MOORE HANDLEY INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-14324
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MOORE-HANDLEY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 63-0819773
(State or other jurisdiction of (I.R.S. Employer
Incorporation of organization) Identification No.)

3140 PELHAM PARKWAY, 35124
PELHAM, ALABAMA (Zip Code)
(Address of principal executive offices)

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(205) 663-8011

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE

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
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 (Section 229.405 of this chapter) 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 III of this
Form 10-K or any amendment to this Form 10-K. ____________

As of March 19, 2002, 1,773,943 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of such shares held by
non-affiliates was approximately $1,111,000. For this computation, the
Registrant has excluded the market value of all common stock beneficially owned
by officers and directors of the Registrant and their associates. Such exclusion
does not constitute an admission that any such person is an "affiliate" of the
Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the following documents are incorporated by reference
into Part III of this Annual Report on Form 10-K: the Registrant's definitive
Proxy Statement to be filed with the Commission not later than 120 days after
the end of the fiscal year covered hereby.
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[MOORE HANDLEY INC. LOGO]

March 30, 2002
To Our Shareholders:

In last year's letter we wrote, "We have continued to strengthen the senior
management team and are beginning to implement productivity and cost savings
incentives throughout much of the company. As a result, despite the tough
business economy we are experiencing early in 2001, we believe the year will be
profitable and show continued improvement in expense control and our quality of
service."

As the accompanying 10-K report details, this turned out to be an accurate
prediction. Retail business remained soft for much of the year, as did our sales
to retailers, and our top line ended up slightly behind 2000. Despite this,
improved cost controls and slightly better margins resulted in net income of 44
cents per share, a positive swing of $1.26 from the preceding year's loss of 82
cents per share.

We expect continuing improvement in the current year, as we continue to
execute our business plan. That plan consists of three elements:

1. Using electronic controls to reduce errors and improve productivity
in our logistic functions. We have described the development of this
complex program in previous reports. It has had dramatic results in
reducing error rates, in allowing for individual incentive pay, and in
increasing productivity. The program is ongoing, and we expect it to result
in continuing improvements in the accuracy and cost of the way we do
business.

2. Global sourcing to provide our customers with high-quality product
lines they can sell at prices comparable to the "big boxes". These product
lines carry our registered "Hardware House" trademark and are furnished as
complete merchandising programs including point of purchase displays and
advertising aids. We now have introduced Hardware House(R) product lines in
locks, hand tools, long-handled tools, faucets, bath hardware, lawn and
garden watering products, builders' hardware, lighting, and paint sundries.
More introductions are planned for each of our three marts this year, and
we expect this segment to be an increasingly important part of our (and our
customers') business.

3. Taking our business national. Until a few years ago, Moore-Handley
was mainly a mid-South distributor with some customers elsewhere in the
Southeast. We have been testing means of serving customers outside this
historic trading area, and results from these tests lead us to believe we
can be competitive in any market east of the Rockies. We are now beginning
a systematic effort to attain market penetration in this broad region
beyond our historic trade area, while continuing to serve our core
customers.

We will report our progress in each of these areas as the year goes on.

/s/ WILLIAM RILEY
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William Riley
Chairman and Chief
Executive Officer

/s/ MICHAEL J. GAINES
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Michael J. Gaines
President and Chief Operating Officer

MOORE-HANDLEY, INC.

TABLE OF CONTENTS

NOTE: Copies of the exhibits may be obtained by stockholders upon written
request directed to the Secretary, Moore-Handley, Inc., P. O. Box 2607,
Birmingham, Alabama 35202, and payment of processing and mailing costs.

BUSINESS

Moore-Handley, Inc. is a full-service distributor of plumbing and
electrical supplies, power and hand tools, paint and paint sundries, lawn and
garden equipment and other hardware and building materials products. Our
customers include retail home centers, hardware stores, building materials
dealers, paint stores, combination stores, a limited number of mass
merchandisers, businesses and institutions. We have approximately 1,950 active
customers located throughout the Southeast and approximately 200 customers
elsewhere in the country, which we service from a 488,000 square foot
distribution center located in Pelham, Alabama.

DESCRIPTION OF BUSINESS

In connection with our distribution activities, we offer a wide range of
marketing, advertising and other support services designed to assist customers
in maintaining and improving their market positions. These support services
include computer-generated systems for the control of inventory, pricing and
gross margin, as well as advertising and store installation and design services.

Home centers and hardware and building supply retailers have a continuing
need for a wide variety of items produced by a number of different
manufacturers. Purchasing from us rather than directly from manufacturers allows
independent retailers to simplify the purchasing process and to place smaller
orders on an as-needed basis, thereby reducing their inventory carrying costs
and excess stock risks. Moreover, we purchase products in quantities that enable
us to obtain favorable prices and payment terms, which are reflected in prices
and payment terms to our customers. Finally, the support services we offer to
customers are generally not available from manufacturers, nor can most customers
afford to develop them independently. We believe that our ability to provide a
broad range of merchandise from a single source on a timely basis and at
competitive prices, together with support services, offers our customers a
substantial advantage over purchasing directly from manufacturers.

In recent years there has been a trend toward consolidation in many
wholesale industries, including the grocery, drug and hard goods distribution
businesses. This trend also is apparent in the building supply and hardware
business.

We believe this consolidating trend is attributable to, among other things,
the inability of small distributors to provide a full range of advertising,
store layout and computer-generated pricing and inventory control services
offered by larger entities. We have benefited from this consolidating trend by
increasing our customer base and sales.

PRODUCTS

We closely monitor our items in stock, maintaining a full range of products
while concentrating our efforts on carrying quantities of stock designed to
achieve high inventory turns. The following table indicates the percentage of
net sales by class of merchandise sold by us in the past three years:

The table above also includes sales through our direct shipment program.

1

MARKETING PROGRAMS AND CUSTOMER SERVICES

Sales Force. Our marketing program is implemented primarily by our sales
force of territory managers, each of whom is responsible for specific customers
within a particular geographic area. Territory managers generally call on
customers weekly to check inventories, take orders and perform various in-store
services. In addition, they promote our support services to our customers. Sales
assistants work with certain of the more senior territory managers. At December
31, 2001, we employed 52 territory managers and assistants.

At December 31, 2001, we also employed 6 district managers, each
responsible for supervising and monitoring the activities of territory managers
located in their assigned area. To supplement our primary sales force, we
maintain a telemarketing group that solicits and accepts orders from customers
between regular visits by territory managers.

Customer Services. An important component of our marketing strategy is the
range of support services we offer to our customers. These services, which we
believe not only strengthen our relationship with existing customers but also
attract new customers, are designed to enable customers to improve their
marketing efforts and compete more effectively, thereby increasing our sales.

Our support services include advertising and promotional services, some
costs of which are shared by our suppliers; store installation and design
services, and computer-generated systems for control of inventory, pricing and
gross margin. We also provide a store identification program, as well as
additional promotional services, to selected customers under the name "Hardware
House", a registered trade name owned and developed by us. Similar programs are
available through the national trade name of Pro Group, Inc., a merchandising
and marketing group to which we belong.

As described previously, we have developed a personal computer-based system
for use by our customers, which includes a color-digitized catalog, electronic
ordering and order editing capabilities and additional software programs to
enable the dealer to increase profitability.

Operations. Our ability to fill and deliver small quantity orders for many
different items enables customers to place orders on an as-needed basis, which
in turn reduces our customers' inventory investment and storage costs. Our
"fill-rate" -- the percentage of items shipped within 48 hours of receipt of an
order -- is a measure of the efficiency of our order processing, inventory
control and warehouse operations. Our fill-rate was approximately 95% for each
of the last three years.

Deliveries are made on a regular basis by common and contract carrier and
our fleet of approximately 32 tractors and 62 trailers. Deliveries of
merchandise are normally made within two or three business days after placement
of an order.

Direct Shipment Program. As an additional service to our customers, we
maintain a direct shipment program where customers order and receive shipments
of some products directly from suppliers but are invoiced through us. We act as
principal in the direct sales transactions, pay the supplier for the goods
shipped and assume the risk of loss for the collection of payment from our
customer. This program enables us to distribute products that would be
inconvenient or expensive to stock in our warehouse, such as commodity building
materials, and allows customers to receive discounts that otherwise might not be
available to them. Approximately 35%, 33% and 34% of our net sales were
attributable to purchases under the direct shipment program for 2001, 2000 and
1999, respectively.

CUSTOMERS

We currently service over 2,100 customers, including retail home centers;
hardware stores; building materials dealers; paint stores; combination stores
and a limited number of mass merchandisers, businesses and institutions. No
customer or affiliated group of customers accounted for more than 2% of our net
sales in 2001, 2000 and 1999.

Our current customers are located primarily in Alabama, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee,
Virginia and West Virginia. We also have active customers in 26 other states.
2

From time to time, we receive extended terms from our suppliers, which we
pass on to our customers.

PURCHASING, SUPPLIERS AND INVENTORY MANAGEMENT

We distribute approximately 34,000 items purchased from approximately 1,075
manufacturers. Our ten largest vendors in 2001 accounted for approximately 21.9%
of our total purchases, but no single manufacturer accounted for more than 3.7%
of our total purchases during the year. We have no long-term supply or
distribution agreements with our vendors. Substantially all products of the type
distributed by us are available from a number of manufacturers.

Because inventory constitutes a substantial portion of our total assets,
efficient control of inventory is an important management priority. Our
inventory turns (determined by dividing cost of stocked goods sold by average
monthly inventory) were 4.5 in 2001 and 4.9 in 2000. Turns were lower in 2001
due to a slight decrease in warehouse shipments and an increase in imported
products.

COMPETITION

Our markets and those of our customers are highly competitive. We compete
directly with other national and regional wholesalers (including co-ops),
direct-selling manufacturers and specialty distributors on the basis of
fill-rate, delivery time, price, breadth of product lines, marketing programs
and support services. A number of these competitors are larger and have greater
financial resources than us. The success of our business depends on our ability
to distribute a large volume and variety of products efficiently and to provide
high quality support services.

EMPLOYEES

As of December 31, 2001, we employed 391 persons, of whom 177 are subject
to a collective bargaining agreement expiring in December 2004. We have not
experienced any strikes or work stoppages and consider our relationship with our
employees to be good.

COMMON STOCK INFORMATION

Our common stock trades on The NASDAQ SmallCap Market(SM) under the symbol
MHCO. The following table shows the high and low bid prices by quarter in 2001
and 2000.

For periods prior to December 24, 1998, our common stock was included in
The NASDAQ National Market(R) system and thereafter in The NASDAQ SmallCap
Market(SM). Such over-the-counter quotations reflect inter-dealer quotations,
without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.

On March 20, 2002, there were 179 holders of record of our common stock.
Since a large number of these holders are nominees, we believe beneficial
holders represent a substantially larger number.

We have not paid cash dividends on our common stock as it has been the
policy of the Board of Directors to retain all available earnings to support the
growth and expansion of our business. The payment of dividends on common stock
in the future and the rate of such dividends, if any, will be determined by the
Board of Directors based on our earnings, financial condition and capital
requirements.

3

EXECUTIVE OFFICERS

The executive officers as of March 1, 2002, their ages and their present
positions with us and their principal occupations since 1994 are as follows:

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(1) Mr. Gaines was employed by Grossman's, a home center chain, from 1993 to
1996.

(2) Mr. Mercer was employed by The Young & Vann Supply Company, an industrial
distributor, from 1988 to 2000.

(3) Mr. Seifert was employed by Marvin's, a home center and building materials
chain, from 1994 to 2001.

(4) Mr. Grear was owner and manager of SMB Trading Group, an internet trading
and distribution consulting company, from 1998 to 2000; he was employed by
Caldor, Inc., a mass merchandise retailer, from 1994 to 1998.

Officers are elected annually and serve at the discretion of the Board of
Directors.

PROPERTIES

Our distribution facility and executive offices are located in a single
488,000 square foot facility, which includes a 51,000 square foot mezzanine, on
a 30-acre site in Pelham, Alabama. Until December 2001, we leased the Pelham
facility pursuant to a lease entered into in connection with the issuance of
industrial development bonds. In 2001, we paid an aggregate of $809,000 as final
payments on such lease agreement. We had the option to purchase the Pelham
facility for a nominal cost at the expiration of the lease and did so in the
first quarter of 2002. We believe that our Pelham facility is adequate for our
presently foreseeable needs. We also lease office space in New York, New York
for which lease payments are approximately $79,000 per annum.

4

SELECTED FINANCIAL DATA

5

QUARTERLY FINANCIAL DATA -- UNAUDITED

Typically, sales in the 1st, 2nd and 3rd quarters are higher than in the
4th quarter due to additional sales generated by Dealers' Marts. In 2001 we held
these Marts during the months of February, May and August. The Summer Mart in
2000 was held in June instead of May. The majority of the additional sales are
factory direct shipments that carry a lower gross margin than warehouse
shipments but contribute to our profitability. Sales in the 4th quarter are also
negatively impacted by the effect of seasonal holidays.

6

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. We
evaluate these estimates on an on-going basis using historical experience and
various other assumptions believed to be reasonable under the circumstances. The
results of these evaluations form the basis for making judgments about the
carrying values of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

REVENUE RECOGNITION

We recognize revenues, net of estimated sales returns, discounts and
allowances, when goods are shipped, title has passed, the sales price is fixed
and the collectibility is reasonably assured. We assume no significant
obligations after goods are shipped. Regarding our direct shipment program,
sales are recorded gross in our statements of operations since we act as
principal in the sales transaction and assume the credit risk.

We record provisions for estimated sales returns and allowances on sales in
the same period as the related sales are recorded. These estimates are based on
historical sales returns and analyses of credit memo data and other known
factors. If the historic data we use to calculate these estimates does not
properly reflect future returns and allowances, net sales could either be
understated or overstated.

In September 2000, the Emerging Issues Task Force issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs (EITF 00-10). EITF 00-10
requires shipping and handling fees billed to customers to be classified as
revenue and shipping and handling costs to be either classified as cost of sales
or disclosed in the notes to the consolidated financial statements. Shipping and
handling costs associated with inbound freight are included in cost of sales.
Shipping and handling fees billed to customers are included in delivery,
selling, general and administrative expenses.

Statement of Position 93-7, Reporting on Advertising Costs, requires the
disclosure of advertising costs. We expense the cost of advertising when
incurred. Advertising expense was immaterial and did not have a significant
impact on expenses for the years 2001, 2000 and 1999.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts to reflect expected credit
losses. We provide for bad debts based on collection history and specific risks
identified on a customer-by-customer basis. A considerable amount of judgment is
required to assess the ultimate realization of accounts receivable and the
credit worthiness of each customer. Furthermore, these judgments must be
continually evaluated and updated. If the financial condition of our customers
were to deteriorate, resulting in impairment in their ability to make payments,
additional allowances may be required in future periods.

MERCHANDISE INVENTORY

We state our inventory at the lower of average cost or market. An allowance
for obsolete or excess inventory is maintained to reflect the estimated net
realizable value of the inventory based on current market conditions and the
inventory's recent historical movement and future demands. If actual market
conditions and future demand are less favorable than we project, additional
inventory provisions may be required.

7

INCOME TAXES

Deferred income taxes are provided for temporary differences between
financial and income tax reporting, primarily related to depreciation, inventory
valuation and certain accrued costs. We continuously assess the need for
valuation allowances on recorded deferred tax assets and establish an allowance
when we believe it is more likely than not that the asset will not be realized.

PENSIONS

We have pension benefit costs and credits that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates and expected return on plan assets. We are required to consider current
market conditions, including changes in interest rates, in selecting these
assumptions. Periodic changes in these key assumptions, along with changes in
head count, could have a significant impact on future pension costs and recorded
pension liabilities.

IMPAIRMENT AND DEPRECIATION OF LONG-LIVED ASSETS

We estimate the depreciable lives of property and equipment when purchased
and evaluate those lives when facts and circumstances change. In regards to
impairment, we have early adopted Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Under SFAS No. 144, when
events and circumstances indicate that long-lived assets used in operations may
be impaired and the undiscounted cash flows estimated to be generated from those
assets are less than their carrying values, we record an impairment loss equal
to the excess of the carrying value over the fair value. Long-lived assets held
for disposal are valued at the lower of the carrying value or fair value less
disposal costs. The adoption of SFAS 144 had no significant impact on our
financial condition or results of operations.

RESULTS OF OPERATIONS

Total gross margin for 2001 increased $449,000 or 1.9% from 2000 on a 0.8%
net sales decrease. Total operating expenses decreased $2,720,000 or 11.0%. As a
result of the increase in gross margin and decrease in operating expenses,
operating income increased $3,169,000 to $2,507,000 compared to an operating
loss of $662,000 in 2000.

Total gross margin for 2000 decreased $2,750,000 or 10.2% from 1999 on a
7.9% net sales decrease. Total operating expenses decreased $237,000 or 1%. The
decrease in gross margin was not fully offset by a decrease in expenses due in
part to increases in benefit-related costs of $635,000 and a loss of
approximately $300,000 related to start-up costs for new distribution channels
for us. Operating income decreased $2,513,000 or 135.8% from 1999.

NET SALES

Net sales for 2001 decreased $1,275,000 or 0.8% compared to 2000. The
majority of the decrease was due to territory consolidations initiated in May
2000. Quarterly comparisons for 2001 compared to 2000 were more favorable after
the first quarter due to the effect of the timing of the territory
consolidations.

Net sales for 2000 decreased $13,152,000 or 7.9% compared to 1999 due to
industry-wide trends and the effect of territory consolidations initiated during
the year.

8

The following table sets forth quarterly net sales and changes by quarter
for the past three years.

OPERATIONS

The following table sets forth certain financial data as a percentage of
net sales for the past three years:

GROSS MARGIN

Gross margin percentage increased to 16.1% of sales for 2001 from 15.7% for
2000. The effect of a higher mix of factory direct shipments that carry a lower
margin rate was more than offset by an improved margin rate on a more favorable
mix of warehouse shipments.

Gross margin percentage decreased to 15.7% for 2000 from 16.1% for 1999,
due to a devaluation in commodities (significant price reductions in copper
wire, PVC pipe and polyethylene film) and a decrease in vendor incentives. Also,
in the third and fourth quarters, we became more promotional in an effort to
increase sales.

In 2001 and 2000, there were three Dealers Marts. Most of the sales from
the Dealers' Marts in both 2001 and 2000 were shipped in the first, second and
third quarters and included a higher proportion of factory direct shipments at
lower gross margins. The gross margin rate for the fourth quarter of 2001 was
higher than

9

the first three quarters mainly due to a lower mix of lower margin factory
direct shipments. The gross margin percentage for the fourth quarter of 2000 was
unfavorably impacted by a decrease in incentive rebates received from our
suppliers and a change in physical inventory counts from an annual count to a
weekly count that cycles vendors throughout the year resulting in a lower fourth
quarter positive adjustment.

The following table sets forth gross margin and gross margin percentages
and year-to-year changes by quarter for the last three years.

WAREHOUSE AND DELIVERY EXPENSES

As a percent of warehouse shipments, warehouse and delivery expenses
decreased to 9.3% in 2001 compared to 9.8% in 2000. Continued warehouse
productivity improvements and route consolidations initiated in May of 2000 had
a favorable impact on warehouse and delivery expenses.

Warehouse and delivery expenses decreased $690,000 or 6.49% during 2000, as
compared to 1999, due to the elimination of unprofitable accounts and related
expenses, as well as the maturing of the stocking and shipping system in the
warehouse.

10

The following table shows the trend of warehouse and delivery expenses by
quarter for the last three years.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses decreased $1,818,000 or 12.4% in 2001
compared to the previous year. Reductions were attained during the year due to
sales territory consolidations and general and administrative expense reductions
initiated in May 2000. We also experienced an increase in vendor allowances.

Selling and administrative expenses increased $453,000 or 3.2% in 2000
compared to the previous year. The expense for 2000 includes $300,000 relating
primarily to new channel start-up costs.

The following table shows the quarterly trend of selling and administrative
expenses in the last three years. The fourth quarter expense in 2001 was
favorably affected by the recording of an increase in vendor allowances and in
2000 was affected adversely by an increase in employee benefit expense.

11

INTEREST EXPENSE

In 2001, net interest expense decreased $374,000 or 22.7% compared to 2000.
The decrease was primarily due to a decrease in the prime lending and LIBOR
based rates in 2001. The weighted average interest rate was 7.10% for 2001
compared to 9.46% in 2000.

In 2000, net interest expense increased $243,000 or 17.3% over 1999 due to
higher interest rates and additional borrowings to fund the net operating loss
and to maximize cash discounts on purchases.

INCOME TAXES

For information concerning income tax provisions for 2001, 2000 and 1999,
as well as information regarding differences between effective tax rates and
statutory tax rates, see Note 6 of our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

In 2001, we purchased 58,200 shares of our common stock and issued 13,500
shares under the employee stock purchase plan. During 2000, we purchased 138,000
shares of our common stock and issued 44,700 shares under the employee stock
purchase plan, as discussed in Note 10 of our financial statements.

In 2001, we financed our working capital requirements with a line of credit
under which we may borrow up to 85% of eligible receivables and 50% of eligible
inventory up to $6,000,000. In December 2001, we received an extension to our
working capital line that will become annually renewable in April 2003. In
February 2002, we executed a working capital line increase and extension. This
new line allows for a maximum borrowing of $28,000,000 and is based on 85% of
eligible receivables and 50% of eligible inventory up to $11,000,000. This new
line has a maturity date of April 30, 2005. The borrowings bear interest at the
prime interest rate or, at our option, 2 1/2% over LIBOR (2 1/4% beginning the
2nd quarter of 2002 if we meet certain requirements). Our trade receivables and
inventory secure the borrowings. Actual borrowings under lines of credit and the
average interest rate were as follows during the past three years:

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(1) The average amount outstanding during the period was computed by dividing
the daily outstanding principal balances by the number of days of the year.

(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense including availability fees by the
average borrowings.

(3) The year-end interest rate reflected for 2001 represents the LIBOR rate on
the first $15,000,000 of borrowings. The remaining balance was subject to
the prime rate of 4.75%.

Average borrowings in 2001 increased as a result of our repayment of term
debt and capital expenditures.

12

Average borrowings in 2000 increased from 1999 as a result of the company's
net operating loss and effort to maximize cash discounts on purchases.

In February 2002, we negotiated an amendment to our working capital line
that extended the maturity date to April 2005. We believe our new credit
facility is adequate to finance our current working capital needs. We believe
that we will have sufficient cash flow from operations and available capacity
under the Credit Facility, to fund both our current operations and anticipated
internal expansion, for the current year and for the subsequent two years
remaining on the Credit Facility.

On an historical basis, net cash provided by (used in) operating activities
for fiscal years 2001, 2000 and 1999 was $5,743,000, ($1,680,000) and $746,000,
respectively. The change from 2000 to 2001 was due to the increase in net income
and a significant decrease in current assets (mainly trade accounts
receivable - see discussion below) partially offset by a decrease in accounts
payable and accrued expenses. The change from 1999 to 2000 was mainly due to the
net loss in 2000. The change from 1998 to 1999 was primarily due to changes in
accounts payable and accrued expenses, accounts receivable and inventory.

Trade receivables decreased $6,503,000 or 29.1% and decreased $801,000 or
3.5% at December 31, 2001 and 2000, respectively, compared to the prior year.
Although fourth quarter sales were 2.9% above the same quarter in 2000, trade
receivables were down significantly due the effect of aggressive promotions
offered to our customers in the fourth quarter of 2001. These promotions helped
increase sales by offering incentive rebates to customers instead of extended
dating terms provided in prior years.

Fourth quarter sales in 2000 were lower than the same quarter in 1999 and
consequently trade receivables were also lower.

The following are the number of inventory items carried and average
inventory turns for the last three years.

At December 31, 2001, inventories decreased $245,000 or 1.4% compared to
the prior year, mainly due to fewer year-end purchases made to reach annual
vendor incentive requirements. At December 31, 2000 inventories decreased
$687,000 or 3.8% compared to 1999. The decrease in 2000 was at a rate less than
the annual decrease in sales due to lower than average inventory turns.

Capital expenditures in 2001 were $1,214,000. Depreciation and amortization
for 2001 was $1,261,000. We have no commitments for material capital
expenditures pending for 2002.

INTEREST RATE RISK

The following discussion about our interest rate risk includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.

13

Our principal credit agreement bears a floating interest rate based on the
prime rate or, at our option, 2 1/2% over LIBOR. Accordingly, we are subject to
market risk associated with changes in interest rates. At December 31, 2001,
$17,518,000 was outstanding under the credit agreement. For 2001, the average
principal amount outstanding under the credit agreement was $18,667,000.
Assuming the average amount outstanding under the credit agreement during 2002
is equal to such average amount outstanding during 2001, a 1% increase in the
applicable interest rate during 2002 would result in additional interest expense
of approximately $186,670, which would reduce cash flow and pre-tax earnings
dollar for dollar.

At December 31, 2001 the prime rate was 4.75% and currently it is 4.75%.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

For information concerning the impact of recently issued accounting
standards, see Note 1 to the financial statements.

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this report (other than the
financial statements and other statements of historical fact) are
forward-looking statements. Use of words such as "expects" and "believes"
indicates the presence of forward-looking statements. There can be no assurance
that future developments will be in accordance with management's expectations or
that the effect of future developments on us will be those anticipated by
management. Among the factors that could cause actual results to differ
materially from estimates reflected in such forward-looking statements are the
following:

- competitive pressures on sales and pricing, including those from other
wholesale distributors and those from retailers in competition with our
customers;

- our ability to achieve projected cost savings from our warehouse
modernization program and ongoing cost reduction efforts;

- changes in cost of goods and the effect of differential terms and
conditions available to our larger competitors;

- uncertainties associated with any acquisition we may seek to implement;
and

- changes in general economic conditions, including increases in interest
rates.

14

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Moore-Handley, Inc.

We have audited the accompanying balance sheets of Moore-Handley, Inc. as
of December 31, 2001 and 2000, and the related statements of operations, changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 referred to above present fairly,
in all material respects, the financial position of Moore-Handley, Inc. at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Birmingham, Alabama
March 1, 2002

15

MOORE-HANDLEY, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying notes.
16

MOORE-HANDLEY, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying notes.
17

(THIS PAGE INTENTIONALLY LEFT BLANK)

18

MOORE-HANDLEY, INC.

BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

See accompanying notes.
19

MOORE-HANDLEY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying notes.

20

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

We are a full-service distributor of plumbing and electrical supplies,
power and hand tools, paint and paint sundries, lawn and garden equipment and
other hardware and building materials products. We service customers, throughout
the Southeast, including retail home centers, hardware stores, building
materials dealers, paint stores, combination stores, a limited number of mass
merchandisers, businesses and institutions.

CASH

We consider all highly liquid securities with maturity at the time of
purchase of three months or less to be cash. As of December 31, 2001, we had no
such instruments.

BASIS OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts to reflect expected credit
losses. We provide for bad debts based on collection history and specific risks
identified on a customer-by-customer basis. A considerable amount of judgment is
required to assess the ultimate realization of accounts receivable and the
credit worthiness of each customer. Furthermore, these judgments must be
continually evaluated and updated. If the financial condition of our customers
were to deteriorate, resulting in impairment in their ability to make payments,
additional allowances may be required in future periods.

CERTAIN CONCENTRATIONS

We are a wholesaler of hardware and building materials products and as such
grant credit to our customers, most of whom are independent retailers located in
the Southeast. We perform periodic credit evaluations of our customers'
financial condition and obtain personal guarantees and/or security interests
where we deem necessary. No customer or affiliated group of customers accounted
for more than 2% of net sales for 2001, 2000 and 1999.

As of December 31, 2001, we employed 391 persons of whom 177 are subject to
a collective bargaining agreement expiring in December 2004.

MERCHANDISE INVENTORY

We state our inventory at the lower of average cost or market. An allowance
for obsolete or excess inventory is maintained to reflect the estimated net
realizable value of the inventory based on current market conditions and the
inventory's recent historical movement and future demands. If actual market
conditions and future demand are less favorable than we project, additional
inventory provisions may be required.

OTHER RECEIVABLES

Other receivables consist primarily of vendor rebates and vendor allowances
receivable (see Note 2). We record the credits and payments as a reduction of
cost of sales at the point in time at which the activities required by the
supplier related to the credit or payment are completed, the amount is fixed and
determinable, and collectibility is reasonably assured. Arrangements with
suppliers for volume incentives are typically based

21

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

on a contractual arrangement covering a one-year or less period of time
providing for incentives based on purchasing volumes. We are not obligated to
purchase a specified volume of the product.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and depreciation is computed using
the straight-line method over estimated useful lives as follows:

Buildings................................................... 25-40 years
Equipment................................................... 3-15 years

INCOME TAXES

Deferred income taxes are provided for temporary differences between
financial and income tax reporting, primarily related to depreciation, inventory
valuation and certain accrued costs. We continuously assess the need for
valuation allowances on recorded deferred tax assets and establish an allowance
when we believe it is more likely than not that the asset will not be realized.

IMPAIRMENT AND DEPRECIATION OF LONG-LIVED ASSETS

We estimate the depreciable lives of property and equipment when purchased
and evaluate those lives when facts and circumstances change. In regards to
impairment, we have early adopted Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. Under SFAS No. 144, when
events and circumstances indicate that long-lived assets used in operations may
be impaired and the undiscounted cash flows estimated to be generated from those
assets are less than their carrying values, we record an impairment loss equal
to the excess of the carrying value over the fair value. Long-lived assets held
for disposal are valued at the lower of the carrying value or fair value less
disposal costs. The adoption of SFAS 144 had no significant impact on our
financial condition or results of operations.

PENSIONS

We have pension benefit costs and credits that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates and expected return on plan assets. We are required to consider current
market conditions, including changes in interest rates, in selecting these
assumptions. Periodic changes in these key assumptions, along with changes in
head count, could have a significant impact on future pension costs and recorded
pension liabilities.

STOCK OPTION ACCOUNTING

We account for our stock compensation arrangements under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), under which no compensation cost has been recognized.

INCOME OR LOSS PER COMMON SHARE

Basic net income or loss per share is computed using the weighted average
number of common shares outstanding. Diluted net income or loss per share is
computed using the weighted average number of common shares outstanding plus the
effect of dilutive stock options.

22

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

We recognize revenues, net of estimated sales returns, discounts and
allowances, when goods are shipped, title has passed, the sales price is fixed
and the collectibility is reasonably assured. We assume no significant
obligations after goods are shipped. Regarding our direct shipment program,
sales are recorded gross in our statements of operations since we act as
principal in the sales transaction and assume the credit risk.

We record provisions for estimated sales returns and allowances on sales in
the same period as the related sales are recorded. These estimates are based on
historical sales returns and analyses of credit memo data and other known
factors. If the historic data we use to calculate these estimates does not
properly reflect future returns and allowances, net sales could either be
understated or overstated.

In September 2000, the Emerging Issues Task Force issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs (EITF 00-10). EITF 00-10
requires shipping and handling fees billed to customers to be classified as
revenue and shipping and handling costs to be either classified as cost of sales
or disclosed in the notes to the consolidated financial statements. Shipping and
handling costs associated with inbound freight are included in cost of sales.
Shipping and handling fees billed to customers are included in delivery,
selling, general and administrative expenses and totaled $169,164, $102,255 and
$48,345 in 2001, 2000 and 1999, respectively.

Statement of Position 93-7, Reporting on Advertising Costs, requires the
disclosure of advertising costs. We expense the cost of advertising when
incurred. Advertising expense was immaterial and did not have a significant
impact on expenses for the years 2001, 2000 and 1999.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, effective January 1, 2001. SFAS No. 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either offset against the change in fair value of the hedged
item through earnings or be recognized in other comprehensive income until the
hedged item is recognized in earnings. The adoption of this statement did not
have a significant impact on our financial statements.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 eliminates
amortization of goodwill and requires an impairment-only model to record the
value of goodwill. SFAS No. 142 requires that impairment be tested at least
annually at the reporting unit level, using a two-step impairment test.
Purchased intangibles with indefinite economic lives will be tested for
impairment annually using a lower of cost or market approach. Other intangibles
will continue to be amortized over their useful lives and reviewed for
impairment when the facts and circumstances suggest that they may be impaired.
The adoption of SFAS No. 142 is not expected to have a significant impact on our
financial condition and results of operation.

2. OTHER RECEIVABLES

Other receivables increased $2,130,000 or 64.9% due to an increase in
vendor rebates and allowances receivable. Most of the increase was due to
negotiated increases in vendor payments of rebates and allowances to be
collected after year-end, including Mart booth fees that historically were
charged and collected during the year, but were converted to a fixed vendor
charge or a calculated rebate based on annual volume during 2001.

23

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table illustrates the content of other receivables as
presented in our financial statements:

3. LOANS TO OFFICERS

In 1999, we loaned an officer $60,000. This loan bears interest at our
average rate during the previous year, and the officer is required to make
scheduled interest payments each April 1 over the term of the loan. In addition,
the officer is required to make principal payments equal to one-third of any
annual bonus received. This note is due and payable in full in April 2004. The
principal balance outstanding as of December 31, 2001 was $57,481.

4. LONG-TERM DEBT

Long-term debt at December 31, 2001 and 2000, includes obligations under
capital leases, a term loan and a revolving line of credit all of which
approximates fair value. At December 31, 2000, we also had outstanding long-term
debt for industrial development bonds for our Pelham facility. These bonds
retired in November 2001.

Long-term debt at December 31 consisted of:

We were party to lease agreements with an industrial development board,
which were accounted for as asset purchases. Under the agreements, industrial
development bonds were issued and the proceeds used to purchase land of $534,000
and building and equipment of $8,881,000. We had an unconditional obligation to
pay the principal and interest at 92% of the prime rate on the bonds and had
options to purchase the property for a nominal cost at the expiration of the
lease. The bonds were paid in full as of December 31, 2001. At December 31,
2000, the prime rate was 9.5%. Subsequent to year-end, we exercised our option
to purchase the property for a nominal cost.

We have financed the purchase of transportation and computer equipment with
leases. These leases are being accounted for as capital leases. Annual
installments of principal on all capital leases decrease from approximately
$133,000 in 2001 to $49,000 in 2002. The amortization expense relating to these
leases is combined with depreciation expense.

24

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The assets purchased under capital leases include:

We have financed a $2,000,000 warehouse modernization program with a term
loan payable in equal monthly principal payments through January 2004, together
with interest at 8.25%.

In March 2000, we executed a working capital line and extension. This new
line allows for a maximum borrowing of $24,000,000 and, in addition to 85% of
eligible receivables, it is secured with 50% of eligible inventory up to
$6,000,000. In December 2001, we received an extension to our working capital
line that will become annually renewable in April 2003. We believe this credit
facility is adequate to finance our working capital needs.

Maturity of long-term debt is as follows:

2002........................................................ $ 334,000
2003........................................................ 17,856,000
2004........................................................ 77,000
2005........................................................ 57,000
2006........................................................ 35,000
-----------
$18,359,000
===========

In February 2002, we negotiated an amendment to our working capital line
that extended the maturity date to April 2005. The amendment will allow maximum
borrowings of $28,000,000 and will be secured with 50% of eligible inventory up
to $11,000,000. The interest rate on the facility will remain at prime rate or,
at our option, 2 1/2% over LIBOR (2 1/4% beginning the 2nd quarter of 2002 if we
meet certain requirements).

Interest expense on long-term debt bank loans and capital lease obligations
for the years ended December 31, 2001, 2000 and 1999 was $1,422,000, $1,797,000
and $1,555,000, respectively.

5. COMMITMENTS

Total future rental payments under non-cancelable operating leases that
expire in 2006 are $2,070,000. Annual rentals for the remainder of the lease
terms are as follows:

2002........................................................ $ 765,000
2003........................................................ 573,000
2004........................................................ 515,000
2005........................................................ 213,000
2006........................................................ 4,000
----------
$2,070,000
==========

Rental expense was $1,078,000, $1,082,000 and $1,107,000 in 2001, 2000 and
1999, respectively.

25

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAX

The provision for income tax expense (benefit) consists of the following:

The deferred income tax assets and liabilities are reflected in the balance
sheets as follows:

The provision for income taxes (benefit) differs from the statutory federal
income tax rate as a result of the following:

7. PENSION PLANS

We have two trusteed, noncontributory, qualified defined benefit pension
plans covering substantially all of our employees. Retirement benefits are
provided based on employees' years of service and earnings. Contributions to the
pension plans are based on the amount necessary to fund the net periodic pension
cost. Contributions are limited to the amount that can be currently deducted for
federal income tax purposes and

26

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

are based on the amount necessary to fund the minimum level required by the
Employee Retirement Income Security Act of 1974.

Net periodic pension cost for the last three years included the following
components:

The following table sets forth benefit obligations, the assets of the plans
and the amount of the net prepaid pension cost recognized in the balance sheets
as of December 31, 2001 and 2000.

The assumptions used to measure the projected benefit obligations and the
expected earnings on plan assets at December 31 for the last three years were:

Weighted average discount rate.............................. 7%
Long-term rate of return on assets.......................... 7%
Increase in future compensation levels...................... 4%

In addition, we have 401(k) savings plans covering substantially all
employees. There were no employer contributions made in 2001, 2000 or 1999.

27

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. SEGMENT REPORTING

We operate in one business segment. Revenues from products are as follows:

9. INCENTIVE COMPENSATION PLAN

On May 23, 1991, the stockholders approved the 1991 Incentive Compensation
Plan pursuant to which a maximum aggregate of 460,000 shares of common stock may
be issued to employees and directors until April 12, 2001. On April 26, 2001,
the stockholders approved the 2001 Incentive Compensation Plan pursuant to which
a maximum aggregate of 460,000 shares of common stock may be issued to employees
and directors until March 23, 2011.

We have elected to follow APB No. 25 and related interpretations in
accounting for our employee stock options. Under APB No. 25, because the
exercise price for the employees' stock options equal the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
These options vest either in six months after the date of grant or in equal
annual installments over five years.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, Accounting for Stock-Based Compensation
(Statement No. 123), and has been determined as if we had accounted for our
employee stock options under the fair value method of Statement No. 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
calculations for 2001, 2000 and 1999; risk-free interest rate of 5.7%, 6.1%, and
7%, respectively; dividend yield of 0%; volatility factor of the expected market
price of our common stock of .34, .28, and .31, respectively; and a
weighted-average expected life of the option of 10.0, 10.0, and 10.0 years. The
weighted average grant date fair value of options granted during 2001 was $.57.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information follows:

28

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows the shares under these plans:

The range of exercise prices of the outstanding options and exercisable
options at December 31, 2001 are as follows:

10. COMMON STOCK SUBSCRIPTIONS RECEIVABLE

During 1998, the stockholders approved the Employee Stock Purchase Plan
(the "Plan"). The Plan is designed to encourage and facilitate stock ownership
to its employees by providing a continued opportunity to purchase common stock,
generally through voluntary after-tax payroll deductions. The price per share of
the common stock shall be 85% of the fair market value on the date of the grant
of the option for the qualified stock purchases and shall not be less than 100%
of the fair market value on the date of the grant of the option for the
non-qualified stock options. During 2001, 13,500 shares were issued under this
Plan from treasury stock compared to 44,700 shares in 2000.

29

MOORE-HANDLEY, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the Employee Stock Purchase Plan formed in 1998, certain
individuals issued three-year promissory notes to us whereby the individuals are
obligated to pay annual interest of 8.5% and a balloon principal payment no
later than June 30, 2001. These notes are secured by related shares of common
stock. In June 2001, one note was paid in full and the others were amended to
extend their maturity date to June 2003. The amended promissory notes are also
payable on demand and the interest rates have been reset to our average cost of
borrowing plus 2.25%.

11. EARNINGS PER SHARE

Basic and diluted earnings per share were the same for 2001, 2000 and 1999.
The numerator for basic and diluted earnings per share includes net income
(loss) of $788,000, ($1,553,000) and $299,000 for 2001, 2000 and 1999,
respectively. The denominator for diluted earnings per share includes weighted
average common shares and common stock equivalents outstanding of 1,845,000,
1,903,000 and 1,883,000 for 2001, 2000 and 1999, respectively. The denominator
for basic earnings per share includes weighted average common shares outstanding
of 1,795,000, 1,903,000, and 1,881,000 for 2001, 2000 and 1999, respectively.

30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MOORE-HANDLEY, INC.

By: /s/ GARY C. MERCER
------------------------------------
Gary C. Mercer
Chief Financial Officer
(Principal Accounting and Financial
Officer)

March 30, 2002

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 and in the capacities and on the dates indicated.

31

MOORE-HANDLEY, INC.

INDEX OF EXHIBITS

33

[MOORE-HANDLEY, INC. LOGO]

ANNUAL REPORT

YEAR ENDED DECEMBER 31, 2001

34