10-K 1 g75037e10-k.txt MOORE-HANDLEY, INC. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-14324 --------------------- MOORE-HANDLEY, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0819773 (State or other jurisdiction of (I.R.S. Employer Incorporation of organization) Identification No.) 3140 PELHAM PARKWAY, 35124 PELHAM, ALABAMA (Zip Code) (Address of principal executive offices)

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (205) 663-8011 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.10 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____________ As of March 19, 2002, 1,773,943 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of such shares held by non-affiliates was approximately $1,111,000. For this computation, the Registrant has excluded the market value of all common stock beneficially owned by officers and directors of the Registrant and their associates. Such exclusion does not constitute an admission that any such person is an "affiliate" of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the following documents are incorporated by reference into Part III of this Annual Report on Form 10-K: the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered hereby. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- [MOORE HANDLEY INC. LOGO] March 30, 2002 To Our Shareholders: In last year's letter we wrote, "We have continued to strengthen the senior management team and are beginning to implement productivity and cost savings incentives throughout much of the company. As a result, despite the tough business economy we are experiencing early in 2001, we believe the year will be profitable and show continued improvement in expense control and our quality of service." As the accompanying 10-K report details, this turned out to be an accurate prediction. Retail business remained soft for much of the year, as did our sales to retailers, and our top line ended up slightly behind 2000. Despite this, improved cost controls and slightly better margins resulted in net income of 44 cents per share, a positive swing of $1.26 from the preceding year's loss of 82 cents per share. We expect continuing improvement in the current year, as we continue to execute our business plan. That plan consists of three elements: 1. Using electronic controls to reduce errors and improve productivity in our logistic functions. We have described the development of this complex program in previous reports. It has had dramatic results in reducing error rates, in allowing for individual incentive pay, and in increasing productivity. The program is ongoing, and we expect it to result in continuing improvements in the accuracy and cost of the way we do business. 2. Global sourcing to provide our customers with high-quality product lines they can sell at prices comparable to the "big boxes". These product lines carry our registered "Hardware House" trademark and are furnished as complete merchandising programs including point of purchase displays and advertising aids. We now have introduced Hardware House(R) product lines in locks, hand tools, long-handled tools, faucets, bath hardware, lawn and garden watering products, builders' hardware, lighting, and paint sundries. More introductions are planned for each of our three marts this year, and we expect this segment to be an increasingly important part of our (and our customers') business. 3. Taking our business national. Until a few years ago, Moore-Handley was mainly a mid-South distributor with some customers elsewhere in the Southeast. We have been testing means of serving customers outside this historic trading area, and results from these tests lead us to believe we can be competitive in any market east of the Rockies. We are now beginning a systematic effort to attain market penetration in this broad region beyond our historic trade area, while continuing to serve our core customers. We will report our progress in each of these areas as the year goes on. /s/ WILLIAM RILEY -------------------------------------- William Riley Chairman and Chief Executive Officer /s/ MICHAEL J. GAINES -------------------------------------- Michael J. Gaines President and Chief Operating Officer MOORE-HANDLEY, INC. TABLE OF CONTENTS

NOTE: Copies of the exhibits may be obtained by stockholders upon written request directed to the Secretary, Moore-Handley, Inc., P. O. Box 2607, Birmingham, Alabama 35202, and payment of processing and mailing costs. BUSINESS Moore-Handley, Inc. is a full-service distributor of plumbing and electrical supplies, power and hand tools, paint and paint sundries, lawn and garden equipment and other hardware and building materials products. Our customers include retail home centers, hardware stores, building materials dealers, paint stores, combination stores, a limited number of mass merchandisers, businesses and institutions. We have approximately 1,950 active customers located throughout the Southeast and approximately 200 customers elsewhere in the country, which we service from a 488,000 square foot distribution center located in Pelham, Alabama. DESCRIPTION OF BUSINESS In connection with our distribution activities, we offer a wide range of marketing, advertising and other support services designed to assist customers in maintaining and improving their market positions. These support services include computer-generated systems for the control of inventory, pricing and gross margin, as well as advertising and store installation and design services. Home centers and hardware and building supply retailers have a continuing need for a wide variety of items produced by a number of different manufacturers. Purchasing from us rather than directly from manufacturers allows independent retailers to simplify the purchasing process and to place smaller orders on an as-needed basis, thereby reducing their inventory carrying costs and excess stock risks. Moreover, we purchase products in quantities that enable us to obtain favorable prices and payment terms, which are reflected in prices and payment terms to our customers. Finally, the support services we offer to customers are generally not available from manufacturers, nor can most customers afford to develop them independently. We believe that our ability to provide a broad range of merchandise from a single source on a timely basis and at competitive prices, together with support services, offers our customers a substantial advantage over purchasing directly from manufacturers. In recent years there has been a trend toward consolidation in many wholesale industries, including the grocery, drug and hard goods distribution businesses. This trend also is apparent in the building supply and hardware business. We believe this consolidating trend is attributable to, among other things, the inability of small distributors to provide a full range of advertising, store layout and computer-generated pricing and inventory control services offered by larger entities. We have benefited from this consolidating trend by increasing our customer base and sales. PRODUCTS We closely monitor our items in stock, maintaining a full range of products while concentrating our efforts on carrying quantities of stock designed to achieve high inventory turns. The following table indicates the percentage of net sales by class of merchandise sold by us in the past three years:

The table above also includes sales through our direct shipment program. 1 MARKETING PROGRAMS AND CUSTOMER SERVICES Sales Force. Our marketing program is implemented primarily by our sales force of territory managers, each of whom is responsible for specific customers within a particular geographic area. Territory managers generally call on customers weekly to check inventories, take orders and perform various in-store services. In addition, they promote our support services to our customers. Sales assistants work with certain of the more senior territory managers. At December 31, 2001, we employed 52 territory managers and assistants. At December 31, 2001, we also employed 6 district managers, each responsible for supervising and monitoring the activities of territory managers located in their assigned area. To supplement our primary sales force, we maintain a telemarketing group that solicits and accepts orders from customers between regular visits by territory managers. Customer Services. An important component of our marketing strategy is the range of support services we offer to our customers. These services, which we believe not only strengthen our relationship with existing customers but also attract new customers, are designed to enable customers to improve their marketing efforts and compete more effectively, thereby increasing our sales. Our support services include advertising and promotional services, some costs of which are shared by our suppliers; store installation and design services, and computer-generated systems for control of inventory, pricing and gross margin. We also provide a store identification program, as well as additional promotional services, to selected customers under the name "Hardware House", a registered trade name owned and developed by us. Similar programs are available through the national trade name of Pro Group, Inc., a merchandising and marketing group to which we belong. As described previously, we have developed a personal computer-based system for use by our customers, which includes a color-digitized catalog, electronic ordering and order editing capabilities and additional software programs to enable the dealer to increase profitability. Operations. Our ability to fill and deliver small quantity orders for many different items enables customers to place orders on an as-needed basis, which in turn reduces our customers' inventory investment and storage costs. Our "fill-rate" -- the percentage of items shipped within 48 hours of receipt of an order -- is a measure of the efficiency of our order processing, inventory control and warehouse operations. Our fill-rate was approximately 95% for each of the last three years. Deliveries are made on a regular basis by common and contract carrier and our fleet of approximately 32 tractors and 62 trailers. Deliveries of merchandise are normally made within two or three business days after placement of an order. Direct Shipment Program. As an additional service to our customers, we maintain a direct shipment program where customers order and receive shipments of some products directly from suppliers but are invoiced through us. We act as principal in the direct sales transactions, pay the supplier for the goods shipped and assume the risk of loss for the collection of payment from our customer. This program enables us to distribute products that would be inconvenient or expensive to stock in our warehouse, such as commodity building materials, and allows customers to receive discounts that otherwise might not be available to them. Approximately 35%, 33% and 34% of our net sales were attributable to purchases under the direct shipment program for 2001, 2000 and 1999, respectively. CUSTOMERS We currently service over 2,100 customers, including retail home centers; hardware stores; building materials dealers; paint stores; combination stores and a limited number of mass merchandisers, businesses and institutions. No customer or affiliated group of customers accounted for more than 2% of our net sales in 2001, 2000 and 1999. Our current customers are located primarily in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. We also have active customers in 26 other states. 2 From time to time, we receive extended terms from our suppliers, which we pass on to our customers. PURCHASING, SUPPLIERS AND INVENTORY MANAGEMENT We distribute approximately 34,000 items purchased from approximately 1,075 manufacturers. Our ten largest vendors in 2001 accounted for approximately 21.9% of our total purchases, but no single manufacturer accounted for more than 3.7% of our total purchases during the year. We have no long-term supply or distribution agreements with our vendors. Substantially all products of the type distributed by us are available from a number of manufacturers. Because inventory constitutes a substantial portion of our total assets, efficient control of inventory is an important management priority. Our inventory turns (determined by dividing cost of stocked goods sold by average monthly inventory) were 4.5 in 2001 and 4.9 in 2000. Turns were lower in 2001 due to a slight decrease in warehouse shipments and an increase in imported products. COMPETITION Our markets and those of our customers are highly competitive. We compete directly with other national and regional wholesalers (including co-ops), direct-selling manufacturers and specialty distributors on the basis of fill-rate, delivery time, price, breadth of product lines, marketing programs and support services. A number of these competitors are larger and have greater financial resources than us. The success of our business depends on our ability to distribute a large volume and variety of products efficiently and to provide high quality support services. EMPLOYEES As of December 31, 2001, we employed 391 persons, of whom 177 are subject to a collective bargaining agreement expiring in December 2004. We have not experienced any strikes or work stoppages and consider our relationship with our employees to be good. COMMON STOCK INFORMATION Our common stock trades on The NASDAQ SmallCap Market(SM) under the symbol MHCO. The following table shows the high and low bid prices by quarter in 2001 and 2000.

For periods prior to December 24, 1998, our common stock was included in The NASDAQ National Market(R) system and thereafter in The NASDAQ SmallCap Market(SM). Such over-the-counter quotations reflect inter-dealer quotations, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions. On March 20, 2002, there were 179 holders of record of our common stock. Since a large number of these holders are nominees, we believe beneficial holders represent a substantially larger number. We have not paid cash dividends on our common stock as it has been the policy of the Board of Directors to retain all available earnings to support the growth and expansion of our business. The payment of dividends on common stock in the future and the rate of such dividends, if any, will be determined by the Board of Directors based on our earnings, financial condition and capital requirements. 3 EXECUTIVE OFFICERS The executive officers as of March 1, 2002, their ages and their present positions with us and their principal occupations since 1994 are as follows:

--------------- (1) Mr. Gaines was employed by Grossman's, a home center chain, from 1993 to 1996. (2) Mr. Mercer was employed by The Young & Vann Supply Company, an industrial distributor, from 1988 to 2000. (3) Mr. Seifert was employed by Marvin's, a home center and building materials chain, from 1994 to 2001. (4) Mr. Grear was owner and manager of SMB Trading Group, an internet trading and distribution consulting company, from 1998 to 2000; he was employed by Caldor, Inc., a mass merchandise retailer, from 1994 to 1998. Officers are elected annually and serve at the discretion of the Board of Directors. PROPERTIES Our distribution facility and executive offices are located in a single 488,000 square foot facility, which includes a 51,000 square foot mezzanine, on a 30-acre site in Pelham, Alabama. Until December 2001, we leased the Pelham facility pursuant to a lease entered into in connection with the issuance of industrial development bonds. In 2001, we paid an aggregate of $809,000 as final payments on such lease agreement. We had the option to purchase the Pelham facility for a nominal cost at the expiration of the lease and did so in the first quarter of 2002. We believe that our Pelham facility is adequate for our presently foreseeable needs. We also lease office space in New York, New York for which lease payments are approximately $79,000 per annum. 4 SELECTED FINANCIAL DATA

5 QUARTERLY FINANCIAL DATA -- UNAUDITED

Typically, sales in the 1st, 2nd and 3rd quarters are higher than in the 4th quarter due to additional sales generated by Dealers' Marts. In 2001 we held these Marts during the months of February, May and August. The Summer Mart in 2000 was held in June instead of May. The majority of the additional sales are factory direct shipments that carry a lower gross margin than warehouse shipments but contribute to our profitability. Sales in the 4th quarter are also negatively impacted by the effect of seasonal holidays. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We evaluate these estimates on an on-going basis using historical experience and various other assumptions believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. REVENUE RECOGNITION We recognize revenues, net of estimated sales returns, discounts and allowances, when goods are shipped, title has passed, the sales price is fixed and the collectibility is reasonably assured. We assume no significant obligations after goods are shipped. Regarding our direct shipment program, sales are recorded gross in our statements of operations since we act as principal in the sales transaction and assume the credit risk. We record provisions for estimated sales returns and allowances on sales in the same period as the related sales are recorded. These estimates are based on historical sales returns and analyses of credit memo data and other known factors. If the historic data we use to calculate these estimates does not properly reflect future returns and allowances, net sales could either be understated or overstated. In September 2000, the Emerging Issues Task Force issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs (EITF 00-10). EITF 00-10 requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of sales or disclosed in the notes to the consolidated financial statements. Shipping and handling costs associated with inbound freight are included in cost of sales. Shipping and handling fees billed to customers are included in delivery, selling, general and administrative expenses. Statement of Position 93-7, Reporting on Advertising Costs, requires the disclosure of advertising costs. We expense the cost of advertising when incurred. Advertising expense was immaterial and did not have a significant impact on expenses for the years 2001, 2000 and 1999. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain an allowance for doubtful accounts to reflect expected credit losses. We provide for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the credit worthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the financial condition of our customers were to deteriorate, resulting in impairment in their ability to make payments, additional allowances may be required in future periods. MERCHANDISE INVENTORY We state our inventory at the lower of average cost or market. An allowance for obsolete or excess inventory is maintained to reflect the estimated net realizable value of the inventory based on current market conditions and the inventory's recent historical movement and future demands. If actual market conditions and future demand are less favorable than we project, additional inventory provisions may be required. 7 INCOME TAXES Deferred income taxes are provided for temporary differences between financial and income tax reporting, primarily related to depreciation, inventory valuation and certain accrued costs. We continuously assess the need for valuation allowances on recorded deferred tax assets and establish an allowance when we believe it is more likely than not that the asset will not be realized. PENSIONS We have pension benefit costs and credits that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected return on plan assets. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Periodic changes in these key assumptions, along with changes in head count, could have a significant impact on future pension costs and recorded pension liabilities. IMPAIRMENT AND DEPRECIATION OF LONG-LIVED ASSETS We estimate the depreciable lives of property and equipment when purchased and evaluate those lives when facts and circumstances change. In regards to impairment, we have early adopted Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Under SFAS No. 144, when events and circumstances indicate that long-lived assets used in operations may be impaired and the undiscounted cash flows estimated to be generated from those assets are less than their carrying values, we record an impairment loss equal to the excess of the carrying value over the fair value. Long-lived assets held for disposal are valued at the lower of the carrying value or fair value less disposal costs. The adoption of SFAS 144 had no significant impact on our financial condition or results of operations. RESULTS OF OPERATIONS Total gross margin for 2001 increased $449,000 or 1.9% from 2000 on a 0.8% net sales decrease. Total operating expenses decreased $2,720,000 or 11.0%. As a result of the increase in gross margin and decrease in operating expenses, operating income increased $3,169,000 to $2,507,000 compared to an operating loss of $662,000 in 2000. Total gross margin for 2000 decreased $2,750,000 or 10.2% from 1999 on a 7.9% net sales decrease. Total operating expenses decreased $237,000 or 1%. The decrease in gross margin was not fully offset by a decrease in expenses due in part to increases in benefit-related costs of $635,000 and a loss of approximately $300,000 related to start-up costs for new distribution channels for us. Operating income decreased $2,513,000 or 135.8% from 1999. NET SALES Net sales for 2001 decreased $1,275,000 or 0.8% compared to 2000. The majority of the decrease was due to territory consolidations initiated in May 2000. Quarterly comparisons for 2001 compared to 2000 were more favorable after the first quarter due to the effect of the timing of the territory consolidations. Net sales for 2000 decreased $13,152,000 or 7.9% compared to 1999 due to industry-wide trends and the effect of territory consolidations initiated during the year. 8 The following table sets forth quarterly net sales and changes by quarter for the past three years.

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

GROSS MARGIN Gross margin percentage increased to 16.1% of sales for 2001 from 15.7% for 2000. The effect of a higher mix of factory direct shipments that carry a lower margin rate was more than offset by an improved margin rate on a more favorable mix of warehouse shipments. Gross margin percentage decreased to 15.7% for 2000 from 16.1% for 1999, due to a devaluation in commodities (significant price reductions in copper wire, PVC pipe and polyethylene film) and a decrease in vendor incentives. Also, in the third and fourth quarters, we became more promotional in an effort to increase sales. In 2001 and 2000, there were three Dealers Marts. Most of the sales from the Dealers' Marts in both 2001 and 2000 were shipped in the first, second and third quarters and included a higher proportion of factory direct shipments at lower gross margins. The gross margin rate for the fourth quarter of 2001 was higher than 9 the first three quarters mainly due to a lower mix of lower margin factory direct shipments. The gross margin percentage for the fourth quarter of 2000 was unfavorably impacted by a decrease in incentive rebates received from our suppliers and a change in physical inventory counts from an annual count to a weekly count that cycles vendors throughout the year resulting in a lower fourth quarter positive adjustment. The following table sets forth gross margin and gross margin percentages and year-to-year changes by quarter for the last three years.

WAREHOUSE AND DELIVERY EXPENSES As a percent of warehouse shipments, warehouse and delivery expenses decreased to 9.3% in 2001 compared to 9.8% in 2000. Continued warehouse productivity improvements and route consolidations initiated in May of 2000 had a favorable impact on warehouse and delivery expenses. Warehouse and delivery expenses decreased $690,000 or 6.49% during 2000, as compared to 1999, due to the elimination of unprofitable accounts and related expenses, as well as the maturing of the stocking and shipping system in the warehouse. 10 The following table shows the trend of warehouse and delivery expenses by quarter for the last three years.

SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses decreased $1,818,000 or 12.4% in 2001 compared to the previous year. Reductions were attained during the year due to sales territory consolidations and general and administrative expense reductions initiated in May 2000. We also experienced an increase in vendor allowances. Selling and administrative expenses increased $453,000 or 3.2% in 2000 compared to the previous year. The expense for 2000 includes $300,000 relating primarily to new channel start-up costs. The following table shows the quarterly trend of selling and administrative expenses in the last three years. The fourth quarter expense in 2001 was favorably affected by the recording of an increase in vendor allowances and in 2000 was affected adversely by an increase in employee benefit expense.

11 INTEREST EXPENSE In 2001, net interest expense decreased $374,000 or 22.7% compared to 2000. The decrease was primarily due to a decrease in the prime lending and LIBOR based rates in 2001. The weighted average interest rate was 7.10% for 2001 compared to 9.46% in 2000. In 2000, net interest expense increased $243,000 or 17.3% over 1999 due to higher interest rates and additional borrowings to fund the net operating loss and to maximize cash discounts on purchases. INCOME TAXES For information concerning income tax provisions for 2001, 2000 and 1999, as well as information regarding differences between effective tax rates and statutory tax rates, see Note 6 of our financial statements. LIQUIDITY AND CAPITAL RESOURCES In 2001, we purchased 58,200 shares of our common stock and issued 13,500 shares under the employee stock purchase plan. During 2000, we purchased 138,000 shares of our common stock and issued 44,700 shares under the employee stock purchase plan, as discussed in Note 10 of our financial statements. In 2001, we financed our working capital requirements with a line of credit under which we may borrow up to 85% of eligible receivables and 50% of eligible inventory up to $6,000,000. In December 2001, we received an extension to our working capital line that will become annually renewable in April 2003. In February 2002, we executed a working capital line increase and extension. This new line allows for a maximum borrowing of $28,000,000 and is based on 85% of eligible receivables and 50% of eligible inventory up to $11,000,000. This new line has a maturity date of April 30, 2005. The borrowings bear interest at the prime interest rate or, at our option, 2 1/2% over LIBOR (2 1/4% beginning the 2nd quarter of 2002 if we meet certain requirements). Our trade receivables and inventory secure the borrowings. Actual borrowings under lines of credit and the average interest rate were as follows during the past three years:

--------------- (1) The average amount outstanding during the period was computed by dividing the daily outstanding principal balances by the number of days of the year. (2) The weighted average interest rate during the period was computed by dividing the actual interest expense including availability fees by the average borrowings. (3) The year-end interest rate reflected for 2001 represents the LIBOR rate on the first $15,000,000 of borrowings. The remaining balance was subject to the prime rate of 4.75%. Average borrowings in 2001 increased as a result of our repayment of term debt and capital expenditures. 12 Average borrowings in 2000 increased from 1999 as a result of the company's net operating loss and effort to maximize cash discounts on purchases.

In February 2002, we negotiated an amendment to our working capital line that extended the maturity date to April 2005. We believe our new credit facility is adequate to finance our current working capital needs. We believe that we will have sufficient cash flow from operations and available capacity under the Credit Facility, to fund both our current operations and anticipated internal expansion, for the current year and for the subsequent two years remaining on the Credit Facility. On an historical basis, net cash provided by (used in) operating activities for fiscal years 2001, 2000 and 1999 was $5,743,000, ($1,680,000) and $746,000, respectively. The change from 2000 to 2001 was due to the increase in net income and a significant decrease in current assets (mainly trade accounts receivable - see discussion below) partially offset by a decrease in accounts payable and accrued expenses. The change from 1999 to 2000 was mainly due to the net loss in 2000. The change from 1998 to 1999 was primarily due to changes in accounts payable and accrued expenses, accounts receivable and inventory. Trade receivables decreased $6,503,000 or 29.1% and decreased $801,000 or 3.5% at December 31, 2001 and 2000, respectively, compared to the prior year. Although fourth quarter sales were 2.9% above the same quarter in 2000, trade receivables were down significantly due the effect of aggressive promotions offered to our customers in the fourth quarter of 2001. These promotions helped increase sales by offering incentive rebates to customers instead of extended dating terms provided in prior years. Fourth quarter sales in 2000 were lower than the same quarter in 1999 and consequently trade receivables were also lower. The following are the number of inventory items carried and average inventory turns for the last three years.

At December 31, 2001, inventories decreased $245,000 or 1.4% compared to the prior year, mainly due to fewer year-end purchases made to reach annual vendor incentive requirements. At December 31, 2000 inventories decreased $687,000 or 3.8% compared to 1999. The decrease in 2000 was at a rate less than the annual decrease in sales due to lower than average inventory turns. Capital expenditures in 2001 were $1,214,000. Depreciation and amortization for 2001 was $1,261,000. We have no commitments for material capital expenditures pending for 2002. INTEREST RATE RISK The following discussion about our interest rate risk includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. 13 Our principal credit agreement bears a floating interest rate based on the prime rate or, at our option, 2 1/2% over LIBOR. Accordingly, we are subject to market risk associated with changes in interest rates. At December 31, 2001, $17,518,000 was outstanding under the credit agreement. For 2001, the average principal amount outstanding under the credit agreement was $18,667,000. Assuming the average amount outstanding under the credit agreement during 2002 is equal to such average amount outstanding during 2001, a 1% increase in the applicable interest rate during 2002 would result in additional interest expense of approximately $186,670, which would reduce cash flow and pre-tax earnings dollar for dollar. At December 31, 2001 the prime rate was 4.75% and currently it is 4.75%. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS For information concerning the impact of recently issued accounting standards, see Note 1 to the financial statements. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report (other than the financial statements and other statements of historical fact) are forward-looking statements. Use of words such as "expects" and "believes" indicates the presence of forward-looking statements. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on us will be those anticipated by management. Among the factors that could cause actual results to differ materially from estimates reflected in such forward-looking statements are the following: - competitive pressures on sales and pricing, including those from other wholesale distributors and those from retailers in competition with our customers; - our ability to achieve projected cost savings from our warehouse modernization program and ongoing cost reduction efforts; - changes in cost of goods and the effect of differential terms and conditions available to our larger competitors; - uncertainties associated with any acquisition we may seek to implement; and - changes in general economic conditions, including increases in interest rates. 14 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Moore-Handley, Inc. We have audited the accompanying balance sheets of Moore-Handley, Inc. as of December 31, 2001 and 2000, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Moore-Handley, Inc. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Birmingham, Alabama March 1, 2002 15 MOORE-HANDLEY, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying notes. 16 MOORE-HANDLEY, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying notes. 17 (THIS PAGE INTENTIONALLY LEFT BLANK) 18 MOORE-HANDLEY, INC. BALANCE SHEETS DECEMBER 31, 2001 AND 2000

See accompanying notes. 19 MOORE-HANDLEY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See accompanying notes. 20 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES We are a full-service distributor of plumbing and electrical supplies, power and hand tools, paint and paint sundries, lawn and garden equipment and other hardware and building materials products. We service customers, throughout the Southeast, including retail home centers, hardware stores, building materials dealers, paint stores, combination stores, a limited number of mass merchandisers, businesses and institutions. CASH We consider all highly liquid securities with maturity at the time of purchase of three months or less to be cash. As of December 31, 2001, we had no such instruments. BASIS OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain an allowance for doubtful accounts to reflect expected credit losses. We provide for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the credit worthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the financial condition of our customers were to deteriorate, resulting in impairment in their ability to make payments, additional allowances may be required in future periods. CERTAIN CONCENTRATIONS We are a wholesaler of hardware and building materials products and as such grant credit to our customers, most of whom are independent retailers located in the Southeast. We perform periodic credit evaluations of our customers' financial condition and obtain personal guarantees and/or security interests where we deem necessary. No customer or affiliated group of customers accounted for more than 2% of net sales for 2001, 2000 and 1999. As of December 31, 2001, we employed 391 persons of whom 177 are subject to a collective bargaining agreement expiring in December 2004. MERCHANDISE INVENTORY We state our inventory at the lower of average cost or market. An allowance for obsolete or excess inventory is maintained to reflect the estimated net realizable value of the inventory based on current market conditions and the inventory's recent historical movement and future demands. If actual market conditions and future demand are less favorable than we project, additional inventory provisions may be required. OTHER RECEIVABLES Other receivables consist primarily of vendor rebates and vendor allowances receivable (see Note 2). We record the credits and payments as a reduction of cost of sales at the point in time at which the activities required by the supplier related to the credit or payment are completed, the amount is fixed and determinable, and collectibility is reasonably assured. Arrangements with suppliers for volume incentives are typically based 21 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) on a contractual arrangement covering a one-year or less period of time providing for incentives based on purchasing volumes. We are not obligated to purchase a specified volume of the product. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciation is computed using the straight-line method over estimated useful lives as follows: ~~Buildings................................................... 25-40 years Equipment................................................... 3-15 years~~

INCOME TAXES Deferred income taxes are provided for temporary differences between financial and income tax reporting, primarily related to depreciation, inventory valuation and certain accrued costs. We continuously assess the need for valuation allowances on recorded deferred tax assets and establish an allowance when we believe it is more likely than not that the asset will not be realized. IMPAIRMENT AND DEPRECIATION OF LONG-LIVED ASSETS We estimate the depreciable lives of property and equipment when purchased and evaluate those lives when facts and circumstances change. In regards to impairment, we have early adopted Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Under SFAS No. 144, when events and circumstances indicate that long-lived assets used in operations may be impaired and the undiscounted cash flows estimated to be generated from those assets are less than their carrying values, we record an impairment loss equal to the excess of the carrying value over the fair value. Long-lived assets held for disposal are valued at the lower of the carrying value or fair value less disposal costs. The adoption of SFAS 144 had no significant impact on our financial condition or results of operations. PENSIONS We have pension benefit costs and credits that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected return on plan assets. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Periodic changes in these key assumptions, along with changes in head count, could have a significant impact on future pension costs and recorded pension liabilities. STOCK OPTION ACCOUNTING We account for our stock compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), under which no compensation cost has been recognized. INCOME OR LOSS PER COMMON SHARE Basic net income or loss per share is computed using the weighted average number of common shares outstanding. Diluted net income or loss per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive stock options. 22 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION We recognize revenues, net of estimated sales returns, discounts and allowances, when goods are shipped, title has passed, the sales price is fixed and the collectibility is reasonably assured. We assume no significant obligations after goods are shipped. Regarding our direct shipment program, sales are recorded gross in our statements of operations since we act as principal in the sales transaction and assume the credit risk. We record provisions for estimated sales returns and allowances on sales in the same period as the related sales are recorded. These estimates are based on historical sales returns and analyses of credit memo data and other known factors. If the historic data we use to calculate these estimates does not properly reflect future returns and allowances, net sales could either be understated or overstated. In September 2000, the Emerging Issues Task Force issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs (EITF 00-10). EITF 00-10 requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of sales or disclosed in the notes to the consolidated financial statements. Shipping and handling costs associated with inbound freight are included in cost of sales. Shipping and handling fees billed to customers are included in delivery, selling, general and administrative expenses and totaled $169,164, $102,255 and $48,345 in 2001, 2000 and 1999, respectively. Statement of Position 93-7, Reporting on Advertising Costs, requires the disclosure of advertising costs. We expense the cost of advertising when incurred. Advertising expense was immaterial and did not have a significant impact on expenses for the years 2001, 2000 and 1999. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133 requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either offset against the change in fair value of the hedged item through earnings or be recognized in other comprehensive income until the hedged item is recognized in earnings. The adoption of this statement did not have a significant impact on our financial statements. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 eliminates amortization of goodwill and requires an impairment-only model to record the value of goodwill. SFAS No. 142 requires that impairment be tested at least annually at the reporting unit level, using a two-step impairment test. Purchased intangibles with indefinite economic lives will be tested for impairment annually using a lower of cost or market approach. Other intangibles will continue to be amortized over their useful lives and reviewed for impairment when the facts and circumstances suggest that they may be impaired. The adoption of SFAS No. 142 is not expected to have a significant impact on our financial condition and results of operation. 2. OTHER RECEIVABLES Other receivables increased $2,130,000 or 64.9% due to an increase in vendor rebates and allowances receivable. Most of the increase was due to negotiated increases in vendor payments of rebates and allowances to be collected after year-end, including Mart booth fees that historically were charged and collected during the year, but were converted to a fixed vendor charge or a calculated rebate based on annual volume during 2001. 23 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table illustrates the content of other receivables as presented in our financial statements:

3. LOANS TO OFFICERS In 1999, we loaned an officer $60,000. This loan bears interest at our average rate during the previous year, and the officer is required to make scheduled interest payments each April 1 over the term of the loan. In addition, the officer is required to make principal payments equal to one-third of any annual bonus received. This note is due and payable in full in April 2004. The principal balance outstanding as of December 31, 2001 was $57,481. 4. LONG-TERM DEBT Long-term debt at December 31, 2001 and 2000, includes obligations under capital leases, a term loan and a revolving line of credit all of which approximates fair value. At December 31, 2000, we also had outstanding long-term debt for industrial development bonds for our Pelham facility. These bonds retired in November 2001. Long-term debt at December 31 consisted of:

We were party to lease agreements with an industrial development board, which were accounted for as asset purchases. Under the agreements, industrial development bonds were issued and the proceeds used to purchase land of $534,000 and building and equipment of $8,881,000. We had an unconditional obligation to pay the principal and interest at 92% of the prime rate on the bonds and had options to purchase the property for a nominal cost at the expiration of the lease. The bonds were paid in full as of December 31, 2001. At December 31, 2000, the prime rate was 9.5%. Subsequent to year-end, we exercised our option to purchase the property for a nominal cost. We have financed the purchase of transportation and computer equipment with leases. These leases are being accounted for as capital leases. Annual installments of principal on all capital leases decrease from approximately $133,000 in 2001 to $49,000 in 2002. The amortization expense relating to these leases is combined with depreciation expense. 24 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The assets purchased under capital leases include:

We have financed a $2,000,000 warehouse modernization program with a term loan payable in equal monthly principal payments through January 2004, together with interest at 8.25%. In March 2000, we executed a working capital line and extension. This new line allows for a maximum borrowing of $24,000,000 and, in addition to 85% of eligible receivables, it is secured with 50% of eligible inventory up to $6,000,000. In December 2001, we received an extension to our working capital line that will become annually renewable in April 2003. We believe this credit facility is adequate to finance our working capital needs. Maturity of long-term debt is as follows: 2002........................................................ $ 334,000 2003........................................................ 17,856,000 2004........................................................ 77,000 2005........................................................ 57,000 2006........................................................ 35,000 ----------- $18,359,000 ===========

In February 2002, we negotiated an amendment to our working capital line that extended the maturity date to April 2005. The amendment will allow maximum borrowings of $28,000,000 and will be secured with 50% of eligible inventory up to $11,000,000. The interest rate on the facility will remain at prime rate or, at our option, 2 1/2% over LIBOR (2 1/4% beginning the 2nd quarter of 2002 if we meet certain requirements). Interest expense on long-term debt bank loans and capital lease obligations for the years ended December 31, 2001, 2000 and 1999 was $1,422,000, $1,797,000 and $1,555,000, respectively. 5. COMMITMENTS Total future rental payments under non-cancelable operating leases that expire in 2006 are $2,070,000. Annual rentals for the remainder of the lease terms are as follows: 2002........................................................ $ 765,000 2003........................................................ 573,000 2004........................................................ 515,000 2005........................................................ 213,000 2006........................................................ 4,000 ---------- $2,070,000 ==========

Rental expense was $1,078,000, $1,082,000 and $1,107,000 in 2001, 2000 and 1999, respectively. 25 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAX The provision for income tax expense (benefit) consists of the following:

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

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

7. PENSION PLANS We have two trusteed, noncontributory, qualified defined benefit pension plans covering substantially all of our employees. Retirement benefits are provided based on employees' years of service and earnings. Contributions to the pension plans are based on the amount necessary to fund the net periodic pension cost. Contributions are limited to the amount that can be currently deducted for federal income tax purposes and 26 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) are based on the amount necessary to fund the minimum level required by the Employee Retirement Income Security Act of 1974. Net periodic pension cost for the last three years included the following components:

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

The assumptions used to measure the projected benefit obligations and the expected earnings on plan assets at December 31 for the last three years were: Weighted average discount rate.............................. 7% Long-term rate of return on assets.......................... 7% Increase in future compensation levels...................... 4%

In addition, we have 401(k) savings plans covering substantially all employees. There were no employer contributions made in 2001, 2000 or 1999. 27 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. SEGMENT REPORTING We operate in one business segment. Revenues from products are as follows:

9. INCENTIVE COMPENSATION PLAN On May 23, 1991, the stockholders approved the 1991 Incentive Compensation Plan pursuant to which a maximum aggregate of 460,000 shares of common stock may be issued to employees and directors until April 12, 2001. On April 26, 2001, the stockholders approved the 2001 Incentive Compensation Plan pursuant to which a maximum aggregate of 460,000 shares of common stock may be issued to employees and directors until March 23, 2011. We have elected to follow APB No. 25 and related interpretations in accounting for our employee stock options. Under APB No. 25, because the exercise price for the employees' stock options equal the market price of the underlying stock on the date of grant, no compensation expense is recognized. These options vest either in six months after the date of grant or in equal annual installments over five years. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement No. 123), and has been determined as if we had accounted for our employee stock options under the fair value method of Statement No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average calculations for 2001, 2000 and 1999; risk-free interest rate of 5.7%, 6.1%, and 7%, respectively; dividend yield of 0%; volatility factor of the expected market price of our common stock of .34, .28, and .31, respectively; and a weighted-average expected life of the option of 10.0, 10.0, and 10.0 years. The weighted average grant date fair value of options granted during 2001 was $.57. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows:

28 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table shows the shares under these plans:

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

10. COMMON STOCK SUBSCRIPTIONS RECEIVABLE During 1998, the stockholders approved the Employee Stock Purchase Plan (the "Plan"). The Plan is designed to encourage and facilitate stock ownership to its employees by providing a continued opportunity to purchase common stock, generally through voluntary after-tax payroll deductions. The price per share of the common stock shall be 85% of the fair market value on the date of the grant of the option for the qualified stock purchases and shall not be less than 100% of the fair market value on the date of the grant of the option for the non-qualified stock options. During 2001, 13,500 shares were issued under this Plan from treasury stock compared to 44,700 shares in 2000. 29 MOORE-HANDLEY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In connection with the Employee Stock Purchase Plan formed in 1998, certain individuals issued three-year promissory notes to us whereby the individuals are obligated to pay annual interest of 8.5% and a balloon principal payment no later than June 30, 2001. These notes are secured by related shares of common stock. In June 2001, one note was paid in full and the others were amended to extend their maturity date to June 2003. The amended promissory notes are also payable on demand and the interest rates have been reset to our average cost of borrowing plus 2.25%. 11. EARNINGS PER SHARE Basic and diluted earnings per share were the same for 2001, 2000 and 1999. The numerator for basic and diluted earnings per share includes net income (loss) of $788,000, ($1,553,000) and $299,000 for 2001, 2000 and 1999, respectively. The denominator for diluted earnings per share includes weighted average common shares and common stock equivalents outstanding of 1,845,000, 1,903,000 and 1,883,000 for 2001, 2000 and 1999, respectively. The denominator for basic earnings per share includes weighted average common shares outstanding of 1,795,000, 1,903,000, and 1,881,000 for 2001, 2000 and 1999, respectively. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOORE-HANDLEY, INC. By: /s/ GARY C. MERCER ------------------------------------ Gary C. Mercer Chief Financial Officer (Principal Accounting and Financial Officer) March 30, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

31 MOORE-HANDLEY, INC. INDEX OF EXHIBITS

33 [MOORE-HANDLEY, INC. LOGO] ANNUAL REPORT YEAR ENDED DECEMBER 31, 2001 34

MOORE HANDLEY INC /DE/ 10-K