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 1,187 active Member-Dealers and sales of more than $178,500,000 in 2001. The Company is owned entirely by its Member-Dealers and former Member-Dealers.
Handy Hardware is currently engaged in the sale to its Member-Dealers of products used in retail hardware, building material and home center stores as well as in plant nurseries, marine, industrial and automotive stores. In addition, the Company offers advertising and other services to Member-Dealers. The Company utilizes a central warehouse and office facility located in Houston, Texas, and maintains a fleet of 46 trailers owned by the Company and 50 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, 2001, Handy Hardware's Member-Dealers were located in Texas, Louisiana, Oklahoma, Arkansas, Alabama, Mississippi, Florida, Colorado, New Mexico, 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 large quantity lots, warehouses the merchandise and resells it in smaller lots to its Member-Dealers. During the Company's fiscal year ended December 31, 2001, 723 of the Company's Member-Dealers were located in Texas, 207 in Louisiana, 103 in Oklahoma, 89 in Arkansas, 12 in Alabama, 26 in Mississippi, 10 in Florida, 1 in Colorado, 8 in New Mexico, 6 in Mexico and 2 in Central America. No individual Member-Dealer accounted for more than 2.4% of the sales of the Company during fiscal 2001. The loss of a single Member-Dealer or several Member-Dealers would not have a material adverse effect on the Company.
Often Member-Dealers may desire to purchase products that are not warehoused by the Company. In this instance, Handy Hardware will, when requested, purchase the product from the vendor and have it shipped directly to the Member-Dealer. Direct shipments from the vendor to Member-Dealers accounted for approximately 36% of the Company's total sales during 2001, 37% in 2000 and 39% in 1999, while warehouse shipments accounted for approximately 64% of total sales in 2001, 63% in 2000 and 61% in 1999.
The Company's total sales include 14 different major classes of merchandise. In 2001, 2000 and 1999, the Company's total sales and total warehouse sales were divided among classes of merchandise listed below.
- -------------------------- (1) These amounts include direct sales and warehouse 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 Hardware 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, merchandise shipped from the Company's warehouse arrives at the Member-Dealer's store the same day it is shipped.
In 2001 the Company maintained a 94.5 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 94.8 percent in 2000 and 95.0 percent in 1999.
This slight decline in service level in 2001 can be attributed to crowded work areas during the first six months of the year as the Company awaited the opening of the new expanded warehouse facility. Inventory turnover was 6.3 times during 2001 and 6.1 times in 2000. This rate of inventory turnover is primarily the result of tight control of the product mix, increase in depth of inventory and continued high service level. No policy of inventory shrinkage has been implemented or is planned.
Member-Dealer Services and Advertising
The Company employs a staff of nine full-time account representatives who visit Member-Dealers to advise them on display techniques, location surveying, inventory control, promotional sales, advertising programs and other Member-Dealer services available to them through the Company.
The Company offers Member-Dealers an electronic ordering system that can assist them in placing orders, receiving price changes, tracking promotions and processing invoice transactions electronically. In addition, the Company provides Member-Dealers with an inventory catalog which is available in paper or CD-ROM format.
The Company has participated in newspaper advertising programs, and has assisted in the preparation and distribution of sales circulars utilized by Member-Dealers. The Company has a computerized circular program which allows the Member-Dealer to customize its own unique advertising circular, utilizing its individual inventory and targeting its particular market. In addition, the system tracks available vendor cooperative funds, allowing the Member-Dealer to deduct such cooperative claims from the cost of the circular program. The Company estimates that approximately $866,503 was expended in 2001 for Member-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 2,100 vendors supplied merchandise to the Company during 2001. 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 2.4% of the Company's total purchases during 2001. The Company has not in the past experienced any significant difficulties in obtaining merchandise and does not anticipate any such difficulty in the foreseeable future.
The Company is a member of PRO Group, Inc., of Englewood, Colorado, an independent hardware merchandising group. PRO Group, Inc. is a merchandising organization with 31 wholesale hardware distributors as members. The size of the organization generally provides greater buying power than that of any individual member. The Company became a member of PRO Group, Inc. in order to take advantage of this buying power, which gives PRO Group, Inc. and its members access to potentially lower prices, bigger discounts, extended terms and other purchasing advantages. The Company may participate in other benefits available to PRO Group, Inc. members, but is under no obligation to do so. The Company currently does not participate in such benefits because these benefits generally are already provided by the Company to its Member-Dealers.
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, 2001, the Company had 323 full-time employees, of which 60 were in management or administrative positions and 263 in warehouse, office or delivery operations. Company employees are not represented by any labor unions. The Company believes its employee relations are satisfactory and it has experienced no work stoppage as a result of labor disputes.
Trade Names
The Company has a trade name, "Handy Hardware Stores," that it licenses to Member-Dealers at no additional charge. This trade name has been registered in all the states in which the Company's Member-Dealers are located. This trade name is displayed by many of the Member-Dealers on storefronts and inside stores and is used in advertising programs organized by Handy Hardware. The Company believes that this trade name is useful to its operations, but also believes that the loss of ability to utilize this trade name would not have a material adverse effect upon the business of the Company.
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"), calculated as detailed below. 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, that dealer is required to purchase, in cash, 10 shares of Class A Common Stock at $100 per share. Handy Hardware does not permit a Member-Dealer to purchase more than 10 shares of Class A Common Stock.
Purchases of Class B Common Stock and Preferred Stock by Member-Dealers
Process for Collecting Funds from Member-Dealers to Purchase Class B Common Stock and Preferred Stock. The Company prepares a semi-monthly statement for each Member-Dealer stating that Member-Dealer's total merchandise purchases made during the preceding half month. Total merchandise purchases include both the Member- Dealer's warehouse purchases from the Company's inventory and that Member-Dealer's purchases directly from the manufacturer that are billed through the Company. An additional charge equal to 2% of the Member-Dealer's warehouse purchases from the Company's inventory is invoiced on each statement. The Company's board may, but traditionally does not, include the amount of purchases made by a Member-Dealer directly from the manufacturer when adding the 2% charge. The Company accumulates the funds from this 2% charge for each Member-Dealer to use for its purchase of Class B Common Stock and Preferred Stock. When a Member-Dealer's accumulated funds total at least $2,000, the Company applies $2,000 to the purchase of 10 shares of Class B Common Stock and 10 shares of Preferred Stock and retains any amounts above $2,000 until the accumulated amounts again equal the $2,000 required for additional purchases.
Formula for Calculating the Desired Stock Ownership Level of each Member-Dealer. In April of each year, the Company calculates each Member-Dealer's desired stock ownership level, which must be at least $10,000. The Company bases each Member-Dealer's desired stock ownership level on the amount of its total merchandise purchases made during the previous calendar year. The formula for calculating a Member-Dealer's desired stock ownership level compares the Member-Dealer's actual stock ownership as of December 31 of the previous year to that Member-Dealer's level of merchandise purchases in the prior year. Actual stock ownership includes all shares of Class A Common Stock, Class B Common Stock and Preferred Stock owned by a Member-Dealer, with each share valued at its $100 par value. Each Member-Dealer's desired stock ownership level is calculated based on the applicable formula set forth in the following table:
Example of How to Calculate a Member-Dealer's Desired Stock Ownership Level. On December 31, a Member-Dealer's actual stock ownership totaled $32,000 and total merchandise purchases made from January 1 to December 31 amounted to $300,000. For the first $250,000 of total merchandise purchases, the Member-Dealer should own $1.00 of stock for each $8.00 of total merchandise purchases, or $31,250. For the remaining $50,000 of total merchandise purchases, the Member-Dealer should own an additional $1.00 of stock for each $10.00 of total merchandise purchases, or $5,000, for a total desired stock ownership of $36,250 [$31,250 plus $5,000]. The Member-Dealer's desired stock ownership level of $36,250 is $4,250 higher than the Member-Dealer's actual stock ownership of $32,000 on December 31. Thus, the Company will require this Member-Dealer to make additional purchases of Class B Common Stock and Preferred Stock during the twelve month period beginning April 1 of the following year using the funds the Company collects from the 2% charges on this Member-Dealer's semi-monthly invoice statement.
When Actual Stock Ownership is Less than Desired Stock Ownership. In April of each year, the Company calculates the desired stock ownership level for each Member-Dealer. If the Company determines that a Member-Dealer's actual stock ownership on the previous December 31 was less than its desired stock ownership level, then starting in April the Company will begin to collect funds for the Member-Dealer's purchase of additional Class B Common Stock and Preferred Stock. The Company collects these funds by adding the 2% charge described above to the Member- Dealer's semi-monthly invoice statements. The Company will continue to collect these funds for one year until the next March 31, even if the Member-Dealer attains its desired stock ownership level before March 31. Until funds for a Member-Dealer total $2,000 and are applied to purchase Class B Common Stock and Preferred Stock, the Company uses that Member-Dealer's funds for working capital.
When Actual Ownership is Greater than Desired Ownership. If a Member-Dealer's actual stock ownership at year-end is equal to or exceeds its desired stock ownership level, it is overinvested and is not required to make additional purchases of Class B Common Stock and Preferred Stock during the twelve month period beginning April 1 of the following year. However, a Member-Dealer may voluntarily continue to make additional purchases of Class B Common Stock and Preferred Stock by paying to the Company amounts equal to 2% of the Member-Dealer's warehouse purchases invoiced on each semi-monthly statement.
Repurchases from Overinvested Member-Dealers. During the past ten years, the Company has repurchased certain shares of Class B Common Stock and Preferred Stock from Member-Dealers whose actual stock ownership exceeded their desired stock ownership by $4,000 or more. Each year the Company has offered to repurchase from each overinvested Member-Dealer one-fourth of the excess amount, equally divided between shares of Class B Common Stock and Preferred Stock, repurchased at the full initial sales price of $100 per share. In 2001,
approximately 19% of the shares eligible for repurchase from overinvested Member-Dealers were submitted for repurchase, for which the Company expended $46,200.
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, 2001, the total amount was $245,000 (excluding shares held by the Texas, Alabama and Louisiana State Treasury Unclaimed Property Divisions). The overinvested amount 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. Over the ten years of the repurchase program, the Company has repurchased a total of $447,700 of shares from Member-Dealers. The Company currently intends, but is not required, to continue offering to repurchase from Member-Dealers overinvested amounts eligible for repurchase. 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 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 earnings traditionally vary based on the timing of events which affect the Company's sales. Traditionally, first and third quarter earnings have been negatively affected by the increased level of direct sales (with no markup) resulting from the Company's semiannual trade show always held in the first and third quarters. However, the Company's overall sales levels often increase during the trade shows, which, in some years, offsets the negative effect of the increased level of direct sales. In addition, the timing difference in the receipt of discounts, rebates and miscellaneous income, as well as changes in the weather and economic conditions in the Company's selling territories, can cause the Company's net earnings per quarter to vary substantially from year to year. For example, during 2001 the cumulative effect of timing differences, together with overall economic conditions, contributed to the decrease in 2001 net earnings. Sales during the fourth quarter are often lower, as hardware sales are slowest during the winter months preceding ordering for significant sales in the spring. In most years, however, this decrease in sales is offset by the corrections to inventory made at year-end, causing fourth quarter net earnings to vary from year to year.
Item 2.
Item 2. Properties
The Company's warehouse and administrative and marketing offices are located on 25.2 acres of land in Houston, Texas. During 2001, the Company completed its warehouse expansion project, increasing the size of its warehouse from 297,000 square feet to 538,000 square feet. The building is of tilt wall construction.
In January 1999 the Company purchased an additional 29.96 acres of land located across the street from its warehouse facility. This land was used to relocate the Company's retention pond, to provide additional parking facilities and to allow for the Company's warehouse expansion project. Total capital expenditures for the Company's recently completed expansion project were $8,872,075, of which $4,146,718 (53.9%) was spent in 2001. The entire amount drawn on the Company's line of credit during 2000 to fund the project was repaid by the Company during the course of that year from cash flow. In 2001, the expansion project was partially funded from cash flow. These funds were supplemented by draws on the line of credit during the third quarter, with $3,960,000 outstanding at September 30, 2001. By December 31, 2001, the amount outstanding had been reduced to $2,700,000 by payments from cash flow.
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.
Item 3. Legal Proceedings
To the Company's knowledge, there are no pending or threatened legal proceedings which would have a material effect on the Company's financial position, results of operation or its assets.
Item 4.
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 2001.
PART II
Item 5.
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. Each Member-Dealer enters into a Subscription Agreement with the Company whereby it purchases 10 shares of Class A Common Stock or, in certain cases, 10 shares of Preferred Stock, from the Company. In addition, the Member-Dealer agrees to purchase a minimum number of shares of Class B Common Stock and Preferred Stock pursuant to a formula based upon merchandise purchased by the Member-Dealer from Handy Hardware. 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. All shares of the equity securities of the Company are, to the best knowledge of the Company, owned by Member-Dealers or former Member-Dealers of the Company or affiliates of such Member-Dealers. In the past the Company has acquired all the stock that former Member-Dealers have offered back to the Company, paying par value in cash for the Class A Common Stock and acquiring Class B Common Stock and Preferred Stock at par value on an installment sale basis. There is no assurance that Handy Hardware will maintain such practices, which could be discontinued without notice at any time. Other than as described above, the Company is not aware of the existence of a trading market for any class of its equity securities.
Shares of the Company's Class A Common Stock are the only shares of capital stock with voting rights. A Member-Dealer receives one vote for each share of Class A Common Stock it owns. The number of record holders of each class of the Company's Common Stock at February 28, 2002, was as follows:
Description Number of Holders ----------- -----------------
Class A Common Stock (Voting), $100 par value 1,012 Class B Common Stock (Non-Voting), $100 par value 891
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.
Item 6.
Item 6. Selected Financial Data
The following table provides selected financial information for the five years ended December 31, 2001, derived from financial statements that have been examined by independent public accountants. The table should be read in conjunction with "Management's Discussion and Analysis" below and the financial statements and the notes thereto included in Item 8.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Material Changes in Results of Operations
The U.S. economic environment, which rapidly deteriorated in the fourth quarter of 2000 and eroded even further in the first quarter of 2001, did not fully recover during 2001, despite rebounding slightly in the second and fourth quarters of 2001. Although the overall economic climate for 2001 was not as strong, the Company maintained its steady growth while continuing to meet its goal of providing quality goods to its Member-Dealers at its cost plus a reasonable mark-up charge.
Net Sales. Despite the overall economy and consumer confidence still showing signs of weakness, the stock market remaining below 2000 levels and pressure from retail warehouses continuing, throughout 2001 the Company's sales growth remained fairly constant when compared to the same period in 2000. Net sales in 2001 increased 6.2% ($10,395,444) over 2000 net sales, increasing only slightly less than the 6.4% growth rate ($10,041,797) of net sales in 2000 over 1999.
Net sales growth during 2001 was mainly attributable to the increase in inventory available for sale. Additionally, net sales were increased by the continuing growth in the number of new Member-Dealers, with the Company adding 109 new Member-Dealers during 2001. The Company expects that the addition of these and future Member-Dealers will continue to offset decreased levels of purchases which occur in the selling territories, due to factors such as loss of current Member-Dealers, negative economic factors or poor weather conditions.
Although the annual sales growth has been relatively steady for the past three years, during those periods, sales within individual selling territories began to exhibit wide variances. During 1999 and 2000, several selling territories added a disproportionate number of new Member-Dealers compared to the other selling territories. Therefore, in order to insure that each regional district manager could adequately service all of his Member-Dealers, at the beginning of 2001 the Company reorganized five selling territories by reallocating the Member-Dealers among the Houston Area, the Austin, Brenham and Central Texas Area, the Southern Louisiana Area, the Arkansas Area and the Baton Rouge, New Orleans and Gulf Coast East Area. Because of this reorganization, comparing sales in these selling territories for 2001 versus 2000 and 1999 may not yield meaningful conclusions because the data does not necessarily reflect sales by the same Member-Dealers, or even the same number of Member-Dealers.
The following table summarizes the Company's sales during 2001, 2000 and 1999 by sales territory:
* Indicates a selling territory which was reorganized by the Company in 2001. Therefore year to year comparisons may not yield meaningful results. (1) Includes sales to Member-Dealers in Colorado, Mexico and Central America. (2) Sales for the West Texas and Eastern New Mexico area commenced in June of 2000. (3) Total does not include miscellaneous sales to employees.
Net Material Costs and Rebates. Net material costs during 2001 were $160,236,413, compared to $150,557,247 in 2000 and $141,831,398 in 1999. Net material costs for 2001 increased 6.4% over those costs in 2000, compared to an increase in net material costs in 2000 of 6.2% over 1999 levels. For 2001, the increase in net material costs (6.4%) was slightly more than the increase in net sales (6.2%). For 2000, however, the increase in net material costs( 6.2%) was slightly less than the increase in net sales (6.4%). Net material costs as a percentage of net sales have remained fairly constant, with such costs totaling 89.8% of net sales in 2001 as compared to 89.6% of net sales for the same period in 2000 and 89.7% in 1999. Two factors were primarily responsible for the 0.2% rise in net material costs as a percentage of net sales for 2001. A decrease in amounts of factory rebates and purchase discounts credited against net material costs in 2001, when compared to amounts credited for 2000, led to a higher growth rate in net material costs for 2001. Rebates for 2001 decreased $231,677 or 4.2% (2001 - $5,282,436 vs. 2000 - $5,514,113) while purchase discounts for 2001 decreased $79,235 or 2.3% (2001 - $3,386,270 vs. 2000 - $3,465,505). Additionally, as discussed above, net sales for 2001 experienced a weaker growth rate than in 2000 (6.2% in 2001 compared to 6.4% in 2000). The combined effect caused net material costs for 2001 to represent a larger percentage of net sales for 2001 than net material costs represented in 2000.
Payroll Costs. With unemployment at relatively low levels, the U.S. labor market in 2001 remained tight, as the Company has seen, for example, with the ongoing shortage of qualified truck drivers. The increase in 2001 payroll costs resulted primarily from salary increases needed to attract or retain high-quality employees. In addition, due to a 7.9% increase in warehouse sales in 2001 (2001 - $114,121,098 vs. 2000 - $105,716,840), the Company increased its number of employees by 19% (2001 - 323 vs. 2000 - 272), primarily in the
warehouse and delivery departments. As a result, payroll costs during 2001 increased $1,059,380, a 12.5% increase over 2000 levels, compared to a more modest increase of $682,045 (8.7%) during 2000 over 1999 levels. Despite the appreciable escalation in 2001 payroll costs, payroll costs as a percentage of each of total expenses and net sales remained fairly constant, at approximately 5.3%, 5.1% and 5.0% for 2001, 2000 and 1999, respectively. The continuing stability in payroll costs, especially considering the sustained pressure on wages, has been a result of an ongoing effort to maintain employee productivity.
Other Operating Costs. In 2001, other operating costs increased $546,880 (4.7%) over 2000 levels, while in 2000 the Company experienced a much more sizable increase of $1,334,570 (13.1%) over 1999 levels. The modest increase in other operating costs, when compared to the increase for 2000, was due mainly to a decline of $277,200 in retirement accruals, a reduction of charges of $52,982 for offsite warehouse rental space and a reduction $45,398 in travel and entertainment expenses (a combined reduction of $375,380), which offset the increases in building depreciation, insurance, property taxes and warehouse and delivery expenses (a combined total of $1,069,177). Other operating costs for 2001 were 6.6% of total expenses in 2001, as compared to 6.7% in 2000 and 6.4% in 1999.
More than 97.9% of 2001's increase in other operating costs resulted from increases in warehouse and delivery expenses. Delivery expenses (net of payroll) increased from $3,291,899 in 2000 to $3,550,156 for in 2001, an increase of $258,257 (7.8%). In particular, a 28.8% increase in contract delivery expenses and a 9.8% increase in rental truck expenses to meet increased delivery demand in 2001 resulted in much higher delivery expenses. Further, warehouse expenses during 2001 increased $276,677 (13.2%) as a result of an increase in the cost of workers compensation insurance (35.6%), an increase in the cost of building and equipment repairs (43.7%) and an increase in the cost of warehouse security, which more than doubled (114.4%). These increases in warehouse expenses were only partially offset by an $85,786 (109.4%) increase in freight rebates.
Net Earnings
While net sales for 2001 increased $10,395,444 (6.2%) over net sales in 2000, net material costs for 2001 grew by $9,679,166 (6.4%) from levels in 2000, causing gross margin for 2001 to increase by only $716,278 (4.1%) compared to an increase in gross margin during 2000 of $1,315,948 (8.1%). Additionally, the increase in gross margin during 2001 was largely offset by a considerable increase in payroll costs of $1,059,380 (12.5%) and a notable rise in other operating costs of $546,880 (4.7%). Thus pretax net earnings, combined with other comprehensive losses, decreased 51.0% (from $1,103,351 for 2000 to $541,090 in 2001) while after-tax net earnings, combined with other comprehensive losses, decreased by 51.4%.
Net earnings for 2001 decreased primarily due to factors previously discussed. However, the first quarter of 2001 accounted for approximately 94.2% of the total decline in net earnings for 2001, principally due to a sharp decrease in gross margin, coupled with a considerable increase in payroll costs.
Net earnings per share for 2001 decreased 237.7% as compared to 2000 levels, from net earnings per share of $2.20 in 2000, to a net loss per share of $3.03 in 2001. The 2001 net loss per share is primarily due to 2001 net earnings being approximately one-half of those in 2000, together with an approximate $50,000 increase in dividends accrued in 2001 over 2000 levels. In 2001, dividends accrued exceeded net earnings by $246,662 (63.4%), resulting in a net loss applicable to the shareholders. By comparison, net earnings for 2000 exceeded dividends accrued by $163,739 (27.9%), resulting in net earnings applicable to shareholders.
The variation in the Company's earnings per share from year to year results from the Company's commitment to price its merchandise in order to deliver the lowest cost buying program for Member-Dealers, although this often results in lower net earnings for the Company. Because virtually all of the Company shareholders are also Member- Dealers, these trends benefit the individual shareholders of the Company who purchase the Company's merchandise. Therefore, there is no demand from shareholders that the Company focus greater attention upon earnings per share.
Material Changes in Financial Condition and Liquidity
In 2001, Handy Hardware maintained its financial condition and its ability to generate adequate amounts of cash while continuing to make significant
investments in inventory, warehouse facilities, computer software and hardware, as well as delivery equipment, to better meet the needs of its Member-Dealers. However, net cash provided by the Company's operating activities may vary substantially from year to year. These variations result from (i) the state of the regional economy in the Company's selling territories, (ii) payment terms the Company offers to its Member-Dealers, (iii) payment terms available to the Company from its suppliers, and (iv) the timing of promotional activities such as the Company's fall trade show.
During 2001 there was an increase of $189,308 in the Company's cash and cash equivalents. The Company generated cash flow from operating activities of $1,528,266, compared to $3,112,053 of cash from operations during 2000 and $1,928,910 in 1999. The decrease in cash flow in 2001 was principally attributable to a significant decrease in the combined total of net earnings and other comprehensive losses, as well as major increases in inventory and accounts receivable, as compared to 2000. These negative influences on cash flow were only partially offset by the positive effects on cash flow from increases in accounts payable, depreciation and accrued expenses payable. Net cash provided by financing activities was $3,554,799 in 2001,as compared to only $551,965 in 2000 and $443,170 in 1999. This difference was principally attributable to borrowings on the line of credit to fund the Company's warehouse expansion project, which was completed in 2001, and a decline in the repurchase of stock.
In 2001 net earnings and other comprehensive losses combined were $362,049 less than combined net earnings and other comprehensive losses in 2000 (2001 - $342,800 vs. 2000 - $704,849). This 51.4% decrease was mainly attributable to a 12.5% increase in payroll costs and a 4.7% increase in other operating expenses during 2001, largely due to increased warehouse and delivery expenses, as well as higher costs for insurance and property tax.
In 2001 inventory increased $2,240,641 compared to a modest increase of only $819,972 in 2000. This 173% increase followed the completion of the Company's warehouse expansion project, which added 241,000 square feet of warehouse space during 2001. The Company ended 2001 with approximately 38,431 stockkeeping units.
Accounts receivable in 2001 increased by $1,897,429 as compared to a decrease of $780,104 in 2000, a net variance of $2,677,533. The increase in the levels of accounts receivable during the last year is attributable to extended payment terms offered to Member-Dealers at the fall trade show, the sizable addition of inventory available for purchase following completion of the warehouse expansion, as well as delays in receipts of remittances due to heightened scrutiny of mail following the September 11th tragedy.
Accounts payable increased $3,619,253 during 2001 compared to an increase of $1,963,384 in 2000. This 84.3% increase is primarily attributable to the extended dating terms for payment offered to the Company by suppliers, together with making additional inventory available for purchase by the Company's Member-Dealers.
Depreciation expense in 2001 was $1,312,553 as compared to $1,104,347 during the same 2000 period. The increase of $208,206 in depreciation expense in 2001 is mainly attributable to depreciating larger warehouse capital cost upon completion of the warehouse expansion project, as well as the acquisition of additional racking for storage of expanded inventory.
Accrued expenses payable increased by $572,646 in 2001 as compared to a decrease of $711,940 in the same 2000 period, a net variance of $1,284,586, mainly attributable to an increase in accruals for the spring 2002 market, increased accruals for property taxes and increased accruals for truck rental expenses.
The Company's continuing ability to generate cash to fund its activities is highlighted by three key liquidity measures -- working capital, current ratio (current assets to current liabilities) and long-term debt as a percentage of capitalization, as shown in the following table:
These key liquidity measures have remained relatively constant over the past few years. However, in 2001 these ratios were negatively affected by the capital expenditures, and borrowings on our line of credit, for completion of our warehouse expansion project.
In 2001, the Company expects to further expand its existing customer base in Arkansas, Oklahoma, West Texas, New Mexico, Louisiana and Mississippi. The Company will finance this expansion with anticipated growth in revenues from sales to the new Member-Dealers in these territories, and with receipts from sales of stock to new and current Member-Dealers. The Company expects that expansion in these selling territories will have a beneficial effect on its ability to generate cash to meet its funding needs.
Capital Resources
Over the past five years, the Company's investments in plant and equipment have amounted to more than $12.7 million, and have provided the Company 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 2001, the Company invested $4,884,777 in plant and equipment, with $4,146,718 (84.9%) used for the Company's warehouse expansion project, including capital improvements such as a parking lot security system and a fence ($51,185). The remainder was used to purchase warehouse equipment ($454,131), to upgrade computer equipment and purchase order entry terminals ($135,293), to upgrade the Company's auto fleet ($113,062), to purchase office furniture and equipment ($21,343) and to purchase one remodeled flatbed trailer ($14,230).
In April 2001 the Company's unsecured revolving line of credit with J P Morgan Chase Bank (formerly known as Chase Bank of Texas) was $10,000,000 and its maturity date was extended to April 2003. This line is used from time to time for brief periods for working capital and other financing needs of the Company. At September 30, 2001 there was an outstanding balance on this line of credit of $3,960,000, which had been reduced to $2,700,000 as of December 31, 2001. The current interest rate on funds borrowed on the line of credit is 3.25%.
The Company has budgeted approximately $366,000 for 2002 capital expenditures. Of this amount, the Company will use approximately $61,000 to make building improvements, $80,000 to purchase warehouse equipment, $88,000 to improve the Company's fleet of automobiles, $110,000 to upgrade the Company's computer equipment and $27,000 to upgrade office furniture and equipment.
The Company's cash position of $1,411,096 at December 31, 2001 is anticipated to be sufficient to fund the budgeted year 2002 capital expenditures, although the Company may utilize some third party financing, including the Company's existing credit sources, to increase inventory to meet Member-Dealer needs.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
HANDY HARDWARE WHOLESALE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2001
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders Handy Hardware Wholesale, Inc. Houston, Texas
We have audited the accompanying balance sheets of Handy Hardware Wholesale, Inc., as of December 31, 2001 and 2000, and the related statements of earnings, 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 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, 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 generally accepted accounting principles.
/s/ Clyde D. Thomas & Company, P.C. --------------------------------------- CLYDE D. THOMAS & COMPANY, P. C. Certified Public Accountants
February 6, 2002 Pasadena, Texas
See accompanying summary of accounting policies and notes to financial statements.
See accompanying summary of accounting policies and notes to financial statements.
See accompanying summary of accounting policies and notes to financial statements.
See accompanying summary of accounting policies and notes to financial statements.
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 1 - ACCOUNTING POLICIES - ---------------------------- Nature of Business ------------------ Handy Hardware Wholesale, Inc., (the "Company"), was incorporated as a Texas corporation on January 6, 1961. Its principal executive offices and warehouse are located at 8300 Tewantin Drive, Houston, Texas 77061. The Company is owned entirely by its Member-Dealers and former Member-Dealers.
Handy Hardware Wholesale, Inc., sells to its Member-Dealers products primarily for retail hardware, lumber and home center stores. In addition, the Company offers advertising and other services to Member-Dealers. The Company wholesales hardware to its dealers in Texas, Oklahoma, Louisiana, Alabama, Mississippi, Arkansas, Florida, Colorado, New Mexico, Mexico, and Central America.
Cash ---- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The company maintains a checking account which, at times, exceeds the FDIC coverage of $100,000 normally extended to such accounts. At December 31, 2001, the balance of this account amounted to $1,392,367.
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:
Property, plant and equipment consists of:
Depreciation expense for the year ended December 31, 2001, amounted to $1,312,553 compared with $1,104,347 for the year ended December 31, 2000.
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Changes in property, plant, and equipment for the year ended December 31, 2001, are shown in the following schedule:
Changes in property, plant, and equipment for the year ended December 31, 2000, are shown in the following schedule:
Changes in property, plant, and equipment for the year ended December 31, 1999, are shown in the following schedule:
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Changes in accumulated depreciation for property, plant, and equipment for the year ended December 31, 2001, are shown in the following schedule:
Changes in accumulated depreciation for property, plant, and equipment for the year ended December 31, 2000, are shown in the following schedule:
Changes in accumulated depreciation for property, plant, and equipment for the year ended December 31, 1999, are shown in the following schedule:
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 1 - ACCOUNTING POLICIES (CONTINUED) - --------------------------------------- Income Taxes ------------
Deferred income taxes are provided to reflect the tax effect of temporary differences between financial statement and federal tax reporting arising from the following:
1. Depreciation for federal income tax purposes is computed under the Straight Line Method for assets acquired by December 31, 1986 and the Modified Accelerated Cost Recovery System for assets acquired after December 31, 1986. For financial statement purposes the Straight Line Method and Modified Accelerated Cost Recovery System are being used. The following chart indicates the difference in the depreciation calculations:
2. Deferred compensation is accrued as follows:
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.
The Company accounts for any tax credits as a reduction of income tax expense in the year in which such credits arise.
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
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:
In prior years, earnings per share were calculated using Net Earnings and Other Comprehensive Earnings (Loss) (previously identified as Total Comprehensive Earnings), adjusted for dividends. Beginning in 2001, earnings per share are calculated using net earnings, adjusted for dividends. Net earnings per share of common stock for the years ended December 31, 2000 and 1999 are restated as follows:
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
Preferred Stock Dividends - -------------------------
Cash dividends paid on the Company's outstanding preferred stock (par value $100 per share) were 10% for 2001, 10% for 2000, and 10% for 1999, 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.
Revenue Recognition - -------------------
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. Accordingly, revenues and expenses are accounted for using the accrual basis of accounting. Under this method of accounting, revenues and receivables are recognized when merchandise is shipped or services are rendered, and expenses are recognized when the liability is incurred.
Use of Estimates - ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
NOTE 2 - NOTES RECEIVABLE - -------------------------
Notes receivable reflect amounts due to the Company from its Member-Dealers under deferred payment agreements.
Under the deferred agreement, the Company supplies Member-Dealers with an initial order of General Electric Lamps. The payment for this order is deferred so long as the Member-Dealer continues to purchase General Electric lamps through the Company. If a Member-Dealer ceases to purchase lamp inventory or sells or closes his business, then General Electric bills the Company for the Member-Dealer's initial order and the note becomes immediately due and payable in full to the Company. In September, 2000, virtually the same type of deferred payment agreement was put into effect with Chicago Specialty, a manufacturer of plumbing supplies.
Notes receivable are classified as follows:
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 3 - NOTES PAYABLE - STOCK - ------------------------------
The five year, interest bearing notes payable - stock reflect amounts due from the Company to former Member-Dealers for the Company's repurchase of shares of Company stock owned by these former Member-Dealers. According to the terms of the notes, only interest is paid on the outstanding balance of the notes during the first four years. In the fifth year, both interest and principal are paid. Interest rates on outstanding notes currently range from 5.25% to 7.0%.
Notes payable - stock are classified as follows:
Principal payments applicable to the next five years are as follows:
2002 $ 32,800 2003 324,280 2004 358,200 2005 41,280 2006 26,600 ----------- $ 783,160
NOTE 4- 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):
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 4- INCOME TAXES (CONTINUED) - -------------------------------
Reconciliation of income taxes on difference between tax and financial accounting:
The Company is not exempt from income tax except for municipal bond interest earned in an amount of $2,319.
Handy is not classified as a nonexempt cooperative under the provisions of the Internal Revenue Code and is not entitled to deduct preferred dividends in determining its taxable income.
NOTE 5 - LEASES - ---------------
Operating Leases ----------------
The Company leases certain trucks and trailers under long-term operating lease agreements. Leases expire in each of the years between 2001 and 2006.
The following is a schedule of future minimum lease payments for operating leases as of December 31, 2001 and 2000 for the subsequent five years:
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 5 - LEASES (CONTINUED) - --------------------------
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:
The following is a schedule by year of future minimum lease payments for capital leases.
The lease payments at year-end 2001 are reflected in the Balance Sheet as current and noncurrent obligations under capital leases of $27,371 and $34,235, respectively. The estimated interest rates range from 4% to 9%. Amortization of leased property is included in depreciation expense.
Rental Expenses ---------------
Rental expenses for the preceding three years are:
2001 $ 894,987 2000 1,328,764 1999 1,089,000
NOTE 6 - RELATED PARTY TRANSACTIONS - -----------------------------------
None
The Company is owned entirely by its Member-Dealers and former Member-Dealers. No shareholder is the beneficial owner of more than five percent of any class of the Company's voting securities. Substantially all sales are made to the Member-Dealers (Owners) of the Company.
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 7 - RETIREMENT PLAN - HANDY HARDWARE WHOLESALE, INC. 401(K) PROFIT SHARING PLAN - --------------------------------------------------------------------------------
During 1997, the Company transferred the former Profit Sharing and Savings Plan to a 401(K)Profit Sharing Plan to help employees achieve financial security during their retirement years. Employees are eligible to participate in the plan if they have attained age 21 and have completed one year of service with the Company. The Plan includes a 401(K) arrangement to allow employees to contribute to the Plan a portion of their compensation, known as elective deferrals. Each year, the Company will make matching contributions in the percentage determined by the Board of Directors at its discretion. The Board of Directors may choose not to make matching contributions to the Plan for a particular year. During 2001, the employees could contribute up to 6% of their gross annual compensation with 50% of such contribution matched by the Company. In addition, the employees could contribute an additional 9% with no Company matching contribution. Employees are 100% vested at all times for elective deferrals in the Plan. The Plan permits the Company to contribute a discretionary amount for a plan year designated as qualified nonelective contributions. Company qualified nonelective contributions are allocated to employees in the same proportion that the number of points per employee bears to the total points of all participants. Employees receive one point for each $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 vest after three years of service at 20% and continue 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:
NOTE 8 - STOCKHOLDERS' EQUITY - -----------------------------
Terms of Capital Stock ----------------------
The holders of Class A Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. Holders of Class A Common Stock must be engaged in the retail sale of goods and merchandise, and may not be issued or retain more than ten shares of Class A Common Stock at any time. The holders of Class B Common Stock are not entitled to vote on matters submitted to a vote of shareholders except as specifically provided by Texas law.
The holders of Preferred Stock are entitled to cumulative dividends of not less than 7 percent per year nor more than 20 percent per year of the par value ($100.00 per share) of the shares of Preferred Stock, as fixed by the Board of Directors. The Preferred Stock has a liquidation value of $100 per share. The holders of Preferred Stock are not entitled to vote on matters submitted to a vote of shareholders except as specifically provided by Texas law. The shares of Preferred Stock are not convertible, but are subject to redemption (at the option of the Company) by vote of the Company's Board of Directors, in exchange for $100 per share and all accrued unpaid dividends.
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED) - ----------------------------------------
Capitalization --------------
To become a Handy Hardware Member-Dealer, an independent hardware dealer must enter into a Subscription Agreement with the Company for the purchase of ten shares of Handy Hardware Class A Common Stock, $100 par value per share, and for any additional store, ten shares of Preferred Stock, with an additional agreement to purchase a minimum number of shares of Class B Common Stock, $100 par value per share, and Preferred Stock, $100 par value per share. Class B Common Stock and Preferred Stock are purchased pursuant to a formula based upon total purchases of merchandise by the Member-Dealer from the Company, which determines the "Desired Stock Ownership" for each Member-Dealer. The minimum Desired Stock Ownership is $10,000.
Each Member-Dealer receives from the Company a semimonthly statement of Total Purchases made during the covered billing period, with an additional charge ("Purchase Funds") equal to 2 percent of that Member-Dealer's warehouse purchases until the Member-Dealer's Desired Stock Ownership for that year is attained. Although the Subscription Agreement entitles the Company to collect 2 percent of total purchases, since May 1, 1983, the Board of Directors has determined to collect 2 percent of warehouse purchases only. On a monthly basis, the Company reviews the amount of unexpended Purchase Funds being held for each Member-Dealer. If a Member-Dealer has unexpended Purchase Funds of at least $2,000, the Company applies $2,000 to the purchase of ten shares of Class B Common Stock ($1,000) and ten shares of Preferred Stock ($1,000) each at $100 per share.
Transferability ---------------
Holders of Class A Common Stock may not sell those shares to a third party without first offering to sell them back to the Company. There are no specific restrictions on the transfer of the Company's Class B Common or Preferred Stock.
Membership Termination ----------------------
Following written request, the Company will present to the Board of Directors a Member-Dealer's desire to have his stock repurchased and the Member-Dealer Contract terminated. According to the current procedures established by the Board of Directors, a Member-Dealer's stock may be repurchased according to either of two options.
Option I - The Member-Dealer's Class A Common Stock is repurchased at $100 per share. Any funds remaining in the Member-Dealer's Purchase Fund Account will be returned at the dollar value of such account. Twenty percent or $3,000, whichever is greater, of the total value of the Class B Common and Preferred Stock will be repurchased. The remaining value of the Class B Common and Preferred Stock is converted to a five-year interest-bearing note. During the first four years this note only pays interest. In the fifth year both interest and principal are paid. The interest rate is determined by the Company's Board of Directors at the same time they approve the repurchase.
Option II - Same as Option I except that the remaining value of the Class B Common and Preferred Stock is discounted 15 percent and paid to the Member-Dealer immediately at the time of repurchase.
Stock Repurchase -----------------
In 2001 and 2000, the Board approved the continuation of its program of repurchasing certain shares from those shareholders who are over-invested in the Company's capital stock by $4,000 or more. The amount repurchased each year was the amount of stock (based on purchase price of $100 per share) equal to one fourth of the over-invested amount, equally divided between shares of Preferred Stock and Class B Common Stock. In connection with the repurchase, the minimum required investment in the Company's capital stock is at least $10,000, but may be more based on the shareholder's Desired Stock Ownership level. In 2001 and 2000, the Company repurchased 462 and 217 shares for $46,200 and $21,700 respectively.
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 9 - LINE OF CREDIT - -----------------------
In April, 2001, JP Morgan Chase Bank, formerly known as Chase Bank of Texas, N. A., ("the Bank") amended the Company's existing unsecured $10 million revolving line of credit to provide for an April 30, 2002, maturity date. The interest rate is prime minus one and one-half percent (1.5%) or the London Interbank Offering Rate ("LIBOR") plus one and one-quarter percent (1.25%). The line has been used from time to time for working capital and other financing needs of the Company. At December, 2001, the outstanding balance due on the line of credit at the end of the year was $2,700,000. The total of all the borrowings against and repayments of the line of credit throughout the year were as follows.
Terms of the line of credit require monthly payments of accrued interest with the balance, if any, of the loan to be repaid on April 30, 2002.
NOTE 10 - COMPREHENSIVE EARNINGS - --------------------------------
1. Deferred compensation funded in the amount of $368,829 on the Balance Sheet as a current asset in the amount of $30,736 and as a non-current asset in the amount of $338,093 at December 31, 2001, includes equity securities classified as investments available for sale in the amount of $308,829 at fair market value. The $308,829 includes $22,866 unrealized gain on securities resulting from the increase in fair market value. The cost of the equity securities is $285,963.
2. Changes in Equity Securities:
3. Components of Comprehensive Earnings:
HANDY HARDWARE WHOLESALE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2001
NOTE 10 - COMPREHENSIVE EARNING (CONTINUED) - ------------------------------------------
4. Components of Retained Earnings
NOTE 11 - SUBSEQUENT EVENT - --------------------------
Mr. James Tipton retired as president and chief executive officer in January, 2002. The employment agreement between Mr. Tipton and the Company provides that upon his retirement the Company shall pay Mr. Tipton in 120 substantially equal monthly installments, an amount equal to the fair market value of the assets in the Deferred Compensation Account as of such date. Each monthly installment shall include the earnings on the remaining balance until the Account shall have been paid out in full. Notwithstanding the foregoing, the total amount payable to Mr. Tipton shall be appropriately increased or decreased, as the case may be, but not more than semiannually, to reflect the appreciation or depreciation in value and the net income or loss on the funds which remain invested in the Deferred Compensation Account. The payments to Mr. Tipton will begin in March, 2002.
Following Mr. Tipton's retirement, Mr. Don Jameson, the Company's Executive Vice President and Chief Operating Officer, was elected as President and Chief Executive Officer of the Company.
NOTE 12 - LITIGATION - --------------------
In the opinion of the Company, at December 31, 2001, there was no pending or threatened litigation or environmental clean-up actions that would have a material effect on the financial position or results of operations of the Company at December 31, 2001.
NOTE 13 - OTHER DISCLOSURES - ---------------------------
1. Costs incurred for advertising are expensed when incurred. The amount charged to advertising expense in the prior three years are:
2001 $ 873,059 2000 855,173 1999 766,977
2. Accounts receivable are net of subscriptions receivable and allowance for doubtful accounts in the following amounts.
Item 9.
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 to be held April 22, 2002, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the close of the Company's 2001 fiscal year.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report
(3) Exhibits --------
Exhibit Number -------
3.1 Articles of Incorporation of Handy Hardware Wholesale, Inc., as amended (Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference).
3.2 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).
-> 3.3 Bylaws of Handy Hardware Wholesale, Inc., as amended May 9, 2001.
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 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).
10.3 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).
10.4 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).
10.5 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).
10.6 Amendment and Restatement of Credit Agreement between Handy Hardware Wholesale, Inc. and Texas Commerce Bank, N.A., dated as of April 30, 1996. (Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference).
10.7 Second Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase Bank of Texas, National Association dated April 30, 1998. (Filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
10.8 Third Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase Bank of Texas, National Association dated April 30, 1999. (Filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.)
10.9 Agreement for Wholesale Financing between the Company and Deutsche Financial Services dated March 9, 1999. (Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.)
* 10.10 Tenth Amendment to the Employment Agreement, as amended, between Handy Hardware Wholesale, Inc. and James J. Tipton dated December 27, 2000.
10.11 Fourth Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase Bank of Texas, National Association dated April 30, 2000.
10.12 Form of Dealer Contract (New Mexico and Colorado).
*,-> 10.13 Employment Agreement between Handy Hardware Wholesale, Inc. and Jerry Donald Jameson dated November 13, 2001.
-> 10.14 Fifth Amendment to Amendment and Restatement of Credit Agreement between the Company and Chase Bank of Texas, National Association dated April 30, 2001.
-> 10.15 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, 2001.
(c) Exhibits
Listed in Item 14(a)(3) above.
(d) Financial Statement Schedules
Listed in Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Handy Hardware Wholesale, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HANDY HARDWARE WHOLESALE, INC.
/s/ Don Jameson ------------------------------------- DON JAMESON President and Chief Executive Officer March 7, 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, Handy Hardware Wholesale, Inc., and in the capacities and on the dates indicated.