-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UBvSKEgEHp9IdZQlFNFl+WWxFE6QU07lY36C8wzhkBc4Q+eL7ndD6moJyKFQOaBW 8dYpjWLYhFyMN326SZlMjQ== 0000950144-99-003775.txt : 19990402 0000950144-99-003775.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003775 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOORE HANDLEY INC /DE/ CENTRAL INDEX KEY: 0000788951 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 630819773 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14324 FILM NUMBER: 99582042 BUSINESS ADDRESS: STREET 1: 133 PEACHTREE STREET STREET 2: SUITE 4710 CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 2056638011 MAIL ADDRESS: STREET 2: 3140 PELHAM PKWY CITY: PELHAM STATE: AL ZIP: 35124 10-K405 1 MOORE HANDLEY INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-14324 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, Pelham, Alabama 35124 - ------------------------------------------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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. X As of March 5, 1999, 1,854,543 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of such shares held by non-affiliates was approximately $1,959,405. 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. - -------------------------------------------------------------------------------- 1 2 - -------------------------------------------------------------------------------- MOORE-HANDLEY, INC. TABLE OF CONTENTS
ITEM NO. PAGE NO. --------- -------- Part I. 1. Business......................................................... 3 2. Properties....................................................... 6 3. Legal Proceedings................................................ None 4. Submission of Matters to a Vote of Security Holders (none during the fourth quarter of 1998).................................... None Part II. 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................ 5 6. Selected Financial Data.......................................... 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 9 7a Quantitative and Qualitative Disclosures about Market Risk....... 12 8. Financial Statements and Supplementary Data...................... 15 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... None Part III. 10. Directors and Executive Officers of the Registrant............... * 11. Executive Compensation........................................... * 12. Security Ownership of Certain Beneficial Owners and Management * 13. Certain Relationships and Related Transactions................... * *Part III (other than Item 401(b) of Regulation S-K, which is included in Item 1 of this Form 10-K) is incorporated by reference to 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. Part IV. 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements........................................ 15 (b) Reports on Form 8-K......................................... None (c) Exhibits Filed.............................................. 28 (d) Financial Statement Schedules filed (Financial statement schedules have been omitted because they are not required, not applicable or the required information is set forth in the Financial Statements or Notes thereto or in the discussion of Liquidity and Capital Resources in Item 7 of this Form 10-K.).......................................... None
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. - -------------------------------------------------------------------------------- 2 3 - -------------------------------------------------------------------------------- BUSINESS Moore-Handley, Inc. (the "Company") 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. The Company's customers include retail home centers, hardware stores, building materials dealers, paint stores, combination stores, a limited number of mass merchandisers, businesses and institutions. The Company has approximately 1,400 active customers located mainly throughout the Southeast which it services from a 488,000 square foot distribution center located in Pelham, Alabama, a suburb of Birmingham, and 20,000 square foot redistribution centers located in Winston-Salem, North Carolina and Ocala, Florida. - -------------------------------------------------------------------------------- DESCRIPTION OF BUSINESS In connection with its distribution activities, the Company offers a wide range of marketing, advertising and other support services which are 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 a distributor 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, distributors purchase products in quantities that enable them to obtain favorable prices and payment terms, which are reflected in prices and payment terms to independent retailers. Finally, the support services the Company offers to customers (in most instances at or near the Company's cost) are generally not available from manufacturers, nor can most customers afford to develop them independently. The Company believes that its 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 its customers a substantial advantage over purchasing directly from manufacturers. In recent years there has been a trend towards 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. The Company believes that 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. The Company has benefitted from this consolidating trend by recruiting experienced territory managers from competitors who have been acquired, gone out of business or reduced market area, thereby increasing the Company's customer base and sales. - -------------------------------------------------------------------------------- PRODUCTS The Company closely monitors its items in stock, maintaining a full range of products while concentrating its 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 the Company in the past three years:
PERCENTAGE OF NET SALES ------------------------------- CLASS OF MERCHANDISE 1998 1997 1996 - -------------------- ----- ----- ----- Electrical and plumbing supplies............................ 22.4% 22.2% 23.2% Home center products (including lawn and garden equipment, paint and accessories, sporting goods and appliances)..... 22.0 17.7 18.3 Building supplies (including aluminum windows and doors, roofing products and lumber).............................. 25.6 24.9 21.9 General and shelf hardware (including power and hand tools, lock sets and wire products).............................. 30.0 35.2 36.6 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
- -------------------------------------------------------------------------------- 3 4 - -------------------------------------------------------------------------------- MARKETING PROGRAMS AND CUSTOMER SERVICES Sales Force. The Company's marketing program is implemented primarily by its 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, the territory managers act as liaison between the customer and the Company to promote the Company's support services. Sales assistants work with certain of the more senior territory managers. At December 31, 1998, there were 70 territory managers and assistants employed by the Company. At December 31, 1998, the Company also employed 8 district managers, each responsible for supervising and monitoring the activities of territory managers located in his assigned area. To supplement its primary sales force, the Company maintains a telemarketing group which solicits and accepts orders from customers between regular visits by territory managers. Customer Services. An important component of the Company's marketing strategy is the range of support services it offers to its customers. These services, which the Company believes not only strengthen its relationships with existing customers but also attract new customers, are designed to enable customers to improve their marketing efforts and compete more effectively, thereby increasing the Company's sales. The Company's support services include advertising and promotional services, some costs of which are shared by the Company's suppliers, store installation and design services, and computer-generated systems for control of inventory, pricing and gross margin. The Company also provides 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 the Company, and similar programs under the national trade name of "Pro". The Company has developed a personal computer-based system for use by its 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. The Company's ability to fill and deliver small quantity orders for many different items enables customers to place orders on an as-needed basis, and in turn, to reduce inventory investment, storage and control costs. The Company's "fill-rate" -- the percentage of items shipped within 48 hours of receipt of an order -- is a measure of the efficiency of its order processing, inventory control and warehouse operations. In 1996 the Company's fill-rate, which has generally exceeded 95%, fell as a result of disruption to operations caused by changes made to the warehouse. By the end of 1997 and continuing throughout 1998 the fill-rate had returned to normal levels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Deliveries are made on a regular basis primarily by the Company's fleet of approximately 40 leased trucks and vans. The Company's sales personnel generally call on customers weekly, and 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 its customers, the Company maintains a direct shipment program under which customers order and receive shipments of some products directly from suppliers but are invoiced through the Company. These programs enable the Company to distribute products that would be inconvenient or expensive to stock at its warehouse, such as commodity building materials, and allow customers to receive discounts that otherwise might not be available to them. In 1998, approximately 36% of the Company's net sales were attributable to purchases under the direct shipment program. - -------------------------------------------------------------------------------- CUSTOMERS The Company currently services approximately 1,400 customers, including retail home centers, hardware stores, building materials dealers, paint stores, combination stores, a limited number of mass merchandisers, businesses and institutions. No customer or affiliated group of customers accounted for more than 1.5% of the Company's 1998 net sales. The Company's current customers are located primarily in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. From time to time the Company receives extended terms from its suppliers which it passes on to its customers. - -------------------------------------------------------------------------------- 4 5 - -------------------------------------------------------------------------------- PURCHASING, SUPPLIERS AND INVENTORY MANAGEMENT The Company distributes approximately 37,250 items purchased from approximately 1,400 manufacturers. The Company's ten largest vendors in 1998 accounted for approximately 22.5% of total Company purchases, but no single manufacturer accounted for more than 4.5% of the Company's total purchases during the year. The Company has no long-term supply or distribution agreements with its vendors. Substantially all products of the type distributed by the Company are available from a number of manufacturers. Because inventory constitutes a substantial portion of the Company's total assets, efficient control of inventory is an important management priority. The Company's inventory turns (determined by dividing cost of stocked goods sold by average monthly inventory) were 5.1 in 1998 and in 1997. - -------------------------------------------------------------------------------- COMPETITION The Company's markets and those of its customers are highly competitive. The Company competes directly with other national and regional wholesalers (including co-ops), with direct-selling manufacturers and with 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 the Company. The Company's business depends on its ability to distribute a large volume and variety of products efficiently and to provide high quality support services. - -------------------------------------------------------------------------------- EMPLOYEES As of December 31, 1998, the Company employed 432 persons, of whom approximately 200 are subject to a collective bargaining agreement expiring in December 2001. The Company has not experienced any strikes or work stoppages and considers its relationship with employees to be good. In December 1998 the Company entered into a three year collective bargaining agreement that provides for gain-sharing with employees based upon warehouse cost reductions. - -------------------------------------------------------------------------------- COMMON STOCK INFORMATION The Company's 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 1998 and 1997.
1998 1997 --------------- --------------- QUARTER ENDED HIGH LOW HIGH LOW - ------------- ---- --- ---- --- March 31,................................................... 2 11/16 2 5/16 3 5/8 2 3/4 June 30,.................................................... 2 3/4 2 3/8 3 3/8 2 3/4 September 30,............................................... 3 1/4 2 1/2 3 2 December 31,................................................ 2 7/8 1 3/4 3 3/8 2 3/8
For periods prior to December 24, 1998, the Company's 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, mark-down or commissions and may not necessarily represent actual transactions. At March 5, 1999, there were 69 holders of record of the Company's common stock. Since a large number of these holders are nominees, the Company believes beneficial holders represent a substantially larger number. The Company has not paid cash dividends on its common stock. It has been the policy of the Board of Directors to retain all available earnings to support the growth and expansion of its 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 the Company's earnings, financial condition and capital requirements. - -------------------------------------------------------------------------------- 5 6 - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company as of March 1, 1999, their ages and their present positions with the Company and their principal occupations since 1993 are as follows:
NAME AGE POSITION ---- --- -------- William Riley...................................... 67 Chairman of the Board and Chief Executive Officer Pierce E. Marks, Jr................................ 70 Director and Member of the Executive Committee Michael J. Gaines.................................. 56 President and Chief Operating Officer(1) L. Ward Edwards.................................... 62 Vice President-- Finance, Treasurer and Secretary Andrew W. Reid..................................... 51 Vice President-- Sales Gregory S. Murphy.................................. 36 Vice President-- Operations(2)
- --------------- (1) Mr. Gaines was employed by Grossman's, a home center chain, from 1993 to 1996; he was employed by Triangle Building Centers, a home center chain, from 1992 to 1993. (2) Mr. Murphy was employed by Decatur-Hopkins, a hardware distributor, from 1982 to 1997. Officers are elected annually and serve at the discretion of the Board of Directors. - -------------------------------------------------------------------------------- PROPERTIES The Company's 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. The Company leases the Pelham facility pursuant to a lease entered into in connection with the issuance of industrial development bonds. The Company has guaranteed payment of the principal and interest on such bonds, and in 1998 paid an aggregate of $938,000 pursuant to such lease agreement. The Company has options to purchase the property for a nominal cost at the expiration of the lease. The Company believes that its Pelham facility is adequate for its presently foreseeable needs. The Company also leases 20,000 square foot warehouse redistribution facilities in Winston-Salem, North Carolina and in Ocala, Florida for monthly rental of approximately $4,700 and $5,300, respectively, and office space in Atlanta, Georgia and New York, New York for which lease payments are approximately $64,000 and $87,000 per annum, respectively. The Atlanta lease expires March 31, 1999, and the office has been closed. - -------------------------------------------------------------------------------- 6 7 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income Statement Data: Net sales............................ $ 159,027 $ 145,730 $ 145,785 $ 142,157 $ 136,236 Cost of sales........................ 144,078 133,114 132,329 127,076 120,945 ---------- ---------- ---------- ---------- ---------- Gross profit......................... 14,949 12,616 13,456 15,081 15,291 Selling and administrative expenses........................... 13,315 13,705 14,140 13,094 12,360 ---------- ---------- ---------- ---------- ---------- Operating income (loss).............. 1,634 (1,089) (684) 1,987 2,931 Interest expense, net................ 1,337 991 908 659 595 ---------- ---------- ---------- ---------- ---------- Income (loss) before income tax (benefit).......................... 297 (2,080) (1,592) 1,328 2,336 Income tax (benefit)................. 136 (664) (520) 520 880 ---------- ---------- ---------- ---------- ---------- Net income (loss).................... $ 161 $ (1,416) $ (1,072) $ 808 $ 1,456 ========== ========== ========== ========== ========== Per share -- basic and diluted data: Net income (loss)............... $ .09 $ (.66) $ (.50) $ .37 $ .65 ========== ========== ========== ========== ========== Weighted average common shares outstanding........................ 1,861,000 2,135,000 2,159,000 2,203,000 2,249,000 ========== ========== ========== ========== ==========
DECEMBER 31, --------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (IN THOUSANDS) Balance Sheet Data: Current assets.................................... $46,105 $44,940 $43,876 $39,597 $42,747 Property and equipment-- net...................... 8,006 8,273 8,771 7,421 7,216 Other assets...................................... 1,164 984 825 797 785 ------- ------- ------- ------- ------- Total assets................................. $55,275 $54,197 $53,472 $47,815 $50,748 ======= ======= ======= ======= ======= Current liabilities............................... $23,408 $21,482 $31,860 $26,316 $29,318 Long-term debt.................................... 17,453 18,397 5,111 3,996 4,699 Deferred income taxes............................. 1,085 1,150 1,129 1,059 988 Stockholders' equity.............................. 13,329 13,168 15,372 16,444 15,743 ------- ------- ------- ------- ------- Total liabilities and stockholders' equity... $55,275 $54,197 $53,472 $47,815 $50,748 ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------- 7 8 - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA -- UNAUDITED QUARTERLY FINANCIAL DATA -- UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------------- ----------------- ----------------- ----------------- 1998 1997 1998 1997 1998 1997 1998 1997 ---- ---- ------- ---- ------- ---- ------- ---- Net sales........................... $40,472 $37,842 $38,012 $35,424 $38,729 $40,000 $41,814 $32,464 Gross profit........................ 3,812 3,217 3,817 2,924 3,538 3,514 3,782 2,961 Net income (loss)................... $ 49 $ (381) $ 58 $ (561) $ (97) $ 45 $ 151 $ (519) ======= ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share -- basic and diluted....................... $ .03 $ (.18) $ .03 $ (.26) $ (05) $ .02 $ .08 $ (.25) ======= ======= ======= ======= ======= ======= ======= =======
Typically, sales in the 1st and 3rd quarters are higher than in other quarters due to additional sales generated by Dealers' Marts. The majority of the additional sales are factory direct shipments which carry a lower gross margin than warehouse shipments so the gross margin percentage for these quarters is lower than in others. In 1998, the regular third quarter Dealers' Mart was held late in the quarter and most of the orders taken at the mart were not shipped until the fourth quarter. Sales and margin in the 2nd quarter are affected to a lesser degree by a special promotion, or in the case of 1998, a smaller third Dealers' Mart. - -------------------------------------------------------------------------------- 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Total gross margin for 1998 increased $2,221,000 or 10% from 1997 on a 9.1% sales increase. At the same time total operating expenses decreased $502,000 or 2.2% despite the sales increase and approximately $805,000 of special expenses related mainly to warehouse improvements and new business start-ups. As a result of the increase in gross margin and decrease in operating expenses, operating income increased $2,723,000 from 1997. Although net sales for 1997 were flat compared to 1996, there was a 6% decrease in warehouse shipments, which was offset by an increase in factory direct shipments, which carry a lower gross margin. The resulting decrease in total gross margin was only partially offset by expense reductions and the net loss for 1997 was $1,416,000. NET SALES Warehouse shipments for 1998 increased $7,586,000 or 8.0%, compared to 1997 and factory direct shipments increased $5,711,000 or 11.2%. Net sales in 1997 were flat compared to 1996. Warehouse shipments decreased 5.6% which was offset by an increase in factory direct shipments. The increase in factory direct shipments as a percent of total sales has been due to the Company's expanded efforts to increase sales of lumber and building materials. Gross margins on direct shipments are lower than gross margins on warehouse shipments; however, expenses related to direct shipments are also lower. While the trend toward factory direct shipments has resulted in decreased gross margins, the Company believes that direct shipments are an important part of its business as a full-service wholesale distributor. The following table sets forth the major elements of net sales in the past three years.
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) Net Sales: Warehouse shipments............................ $102,546 64.5% $ 94,960 65.2% $100,582 69.0% Factory direct shipments....................... 56,481 35.5 50,770 34.8 45,203 31.0 -------- ----- -------- ----- -------- ----- Net Sales.............................. $159,027 100.0% $145,730 100.0% $145,785 100.0% ======== ===== ======== ===== ======== =====
OPERATIONS The following table sets forth certain financial data as a percentage of net sales for the past three years:
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ----- ----- ----- Net sales................................................... 100.0% 100.0% 100.0% ===== ===== ===== Gross margin................................................ 15.3% 15.2% 16.0% Warehouse and delivery expense.............................. 5.9 6.5 6.8 ----- ----- ----- Gross profit................................................ 9.4 8.7 9.2 Selling and administrative expense.......................... 8.4 9.4 9.7 ----- ----- ----- Operating income (loss)..................................... 1.0 (.7) (.5) Interest expense, net....................................... .8 .7 .6 ----- ----- ----- Income (loss) before income tax (benefit)................... .2% (1.4)% (1.1)% ===== ===== =====
GROSS MARGIN The gross margin percentage increased to 15.3% for 1998 from 15.2% for 1997, as the effects of the continuing trend toward increased factory direct shipments in 1998 were more than offset by an improvement in margins on warehouse shipments. The gross margin percentage in 1997 decreased to 15.2% from 16.0% in 1996. The decrease was due to the increase in factory direct shipments as a percent of total sales. - -------------------------------------------------------------------------------- 9 10 Total gross margin dollars in the 1st and 3rd quarters are normally higher than in other quarters, although the gross margin percentages for the first and third quarters are typically lower than in other quarters. This is because of increased sales generated at Dealers' Marts typically held during the 1st and 3rd quarters which include a higher proportion of factory direct shipments at lower gross margins. In 1998, there were three Dealers Marts, most of the sales from which were shipped in the first, second and fourth quarters. The following table sets forth gross margin and gross margin percentages and year-to-year changes by quarter for the last three years.
INCREASE (DECREASE) VS. SAME QUARTER GROSS MARGIN IN PREVIOUS YEAR ------------------------------ ------------------------------ AMOUNT PERCENTAGE AMOUNT PERCENTAGE QUARTER (IN THOUSANDS) OF SALES (IN THOUSANDS) POINTS ------- -------------- ---------- -------------- ---------- 1996 -- 1st........................................ $5,913 15.3% $ 84 (1.0)% 2nd........................................ 5,815 16.2 (109) -- 3rd........................................ 5,955 15.2 148 (.3) 4th........................................ 5,681 17.8 293 1.0 1997 -- 1st........................................ 5,511 14.6 (402) (.7) 2nd........................................ 5,394 15.2 (421) (1.0) 3rd........................................ 5,843 14.6 (112) (.6) 4th........................................ 5,354 16.5 (327) (1.3) 1998 -- 1st........................................ 6,066 15.0 555 0.4 2nd........................................ 6,037 15.9 643 0.7 3rd........................................ 5,960 15.4 117 0.8 4th........................................ 6,260 15.0 906 (1.5)
WAREHOUSE AND DELIVERY EXPENSE The efficiency of the warehouse and delivery operations increased during 1998; however, the net decrease in expenses in 1998 was only $112,000 or 1.2% as compared with 1997, because of the following special items: Cost of resetting warehouse................................. $403,000 Estimated installation and training cost related to a radio frequency stocking and picking system..................... 76,000 Less gain on sale of equipment in excess of similar gain in 1997...................................................... (87,000) -------- Net special expenses........................................ $392,000 ========
In 1997 warehouse and delivery expense decreased by $422,000 or 4.3%, compared to 1996. However, as a percent of warehouse shipments this expense increased slightly The following table shows the trend of warehouse and delivery expense by quarter for the last three years.
INCREASE (DECREASE) WAREHOUSE & DELIVERY EXPENSE VS. SAME QUARTER -------------------------------- IN PREVIOUS YEAR PERCENTAGE ------------------------------ AMOUNT OF WAREHOUSE AMOUNT PERCENTAGE QUARTER (IN THOUSANDS) SHIPMENTS (IN THOUSANDS) POINTS ------- -------------- ------------ -------------- ---------- 1996 -- 1st...................................... $2,203 8.5% $ 221 .5% 2nd...................................... 2,595 10.1 576 2.1 3rd...................................... 2,703 10.3 668 2.2 4th...................................... 2,407 10.5 576 2.8 1997 -- 1st...................................... 2,294 9.4 91 .9 2nd...................................... 2,470 10.3 (125) .2 3rd...................................... 2,329 9.3 (374) (1.0) 4th...................................... 2,393 11.0 (14) .5 1998 -- 1st...................................... 2,254 9.0 (40) (0.4) 2nd...................................... 2,220 8.7 (250) (1.6) 3rd...................................... 2,422 9.5 93 0.2 4th...................................... 2,478 9.3 85 (1.7)
- -------------------------------------------------------------------------------- 10 11 SELLING AND ADMINISTRATIVE EXPENSE Selling and administrative expense decreased $390,000 or 2.8% in 1998 and $435,000 or 3.1% in 1997 compared to the previous year. The expense for 1998 includes $326,000 related to new business start-ups and year 2000 compliance and the expense for 1997 includes $365,000 of severance pay and expenses. The following table shows the quarterly trend of selling and administrative expense in the last three years.
INCREASE (DECREASE) SELLING & ADMINISTRATIVE VS. SAME QUARTER EXPENSE IN PREVIOUS YEAR ------------------------------ ------------------------------ AMOUNT PERCENTAGE AMOUNT PERCENTAGE QUARTER (IN THOUSANDS) OF SALES (IN THOUSANDS) POINTS ------- -------------- ---------- -------------- ---------- 1996 -- 1st.................................... $3,339 8.6% $ 194 (.2)% 3,732 10.4 332 1.1 2nd.................................... 3,593 9.1 211 .1 3rd.................................... 3,476 10.9 309 1.0 4th.................................... 1997 -- 1st.................................... 3,497 9.2 158 .6 3,528 10.0 (204) (.4) 2nd.................................... 3,212 8.0 (381) (1.1) 3rd.................................... 3,468 10.7 (8) (.2) 4th.................................... 1998 -- 1st.................................... 3,374 8.3 (123) (0.9) 3,367 8.9 (161) (0.1) 2nd.................................... 3,358 8.6 146 0.6 3rd.................................... 3,216 7.7 (252) (3.0) 4th....................................
INTEREST EXPENSE Interest expense increased $346,000 or 34.9% in 1998 compared to 1997 as a result of additional borrowing to finance higher average receivables and inventories, the purchase of treasury stock, and the loss incurred in 1997. In 1997, net interest expense increased $83,000 or 9.1% over 1996 due to increased average borrowings to finance higher average trade receivables. EARNINGS PER SHARE In late November 1997, the Company purchased 300,000 shares of its common stock for treasury which reduced the average shares outstanding in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company finances its working capital requirements with a line of credit under which it may borrow up to 85% of eligible receivables. During 1998, this line of credit was renegotiated from $15,000,000 to $20,000,000. The Company believes this credit facility, which matures in 2000, is adequate to finance its working capital needs. Actual borrowings under lines of credit and the average interest rate were as follows during the past three years:
WEIGHTED AVERAGE YEAR-END AVERAGE YEAR-END MAXIMUM INTEREST INTEREST BORROWINGS(1) BORROWINGS BORROWINGS RATE(2) RATE ------------- ----------- ----------- -------- -------- 1996.............................................. $ 6,198,000 $10,450,000 $10,450,000 8.38% 8.25% 1997.............................................. 7,231,000 14,389,000 14,389,000 8.63 8.50 1998.............................................. 12,039,000 14,430,000 15,014,000 8.57 7.75
Average borrowings in 1998 increased from 1997 as a result of higher average receivables and inventories, the purchase of treasury stock, and the loss incurred in 1997. Average borrowings in 1997 increased only slightly from 1996 as average inventory levels were lowered offsetting borrowings required to finance the loss for the year and capital expenditures. Borrowings at December 31, 1997 were $3,939,000 higher than at December 31, 1996 due to higher year-end trade receivables as well as the loss for the year, capital expenditures, the purchase of treasury stock and principal payments on other long-term debt. - -------------------------------------------------------------------------------- 11 12 Typically, borrowings are greatest in December, January and February as average inventories increase as the Company takes advantage of special year-end buying opportunities from its suppliers. Borrowings then decrease as the inventory returns to normal levels. (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. Trade receivables increased $976,000 or 4.2% and $1,237,000 or 5.7% at December 31, 1998 and 1997, respectively, compared to the prior year mainly due to increased sales with extended payment terms in the fourth quarters. The following are the number of inventory items carried and average inventory turns for the last three years.
NUMBER OF AVERAGE ITEMS INVENTORY CARRIED TURNS --------- --------- 1996........................................................ 36,600 5.0 1997........................................................ 36,450 5.1 1998........................................................ 37,250 5.1
At December 31, 1998, inventories increased $672,000 or 3.9% compared to the prior year. At December 31, 1997 inventories decreased $658,000 or 3.7% compared to the prior year. In order to improve the "fill rate" (the percentage of items shipped within 48 hours of the receipt of an order) on customer orders, which decreased due to warehouse disruption, inventories were increased in the latter part of 1996. Accounts payable at December 31, 1998 increased $1,793,000 or 10.1% from December 31, 1997, largely due to extended terms from vendors in connection with the Fall Dealers' Mart. Capital expenditures in 1998 were $1,066,000. Depreciation and amortization for 1998 was $1,220,000. INTEREST RATE RISK The following discussion about the Company's 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. The Company's principal credit agreement and the Company's lease with respect to industrial development bonds issued to finance the Company's principal warehouse distribution facility both bear a floating interest rate based on, in the case of the credit agreement, the prime rate or at the Company's option 2 1/2% over LIBOR, and in the case of the industrial development lease, based on 92% of the prime rate. Accordingly, the Company is subject to market risk associated with changes in interest rates. At December 31, 1998, $14,430,000 was outstanding under the credit agreement and $2,405,000 was outstanding under the industrial development lease agreement. For 1998, the average principal amount outstanding under the credit agreement was $12,039,000. Assuming the average amount outstanding under the credit agreement during 1999 is equal to such average amount outstanding during 1998 and assuming the Company makes its scheduled amortization payments on its industrial development lease of $769,000 in 1999, a 1% increase in the applicable interest rate during 1999 would result in additional interest expense of approximately $60,000, which would reduce cash flow and pre-tax earnings dollar for dollar. IMPACT OF YEAR 2000 The Company is in the process of modifying or replacing those portions of its software and hardware which are used in the ordinary course of the Company's business so that its computer, telephone and other systems will function properly with respect to dates of the year 2000 and thereafter. Based on its current assessment of which portions of the software and hardware must be modified, the Company estimates the cost of year 2000 project will be approximately 200,000, of which $16,000 has been expended through the end of 1998. The Company anticipates that the required modifications will be largely completed in a timely fashion between now and year end and does not anticipate any material interruption of its business stemming from the failure of its software and hardware to be year 2000 compliant. The Company is focusing its efforts on those systems which it believes are essential to its ability to conduct its operations in the ordinary course and anticipates that the modification, replacement and testing of those systems will be largely completed by the end of the third quarter of 1999. - -------------------------------------------------------------------------------- 12 13 The Company has made an assessment of the year 2000 compliance of most of its embedded microchips and other microprocessors in the non-information technology equipment that it uses in its operations. While it is impossible to be certain, the Company presently anticipates that it will be able to repair or replace non-year 2000 compliant equipment as necessary without material disruption to its operations. Even though the Company is in the process of converting its computer and other systems so that they will be year 2000 compliant, it is possible that third parties with whom the Company does business will encounter problems with their systems that may have an adverse impact on the Company. The Company has not ascertained the year 2000 compliance of the approximately 1,400 suppliers of the products it distributes. However, no supplier accounts for more than 4.5% of the Company's total purchases and substantially all products of the type distributed by the Company are available from a number of manufacturers. The Company has no contingency plan for addressing possible disruptions in utility service to the Company stemming from year 2000 problems, such as power, telephone and the like, but will rely on those suppliers to address their year 2000 issues in a timely manner so as to avoid a material disruption of service to the Company. The Company is unable to predict with any certainty the reasonable worst case scenario for disruption to its operations stemming from year 2000 issues. These could range from minor disruption of its operations requiring temporary work-around solutions that may involve additional overtime or other unanticipated costs, to the potential for lost sales and additional costs to repair or replace equipment if the Company encounters greater disruption than is currently anticipated. 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. Words such as "expects", "believes", "estimates", "anticipates", "in the process", "could", "target" and "objective" indicate 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 the Company 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 the Company's customers; - the Company's ability to achieve projected cost savings from its warehouse modernization program and ongoing cost reduction efforts; - changes in cost of goods and the effect of differential terms and conditions available to larger competitors of the Company; - uncertainties associated with any acquisition the Company may seek to implement; - changes in general economic conditions, including interest rates; and - impact of year 2000 issues on the Company's operations, including issues relating to the compliance or lack thereof by third-party suppliers. - -------------------------------------------------------------------------------- 13 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, 1998 and 1997, 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, 1998. 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 referred to above present fairly, in all material respects, the financial position of Moore-Handley, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Birmingham, Alabama February 19, 1999 - -------------------------------------------------------------------------------- 14 15 MOORE-HANDLEY, INC. STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 - -------------------------------------------------------------------------------------------- Net sales....................................... $159,027,000 $145,730,000 $145,785,000 Cost of merchandise sold........................ 134,704,000 123,628,000 122,421,000 Warehouse and delivery expense.................. 9,374,000 9,486,000 9,908,000 ------------ ------------ ------------ Cost of sales................................... 144,078,000 133,114,000 132,329,000 ------------ ------------ ------------ Gross profit.................................... 14,949,000 12,616,000 13,456,000 Selling and administrative expense.............. 13,315,000 13,705,000 14,140,000 ------------ ------------ ------------ Operating income (loss)......................... 1,634,000 (1,089,000) (684,000) Interest expense, net........................... 1,337,000 991,000 908,000 ------------ ------------ ------------ Income (loss) before provision for income tax (benefit).................................... 297,000 (2,080,000) (1,592,000) Income tax (benefit)............................ 136,000 (664,000) (520,000) ------------ ------------ ------------ Net income (loss)............................... $ 161,000 $ (1,416,000) $ (1,072,000) ============ ============ ============ Per share -- basic and diluted data: Net income (loss) per common share........... $ .09 $ (.66) $ (.50) ============ ============ ============ Weighted average common shares outstanding... 1,861,000 2,135,000 2,159,000 ============ ============ ============
See accompanying notes. - -------------------------------------------------------------------------------- 15 16 MOORE-HANDLEY, INC. STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss)...................................... $ 161,000 $(1,416,000) $(1,072,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization..................... 1,220,000 1,268,000 1,176,000 Provision for doubtful accounts................... 280,000 224,000 500,000 Gain on sale of equipment......................... (173,000) (86,000) (10,000) Deferred income taxes............................. (104,000) (20,000) 30,000 Change in assets and liabilities: Trade and other receivables.................. (2,240,000) (1,601,000) (1,356,000) Merchandise inventory........................ (672,000) 658,000 (2,362,000) Prepaid expenses............................. (159,000) 17,000 (28,000) Prepaid pension cost......................... (191,000) (166,000) (54,000) Loan to officer.............................. -- -- 19,000 Accounts payable and accrued expenses........ 1,851,000 34,000 2,679,000 Refundable or accrued income taxes........... 632,000 238,000 (551,000) ----------- ----------- ----------- Total adjustments............................ 444,000 566,000 43,000 ----------- ----------- ----------- Net cash provided by (used in) operating activities................................. 605,000 (850,000) (1,029,000) Cash flows from investing activities: Capital expenditures................................... (1,066,000) (792,000) (2,519,000) Proceeds from sale of equipment........................ 297,000 115,000 10,000 ----------- ----------- ----------- Net cash used in investing activities............. (769,000) (677,000) (2,509,000) Cash flows from financing activities: Net borrowings (repayments) under bank loans........... -- (10,450,000) 2,700,000 Principal payments under long-term debt................ (1,214,000) (1,065,000) (978,000) Net borrowings (repayments) under line of credit....... 42,000 14,389,000 2,258,000 Additional long-term borrowings........................ 303,000 -- -- Purchase of treasury stock............................. -- (788,000) (43,000) ----------- ----------- ----------- Net cash (used in) provided by financing activities...................................... (869,000) 2,086,000 3,937,000 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents..................................... (1,033,000) 559,000 399,000 Cash and cash equivalents at beginning of year.............. 1,155,000 596,000 197,000 ----------- ----------- ----------- Cash and cash equivalents at end of year.................... $ 122,000 $ 1,155,000 $ 596,000 =========== =========== ===========
Supplemental Disclosures of Cash Flow Information
1998 1997 1996 ---- ---- ---- Cash paid (refunded) during the year for: Interest............................................... $ 1,352,000 $ 929,000 $ 867,000 Income taxes........................................... (605,000) (882,000) 29,000
See accompanying notes. - -------------------------------------------------------------------------------- 16 17 (This page intentionally left blank) 17 18 MOORE-HANDLEY, INC. BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, 1998 and 1997
ASSETS 1998 1997 - ----------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents............................ $ 122,000 $ 1,155,000 Trade receivables, net of allowance for doubtful accounts of $1,150,000 in 1998 and $1,100,000 in 1997................................................ 24,228,000 23,252,000 Other receivables.................................... 3,073,000 2,089,000 Merchandise inventory................................ 17,707,000 17,035,000 Prepaid expenses..................................... 385,000 226,000 Refundable income taxes.............................. -- 632,000 Deferred income taxes................................ 590,000 551,000 ------------ ------------ Total current assets........................... 46,105,000 44,940,000 Prepaid pension cost....................................... 1,146,000 955,000 Property and equipment: Land................................................. 718,000 718,000 Buildings............................................ 9,475,000 9,288,000 Equipment............................................ 9,309,000 9,603,000 Less accumulated depreciation........................ (11,496,000) (11,336,000) ------------ ------------ Net property and equipment........................... 8,006,000 8,273,000 Deferred charges, net of accumulated amortization of $80,000 and $71,000 in 1998 and 1997, respectively...... 18,000 29,000 ------------ ------------ Total Assets............................................... $ 55,275,000 $ 54,197,000 ============ ============
See accompanying notes. - -------------------------------------------------------------------------------- 18 19
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 - ---------------------------------------------------------------------------------------- Current liabilities: Accounts payable...................................... $19,633,000 $17,640,000 Accrued payroll....................................... 535,000 437,000 Other accrued liabilities............................. 1,994,000 2,234,000 Long-term debt due within one year.................... 1,246,000 1,171,000 ----------- ----------- Total current liabilities....................... 23,408,000 21,482,000 Long-term debt, less amount due within one year............. 17,453,000 18,397,000 Deferred income taxes....................................... 1,085,000 1,150,000 Stockholders equity: Common stock, $.10 par value: 10,000,000 shares authorized, 2,510,040 shares issued.................. 251,000 251,000 Common stock subscribed, 112,000 shares subscribed.... 11,200 -- Capital in excess of par value........................ 13,165,800 12,883,000 Retained earnings..................................... 2,826,000 2,665,000 Less: Treasury stock at cost, 655,497 shares in 1998 and 1997............................................. (2,631,000) (2,631,000) Common stock subscriptions receivable.............. (294,000) -- ----------- ----------- Total stockholders' equity......................... 13,329,000 13,168,000 ----------- ----------- Total Liabilities and Stockholders' Equity.................. $55,275,000 $54,197,000 =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- 19 20 MOORE-HANDLEY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the Years Ended December 31, 1998, 1997 and 1996
COMMON STOCK COMMON STOCK SUBSCRIBED -------------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995........................ 2,510,040 $251,000 -- $ -- Purchase of shares for treasury..................... -- -- -- Net loss............................................ -- -- -- -- --------- -------- ------- ------- Balance at December 31, 1996........................ 2,510,040 251,000 -- -- Purchase of shares for treasury..................... -- -- -- -- Net loss............................................ -- -- -- -- --------- -------- ------- ------- Balance at December 31, 1997........................ 2,510,040 251,000 -- -- Net income.......................................... -- -- -- -- Common stock subscribed............................. -- -- 112,000 11,200 --------- -------- ------- ------- Balance at December 31, 1998........................ 2,510,040 $251,000 112,000 $11,200 ========= ======== ======= =======
See accompanying notes. - -------------------------------------------------------------------------------- 20 21 - --------------------------------------------------------------------------------
CAPITAL IN TREASURY SHARES COMMON STOCK TOTAL EXCESS OF RETAINED ---------------------- LOANS TO SUBSCRIPTIONS STOCKHOLDERS' PAR VALUE EARNINGS SHARES AMOUNT OFFICERS RECEIVABLE EQUITY - -------------------------------------------------------------------------------------------------------------------- $12,883,000 $ 5,153,000 345,497 $(1,800,000) $(43,000) $ -- $16,444,000 -- -- 10,000 (43,000) 43,000 -- -- -- (1,072,000) -- -- -- -- (1,072,000) ----------- ----------- ------- ----------- -------- --------- ----------- 12,883,000 4,081,000 355,497 (1,843,000) -- -- 15,372,000 -- -- 300,000 (788,000) -- -- (788,000) -- (1,416,000) -- -- -- -- (1,416,000) ----------- ----------- ------- ----------- -------- --------- ----------- 12,883,000 2,665,000 655,497 (2,631,000) -- -- 13,168,000 -- 161,000 -- -- -- -- 161,000 282,800 -- -- -- -- (294,000) -- ----------- ----------- ------- ----------- -------- --------- ----------- $13,165,000 $ 2,826,000 655,497 $(2,631,000) $ -- $(294,000) $13,329,000 =========== =========== ======= =========== ======== ========= ===========
See accompanying notes. - -------------------------------------------------------------------------------- 21 22 - -------------------------------------------------------------------------------- MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. Significant Accounting Policies Cash and Cash Equivalents The Company considers all highly liquid securities with maturities at the time of purchase of three months or less to be cash equivalents. Basis of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles 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. Certain Concentrations The Company is a wholesaler of hardware and building material products and as such grants credit to its customers, most of whom are independent retailers located in the Southeast. The Company performs periodic credit evaluations of its customers' financial condition and obtains personal guarantees and/or security interests where it deems necessary. Merchandise Inventory Merchandise inventory is stated at the lower of weighted average cost or market. 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.............................. 25-31.5 years Equipment.............................. 3-10 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. Deferred Charges Deferred charges, consisting of financing costs, are amortized over the term of the indebtedness. Stock Option Accounting The Company accounts for its stock compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25), and intends to continue to do so. Income per Common Share Basic net income per share is based on the weighted average number of common shares outstanding and net income. Diluted net income per share is based on the weighted average of common shares outstanding plus the effect of dilutive employee stock options and net income. Revenue and Expense Recognition The Company recognizes revenues when goods are shipped and recognizes expenses when incurred. Any shared costs with its suppliers such as advertising and promotional items are offset against the specific expense. Segment Reporting Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. See note 6. Reclassification Certain amounts in the financial statements for the year ended December 31, 1997 have been reclassified to conform with the 1998 presentation. 2. Long-Term Debt Long-term debt at December 31, 1998 and 1997 includes industrial development bonds, obligations under capital leases financing transportation equipment, - -------------------------------------------------------------------------------- 22 23 - -------------------------------------------------------------------------------- a term loan and a revolving line of credit all of which approximate fair value. The Company is a party to lease agreements with an industrial development board which are being 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. The Company has an unconditional obligation to pay the principal and interest at 92% of prime (7.75% December 31, 1998) on the bonds and has options to purchase the property for a nominal cost at the expiration of the lease. The Company has financed the purchase of certain transportation and computer equipment with leases. The leases, which include interest, are being accounted for as capital leases. Total capital leases outstanding at December 31, 1998 and 1997 were $2,818,000 and $3,441,000, respectively. Annual installments of principal on all capital leases decrease from approximately $966,000 in 1999 to $830,000 in 2001. The assets purchased under capital leases include:
1998 1997 ----------- ---------- Land, building and equipment.................. $10,052,000 $9,749,000 Less accumulated amortization............... (5,058,000) (4,744,000) ----------- ---------- Net land, building and equipment............... $ 4,994,000 $5,005,000 =========== ==========
The amortization expense relating to these leases is included in depreciation expense. The Company has financed a $2,000,000 warehouse modernization program with a term loan payable in equal monthly principal payments thru January 2004, together with interest at 8.25%. The balance of this term loan outstanding as of December 31, 1998 and 1997 was $1,452,000, and $1,738,000 respectively. On August 7, 1997 the Company entered into a credit agreement, as amended on September 24, 1998, under which it may borrow up to 85% of eligible receivables up to a maximum of $20,000,000, of which $14,430,000 was outstanding at December 31, 1998. The borrowings bear interest at the prime interest rate or, at the Company's option, 2 1/2% over LIBOR, and are secured by the Company's trade receivables. The Company is charged a commitment fee of 1/2% on the unused portion of the line of credit. Unless extended this line of credit becomes due in August 2000. This credit facility replaced the Company's lines of credit with banks totaling $10,000,000 and one of which was amended in the second quarter of 1997 to avoid a violation of a debt covenant. Maturities of long-term debt during the next five years are as follows: 1999............................ $ 1,246,000 2000............................ 15,694,000 2001............................ 1,161,000 2002............................ 286,000 2003............................ 286,000 Thereafter...................... 26,000 ----------- $18,699,000 ===========
Interest expense on long-term debt bank loans and capital lease obligations for the years ended December 31, 1998, 1997 and 1996 was $1,419,000, $1,140,000 and $1,022,000, respectively. 3. Commitments Total future rental payments under non-cancelable operating leases which expire in 2006 are $5,065,000. Annual rentals for the remainder of the lease terms are as follows: 1999............................ $ 984,000 2000............................ 892,000 2001............................ 845,000 2002............................ 576,000 2003............................ 494,000 Thereafter...................... 1,274,000 ---------- $5,065,000
Rental expense was $780,000, $384,000 and $394,000 in 1998, 1997 and 1996, respectively. 4. Income Tax The provision for income tax expense (benefit) consists of the following:
1998 1997 1996 -------- --------- --------- Current: Federal......................... $240,000 $(633,000) $(542,000) State........................... -- (11,000) (8,000) Deferred.......................... (104,000) (20,000) 30,000 -------- --------- --------- $136,000 $(664,000) $(520,000) ======== ========= =========
The current year tax provision reflects the tax benefit of a state net operating loss carry forward of approximately $10,000. - -------------------------------------------------------------------------------- 23 24 - -------------------------------------------------------------------------------- The deferred income tax liabilities (assets) are reflected in the balance sheets as follows:
1998 1997 --------- --------- Current Assets Accrued health insurance and vacation costs................................... $(147,000) $(151,000) Allowance for doubtful accounts......... (426,000) (409,000) Inventory costs capitalized for tax purposes.............................. 41,000 83,000 Reserve for write down of excess inventory............................. (58,000) (74,000) --------- --------- (590,000) (551,000) Non-current liabilities Depreciation...... 750,000 815,000 Provision for pension expenses.......... 335,000 335,000 --------- --------- 1,085,000 1,150,000 --------- --------- Net liability............................. $ 495,000 $ 599,000 ========= =========
The provision for income taxes (benefit) differs from the statutory federal income tax rate as a result of the following:
PERCENT OF PRE-TAX INCOME ------------------ 1998 1997 1996 ---- ---- ---- Statutory U. S. income tax rate................ 34% (34)% (34)% Increase in rates resulting from: State income taxes-- net of federal benefit.................................... -- -- -- Non-deductible meals and entertainment....... 8 -- -- Other non-deductible items................... 4 2 1 -- --- --- Effective income tax rate...................... 46% (32)% (33)% == === ===
5. Pension Plan The Company has two trusteed, noncontributory, qualified defined benefit pension plans ("Pension Plans") covering substantially all employees of the Company. 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 are based on the amount necessary to fund the minimum level required by the Employee Retirement Income Security Act of 1974. The Company's net periodic pension cost for the last three years included the following components:
1998 1997 1996 -------- -------- -------- Service cost-- benefits earned during the period.............. $290,000 $270,000 $273,000 Interest cost on projected benefit obligation.......... 432,000 392,000 356,000 Actual return on assets.............. (457,000) (475,000) (260,000) Net amortization and deferral............ 119,000 143,000 (30,000) -------- -------- -------- Net periodic pension cost................ $384,000 $330,000 $339,000 ======== ======== ========
The following table sets forth benefit obligations, the assets and liabilities of the plans and the amount of the net prepaid pension cost recognized in the Company's balance sheets as of December 31, 1998 and 1997.
1998 1997 ---------- ---------- Change in benefit obligation: Benefit obligation at beginning of year....... $6,272,000 $5,728,000 Service costs.............. 290,000 270,000 Interest costs............. 432,000 392,000 Benefits paid.............. (198,000) (118,000) ---------- ---------- Benefit obligation at end of year................. 6,796,000 6,272,000 ---------- ---------- Change in plan assets: Fair value of plan assets at beginning of year.... 6,594,000 5,775,000 Actual return on plan assets.................. 457,000 475,000 Company contributions...... 552,000 462,000 Benefits paid.............. 198,000 118,000 ---------- ---------- Fair value of assets at end of year................. 7,405,000 6,594,000 ---------- ---------- Funded status of plan...... 609,000 322,000 Unrecognized obligations at transition.............. 254,000 362,000 Unrecognized net actuarial loss.................... 187,000 163,000 Unrecognized prior service cost.................... 96,000 108,000 ---------- ---------- Prepaid benefit cost....... $1,146,000 $ 955,000 ========== ==========
The assumed rates 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%
The Company has 401(k) savings plans covering substantially all employees. Contributions by the Company are discretionary and no contributions were made in 1998, 1997 or 1996. - -------------------------------------------------------------------------------- 24 25 - -------------------------------------------------------------------------------- 6. Segment Reporting The Company operates in one business segment. Revenues from products are as follows:
1998 1997 1996 ------------ ------------ ------------ Electrical and plumbing supplies............... $ 35,622,000 $ 32,352,000 $ 33,822,000 Home center products (including lawn and garden equipment, paint and accessories, sporting goods and appliances)............ 34,986,000 25,794,000 26,679,000 Building supplies (including aluminum windows and doors, roofing products and lumber)................ 40,711,000 36,287,000 31,927,000 General and shelf hardware (including power and hand tools, lock sets and wire products).............. 47,708,000 51,297,000 53,357,000 ------------ ------------ ------------ $159,027,000 $145,730,000 $145,785,000 ============ ============ ============
7. 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. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options. Under APB 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 or in equal annual installments over five years. Pro forma information regarding net income and earnings per share is required by FASB Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. 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 assumptions for 1998 and 1997; risk-free interest rate of 7%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of .33; a weighted-average expected life of the option of 4.0 and 5.3 years, respectively; and a weighted average grant date fair value of options granted of $0.95 and $1.46, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1998 1997 1996 -------- ----------- ----------- Pro forma net income (loss)... $101,000 $(1,463,000) $(1,161,000) ======== =========== =========== Pro forma net income (loss) per share -- basic and diluted..................... $ .05 $ (.69) $ (.54) ======== =========== ===========
The effect of FASB Statement 123 on pro forma net income or loss in 1998, 1997 and 1996 is not likely to be representative of the effects on pro forma net income or loss in future years. As of December 31, 1998 the following options have been granted under this plan: A. Options to officers for 80,000 shares at $3.75 per share (market value at date of grant) exercisable through April 2001 in four equal annual installments beginning April 12, 1992. Options for 40,000 shares were forfeited in 1997 and 30,000 shares have been exercised. B. Options to Independent Directors for 12,000 shares at $5.00 per share (canceled in 1998), 4,000 shares at $4.75 per share, 4,000 shares at $4.875 per share, 4,000 at $3.50 per share, 4,000 at $3.375 per share and 4,000 at $2.438 per share (market value at date of grant) exercisable through May 2006. C. Options to Officer-Directors for 110,000 shares at $5.36 per share (approximately 143% of market value at date of grant) exercisable, if at all, through April 2001 upon the first to occur of (i) the Company earning $.85 or more per share in any fiscal year during the term of the option; (ii) three months before the tenth anniversary of the date of grant of the option if the holder is still an employee; or (iii) the date of retirement of the holder if he is age 70 or older. Options for 100,000 shares were cancelled in 1998. D. Options to Officer for 100,000 shares at $5.50 per share (market value at date of grant) exercisable through June, 2005, in five installments of 18,181 shares and one installment of 9,095 beginning in June 1997. These options were canceled in 1997. E. Options to Officers and employees for 150,000 shares were granted in 1996 at $3.375 to $3.625 per share (market value at date of grant) exercisable through 2006 in five equal installments beginning in 1997. These options have a weighted average exercise price of approximately $3.48. Of these, 75,000 have been canceled. F. Options to Officers for 125,000 shares were granted in 1997 at $2.375 to $3.267 per share (market value at date of grant) exercisable through 2007 in - -------------------------------------------------------------------------------- 25 26 - -------------------------------------------------------------------------------- five equal installments beginning in 1998. These options have a weighted average exercise price of approximately $2.91. G. Options to Officers and employees for 40,000 shares were granted in 1998 at $1.875 to $2.532 per share (market value at date of grant) exercisable through 2008 in five equal installments beginning in 1999. These options have a weighted average exercise price of approximately $2.12. During 1998, the stockholders approved the Employee Stock Purchase Plan (the "Plan"). The Plan is designed to encourage and facilitate stock ownership by 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 options 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. 8. Common Stock Subscriptions Receivable In connection with the Employee Stock Purchase Plan formed in 1998, certain individuals issued three year promissory notes to the Company 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 the related shares of common stock. 9. Earnings Per Share Basic and diluted earnings per share were the same for 1998, 1997 and 1996. The numerator for basic and diluted earnings per share includes net income (loss) of $161,000, $(1,416,000) and $(1,072,000) for 1998, 1997 and 1996, respectively. The denominator for diluted earnings per share includes weighted average common shares outstanding of 1,863,000, 2,135,000 and 2,159,000 for 1998, 1997 and 1996, respectively. The denominator for basic earnings per share includes weighted average common shares outstanding of 1,861,000, 2,135,000 and 2,159,000 for 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- 26 27 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/ L. WARD EDWARDS ---------------------------------- L. Ward Edwards Vice President, Treasurer and Secretary and Director (Principal Accounting and Financial Officer) March 29, 1999 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.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ WILLIAM RILEY Chairman of the Board, Director and Chief March 27, 1999 - ----------------------------------------------------- Executive Officer William Riley /s/ PIERCE E. MARKS, JR. Director March 29, 1999 - ----------------------------------------------------- Pierce E. Marks, Jr. /s/ MICHAEL J. GAINES President and Chief Operating Officer March 27, 1999 - ----------------------------------------------------- Michael J. Gaines /s/ L. WARD EDWARDS Vice President, Treasurer and Secretary and March 29, 1999 - ----------------------------------------------------- Director (Principal Accounting and Financial L. Ward Edwards Officer) /s/ MICHAEL B. STUBBS Director March 30, 1999 - ----------------------------------------------------- Michael B. Stubbs /s/ RONALD J. JUVONEN Director March 29, 1999 - ----------------------------------------------------- Ronald J. Juvonen
- -------------------------------------------------------------------------------- 27 28 MOORE-HANDLEY, INC. INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3(a) Restated Certificate of Incorporation of Company, filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. 3(a)-1 Amendment to Restated Certificate of Incorporation dated May 7, 1987, filed as Exhibit 3(a)-1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. 3(b) By-laws of the Company, filed as Exhibit 3(d) to the Company's Registration Statement on Form S-1 (Reg. No. 33-3032) and incorporated herein by reference. 3(b)-1 Article VII of By-laws of the Company, as amended May 7, 1987 filed as Exhibit 3(b)-1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. 10.1 Lease Agreement, dated as of December 30, 1986, between the Company and the Industrial Development Board of the Town of Pelham (the "Board"), filed as Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. 10.2 Guarantee Agreement, dated as of December 30, 1986, between the Company and the First Alabama Bank of Birmingham, as Trustee ("Trustee"), filed as Exhibit 10(dd) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. 10.3 Mortgage and Trust Indenture, dated as of December 30, 1986, between the Trustee and the Board, filed as Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference. 10.4 The Moore-Handley, Incorporated Salaried Pension Plan, effective January 1, 1985, as amended, filed as Exhibit 10(n) to the Company's Registration Statement on Form S-1 (Reg. No. 33-3032) and incorporated herein by reference. 10.5 Amendment No. 4 to The Moore-Handley Incorporated Salaried Pension Plan, dated February 10, 1992 but effective January 1, 1987, filed as Exhibit 10(n)-1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.6 Amendment No. 5 to The Moore-Handley Incorporated Salaried Pension Plan, dated February 10, 1992 but effective January 1, 1988, filed as Exhibit 10(n)-2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.7 Amended and Restated Moore-Handley, Inc. Salaried Pension Plan, dated February 10, 1992 but effective January 1, 1989, filed as Exhibit 10(n)-3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.8 Amendment No. 6 to The Moore-Handley Incorporated Salaried Pension Plan, dated February 10, 1992, filed as Exhibit 10(n)-4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.9 Amendment No. 2 to The Moore-Handley Incorporated Salaried Pension Plan, dated December 29, 1994, filed as Exhibit 10(n)-5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.10 The Moore-Handley Salaried Employees' Savings Plan and Trust, effective January 1, 1985, as amended, filed as Exhibit 10(p) to the Company's Registration Statement on Form S-1 (Reg. No. 33-3032) and incorporated herein by reference. 10.11 Amended and restated The Moore-Handley Salaried Employees' Savings Plan and Trust dated February 4, 1994 but effective January 1, 1989, filed as Exhibit 10(p)-1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.12 The Moore-Handley Return-on-Investment Bonus Program, dated February 23, 1983, filed as Exhibit 10(r) to the Company's Registration Statement on Form S-1 (Reg. No. 33-3032) and incorporated herein by reference. 10.13 Form of Stock Subscription Agreement, dated as of January 29, 1986, between the Company and certain managers of the Company, filed as Exhibit 10(aa) to the Company's Registration Statement on Form S-1 (Reg. No. 33-3032) and incorporated herein by reference. 10.14 1991 Incentive Compensation Plan, filed as Exhibit A to the Company's Proxy Statement dated April 30, 1991 and incorporated herein by reference. 10.15 The Moore-Handley, Inc. Employees' 401(k) Profit Sharing Prototype Non-Standardized Adoption Agreement effective July 1, 1993, filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.16 Financing Agreement, dated August 7, 1997, between the Company and The CIT Group/Business Credit, Inc. filed as Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. 10.17 The Moore-Handley, Inc. Employee Stock Purchase Plan filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. 10.18 Amendment dated September 24, 1998 to Financing Agreement, dated August 7, 1997, between the Company and The CIT Group/Business Credit, Inc. filed as Exhibit 10-(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference. 21 List of Subsidiaries is incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 23 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule (For SEC purposes only).
- -------------------------------------------------------------------------------- 28 EX-23 2 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-59611) pertaining to the Moore-Handley, Inc. Employee Stock Purchase Plan of our report dated February 19, 1999, with respect to the financial statements of Moore-Handley, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Birmingham, Alabama March 29, 1999 - -------------------------------------------------------------------------------- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MOORE-HANDLEY FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 122 0 24,228 0 17,707 46,105 19,502 (11,496) 55,275 23,408 17,453 0 0 251 13,078 55,275 159,027 159,027 134,704 144,078 13,315 0 1,337 297 136 161 0 0 0 161 .09 .09
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