Balance at December 31, 6,124,411 5,773,096 5,697,610
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 25,453,274 $ 23,631,002 $ 22,585,837
- -------------------------- ============ ============ ============
See accompanying summary of accounting policies and notes to financial statements.
17
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------------
2003 2002 2001
----------- -------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net earnings and other comprehensive earnings (loss) $ 875,508 $ 566,970 $ 342,800
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Amortization 487 237 -
Depreciation 1,181,572 1,319,648 1,312,553
Deferred income tax 77,097 81,949 (14,690)
(Gain) Loss on sale of property, plant, and equipment (13,351) (18,830) (3,250)
Unrealized loss, decrease, gain (increase) in fair
market value of securities (37,017) 71,403 70,114
Deferred compensation funded 60,134 60,000 -
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (519,425) 694,206 (1,897,429)
(Increase) Decrease in notes receivable (4,089) 86,080 (17,278)
(Increase) Decrease in inventory (2,523,184) 178,509 (2,240,641)
(Increase) Decrease in prepaid expenses (75,593) 200,940 (182,111)
Increase (Decrease) in note payable for vendor
consignment merchandise (4,704) (86,694) 24,182
Increase (Decrease) in accounts payable (894,900) (820,058) 3,619,253
Increase (Decrease) in accrued expenses payable (1,121,652) 344,553 572,646
Increase (Decrease) in deferred
compensation payable (19,342) (128,259) (57,883)
----------- ----------- -----------
Net Cash Provided by (Used for) Operating Activities (3,018,459) 2,550,654 1,528,266
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital expenditures for property, plant, and equipment (395,995) (460,891) (4,884,777)
Expenditure for intangible asset (3,600) (6,105) -
Investment in deferred compensation funded - - (9,770)
Sale of property, plant and equipment 23,800 34,250 3,250
Reinvested dividends, interest, and capital gains (3,775) (3,145) (2,460)
----------- ----------- -----------
Net Cash Provided by (Used for) Investing Activities (379,570) (435,891) (4,893,757)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Note Payable - line of credit borrowings 53,150,000 76,315,000 54,955,000
Note Payable - line of credit repayments (50,720,000) (79,015,000) (52,255,000)
Increase (Decrease) in notes payable - lease 401 (27,370) 36,126
Increase (Decrease) in notes payable - stock (306,780) 117,640 (30,400)
(Increase) Decrease in subscription receivable (14,756) (6,116) 5,946
Proceeds from issuance of stock 1,906,412 1,802,595 1,804,664
Purchase of treasury stock (420,700) (826,800) (325,800)
Dividends paid (524,193) (491,484) (635,737)
----------- ----------- -----------
Net Cash Provided by (Used for) Financing Activities 3,070,384 (2,131,535) 3,554,799
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (327,645) (16,772) 189,308
- -----------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,394,324 1,411,096 1,221,788
- ---------------------------------------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,066,679 $ 1,394,324 $ 1,411,096
- ---------------------------------------- =========== =========== ===========
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest expense paid $ 83,324 $ 159,692 $ 152,547
Income tax payments 480,174 176,572 344,094
See accompanying summary of accounting policies and notes to financial statements.
18
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
Nature of Business
------------------
Handy Hardware Wholesale, Inc., (the "Company"), was incorporated as a
Texas corporation on January 6, 1961. Its principal executive offices and
warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061. The
Company is owned entirely by its Member-Dealers and former Member-Dealers.
Handy Hardware Wholesale, Inc., sells to its Member-Dealers products
primarily for retail hardware, lumber and home center stores. In addition,
the Company offers advertising and other services to Member-Dealers. The
Company wholesales hardware to its dealers in Texas, Oklahoma, Louisiana,
Alabama, Mississippi, Arkansas, Florida, Colorado, New Mexico, Tennessee,
Mexico, and Central America.
Cash
----
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. The Company maintains a checking account
which, at times, exceeds the FDIC coverage of $100,000 normally extended to
such accounts. At December 31, 2003, the balance of this account amounted
to $1,050,129.
Inventories
-----------
Inventories are valued at the lower of cost or market method, determined by
the first in, first out method.
On August 28, 2003, the Company entered into a Security Agreement with
Frigidaire Financial Corporation for inventory acquired from Electrolux
Home Products North America. Inventory subject to this agreement at
December 31, 2003, was $90,817.
Property, Plant, and Equipment
------------------------------
Property, plant, and equipment are carried at cost. Depreciation of
property accounts for financial statement presentation is based on
estimated useful lives and methods as follows:
Life Method of
Asset in Years Depreciation
------------------------------------------- -------- ------------
Building 30-39 Straight Line
Furniture and warehouse equipment including
computer and data processing equipment 3-7 Straight Line/MACRS
Transportation equipment 3-5 Straight Line
Property, plant and equipment consists of:
December 31,
-------------------------------------
2003 2002
------------ ------------
Land $ 3,207,866 $ 3,207,866
Buildings & improvements 15,490,838 15,478,032
Furniture, computer, warehouse equipment 3,388,830 3,715,818
Transportation equipment 526,857 507,161
------------ ------------
$ 22,614,391 $ 22,908,877
Less: Accumulated depreciation 7,508,201 7,006,662
----------- -----------
$ 15,106,190 $ 15,902,215
Depreciation expense for the year ended December 31, 2003, amounted to
$1,181,572 compared with $1,319,648 for the year ended December 31, 2002.
19
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Changes in property, plant, and equipment for the year ended December 31, 2003,
are shown in the following schedule:
Balance Additions
1-1-2003 At Cost Retirements Changes 12-31-2003
-------- ------- ----------- ------- ----------
Land $ 3,207,866 $ - $ - $ - $ 3,207,866
Buildings and improvements 15,478,032 12,806 - - 15,490,838
Furniture, computers and
warehouse equipment 3,715,818 260,859 587,847 - 3,388,830
Transportation equipment 507,161 122,330 102,634 - 526,857
----------- ---------- --------- ------- -----------
$22,098,877 $ 395,995 $ 690,481 $ - $22,614,391
=========== ========== ========= =========== ===========
Changes in property, plant, and equipment for the year ended December 31, 2002,
are shown in the following schedule:
Balance Additions
1-1-2002 At Cost Retirements Changes 12-31-2002
-------- ------- ----------- ------- ----------
Land $ 3,207,866 $ - $ - $ - $ 3,207,866
Buildings and improvements 15,452,276 37,957 12,201 - 15,478,032
Furniture, computers and
warehouse equipment 3,698,071 333,967 316,220 - 3,715,818
Transportation equipment 506,524 88,967 88,330 - 507,161
----------- ---------- --------- ------- -----------
$22,864,737 $ 460,891 $ 416,751 $ - $22,908,877
=========== ========== ========= =========== ===========
Changes in property, plant, and equipment for the year ended December 31, 2001,
are shown in the following schedule:
Balance Additions
1-1-2001 At Cost Retirements Changes 12-31-2001
-------- ------- ----------- ------- ----------
Land $ 3,207,866 $ - $ - $ - $ 3,207,866
Construction in Progress-
warehouse expansion 2,107,122 4,044,192 - (6,151,314) -
Buildings and improvements 9,235,072 102,526 36,636 6,151,314 15,452,276
Furniture, computers and
warehouse equipment 3,642,310 610,767 555,006 - 3,698,071
Transportation equipment 561,104 132,084 186,664 - 506,524
----------- ---------- --------- ------- -----------
$18,753,474 $4,889,569 $ 778,306 $ - $22,864,737
=========== ========== ========= =========== ===========
20
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 2003, are shown in the following schedule:
Balance Additions
1-1-2003 At Cost Retirements Changes 12-31-2003
-------- ------- ----------- ------- ----------
Land $ - $ - $ - $ - $ -
Buildings and improvements 3,928,746 584,862 - - 4,513,608
Furniture, computers and
warehouse equipment 2,757,342 451,544 587,847 - 2,621,039
Transportation equipment 320,574 145,166 92,186 - 373,554
----------- --------- --------- ------- -----------
$ 7,006,662 $1,181,572 $ 680,033 $ - $ 7,508,201
=========== ========== ========= =========== ===========
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 2002, are shown in the following schedule:
Balance Additions
1-1-2002 At Cost Retirements Changes 12-31-2002
-------- ------- ----------- ------- ----------
Land $ - $ - $ - $ - $ -
Buildings and improvements 3,309,391 631,556 12,201 - 3,928,746
Furniture, computers and
warehouse equipment 2,528,656 544,906 316,220 - 2,757,342
Transportation equipment 250,299 143,186 72,911 - 320,574
----------- --------- --------- ------- -----------
$ 6,088,346 $1,319,648 $ 401,332 $ - $ 7,006,662
=========== ========== ========= =========== ===========
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 2001, are shown in the following schedule:
Balance Additions
1-1-2001 At Cost Retirements Changes 12-31-2001
-------- ------- ----------- ------- ----------
Land $ - $ - $ - $ - $ -
Buildings and improvements 2,755,238 590,789 36,636 - 3,309,391
Furniture, computers and
warehouse equipment 2,508,681 574,981 555,006 - 2,528,656
Transportation equipment 285,387 146,783 181,871 - 250,299
----------- --------- --------- ------- -----------
$ 5,549,306 $1,312,553 $ 773,513 $ - $ 6,088,346
=========== ========== ========= =========== ===========
21
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Income Taxes
------------
Deferred income taxes are provided to reflect the tax effect of temporary
differences between financial statement and federal tax reporting arising
from the following:
1. Depreciation for federal income tax purposes is computed under the
Straight Line Method for assets acquired by December 31, 1986 and the
Modified Accelerated Cost Recovery System for assets acquired after
December 31, 1986. For financial statement purposes the Straight Line
Method and Modified Accelerated Cost Recovery System are being used.
The following chart indicates the difference in the depreciation
calculations:
Annual Tax Depreciation Total
Tax Depreciation (Over) Under Book Accumulation
Over (Under) Book Depreciation for Tax Over Book
Year Depreciation Deleted Assets Depreciation
---- ----------------- ------------------ --------------
12-31-01 67,232 (23,769) 1,342,353
12-31-02 157,844 40,587 1,540,784
12-31-03 178,241 14,706 1,733,731
2. Deferred compensation is accrued as follows:
Balance, December 31, 2002 $ 240,570
Decrease for year ended December 31, 2003 19,342
----------
Balance, December 31, 2003 $ 221,228
==========
The deferred compensation has not been deducted for income tax
purposes. The deferred compensation is to be paid over a five-year
period to Mr. James Tipton, retired former President and Chief
Executive Officer of the Company. Mr. Tipton retired in January, 2002.
3. Internal Revenue Code Section 263A requires certain costs to be
capitalized for inventory purposes. The following schedule shows the
amount reported on the tax return.
December 31,
----------------------------------
2003 2002
------------ ------------
Book inventory $ 20,552,365 $ 18,029,181
Adjustment for 263A uniform
capitalization costs 435,814 400,500
------------ ------------
Inventory for tax return $ 20,988,179 $ 18,429,681
============ ============
The Company accounts for any tax credits as a reduction of income tax
expense in the year in which such credits arise.
22
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Net Earnings Per Share of Common Stock
--------------------------------------
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 stock issued, stock subscribed, dividends on
preferred stock, and treasury stock as set forth by Accounting
Principles Board Opinion No. 15 as follows:
Years ended December 31,
---------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net earnings $ 851,077 $ 614,096 $ 389,075
Less: Dividends on preferred stock 524,193 491,484 635,737
---------- ---------- ----------
Net earnings (loss) applicable to
common stockholders $ 326,884 $ 122,612 $ (246,662)
Weighted average shares of common 93,239 88,223 81,415
stock (Class A and Class B outstanding)
Net earnings (loss) per share of
common stock $ 3.51 $ 1.39 $ (3.03)
Preferred Stock Dividends
-------------------------
Cash dividends paid on the Company's outstanding preferred stock (par
value $100 per share) were 7% for 2003, 7% for 2002, and 10% for 2001,
pro-rated for the portion of a twelve-month period (ending January 31)
during which the preferred stock was held. The weighted average number
of preferred shares outstanding during each 12 month period was used
to calculate the per share cash dividends on preferred stock as
reflected below. Cash dividends have never been paid and are not
anticipated to be paid in the future on either class of the Company's
outstanding common stock.
SCHEDULE OF PREFERRED STOCK DIVIDENDS
During the
Year Ended Weighted Average Per
December 31 Shares Outstanding Share
----------- ------------------ -----
2003 85,918 $6.10
2002 80,761 $6.09
2001 73,980 $8.59
Revenue Recognition
-------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. Accordingly, revenues
and expenses are accounted for using the accrual basis of accounting.
Under this method of accounting, revenues and receivables are
recognized when merchandise is shipped or services are rendered, and
expenses are recognized when the liability is incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets,
liabilities, revenues and expenses. Estimates in these financial
statements include allowance for doubtful accounts receivable and
useful lives for depreciation. Accordingly, actual results could
differ from those estimates.
23
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 2 - NOTES RECEIVABLE
- -------------------------
Notes receivable reflect amounts due to the Company from its
Member-Dealers under deferred payment agreements.
Under the deferred agreement, the Company supplies Member-Dealers with
an initial order of General Electric Lamps. The payment for this order
is deferred so long as the Member-Dealer continues to purchase General
Electric lamps through the Company. If a Member-Dealer ceases to
purchase lamp inventory or sells or closes his business, then General
Electric invoices the Company for the Member-Dealer's initial order
and the note becomes immediately due and payable in full to the
Company.
Notes receivable are classified as follows:
December 31,
-------------------------------
2003 2002
----------- ------------
Current $ 9,099 $ 552
Noncurrent 244,002 248,460
----------- ------------
Total $ 253,101 $ 249,012
=========== ============
NOTE 3 - NOTES PAYABLE - STOCK
- ------------------------------
The five year, interest bearing notes payable - stock reflect amounts
due from the Company to former Member-Dealers for the Company's
repurchase of shares of Company stock owned by these former
Member-Dealers. According to the terms of the notes, only interest is
paid on the outstanding balance of the notes during the first four
years. In the fifth year, both interest and principal are paid.
Interest rates on outstanding notes currently range from 3.0% to 6.0%.
Notes payable - stock are classified as follows:
December 31,
-------------------------------
2003 2002
----------- ------------
Current $ 358,200 $ 324,280
Noncurrent 235,820 576,520
----------- ------------
Total $ 594,020 $ 900,800
=========== ============
Principal payments applicable to the next five years are as follows:
December 31,
-------------------------------
2003 2002
----------- ------------
2003 $ - $ 324,280
2004 358,200 358,200
2005 41,280 41,280
2006 26,600 26,600
2007 150,440 150,440
2008 17,500 -
----------- ------------
Total $ 594,020 $ 900,800
=========== ============
24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 4- INCOME TAXES
- --------------------
The Company adopted FASB Statement No. 109, "Accounting for Income
Taxes," effective January 1, 1993. The adoption of this standard
changed the Company's method of accounting for income taxes from the
deferred method to the liability method.
The major categories of deferred income tax provisions are as follows
(based on FASB 109):
Years ended December 31,
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
Excess of tax over book depreciation $ 1,733,731 $ 1,540,784 $ 1,342,353
Allowance for doubtful accounts (41,570) (48,714) (44,001)
Inventory - ending inventory adjustment
for tax recognition of sec. 263A
uniform capitalization costs (435,814) (400,500) (380,869)
Deferred compensation (227,128) (289,107) (356,048)
----------- ----------- -----------
Total 1,029,219 802,463 561,435
Statutory tax rate 34% 34% 34%
----------- ----------- -----------
Cumulative deferred income tax payable $ 349,934 $ 272,837 $ 190,888
=========== =========== ===========
Classified as:
Current liability $ - $ - $ -
Noncurrent liability 349,934 272,837 190,888
----------- ----------- -----------
$ 349,934 $ 272,837 $ 190,888
=========== =========== ===========
Reconciliation of income taxes on difference between tax and financial
accounting is as follows:
Years ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Principal components of income tax expense Federal:
Current
Income tax paid $ 480,174 $ 176,572 $ 344,094
Carryover of prepayment from prior year 115,456 201,897 70,783
Current income tax payable - - -
--------- --------- ---------
$ 595,630 $ 378,469 $ 414,877
Less carryover to subsequent year (183,205) (115,456) (201,897)
--------- --------- ---------
Income tax for tax reporting at statutory rate of 34% $ 412,425 $ 263,013 $ 212,980
Deferred
Adjustments for financial reporting:
Depreciation 65,602 67,467 14,777
263A uniform capitalization costs (12,007) (6,674) (20,680)
Other 23,502 21,157 (8,787)
--------- --------- ---------
Provision for federal income tax (U.S.) $ 489,522 $ 344,963 $ 198,290
========= ========= =========
The Company is not exempt from income tax except for municipal bond
interest earned in an amount of $3,775.
The Company is not classified as a nonexempt cooperative under the
provisions of the Internal Revenue Code and is not entitled to deduct
preferred dividends in determining its taxable income.
25
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 5 - LEASES
- ---------------
Operating Leases
The Company leases certain trucks and trailers under long-term
operating lease agreements. Leases expire in each of the years between
2004 and 2012.
The following is a schedule of future minimum lease payments for
operating leases as of December 31, 2003 and 2002 for the subsequent
five years:
Years ended
December 31,
--------------------------------
2003 2002
----------- -------------
2003 $ - $ 719,782
2004 1,035,888 701,184
2005 943,271 640,014
2006 744,595 429,389
2007 646,648 366,609
2008 487,086 -
Thereafter 399,838 -
Capital Leases
--------------
The Company leases equipment as a capital lease. The following is an
analysis of the leased property under capital leases by major class:
Years ended
December 31,
-------------------------------
2003 2002
----------- ------------
Class of Property
-----------------
Furniture, computers,
and warehouse equipment $ 51,834 $ 100,467
Less: Accumulated depreciation 31,262 80,878
------------ ------------
$ 20,572 $ 19,589
============= ============
The following is a schedule by year of future minimum lease payments for
capital leases:
Years ended
December 31,
----------------------------------
2003 2002
------------- ------------
2003 $ - $ 9,780
2004 12,244 9,780
2005 12,244 9,780
2006 6,545 4,896
2007 2,464 -
2008 1,140 -
------------- ------------
Total $ 34,637 $ 34,236
============= ============
26
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 5 - LEASES (CONTINUED)
- --------------------------
The lease payments at year-end 2003 are reflected in the Balance Sheet
as current and noncurrent obligations under capital leases of $12,244
and $22,393, respectively. The estimated interest rates range from
4.0% to 9.0%. Amortization of leased property is included in
depreciation expense.
Rental Expenses
---------------
Rental expenses for the preceding three years are:
2003 $ 1,622,216
2002 $ 1,613,719
2001 $ 894,987
NOTE 6 - RELATED PARTY TRANSACTIONS
- -----------------------------------
None
The Company is owned entirely by its Member-Dealers and former
Member-Dealers. No shareholder is the beneficial owner of more than
five percent of any class of the Company's voting securities.
Substantially all sales are made to the Member-Dealers (Owners) of the
Company.
NOTE 7 - RETIREMENT PLAN - HANDY HARDWARE WHOLESALE, INC. 401(K) PROFIT SHARING
PLAN
- --------------------------------------------------------------------------------
During 1997, the Company transferred the former Profit Sharing and
Savings Plan to a 401(K)Profit Sharing Plan to help employees achieve
financial security during their retirement years. Employees are
eligible to participate in the plan if they have attained age 21 and
have completed one year of service with the Company. The Plan includes
a 401(K) arrangement to allow employees to contribute to the Plan a
portion of their compensation, known as elective deferrals. Each year,
the Company will make matching contributions in the percentage
determined by the Board of Directors at its discretion. The Board of
Directors may choose not to make matching contributions to the Plan
for a particular year. During 2003, the employees could contribute up
to 6% of their gross annual compensation with 50% of such contribution
matched by the Company. In addition, the employees could contribute an
additional 9% with no Company matching contribution. Employees are
100% vested at all times for elective deferrals in the Plan. The Plan
permits the Company to contribute a discretionary amount for a plan
year designated as qualified nonelective contributions. Company
qualified nonelective contributions are allocated to employees in the
same proportion that the number of points per employee bears to the
total points of all participants. Employees receive one point for each
$200 of compensation and five points for each year of service.
Employees' interests in the value of the contributions made to their
account first partially vest after two years of service at 20% and
continue to vest an additional 20% each year until fully vested after
six years of service. Participating employees who reach age 65 are
fully vested without regard to their number of years of service.
Benefits are paid to eligible employees under the plan in lump sum
upon retirement, or at the direction of the employee, pursuant to the
terms of an annuity plan selected by the employee. The amount of cost
recognized during the years ended December 31, is as follows:
Company Matching Company Qualified
Total Contribution Nonelective Contribution
----- ---------------- ------------------------
2003 $ 133,461 $ 133,461 $ -
2002 $ 129,244 $ 129,244 $ -
2001 $ 133,959 $ 133,959 $ -
27
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY
- -----------------------------
Terms of Capital Stock
----------------------
The holders of Class A Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of
shareholders. Holders of Class A Common Stock must be engaged in the
retail sale of goods and merchandise, and may not be issued or retain
more than ten shares of Class A Common Stock at any time. The holders
of Class B Common Stock are not entitled to vote on matters submitted
to a vote of shareholders except as specifically provided by Texas
law.
The holders of Preferred Stock are entitled to cumulative dividends of
not less than 7 percent per year nor more than 20 percent per year of
the par value ($100.00 per share) of the shares of Preferred Stock, as
fixed by the Board of Directors. The Preferred Stock has a liquidation
value of $100 per share. The holders of Preferred Stock are not
entitled to vote on matters submitted to a vote of shareholders except
as specifically provided by Texas law. The shares of Preferred Stock
are not convertible, but are subject to redemption (at the option of
the Company) by vote of the Company's Board of Directors, in exchange
for $100 per share and all accrued unpaid dividends.
Capitalization
--------------
To become a Handy Hardware Member-Dealer, an independent hardware
dealer must enter into a Subscription Agreement with the Company for
the purchase of ten shares of Handy Hardware Class A Common Stock,
$100 par value per share, and for any additional store, ten shares of
Preferred Stock, with an additional agreement to purchase a minimum
number of shares of Class B Common Stock, $100 par value per share,
and Preferred Stock, $100 par value per share. Class B Common Stock
and Preferred Stock are purchased pursuant to a formula based upon
total purchases of merchandise by the Member-Dealer from the Company,
which determines the "Desired Stock Ownership" for each Member-Dealer.
The minimum Desired Stock Ownership is $10,000.
Each Member-Dealer receives from the Company a semimonthly statement
of total purchases made during the covered billing period, with an
additional charge ("Purchase Funds") equal to 2 percent of that
Member-Dealer's warehouse purchases until the Member-Dealer's Desired
Stock Ownership for that year is attained. Although the Subscription
Agreement entitles the Company to collect 2 percent of total
purchases, since May 1, 1983, the Board of Directors has determined to
collect 2 percent of warehouse purchases only. On a monthly basis, the
Company reviews the amount of unexpended Purchase Funds being held for
each Member-Dealer. If a Member-Dealer has unexpended Purchase Funds
of at least $2,000, the Company applies $2,000 to the purchase of ten
shares of Class B Common Stock ($1,000) and ten shares of Preferred
Stock ($1,000) each at $100 per share.
Transferability
---------------
Holders of Class A Common Stock may not sell those shares to a third
party without first offering to sell them back to the Company. There
are no specific restrictions on the transfer of the Company's Class B
Common or Preferred Stock.
Membership Termination
----------------------
Following written request, the Company will present to the Board of
Directors a Member-Dealer's desire to have his stock repurchased and
the Member-Dealer Contract terminated. According to the current
procedures established by the Board of Directors, a Member-Dealer's
stock may be repurchased according to either of two options.
28
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------
Option I - The Member-Dealer's Class A Common Stock is repurchased at
$100 per share. Any funds remaining in the Member-Dealer's
Purchase Fund Account will be returned at the dollar value
of such account. Twenty percent or $3,000, whichever is
greater, of the total value of the Class B Common and
Preferred Stock will be repurchased. The remaining value of
the Class B Common and Preferred Stock is converted to a
five-year interest-bearing note. During the first four years
this note only pays interest. In the fifth year both
interest and principal are paid. The interest rate is
determined by the Company's Board of Directors at the same
time they approve the repurchase.
Option II - Same as Option I except that the remaining value of the
Class B Common and Preferred Stock is discounted 15 percent
and paid to the Member-Dealer immediately at the time of
repurchase.
Stock Repurchase
-----------------
In 2003 and 2002, the Board continued its program of offering to
repurchase from shareholders who are over-invested in the Company's
capital stock by $4,000 or more, an amount of stock (based on a
purchase price of $100 per share) equal to one-fourth of their
over-invested amount, equally divided between shares of Preferred
Stock and Class B Common Stock. In connection with the repurchase, the
minimum required investment in the Company's capital stock is at least
$10,000, but may be more based on the shareholder's Desired Stock
Ownership level. As of December 31, 2003 and 2002, the total
over-invested amount eligible for repurchase by the Company was
approximately $1,700,000 and $1,600,000, of which the Company offered
to repurchase 3,524 shares valued at $352,400 in 2003 and 3,250 shares
valued at $325,000 in 2002. Of the 3,524 shares and 3,250 shares which
the Company offered to repurchase during the last two years,
Member-Dealers submitted 360 shares in 2003 (totaling $36,000) and 128
shares in 2002 (totaling $12,800).
NOTE 9 - LINE OF CREDIT
- -----------------------
In August, 2003, JPMorgan Chase Bank, ("the Bank") amended the
Company's existing unsecured $10 million revolving line of credit to
provide for an April 30, 2005 maturity date. The interest rate is
prime minus one and three quarter percent (1.75%) or the London
Interbank Offering Rate ("LIBOR") plus one and one-quarter percent
(1.25%). The line has been used from time to time for working capital
and other financing needs of the Company. The total of all the
borrowings against and repayments of the line of credit throughout the
year were as follows:
Balance Borrowings Repayments Balance Interest Interest
1-01-03 Throughout 2003 Throughout 2003 12-31-03 Rate Paid
------- --------------- --------------- -------- ---- --------
$ - $53,150,000 $50,720,000 $2,430,000 2.25% $43,501
Terms of the line of credit require monthly payments of accrued
interest with the balance, if any, of the loan to be repaid on April
30, 2005.
NOTE 10 - COMPREHENSIVE EARNINGS
- --------------------------------
1. Deferred compensation funded in the amount of $221,228 on the Balance
Sheet as a current asset in the amount of $73,743 and as a non-current
asset in the amount of $147,485 at December 31, 2003, includes equity
securities classified as investments available for sale in the amount
of $221,228 at fair market value. The $221,228 includes $5,900
unrealized loss on securities resulting from the decrease in fair
market value. The cost of the equity securities is $227,128.
29
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 10 - COMPREHENSIVE EARNINGS (CONTINUED)
- -------------------------------------------
2. Changes in Equity Securities:
Year Ended
December 31, 2003 Cumulative
----------------- ----------
Balance, January 1, 2003 $ 240,570 $ -
Purchases - 117,400
Dividends, interest and capital gains 3,775 175,482
Deferred compensation funded (60,134) (60,134)
Unrealized gains (losses) on securities resulting from
Increase (decrease) in fair market value 37,017 (11,520)
---------- ---------
Balance, December 31, 2003 $ 221,228 $ 221,228
========== =========
3. Components of Net Earnings Plus Other Comprehensive Earnings and
Components of Total Comprehensive Earnings for the twelve months ended
December 31, 2003:
Other Comprehensive Net Earnings Plus Other
Net Earnings Earnings (Loss) Comprehensive Earnings
------------ ------------------- -----------------------
Earnings Before Provision Unrealized Gain
for Federal Income Tax $1,328,013 (Loss) on Securities $ 37,017 Net Earnings $ 851,077
Provision for Provision for Other Comprehensive
Federal Income Tax 476,936 Federal Income Tax 12,586 Earnings 24,431
---------- -------- ---------
$ 851,077 $ 24,431 $ 875,508
========== ======== =========
Net Earnings Applicable to Other Comprehensive Total Comprehensive
Common Stockholders Earnings (Loss) Earnings
-------------------------- ------------------- -------------------
Unrealized Gain Net Earnings Applicable to
Net Earnings $ 851,077 (Loss) on Securities $ 37,017 Common Stockholders $ 326,884
Less Dividends Provision for Other Comprehensive
On Preferred Stock 524,193 Federal Income Tax 12,586 Earnings 24,431
---------- ------ ---------
$ 326,884 $ 24,431 $ 351,315
========== ======== =========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Applicable to Other Exclusive of Other
Comprehensive Comprehensive
Earnings Earnings Total
------------------- ------------------ -----------
Balance, January 1, 2003 $ (32,035) $ 5,805,131 $ 5,773,096
Add: Net earnings year ended December 31, 2003 24,431 851,077 875,508
Deduct: Cash Dividends on preferred stock - 524,193 524,193
------------ ----------- -----------
Balance, December 31, 2003 $ (7,604) $ 6,132,015 $ 6,124,411
============ =========== ===========
30
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 11 - SUBSEQUENT EVENT
- --------------------------
None
NOTE 12 - LITIGATION
- --------------------
In the opinion of the Company, no material legal proceedings and no
environmental clean-up actions are pending or threatened that would
have a material effect on the financial position or results of
operations of the Company.
NOTE 13 - OTHER DISCLOSURES
- ---------------------------
1. Costs incurred for advertising are expensed when incurred. The amount
charged to advertising expense in the prior three years are:
2003 1,244,951
2002 1,029,969
2001 873,059
2. Accounts receivable are net of subscriptions receivable and
allowance for doubtful accounts in the following amounts.
December 31,
-------------------------------
2003 2002
---------- ----------
Subscriptions receivable 65,876 $ 51,120
Allowance for doubtful accounts 41,570 48,714
The allowance for doubtful accounts is determined based upon past
experience of the Company as follows:
Net Bad Debts Expense
December 31,
-------------------------
2003 2002
-------- --------
12-31-2003 $ 38,223 $ -
12-31-2002 35,553 35,553
12-31-2001 50,933 50,933
12-31-2000 - 59,657
-------- --------
$124,709 $146,143
======== ========
Average $ 41,570 $ 48,714
======== ========
31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
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 report.
Based on that evaluation, they have concluded that such disclosure controls
and procedures are effective in alerting them on a timely basis to material
information relating to the Company and required under the Exchange Act to
be disclosed in this annual report.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls
that could significantly affect such controls subsequent to the date of
their evaluation.
PART III
Items 10-14 are incorporated by reference to the Company's Proxy
Statement for its annual stockholders' meeting to be held April 19, 2004,
which proxy statement will be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's 2003 fiscal
year.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report
(1) Financial Statements Reference
-------------------- ---------
Auditor's Report.................................................................................... 12
Balance Sheets at December 31,
2003 and 2002..................................................................................... 13
Statements of Earnings for the years ended December 31,
2003, 2002 and 2001 .............................................................................. 15
Statements of Stockholders' Equity
for the years ended December 31,
2003, 2002 and 2001 .............................................................................. 16
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 ................................................................. 18
Notes to Financial Statements....................................................................... 19
(2) Financial Statement Schedules
Schedule V has been omitted because none of the items reflected
thereon was in excess of 1% of total sales for the periods covered.
All other schedules are omitted because the information is not
required or because the information required is in the financial
statements or notes thereto.
(3) Exhibits
--------
Exhibit
Number
------
3.1 Articles of Incorporation of Handy Hardware Wholesale, Inc., as amended (Filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and
incorporated herein by reference).
3.2 Bylaws of Handy Hardware Wholesale, Inc. (Filed as Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1983, and incorporated herein by reference).
3.3 Bylaws of Handy Hardware Wholesale, Inc., as amended May 9, 2001. (Filed as Exhibit 3.3 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, and incorporated
herein by reference.)
+ 3.4 Bylaws of Handy Hardware Wholesale, Inc., as amended April 21, 2003.
4.1 Specimen copy of certificate representing Class A Common Stock (Filed as Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1983, and incorporated
herein by reference).
4.2 Specimen copy of certificate representing Class B Common Stock (Filed as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1983, and incorporated
herein by reference).
4.3 Specimen copy of certificate representing Preferred Stock (Filed as Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1983, and incorporated
herein by reference).
4.4 Form of Subscription to Shares of Handy Hardware Wholesale, Inc. for Class A Common Stock,
Class B Common Stock and Preferred Stock (Filed as Exhibit 4.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference).
10.1 Form of Dealer Contract (Alabama, Arkansas, Florida, Louisiana, Oklahoma and Texas) (Filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991,
and incorporated herein by reference).
10.2 Form of Dealer Contract (Mississippi) (Filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, and incorporated herein by reference).
10.3 Loan Agreement dated March 30, 1993, between Texas Commerce Bank, N.A., and Handy Hardware
Wholesale, Inc. (Filed as Exhibit I to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993, and incorporated herein by reference).
10.4 Amendment and Restatement of Credit Agreement between Handy Hardware Wholesale, Inc. and Texas
Commerce Bank, N.A., dated as of April 30, 1996. (Filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein
by reference).
10.5 Second Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase
Bank of Texas, National Association dated April 30, 1998. (Filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference).
10.6 Third Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase
Bank of Texas, National Association dated April 30, 1999. (Filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated
herein by reference.)
10.7 Agreement for Wholesale Financing between the Company and Deutsche Financial Services dated
March 9, 1999. (Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, and incorporated herein by reference.)
10.8 Fourth Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase
Bank of Texas, National Association dated April 30, 2000. (Filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated
herein by reference.)
33
Exhibit
Number
------
10.9 Form of Dealer Contract (New Mexico and Colorado). (Filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by
reference.)
* 10.10 Employment Agreement between Handy Hardware Wholesale, Inc. and Jerry Donald Jameson dated
November 13, 2001. (Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, and incorporated herein by reference.)
10.11 Fifth Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase
Bank of Texas, National Association dated April 30, 2001. (Filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, and incorporated
herein by reference.)
10.12 Sixth Amendment to Amendment and Restatement of Credit Agreement between the Company and
JPMorgan Chase Bank dated April 30, 2002. (Filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2002, and incorporated herein by reference.)
* 10.13 First Amendment to the Employment Agreement, as amended, between Handy Hardware Wholesale, Inc.
and Jerry Donald Jameson, dated November 13, 2002. (Filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by
reference.)
10.14 Seventh Amendment to Amendment and Restatement of Credit Agreement between the Company and
JPMorgan Chase Bank dated April 30, 2003. (Filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference.)
+ 10.15 Eighth Amendment to Amendment and Restatement of Credit Agreement between the Company and
JPMorgan Chase Bank dated August 1, 2003.
*+ 10.16 Second Amendment to the Employment Agreement as amended between Handy Hardware Wholesale, Inc.
and Jerry Donald Jameson dated, March 1, 2004.
+ 11.1 Statement re Computation of Per Share Earnings.
+ 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934
+ 31.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934.
+ 32.0 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
* Management Contract.
+ Filed herewith.
The Company will furnish to any requesting shareholder a copy of any
exhibit upon payment of $.40 per page to cover the expense of furnishing such
copies. Requests should be directed to Tina S. Kirbie, Secretary and Treasurer,
Handy Hardware Wholesale, Inc., 8300 Tewantin Drive, Houston, Texas 77061.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
December 31, 2003.
(c) Exhibits
Listed in Item 15(a)(3) above.
(d) Financial Statement Schedules
Listed in Item 15(a)(2) above.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Handy Hardware Wholesale, Inc., has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ Don Jameson
-----------------------------------------------
DON JAMESON
President and Chief Executive Officer
March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, Handy Hardware Wholesale, Inc., and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Don Jameson President, Chief Executive March 11, 2004
------------------------------- Officer and Director
Don Jameson
/s/ Tina S. Kirbie Chief Financial and March 11, 2004
------------------------------- Accounting Officer
Tina S. Kirbie
/s/ Doug Ashy, Jr. Director March 12, 2004
-------------------------------
Doug Ashy, Jr.
/s/ Terrill Bartlett Director March 18, 2004
-------------------------------
Terrill Bartlett
/s/ Craig E. Blum Director March 17, 2004
-------------------------------
Craig E. Blum
/s/ Susie Bracht-Black Director March 18, 2004
-------------------------------
Susie Bracht-Black
/s/ Suzanne Elliott Director March 18, 2004
-------------------------------
Suzanne Elliott
/s/ William R. Hill Director March 16, 2004
-------------------------------
William R. Hill
/s/ Jimmy T. Pate Director March 12, 2004
-------------------------------
Jimmy T. Pate
/s/ Leory Welborn Director March 18, 2004
-------------------------------
Leroy Welborn
35