SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 1997 Commission File Number 2-63880
ACE HARDWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-0700810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Kensington Court, Oak Brook, IL 60523-2100
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (630) 990-6600
NONE
Former name, former address and former
fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES XX NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding at September 30, 1997
Class A Voting Stock - $1,000 par value 3,945 shares
Class B Stock - $1,000 par value 2,760 shares
Class C Stock - $ 100 par value 2,167,810 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Earnings - Nine Months and Three
Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 - 7
Part II. - Other Information 8
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(000's omitted)
ASSETS
Current Assets:
Cash $ 10,812 $ 12,657
Accounts Receivable, Net 350,258 347,248
Merchandise Inventory 329,318 327,145
Prepaid Expenses and Other Current Assets 13,717 11,880
---------- ----------
Total Current Assets 704,105 698,930
Property and Equipment, Net 242,033 213,534
Other Assets 9,877 3,911
---------- ----------
Total Assets $ 956,015 $ 916,375
========== ==========
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 7,642 $ 6,727
Short-Term Borrowings 77,500 71,000
Accounts Payable 380,464 394,070
Patronage Dividends Payable in Cash 21,977 28,178
Patronage Refund Certificates Payable 13,614 14,138
Accrued Expenses 50,167 36,349
---------- ----------
Total Current Liabilities 551,364 550,462
Notes Payable 98,446 71,837
Patronage Refund Certificates Payable 43,082 49,639
Other Long-Term Liabilities 15,424 11,074
---------- ----------
Total Liabilities 708,316 683,012
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 4,124 3,937
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 224,992 196,742
Class C Stock of $100 Par Value, Issuable 20,479 26,474
Additional Stock Subscribed,
Net of Unpaid Portion 320 502
Retained Earnings and Contributed Capital 7,152 6,415
---------- ----------
Total Member Dealers' Equity 263,566 240,569
Less: Treasury Stock, at Cost 15,867 7,206
---------- ----------
Total Member Dealers' Equity 247,699 233,363
Total Liabilities and Member Dealers Equity $ 956,015 $ 916,375
========== ==========
See accompanying notes to consolidated financial statements.
-1-
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
(000's omitted) (000's omitted)
Net Sales $734,353 $712,597 $2,165,057 $2,020,220
Cost of Sales 673,932 656,030 1,995,059 1,867,283
Gross Profit 60,421 56,567 169,998 152,937
Operating Expenses:
Warehouse and Distribution 9,764 9,456 29,521 26,960
Selling, General
and Administrative 18,224 16,862 54,331 49,124
Retail Success
and Development 7,764 5,949 20,314 18,065
-------- -------- ---------- ----------
Total Operating Expenses 35,752 32,267 104,166 94,149
Operating Income 24,669 24,300 65,832 58,788
Interest Expense (3,537) (3,235) (11,202) (8,100)
Other Income, Net 1,285 1,142 4,143 3,279
Income Taxes (505) (368) (1,687) (1,020)
-------- -------- ---------- ----------
Net Earnings $ 21,912 $ 21,839 $ 57,086 $ 52,947
======== ======== ========== ==========
Distribution of Net Earnings:
Patronage Dividend $ 21,785 $ 21,666 $ 56,349 $ 53,996
Retained Earnings 127 173 737 (1,049)
-------- -------- ---------- ----------
Net Earnings $ 21,912 $ 21,839 $ 57,086 $ 52,947
======== ======== ========== ==========
See accompanying notes to consolidated financial statements.
-2-
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September, 30
1997 1996
(000's omitted)
Operating Activities:
Net Earnings $ 57,086 $ 52,947
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 14,296 13,060
Loss (Gain) on sale of property and equipment 212 (22)
Increase in accounts receivable, net (3,010) (31,836)
Increase in merchandise inventory (2,173) (78,903)
Increase in prepaid expenses
and other current (1,837) (3,920)
Increase in accounts payable
and accrued expenses 212 56,921
Increase in other long-term liabilities 4,350 2,430
-------- --------
Net Cash Provided By Operating Activities 69,136 10,677
Investing Activities:
Purchases of property and equipment (43,161) (26,178)
Proceeds from sale of property and equipment 154 53
Decrease (Increase) in other assets (5,966) 45
-------- --------
Net Cash Used In Investing Activities (48,973) (26,080)
Financing Activities:
Proceeds from short-term borrowings 6,500 40,500
Proceeds from notes payable 33,016 20,808
Principal payments on long-term debt (5,492) (5,821)
Payments on refund certificates and
patronage financing programs (20,974) (19,257)
Proceeds from sale of common stock 1,781 1,176
Repurchase of common stock (8,661) (7,715)
Payments of cash portion of patronage dividend (28,178) (23,522)
-------- --------
Net Cash Provided By (Used In)
Financing Activities (22,008) 6,169
Decrease in Cash and Cash Equivalents (1,845) (9,234)
Cash and Cash Equivalents at Beginning of Period 12,657 12,853
-------- --------
Cash and Cash Equivalents at End of Period $ 10,812 $ 3,619
======== ========
See accompanying notes to consolidated financial statements.
-3-
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The accompanying consolidated financial statements have not been
examined by independent public accountants except for the
December 31, 1996 balance sheet but in the opinion of the Company
reflect all adjustments necessary to present fairly the financial
position as of September 30, 1997 and 1996 and the results of
operations and cash flows for the nine months then ended. These
interim figures are not necessarily indicative of the results to
be expected for the full year.
2) Patronage Dividends
The Company operates as a cooperative organization and will pay
patronage dividends to consenting member dealers based on the
earnings derived from business done with such dealers. It has
been the practice of the Company to distribute substantially all
patronage sourced earnings in the form of patronage dividends.
Net earnings and patronage dividends will normally be similar
since patronage sourced net earnings is paid to consenting member
dealers. International dealers signed under a Retail Merchant
Agreement are not eligible for patronage dividends and related
earnings or loss are not included in patronage sourced earnings.
3) Reclassifications
Certain financial statement reclassifications have been made to
prior year and prior quarter amounts to conform to comparable
classifications followed in 1997.
4) Notes Payable
In March 1997, the Company entered into a $30,000,000 loan
agreement due March 25, 2009. The note bears interest at 7.55%
per annum, payable quarterly. Annual principle payments commence
on March 25, 2005 and continue through 2009.
-4-
ACE HARDWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1997, compared to Three Months Ended
September 30, 1996.
Results of Operations
Net sales increased 3.1% primarily due to increased existing dealer volume,
targeted efforts on new store development and conversions to the Ace program.
Gross profit increased 6.8% vs. 1996, and increased as a percent of sales due
to increased cash and vendor discounts, improved product and manufacturing
gross profit and increased handling charges due to a shift in sales mix.
Gross profit on the Company's retail operations also contributed to increased
1997 gross profit.
Warehouse and distribution expenses increased $308,000 or 3.3% and remained
consistent as a percent of sales versus 1996. Start-up and shutdown costs
for the replacement of an existing facility are partially offset by increased
traffic and freight consolidations income.
Selling, general and administrative expenses increased $1.4 million or 8.1%
and as a percent of sales due to increased data processing expenses and
start-up and shutdown costs for the opening and closure of facilities in
August 1997.
Retail success and development expenses increased $1.8 million or 30.5% and
as a percent of sales due to increased advertising expenses and expenses for
the Company's retail operations.
Interest expense increased $302,000 vs. 1996 due to increased borrowings,
additional dealer dating programs and higher interest rates.
Income taxes increased $137,000 primarily due to improved profitability of
the Company's non-patronage operations.
-5-
ACE HARDWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 compared to Nine Months Ended
September 30, 1996.
Results of Operations
Net sales increased 7.2% in 1997 primarily due to increased existing dealer
volume, targeted efforts on new store development and conversions to the Ace
program and the June 1996 start-up of Canadian operations.
Gross profit increased 11.2% vs. 1996, and increased as a percent of sales due
to increased levels of vendor discounts, improved product and manufacturing
gross profit and gross profit realized from Canadian operations.
Warehouse and distribution expenses increased $2.6 million or 9.5% due to
costs for the operation of one additional domestic and two Canadian facilities
opened in mid 1996 partially offset by increased traffic revenues. Costs for
the replacement of an existing facility also contributed to the increase.
Selling, general and administrative expenses increased $5.2 million or 10.6%
and as a percent of sales due to Canadian operation costs and increased data
processing expenses.
Retail success and development expenses increased $2.2 million or 12.4% and
as a percent of sales primarily due to increased expenses associated with
the Company's retail operations and lower retailer computer systems income
partially offset by increased advertising income.
Interest expense increased $3.1 million vs. 1996 due to increased borrowings,
additional dealer dating programs and higher interest rates. Additional long-
term debt was issued in the first quarter to fund long-term capital
investments. Other income increased due to increased penalty charges.
Income taxes increased $667,000 vs. 1996 due to improved profitability of
the Company's non-patronage operations.
-6-
Liquidity and Capital Resources
The company expects that internally generated funds, along with new and
established lines of credit and long-term financing, will be the primary
financing sources for capital expenditures in the future.
-7-
PART II. OTHER INFORMATION
ACE HARDWARE CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(b) There were no reports on Form 8-K filed for the
three month period ended September 30, 1997.
-8-
SIGNATURE
Pursuant to the requirements 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.
ACE HARDWARE CORPORATION
LORI L. BOSSMANN DATE: 11/14/97
Lori L. Bossmann
Vice President, Controller
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
-9-
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