UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2004.
Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1381875
(State of incorporation) (I.R.S. Employer
Identification No.)
8300 Tewantin Drive, Houston, Texas 77061
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number: (713) 644-1495
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
The number of shares outstanding of each of the Registrant's classes of common
stock as of April 30, 2004, was 10,320 shares of Class A Common Stock, $100 par
value, and 83,311 shares of Class B Common Stock, $100 par value.
HANDY HARDWARE WHOLESALE, INC.
INDEX
- -----
PART I Financial Information Page No.
-------
Item 1. Financial Statements
Condensed Balance Sheet March 31, 2004
and December 31, 2003 ........................ 3-4
Condensed Statement of Earnings - Three Months
Ended March 31, 2004 and 2003................. 5
Condensed Statement of Cash Flows - Three Months
Ended March 31, 2004 and 2003................. 6-7
Notes to Condensed Financial Statements............. 8-13
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations........... 14-19
Item 3. Quantitative & Qualitative Disclosures About
Market Risk................................... 19
Item 4. Controls and Procedures....................... 19
PART II Other Information
Item 1. None 20
Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities 20
Items 3-5. None 20
Item 6. Exhibits 20
Signatures 21
2
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
------
CURRENT ASSETS
--------------
Cash $ 1,607,377 $ 1,066,679
Accounts Receivable, net of 19,119,283 11,573,826
subscriptions receivable and
allowance for doubtful accounts
Notes Receivable (Note 3) 7,245 9,099
Inventory 22,839,405 20,552,365
Deferred Compensation Funded 73,743 73,743
Other Current Assets 764,849 100,754
Prepaid Income Tax -0- 183,205
----------- -----------
$44,411,902 $33,559,671
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
-------------------------------------
At Cost Less Accumulated Depreciation
of $7,722,305(2004) and $7,508,201 (2003) $15,114,875 $15,106,190
----------- -----------
OTHER ASSETS
------------
Notes Receivable (Note 3) $ 237,672 $ 244,002
Intangible Assets Less Accumulated Amortization
$886 (2004) and $724 (2003) 8,819 8,981
Deferred Compensation Funded 133,390 147,485
Other Noncurrent Assets -0- 31,814
----------- -----------
$ 379,881 $ 432,282
----------- -----------
TOTAL ASSETS $59,906,658 $49,098,143
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Notes Payable - Line of Credit $ 550,000 $ 2,430,000
Notes Payable-Stock (Note 4) 358,200 358,200
Notes Payable-Capital Lease 9,985 12,244
Accounts Payable - Trade 30,927,734 19,319,296
Other Current Liabilities 504,806 452,995
Deferred Compensation Payable 73,743 73,743
Federal Income Taxes Payable (Note 5) 137,391 -0-
----------- -----------
$32,561,859 $22,646,478
----------- -----------
NONCURRENT LIABILITIES
----------------------
Notes Payable - Line of Credit $ 550,000 $ -0-
Notes Payable-Stock (Note 4) 244,220 235,820
Notes Payable-Capital Lease 13,046 22,393
Notes Payable-Vendor 236,712 242,759
Deferred Compensation Payable 133,390 147,485
Deferred Income Taxes Payable (Note 5) 346,131 349,934
----------- -----------
$ 1,523,499 $ 998,391
----------- -----------
TOTAL LIABILITIES $34,085,358 $23,644,869
----------------- ----------- -----------
The accompanying notes are an integral part of the Condensed Financial Statements.
3
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
STOCKHOLDERS' EQUITY
--------------------
Common Stock, Class A,
authorized 20,000 shares, $100
par value per share, issued
10,480 & 10,200 shares $ 1,048,000 $ 1,020,000
Common Stock, Class B,
authorized 100,000 shares, $100
par value per share, issued
84,242 & 82,762 shares 8,424,200 8,276,200
Common Stock, Class B
Subscribed 6,202.13 & 5,174.65
shares 620,213 517,465
Less Subscription Receivable (55,125) (32,938)
Preferred Stock 10% Cumulative,
authorized 100,000 shares, $100
par value per share, issued
87,100 & 85,550 shares 8,710,000 8,555,000
Preferred Stock, Subscribed
6,202.13 & 5,174.65 shares 620,213 517,465
Less Subscription Receivable (55,125) (32,938)
Paid in Surplus 520,369 508,609
----------- -----------
$19,832,745 $19,328,863
Less: Cost of Treasury Stock
1,548.00 and -0- shares (154,800) -0-
----------- -----------
$19,677,945 $19,328,863
Retained Earnings exclusive of other
comprehensive loss (Note 6) 6,148,423 6,132,015
Retained Earnings applicable to other
comprehensive loss (Note 6) (5,068) (7,604)
----------- -----------
6,143,355 6,124,411
----------- -----------
Total Stockholders' Equity $25,821,300 $25,453,274
----------- -----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $59,906,658 $49,098,143
-------------------- =========== ===========
The accompanying notes are an integral part of the Condensed Financial Statements.
4
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2004 2003
---- ----
REVENUES
--------
Net Sales $52,274,312 $48,974,287
Sundry Income 1,943,709 1,634,618
----------- -----------
TOTAL REVENUES $54,218,021 $50,608,905
-------------- ----------- -----------
EXPENSE
-------
Net Material Costs $46,565,586 $44,255,647
Payroll Costs 2,454,632 2,376,432
Other Operating Costs 4,269,700 3,617,693
Interest Expense 23,484 28,846
----------- -----------
TOTAL EXPENSE $53,313,402 $50,278,618
------------- ----------- -----------
NET EARNINGS BEFORE PROVISIONS
FOR ESTIMATED FEDERAL INCOME TAX $ 904,619 $ 330,287
--------------------------------
PROVISIONS FOR ESTIMATED
FEDERAL INCOME TAX (Note 5 & 6) (315,487) (119,117)
------------------------------- ----------- -----------
NET EARNINGS $ 589,132 $ 211,170
------------
LESS ESTIMATED DIVIDENDS ON
PREFERRED STOCK (143,181) (131,048)
--------------------------- ----------- -----------
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 445,951 $ 80,122
-------------------------- =========== ===========
NET EARNINGS PER SHARE OF
COMMON STOCK, CLASS A &
CLASS B (Note 1) $ 4.52 $ 0.88
------------------------- =========== ===========
OTHER COMPREHENSIVE EARNINGS (LOSS)
----------------------------------
Unrealized Earnings (Loss) on Securities
(Note 6) $ 3,843 $ (4,034)
Provision for Federal Income Tax(Note 5) (1,307) 1,372
----------- -----------
Other Comprehensive Earnings (Loss)
Net of Tax $ 2,536 $ (2,662)
----------- -----------
TOTAL COMPREHENSIVE EARNINGS (NOTE 6) $ 448,487 $ 77,460
-------------------------------------
The accompanying notes are an integral part of the Condensed Financial Statements.
5
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITY
- ----------------------------------
Net Earnings plus Other Comprehensive
Earnings (Loss) (Note 6) $ 591,668 $ 208,508
----------- -----------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Amortization $ 162 $ 339
Depreciation 218,045 245,759
Gain on Sale of property, plant & equipment (3,941) (6,236)
Increase (Decrease) in Deferred
Income Tax (3,803) (1,348)
Unrealized gain (increase) decrease
In fair market value of securities (3,843) 4,034
Deferred Compensation Funded 18,435 16,343
Changes in Assets and Liabilities
Increase in Accounts Receivable $(7,545,458) $(5,716,298)
Decrease in Notes Receivable 8,184 135
Increase in Inventory (2,287,040) (3,478,033)
Increase in Other Assets (632,281) (546,599)
Decrease in Prepaid Income Tax 183,205 115,456
Increase in Note Payable-Vendor (6,047) -0-
Increase in Accounts Payable 11,608,438 12,614,488
Increase (Decrease) in Other Liabilities 51,810 (983,874)
Increase in Federal Income
Taxes Payable 137,391 3,637
Decrease in Deferred Compensation
Payable (14,095) (19,068)
----------- -----------
TOTAL ADJUSTMENTS $ 1,729,162 $ 2,248,735
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 2,320,830 $ 2,457,243
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital Expenditures $ (262,882) $ (102,928)
Sale of property, plant and equipment 40,095 42,690
Reinvested dividends, interest & capital gains (497) (1,309)
----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES $ (223,284) $ (61,547)
----------- -----------
The accompanying notes are an integral part of the Condensed Financial Statements.
6
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)Cont.
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2004 2003
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
(Decrease)in Notes Payable-Line of Credit $(1,330,000) $ -0-
Increase (Decrease) in Notes Payable-Stock 8,400 (121,940)
Decrease in Notes Payable-Capital Lease (11,606) (815)
Increase in Subscription Receivable (44,374) (43,148)
Proceeds From Issuance of Stock 548,256 472,379
Purchase of Treasury Stock (154,800) (92,900)
Dividends Paid (572,724) (524,193)
----------- ------------
NET CASH (USED FOR) FINANCING
ACTIVITIES $(1,556,848) $ (310,617)
----------- ------------
NET INCREASE (DECREASE)
IN CASH & CASH EQUIVALENTS $ 540,698 $ 2,085,079
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,066,679 1,394,324
----------- ------------
CASH & CASH EQUIVALENTS AT END OF
PERIOD $ 1,607,377 $ 3,479,403
=========== ============
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest Expense Paid $ 23,484 $ 28,846
Income Taxes Paid 183,206 115,456
The accompanying notes are an integral part of the Condensed Financial Statements.
7
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
(1) Description of Business:
-----------------------
Handy Hardware Wholesale, Inc., ("Handy"), was incorporated as a Texas
corporation on January 6, 1961. Our principal executive offices and
warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061. We are
owned entirely by our member-dealers and former member-dealers.
We sell to our member-dealers products primarily for retail hardware,
lumber and home center stores. In addition, we offer advertising and other
services to member-dealers. We wholesale hardware to our member-dealers in
Texas, Oklahoma, Louisiana, Alabama, Mississippi, Arkansas, Florida,
Colorado, New Mexico, Tennessee, Mexico and Belize.
(2) General Information:
-------------------
The condensed consolidated financial statements included herein have been
prepared by us. The financial statements reflect all adjustments, which
were all of a recurring nature, and which are, in the opinion of
management, necessary for a fair presentation. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). We believe that the disclosures made are adequate to make
the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in our latest Form 10-K
Annual Report.
(3) Cash:
-----
For purposes of the statement of cash flows, we consider all highly liquid
debt instruments purchased with a maturity of three months or less to be
cash equivalents.
(4) Inventories:
-----------
Inventories are valued at the lower of cost or market method, determined by
the first in, first out method, with proper adjustment having been made for
any old or obsolete merchandise.
(5) Earnings Per Share:
------------------
Net earnings per common share (Class A and Class B combined) are based on
the weighted average number of shares outstanding in each period after
giving effect to the stock issued, stock subscribed, accrued dividends on
Preferred Stock, and treasury stock as set forth by Accounting Principles
Board Opinion No. 15 as follows:
THREE MONTHS ENDED MARCH 31,
Calculation of Net Earnings Per Share -------------------------------------
of Common Stock 2004 2003
- ------------------------------------- ---- ----
Net Earnings Before Preferred Dividends $ 589,132 $ 211,170
Less: Estimated Dividends
on Preferred Stock (143,181) (131,048)
---------- ---------
Net Earnings Applicable to
Common Stockholders $ 445,951 $ 80,122
Weighted Average
Shares of Common Stock
(Class A & Class B)
outstanding 98,628 91,377
Net Earnings Per Share
of Common Stock $ 4.52 $ 0.88
========== =========
8
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------
(6) Revenue Recognition:
-------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. Accordingly, revenues and
expenses are accounted for using the accrual basis of accounting. Under
this method of accounting, revenues and receivables are recognized when
merchandise is shipped or services are rendered, and expenses are
recognized when the liability is incurred.
(7) Accounting for Dividends on Preferred Stock
-------------------------------------------
We pay dividends on Preferred Stock during the first quarter of each fiscal
year. Only holders of Preferred Stock on the record date for the payment of
the dividend are entitled to receive dividends. Dividends are prorated for
the portion of the twelve-month period ending January 31 during which the
Preferred Stock was held.
Because we are unable to anticipate the amount of the Preferred Stock
dividends to be paid in the first quarter of 2005, we do not accrue a
liability for the payment of those dividends on our balance sheet. To more
properly reflect net earnings, however, on the Condensed Statement of
Earnings included herein, we show an estimated portion of the annual
dividends to be paid in the first quarter of 2005 based on one-fourth
($143,181) of the annual dividends paid in the first quarter of 2004.
When dividends on Preferred Stock are actually paid, there is a reduction
of retained earnings. Retained earnings on the Condensed Balance Sheet for
the three months ended March 31, 2004 contained herein, therefore, are net
of dividends actually paid during the first quarter of 2004 in the amount
of $572,724.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
- ------------------------------------
Property, Plant & Equipment Consists of:
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
Land $ 3,207,866 $ 3,207,866
Building & Improvements 15,496,833 15,490,838
Furniture, Computer, Warehouse 3,626,964 3,388,830
Transportation Equipment 505,517 526,857
----------- -----------
$22,837,180 $22,614,391
Less: Accumulated Depreciation (7,722,305) (7,508,201)
----------- -----------
$15,114,875 $15,106,190
=========== ===========
9
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - NOTES RECEIVABLE
- -------------------------
Notes receivable reflect amounts due to us from our member-dealers under
deferred payment agreements and installment sale agreements as well as amounts
due from former member- dealers on amounts still owing on their accounts.
Under the deferred agreement, we supply 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 us. If a
member-dealer ceases to purchase lamp inventory or sells or closes his business,
then General Electric invoices us for the member-dealer's initial order and the
member-dealer's note becomes immediately due and payable in full to us.
Under the installment sale agreements, we sell member-dealers computer hardware,
the purchase price of which is due and payable by member-dealers to us in
thirty-six monthly installments of principal and interest.
Additionally, as of March 31, 2004 there was one note receivable from a former
member-dealer for amounts owed on its account, which bears interest at an
annualized rate of 10%. Monthly payments on this note, including interest, total
$1,000.00.
Notes Receivable are classified as follows:
CURRENT PORTION NONCURRENT PORTION
---------------------- -------------------------
MARCH 31, DEC. 31, MARCH 31, DEC. 31,
-------- ------- -------- -------
2004 2003 2004 2003
---- ---- ---- ----
Note from Former Member-Dealer $ 6,141 $ 8,015 $ -0- $ -0-
Deferred Agreements -0- -0- 236,713 242,759
Installment Sale Agreements 1,104 1,084 959 1,243
------- ------- -------- --------
$ 7,245 $ 9,099 $237,672 $244,002
======= ======= ======== ========
NOTE 4 - NOTES PAYABLE STOCK
- ----------------------------
The five year, interest bearing notes payable - stock reflect amounts due from
us to former member-dealers for our repurchase of shares of Handy stock owned by
these former member-dealers. According to the terms of the notes, only interest
is paid on the outstanding balance of the notes during the first four years. In
the fifth year, both interest and principal are paid. Interest rates range from
3.0% to 6.0%.
Notes payable - stock are classified as follows:
CURRENT PORTION NON-CURRENT PORTION
---------------------- --------------------------
MARCH 31, DEC. 31, MARCH 31, DEC. 31,
-------- ------- -------- -------
2004 2003 2004 2003
---- ---- ---- ----
$358,200 $358,200 $244,220 $235,820
Principal payments due over the next five years are as follows:
2004 358,200
2005 41,280
2006 26,600
2007 150,440
2008 17,500
Thereafter 8,400
--------
$602,420
10
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
- ---------------------
We adopted FASB Statement No. 109, "Accounting for Income Taxes," effective
January 1, 1993. The adoption of this standard changed our method of accounting
for income taxes from the deferred method to the liability method.
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Excess of tax over book depreciation $ 1,731,375 $ 1,733,731
Allowance for Bad Debt (41,570) (41,570)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (444,643) (435,814)
Deferred Compensation (227,128) (227,128)
----------- ------------
Total $ 1,018,034 $ 1,029,219
Statutory Tax Rate 34% 34%
----------- -----------
Cumulative Deferred Income Tax Payable $ 346,131 $ 349,934
=========== ============
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 346,131 349,934
----------- ------------
$ 346,131 $ 349,934
=========== ============
Reconciliation of income taxes on the difference between tax and financial
accounting is as follows:
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
2004 2003
------------- -------------
Principal Components of Income Tax Expense
Federal:
Current
-------
Income tax paid $ -0- $ -0-
Carry-over of prepayment from
from prior year 183,206 115,456
Refund received for overpayment
from prior year -0- -0-
----------- ------------
$ 183,206 $ 115,456
Federal Income Tax Payable (Receivable) 137,391 3,637
Carry-over to subsequent year -0- -0-
----------- ------------
Income tax for tax reporting
at statutory rate of 34% $ 320,597 $ 119,093
Deferred
--------
Adjustments for financial reporting:
Depreciation (801) 321
263A Uniform Capitalization Costs (3,002) (1,669)
Other -0- -0-
----------- ------------
Provision for federal income tax $ 316,794 $ 117,745
=========== ============
We are not exempt from income tax except for municipal bond interest earned
in the amount of $497.
We are not classified as a nonexempt cooperative under the provisions of
the Internal Revenue Code and are not entitled to deduct preferred dividends in
determining our taxable income.
11
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - COMPONENTS OF COMPREHENSIVE EARNINGS (LOSS)
- ---------------------------------------------------
1. Deferred compensation funded in the amount of $207,132 on the Balance Sheet
as a current asset in the amount of $73,743 and as a non-current asset in
the amount of $133,389 at March 31, 2004, includes equity securities
classified as investments available for sale in the amount of $207,132 at
fair market value. The $207,132 includes $2,057 unrealized loss on
securities resulting from a decrease in fair market value. The cost of the
equity securities is $209,189.
2. Changes in Equity securities
Quarter Ended
March 31, 2004 Cumulative
-------------- ----------
Beginning Balance-January 1, 2004 $ 221,228 $ - 0-
Purchases -0- 117,400
Dividends, interest and capital gains 497 170,359
Deferred Compensation Funded (18,436) (78,570)
Unrealized gains (losses) on securities
resulting from increase (decrease)
in fair market value 3,843 (2,057)
----------- ----------
Balance-March 31, 2004 $ 207,132 $ 207,132
=========== ==========
3. Components of Net Earnings plus Other Comprehensive Earnings and Components
of Total Comprehensive Earnings for the three months ended March 31, 2004:
Other Comprehensive Net Earnings Plus Other
Net Earnings Earnings (Loss) Comprehensive Earnings (Loss)
------------ ------------------ ----------------------------
Earnings Before Provision Unrealized Loss
For Federal Income Tax $904,619 on Securities $ 3,843 Net Earnings $589,132
Provision for Provision for Other Comprehensive
Federal Income Tax (315,487) Federal Income Tax (1,307) Loss 2,536
-------- ------- --------
Other Comprehensive Net Earnings Plus Other
Net Earnings $589,132 Loss $ 2,536 Comprehensive Loss $591,668
======== ======= ========
Net Earnings Applicable to Other Comprehensive Total Comprehensive
Common Stockholders Loss Earnings
-------------------------- ------------------- -------------------
Unrealized Loss Net Earnings Applicable to
Net Earnings $589,132 on Securities $ 3,843 Common Stockholders $445,951
Less Estimated Dividends Provision for Other Comprehensive
On Preferred Stock (143,181) Federal Income Tax (1,307) Loss 2,536
-------- ------- --------
Net Earnings Applicable Other Comprehensive Total Comprehensive
to Common Stockholders $445,951 Loss $ 2,536 Earnings $448,487
======== ======= ========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Exclusive of Other Applicable to Other
Comprehensive Loss Comprehensive Loss Total
------------------ ------------------- -----
Balance-January 1, 2004 $6,132,015 $ (7,604) $6,124,411
Add: Net earnings (loss)
3 months ended
March 31, 2004 589,132 2,536 591,668
Deduct: Cash Dividends on
Preferred Stock 572,724 -0- 572,724
---------- ---------- ----------
Balance-March 31, 2004 $6,148,423 $ (5,068) $6,143,355
========== ========== ==========
12
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are net of subscriptions receivable and allowance for
doubtful accounts.
March 31, 2004 December 31, 2003
-------------- -----------------
Accounts Receivable $19,271,103 $11,681,272
Subscription Receivable (110,250) (65,876)
Allowance for Doubtful Accounts (41,570) (41,570)
----------- -----------
Accounts Receivable, Net of
Subscription Receivable and
Allowance for Doubtful Accounts $19,119,283 $11,573,826
=========== ===========
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
For the first three months of 2004, we continued to widen our offering of
products in order to give member-dealers more variety in what they can offer to
their customers. In addition, we also explored expanding our presence
geographically to increase the number of member-dealers as a means of continuing
the growth of net sales. Further, March, 2004 was the largest sales month in the
history of Handy. Overall, for the first three months of 2004, we strove to
maintain our steady growth while continuing to meet our goals of providing
quality goods to our member-dealers.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
NET SALES Net sales in the first quarter of 2004 increased 6.7%
($3,300,025) from net sales during the same period in 2003, while decreasing
0.6% ($280,790) between the respective first quarters of 2002 and 2003.
Net sales growth during the first quarter of 2004 was mainly attributable
to strong increases in both regular sales and sales generated from our spring
trade show, as well as sales from other marketing initiatives which helped
member-dealers maintain their competitiveness in their selling territories.
NET MATERIAL COSTS AND REBATES Net material costs for the first quarter of
2004 were $46,565,586 versus $44,255,647 for the same period in 2003. This
increase in net material costs of 5.2 percent, however, was smaller than the 6.7
percent increase in net sales. Net material costs as a percentage of net sales
were 89.1 percent in the first quarter of 2004 as compared to 90.4 percent for
the same period in 2003. This 1.3% decline was primarily the result of a timing
difference in the recognition of factory rebates which are offset against net
material costs. Factory rebates increased from $1,383,716 in the first quarter
of 2003 to $1,612,645 for the same period in 2004.
PAYROLL COSTS Payroll costs for the first quarter of 2004 increased $78,200
(3.3%) over the same 2003 period. This relatively moderate increase was due to
salary increases needed to attract or retain high-quality employees. Payroll
costs as a percentage of total expenses and of net sales remained fairly
constant. Payroll costs for the first quarter of 2004 constituted 4.6 percent of
total expenses and 4.7 percent of net sales, compared to 4.7 percent of total
expenses and 4.9 percent of net sales for the first quarter of 2003. The
relative stability in payroll costs has been a result of a continuing effort to
maintain employee productivity.
OTHER OPERATING COSTS During the first quarter of 2004, other operating
costs increased by $652,007 (18.0%), a significant increase when compared to the
level of the same costs in the first quarter of 2003. The amount spent for other
operating costs for the first quarter of 2004 totaled $4,269,700(8.2% of net
sales and 8.0% of total expenses) as compared to $3,617,693 spent for other
operating costs during the same period of 2003 (7.4% of net sales and 7.2% of
total expenses).
The increase in other operating costs in the first quarter of 2004 can be
attributed to an increase in warehouse and delivery expense, most notably fuel
costs, contract driver costs and rental equipment costs ($269,270), an increase
in the accrual for year end employee bonuses ($135,000), an increase in
advertising costs ($121,238), which advertising costs were totally offset by
advertising income, and an increase in spring market expenses ($156,864), which
market expenses were offset by market income.
14
NET EARNINGS AND EARNINGS PER SHARE
- -----------------------------------
NET EARNINGS - FIRST QUARTER Net sales for the first quarter of 2004
increased by $3,300,025 and net material costs for the same period increased by
$2,309,939, from levels of net sales and net material costs in the first quarter
of 2003, resulting in an increase in gross margin of $990,086. The increase in
gross margin, as well as the substantial increase in other income of $309,091,
were only partially offset by an increase of $78,200 in payroll costs (3.3%) and
a substantial increase in other operating costs of $652,007 (18.0%). Thus, after
tax net earnings increased by $377,962 (179.0%), from $211,170 in the first
quarter of 2003 to $589,132 for the same 2004 period. After tax net earnings,
combined with estimated dividends on preferred stock and other comprehensive
earnings, resulted in total comprehensive earnings for 2004 of $448,487,
compared to total comprehensive earnings of $77,460 for the same 2003 period,
for an overall increase of $371,027, a more than four-fold increase.
EARINGS PER SHARE In the first quarter of 2004, net earnings per share
increased more than four times from the level in same period of 2003, from $0.88
for the 2003 period to $4.52 for the 2004 period. The increase in 2004 is due to
the factors previously discussed, as well as estimated dividends accrued in the
first quarter of 2004, representing a smaller percentage of 2004 net earnings
than estimated dividends accrued in the first quarter of 2003 (2004-24.3% versus
2003-62.1%).
SEASONALITY Our quarterly net earnings generally vary based on the timing
of events which affect our sales. Traditionally, our first and third quarter
earnings are negatively affected by the increased level of direct sales (with no
markup) during our semiannual trade show which is always held in those quarters.
Generally, there is an overall increase in sales during the trade show which
typically offsets the effect of increased direct sales with no markup.
Additionally, net earnings per quarter may vary substantially from year to year
due to the timing difference in the receipt of discounts, rebates and
miscellaneous income, as well as changes in the weather conditions and the
economic conditions in our selling territories. For example, during the first
quarter of 2004, the cumulative effect of the various timing differences, as
well as improved economic conditions, caused a dramatic increase in net earnings
for that period.
15
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
- --------------------------------------------
The following is a summary of selected quarterly financial data for each of
the last eight quarterly periods beginning April 1, 2002 and ending March 31,
2004;
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended
06-30-02 09-30-02 12-31-02 03-31-03 06-30-03 09-30-03 12-31-03 03-31-04
Sales $46,936,553 $45,337,615 $44,920,202 $48,974,287 $46,362,123 $49,947,734 $43,784,516 $52,274,312
Net
Mat'l
Costs 41,604,459 40,609,542 39,404,595 44,255,647 40,728,187 44,879,936 38,302,519 46,565,586
Gross
Margin 5,332,094 4,728,073 5,515,607 4,718,640 5,633,936 5,067,798 5,481,997 5,708,726
Other
Operating
Expenses(1) 5,382,108 5,229,594 7,840,146 6,022,971 6,038,570 6,446,809 6,090,815 6,747,816
Sundry
Income(1) 356,883 790,345 2,510,195 1,634,618 991,776 1,705,174 693,239 1,943,709
Pre-Tax Net
Earnings(2) 306,869 288,824 185,656 330,287 587,142 326,163 84,421 904,619
- ------------------
(1) Historically, sundry income has included income generated from our trade
shows offset by expenses incurred from our trade shows. Starting with the
quarter ended 12/31/02, we began to include expenses incurred from our trade
shows in other operating expenses rather than offsetting sundry income.
Therefore, in order to provide the data for other operating expenses and sundry
income using a consistent calculation method, for each quarter in the table
above, we have included expenses incurred from our trade shows in other
operating expenses rather than offsetting sundry income. This change has no
effect on pre-tax net earnings.
(2) Excludes other comprehensive income/(loss).
Trends
- ------
As reflected in our numbers for the first three months of 2004, our
insurance premium expenses have steadily increased. We expect that the trend
toward increased insurance costs will continue for the foreseeable future, as
part of a general nationwide trend in increased insurance premiums due to
factors such as the events of September 11, 2001, recent insurance company
losses, and insurance company risk assessments. In addition, our property taxes
are continuing to increase and may increase in the future, due to the completion
of our warehouse expansion project and general increases in tax assessments.
Furthermore, with the current unstable environment in the Middle East and
additional Department of Transportation regulations, we expect delivery costs to
continue to increase in the foreseeable future.
16
MATERIAL CHANGES IN FINANCIAL CONDITION
---------------------------------------
FINANCIAL CONDITION AND LIQUIDITY During the period ending March 31, 2004,
we maintained our financial condition and ability to generate adequate amounts
of cash while continuing to make investments in inventory, warehouse and
computer equipment, software, and office furniture and equipment. However, net
cash provided by our operating activities often varies substantially from year
to year. These variations result from (i) the timing of promotional activities
such as our spring trade show, (ii) payment terms available to us from our
suppliers, (iii) payment terms we offer to our member-dealers, and (iv) the
state of the regional economy in our selling territories.
During the first quarter of 2004 our cash and cash equivalents decreased
$1,872,026 as compared to the first quarter of 2003, versus an increase of
$2,356,812 when comparing the same 2003 period to that of 2002. During the first
three months of 2004, we generated cash flow from operating activities of
$2,320,830, as compared to $2,457,243 in the first quarter of 2003. This
decrease in cash flow in the 2004 period was principally attributable to a
significant increase in accounts receivable, which increased 32.0% compared to
the same 2003 period, which was offset by smaller increases in both inventory
and accounts payable during the first quarter of 2004 than during the first
quarter of 2003.
We had approximately 42,300 stockkeeping units in inventory in the period
ending March 31, 2004, which were maintained as a result of managements strategy
to increase the breadth and depth of inventory to better meet the needs of our
member-dealers. The increase in inventory of $2,287,040 in the first three
months of 2004 was significantly lower (34.2%) than the increase in inventory of
$3,478,033 in the same period in 2003, due to the fact that we had more
accurately estimated the level of warehouse inventory needed to meet our
member-dealers' inventory requirements.
Accounts payable increased by $11,608,438 during the first three months of
2004 as compared to a larger increase of $12,614,488 during the same period in
2003. The difference in the increase during these two periods was due primarily
to variations in extended payment terms offered to us by suppliers.
In the first three months of 2004 and 2003, accounts receivable increased
by $7,545,458 and $5,716,298, respectively. For both periods, this variation in
levels of accounts receivable was mainly attributable to differences in extended
payment terms offered to member-dealers at the spring trade shows.
For the period ended March 31, 2004, net earnings plus other comprehensive
earnings were $591,668, compared to $208,508 for the same 2003 period. This 184%
increase was mainly attributable to the increase in gross margin and sundry
income.
Net cash used for investing activities increased from $61,547 in the first
quarter of 2003 to $223,284 for the same period in 2004. The increase in the
first quarter of 2004 was mainly due to the replacement of a large section of
the Company's conveyor system.
Net cash used for financing activities was $1,556,848 in the period ending
March 31, 2004 as compared to net cash used for financing activities of $310,617
during the same period in 2003. This considerable difference was principally
attributable to funds being used during 2004 to pay down draws on the Company's
line of credit which were made throughout 2003 and through the first quarter of
2004.
Our continuing ability to generate cash for funding our activities is
highlighted by the relative constancy of three key liquidity measures - working
capital, current ratio (current assets to current liabilities) and long-term
debt as a percentage of capitalization, as shown in the following table:
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
----------- ------------ ----------
Working Capital $11,850,043 $10,913,193 $8,801,505
Current Ratio 1.4 to 1 1.5 to 1 1.3 to 1
Long-term Debt as Percentage
of Capitalization 5.9% 3.9% 5.4%
17
During the remainder of 2004, 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 new
member-dealers in these territories, and with proceeds from the sale 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.
Off-Balance Sheet Arrangements
------------------------------
As of March 31, 2004, we 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.
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) (1) (1) -- -- -- -- --
Notes Payable -
Stock 358,200 41,280 26,600 150,440 17,500 8,400 602,420
Notes Payable -
Vendor
Consignment -0- -0- -0- -0- -0- 236,712 236,712
Non-cancelable
Capital Leases 12,244 12,244 6,545 2,464 1,140 -0- 34,637
$1,406,332 $996,795 $777,740 $799,552 $505,726 $644,950 $5,131,095
========== ======== ======== ======== ======== ======== ==========
(1) There was $2,430,000 outstanding on the Company's credit facility at
December 31, 2003 and $1,100,000 outstanding on March 31, 2004. The amounts
outstanding under the credit facility fluctuate on a daily basis.
Capital Resources
- -----------------
In the three month periods ending March 31, 2004 and March 31, 2003, our
investment in capital assets was $262,882 and $102,928, respectively.
Approximately 82.0 percent ($215,441) of the amount expended in the first three
months of 2004 was used to upgrade warehouse equipment, 7.3 percent ($19,072)
was used to purchase company vehicles and 6.4 percent ($16,723) was used to
purchase computer equipment. By comparison, of the total amount expended in the
first three months of 2003, $64,794 (63.0%) was used to purchase company
vehicles, $25,293 (24.6%) was used to upgrade warehouse equipment and $12,841
(12.5%) was used to purchase computer equipment.
In April, 2003, JP Morgan Chase Bank amended the Company's existing
unsecured $10 million revolving line of credit to provide for an April 30, 2005
maturity date. We use our unsecured $10 million revolving line of credit from
time to time for our working capital and other financing needs. During the first
three months of 2004, we borrowed $22,080,000 and repaid $20,980,000 from cash
flow, leaving an outstanding balance of $1,100,000 under our line of credit on
March 31, 2004. Our average outstanding balance on our line of credit for the
first quarter of 2004 was $2,848,681.
For the remaining nine months of 2004, we anticipate significant cash
outlays for payment of accounts payable and increased inventory purchases.
Additional cash outlays anticipated for capital expenditures include
approximately $185,000 to purchase warehouse equipment, $183,000 to upgrade
computer equipment, $80,000 to improve our automobile fleet and $20,000 to
purchase office furniture and equipment.
18
Our cash position of $1,607,377 at March 31, 2004 is anticipated to be
sufficient to fund all planned capital expenditures and working capital needs,
although some third party financing, including draws on our line of credit, may
be needed.
CRITICAL ACCOUNTING POLICIES
----------------------------
For a discussion of our critical accounting policies which relate to
inventory, revenue recognition and allowance for doubtful accounts, and which
remain unchanged, see our annual report on Form 10-K for the year ended December
31, 2003.
FORWARD-LOOKING STATEMENTS
--------------------------
The statements contained in this report that are not historical facts are
forward- looking statements as that term is defined in Section 21E of the
Securities Exchange Act of 1934, as amended, and therefore involve a number of
risks and uncertainties. Such forward- looking statements may be or may concern,
among other things, sales levels, the general condition of retail markets,
levels of costs and margins, capital expenditures, liquidity, and competition.
Such forward-looking statements generally are accompanied by words such as
"plan," "budget," "estimate," "expect," "predict," "anticipate," "projected,"
"should," "believe," or other words that convey the uncertainty of future events
or outcomes. Such forward-looking information is based upon management's current
plans, expectations, estimates and assumptions and is subject to a number of
risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's financial
condition and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or assumptions expressed in or implied
by any forward-looking statements made by or on behalf of the Company, including
those regarding the Company's financial results, levels of revenues, capital
expenditures, or capital resource activities. Among the factors that could cause
actual results to differ materially are: fluctuations of the prices received for
or demand for the Company's goods, amounts of goods sold for reduced or no
mark-up, a need for additional labor or transportation costs for delivery of
goods, requirements for capital; general economic conditions or specific
conditions in the retail hardware business; weather conditions; competition and
insurance costs, as well as the risks and uncertainties discussed in this
report, including, without limitation, the portions referenced above and the
uncertainties set forth from time to time in the Company's other public reports,
filings, and public statements. Interim results are not necessarily indicative
of those for a full year.
Item 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedure
The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934
(the "Exchange Act") as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on that evaluation, they have concluded that
such disclosure controls and procedures are effective, in all material
respects, in communicating to them on a timely basis material information
relating to the Company required under the Exchange Act to be disclosed in
this Quarterly Report.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls over
financial reporting that occurred during the fiscal quarter covered by this
Quarterly Report that have materially affected, or are reasonably likely to
materially affect such internal controls over financial reporting.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Issuer Purchase of Equity Securities
------------------------------------
Period (a) Total (b) Average (c)Total Number (d) Maximum
Number of Price Paid of Shares (or Number (or
Shares (or Per Share Units) Purchased Approximate
Units) (or Unit) as Part of Dollar Value)
Purchased Publicly of Shares (or
Announced Plans Units) that May
or Programs Yet Be
Purchased Under
the Plans or
Programs
January 1-31, 2004 50 shares $100.00 0 0
February 1-29, 2004 1,172 shares $100.00 0 0
March 1-31, 2004 1,548 shares $100.00 0 0
Total 2,770 shares $100.00 0 0
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits
Exhibit Number
--------------
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
20
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ Don Jameson
------------------------------
DON JAMESON
President
(Chief Executive Officer)
/s/ Tina S. Kirbie
------------------------------
TINA S. KIRBIE
Executive Vice President
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date: May 14, 2004
21