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, 2004 Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact Name of Registrant)
TEXAS 74-1381875
(State of incorporation (I.R.S. Employer
or organization) 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, 2004 (computed by reference to
the price at which the stock was sold) was $1,013,000 for Class A Common Stock
and $7,779,400 for Class B Common Stock.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 28, 2005, was 10,240 shares of Class A Common Stock,
$100 par value, and 87,519 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,
Annual Meeting of Stockholders 12, 13 and 14
to be held April 18, 2005
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, Related Stockholder
Matters and Issuer Purchases of Equity Securities..................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..........................................31
Item 9A. Controls and Procedures...........................................31
Item 9B. Other Information.................................................31
PART III
Item 10. *Directors and Executive Officers of the Registrant................31
Item 11. *Executive Compensation............................................31
Item 12. *Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................31
Item 13. *Certain Relationships and Related Transactions....................31
Item 14. *Principal Accountant Fees and Services............................31
PART IV
Item 15. Exhibits and Financial Statement Schedules........................31
- ---------------------
* 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. Our 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.
We utilize a central warehouse and office facility located in Houston, Texas,
and maintain 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 adjacent 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 2.1% of the sales of the
Company during fiscal 2004. 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 33% of the Company's total sales during 2004 and 34% in 2003,
while warehouse shipments accounted for approximately 67% of total sales in 2004
and 66% in 2003.
The Company's total sales include 14 different major classes of
merchandise. In 2004, 2003 and 2002, the Company's total sales and total
warehouse sales were divided among classes of merchandise listed below.
1
Total Sales (1) Warehouse Sales
Class of Merchandise 2004 2003 2002 2004 2003 2002
- -------------------- ---- ---- ---- ---- ---- ----
Plumbing Supplies 19% 19% 19% 24% 23% 23%
Building Materials 15 12 12 3 3 3
General Hardware 10 10 10 11 11 11
Paint Sundries 11 11 11 13 13 13
Electrical Supplies 10 10 10 13 12 12
Hand Tools 7 8 8 6 7 7
Lawn and Garden Products 7 8 8 9 10 10
Paint 4 4 4 5 5 5
Power Tools 3 4 4 2 2 2
Housewares & Related Supplies 3 3 3 4 4 4
Fasteners 3 2 2 1 1 1
Automotive After Market 3 3 3 4 3 3
Outdoor Products 3 2 2 3 2 2
Miscellaneous 2 4 4 2 4 4
---- ----- ----- ---- ---- ----
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 2004 the Company maintained a 95.8 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 96.3 percent in 2003 and 95.9 percent in 2002.
Inventory turnover was 5.6 times during 2004, 5.8 times in 2003 and 6.0 times in
2002. The slight decrease in service level and inventory turnover can be
attributed to a continuing emphasis on purchasing inventory in larger quantities
to keep prices competitive for Member-Dealers, but which impacts lead times,
service levels and inventory turns. No policy of inventory shrinkage has been
implemented or is planned.
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. These account
representatives are also responsible for selling the Company's program to new
Member-Dealers.
2
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 1,600
vendors supplied merchandise to the Company during 2004. 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 3.1% of the
Company's total purchases during 2004. 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 24 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 at 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, 2004, the Company had 364 full-time employees, of which
64 were in management or administrative positions and 300 were 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. In addition, the Company has a
registered trademark "H-Bolt" logo. The Company also believes that this
trademark is useful to its operations but that the loss of ability to use this
trademark would not materially affect 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
3
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.
Affiliated Member-Dealers
If one or more individuals who control an existing Member-Dealer opens 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 2004 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 2004 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 560,000 square foot 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.
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
2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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
4
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
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 28, 2005, was as follows:
Description Number of Holders
----------- -----------------
Class A Common Stock (Voting), $100 par value 992
Class B Common Stock (Non-Voting), $100 par value 996
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.
EQUITY COMPENSATION PLAN INFORMATION
The Company does not have any equity compensation plans or individual
compensation arrangements under which the Company's equity securities may be
issued in exchange for goods or services as described in Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table summarizes the Company's purchase of all classes of
equity securities during the three months ended December 31, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------
(d) Maximum
Number (or
(c) Total Number Approximate
of Shares (or Dollar Value)
Units) Purchased or Shares (or
(b) Average as Part of Units) that May
Price Paid Publicly Yet Be
(a) Total Number of Shares (or Units) Per Share Announced Plans Purchased Under
Period Purchased (or Unit) or Programs (1) the Plans or Programs
- -------------------------- ------------------------------------- ----------- ---------------- ---------------------
October 1-31, 2004 Class A Common Stock 130
Class B Common Stock 369
Preferred Stock 389
---
TOTAL 888 shares $100.00 N/A N/A
November 1-30, 2004 Class A Common Stock 20
Class B Common Stock 134
Preferred Stock 134
---
Total 288 shares $100.00 N/A N/A
December 1-31, 2004 Class A Common Stock 80
Class B Common Stock 254
Preferred Stock 285.50
------
Total 619.50 shares $100.00 N/A N/A
-------------------------------------- ---------- --------------- --------------------
Total 1,795.50 shares $100.00 N/A N/A
====================================== ========== =============== ====================
(1) We do not have any publicly announced repurchase programs. These shares
were repurchased when ownership exceeded desired levels or upon the retirement
of Member-Dealers from our buying group.
5
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial information for the five
years ended December 31, 2004, 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,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
OPERATING INCOME DATA:
Net Sales $ 198,327,611 $ 189,068,660 $ 186,449,447 $ 178,503,543 $ 168,108,099
Total Revenue 203,618,053 194,093,467 190,989,139 182,617,439 171,826,695
Total Expenses 201,876,049 192,765,454 190,005,803 182,006,236 170,655,442
Net Earnings 1,120,628 851,077 614,096 389,075 749,664
Preferred Stock
Dividends Paid 572,724 524,193 491,484 635,737 585,925
Net Earnings (Loss)
Applicable to Common
Stockholders 547,904 326,884 122,612 (246,662) 163,739
Net Earnings (Loss) Per
Share of Class A and
Class B Common Stock 5.52 3.51 1.39 (3.03) 2.20
Total Comprehensive
Earnings (Loss) $ 555,035 $ 351,315 $ 75,486 $ (292,937) $ 118,924
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- -------------
BALANCE SHEET DATA:
Current Assets $ 35,065,189 $ 33,559,671 $ 30,776,898 $ 31,814,422 $ 27,290,088
Property
(Net of Accumulated
Depreciation) 15,033,352 15,106,190 15,902,215 16,776,391 13,204,168
Other Assets 320,741 432,282 436,638 698,012 753,462
-------------- ------------- -------------- -------------- --------------
Total Assets $ 50,419,282 $ 49,098,143 $ 47,115,751 $ 49,288,825 $ 41,247,718
============== ============= ============== ============= =============
Current Liabilities $ 22,501,930 $ 22,646,478 $ 22,183,037 $ 25,055,255 $ 18,137,338
Noncurrent Liabilities 1,130,915 998,391 1,301,712 1,647,733 1,716,416
Stockholders' Equity 26,786,437 25,453,274 23,631,002 22,585,837 21,393,964
-------------- ------------- -------------- -------------- -------------
Total Liabilities and
Stockholders' Equity $ 50,419,282 $ 49,098,143 $ 47,115,751 $ 49,288,825 $ 41,247,718
============== ============= ============== ============== ============
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In 2004, Handy Hardware continued to accomplish several goals, which
resulted in a year of significant sales increases. 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
2004, the Company had a 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 2004 financial results was a net sales increase of over $9,200,000 in
2004.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NET SALES. With an economic recovery underway, the Company's net sales
growth continued throughout 2004. Net sales in 2004 increased 4.9% ($9,258,951)
over 2003 net sales, compared to a 1.4% growth rate ($2,619,213) of net sales in
2003 over 2002 levels. Net sales growth during 2004 was mainly attributable to
marketing initiatives to help Member-Dealers maintain their competitiveness in
their selling territories, as well as strong increases in regular sales and
sales generated from our spring and fall trade show. The sales increased in
spite of a slight decrease in the number of Member-Dealers for the past three
years primarily because in 2003 the Company began to focus on increasing sales
per Member-Dealer, in part by tightening its membership standards. No single
Member-Dealer represents more than 2.1% of our net sales.
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 2004, sales in eleven of our twelve selling territories
were more robust than in the same period in 2003. Texas territories represent
approximately 62% of net sales and showed increases in net sales in all
territories other than North Houston. On a Company-wide basis, however, the
growth in the Oklahoma, Alabama, Mississippi, and Arkansas territories in 2004
more than made up for the slight decrease in the North Houston territory.
NET MATERIAL COSTS AND REBATES. Net material costs during 2004 were
$175,055,042, compared to $168,166,289 in 2003 and $166,330,582 in 2002. Net
material costs for 2004 increased 4.1% over the level of those costs in 2003,
compared to an increase in net material costs in 2003 of 1.1% over 2002 levels.
For 2004, the percentage increase in net material costs (4.1%) remained lower
than the percentage increase in net sales (4.9%), as was the case with the
percentage increase in net material costs during 2003 (1.1%) compared to the
percentage increase in net sales during 2003 (1.4%) from 2002 levels. Net
material costs as a percentage of net sales have remained fairly constant: 88.3%
of net sales in 2004, 89.9% of 2003 net sales and 89.2% of 2002 net sales. The
factors primarily responsible for the decrease in net material costs as a
percentage of net sales for 2004 was an increase in factory rebates, as well as
an increase in imported products, which have a lower per unit cost.
PAYROLL COSTS. Payroll costs during 2004 increased $561,067 (5.4%) over
2003 levels, compared to an increase in payroll costs during 2003 of $409,129
(4.1%) over 2002 levels. The 2004 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
2004, 2003 and 2002.
OTHER OPERATING COSTS. In 2004, other operating costs increased $1,657,069
(11.7%) from 2003 levels compared to a substantially lower increase in 2003 of
$591,183 (4.3%) from 2002 levels. The more significant increase in 2004 can be
attributed primarily to a larger increase in warehouse and delivery expenses,
most significantly an increase in fuel costs of $533,570, and an increase in the
cost of rental equipment of $231,361. In addition, insurance costs increased
approximately $282,940. These three expenses accounted for 63% of the total
increase.
NET EARNINGS
While net sales for 2004 increased $9,258,951 (4.9%) over net sales for
2003, net material costs for 2004 grew by $6,888,753 (4.1%) over 2003 levels,
causing gross margin for 2004 to increase by $2,370,198 (11.3%), as compared to
the increase in gross margin for 2003 of $783,506 (3.9%). In addition, sundry
income for 2004 increased $265,635 (5.3%) over 2003 levels. During 2004,
however, a rise in payroll costs and an increase in other operating costs
partially offset the increase in gross margin and sundry income, with the result
that net earnings before taxes for 2004 increased $413,991 over net earning for
2003. After-tax net earnings, combined with dividends on preferred stock and
other comprehensive earnings, resulted in total comprehensive earnings of
$555,035 in 2004, compared to a total comprehensive earnings of $351,315 in
2003, a difference of $203,720.
7
Net earnings per share for 2004 increased 57.3% from $3.51 in 2003 to $5.52
in 2004. The increase is primarily due to net earnings in 2004 being
approximately 31.7% higher than net earnings in 2003, partially offset by a
$48,531 increase in dividends paid in 2004 over 2003 levels. In 2004, net
earnings exceeded dividends by $547,904 (48.9%), resulting in net earnings
applicable to the common shareholders. By comparison, in 2003 net earnings
exceeded dividends by $326,884 (38.4%).
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 2004, 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 for merchandise, (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 2004 there was an increase of $322,383 in the Company's cash and
cash equivalents. The Company used $1,157,127 of cash flow for operating
activities, compared to cash flow used for operating activities in 2003 of
$3,018,459 and cash flow provided by operating activities in 2002 of $2,550,654.
The operating cash outflow in 2004 was principally attributable to a significant
increase in inventory and a sizeable decrease in accounts payable. 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 and depreciation.
In 2004, net earnings and other comprehensive earnings combined were
$252,251 more than the combined total in 2003 (2004 - $1,127,759 vs. 2003 -
$875,508). This 28.8% increase was mainly attributable to an 11.3% increase in
gross margin and a 5.3% increase in sundry income.
In 2004, inventory increased $1,769,437 compared to an increase of
$2,523,184 in 2003. In 2003, management implemented a strategy to increase the
breadth and depth of inventory to better meet the needs of our Member-Dealers,
which strategy was continued in 2004, to a lesser extent. The Company ended both
2004 and 2003 with in excess of 42,000 stockkeeping units.
Accounts receivable in 2004 decreased by $644,688 as compared to an
increase of $519,425 in 2003, a net change of $1,164,113. The decrease 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 $2,211,924 during 2004 compared to a decrease of
$894,900 in 2003. This disparity when comparing these two periods is primarily
attributable to variances in extended payment terms offered by vendors.
In 2004, accrued expenses payable decreased $199,436 as compared to a
decrease of $1,121,652 in 2003. The significant decline in 2003 can be
attributed to 2002 property tax of $925,140 which was not paid until January
2003.
Net cash provided by financing activities was $2,526,728 in 2004, as
compared to $3,070,384 in 2003 and to net cash used for financing activities of
$2,131,535 in 2002. The decrease in 2004 from 2003 was principally attributable
to increased purchases of Company stock from former Member-Dealers.
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,
-------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Working Capital $ 12,563,259 $ 10,913,193 $ 8,593,861
Current Ratio 1.56 to 1 1.48 to 1 1.39 to 1
Long-Term Debt as Percentage of 4.2% 3.9% 5.5%
Capitalization
In 2005, the Company expects to further expand its existing customer base
in its non-core selling territories by increasing its efforts to sell its
program to new Member-Dealers. 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,
---------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
CONTRACTUAL
OBLIGATION: (1)
Non-cancelable
Operating Leases $ 1,194,823 $ 990,263 $ 831,838 $ 717,377 $ 518,899 $ 290,269 $ 4,543,469
Credit Facility
which expires in
April 2006 (1) (2) (2) -- -- -- -- --
Notes Payable - 51,060 30,681 150,440 17,500 120,520 -0- 370,201
Stock
Notes Payable -
Vendor
Consignment -0- -0- -0- -0- -0- 221,203 221,203
Non-cancelable
Capital Leases 9,780 -0- -0- -0- -0- -0- 9,780
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 1,255,663 $ 1,020,944 $ 982,278 $ 734,877 $ 639,419 $ 511,472 $ 5,144,653
=========== =========== =========== =========== =========== =========== ===========
---------------------
1. Excludes any obligation to repurchase shares which is discussed above in
Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities" and below in Note 3 to the Financial
Statements.
2. There was $5,000,000 outstanding on the Company's credit facility at
December 31, 2004 and $3,590,000 outstanding on March 22, 2005. The amounts
outstanding under the credit facility fluctuate on a daily basis.
9
CAPITAL RESOURCES
Over the past five years, the Company's investments in plant and equipment
have amounted to more than $10.3 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.
During 2004, the Company invested $1,080,649 in plant and equipment, with
$860,603 (79.6%) used to purchase warehouse equipment. The remainder was used to
upgrade the Company's auto fleet ($161,208), to upgrade computer equipment and
purchase order entry terminals ($38,035), to remodel and upgrade the Company's
building facility ($15,151) and to purchase office furniture and equipment
($5,652).
In April 2004, JPMorgan Chase Bank amended the Company's existing unsecured
$10,000,000 revolving line of credit to extend the maturity date to April 2006.
This line is used from time to time for working capital and other financing
needs of the Company. At December 31, 2004, there was $5,000,000 outstanding
under the line of credit.
The Company has budgeted approximately $545,000 for 2005 capital
expenditures. Of this amount, the Company will use approximately $250,000 to
upgrade the Company's computer system, $120,000 to improve the Company's fleet
of automobiles, $125,000 to upgrade the Company's office equipment and $50,000
to purchase warehouse equipment.
The Company's cash position of $1,389,062 at December 31, 2004 is
anticipated to be sufficient to fund budgeted 2005 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, 2004, 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
The Company's Credit Agreement with JPMorgan Chase Bank provides for a
fluctuating interest rate of prime rate minus one and three-quarter percent
(1.75%) or the London Interbank Offering Rate ("LIBOR") plus one and one-quarter
percent (1.25%), at the Company's election. The interest rate in effect as of
December 31, 2004 was 3.5% and the weighted average interest rate in effect
during 2004 was 2.61%. Based on the December 31, 2004 outstanding balance of
$5,000,000 under the line of credit, if the interest rate on the line of credit
increased by an average of one percent (1%) over the December 31, 2004 rate, the
Company's interest expense for the next twelve months would increase by
approximately $50,000. The Company does not own, nor have an interest in, any
other market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
10
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, 2004 and 2003, and the related statements of
earnings, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2004. 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, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004, 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 17, 2005
Pasadena, Texas
11
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------------------------
2004 2003
---------------- ---------------
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 1,389,062 $ 1,066,679
Accounts receivable - trade, net of subscriptions receivable and
allowance for doubtful accounts 10,929,138 11,573,826
Inventory 22,321,802 20,552,365
Note receivable 953 9,099
Prepaid expenses 105,644 100,754
Prepaid income tax 238,431 183,205
Deferred compensation funded 80,159 73,743
---------------- ----------------
Total Current Assets 35,065,189 33,559,671
---------------- ---------------
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
At cost, less accumulated depreciation of
$7,682,646 (2004) and $7,508,201 (2003) 15,033,352 15,106,190
---------------- ---------------
OTHER ASSETS
- ------------
Notes receivable 221,492 244,002
Deferred compensation funded 80,159 147,485
Prepaid expenses 3,622 31,814
Intangible asset, less accumulated amortization of
$1,676 (2004) and $724 (2003) 15,468 8,981
---------------- ---------------
320,741 432,282
---------------- ---------------
TOTAL ASSETS $ 50,419,282 $ 49,098,143
------------ ================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Notes payable - line of credit $ 5,000,000 $ 2,430,000
Notes payable - stock - current portion 51,060 358,200
Notes payable - capital leases 9,780 12,244
Accounts payable - trade 17,107,372 19,319,296
Accrued expenses payable 253,559 452,995
Deferred compensation payable - current 80,159 73,743
---------------- ----------------
Total Current Liabilities 22,501,930 22,646,478
---------------- ---------------
NONCURRENT LIABILITIES
- ----------------------
Notes payable - stock - noncurrent portion 319,141 235,820
Notes payable - capital leases - 22,393
Notes payable - vendor consignment merchandise 221,203 242,759
Deferred compensation payable 80,159 147,485
Deferred income taxes payable 510,412 349,934
---------------- ---------------
1,130,915 998,391
---------------- ---------------
Total Liabilities $ 23,632,845 $ 23,644,869
================ ===============
12
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------------------------
2004 2003
---------------- ---------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, Class A, authorized 30,000 shares, $100
par value per share, issued 10,200 and 10,200 shares $ 1,020,000 $ 1,020,000
Common stock, Class B, authorized 200,000 shares, $100
par value per share, issued 86,611 and 82,762 shares 8,661,100 8,276,200
Common stock, Class B subscribed, 4,867.26 and
5,174.65 shares 486,726 517,465
Less subscriptions receivable for Class B Common stock (33,308) (32,938)
Preferred stock, 7% cumulative, authorized 200,000 shares,
$100 par value per share, issued 89,191.25
and 85,550 shares 8,919,125 8,555,000
Preferred stock subscribed 4,867.26 and 5,174.65 shares 486,726 517,465
Less subscriptions receivable for Preferred stock (33,308) (32,938)
Paid in surplus 599,930 508,609
--------------- ---------------
20,106,991 19,328,863
--------------- ---------------
Retained earnings exclusive of other comprehensive earnings 6,679,919 6,132,015
Retained earnings applicable to other comprehensive earnings (473) (7,604)
--------------- ----------------
Total retained earnings 6,679,446 6,124,411
--------------- ----------------
Total Stockholders' Equity $ 26,786,437 $ 25,453,274
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,419,282 $ 49,098,143
------------------------------------------ =============== ===============
See accompanying summary of accounting policies and notes to financial
statements.
13
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
REVENUE
- -------
Net sales $ 198,327,611 $ 189,068,660 $ 186,449,447
Sundry income 5,290,442 5,024,807 4,539,692
----------------- ----------------- -----------------
Total Revenue 203,618,053 194,093,467 190,989,139
----------------- ----------------- -----------------
EXPENSES
- --------
Net material costs 175,055,042 168,166,289 166,330,582
Payroll costs 10,863,811 10,302,744 9,893,615
Other operating costs 15,870,166 14,213,097 13,621,914
Interest expense 87,030 83,324 159,692
----------------- ----------------- -----------------
Total Expenses 201,876,049 192,765,454 190,005,803
----------------- ----------------- -----------------
EARNINGS BEFORE PROVISION FOR FEDERAL
- -------------------------------------
INCOME TAX 1,742,004 1,328,013 983,336
----------
PROVISION FOR FEDERAL INCOME TAX 621,376 476,936 369,240
- -------------------------------- ----------------- ----------------- -----------------
NET EARNINGS 1,120,628 851,077 614,096
- ------------
LESS DIVIDENDS ON PREFERRED STOCK 572,724 524,193 491,484
- --------------------------------- ----------------- ----------------- -----------------
NET EARNINGS (LOSS) APPLICABLE
- ------------------------------
TO COMMON STOCKHOLDERS $ 547,904 $ 326,884 $ 122,612
---------------------- ================= ================= =================
NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
- ---------------------------------------------
CLASS A & CLASS B $ 5.52 $ 3.51 $ 1.39
----------------- ================= ================= =================
OTHER COMPREHENSIVE EARNINGS (LOSS)
- ----------------------------------
Unrealized gain (loss) on securities 10,804 37,017 (71,403)
Provision for federal income tax 3,673 12,586 24,277
----------------- ----------------- -----------------
Other comprehensive earnings (loss) net of tax 7,131 24,431 (47,126)
----------------- ----------------- -----------------
TOTAL COMPREHENSIVE EARNINGS (LOSS) $ 555,035 $ 351,315 $ 75,486
- ----------------------------------- ================= ================= =================
See accompanying summary of accounting policies and notes to financial
statements.
14
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
COMMON STOCK, CLASS A $100 PAR VALUE
- ------------------------------------
Balance at January 1, $ 1,020,000 $ 1,025,000 $ 1,051,000
Stock issued (year 2004 - 730 shares) 73,000 63,000 39,000
Stock canceled (year 2004 - 730 shares) (73,000) (68,000) (65,000)
---------------- --------------- ---------------
Balance at December 31, 1,020,000 1,020,000 1,025,000
---------------- --------------- ---------------
COMMON STOCK, CLASS B, $100 PAR VALUE
- -------------------------------------
Balance at January 1, 8,276,200 7,547,500 7,075,300
Stock issued (year 2004 - 9,403 shares) 940,300 898,800 846,500
Stock canceled (year 2004 - 5,554 shares) (555,400) (170,100) (374,300)
---------------- --------------- ---------------
Balance at December 31, 8,661,100 8,276,200 7,547,500
---------------- --------------- ---------------
COMMON STOCK, CLASS B, SUBSCRIBED
- ---------------------------------
Balance at January 1, 517,465 509,995 509,362
Stock subscribed 871,661 877,170 839,233
Transferred to stock (902,400) (869,700) (838,600)
---------------- --------------- ---------------
Balance at December 31, 486,726 517,465 509,995
Less subscription receivable (33,308) (32,938) (25,560)
--------------- --------------- ---------------
Total 453,418 484,527 484,435
---------------- --------------- ---------------
PREFERRED STOCK, 7% CUMULATIVE $100 PAR VALUE
- ---------------------------------------------
Balance at January 1, 8,555,000 7,833,200 7,362,200
Stock issued (year 2004 - 9,597.25 shares) 959,725 904,400 858,500
Stock canceled (year 2004 - 5,956 shares) (595,600) (182,600) (387,500)
---------------- --------------- ---------------
Balance at December 31, 8,919,125 8,555,000 7,833,200
---------------- --------------- ---------------
PREFERRED STOCK, 7% CUMULATIVE SUBSCRIBED
- -----------------------------------------
Balance at January 1, 517,465 509,995 509,362
Stock subscribed 871,661 877,170 839,233
Transferred to stock (902,400) (869,700) (838,600)
---------------- --------------- ---------------
Balance at December 31, 486,726 517,465 509,995
Less subscription receivable (33,308) (32,938) (25,560)
---------------- --------------- ---------------
Total 453,418 484,527 484,435
---------------- --------------- ---------------
PAID IN CAPITAL SURPLUS
- -----------------------
Balance at January 1, $ 508,609 $ 483,336 $ 426,007
Additions 91,321 25,273 57,329
---------------- --------------- ---------------
Balance at December 31, $ 599,930 $ 508,609 $ 483,336
---------------- --------------- ---------------
TREASURY STOCK, AT COST
- -----------------------
COMMON STOCK, CLASS A, AT COST
------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (73,000) (68,000) (65,000)
Stock canceled 73,000 68,000 65,000
Stock issued - - -
---------------- --------------- ---------------
Balance at December 31, $ - $ - $ -
---------------- =============== ===============
15
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Page 2
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
COMMON STOCK, CLASS B, AT COST
------------------------------
Balance at January 1, $ - $ - $ -
Stock reacquired (555,400) (170,100) (374,300)
Stock canceled 555,400 170,100 374,300
Stock issued - - -
---------------- --------------- ---------------
Balance at December 31, - - -
---------------- --------------- ---------------
PREFERRED STOCK, 7% CUMULATIVE AT COST
--------------------------------------
Balance at January 1, - - -
Stock reacquired (595,600) (182,600) (387,500)
Stock canceled 595,600 182,600 387,500
Stock issued - - -
---------------- --------------- ---------------
Balance at December 31, - - -
---------------- --------------- ---------------
TOTAL TREASURY STOCK - - -
-------------------- ---------------- --------------- ---------------
RETAINED EARNINGS
- -----------------
Balance at January 1 6,124,411 5,773,096 5,697,610
Add: Net earnings year ending December 31 1,120,628 851,077 614,096
Other comprehensive earnings (loss) 7,131 24,431 (47,126)
Deduct: Cash dividends on Preferred Stock 572,724 524,193 491,484
---------------- --------------- ---------------
Balance at December 31, 6,679,446 6,124,411 5,773,096
---------------- --------------- ---------------
TOTAL STOCKHOLDERS' EQUITY $ 26,786,437 $ 25,453,274 $ 23,631,002
- -------------------------- ================ =============== ===============
See accompanying summary of accounting policies and notes to financial
statements.
16
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net earnings and other comprehensive earnings (loss) $ 1,127,759 $ 875,508 $ 566,970
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Amortization 952 487 237
Depreciation 1,140,533 1,181,572 1,319,648
Deferred income tax 160,478 77,097 81,949
(Gain) Loss on sale of property, plant, and equipment (29,934) (13,351) (18,830)
Unrealized loss, decrease, gain (increase) in fair
market value of securities (10,804) (37,017) 71,403
Deferred compensation funded 73,732 60,134 60,000
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable 644,688 (519,425) 694,206
(Increase) Decrease in notes receivable 30,656 (4,089) 86,080
(Increase) Decrease in inventory (1,769,437) (2,523,184) 178,509
(Increase) Decrease in prepaid expenses (31,924) (75,593) 200,940
Increase (Decrease) in note payable for vendor
consignment merchandise (21,556) (4,704) (86,694)
Increase (Decrease) in accounts payable (2,211,924) (894,900) (820,058)
Increase (Decrease) in accrued expenses payable (199,436) (1,121,652) 344,553
Increase (Decrease) in deferred
compensation payable (60,910) (19,342) (128,259)
----------------- ---------------- ----------------
Net Cash Provided by (Used for) Operating Activities (1,157,127) (3,018,459) 2,550,654
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital expenditures for property, plant, and equipment (1,080,649) (395,995) (460,891)
Expenditure for intangible asset (7,438) (3,600) (6,105)
Sale of property, plant and equipment 42,888 23,800 34,250
Reinvested dividends, interest, and capital gains (2,019) (3,775) (3,145)
----------------- ---------------- ----------------
Net Cash Provided by (Used for) Investing Activities (1,047,218) (379,570) (435,891)
----------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Note Payable - line of credit borrowings 64,950,000 53,150,000 76,315,000
Note Payable - line of credit repayments (62,380,000) (50,720,000) (79,015,000)
Increase (Decrease) in notes payable - lease (24,857) 401 (27,370)
Increase (Decrease) in notes payable - stock (223,819) (306,780) 117,640
(Increase) Decrease in subscription receivable (740) (14,756) (6,116)
Proceeds from issuance of stock 2,002,868 1,906,412 1,802,595
Purchase of treasury stock (1,224,000) (420,700) (826,800)
Dividends paid (572,724) (524,193) (491,484)
----------------- ---------------- ----------------
Net Cash Provided by (Used for) Financing Activities 2,526,728 3,070,384 (2,131,535)
----------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 322,383 (327,645) (16,772)
- ---------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,066,679 1,394,324 1,411,096
- ---------------------------------------------- ----------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,389,062 $ 1,066,679 $ 1,394,324
- ---------------------------------------- ================= ================ ================
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest expense paid $ 87,030 $ 83,324 $ 159,692
Income tax payments 519,797 480,174 176,572
See accompanying summary of accounting policies and notes to financial
statements.
17
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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, 2004, the
balance of this account amounted to $1,387,497.
ACCOUNTS RECEIVABLE
Generally accepted accounting principles require that financial
statements show the amount of the allowance for doubtful accounts and
subscription receivable as a reduction of receivables. Accounts
receivable are net of subscriptions receivable and allowance for
doubtful accounts in the following amounts.
December 31
-----------------------------------
2004 2003
--------------- -------------
Subscriptions receivable $ 66,617 $ 65,876
Allowance for doubtful accounts 41,570 41,570
This allowance is estimated based on historical experience. The
specific write-off method is required for income tax purposes, with
the difference shown as an adjustment on the Federal income tax
return. Interest is applied to past due balances of more than 15 days.
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, 2004, was $121,011.
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
18
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------
Property, plant and equipment consists of:
December 31,
---------------------------------------
2004 2003
---------------- ----------------
Land $ 3,207,866 $ 3,207,866
Buildings & improvements 15,467,169 15,490,838
Furniture, computer, warehouse equipment 3,481,948 3,388,830
Transportation equipment 559,015 526,857
--------------- ---------------
$ 22,715,998 $ 22,614,391
Less: Accumulated depreciation 7,682,646 7,508,201
--------------- ---------------
$ 15,033,352 $ 15,106,190
=============== ===============
Depreciation expense for the year ended December 31, 2004, amounted to
$1,140,533 compared with $1,181,572 for the year ended December 31, 2003.
Depreciation expense is included in other operating costs.
Changes in property, plant, and equipment for the year ended December 31, 2004,
are shown in the following schedule:
Balance Additions Other Balance
1-1-2004 At Cost Retirements Changes 12-31-2004
----------- ---------- ----------- ------------- --------------
Land $ 3,207,866 $ - $ - $ - $ 3,207,866
Buildings and improvements 15,490,838 15,151 38,820 - 15,467,169
Furniture, computers and
warehouse equipment 3,388,830 904,291 811,173 - 3,481,948
Transportation equipment 526,857 161,207 129,049 - 559,015
----------- ---------- ---------- ------------- --------------
$22,614,391 $1,080,649 $ 979,042 $ - $ 22,715,998
=========== =========== ========== ============= ==============
Changes in property, plant, and equipment for the year ended December 31, 2003,
are shown in the following schedule:
Balance Additions Other Balance
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
----------- ---------- ---------- ------------- --------------
$22,908,877 $ 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 Other Balance
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
=========== =========== =========== ============ ==============
19
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 2004, are shown in the following schedule:
Balance Additions Other Balance
1-1-2004 At Cost Retirements Changes 12-31-2004
----------- ---------- ----------- ------------- --------------
Land $ - $ - $ - $ - $ -
Buildings and improvements 4,513,608 547,012 38,820 - 5,021,800
Furniture, computers and
warehouse equipment 2,621,039 444,372 809,517 - 2,255,894
Transportation equipment 373,554 149,149 117,751 - 404,952
----------- ---------- ----------- ------------ --------------
$ 7,508,201 $1,140,533 $ 966,088 $ - $ 7,682,646
=========== ========== =========== ============ ==============
Changes in accumulated depreciation for property, plant, and equipment for the
year ended December 31, 2003, are shown in the following schedule:
Balance Additions Other Balance
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 Other Balance
1-1-2002 At Cost Retirements Changes 12-31-2001
----------- ---------- ----------- ------------- --------------
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
=========== ========== =========== ============ ==============
20
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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
---- ------------ -------------- ------------
12-31-02 157,844 40,587 1,540,784
12-31-03 178,241 14,706 1,733,731
12-31-04 429,417 5,949 2,169,097
2. Deferred compensation is accrued as follows:
Balance, December 31, 2003 $ 221,228
Decrease for year ended December 31, 2004 60,910
---------
Balance, December 31, 2004 $ 160,318
=========
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,
--------------------------------------
2004 2003
---------------- -----------------
Book inventory $ 22,321,802 $ 20,552,365
Adjustment for 263A uniform
capitalization costs 476,581 435,814
---------------- -----------------
Inventory for tax return $ 22,798,383 $ 20,988,179
================ =================
The Company accounts for any tax credits as a reduction of income tax
expense in the year in which such credits arise.
21
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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,
----------------- --- ----------------- --- -----------------
2004 2003 2002
----------------- ----------------- -----------------
Net earnings $ 1,120,628 $ 851,077 $ 614,096
Less: Dividends on preferred stock 572,724 524,193 491,484
---------------- ----------------- -----------------
Net earnings (loss) applicable to
common stockholders $ 547,904 $ 326,884 $ 122,612
Weighted average shares of common
stock (Class A and Class B outstanding) 99,248 93,239 88,223
Net earnings (loss) per share of
common stock $ 5.52 $ 3.51 $ 1.39
PREFERRED STOCK DIVIDENDS
Cash dividends paid on the Company's outstanding preferred stock (par
value $100 per share) were 7% for 2004, 7% for 2003, and 7% for 2002,
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
----------- ------------------ -----
2004 91,740 $6.24
2003 85,918 $6.10
2002 80,761 $6.09
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.
22
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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,
--------------------------------
2004 2003
------------- -------------
Current $ 953 $ 9,099
Noncurrent 221,492 244,002
------------ -------------
Total $ 222,445 $ 253,101
============ =============
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,
--------------------------------
2004 2003
------------- -------------
Current $ 51,060 $ 358,200
Noncurrent 319,141 235,820
------------ ------------
Total $ 370,201 $ 594,020
============ ============
Principal payments applicable to the next five years are as follows:
December 31,
--------------------------------
2004 2003
------------- -------------
2004 $ - $ 358,200
2005 51,060 41,280
2006 30,681 26,600
2007 150,440 150,440
2008 17,500 17,500
2009 120,520 -
------------- -------------
Total $ 370,201 $ 594,020
============= =============
23
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
NOTE 4- INCOME TAXES
- --------------------
The Company accounts for income taxes in accordance with FASB Statement No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred income taxes for differences between the basis of assets and
liabilities for financial statements and income tax purposes.
The major categories of deferred income tax provisions are as follows
(based on FASB 109):
Years ended December 31,
----------------- --- ----------------- --- -----------------
2004 2003 2002
----------------- ----------------- -----------------
Excess of tax over book depreciation $ 2,169,097 $ 1,733,731 $ 1,540,784
Allowance for doubtful accounts (41,570) (41,570) (48,714)
Inventory - ending inventory adjustment
for tax recognition of sec. 263A
uniform capitalization costs (476,581) (435,814) (400,500)
Deferred compensation (149,734) (227,128) (289,107)
---------------- ----------------- -----------------
Total 1,501,212 1,029,219 802,463
Statutory tax rate 34% 34% 34%
---------------- ----------------- -----------------
Cumulative deferred income tax payable $ 510,412 $ 349,934 $ 272,837
================ ================= =================
Classified as:
Current liability $ - $ - $ -
Noncurrent liability 510,412 349,934 272,837
---------------- ----------------- ------------------
$ 510,412 $ 349,934 $ 272,837
================ ================= ==================
Reconciliation of income taxes on difference between tax and financial
accounting is as follows:
Years ended December 31,
----------------- --- ----------------- --- -----------------
2004 2003 2002
----------------- ----------------- -----------------
Principal components of income tax expense
Federal
Current
Income tax paid $ 519,797 $ 480,174 $ 176,572
Carryover of prepayment from prior year 183,205 115,456 201,897
Current income tax payable - - -
----------------- ----------------- -----------------
$ 703,002 $ 595,630 $ 378,469
Less carryover to subsequent year (238,431) (183,205) (115,456)
----------------- ----------------- -----------------
Income tax for tax reporting at statutory rate of 34% $ 464,571 $ 412,425 $ 263,013
Deferred
Adjustments for financial reporting:
Depreciation 148,205 65,602 67,467
263A uniform capitalization costs (13,861) (12,007) (6,674)
Other 26,134 23,502 21,157
----------------- ----------------- -----------------
Provision for federal income tax (U.S.) $ 625,049 $ 489,522 $ 344,963
================= ================= ==================
The Company is not exempt from income tax except for municipal bond
interest earned in an amount of $993.
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.
24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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
2005 and 2012.
The following is a schedule of future minimum lease payments for
operating leases as of December 31, 2004 and 2003 for the subsequent
five years:
Years ended
December 31,
-----------------------------------------
2004 2003
------------------ -----------------
2004 $ - 1,035,888
2005 1,194,823 943,271
2006 990,263 744,595
2007 831,838 646,648
2008 717,377 487,086
2009 518,899 -
Thereafter 290,269 399,838
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,
-----------------------------------------
2004 2003
------------------ ------------------
Class of Property
Furniture, computers,
and warehouse equipment $ 51,834 $ 51,834
Less: Accumulated depreciation 39,491 31,262
----------------- -----------------
$ 12,343 $ 20,572
================= =================
The following is a schedule by year of future minimum lease
payments for capital leases:
Years ended
December 31,
-----------------------------------------
2004 2003
------------------ ------------------
2004 $ - 12,244
2005 9,780 12,244
2006 - 6,545
2007 - 2,464
2008 - 1,140
2009 - -
----------------- -----------------
Total $ 9,780 $ 34,637
================= =================
25
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
NOTE 5 - LEASES (CONTINUED)
- ---------------------------
The lease payments at year-end 2004 are reflected in the Balance
Sheet as current obligations under capital leases of $9,780. 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:
2004 $ 2,034,970
2003 $ 1,622,216
2002 $ 1,613,719
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 2004, 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
---------- ------------ ------------------------
2004 $ 150,157 $ 150,157 $ -
2003 $ 133,461 $ 133,461 $ -
2002 $ 129,244 $ 129,244 $ -
26
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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.
27
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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 2004 and 2003, 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, 2004 and 2003, the total
over-invested amount eligible for repurchase by the Company was
approximately $2,200,000 and $1,700,000, of which the Company offered
to repurchase 4,816 shares valued at $481,600 in 2004 and 3,524 shares
valued at $352,400 in 2003. Of the 4,816 shares and 3,524 shares which
the Company offered to repurchase during the last two years,
Member-Dealers submitted 856 shares in 2004 (totaling $85,600) and 404
shares in 2003 (totaling $40,400).
NOTE 9 - LINE OF CREDIT
- -----------------------
In April, 2004, JPMorgan Chase Bank, ("the Bank") amended the Company's
existing unsecured $10 million revolving line of credit to provide for an
April 30, 2006 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
01-01-04 Throughout 2004 Throughout 2004 12/31/04 Rate Paid
-------- --------------- --------------- --------- -------- -------
$2,430,000 $64,950,000 $62,380,000 $5,000,000 3.5% $60,260
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, 2006.
NOTE 10 - COMPREHENSIVE EARNINGS
- --------------------------------
1. Deferred compensation funded in the amount of $160,318 on the Balance
Sheet as a current asset in the amount of $80,159 and as a non-current
asset in the amount of $80,159 at December 31, 2004, includes equity
securities classified as investments available for sale in the amount
of $160,318 at fair market value. The $160,318 includes $10,584
unrealized gain on securities resulting from the increase in fair
market value. The cost of the equity securities is $149,734.
28
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
NOTE 10 - COMPREHENSIVE EARNINGS (CONTINUED)
- --------------------------------------------
2. Changes in Equity Securities:
Year Ended
December 31, 2004 Cumulative
----------------- ----------
Balance, January 1, 2004 $ 221,228 $ -
Purchases - 117,400
Dividends, interest and capital gains 2,018 177,500
Deferred compensation funded (73,732) (133,866)
Unrealized gains (losses) on securities resulting from
Increase (decrease) in fair market value 10,804 (716)
----------------- ----------
Balance, December 31, 2004 $ 160,318 $ 160,318
================= ===========
3. Components of Net Earnings Plus Other Comprehensive Earnings and
Components of Total Comprehensive Earnings for the twelve months ended
December 31, 2004:
Other Comprehensive Net Earnings Plus Other
Net Earnings Earnings (Loss) Comprehensive Earnings
- -------------------------------------------- ------------------------------------ ------------------------------------------
Earnings Before Provision Unrealized Gain
for Federal Income Tax $1,742,004 (Loss) on Securities $ 10,804 Net Earnings $ 1,120,628
Provision for Provision for Other Comprehensive
Federal Income Tax 621,376 Federal Income Tax 3,673 Earnings 7,131
---------- --------- -----------
Other Comprehensive Net Earnings Plus Other
Net Earnings $1,120,628 Earnings (Loss) $ 7,131 Comprehensive Earnings $ 1,127,759
========== ========== ===========
Net Earnings Applicable to Other Comprehensive
Common Stockholders Earnings (Loss) Total Comprehensive Earnings
- -------------------------------------------- ------------------------------------ ------------------------------------------
Unrealized Gain Net Earnings Applicable
Net Earnings $1,120,628 (Loss) on Securities $ 10,804 to Common Stockholders $ 547,904
Less Dividends Provision for Other Comprehensive
On Preferred Stock 572,724 Federal Income Tax 3,673 Earnings 7,131
---------- --------- -----------
Net earnings Applicable To Other Comprehensive Total Comprehensive
Common Stockholders $ 547,904 Earnings (Loss) $ 7,131 Earnings $ 555,035
========== ========= ===========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Applicable to Other Exclusive of Other
Comprehensive Comprehensive
Earnings Earnings Total
------------------- ------------------ -------------
Balance, January 1, 2004 $ (7,604) $ 6,132,015 $ 6,124,411
Add: Net earnings year ended December 31, 2004 7,131 1,120,628 1,127,759
Deduct: Cash Dividends on preferred stock - 572,724 572,724
------------------ ------------------ ------------
Balance, December 31, 2004 $ (473) $ 6,679,919 $ 6,679,446
================== ================== ============
29
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
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
- ---------------------------
ADVERTISING
Costs incurred for advertising are expensed when incurred. The amount
charged to advertising expense in the prior three years are:
2004 1,118,437
2003 1,244,951
2002 1,029,969
30
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.
ITEM 9B. OTHER INFORMATION
None.
PART III
Items 10-14 are incorporated by reference to the Company's Proxy Statement
for its annual stockholders' meeting to be held April 18, 2005, which proxy
statement will be filed with the Securities and Exchange Commission within 120
days after the close of the Company's 2004 fiscal year.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements Reference
-------------------- ---------
Auditor's Report.................................................................................... 11
Balance Sheets at December 31, 2004 and 2003........................................................ 12
Statements of Earnings for the years ended December 31, 2004, 2003 and 2002 ........................ 14
Statements of Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 ............ 15
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 ...................... 17
Notes to Financial Statements....................................................................... 18
(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.
31
(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 Amended Bylaws of Handy Hardware Wholesale, Inc., (filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by
reference).
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).
10.4 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.)
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.)
32
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 March 6, 2003. (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. (Filed as Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by
reference.)
+ 10.17 Ninth Amendment to Amendment and Restatement of Credit Agreement between the company and JP
Morgan Bank dated April 30, 2004.
*+ 10.18 Third Amendment to the Employment Agreement as amended between Handy Hardware Wholesale Inc.
and Jerry Donald Jameson dated February 17, 2005.
+ 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.
+ 32.1 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) EXHIBITS
Listed in Item 15(a)(3) above.
(c) FINANCIAL STATEMENT SCHEDULES
Listed in Item 15(a)(2) above.
33
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 21, 2005
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 21, 2005
- ------------------------------------- Officer and Director
Don Jameson
/s/ Tina S. Kirbie Chief Financial and March 21, 2005
- ------------------------------------- Accounting Officer
Tina S. Kirbie
/s/ Doug Ashy, Jr. Director March 22, 2005
- -------------------------------------
Doug Ashy, Jr.
/s/ Ken Blackmon Director March 21, 2005
- -------------------------------------
Ken Blackmon
/s/ Terrill Bartlett Director March 21, 2005
- -------------------------------------
Terrill Bartlett
/s/ Craig E. Blum Director March 21, 2005
- -------------------------------------
Craig E. Blum
/s/ Susie Bracht-Black Director March 18, 2005
- -------------------------------------
Susie Bracht-Black
/s/ Suzanne Elliott Director March 21, 2005
- -------------------------------------
Suzanne Elliott
/s/ William R. Hill Director March 21, 2005
- -------------------------------------
William R. Hill
/s/ Jimmy T. Pate Director March 22, 2005
- -------------------------------------
Jimmy T. Pate
/s/ Leroy Welborn Director March 22, 2005
- -------------------------------------
Leroy Welborn