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 June 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 June 30, 1997
Class A Voting Stock - $1,000 par value 3,925 shares
Class B Stock - $1,000 par value 2,800 shares
Class C Stock - $ 100 par value 2,184,519 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 1
Consolidated Statements of Earnings - Six Months and Three
Months Ended June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 & 6
Part II. - Other Information 7
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(000's omitted)
ASSETS
Current Assets:
Cash $ 11,176 $ 12,657
Accounts Receivable, Net 419,965 347,248
Merchandise Inventory 298,672 327,145
Prepaid Expenses and Other Current Assets 15,824 11,880
---------- ----------
Total Current Assets 745,637 698,930
Property and Equipment, Net 239,274 213,534
Other Assets 7,838 3,911
---------- ----------
Total Assets $ 992,749 $ 916,375
========== ==========
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 7,632 $ 6,727
Short-Term Borrowings 64,903 71,000
Accounts Payable 451,844 394,070
Patronage Dividends Payable in Cash 13,272 28,178
Patronage Refund Certificates Payable 13,665 14,138
Accrued Expenses 45,750 36,349
---------- ----------
Total Current Liabilities 597,066 550,462
Notes Payable 100,251 71,837
Patronage Refund Certificates Payable 40,246 49,639
Other Long-Term Liabilities 13,743 11,074
---------- ----------
Total Liabilities 751,306 683,012
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 4,046 3,937
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 223,776 196,742
Class C Stock of $100 Par Value, Issuable 12,368 26,474
Additional Stock Subscribed,
Net of Unpaid Portion 568 502
Retained Earnings and Contributed Capital 7,025 6,415
---------- ----------
Total Member Dealers' Equity 254,282 240,569
Less: Treasury Stock, at Cost 12,839 7,206
---------- ----------
Total Member Dealers' Equity 241,443 233,363
Total Liabilities and Member Dealers' Equity $ 992,749 $ 916,375
========== ==========
See accompanying notes to consolidated financial statements.
-1-
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
(000's omitted) (000's omitted)
Net Sales $788,567 $714,437 $1,430,704 $1,307,623
Cost of Sales 725,269 659,512 1,321,127 1,211,253
-------- -------- ---------- ----------
Gross Profit 63,298 54,925 109,577 96,370
Operating Expenses:
Warehouse and Distribution 8,289 8,998 19,757 17,504
Selling, General
and Administration 18,825 16,659 37,066 32,451
Retail Success
and Development 6,036 6,019 11,591 11,927
-------- -------- ---------- ----------
Total Operating Expenses 33,150 31,676 68,414 61,882
-------- -------- ---------- ----------
Operating Income 30,148 23,249 41,163 34,488
Interest Expense (4,059) (2,393) (7,666) (4,865)
Other Income, Net 1,653 970 2,857 2,137
Income Taxes (871) (297) (1,181) (652)
-------- -------- ---------- ----------
Net Earnings $ 26,871 $ 21,529 $ 35,173 $ 31,108
======== ======== ========== ==========
Distribution of Net Earnings:
Patronage Dividend $ 26,342 $ 22,456 $ 34,563 $ 32,923
Retained Earnings 529 (927) 610 (1,815)
-------- -------- ---------- ----------
Net Earnings $ 26,871 $ 21,529 $ 35,173 $ 31,108
======== ======== ========== ==========
See accompanying notes to financial statements.
-2-
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE, 30
1997 1996
(000's omitted)
Operating Activities:
Net Earnings $ 35,173 $ 31,108
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 9,578 8,160
Loss on sale of property and equipment 203 (22)
Increase in accounts receivable, net (72,717) (82,097)
Decrease (Increase) in merchandise inventory 28,473 (32,663)
Increase in prepaid expenses
and other current assets (3,944) (5,300)
Increase in accounts payable
and accrued expenses 67,175 103,049
Increase in other long-term liabilities 2,669 366
--------- ---------
Net Cash Provided By Operating Activities 66,610 22,601
Investing Activities:
Purchases of property and equipment (35,666) (19,736)
Proceeds from sale of property and equipment 145 51
Increase in other assets (3,927) (167)
--------- ---------
Net Cash Used In Investing Activities (39,448) (19,852)
Financing Activities:
Proceeds from short-term borrowings (6,097) 35,000
Proceeds from notes payable 32,464 0
Principal payments on long-term debt (3,145) (3,236)
Payments on refund certificates and
patronage financing programs (18,790) (16,920)
Proceeds from sale of common stock 736 776
Repurchase of common stock (5,633) (5,562)
Payments of cash portion of
patronage dividend (28,178) (23,522)
--------- ---------
Net Cash Used in Financing Activities (28,643) (13,464)
Decrease in Cash and Cash Equivalents (1,481) (10,715)
Cash and Cash Equivalents at Beginning of Period 12,657 12,853
--------- ---------
Cash and Cash Equivalents at End of Period $ 11,176 $ 2,138
========= =========
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 June 30, 1997 and 1996 and the results of
operations and cash flows for the six 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 June 30, 1997, compared to Three Months Ended June 30, 1996.
Results of Operations
Net sales increased 10.4% 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 Canada operations.
Gross profit increased 15.2% vs. 1996, and increased as a percent of sales
due to gross profit realized from the Canadian operation and increased
levels of vendor discounts. Gross profit on the Company's retail
operations also contributed to increased gross profit in 1997.
Warehouse and distribution expenses decreased $709,000 or 7.9% and as a
percent of sales versus 1996. This decrease is primarily due to increased
traffic and freight consolidations revenue partially offset by an increase
in expenses for the operation of two Canadian facilities.
Selling, general and administrative expenses increased $2.2 million or
13.0% and as a percent of sales due to costs associated with the Canadian
operation, increased data processing expenses and expenses for the
Company's retail operations.
Retail success and development expenses are comparable to 1996 but declined
as a percent of sales due to lower 1997 net advertising expenses.
Interest expense increased $1.7 million vs. 1996 due to increased
borrowings, additional dealer dating programs and higher interest rates.
Other income increased due to higher 1997 penalty charge income.
Income taxes increased $574,000 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
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996.
Results of Operations
Net sales increased 9.4% 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 Canada operations.
Gross profit increased 13.7% 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 the Canadian
operations.
Warehouse and distribution expenses increased $2.3 million or 12.8% and as
a percent of sales versus 1996 due to costs for the operation of one
additional domestic and two Canadian facilities opened in mid 1996
partially offset by increased traffic revenues.
Selling, general and administrative expenses increased $4.6 million or
14.2% and as a percent of sales due to costs associated with the Canadian
operation and increased data processing expenses.
Retail success and development expenses decreased $336,000 or 2.8%, and as
a percent of sales primarily due to increased advertising income.
Interest expense increased $2.8 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.
Income taxes increased $529,000 vs. 1996 due to improved profitability
of the Company's non-patronage operations.
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.
-6-
PART II. OTHER INFORMATION
ACE HARDWARE CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
The following information is furnished with respect to matters
submitted to a vote of the stockholders of the registrant at a meeting
thereof held during the quarter covered by this report:
(a) Date of meeting: June 2, 1997 - said meeting was
an annual meeting.
(b) 1. The following directors were elected at said
meeting for a three year term expiring in 2000:
Eric R. Bibens II
D. William Hagan
2. The following directors were reelected at said
meeting for a three year term expiring in 2000:
Jennifer C. Anderson
Mark Jeronimus
3. The names of the other directors other than the
above elected directors whose terms of office as
directors continue after the meeting are:
Roger E. Peterson
Lawrence R. Bowman
Richard E. Laskowski
James R. Williams, Jr.
Jon R. Weiss
John E. Kingrey
James T. Glenn
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 June 30, 1997.
-7-
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
RITA D. KAHLE DATE: AUGUST 14, 1997
Rita D. Kahle
Vice President, Finance
(Principal Financial and Accounting Officer,
and duly authorized Officer of the registrant)
-8-
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