Back to GetFilings.com
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, 1996 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. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant (computed by reference to the price at which the stock was sold)
was $822,000 of February 28, 1997.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 28, 1997, was 8,310 shares of Class A Common Stock,
$100 par value, and 48,576 shares of Class B Common Stock, $100 par value.
Documents Incorporated by Reference
Document Incorporated as to
Notice and Proxy Statement for the Part III, Items 10, 11, 12 and 13
Annual Meeting of Stockholders
to be held May 14, 1997
TABLE OF CONTENTS
PART I
Item 1. Business.....................................................1
Item 2. Properties...................................................6
Item 3. Legal Proceedings............................................7
Item 4. Submission of Matters to a Vote of Security Holders..........7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................7
Item 6. Selected Financial Data......................................8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................9
Item 8. Financial Statements and Supplementary Data.................12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................33
PART III
Item 10.* Directors and Executive Officers of the Registrant
Item 11.* Executive Compensation
Item 12.* Security Ownership of Certain Beneficial Owners and Management
Item 13.* Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...............................................33
* 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.
PART I
Item 1. Business
General Development of Business
Handy Hardware Wholesale, Inc. ("Handy Hardware" or the "Company) was
incorporated as a Texas corporation on January 6, 1961. Its principal executive
offices and warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061.
Handy Hardware was formed by 13 independent hardware dealers in
response to competitive pressure from larger businesses and chain discount
stores. 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. Handy Hardware has grown from 13 Member-Dealers and sales of $150,000
in 1961 to 929 active Member-Dealers and sales of more than $120,000,000 in
1996. 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, lumber and home center stores as well as in
plant nurseries. In addition, the Company offers advertising and other services
to Member-Dealers. The Company utilizes a central warehouse and office facility
located in Houston, Texas, and maintains a fleet of 39 trailers owned by the
Company and 43 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. Member-Dealers may buy merchandise from any source they
desire, and Member-Dealers are not required to make any minimum levels of
purchases from Handy Hardware. As of December 31, 1996, Handy Hardware's
Member-Dealers were located in Texas, Louisiana, Mississippi, Alabama, Florida,
Oklahoma, Arkansas, Mexico and Central America. Information as to revenues,
operating profit and identifiable assets of the Company's single industry
segment is presented under "Item 6.
Selected Financial Data."
Products and Distribution
The Company buys merchandise from vendors in quantity lots, warehouses
the merchandise and resells it in smaller lots to its Member-Dealers. During the
Company's fiscal year ended December 31, 1996, the Company sold its products to
a total of 929 Member-Dealers, of which 610 were located in Texas, 159 in
Louisiana, 74 in Oklahoma, 40 in Arkansas, 14 in Alabama, 16 in Mississippi, 11
in Florida, 4 in Mexico and 1 in Central America. No individual Member-Dealer
accounted for more than 1.6% of the sales of the Company during fiscal 1996. The
loss of a single customer or several customers 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 the Member-Dealer
accounted for approximately 32% of Company sales during 1996 and 1995 and 31% in
1994, while warehouse shipments accounted for approximately 68% of total net
sales in 1996 and 1995 and 69% of total net sales in 1994.
The Company's total sales include 14 different major classes of
merchandise. In 1996, 1995 and 1994, the Company's total sales and total
warehouse sales were divided among classes of merchandise listed below.
Total Sales1 Warehouse Sales
Class of Merchandise 1996 1995 1994 1996 1995 1994
- -------------------- ---------- ---------- ----------- ---------- ------------ -------
Plumbing Supplies 18% 16% 17% 20% 19% 19%
General Hardware 14 14 15 13 14 14
Paint Sundries 12 13 12 14 15 15
Electrical Supplies 12 12 12 14 14 14
Hand Tools 10 10 10 9 9 9
Lawn and Garden Products 8 9 9 10 10 11
Paint 4 4 4 4 4 4
Building Materials 5 6 5 2 2 2
Power Tools 5 4 5 3 2 2
Housewares & Related Supplies 3 2 2 3 3 2
Fasteners 2 2 2 1 1 1
Automotive After Market 2 2 2 2 2 2
Outdoor Products 1 1 1 1 1 1
Miscellaneous 4 5 4 4 4 4
---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ====
1These amounts include direct sales and warehouse sales. Total sales in
1996 generated from sales of store supplies, catalogs and special purchases from
vendors of goods not part of the Company's regular inventory represented less
than .36% of total sales.
Warehouse sales normally carry a markup of 9%, excluding any purchase
discounts and manufacturer's rebates. As an incentive to Member-Dealers to make
direct sale purchases, since June 1, 1989 direct sales have been sold at the
Company's cost with no markup, excluding purchase discounts and manufacturers'
rebates. The Company maintains a list of price-sensitive, high volume items on
which the markup is reduced from 9 percent to 2 or 4 percent. This program was
developed in order to allow Handy Member-Dealers to become more competitive in
the markets they serve. The price-sensitive items are reviewed every six months
and additions and deletions are made based on Member-Dealer input and as the
market dictates. 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.
Most Member-Dealers have a computer terminal at their hardware store
that provides a direct link to the offices of the Company. Each Member-Dealer is
assigned a day of the week on which it is to transmit its orders through the
computer terminal. 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 during the day following
receipt of each order and on the next day, the merchandise leaves the warehouse
for delivery to the Member-Dealer. Generally, the merchandise arrives at
individual stores on the day that it is shipped from the Company's warehouse.
In 1996 the Company maintained a 94.6 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 92.8 percent and 92.6 percent in 1995
and 1994, respectively. No policy of inventory shrinkage has been implemented or
is planned.
Dealer Services and Advertising
The Company employs a staff of eight full time account representatives
who visit Member-Dealers to advise them on display techniques, record keeping,
inventory control, promotional sales, advertising programs and other
dealer-related services available to them by and through the Company.
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
retail 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 dealer to deduct
such cooperative claims from the cost of the circular program. The Company
estimates that approximately $715,000 was expended in 1996 for dealer
advertising activities. These advertising costs were completely offset by
contributory payments by participating Member-Dealers and cooperative
advertising allowances by participating manufacturers.
Suppliers
The Company purchases merchandise from various vendors, depending upon
product specifications and Member-Dealer requirements. Approximately 1,400
vendors supplied merchandise to the Company during 1996. The Company has no
significant long-term contract with any vendor. Most of the merchandise
purchased by the Company is available from several vendors and manufacturers,
and no single vendor or manufacturer accounted for more than 2% of the Company's
total purchases during 1996. 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 Hardware, Inc., of Englewood, Colorado,
an independent hardware merchandising group. PRO Hardware, Inc. is a
merchandising organization with 40 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 Hardware, Inc. in
order to take advantage of this buying power, which gives PRO Hardware, 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 Hardware, Inc. members at its option, but is under no
obligation to do so and currently does not participate in such benefits.
All of the Company's products are warranted to various levels by the
manufacturers, whose warranties are passed on to the Member-Dealers. In
addition, the Company maintains product liability insurance which the Company
believes is sufficient to meet its needs.
Employees
As of December 31, 1996, the Company had 249 full-time employees, of
which 43 were in management positions and 206 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 that the loss of
ability to utilize this trade name would not have a material adverse effect upon
the business of the Company.
Capitalization by Member-Dealers
In order to become a Handy Hardware Member-Dealer, an independent
hardware dealer must enter into a Dealer Contract with the Company. In addition,
a Member-Dealer must enter into a Subscription Agreement with the Company for
the purchase of 10 shares of Handy Hardware Class A Common Stock, $100 par value
per share ("Class A Common Stock"), with an additional agreement to purchase a
minimum number of shares of Class B Common Stock, $100 par value per share
("Class B Common Stock"), and Preferred Stock, $100 par value per share
("Preferred Stock"), as detailed below. The Class A Common Stock and Class B
Common Stock are collectively referred to herein as the "Common Stock." 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. All shares
of the Company's stock have a purchase price of $100 per share.
Purchase of Class A Common Stock
At the time an independent hardware dealer becomes a Member-Dealer, he
is required to purchase, in cash, 10 shares of Class A Common Stock at $100 per
share.
Purchases of Class B Common Stock and Preferred Stock
General. In approximately March of each fiscal year, the Company
calculates a minimum desired level of stock ownership for each Member-Dealer
("Desired Stock Ownership"), based on (i) the dollar amount of Class A Common
Stock, Class B Common Stock and Preferred Stock owned by the Member-Dealer as of
December 31 of the preceding fiscal year ("Actual Stock Ownership") and (ii) the
Member-Dealer's total purchases of merchandise from the Company during that
preceding fiscal year ("Total Purchases"). The minimum Desired Stock Ownership
for a Member-Dealer is $10,000. If the Member-Dealer's Actual Stock Ownership is
less than his Desired Stock Ownership, then throughout the period from April 1
of the current fiscal year to March 31 of the following fiscal year, the Company
will collect funds from the Member-Dealer for the purchase of additional Class B
Common Stock and Preferred Stock ("Purchase Funds").
Calculation of Desired Stock Ownership. Each Member-Dealer's Desired
Stock Ownership is calculated as set forth in the following table:
Actual Stock
Ownership Desired Stock Ownership1
- --------------------------------- ------------------------------------------------------------------------
$1 to $31,249 $1.00 for every $8.00 of Total Purchases
$31,250 to $56,249 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases over $250,000
$56,250 to $74,999 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,000 to $500,000
+ $1.00 for every $13.33 of Total Purchases over $500,000
$75,000 to $87,499 $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,000 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,000 to $750,000
+ $1.00 for every $20.00 of Total Purchases over $750,000
$87,500 and above $1.00 for every $8.00 of Total Purchases from $1 to $250,000
+ $1.00 for every $10.00 of Total Purchases from $250,000 to $500,000
+ $1.00 for every $13.33 of Total Purchases from $500,000 to $750,000
+ $1.00 for every $20.00 of Total Purchases from $750,000 to $1,000,000
+ $1.00 for every $40.00 of Total Purchases over $1,000,000
1 The minimum Desired Stock Ownership is $10,000. In each case "Total Purchases"
are measured as of the end of the immediately preceding fiscal year.
4
Example.
In March 1997, the Company calculates that as of December 31, 1996, a
Member-Dealer's Actual Stock Ownership was $32,000 and his Total
Purchases during 1996 were $300,000. The Member-Dealer's Desired Stock
Ownership will be $36,250 ($1.00 for each $8.00 of the first $250,000
of Total Purchases [$31,250] plus $1.00 for each $10.00 of the next
$50,000 of Total Purchases [$5,000]). Because the Member-Dealer's
Actual Stock Ownership is less than his Desired Stock Ownership, the
Company will collect Purchase Funds throughout the period from April 1,
1997 to March 31, 1998 for the purchase of additional Class B Common
Stock and Preferred Stock.
Collection of Purchase Funds. Each Member-Dealer receives from the
Company a semi-monthly statement of the Total Purchases made by the
Member-Dealer during the covered billing period. Total Purchases include
purchases of inventory from the Company's warehouse ("Warehouse Purchases") and
purchases of inventory by the Member-Dealer directly from the manufacturer which
are billed through the Company. If the Company has determined that Purchase
Funds are to be collected from a Member-Dealer for a particular April 1 to March
31 period, then each statement sent to that Member-Dealer during that period
will contain an additional charge for Purchase Funds, in an amount equal to two
percent (2%) of the Warehouse Purchases invoiced on the statement. The
Subscription Agreement entitles the Company to collect 2% of Total Purchases as
Purchase Funds. At present, however, the board of directors has determined to
collect 2% of Warehouse Purchases only. The Company will continue to collect
Purchase Funds throughout the April 1 to March 31 period, even though the
Member-Dealer attains his Desired Stock Ownership during the course of the
period. On a monthly basis, the Company reviews the amount of unexpended
Purchase Funds then being held for each Member-Dealer. If a Member-Dealer has
unexpended Purchase Funds in an amount of at least $2,000, the Company applies
such funds to the purchase of 10 shares of Class B Common Stock and 10 shares of
Preferred Stock at $100 per share.
Overinvested Member-Dealers. If at the end of any fiscal year a
Member-Dealer's Actual Stock Ownership exceeds his Desired Stock Ownership (an
"Overinvested Member-Dealer"), he will not be required to pay any Purchase Funds
during the following April 1 to March 31 period. An Overinvested Member-Dealer
may voluntarily continue to make additional purchases of Class B Common Stock
and Preferred Stock by paying Purchase Funds to the Company in amounts equal to
2% of Warehouse Purchases.
Repurchases from Overinvested Member-Dealers. In 1996 the Company
repurchased certain shares of Class B Common Stock and Preferred Stock from
Overinvested Member-Dealers whose Actual Stock Ownership exceeded their Desired
Stock Ownership by $4,000 or more. The amount repurchased from each Overinvested
Member-Dealer was equal to one-fourth of the excess amount, equally divided
between shares of Class B Common Stock and Preferred Stock. The repurchases were
made at the full initial sale price of $100 per share. In 1996, approximately
10% of the shares eligible for repurchase from Overinvested Member-Dealers were
submitted for repurchase, for which the Company expended $16,825. When the
Company began the repurchase program in 1991, the total overinvested amount for
all Member-Dealers was $93,600 and as of December 31, 1996, the total amount was
$153,800 (excluding shares held by the Texas and Louisiana State Treasury
Unclaimed Property Divisions). The amount overinvested varies over time due to
repurchases and additional Member-Dealers becoming overinvested because of
additional stock purchases. Additionally, because stock purchases are based on
each Member-Dealer's Desired Stock Ownership, which fluctuates depending on the
total dollar amount of annual purchases of merchandise from the Company, some
Member-Dealers who were overinvested in one year may no longer be overinvested
in the following year because of an increase in purchases of merchandise. Over
the six years of the repurchase program, the Company has repurchased a total of
$289,800 of shares from Member-Dealers. The Company currently intends, but is
not required, to repurchase from Overinvested Member-Dealers their entire
overinvested amounts. The Company's ability to conduct such repurchases,
however, will depend upon the Company's future results of operations, liquidity,
capital needs and other financial factors.
Affiliated Member-Dealers
If one or more individuals who control an existing Member-Dealer open a
new store which will also be a Member-Dealer, the new Member-Dealer is required
to make an initial purchase of 10 shares of Preferred Stock rather than 10
shares of Class A Common Stock. In all other respects, however, the Company will
treat the new Member-Dealer as an entirely separate entity for purposes of
determining required stock purchases. The Company will calculate
5
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 larger 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 income traditionally has been subject to
two primary factors. 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.
Secondly, sales during the fourth quarter have traditionally been lower, as
hardware sales are slowest during the winter months preceding ordering for
significant sales for the spring. However, net income has varied substantially
from year to year in the fourth quarter as a result of corrections to inventory
made at year-end.
In 1996, traditional seasonality trends deviated from the norm. As a
result of a $200,000 increase in purchase discount and factory rebate credits
due to the timing of receipt of such, net income in the first quarter of 1996
was higher than usual. In the second quarter of 1996, net income was lower than
usual. This was due, in part, to the Company's decision to forego higher margins
on selected inventory. This action was taken because of a repressed market
caused by a severe drought in the Company's selling territories within Texas.
Environmental Matters
In 1990, the Company detected soil contamination apparently associated
with the underground petroleum storage systems for its fleet of trucks located
at its warehouse facility. The Company believes the contamination resulted from
overfill and/or spillage prior to the installation of spill containment and
overfill protection equipment. The Company has implemented corrective measures
to mitigate any possible future environmental impact, including installation of
a recovery well, daily removal of contaminants using a dual-pump product
recovery system and in-place closure of two underground storage tanks.
Pursuant to a remedial action plan submitted to the Texas Natural
Resource Conservation Commission ("TNRCC"), (formerly the Texas Water
Commission) in 1992, the Company proposed vacuum extraction of contaminants,
enhanced bioremediation and on-site remediation of soils previously generated
during subsurface drilling. At December 31, 1996, the Company had expended
$357,641 on these measures, of which the TNRCC had reimbursed $250,877 to the
Company pursuant to a reimbursement application submitted by the Company for all
potentially allowable expenses. Although the Company followed up with the TNRCC
to try and collect the remainder of the submission that had not been reviewed by
the TNRCC in the amount of $80,240, no further reimbursement is anticipated. The
Company anticipates that the expense of its remediation efforts related to these
storage tanks in 1997 will not exceed $35,000, and barring unforeseen
developments, these efforts should be largely completed by year-end 1997.
Item 2. Properties
The Company's warehouse facility and administrative and marketing
offices are located on 20 acres of land in Houston, Texas. The facility is
317,000 square feet with approximately 297,000 square feet utilized for
warehouse space and the remainder used for offices. The building is of tilt wall
construction. The warehouse and office facilities are subject to certain
obligations associated with a bank line of credit. The Company also owns 5.2
acres of vacant land adjoining the Company's property, which is to be used for
future expansion.
6
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
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject.
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
1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for any class of Handy
Hardware's capital stock. Upon becoming a Member-Dealer of Handy Hardware, the
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. See "Item 1. Business -- Capitalization by Member-Dealers"
above. Holders of Class A Common Stock may not transfer those shares to a third
party without first offering to sell them back to the Company. There are no
restrictions on the transfer of the Company's Class B Common Stock or Preferred
Stock; however, 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 Class A Common Stock are the only shares of capital stock
with voting rights and are entitled to one vote per share. The number of record
holders of each class of the Company's Common Stock at February 28, 1997, was as
follows:
Description Number of Holders
- ------------------------------------------------- -----------------
Class A Common Stock (Voting), $100 par value 831
Class B Common Stock (Non-Voting), $100 par value 700
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.
7
Item 6. Selected Financial Data
The following table provides selected financial information for the
five years ended December 31, 1996, derived from financial statements that have
been examined by independent public accountants. The table should be read in
conjunction with the financial statements and the notes thereto included in Item
8.
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
Operating Income Data:
Total Revenues $121,416,635 $115,802,817 $109,282,083 $100,270,031 $91,885,054
Net Revenues from Sales 120,698,632 114,885,634 108,766,633 99,739,046 91,365,551
Total Expenses 119,559,309 114,234,183 108,394,298 99,503,930 91,267,839
Income from Operations
after Tax 1,206,222 1,016,484 571,710 503,260 400,744
Preferred Stock Dividends
Paid 515,029 401,155 438,654 501,547 457,755
Earnings Per Share of Class
A and Class B Common
Stock $ 12.13 $ 11.55 $ 2.71 $ 0.04 $ (1.39)
December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
Balance Sheet Data:
Current Assets $ 22,168,721 $ 18,607,029 $ 21,219,403 $ 18,552,958 $17,591,341
Property (Net of Accumulated
Depreciation) 9,466,577 9,787,350 7,334,774 7,233,306 7,389,410
Other Assets 440,405 386,648 281,151 239,996 240,101
------------ ------------ ------------ ------------ -----------
Total Assets $ 32,075,703 $ 28,781,027 $ 28,835,328 $ 26,026,260 $25,220,852
============ ============ ============ ============ ===========
Current Liabilities $ 14,131,330 $ 10,835,557 $ 12,090,327 $ 10,038,999 $ 9,741,215
Long Term Liabilities 1,833,508 3,497,845 3,580,174 3,774,409 4,088,504
Stockholders' Equity 16,110,865 14,447,625 13,164,827 12,212,852 11,391,133
------------ ------------ ------------ ------------ -----------
Total Liabilities and
Stockholders' Equity $ 32,075,703 $ 28,781,027 $ 28,835,328 $ 26,026,260 $25,220,852
============ ============ ============ ============ ===========
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company continued its steady growth in 1996 while continuing to
meet its goal of providing quality goods to its Member-Dealers at its cost plus
a reasonable mark-up charge. Net revenues from sales in 1996 increased 5.1%
($5,812,998) over 1995 net revenues from sales, compared to a 5.6% growth rate
($6,119,001) of net revenues from sales in 1995 over 1994.
The following table summarizes the Company's sales during the period
1994 to 1996 by sales territory:
1996 1995 1994
--------------------------------------------- ------ ------
% Increase
in Sales % of % of % of
from Prior Total Total Total
Sales Territory Sales Year Sales Sales Sales
- -------------------------------------------- ------------- -------- ------ ------ ------
Houston Area $ 31,099,904 4% 26.0% 26.7% 26.6%
Victoria, San Antonio, Corpus Christi & 21,593,406 5% 18.0% 18.4% 20.6%
Rio Grande Valley Area*
North Texas, Dallas & Fort Worth Area 17,461,937 (6%) 14.6% 16.5% 16.3%
Austin, Brenham & Central Texas Area 13,746,477 22% 11.5% 10.1% 9.9%
Southern Louisiana Area 13,842,859 10% 11.6% 11.2% 10.0%
Baton Rouge, New Orleans, Mississippi, 10,836,360 4% 9.1% 9.2% 8.8%
Alabama & Florida Area
Oklahoma & Arkansas Area 11,025,463 25% 9.2% 7.9% 7.8%
------------- ------ ------ ------
Totals: $119,606,4061 100.0% 100.0% 100.0%
============= ====== ====== ======
* Includes sales to Mexican and Central American dealers.
1 Total does not include sales to dealers who were no longer
Member-Dealers at December 31, 1996.
The Company believes that an increase in promotional sales activities
and quality inventory available for orders, plus low-cost dealer buying
programs, as well as a continuing recovery of the economy in most of the areas
the Company services, were key elements in the Company's sales growth. The
significant increase of 22% in sales in the Austin, Brenham and Central Texas
area has resulted from increased marketing efforts by the Company's employees in
that area. The 25% increase in sales in the Oklahoma and Arkansas area was the
result of two significant factors (1) the increased marketing efforts by the
Company's employees in that area where twenty-four new dealers were added to the
Company's membership and (2) the positive result of a territory reorganization
which transferred the sales of eleven Member-Dealers with $733,463 in sales from
the North Texas, Dallas and Fort Worth area to this territory. The North Texas,
Dallas and Fort Worth area sales were negatively effected by the territory
reorganization discussed above and the loss of $321,023 of Member-Dealer sales
due to store closings or transfer of ownership. Three stores accounted for 71.6%
of the latter loss of sales. Without considering the effect of the territory
reorganization on the two sales areas, sales in the Oklahoma and Arkansas area
increased approximately 16% and sales in the North Texas, Dallas and Fort Worth
area decreased approximately 2%. In addition, throughout the Company's selling
territories the expansion of retail warehouses continues to erode the market
share of independent hardware stores. Furthermore, high consumer debt, an
unusually late spring and significantly lower than normal rainfall suppressed
sales.
9
Net material costs during 1996 were $106,732,258 compared to
$101,115,786 in 1995 and $96,632,590 in 1994. The increase of 5.6 percent in net
material costs for 1996 is slightly higher than the 5.1 percent increase in
sales. By way of comparison, net material costs increased 4.6 percent in 1995
over 1994 while sales increased 5.6 percent in 1995 over 1994. Net material
costs as a percentage of sales remained relatively stable in 1996, 1995 and
1994, at 88.4%, 88.0% and 88.4%, respectively. The stability in net material
costs and in net material costs as a percentage of sales is due to the
continuing efforts of the Company to maintain a reasonable level of markup, in
order to allow Member-Dealers to have a competitive edge in the markets they
serve and due to the relative stability of factory rebate income and purchase
discount income as a percentage of net material costs. Factory rebate income in
1996 was $4,035,298 (3.8% of material costs) as compared to $4,143,225 (4.1% of
material costs) and $3,494,854 (3.6% of material costs) for 1995 and 1994,
respectively. Purchase discount income during the same three periods was
$2,663,891 (2.5% of material costs), $2,447,862 (2.4% of material costs) and
$2,168,015 (2.2% of material costs), respectively. As a result, gross profit
(net sales less net material costs) in 1996 was $13,966,374, which represents a
$196,526 increase over 1995 gross profit of $13,769,848.
Payroll costs during 1996 increased $179,960 (2.9%) over 1995 levels,
while in 1995 payroll costs increased $588,621 (10.5%) over 1994 levels. The
increase in 1996 payroll costs over 1995 resulted primarily from regular salary
increases for employees. The payroll increase for the twelve month period ended
December 31, 1995 over the same period in 1994 was the result of a 20.6%
increase in overtime payroll associated with the Company's warehouse expansion
program, most of which occurred during the first quarter of 1995. Due to the
lack of adequate storage space for inventory, the Company was forced to lease
additional warehouse space in an offsite facility. The lack of proximity of the
additional space to the office of the Company resulted in an increase in
overtime payroll. Payroll costs constituted 5.3%, 5.4% and 5.2% of both total
expenses and net sales for 1996, 1995 and 1994, respectively. The stability in
payroll costs as a percentage of total expenses has been a result of a
continuing effort to maintain employee productivity.
Other operating costs include a wide variety of expenses related to the
Company. The largest components of other operating costs in 1996 were $1,708,682
of employee expenses (representing an increase of $12,970 or .8% over 1995
levels), $1,594,561 of delivery expenses (representing an increase of $64,528 or
4.2% over 1995 levels) and $865,717 of warehouse expenses (representing an
increase of $111,447 or 14.8% over 1995 levels).
In 1996, other operating costs decreased $407,047 (6.1%) over 1995
levels, while in 1995 these costs increased $779,242 (13.2%) over 1994 levels. A
decrease in property tax expense accounted for almost all of the total decrease
of other operating costs in 1996. Property tax expense was approximately
$408,533 in 1996 ($495,381 for 1996 property tax less an $86,848 adjustment for
overestimated 1995 taxes) as compared to $796,004 in 1995 and $357,620 in 1994.
Property tax expense in 1995 was $438,384 higher than 1994 primarily because of
$385,869 in prior period adjustments, which were imposed in 1995 by The Harris
County Appraisal District ("HCAD") as a result of a revised appraisal for
1991-1995. The HCAD asserted that the value of the company's real property was
actually $4.2 million, but as a result of a clerical error regarding the size of
the Company's warehouse, HCAD had undervalued the Company's real property by
approximately $3.1 million. As a result of a hearing with the HCAD, the value of
the Company's real property was reappraised at approximately $3.5 million. In
April 1996, the Company filed a lawsuit against HCAD and the Harris County
Appraisal Review Board contesting their authority to increase the appraised
value of the property. The lawsuit was based, in part, on the fact that the
Company's property was correctly described on the appraisal roll for each year
from 1991 through 1995. Pending the outcome of this lawsuit, however, the
Company paid the additional property taxes due for the years 1991 through 1995
in April of 1996 based on the $3.5 million appraisal.
In September 1996, the company received a summary judgment reducing its
1991 property value by $2,532,000, generating a tax savings of approximately
$60,000. In February 1997, HCAD agreed to reappraise the Company's property for
the years 1992 through 1995, from approximately $3.5 million to $3.3 million.
This generated a tax savings of approximately $23,000. This savings in addition
to the savings for the 1991 reappraisal will result in a refund due the Company
of approximately $83,000.
Net Income
Net income increased 18.7% to $1,206,222 from $1,016,484 in 1995. This
increase was primarily due to the $196,526 increase in gross profit from
operations in 1996 over gross profit from operations in 1995 and the $407,047
decline in other operating costs, principally offset by the $179,960 increase in
payroll costs and the $199,180 decrease in other sundry income. The principal
component of the decrease in sundry income is the amount received in 1995 from
the TNRCC as reimbursement for expenses and capital expenditures for the
Company's soil contamination remediation
10
efforts while the principal component in the decrease in other operating costs
in 1996 is the reduction in property tax expense in 1996. In 1996 and 1995, the
earnings per share of common stock were $12.13 and $11.55, respectively. The
increase in earnings per share in 1996 over 1995 is due to the moderate increase
in net income of $189,738, offset by a moderate increase of $113,874 in
dividends paid to preferred stockholders in 1996 as compared to 1995.
The variation in the Company's earnings per share from year to year
results from the Company's attempts to price its merchandise in order to deliver
the lowest cost buying program for Member-Dealers (who own all of the stock of
the Company), although this often results in lower net income for the Company.
Because these trends benefit the individual shareholders of the Company who
purchase its merchandise, there is no demand from shareholders that the Company
focus greater attention upon earnings per share.
Financial Condition and Liquidity
In 1996, Handy Hardware maintained its financial condition and its
ability to generate adequate amounts of cash while continuing to make
significant investments in inventory, warehouse and computer equipment, and
software and delivery equipment to better meet the needs of its Member-Dealers.
The Company's operating activities provided net cash of $1,113,103 in
1996, $3,754,401 in 1995, and $745,681 in 1994. As illustrated by these figures,
net cash provided by the Company's operating activities may vary substantially
from year to year. These variations result from (i) the timing of promotional
activities such as the Company's Spring and Fall trade shows, (ii) payment terms
available to the Company from its suppliers, (iii) payment terms offered by the
Company to its Member-Dealers, and (iv) the state of the regional economy.
During 1996 there was a net decrease of $42,588 in the Company's cash
and cash equivalents as compared to an increase of $577,980 in 1995. Cash flow
from operating activities from the beginning to the end of 1996 was $1,113,103,
as compared to $3,754,401 in 1995. The variance between cash flow from operating
activities in 1996 as compared to 1995 consisted principally of the following
differences in cash inflows: (i) a $2,412,614 increase in accounts payable in
1996 as compared to a $1,718,857 decrease in accounts payable in 1995; (ii) an
increase in net income to $1,206,222 in 1996 from $1,016,484 in 1995; (iii) an
increase in accrued expenses of $139,660 as compared to an increase in accrued
expenses of $483,845 in 1995; and (iv) an increase to $67,741 in current income
taxes payable in 1996, while there were no income taxes payable in 1995. These
cash inflows in 1996 were offset by (i) a $2,641,404 increase in accounts
receivable in 1996 as compared to a $776,897 decrease in 1995 and (ii) an
increase of $966,057 in inventory in 1996 as compared to a decrease in inventory
of $2,525,192 during 1995.
The significant increase in inventory in 1996 was the result of the
addition of approximately 2,773 stockkeeping units (i.e. products), which were
added in response to Member-Dealer demand for more breadth of inventory. The
increase in inventory was made possible by the increase in the availability of
warehouse space following the completion of the Company's warehouse expansion
project in 1995. Conversely, during 1995 inventory decreased significantly
because there was a lack of inventory stocking areas available during the
construction phase of the Company's warehouse expansion project. In addition,
the significant increase in accounts receivable, inventory and accounts payable
is the result of the Company's fall trade show being held later in the third
quarter of 1996 than in 1995, which resulted in the Company collecting a smaller
portion of its accounts receivable, selling a smaller portion of its inventory
and paying a smaller portion of its accounts payable prior to year-end 1996.
Although, accrued expenses increased during 1996, it did not increase as
significantly as during 1995. As previously discussed, it was necessary to
accrue additional property tax in 1995 due to a reappraisal of the Company's
property for the years 1991 through 1995.
Net cash used for financing activities was $543,481 in 1996, as
compared to net cash provided by financing activities of $56,789 in 1995. The
use of cash in 1996 consisted principally of (i) a larger decrease in mortgage
payable ($2,823,306 as compared to $308,205 in 1995), (ii) a larger preferred
stock dividend payment in the first quarter of 1996 ($515,029 as compared to
$401,155 in 1995) because of an increase in the dividend rate to 12 percent from
10 percent, and (iii) a decline in proceeds from the issuance of stock
($1,303,921 compared to $1,585,391 in 1995), which increases were offset by (i)
a decrease in the repurchase of Company stock ($320,675 compared to $923,050 in
1995) and (ii) an increase of cash from the proceeds of a line of credit of
$1,837,424 extended to the Company.
In August 1996, Texas Commerce Bank ("the Bank") extended to the
company an unsecured $7.5 million revolving line of credit with an April 30,
1998, maturity date at an interest rate of prime minus one and one-half percent
(1.5%) or the London Interbank Offering rate ("LIBOR") plus one and one-quarter
percent (1.25%). Prior to that date
11
the Bank extended the Company a $2 million revolving line of credit at the prime
interest rate published by the Bank. The new line of credit was used to retire
the company's mortgage ($2,449,898) with the Bank and may also be used for
working capital and other financing needs of the Company. On December 31, 1996,
the outstanding balance of the line of credit was $1,837,424, resulting from the
initial draw on the line of credit of $2,449,898 net of total payments of
$612,474 on the line of credit.
The Company's ability to generate cash sufficient to meet its needs for
funding its activities is highlighted by comparing three key liquidity measures
- -- working capital, current ratio (current assets to current liabilities) and
long term debt as a percentage of capitalization, as shown below:
December 31,
------------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
Working Capital $8,037,391 $7,771,472 $9,129,076
Current Ratio 1.57 to 1 1.72 to 1 1.75 to 1
Debt as Percentage of 11.4% 24.2% 27.2%
Capitalization
In 1996, Handy Hardware expects to further expand its existing customer
base in Arkansas and Oklahoma. The Company will finance this expansion with
receipts from sales of stock to new and current Member-Dealers and with
increased revenues from sales to the new Member-Dealers in Arkansas and
Oklahoma. The Company anticipates that this expansion will have a beneficial
effect on its ability to generate cash to meet its funding needs.
Capital Resources
The Company invested $617,062 in plant and equipment in 1996. Over the
past five years the Company's investments in plant and equipment have amounted
to more than $6.7 million, and have provided Handy Hardware with the capacity
for growth to meet the 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 1996, approximately 45.9% ($283,449) of the $617,062 amount
invested in plant and equipment was used to purchase warehouse equipment. The
remainder was invested in upgrading the Company's computer system and used to
purchase order entry terminals, building improvements, office fixtures and
equipment and in upgrading the Company's auto fleet.
The Company has budgeted approximately $660,000 for 1997 capital
expenditures. Of this amount, approximately $350,000 has been allocated to
improving the Company's warehouse equipment. Approximately $150,000 has been
allocated to upgrading the Company's computer equipment. The Company has also
allocated approximately $75,000 for upgrading the Company's catalog,
approximately $60,000 for improving the automobile fleet, and approximately
$25,000 to improve the Company's office facility and equipment. The Company
expects to fund the budgeted capital expenditures described herein from working
capital, and believes that it will not need to rely upon external financing.
Adoption of FASB 109
The Company adopted FASB 109 for the year ended December 31, 1993 and
subsequent years. The impact of this action is discussed in Note 5 to the
Financial Statements included in Item 8.
Item 8. Financial Statements and Supplementary Data
12
HANDY HARDWARE WHOLESALE, INC.
REPORT OF EXAMINATION
DECEMBER 31, 1996
13
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Handy Hardware Wholesale, Inc.
Houston, Texas
Gentlemen:
We have audited the accompanying balance sheets of Handy Hardware Wholesale,
Inc., as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ Clyde D. Thomas
----------------------------------
CLYDE D. THOMAS & COMPANY
Certified Public Accountants
February 10, 1997
14
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------
1996 1995
----------- -----------
ASSETS
----------
CURRENT ASSETS
Cash $ 1,224,327 $ 1,266,915
Accounts receivable, net of subscriptions receivable in the
amount of $45,515 for 1996 and $34,316 for 1995 9,206,177 6,564,773
Inventory (Note 1) 11,421,127 10,455,070
Prepaid Expenses 317,090 320,271
----------- -----------
$22,168,721 $18,607,029
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
At cost, less accumulated depreciation of $3,380,058 (1996)
and $3,124,646 (1995) (Note 1) $ 9,466,577 $ 9,787,350
----------- -----------
OTHER ASSETS
Notes receivable (Note 2) $ 105,844 $ 109,483
Deferred compensation funded 245,110 214,384
Prepaid expenses 89,451 62,781
----------- -----------
$ 440,405 $ 386,648
----------- -----------
TOTAL ASSETS $32,075,703 $28,781,027
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Mortgage payable - Current portion (Note 4) $ - $ 308,204
Note payable - Line of Credit (Note 10) 985,883 -
Notes payable - Stock - Current portion (Note 3) 23,860 -
Notes payable - Capital Leases (Note 6) 67,002 92,783
Accounts payable - Trade 11,932,351 9,519,737
Accrued expenses payable 1,054,493 914,833
Current income taxes payable 67,741 -
----------- -----------
$14,131,330 $10,835,557
----------- -----------
NONCURRENT LIABILITIES
Mortgage payable - Noncurrent portion (Note 4) $ - $ 2,515,102
Note payable - Line of credit (Note 10) 851,541 -
Notes payable - Stock - Noncurrent portion (Note 3) 209,950 176,810
Notes payable - Capital Leases (Note 6) 123,290 169,126
Notes payable - Dealer consignment merchandise 105,844 108,013
Deferred compensation payable 245,110 214,384
Deferred income taxes payable (Notes 1 and 5) 297,773 314,410
----------- -----------
$ 1,833,508 $ 3,497,845
----------- -----------
TOTAL LIABILITIES $15,964,838 $14,333,402
----------- -----------
15
HANDY HARDWARE WHOLESALE, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------
STOCKHOLDERS' EQUITY 1996 1995
- -------------------- ----------- -----------
Common stock, Class A, authorized 20,000 shares, $100 par
value per share, issued 8,220 and 7,960 shares $ 822,000 $ 796,000
Common stock, Class B, authorized 100,000 shares, $100 par
value per share, issued 47,733 and 43,149 shares 4,73,300 4,314,900
Common stock, Class B subscribed, 4,036.51 and 3,915.35 403,651 391,535
shares
Less subscriptions receivable (22,757) (17,158)
Preferred stock, 7% cumulative, authorized 100,000 shares,
$100 par value per share, issued 50,213.75 and 45,634.5 5,021,375 4,563,450
shares
Preferred stock subscribed, 4,036.52 and 3,915.35 shares 403,652 391,535
Less subscriptions receivable (22,758) (17,158)
Paid in surplus 296,965 280,277
----------- -----------
$11,675,428 $10,703,381
Retained earnings 4,435,437 3,744,244
----------- -----------
Total Stockholders' Equity $16,110,865 $14,447,625
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,075,703 $28,781,027
------------------------------------------ =========== ===========
See accompanying notes.
16
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
INCOME
Net sales $120,698,632 $114,885,634 $108,766,633
Sundry income 718,003 917,183 515,450
------------ ------------ ------------
TOTAL INCOME $121,416,635 $115,802,817 $109,282,083
------------ ------------ ------------
EXPENSES
Net material cost $106,732,258 $101,115,786 $ 96,632,590
Payroll costs 6,390,319 6,210,359 5,621,738
Other operating costs 6,264,249 6,671,296 5,892,054
Interest expense 172,483 236,742 247,916
------------ ------------ ------------
TOTAL EXPENSES $119,559,309 $114,234,183 $108,394,298
------------ ------------ ------------
INCOME BEFORE PROVISIONS FOR FEDERAL
INCOME TAX $ 1,857,326 $ 1,568,634 $ 887,785
PROVISION FOR FEDERAL INCOME TAX (Note 5) 651,104 (552,150) 316,075
------------ ------------ ------------
NET INCOME $ 1,206,222 $ 1,016,484 $ 571,710
LESS DIVIDENDS ON PREFERRED STOCK 515,029 401,155 438,654
------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON
STOCKHOLDERS $ 691,193 $ 615,329 $ 133,056
============ ============ ============
EARNINGS PER SHARE OF COMMON STOCK
CLASS A & CLASS B (Note 1) $ 12.13 $ 11.55 $ 2.71
============ ============ ============
See accompanying notes.
17
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
COMMON STOCK, CLASS A $100 PAR VALUE
Balance at January 1, $ 796,000 $ 779,000 $ 797,000
Stock issued 65,000 75,000 72,000
Stock canceled (39,000) (58,000) (90,000)
----------- ----------- -----------
Balance at December 31, $ 822,000 $ 796,000 $ 779,000
----------- ----------- -----------
COMMON STOCK, CLASS B, $100 PAR VALUE
Balance at January 1, $ 4,314,900 $ 4,020,500 $ 3,829,300
Stock issued 591,700 585,100 568,700
Stock canceled (133,300) (290,700) (377,500)
----------- ----------- -----------
Balance at December 31, $ 4,773,300 $ 4,314,900 $ 4,020,500
----------- ----------- -----------
COMMON STOCK, CLASS B, SUBSCRIBED
Balance at January 1, $ 391,535 $ 389,897 $ 367,121
Stock subscribed 596,416 580,138 591,476
Transferred to stock (584,300) (578,500) (568,700)
----------- ----------- -----------
Balance at December 31, $ 403,651 $ 391,535 $ 389,897
Less subscription receivable (22,757) (17,158) (19,722)
----------- ----------- -----------
Total $ 380,894 $ 374,377 $ 370,175
----------- ----------- -----------
PREFERRED STOCK, 7% CUMULATIVE $100 PAR VALUE
Balance at January 1, $ 4,563,450 $ 4,256,900 $ 4,099,350
Stock issued 606,300 614,000 578,300
Stock canceled (148,375) (307,450) (420,750)
----------- ----------- -----------
Balance at December 31, $ 5,021,375 $ 4,563,450 $ 4,256,900
----------- ----------- -----------
PREFERRED STOCK, 7% CUMULATIVE SUBSCRIBED
Balance at January 1, $ 391,535 $ 389,897 $ 367,122
Stock subscribed 596,417 580,138 601,075
Transferred to stock (584,300) (578,500) (578,300)
----------- ----------- -----------
Balance at December 31, $ 403,652 $ 391,535 $ 389,897
Less subscription receivable (22,758) (17,158) (19,722)
----------- ----------- -----------
Total $ 380,894 $ 374,377 $ 370,175
----------- ----------- -----------
PAID IN CAPITAL SURPLUS
Balance at January 1, $ 280,277 $ 239,162 $ 210,565
Additions 16,688 41,115 28,597
----------- ----------- -----------
Balance at December 31, $ 296,965 $ 280,277 $ 239,162
----------- ----------- -----------
TREASURY STOCK, AT COST
COMMON STOCK, CLASS A, AT COST
Balance at January 1, $ -- $ -- $ (38,000)
Stock reacquired (39,000) (143,000) (52,000)
Stock canceled 39,000 58,000 90,000
Stock issued -- 85,000 --
----------- ----------- -----------
Balance at December 31, $ -- $ -- --
----------- ----------- -----------
18
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PAGE 2
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
COMMON STOCK, CLASS B, AT COST
Balance at January 1, $ -- $ -- $ (179,000)
Stock reacquired (133,300) (377,700) (198,500)
Stock canceled 133,300 290,700 377,500
Stock issued -- 87,000 --
----------- ----------- -----------
Balance at December 31, $ -- $ -- $ --
----------- ----------- -----------
PREFERRED STOCK, 7% CUMULATIVE AT COST
Balance at January 1, $ -- $ -- $ (200,400)
Stock reacquired (148,375) (402,350) (220,350)
Stock canceled 148,375 307,450 420,750
Stock issued -- 94,900 --
----------- ----------- -----------
Balance at December 31, $ -- $ -- $ --
----------- ----------- -----------
TOTAL TREASURY STOCK $ -- $ -- $ --
----------- ----------- -----------
RETAINED EARNINGS
Balance at January 1, $ 3,744,244 $ 3,128,915 $ 2,995,859
Add: Net income, year ending December 31, 1,206,222 1,016,484 571,710
Deduct: Cash dividends on Preferred Stock (Note 515,029 401,155 438,654
----------- ----------- -----------
Balance at December 31, $ 4,435,437 $ 3,744,244 $ 3,128,915
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY $16,110,865 $14,447,625 $13,164,827
=========== =========== ===========
19
HANDY HARDWARE WHOLESALE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,206,222 $ 1,016,484 $ 571,710
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 933,983 907,565 813,859
Deferred income tax (16,637) 21,523 10,701
(Gain) Loss on sale of property, plant and equipment (1,000 (126,931) --
Changes in assets and liabilities:
(Increase) Decrease in Accounts Receivable (2,641,404) 776,897 (1,186,622)
(Increase) Decrease in Notes Receivable 3,639 (33,617) (14,843)
(Increase) Decrease in Deferred Compensation Investment (30,726) (51,622) (17,154)
(Increase) Decrease in Inventory (966,057) 2,525,192 (1,496,643)
(Increase) Decrease in Prepaid Expense (23,489) (131,993) 30,210
Increase (Decrease) in Note Payable for Dealer Consignment
Merchandise (2,169) 34,293 15,553
Increase (Decrease) in Accounts Payable 2,412,614 (1,718,857) 1,947,609
Increase Decrease) in Accrued Expenses Payable 139,660 483,845 54,147
Increase (Decrease) in Current Income Tax Payable 67,741 -- --
Increase Decrease in Deferred Compensation Payable 30,726 51,622 17,154
----------- ----------- -----------
Net cash provided by (used for) operating activities $ 1,113,103 $ 3,754,401 $ 745,681
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures $ (617,062) $(3,419,243) $ (923,973)
Sale of property, plant and equipment 4,852 186,033 8,646
----------- ----------- -----------
Net cash provided by (used for) investing activities $ (612,210) $(3,233,210) $ (915,327)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Mortgage Payable $(2,823,306) $ (308,205) $ (308,204)
Increase (Decrease) in Notes Payable - Line of Credit 1,837,424 -- --
Increase (Decrease) in Notes Payable - Lease (71,617) 15,640 89,583
Increase (Decrease) in Notes Payable - Stock 57,000 83,040 30,550
(Increase) Decrease in Subscription Receivable (11,199) 5,128 (3,379)
Proceeds from issuance of stock 1,303,921 1,585,391 1,293,148
Purchase of Treasury Stock (320,675) (923,050) (470,850)
Dividends paid (515,029) (401,155) (438,654)
----------- ----------- -----------
Net cash provided by (used for) financing activities $ (543,481) $ 56,789 $ 192,194
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (42,588) $ 577,980 $ 22,548
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,266,915 688,935 666,387
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,224,327 $ 1,266,915 $ 688,935
=========== =========== ===========
ADDITIONAL RELATED DISCLOSURES TO THE
STATEMENT OF CASH FLOWS
Interest expense paid $ 172,483 $ 236,742 $ 247,916
Income tax payments 492,922 637,705 333,427
See accompanying notes.
20
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - ACCOUNTING POLICIES
Cash
For purposes of the statement of cash flows, Handy Hardware Wholesale, Inc.,
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 normally extended to
such accounts. At December 31, 1996, the balance of this account amounted to
$1,207,098.
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.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost. Depreciation of property
accounts for financial statement presentation is based on estimated useful lives
and methods as follows:
Life Method of
Asset in Years Depreciation
------------------------------------------- -------- -------------------
Building 30-39 Straight Line
Furniture and warehouse equipment including
computer and data processing equipment 3-7 Straight Line/MACRS
Transportation equipment 3-5 Straight Line
Property, plant and equipment consists of:
DECEMBER 31,
-----------------------------
1996 1995
----------- ------------
Land $ 2,027,797 $ 2,027,797
Buildings & improvements 7,479,697 7,450,391
Furniture, computer, warehouse equipment 2,875,288 2,960,102
Transportation equipment 463,853 473,706
----------- ------------
$12,846,635 $ 12,911,996
3,380,058 3,124,646
----------- ------------
$ 9,466,577 $ 9,787,350
=========== ============
Depreciation expense for the year ended December 31, 1996, amounted to
$933,983 compared with $907,565 for the year ended December 31, 1995.
21
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 2
DECEMBER 31, 1996
NOTE 1 - ACCOUNTING POLICIES (continued)
Changes in Property, Plant, and Equipment for the year ended December 31,
1996, are shown in the following schedule:
Balance Additions Other Balance
1-1-96 At Cost Retirements Changes 12-31-96
----------- ------------ ------------ ----- -----------
Land $ 2,027,797 $ - $ - $ - $ 2,027,797
Buildings and improvements 7,450,391 29,305 - - 7,479,697
Furniture, Computers and
warehouse equipment 2,960,102 483,291 568,105 - 2,875,288
Transportation equipment 473,706 104,465 114,318 - 463,853
----------- ------------ ------------ ----- -----------
$12,911,996 $ 617,061 $ 682,423 $ - $12,846,635
=========== ============ ============ ===== ===========
Changes in Property, Plant, and Equipment for the year ended December 31,
1995, are shown in the following schedule:
Balance Additions Other Balance
1-1-95 At Cost Retirements Changes 12-31-95
----------- ------------ ------------ ----- -----------
Land $ 2,027,797 $ - $ - $ - $ 2,027,797
Buildings and improvements 5,026,886 2,659,709 236,204 - 7,450,391
Furniture, Computers and
warehouse equipment 2,842,862 738,728 621,488 - 2,960,102
Transportation equipment 617,201 20,806 164,301 - 473,706
----------- ------------ ------------ ----- -----------
$10,514,746 $ 3,419,243 $ 1,021,993 $ - $12,911,996
=========== ============ ============ ===== ===========
Changes in Property, Plant, and Equipment for the year ended December 31,
1994, are shown in the following schedule:
Balance Additions Other Balance
1-1-94 At Cost Retirements Changes 12-31-94
----------- ------------ ------------ ----- -----------
Land $ 2,027,797 $ - $ - $ - $ 2,027,797
Buildings and improvements 4,702,101 324,785 - - 5,026,886
Furniture, Computers and
warehouse equipment 2,765,984 435,521 358,643 - 2,842,862
Transportation equipment 519,243 163,667 65,709 - 617,201
----------- ------------ ------------ ----- -----------
$10,015,125 $ 923,973 $ 424,352 $ - $10,514,746
=========== ============ ============ ===== ===========
22
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 3
DECEMBER 31, 1996
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Changes in Accumulated Depreciation for Property, Plant, and Equipment for
the year ended December 31, 1996, are shown in the following schedule:
Balance Additions Other Balance
1-1-96 at Cost Retirements Changes 12-31-96
----------- ------------ ----------- ----- -----------
Land $ - $ - $ - $ - $ -
Buildings and improvements 1,364,782 237,912 - - 1,602,694
Furniture, Computers and
warehouse equipment 1,464,406 601,259 568,105 - 1,497,560
Transportation equipment 295,458 94,812 110,466 - 279,804
----------- ------------ ----------- ----- -----------
$ 3,124,646 $ 933,983 $ 678,571 $ - $ 3,380,058
=========== ============ =========== ===== ===========
Changes in Accumulated Depreciation for Property, Plant, and Equipment for
the year ended December 31, 1995, are shown in the following schedule:
Balance Additions Other Balance
1-1-95 at Cost Retirements Changes 12-31-95
----------- ------------ ----------- ----- -----------
Land $ - $ - $ - $ - $ -
Buildings and improvements 1,317,804 225,914 178,936 - 1,364,782
Furniture, Computers and
warehouse equipment 1,524,434 561,461 621,489 - 1,464,406
Transportation equipment 337,734 120,190 162,466 - 295,458
----------- ------------ ----------- ----- -----------
$ 3,179,972 $ 907,565 $ 962,891 $ - $ 3,124,646
=========== ============ =========== ===== ===========
Changes in Accumulated Depreciation for Property, Plant, and Equipment for the
year ended December 31, 1994, are shown in the following schedule:
Balance Additions Other Balance
1-1-94 at Cost Retirements Changes 12-31-94
----------- ------------ ----------- ----- -----------
Land $ - $ - $ - $ - $ -
Buildings and improvements 1,117,714 200,090 - - 1,317,804
Furniture, Computers and
warehouse equipment 1,386,904 496,173 358,643 - 1,524,434
Transportation equipment 277,201 117,596 57,063 - 377,734
----------- ------------ ----------- ----- -----------
$ 2,781,819 $ 813,859 $ 415,706 $ - $ 3,179,972
=========== ============ =========== ===== ===========
23
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 4
DECEMBER 31, 1996
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 prior to 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
-------- ------------ -------------- -------------
12-31-94 76,849 9,617 1,310,183
12-31-95 30,849 (27,981) 1,313,051
12-31-96 23,003 (4,582) 1,331,472
2. Deferred compensation is accrued as follows:
Balance, December 31, 1995 $ 214,384
Addition for year ended December 31, 1996 30,726
---------
Balance, December 31, 1996 $ 245,110
=========
The deferred compensation has not been deducted for income tax purposes.
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,
----------------------------
1996 1995
----------- -----------
Book inventory $11,421,127 $10,455,070
Adjustment for 263A Uniform
Capitalization costs 249,239 208,561
----------- -----------
Inventory for tax return $11,670,366 $10,663,631
=========== ===========
The Company accounts for any tax credits as a reduction of income tax expense
in the year in which such credits arise.
24
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 5
DECEMBER 31, 1996
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock
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:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---------- ---------- --------
Net Income $1,206,222 $1,016,484 $571,710
Less: Dividends on Preferred Stock 515,029 401,155 438,654
---------- ---------- --------
Weighted average shares outstanding $ 691,193 $ 615,329 $133,056
Income (Loss) per share 56,984 53,253 49,129
12.13 11.55 2.71
Preferred Stock Dividends
Cash dividends paid on the Company's outstanding preferred stock (par value
$100 per share) were 12% for 1996, 10% for 1995, and 12% for 1994, 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
----------- ------------------ --------
1996 51,277 $ 10.04
1995 47,787 8.39
1994 43,869 10.00
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 are recognized when a receivable exists and expenses are
recognized with the liability is incurred.
25
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 6
DECEMBER 31, 1996
NOTE 2 - NOTES RECEIVABLE
December 31,
-------------------------------------------------------------------
1996 1995
--------------------------- -----------------------------
Debtor Collateral Current Noncurrent Current Noncurrent
- ----------------------------------- ---------- ------- ---------- ------- ----------
Alamo Heights Hardware None $ - $ 5,893 $ - $ 5,893
Breed & Co., Inc. None - 3,089 - 3,089
Broadway Hardware None - 21,333 - 21,333
Commerce Hardware None - 3,053 - -
Decatur Hardware None - 2,340 - 2,340
Casey's Supply None - 1,303 - -
Doug Ashy Building Material None - 1,912 - 1,912
Granbury Farm & Ranch None - 1,219 - 1,219
Handyman Hardware None - 13,165 - 13,165
Highway 6 Ace Hardware Center None - 5,446 - 5,446
Island Hardware None - - - 2,807
J & B Auto Supply & Hardware None - 2,171 - 2,171
Jackson Hardware & Supply Co. None - 2,297 - 2,297
Karl Obst Feed Sales None - 825 - -
Katy Mason Hardware None - - - 3,427
Kilgore Hardware None - - - 3,556
King Feed & Hardware None - 4,255 - 4,255
Liberty Auto Parts & Hardware None - 2,880 - 2,880
Marchand's, Inc. None - 2,830 - 2,830
Mardis Auto Parts & Hardware None - 2,619 - 2,619
Max Squires None - - - 1,471
Mike's Hardware None - 1,511 - 1,511
Overall Lumber None - 3,362 - 3,362
A. Peterson Co. None - 1,993 - -
Pitts Hardware None - 1,772 - 1,772
RBC Hardware None - - - 2,549
Rusty's Plumbing & Hardware None - 1,291 - -
Sawyer Brothers Hardware None - 4,840 - 4,840
Sealy Ace Hardware None - 4,920 - 4,920
Stifter Lumber None - 3,087 - 3,087
Trahan Hardware None - 1,372 - 1,372
Wagner Hardware None - 3,360 - 3,360
Wichita Hardware None - 1,706 - -
----- --------- ---- ---------
TOTAL $ - $ 105,844 $ - $ 109,483
===== ========= ==== =========
26
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 7
DECEMBER 31, 1996
NOTE 3 - NOTES PAYABLE - STOCK
Current Portion Non-Current Portion
December 31, December 31,
Interest Maturity ----------------------- ----------------------
Payee Rate Collateral Date 1996 1995 1996 1995
- ---------------------------- -------- ---------- -------- --------- ---- -------- ---------
Alamo Lumber 6.25% None 2000 $ - $ - $ 3,000 $ 3,000
Arlington Hardware 6.25% None 2000 - - 10,000 10,000
Arlington Hardware 6.25% None 2000 - - 46,400 46,400
Beere Hardware 6.0 % None 1997 1,100 - - 1,100
Eagle Lake Farm & 6.25% None 2001 - - 9,000 -
Hwy Supply
Community Hardware 6.25% None 2000 - - 6,400 6,400
Cleveland Hardware 6.0% None 1997 21,760 - - 21,760
Company Store 6.25% None 2000 - - 9,600 9,600
Cyprus Creek Hardware 6.25% None 2001 - - 14,400 -
D.A.D.S. Wholesale, Inc. 6.25% None 2000 - - 5,000 5,000
Dav's Home Center 6.0% None 1999 - - 8,600 8,600
Gulfway Lumber Co. 6.25% None 2000 - - 12,800 12,800
Hawkins Hardware 6.0% None 1999 - - 2,150 2,150
Hometown Hardware 6.0% None 1997 1,000 - - 1,000
J & B Builders 6.0% None 1998 - - 7,000 7,000
Ken's Hardware 6.0% None 1999 - - 5,000 5,000
King Copeland 6.25% None 2001 - - 14,240 -
McGinty Hardware 6.25% None 2001 - - 19,360 -
Patterson Hardware 6.25% None 1999 - - 12,000 12,000
Rockdale Building Center 6.25% None 2000 - - 3,000 3,000
Space City Hardware 6.0% None 1999 - - 9,000 9,000
Swan Lake Hardware 6.25% None 2000 - - 5,000 5,000
Yeager TV Hardware 6.0% None 1999 - - 2,000 2,000
Yeager TV Hardware 7.0% None 2000 - - 6,000 6,000
--------- --- -------- ---------
$ 23,860 $ - $209,950 $ 176,810
========= ==== ======== =========
Interest only is paid the first four years, and interest and principal are paid
in the fifth year.
Principal payments applicable to the next five years are as follows:
1997 $ 23,860
1998 7,000
1998 38,750
2000 107,200
2001 57,000
--------
$233,810
========
27
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 8
DECEMBER 31, 1996
NOTE 4 - MORTGAGE PAYABLE
On April 2, 1993, Texas Commerce Bank approved a $3,670,868 loan for
the purpose of refinancing the property at 8300 Tewantin Drive. Monthly
principal payments in the amount of $25,684 began April 30, 1993. Interest was
calculated at 7.2% annual rate payable monthly. The mortgage was retired in
August, 1996 by using a portion of the line of credit extended by Texas Commerce
Bank. See Note 10.
The mortgage payable is secured by land and buildings at the present
location on Tewantin Street and classified as follows:
December 31,
----------------------
1996 1995
------- ----------
Current Liabilities $ - $ 308,204
Noncurrent Liabilities $ - $2,515,102
------- ----------
$ - $2,823,306
======= ==========
On October 7, 1994, the board of directors approved the construction of
a 96,715 square foot expansion of the warehouse facility. The expansion was
completed in 1995. Financing had been arranged through NationsBank for the cost
of construction of the addition; however, no financing from this source was used
during construction as a temporary loan was made on the line of credit at Texas
Commerce Bank. This temporary loan was repaid in May, 1995.
NOTE 5 - INCOME TAXES
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes,"
effective January 1, 1993. The adoption of this standard changed the Company's
method of accounting for income taxes from the deferred method to the liability
method.
The major categories of deferred income tax provisions are as follows
(based on FASB 109):
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Excess of tax over book depreciation $1,331,472 $1,313,050 $1,310,183
Allowance for bad debts (7,195) - -
Inventory - ending inventory adjustment for tax recognition of
Sec. 263A Uniform Capitalization Costs (249,239) (208,561) (285,988)
Deferred compensation (199,235) (179,754) (162,762)
---------- ---------- ----------
Total $ 875,803 $ 924,735 $ 861,433
Statutory tax rate 34% 34% 34%
---------- ---------- ----------
Cumulative deferred income tax payable $ 297,773 $ 314,410 $ 292,887
========== ========== ==========
Classified as:
Current liability $ - $ - $ -
Noncurrent liability 297,773 314,410 292,887
---------- ---------- ----------
$ 297,773 $ 314,410 $ 292,887
========== ========== ==========
28
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 9
DECEMBER 31, 1996
NOTE 5 - INCOME TAXES (CONTINUED)
Reconciliation of income taxes on difference between tax and financial
accounting:
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
Principal components of income tax expense Federal:
Current
Income tax paid $ 492,922 $ 637,705 $ 333,427
Carryover of prepayment from prior year 107,078 - 65,323
Current income tax payable 67,741 - -
--------- --------- ---------
$ 667,741 $ 637,705 $ 398,750
Carryover to subsequent year - 107,078 93,377
--------- --------- ---------
Income tax for tax reporting at statutory rate of 34% $ 667,741 $ 530,627 $ 305,373
Deferred
Adjustments for financial reporting:
Depreciation 6,263 975 26,129
263A Uniform capitalization costs (13,831) 26,325 (9,595)
Other (9,069) (5,777) (5,832)
---------- ---------- ---------
Provision for federal income tax $ 651,104 $ 552,150 $ 316,075
========= ========= =========
NOTE 6 - LEASES
Operating Leases
The Company leases certain trucks and warehouse equipment under
long-term operating lease agreements. The leases expire in 1997, 1998,
1999, 2000, 2001, and 2002.
The following is a schedule of future minimum lease payments for
operating leases as of December 31, 1996 and 1995 for the subsequent five
years:
YEAR ENDED
DECEMBER 31
------------------------------------
1996 1995
-------- --------
1996 $ - $496,571
1997 584,407 472,288
1998 546,220 424,156
1999 535,845 400,401
2000 508,881 354,240
2001 352,349 -
29
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 10
DECEMBER 31, 1996
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:
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995
-------- --------
Class of Property
Furniture, computers, and
warehouse equipment $413,506 $385,324
Transportation equipment 39,971 39,971
-------- --------
$453,477 $425,295
Less: Accumulated depreciation 263,078 172,383
-------- --------
$190,399 $252,912
======== ========
The following is a schedule by year of future minimum lease payments for
capital leases.
YEAR ENDED
DECEMBER 31
------------------------------------
1996 1995
-------- --------
1996 $ - $ 92,783
1997 67,002 49,636
1998 39,377 40,523
1999 38,985 36,937
2000 31,506 29,458
2001 13,422 12,571
-------- --------
TOTAL $190,292 $261,908
======== ========
The lease payments are reflected in the Balance Sheet as current and noncurrent
obligations under capital leases of $67,002 and $123,290, respectively. The
estimated interest rates range from 4% to 9%.
Rental Expenses
Rental expenses for the preceding three years are:
1996 $909,912
1995 854,603
1994 749,881
30
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 11
DECEMBER 31, 1996
NOTE 7 - RELATED PARTY TRANSACTIONS
NONE
The Company is owned entirely by its dealers and former 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 8 - RETIREMENT PLAN - DEFINED CONTRIBUTIONS
the company maintains a Profit Sharing and Savings 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. Contributions to the plan are determined by
the Board of Directors. 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 $1,000 of compensation
and one point for each year of service. Employees' interests in the value of the
contributions made to their account first partially vests after three years of
service at 20% and continues to vest an additional 20% each year until fully
vested after seven 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:
1996 $561,318
1995 515,847
1994 400,000
NOTE 9 - STOCK PURCHASE FORMULA
Effective July, 1991, the Board of Directors approved a modification of
the stock investment formula for dealers. Based on annual purchases by dealers,
limits of stock investments are determined by formula to arrive at a maximum
investment in Handy stock. In 1995 and 1996 the Board approved the repurchase of
certain shares from those shareholders who are over-invested in the Company's
capital stock by $4,000 or more. The amount repurchased was the amount of stock
(based on purchase price of $100 per share) equal to one fourth of the
overinvested 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 was raised from $5,000 to $10,000. In
1995 and 1996 the Company repurchased 326 and 168 shares for $32,600 and
$16,800, respectively.
31
HANDY HARDWARE WHOLESALE, INC.
NOTES TO FINANCIAL STATEMENTS, PAGE 12
DECEMBER 31, 1996
NOTE 10 - LINE OF CREDIT
Texas Commerce Bank committed to a $7,500,000 unsecured revolving line
of credit. The commitment expires on April 30, 1998. Borrowing against the line
of credit during the year was as follows.
Balance Borrowing Balance Interest Interest
1-01-96 8-01-96 Payments 12-31-96 Rate Paid
------- ------- -------- -------- ------- --------
$-0- $2,449,898 $612,474 $1,837,424 6.25% $32,695
The line of credit liability is classified as follows:
December 31
------------------------------
1996 1995
---------- ------
Current Liabilities $ 985,883 $ -
Noncurrent Liabilities 851,541 -
----------
$1,837,424 $ -
========== ======
Principal payment applicable to the next five years is as follows:
1997 $367,485
1998 -
1999 -
2000 -
2001 -
The line of credit loan was used to retire the mortgage payable (see Note
4). Terms of the line of credit require monthly payments of accrued interest
with the balance of the loan to be repaid on April 30, 1998. The amount shown as
a current liability is the amount estimated to be paid in 1997.
NOTE 11 - SUBSEQUENT EVENT
None
NOTE 12 - OTHER DISCLOSURES
Costs incurred for advertising are expensed when incurred.
The Company wholesales hardware to its dealers in Texas, Oklahoma,
Louisiana, Alabama, Mississippi, Arkansas, and Florida.
The Company is not a party to any legal proceedings or environmental
clean-up actions that it believes will have a material adverse effect on its
financial position or results of operations.
32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Items 10-13 are incorporated by reference to the Company's Proxy Statement
for its annual stockholders' meeting which will be subsequently filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report
Page
(1) Financial Statements Reference
Auditor's Report................................................14
Balance Sheets at December 31,
1996 and 1995.................................................15
Statements of Income for the
years ended December 31,
1996, 1995 and 1994 ..........................................17
Statements of Stockholders' Equity
for the years ended December 31,
1996, 1995 and 1994 ..........................................18
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 .............................19
Notes to Financial Statements...................................21
(2) Financial Statement Schedules
Schedule V has been omitted because none of the items reflected
thereon was in excess of 1% of total sales for the periods
covered.
All other schedules are omitted because the information is not
required or because the information required is in the financial
statements or notes thereto.
(3) Exhibits
Exhibit
Number
3.1 Articles of Incorporation of Handy Hardware Wholesale,
Inc., as amended (Filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, and incorporated herein by reference).
33
3.2 Bylaws of Handy Hardware Wholesale, Inc. (Filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1983, and incorporated herein by
reference).
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 Employment Agreement, as amended, between Handy Hardware
Wholesale, Inc. and James D. Tipton (Filed as Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1983, and incorporated herein by
reference).
* 10.2 Second Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated July 19, 1985 (Filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1985, and incorporated herein by reference).
* 10.3 Third Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated December 16, 1988 (Filed as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by reference).
* 10.4 Fourth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated September 20, 1991 (Filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
10.5 Split-Dollar Agreement dated November 13, 1991 between the
Company and James D. Tipton (Filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
10.6 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).
10.7 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).
* 10.8 Fifth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated September 7, 1993. (Filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and incorporated herein by reference.)
35
10.9 Loan Agreement dated March 30, 1993, between Texas
Commerce Bank, N.A., and Handy Hardware Wholesale, Inc.
(filed as Exhibit I to the Company's Quarterly Report on
Form 10- Q for the quarter ended June 30, 1993, and
incorporated herein by reference).
10.10 Credit Agreement between Handy Hardware Wholesale, Inc.
("Borrower") and NationsBank of Texas, N.A. ("Lender")
dated November 2, 1994 (with Exhibits "A" and "B"
intentionally omitted).
10.11 Sixth Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated November 14, 1995.
*,** 10.12 Seventh Amendment to the Employment Agreement, as amended,
between Handy Hardware Wholesale, Inc. and James D. Tipton
dated September 30, 1996.
** 11.1 Statement re computation of per share earnings.
- -----------------------
* Management Contract
** Filed herewith.
The Company will furnish to any requesting shareholder a copy of any
exhibit upon payment of $.40 per page to cover the expense of furnishing such
copies. Requests should be directed to Tina S. Kirbie, Secretary and Treasurer,
Handy Hardware Wholesale, Inc., 8300 Tewantin Drive, Houston, Texas 77061.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
December 31, 1996.
(c) Exhibits
Listed in Item 14(a)(3) above.
(d) Financial Statement Schedules
Listed in Item 14(a)(2) above.
36
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.
-------------------------------------
JAMES D. TIPTON
President and Chief Executive Officer
March ___, 1997
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
- -------------------------- President, Chief Executive March __, 1997
James D. Tipton Officer and Director
- -------------------------- Chief Financial and March __, 1997
Tina S. Kirbie Accounting Officer
- -------------------------- Director March __, 1997
Weldon D. Bailey
- -------------------------- Director March __, 1997
Norman J. Bering, II
- -------------------------- Director March __, 1997
Susie Bracht-Black
- -------------------------- Director March __, 1997
Virgil H. Cox
- -------------------------- Director March __, 1997
Samuel J. Dyson
- -------------------------- Director March __, 1997
Robert L. Eilers
- -------------------------- Director March __, 1997
Phil Grothues
- -------------------------- Director March __, 1997
Larry Ward
- -------------------------- Director March __, 1997
Leroy Welborn
37
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/James D. Tipton
-------------------------------------
JAMES D. TIPTON
President and Chief Executive Officer
March 12, 1997
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/James D. Tipton President, Chief Executive March 12, 1997
- -------------------------- Officer and Director
James D. Tipton
/s/Tina S. Kirbie Chief Financial and March 12, 1997
- -------------------------- Accounting Officer
Tina S. Kirbie
/s/Weldon D. Bailey Director March 12, 1997
- --------------------------
Weldon D. Bailey
/s/Norman J. Bering, II Director March 13, 1997
- --------------------------
Norman J. Bering, II
/s/ Susie Bracht-Black Director March 12, 1997
- --------------------------
Susie Bracht-Black
/s/Virgil H. Cox Director March 12, 1997
- --------------------------
Virgil H. Cox
/s/Samuel J. Dyson Director March 12, 1997
- --------------------------
Samuel J. Dyson
/s/Robert L. Eilers Director March 15, 1997
- --------------------------
Robert L. Eilers
/s/Phil Grothues Director March 17, 1997
- --------------------------
Phil Grothues
/s/ Larry Ward Director March 12, 1997
- --------------------------
Larry Ward
/s/Leroy Welborn Director March 12, 1997
- --------------------------
Leroy Welborn
EXHIBIT 10.12
Seventh Amendment to Employment Agreement
Reference is made to an Employment Agreement (hereinafter called
"Agreement") dated July 9, 1980, between Handy Hardware Wholesale, Inc., a Texas
corporation (therein and hereinafter called "Employer"), and James D. Tipton
(therein and hereinafter called "Employee"), the First Amendment to the
Agreement, dated August 18, 1980 (the "First Amendment"), the Second Amendment
to the Agreement, dated July 18, 1985 (the "Second Amendment"), the Third
Amendment to the Agreement, dated December 6, 1988 (the "Third Amendment"), the
Fourth Amendment to the Agreement, dated September 20, 1991 (the "Fourth
Amendment"), the Fifth Amendment to the Agreement, dated September 7, 1993 (the
"Fifth Amendment"), and the Sixth Amendment to the Agreement, dated November 14,
1995 (the "Sixth Amendment").
At this time, Employer and Employee wish to amend the Agreement, the First
Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the
Fifth Amendment and the Sixth Amendment as hereinafter set forth:
NOW THEREFORE, in consideration of the premises, the agreements herein
contained and other good and valuable considerations, Employer and Employee
hereby amend the Agreement, the First Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment, the Fifth Amendment and the Sixth Amendment as
follows:
1. Subparagraph (9) of Paragraph 2.a. is hereby amended to read as
follows:
"(9) For the period from January 1, 1996 to December 31, 1998,
Employer shall pay Employee $20,834.34 per month, payable semi-monthly on
the 15th and last day of each month during this period."
2. Paragraph 3.a. is hereby amended to read as follows:
"a. The term of employment by Employer shall mean the period
commencing August 18, 1980, and terminating December 31, 1998, unless
sooner terminated in accordance with the terms and conditions hereinafter
set forth, provided, however, in the event of the death of Employee, the
term of employment shall end the 60th day after the date of the death of
Employee."
Except as amended above, the Agreement, the First Amendment, the Second
Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment and
the Sixth Amendment remain unchanged and continue in full force and effect.
This Seventh Amendment is executed in multiple counterparts, each of which
shall have the force and effect of an original, this 30th day of September,
1996.
HANDY HARDWARE WHOLESALE, INC.
/s/ James D. Tipton By: /s/ Weldon D. Bailey
- --------------------------- ---------------------------
James D. Tipton Chairman of the Board
EMPLOYEE EMPLOYER
EXHIBIT 11.1
Computation of Per Share Earnings
1996 1995 1994
---------- ---------- ----------
Net Income $1,206,222 $1,016,484 $ 571,710
Dividends Paid $ (515,029) $ (401,155) $ (438,654)
---------- ---------- ----------
$ 691,193 $ 615,329 $ 133,056
Weighted Average Shares Outstanding 56,984 53,253 49,129
Earnings Per Share of Common Stock $ 12.13 $ 11.55 $ 2.71