UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2005.
Commission File Number 0-15708
HANDY HARDWARE WHOLESALE, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1381875
(State of incorporation) (I.R.S. Employer
Identification No.)
8300 Tewantin Drive, Houston, Texas 77061
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number: (713) 644-1495
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The number of shares outstanding of each of the Registrant's classes of common
stock as of April 30, 2005, was 10,250 shares of Class A Common Stock, $100 par
value, and 88,709 shares of Class B Common Stock, $100 par value.
Page 1 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
INDEX
PART I Financial Information Page No.
-------
Item 1. Financial Statements
Condensed Balance Sheet March 31, 2005
and December 31, 2004 ........................... 3-4
Condensed Statement of Earnings - Three Months
Ended March 31, 2005 and 2004.................... 5
Condensed Statement of Cash Flows - Three Months
Ended March 31, 2005 and 2004.................... 6-7
Notes to Condensed Financial Statements............. 8-13
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations................. 14-19
Item 3. Quantitative & Qualitative Disclosures About
Market Risk.......................................... 19
Item 4. Controls and Procedures.............................. 19
PART II Other Information
Item 1. Legal Procedings..................................... 20
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds...................................... 20
Item 3. Defaults upon Senior Securities...................... 20
Item 4. Submission of Matters to a Vote of Security Holders.. 20
Item 5. Other Information.................................... 20
Item 6. Exhibits............................................. 20
Signatures............................................................ 21
Page 2 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET
MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
ASSETS
------
CURRENT ASSETS
--------------
Cash $ 1,919,498 $ 1,389,062
Accounts Receivable, net of subscriptions receivable 21,999,473 10,929,138
and allowance for doubtful accounts
Notes Receivable (Note 3) 623 953
Inventory 24,125,816 22,321,802
Deferred Compensation Funded 80,159 80,159
Other Current Assets 321,702 105,644
Prepaid Income Tax 154,120 238,431
----------------- -----------------
$ 48,601,391 $ 35,065,189
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT (Note 2)
--------------------------------------
At Cost Less Accumulated Depreciation
of $7,925,046(2005) and $7,682,646 (2004) $ 14,879,510 $ 15,033,352
----------------- -----------------
OTHER ASSETS
------------
Notes Receivable (Note 3) $ 221,349 $ 221,492
Intangible Assets Less Accumulated Amortization
$1,962 (2005) and $1,676 (2004) 15,182 15,468
Deferred Compensation Funded 56,746 80,159
Other Noncurrent Assets -0- 3,622
----------------- -----------------
$ 293,277 $ 320,741
----------------- -----------------
TOTAL ASSETS $ 63,774,178 $ 50,419,282
------------ ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Notes Payable - Line of Credit $ 1,227,500 $ 5,000,000
Notes Payable-Stock (Note 4) 9,000 51,060
Notes Payable-Capital Lease 9,780 9,780
Accounts Payable - Trade 33,093,871 17,107,372
Other Current Liabilities 411,767 253,559
Deferred Compensation Payable 80,159 80,159
----------------- -----------------
$ 34,832,077 $ 22,501,930
----------------- -----------------
NONCURRENT LIABILITIES
----------------------
Notes Payable - Line of Credit $ 1,227,500 $ -0-
Notes Payable-Stock (Note 4) 333,460 319,141
Notes Payable-Capital Lease 1,636 -0-
Notes Payable-Vendor 221,203 221,203
Deferred Compensation Payable 56,746 80,159
Deferred Income Taxes Payable (Note 5) 484,133 510,412
----------------- -----------------
$ 2,324,678 $ 1,130,915
----------------- -----------------
TOTAL LIABILITIES $ 37,156,755 $ 23,632,845
----------------- ----------------- -----------------
The accompanying notes are an integral part of the Condensed Financial Statements.
Page 3 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
CONDENSED BALANCE SHEET (CONTINUED)
MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
STOCKHOLDERS' EQUITY
--------------------
Common Stock, Class A,
authorized 30,000 shares, $100
par value per share, issued
10,430 & 10,200 shares $ 1,043,000 $ 1,020,000
Common Stock, Class B,
authorized 200,000 shares, $100
par value per share, issued
89,291 & 86,611 shares 8,929,100 8,661,100
Common Stock, Class B
Subscribed 4,636.79 & 4,867.26
shares 463,679 486,726
Less Subscription Receivable (53,773) (33,308)
Preferred Stock 7.25% Cumulative,
authorized 200,000 shares, $100
par value per share, issued
91,911.25 & 89,191.25 shares 9,191,125 8,919,125
Preferred Stock, Subscribed
4,636.79 & 4,867.26 shares 463,679 486,726
Less Subscription Receivable (53,773) (33,308)
Paid in Surplus 605,960 599,930
----------------- -----------------
$ 20,588,997 $ 20,106,991
Less: Cost of Treasury Stock
1,264.00 and -0- shares (126,400) -0-
----------------- -----------------
$ 20,462,597 $ 20,106,991
Retained Earnings exclusive of other
comprehensive loss (Note 6) 6,157,535 6,679,919
Retained Earnings applicable to other
comprehensive loss (Note 6) (2,709) (473)
----------------- -----------------
6,154,826 6,679,446
----------------- -----------------
Total Stockholders' Equity $ 26,617,423 $ 26,786,437
----------------- -----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 63,774,178 $ 50,419,282
----------------------------------------- ================= =================
The accompanying notes are an integral part of the Condensed Financial Statements.
Page 4 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2005 2004
----------------- -----------------
REVENUES
--------
Net Sales $ 55,351,320 $ 52,274,312
Sundry Income 1,691,827 1,943,709
----------------- -----------------
TOTAL REVENUES $ 57,043,147 $ 54,218,021
-------------- ----------------- -----------------
EXPENSE
-------
Net Material Costs $ 49,853,237 $ 46,565,586
Payroll Costs 2,556,744 2,454,632
Other Operating Costs 4,443,912 4,269,700
Interest Expense 32,757 23,484
----------------- -----------------
TOTAL EXPENSE $ 56,886,650 $ 53,313,402
------------- ----------------- -----------------
NET EARNINGS BEFORE PROVISIONS FOR ESTIMATED FEDERAL INCOME TAX $ 156,497 $ 904,619
---------------------------------------------------------------
PROVISIONS FOR ESTIMATED FEDERAL INCOME TAX (Note 5 & 6) (59,169) (315,487)
-------------------------------------------------------- ----------------- -----------------
NET EARNINGS $ 97,328 $ 589,132
------------
LESS ESTIMATED DIVIDENDS ON PREFERRED STOCK (154,928) (143,181)
------------------------------------------- ----------------- -----------------
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ (57,600) $ 445,951
---------------------------------------------- ================= =================
NET EARNINGS (LOSS) PER SHARE OF
COMMON STOCK, CLASS A & CLASS B (Note 1) $ (0.56) $ 4.52
--------------------------------------- ================= =================
OTHER COMPREHENSIVE EARNINGS (LOSS)
-----------------------------------
Unrealized Earnings (Loss) on Securities (Note 6) $ (3,373) $ 3,843
Provision for Federal Income Tax(Note 5&6) 1,137 (1,307)
----------------- -----------------
Other Comprehensive Earnings (Loss) Net of Tax $ (2,236) $ 2,536
----------------- -----------------
TOTAL COMPREHENSIVE EARNINGS (LOSS) (NOTE 6) $ (59,836) $ 448,487
--------------------------------------------
The accompanying notes are an integral part of the Condensed Financial Statements.
Page 5 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2005 2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITY
- ----------------------------------
Net Earnings plus Other Comprehensive Earnings (Loss) (Note 6) $ 95,091 $ 591,668
----------------- -----------------
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Amortization $ 286 $ 162
Depreciation 246,659 218,045
Gain on Sale of property, plant & equipment (4,259) (3,941)
Decrease in Deferred Income Tax (26,279) (3,803)
Unrealized gain (increase) decrease
In fair market value of securities 3,373 (3,843)
Deferred Compensation Funded 20,040 18,435
Changes in Assets and Liabilities
Increase in Accounts Receivable $ (11,070,335) $ (7,545,458)
Decrease in Notes Receivable 473 8,184
Increase in Inventory (1,804,014) (2,287,040)
Increase in Other Assets (212,435) (632,281)
Decrease in Prepaid Income Tax 84,311 183,205
Increase in Notes Payable-Vendor -0- (6,047)
Increase in Accounts Payable 15,986,499 11,608,438
Increase in Other Liabilities 158,208 51,810
Increase in Federal Income Taxes Payable -0- 137,391
Decrease in Deferred Compensation Payable (23,413) (14,095)
----------------- -----------------
TOTAL ADJUSTMENTS $ 3,359,114 $ 1,729,162
----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,454,205 $ 2,320,830
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Capital Expenditures $ (115,146) $ (262,882)
Sale of property, plant and equipment 26,588 40,095
Reinvested dividends, interest & capital gains -0- (497)
----------------- -----------------
NET CASH USED FOR INVESTING ACTIVITIES $ (88,558) $ (223,284)
----------------- -----------------
The accompanying notes are an integral part of the Condensed Financial Statements.
Page 6 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)Cont.
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2005 2004
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Decrease in Notes Payable-Line of Credit $ (2,545,000) $ (1,330,000)
Increase (Decrease) in Notes Payable-Stock (27,741) 8,400
Increase (Decrease) in Notes Payable-Capital Lease 1,636 (11,606)
Increase in Subscription Receivable (40,930) (44,374)
Proceeds From Issuance of Stock 522,936 548,256
Purchase of Treasury Stock (126,400) (154,800)
Dividends Paid (619,712) (572,724)
----------------- -----------------
NET CASH USED FOR FINANCING ACTIVITIES $ (2,835,211) $ (1,556,848)
----------------- -----------------
NET INCREASE IN CASH & CASH EQUIVALENTS $ 530,436 $ 540,698
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,389,062 1,066,679
----------------- -----------------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 1,919,498 $ 1,607,377
================= =================
ADDITIONAL RELATED DISCLOSURES TO THE STATEMENT OF CASH FLOWS
- -------------------------------------------------------------
Interest Expense Paid $ 32,757 $ 23,484
Income Taxes Paid 238,431 183,206
The accompanying notes are an integral part of the Condensed Financial Statements.
Page 7 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
(1) Description of Business:
-----------------------
Handy Hardware Wholesale, Inc., ("Handy"), was incorporated as a Texas
corporation on January 6, 1961. Our principal executive offices and
warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061. We
are owned entirely by our member-dealers and former member-dealers.
We sell to our member-dealers products primarily for retail hardware,
lumber and home center stores. In addition, we offer advertising and
other services to member-dealers. We wholesale hardware to our
member-dealers in Texas, Oklahoma, Louisiana, Alabama, Mississippi,
Arkansas, Florida, Colorado, New Mexico, Tennessee, Mexico and Belize.
(2) General Information:
-------------------
The condensed consolidated financial statements included herein have
been prepared by us. The financial statements reflect all adjustments,
which were all of a recurring nature, and which are, in the opinion of
management, necessary for a fair presentation. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). We believe that the
disclosures made are adequate to make the information presented not
misleading. The condensed consolidated financial statements should be
read in conjunction with the audited financial statements and the
notes thereto included in the latest Form 10-K Annual Report.
(3) Cash:
----
For purposes of the statement of cash flows, we consider all highly
liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
(4) Inventories:
-----------
Inventories are valued at the lower of cost or market method,
determined by the first in, first out method, with proper adjustment
having been made for any old or obsolete merchandise.
(5) Earnings Per Share:
------------------
Net earnings per common share (Class A and Class B combined) are based
on the weighted average number of shares outstanding in each period
after giving effect to the stock issued, stock subscribed, accrued
dividends on Preferred Stock, and treasury stock as set forth by
Accounting Principles Board Opinion No. 15 as follows:
Calculation of Net Earnings (Loss) Per Share of Common Stock THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------ ----------------------------------------------
2005 2004
----------------- -----------------
Net Earnings Before Preferred Dividends $ 97,328 $ 589,132
Less: Estimated Dividends on Preferred Stock (154,928) (143,181)
----------------- -----------------
Net Earnings Applicable to Common Stockholders $ (57,600) $ 445,951
Weighted Average
Shares of Common Stock (Class A & Class B) outstanding 102,164 98,628
Net Earnings Per Share of Common Stock $ (0.56) $ 4.52
================= =================
Page 8 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
(6) Revenue Recognition:
-------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. Accordingly, revenues
and expenses are accounted for using the accrual basis of accounting.
Under this method of accounting, revenues and receivables are
recognized when merchandise is shipped or services are rendered, and
expenses are recognized when the liability is incurred.
(7) Accounting for Dividends on Preferred Stock:
-------------------------------------------
We pay dividends on Preferred Stock during the first quarter of each
fiscal year. Only holders of Preferred Stock on the record date for
the payment of the dividend are entitled to receive dividends.
Dividends are prorated for the portion of the twelve-month period
ending January 31, during which the Preferred Stock was held.
Because we are unable to anticipate the amount of the Preferred Stock
dividends to be paid in the first quarter of 2006, we do not accrue a
liability for the payment of those dividends on our balance sheet. To
more properly reflect net earnings, however, on the Condensed
Statement of Earnings included herein, we show an estimated portion of
the annual dividends to be paid in the first quarter of 2006 based on
one-fourth ($154,928) of the annual dividends paid in the first
quarter of 2005.
When dividends on Preferred Stock are actually paid, there is a
reduction of retained earnings. Retained earnings on the Condensed
Balance Sheet for the three months ended March 31, 2005 contained
herein, therefore, are net of dividends actually paid during the first
quarter of 2005 in the amount of $619,712.
NOTE 2 - PROPERTY, PLANT & EQUIPMENT
- ------------------------------------
Property, Plant & Equipment Consists of:
MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
Land $ 3,207,866 $ 3,207,866
Building & Improvements 15,470,228 15,467,169
Furniture, Computer, Warehouse 3,572,472 3,481,948
Transportation Equipment 553,990 559,015
----------------- -----------------
$ 22,804,556 $ 22,715,998
Less: Accumulated Depreciation (7,925,046) (7,682,646)
----------------- -----------------
$ 14,879,510 $ 15,033,352
================= =================
Page 9 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 3 - NOTES RECEIVABLE
- -------------------------
Notes receivable reflect amounts due to us from our member-dealers under
deferred payment agreements and one installment sale agreement.
Under the deferred agreement, we supply member-dealers with an initial order of
General Electric Lamps. The payment for this order is deferred so long as the
member-dealer continues to purchase General Electric lamps through us. If a
member-dealer ceases to purchase lamp inventory or sells or closes his business,
then General Electric invoices us for the member-dealer's initial order and the
member-dealer's note becomes immediately due and payable in full to us.
Under the installment sale agreements, we sell member-dealers computer hardware,
the purchase price of which is due and payable by member-dealers to us in
thirty-six monthly installments of principal and interest.
Notes Receivable are classified as follows:
CURRENT PORTION NONCURRENT PORTION
----------------------------- -----------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Deferred Agreements $ -0- $ -0- $ 221,203 $ 221,203
Installment Sale Agreements 623 953 146 289
------------ ------------ ------------ ------------
$ 623 $ 953 $ 221,349 $ 221,492
============ ============ ============ ============
NOTE 4 - NOTES PAYABLE STOCK
- ----------------------------
The five year, interest bearing notes payable - stock reflect amounts due from
us to former member-dealers for our repurchase of shares of Handy stock owned by
these former member-dealers. According to the terms of the notes, only interest
is paid on the outstanding balance of the notes during the first four years. In
the fifth year, both interest and principal are paid. Interest rates range from
3.0% to 6.0%.
Notes payable - stock are classified as follows:
CURRENT PORTION NONCURRENT PORTION
----------------------------- -----------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
$ 9,000 $ 51,060 $ 333,460 $ 319,141
Principal payments due over the next five years are as follows:
2005 9,000
2006 17,600
2007 150,440
2008 17,500
2009 120,520
Thereafter 27,400
-------
$342,460
Page 10 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 5 - INCOME TAXES
- ---------------------
We adopted FASB Statement No. 109, "Accounting for Income Taxes," effective
January 1, 1993. The adoption of this standard changed our method of accounting
for income taxes from the deferred method to the liability method.
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
Excess of tax over book depreciation $ 2,081,957 $ 2,169,097
Allowance for Bad Debt (41,570) (41,570)
Inventory - Ending inventory adjustment
for tax recognition of Sec. 263A
Uniform Capitalization Costs (486,773) (476,581)
Deferred Compensation (129,694) (149,734)
----------------- -----------------
Total $ 1,423,920 $ 1,501,212
Statutory Tax Rate 34% 34%
----------------- -----------------
Cumulative Deferred Income Tax Payable $ 484,133 $ 510,412
================= =================
Classified as:
Current Liability $ -0- $ -0-
Noncurrent Liability 484,133 510,412
----------------- -----------------
$ 484,133 $ 510,412
================= =================
Reconciliation of income taxes on the difference between tax and financial accounting is as follows:
QUARTER ENDED QUARTER ENDED
MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
Principal Components of Income Tax Expense
Federal:
Current
-------
Income tax paid $ -0- $ -0-
Carry-over of prepayment from prior year 238,431 183,206
Refund received for overpayment from prior year -0- -0-
----------------- -----------------
$ 238,431 $ 183,206
Federal Income Tax Payable (Receivable) (154,120) 137,391
Carry-over to subsequent year -0- -0-
----------------- -----------------
Income tax for tax reporting at statutory rate of 34% $ 84,311 $ 320,597
Deferred
--------
Adjustments for financial reporting:
Depreciation (29,628) (801)
263A Uniform Capitalization Costs (3,465) (3,002)
Other 6,814 -0-
----------------- -----------------
Provision for federal income tax $ 58,032 $ 316,794
================= =================
We are not exempt from income tax except for municipal bond interest. There
was no municipal bond interest in the first quarter of 2005.
We are not classified as a nonexempt cooperative under the provisions of
the Internal Revenue Code and are not entitled to deduct preferred dividends in
determining our taxable income.
Page 11 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 6 - COMPONENTS OF COMPREHENSIVE EARNINGS (LOSS)
- ----------------------------------------------------
1. Deferred compensation funded in the amount of $136,905 on the Balance Sheet
as a current asset in the amount of $80,159 and as a non-current asset in
the amount of $56,746 at March 31, 2005, includes equity securities
classified as investments available for sale in the amount of $136,905 at
fair market value. The $136,905 includes $4,089 unrealized loss on
securities resulting from the decrease in fair market value. The cost of
the equity securities is $140,994.
2. Changes in Equity securities Quarter Ended
Quarter Ended
March 31, 2005 Cumulative
----------------- -----------------
Beginning Balance-January 1, 2005 $ 160,318 $ -0-
Purchases -0- 117,400
Dividends, interest and capital gains -0- 177,500
Deferred Compensation Funded (20,040) (153,906)
Unrealized gains (losses) on securities resulting from increase
(decrease) in fair market value (3,373) (4,089)
----------------- -----------------
Balance-March 31, 2005 $ 136,905 $ 136,905
================= =================
3. Components of Net Earnings plus Other Comprehensive Earnings and Components
of Total Comprehensive Earnings for the three months ended March 31, 2005:
Other Comprehensive Net Earnings Plus Other
Net Earnings Earnings (Loss) Comprehensive Earnings (Loss)
- ------------------------------------ ------------------------------- -----------------------------------
Earnings Before Provision Unrealized Loss
For Federal Income Tax $156,497 on Securities $(3,373) Net Earnings: $97,328
Provision for Provision for Other Comprehensive
Federal Income Tax (59,169) Federal Income Tax 1,137 Loss (2,236)
-------- -------- -------
Other Comprehensive Net Earnings Plus Other
Net Earnings $ 97,328 Loss $(2,236) Comprehensive Loss $95,092
======== ======== =======
Net Earnings (Loss) Applicable Other Comprehensive Total Comprehensive
To Common Stockholders Loss Earnings (Loss)
- ------------------------------------ ------------------------------- -----------------------------------
Unrealized Loss Net Loss Applicable to
Net Earnings $ 97,328 on Securities $(3,373) Common Stockholders $(57,600)
Less Estimated Dividends Provision for Other Comprehensive
On Preferred Stock (154,928) Federal Income Tax 1,137 Loss (2,236)
-------- ------- --------
Net Loss Applicable Other Comprehensive Net Earnings Plus Other
to Common Stockholders $(57,600) Loss $(2,236) Comprehensive Loss $(59,836)
======== ======== ========
4. Components of Retained Earnings
Retained Earnings Retained Earnings
Exclusive of Other Applicable to Other
Comprehensive Loss Comprehensive Loss Total_
------------------ ------------------ ------------------
Balance-January 1, 2005 $ 6,679,919 $ (473) $ 6,679,446
Add: Net earnings (loss)
3 months ended March 31, 2005 97,328 (2,236) 95,092
Deduct: Cash Dividends on Preferred Stock 619,712 -0- 619,712
------------------ ------------------ ------------------
Balance-March 31, 2005 $ 6,157,535 $ (2,709) $ 6,154,826
================== ================== ==================
Page 12 of 21 Pages
HANDY HARDWARE WHOLESALE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------
NOTE 7 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are net of subscriptions receivable and allowance for
doubtful accounts.
March 31, 2005 December 31, 2004
----------------- -----------------
Accounts Receivable $ 22,148,589 $ 11,037,325
Subscription Receivable (107,546) (66,617)
Allowance for Doubtful Accounts (41,570) (41,570)
----------------- -----------------
Accounts Receivable, Net of Subscription Receivable and
Allowance for Doubtful Accounts $ 21,999,473 $ 10,929,138
----------------- -----------------
Page 13 of 21 Pages
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
- --------
For the first three months of 2005, we continued to widen our offering of
products in order to give member-dealers more variety in what they can offer to
their customers. In addition, we also explored expanding our presence
geographically to increase the number of member-dealers as a means of continuing
the growth of net sales. Further, March, 2005 was the largest sales month in the
history of Handy. Overall, for the first three months of 2005, we strove to
maintain our steady growth while continuing to meet our goals of providing
quality goods to our member-dealers.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
- -----------------------------------------
NET SALES. Net sales in the first quarter of 2005 increased 5.9%
($3,077,008) from net sales during the same period in 2004 while increasing 6.7%
($3,300,025) between the respective first quarters of 2003 and 2004.
Net sales growth during the first quarter of 2005 was mainly attributable
to strong increases in both regular sales and sales generated from our spring
trade show, as well as sales from other marketing initiatives which helped
member-dealers maintain their competitiveness in their selling territories.
NET MATERIAL COSTS. Net material costs for the first quarter of 2005 were
$49,853,237 versus $46,565,586 for the same period in 2004. This increase in net
material costs of 7.1 percent, was larger than the 5.9 percent increase in net
sales. Net material costs as a percentage of net sales were 90.1 percent in the
first quarter of 2005 as compared to 89.1 percent for the same period in 2004.
This 1.0% increase was primarily the result of a timing difference of direct
shipment orders generated from our spring trade show. Direct shipments, which
are sold at cost with no markup, increased by $423,602 from the first quarter of
2004 to the first quarter in 2005. In addition, warehouse sales generated from
our spring trade show, which are sold at lower margins, increased $1,205,898,
which is an increase of 21.5%.
PAYROLL COSTS. Payroll costs for the first quarter of 2005 increased by
$102,112 (4.2%) over those costs for the same 2004 period. This increase was due
to salary increases needed to attract or retain high-quality employees. Payroll
costs as a percentage of total expenses and of net sales remained fairly
constant. Payroll costs for the first quarter of 2005 constituted 4.5 percent of
total expenses and 4.6 percent of net sales, compared to 4.6 percent of total
expenses and 4.7 percent of net sales for the first quarter of 2004. The
relative stability in payroll costs has been a result of a continuing effort to
maintain employee productivity.
OTHER OPERATING COSTS. During the first quarter of 2005, other operating
costs increased by $174,212 (4.1%), a moderate increase when compared to the
level of the same costs in the first quarter of 2004. The amount spent for other
operating costs for the first quarter of 2005 totaled $4,443,912(8.0% of net
sales and 7.8% of total expenses) as compared to $4,269,700 spent for other
operating costs during the same period of 2004 (8.2% of net sales and 8.0% of
total expenses).
The increase in other operating costs in the first quarter of 2005 can be fully
attributed to an increase in warehouse and delivery expense ($392,729), most
notably fuel costs, contract driver costs and tractor rental equipment costs
($276,089), which together accounted for 70.1% of the increase, offset by a
decrease in the accrual for year-end employee bonuses ($180,000).
Page 14 of 21 Pages
NET EARNINGS AND EARNINGS PER SHARE
- -----------------------------------
NET EARNINGS - FIRST QUARTER. Net sales for the first quarter of 2005
increased by $3,077,008 and net material costs for the same period increased
$3,287,651, from levels of net sales and net material costs in the first quarter
of 2004, resulting in a decrease in gross margin of $210,643. With a decrease in
gross margin, a decrease in sundry income of $251,882, as well as an increase in
other operating costs of $174,212, and an increase of $102,112 in payroll costs,
after tax net earnings decreased by $491,804 (83.5%), from $589,132 in the first
quarter of 2004 to $97,328 for the same 2005 period. After tax net earnings,
combined with estimated dividends on preferred stock and other comprehensive
loss, resulted in a total comprehensive loss for 2005 of $59,836, compared to
total comprehensive earnings of $448,487 for the same 2004 period, for an
overall decrease of $508,323.
EARNINGS PER SHARE. In the first quarter of 2005, net earnings per share
decreased by $5.08, from earnings of $4.52 for the 2004 period to a loss of
$0.56 for the 2005 period. The decrease in 2005 is due to the factors previously
discussed, as well as estimated dividends accrued in the first quarter of 2005
representing a larger percentage of 2005 net earnings than estimated dividends
accrued in the first quarter of 2004 (2005-159.2% versus 2004-24.3%).
SEASONALITY. Our quarterly net earnings generally vary based on the timing
of events which affect our sales. Traditionally, our first and third quarter
earnings are negatively affected by the increased level of direct sales (with no
markup) during our semiannual trade show which is always held in those quarters.
Generally, there is an overall increase in sales during the trade show which
typically offsets the effect of increased direct sales with no markup.
Additionally, net earnings per quarter may vary substantially from year to year
due to the timing difference in the receipt of discounts, rebates and
miscellaneous income, as well as changes in the weather conditions and the
economic conditions in our selling territories. For example, during the first
quarter of 2005, the cumulative effect of significant increases in fuel prices
on the cost of deliveries and on the cost of inventory products caused a
dramatic decrease in net earnings for that period.
Page 15 of 21 Pages
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
- ---------------------------------------------
The following is a summary of selected quarterly financial data for each of
the last eight quarterly periods beginning April 1, 2003 and ending March 31,
2005;
2003 2004 2005
--------------------------------------- ------------------------------------------------------ ----------
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended
06-30-03 09-30-03 12-31-03 03-31-04 06-30-04 09-30-04 12-31-04 03-31-05
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Sales $46,362,123 $49,947,734 $43,784,516 $52,274,312 $48,690,876 $53,600,240 $43,762,183 $55,351,320
Net
Mat'l
Costs 40,728,187 44,879,936 38,302,519 46,565,586 42,603,125 47,941,956 37,944,375 49,853,237
Gross
Margin 5,633,936 5,067,798 5,481,997 5,708,726 6,087,751 5,658,284 5,817,808 5,498,083
Other
Operating
Expenses 6,038,570 6,446,809 6,090,815 6,747,816 6,323,459 7,049,389 6,700,343 7,033,413
Sundry
Income 991,776 1,705,174 693,239 1,943,709 757,137 1,783,777 805,819 1,691,827
Pre-Tax Net
Earnings(1) 587,142 326,163 84,421 904,619 521,429 392,672 (76,716) 156,497
- ------------------------
(1) Excludes other comprehensive income/(loss).
Trends
------
As reflected in our numbers for the first three months of 2005, our fuel
and delivery expenses have steadily increased. We expect that increased fuel and
delivery costs will continue for the foreseeable future, as part of a general
nationwide trend as gasoline and diesel prices remain high due to domestic and
world market conditions as well as Department of Transportation regulations.
Page 16 of 21 Pages
MATERIAL CHANGES IN FINANCIAL CONDITION
- ---------------------------------------
FINANCIAL CONDITION AND LIQUIDITY. During the period ending March 31, 2005,
we maintained our financial condition and ability to generate adequate amounts
of cash while continuing to make investments in inventory, warehouse and
computer equipment, software, and office furniture and equipment. However, net
cash provided by our operating activities may vary substantially from year to
year. These variations result from (i) the timing of promotional activities such
as our spring trade show, (ii) payment terms available to us from our suppliers,
(iii) payment terms we offer our member-dealers, and (iv) the state of the
regional economy in our selling territories.
During the first quarter of 2005 our cash and cash equivalents increased
$312,121 as compared to cash generated in the first quarter of 2004, versus a
decrease of $1,872,026 when comparing the same 2004 period to that of 2003.
During the first three months of 2005, we generated cash flow from operating
activities of $3,454,205, as compared to $2,320,830 in the first quarter of
2004. This increase in cash flow in the 2005 period was principally attributable
to a significant increase in accounts payable, which increased 37.7% compared to
the same 2004 period and a smaller increase in inventory in the 2005 period
offset by a larger increase in accounts receivable during the first quarter of
2005 than during the first quarter of 2004.
Accounts payable increased $15,986,499 during the first three months of 2005 as
compared to a smaller increase of $11,608,438 during the same period in 2004.
The difference in the increase during these two periods was due primarily to
variations in extended payment terms offered to us by suppliers, as well as the
timing of our spring trade show which was held later in the first quarter of
2005 than the 2004 trade show.
We had approximately 43,290 stockkeeping units in inventory in the period ending
March 31, 2005, which were maintained as a result of management's strategy to
increase the breadth and depth of inventory to better meet the needs of our
member-dealers. The increase in inventory of $1,804,014 in the first three
months of 2005, was lower (21.1%) than the increase in inventory of $2,287,040
in the same period in 2004, due to the fact that we had more accurately
estimated the level of warehouse inventory needed to meet our member-dealers'
inventory requirements.
In the first three months of 2005 and 2004, accounts receivable increased
$11,070,335 and $7,545,458, respectively. For both periods, this variation in
levels of accounts receivable was mainly attributable to differences in extended
payment terms offered to member-dealers at the spring trade shows.
For the period ended March 31, 2005, net earnings plus other comprehensive loss
were $95,091, compared to net earnings plus other comprehensive earnings of
$591,668 for the same 2004 period. This 84% decrease was mainly attributable to
the decrease in gross margin and sundry income as well as an increase in other
operating expenses and payroll costs.
Net cash used for investing activities decreased from $223,284 in the first
quarter of 2004 to $88,558 for the same period in 2005. In the first quarter of
2004 the Company replaced a large section of its conveyor system.
Net cash used for financing activities was $2,835,211 in the period ending March
31, 2005 as compared to net cash used for financing activities of $1,556,848
during the same period in 2004. This considerable difference was principally
attributable to funds being used during 2005 to pay down draws on the Company's
line of credit which were made throughout 2004 and through the first quarter of
2005.
Our continuing ability to generate cash for funding our activities is
highlighted by the relative constancy of three key liquidity measures - working
capital, current ratio (current assets to current liabilities) and long-term
debt as a percentage of capitalization, as shown in the following table:
MARCH 31, DECEMBER 31, MARCH 31,
2005 2004 2004
----------- ----------- -----------
Working Capital $13,769,314 $12,563,259 $11,850,043
Current Ratio 1.4 to 1 1.6 to 1 1.4 to 1
Long-term Debt as Percentage
of Capitalization 8.7% 4.2% 5.9%
Page 17 of 21 Pages
During the remainder of 2005, the Company expects to further expand its existing
customer base in its non-core selling territories. The Company will finance this
expansion with anticipated growth in revenues from sales to new member-dealers
in these territories, and with proceeds from the sale of stock to new and
current member-dealers. The Company expects that expansion in these selling
territories will have a beneficial effect on its ability to generate cash to
meet its funding needs.
Off-Balance Sheet Arrangements
- ------------------------------
As of March 31, 2005, we did not have any off-balance sheet arrangements,
as defined by Item 303(a)(4) of Regulation S-K promulgated by the Securities and
Exchange Commission.
Contractual Commitments and Obligations
- ----------------------------------------
Our contractual obligations for the next five years and thereafter are as
follows:
Year Ended December 31,
------------------------------------------------------------------------------------------------
2005 (2) 2006 2007 2008 2009 Thereafter Total
---------- ---------- ----------- ---------- ---------- ---------- ----------
Contractual
Obligation(1):
Non-cancelable
Operating Leases $ 896,117 $ 990,263 $ 831,838 $ 717,377 $ 518,899 $ 290,269 $4,244,763
Credit Facility
which expires in
April 2006 (1) (1) (1) -- -- -- -- --
Notes Payable -
Stock 9,000 17,600 150,440 17,500 120,520 27,400 342,460
Notes Payable -
Vendor
Consignment -0- -0- -0- -0- -0- 221,203 221,203
Non-cancelable
Capital Leases 9,780 1,636 -0- -0- -0- -0- 11,416
---------- ---------- ----------- ---------- ---------- ---------- ----------
$ 914,897 $1,009,499 $ 982,278 $ 734,877 $ 639,419 $ 538,872 $4,819,842
========== ========== =========== ========== ========== ========== ==========
- ------------------------------------
(1) There was $5,000,000 outstanding on the Company's credit facility at
December 31, 2004 and $2,455,000 outstanding on March 31, 2005. The amounts
outstanding under the credit facility fluctuate on a daily basis.
(2) April 1 through December 31, 2005
Capital Resources
- -----------------
In the three month periods ending March 31, 2005 and March 31, 2004, our
investment in capital assets was $115,146 and $262,882, respectively.
Approximately 40.6 percent ($46,769) of the amount expended in the first three
months of 2005 was used to upgrade warehouse equipment, 31.9 percent ($36,721)
was used to purchase computer equipment and 18.7 percent ($21,563) was used to
purchase a company vehicle. By comparison, of the total amount expended in the
first three months of 2004, $215,441 (82.0%) was used to purchase warehouse
equipment, $19,072 (7.3%) was used to purchase a company vehicle and $16,723
(6.4%) was used to purchase computer equipment.
In April, 2004, JP Morgan Chase Bank amended the Company's existing
unsecured $10 million revolving line of credit to provide for an April 30, 2006
maturity date. We use our unsecured $10 million revolving line of credit from
time to time for our working capital and other financing needs. During the first
three months of 2005, we borrowed $22,000,000 and repaid $19,545,000 from cash
flow, leaving an outstanding balance of $2,455,000 under our line of credit on
March 31, 2005. We make monthly interest payments on the outstanding balance of
our line of credit. Our average outstanding balance on our line of credit for
the first quarter of 2005 was $4,284,444.
For the remaining nine months of 2005, we anticipate significant cash
outlays for payment of accounts payable and increased inventory purchases.
Additional cash outlays anticipated for capital expenditures include
approximately $213,000 to upgrade computer equipment, $100,000 to improve our
automobile fleet, and $120,000 to purchase office furniture and equipment.
Page 18 of 21 Pages
Our cash position of $1,919,498 at March 31, 2005 is anticipated to be
sufficient to fund all planned capital expenditures and working capital needs,
although some third party financing, including draws on our line of credit, may
be needed.
CRITICAL ACCOUNTING POLICIES
----------------------------
For a discussion of our critical accounting policies which relate to
inventory, revenue recognition and allowance for doubtful accounts, and which
remain unchanged, see our annual report on Form 10-K for the year ended December
31, 2004.
FORWARD-LOOKING STATEMENTS
--------------------------
The statements contained in this report that are not historical facts are
forward-looking statements as that term is defined in Section 21E of the
Securities and Exchange Act of 1934, as amended, and therefore involve a number
of risks and uncertainties. Such forward-looking statements may be or may
concern, among other things, sales levels, the general condition of retail
markets, levels of costs and margins, capital expenditures, liquidity, and
competition. Such forward-looking statements generally are accompanied by words
such as "plan," "budget," "estimate," "expect," "predict," "anticipate,"
"projected," "should," "believe," or other words that convey the uncertainty of
future events or outcomes. Such forward-looking information is based upon
management's current plans, expectations, estimates and assumptions and is
subject to a number of risks and uncertainties that could significantly affect
current plans, anticipated actions, the timing of such actions and the Company's
financial condition and results of operations. As a consequence, actual results
may differ materially from expectations, estimates or assumptions expressed in
or implied by any forward-looking statements made by or on behalf of the
Company, including those regarding the Company's financial results, levels of
revenues, capital expenditures, or capital resource activities. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received for or demand for the Company's goods, amounts of goods
sold for reduced or no mark-up, a need for additional labor or transportation
costs for delivery of goods, requirements for capital; general economic
conditions or specific conditions in the retail hardware business; weather
conditions; competition, as well as the risks and uncertainties discussed in
this report, including, without limitation, the portions referenced above and
the uncertainties set forth from time to time in the Company's other public
reports, filings, and public statements. Interim results are not necessarily
indicative of those for a full year.
Item 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act") as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, they have
concluded that such disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified
in the Commission's rules and forms.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls
over financial reporting that occurred during the fiscal quarter
covered by this Quarterly Report that have materially affected, or are
reasonably likely to materially affect such internal controls over
financial reporting.
Page 19 of 21 Pages
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
- ----------------------------------------------------------------------------------------------------------------------------------
Period (a) Total (b) Average (c)Total Number (d) Maximum
Number of Price Paid of Shares (or Number (or
Shares (or Per Share Units) Purchased Approximate
Units) (or Unit) as Part of Dollar Value)
Purchased (1) Publicly of Shares (or
Announced Plans Units) that May
or Programs Yet Be
Purchased Under
the Plans or
Programs
- ------------------------------------- ---------------------- ------------------ -------------------------- -----------------------
January 1-31, 2005 50 shares $100.00 0 0
February 1-28, 2005 1,064 shares $100.00 0 0
March 1-31, 2005 150 shares $100.00 0 0
- ------------------------------------- ---------------------- ------------------ -------------------------- -----------------------
Total 1,264 shares $100.00 0 0
- ------------------------------------- ---------------------- ------------------ -------------------------- -----------------------
(1) We do not have any publicly announced repurchase programs. These shares
were repurchased when certain member-dealers' stock ownership exceeded
desired levels or upon the retirement of member-dealers from our buying
group.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits
Exhibit Number Description
-------------- -----------
+10.1 Third Amendment to Employment Agreement between
Handy Hardware Wholesale, Inc. and Jerry Donald
Jameson, Jr. dated February 17, 2005 (filed as
Exhibit 99.1 to the Company's Form 8-K filed March
22, 2005, and incorporated herein by reference,
File No. 0-15708).
*31.1 Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
*32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- --------------------
*Filed herewith
+Management Contract
Page 20 of 21 Pages
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ Don Jameson
------------------------------
DON JAMESON
President
(Chief Executive Officer)
/s/ Tina S. Kirbie
------------------------------
TINA S. KIRBIE
Executive Vice President
Secretary and Treasurer
(Chief Financial and Accounting Officer)
Date: May 13, 2005
Page 21 of 21 Pages