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 the Period ended July 4, 1998 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
(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 July 4, 1998
Class A Voting Stock - $1,000 par value 3,810 shares
Class B Stock - $1,000 par value 2,650 shares
Class C Stock - $ 100 par value 2,301,870 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
Consolidated Balance Sheets -
July 4, 1998 and December 31, 1997 1
Consolidated Statements of Earnings - Twenty-six Weeks and
Thirteen Weeks Ended July 4, 1998 and Six Months and
Three Months Ended June 30, 1997 2
Consolidated Statements of Cash Flows - Twenty-six Weeks
Ended July 4, 1998 and Six Months Ended June 30, 1997 3
Notes to Consolidated Financial Statements 4 & 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 & 7
Part II. - Other Information 8
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
July 4, December 31,
1998 1997
(000's omitted)
ASSETS
Current Assets:
Cash $ 46,492 $ 14,171
Accounts Receivable, Net 450,840 364,541
Merchandise Inventory 331,747 338,509
Prepaid Expenses and Other Current Assets 16,675 11,966
-------------- --------------
Total Current Assets 845,754 729,187
Property and Equipment, Net 235,069 242,979
Other Assets 7,104 4,405
-------------- --------------
Total Assets $ 1,087,927 $ 976,571
============== ==============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 7,402 $ 7,515
Short-Term Borrowings 43,990 42,000
Accounts Payable 525,843 423,499
Patronage Dividends Payable in Cash 16,721 29,943
Patronage Refund Certificates Payable 10,362 13,636
Accrued Expenses 50,520 53,583
-------------- --------------
Total Current Liabilities 654,838 570,176
Notes Payable 117,221 96,815
Patronage Refund Certificates Payable 46,137 49,044
Other Long-Term Liabilities 17,069 14,722
-------------- --------------
Total Liabilities 835,265 730,757
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 3,963 3,874
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 236,613 213,609
Class C Stock of $100 Par Value, Issuable 12,633 22,366
Additional Stock Subscribed, Net of Unpaid 220 383
Retained Earnings and Contributed Capital 6,741 6,649
-------------- --------------
Total Member Dealers' Equity 266,669 253,380
Less: Treasury Stock, at Cost 14,007 7,566
-------------- --------------
Total Member Dealers' Equity 252,662 245,814
-------------- --------------
Total Liabilities and Member Dealers $ 1,087,927 $ 976,571
============== ==============
See accompanying notes to consolidated financial statements.
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Three Months Ended Twenty-six Weeks Ended Six Months Ended
July 4, June 30, July 4, June 30,
1998 1997 1998 1997
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Net Sales $ 829,569 $ 788,567 $ 1,550,972 $ 1,430,704
Cost of Sales 761,008 725,269 1,429,905 1,321,127
------------ ------------ ------------- -------------
Gross Profit 68,561 63,298 121,067 109,577
Operating Expenses:
Warehouse and Distribution 8,266 8,299 19,312 19,757
Selling, General and Administrative 19,088 18,247 38,445 36,107
Retail Success and Development 7,537 6,604 14,347 12,550
------------ ------------ ------------- -------------
Total Operating Expenses 34,891 33,150 72,104 68,414
Operating Income 33,670 30,148 48,963 41,163
Interest Expense (4,294) (4,059) (8,149) (7,666)
Other Income, Net 1,159 1,653 2,782 2,857
Income Taxes (665) (871) (1,348) (1,181)
------------ ------------ ------------- -------------
Net Earnings $ 29,870 $ 26,871 $ 42,248 $ 35,173
============ ============ ============= =============
Distribution of Net Earnings:
Patronage Dividends $ 29,568 $ 26,342 $ 42,156 $ 34,563
Retained Earnings 302 529 92 610
------------ ------------ ------------- -------------
Net Earnings $ 29,870 $ 26,871 $ 42,248 $ 35,173
============ ============ ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six Weeks Ended Six Months Ended
July 4, June 30,
1998 1997
(000's omitted)
<S> <C> <C>
Operating Activities:
Net Earnings $ 42,248 $ 35,173
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 10,812 9,578
Loss on sale of property and equipment 415 203
Increase in accounts receivable, net (86,299) (72,910)
Decrease in merchandise inventory 6,762 28,473
Increase in prepaid expenses and other current assets (4,709) (3,944)
Increase in accounts payable and
accrued expenses 99,281 67,450
Increase in other long-term liabilities 2,347 2,587
----------- -------------
Net Cash Provided By Operating Activities 70,857 66,610
Investing Activities:
Purchases of property and equipment (11,460) (35,666)
Proceeds from sale of property and equipment 8,143 145
Increase in other assets (2,699) (3,927)
----------- -------------
Net Cash Used In Investing Activities (6,016) (39,448)
Financing Activities:
Proceeds (Payments) of short-term borrowings 1,990 (6,097)
Proceeds from notes payable 25,713 32,464
Principal payments on long-term debt (5,420) (3,145)
Payments on refund certificates and
patronage financing programs (18,983) (18,790)
Proceeds from sale of common stock 564 736
Repurchase of common stock (6,441) (5,633)
Payments of cash portion of patronage dividend (29,943) (28,178)
------------- -------------
Net Cash Provided By Financing Activities (32,520) (28,643)
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents 32,321 (1,481)
Cash and Cash Equivalents at Beginning of Period 14,171 12,657
------------- -------------
Cash and Cash Equivalents at End of Period $ 46,492 $ 11,176
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
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, 1997 balance
sheet but in the opinion of the Company reflect all adjustments necessary
to present fairly the financial position as of July 4, 1998 and June 30,
1997 and the results of operations and cash flows for the twenty-six weeks
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 1998.
4) Notes Payable
In March 1998, the Company entered into a $25,000,000 loan agreement due
February 9, 2010. The note bears interest at 6.61% per annum, payable
annually. Annual principle payments commence on February 9, 2006 and
continue through 2010.
5) Fiscal Year
Effective January 1, 1998, the Board of Directors approved a change to the
Company's fiscal year from December 31 to the Saturday nearest December 31.
Accordingly, the second quarter of 1998 consists of thirteen weeks ending
July 4, 1998.
6) Year 2000
A detailed plan has been established to identify and track progress on the
identification of systems, changing of non-compliant systems and testing of
those systems for Year 2000 compliance. Project completion is planned for
the middle of 1999. In addition, a plan is being developed for all devices
(time clocks, power systems, etc.) within the Company. The Company expects
its Year 2000 date conversion project to be completed on a timely basis.
The Company expects to incur internal staff costs as well as incremental
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the Year 2000. A
significant portion of these costs will represent the re-deployment of
existing information technology resources. Based upon an initial
investigation, the Company estimates that such costs could range between
$3,000,000 and $5,000,000.
To date, correspondence has been received from the Company's primary vendors
that plans are being developed to address processing of transactions in the
Year 2000. However, there can be no assurance that the systems of other
companies on which the Company's system rely will be converted timely or that
any such failure to convert by another company would not have an adverse
effect on the Company's systems.
ACE HARDWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended July 4, 1998 compared to Three Months Ended June 30, 1997.
Results of Operations
Net sales increased 5.2% in 1998 primarily due to increased existing retailer
volume, targeted efforts on new store development and conversions to the Ace
program. Price deflation in the lumber category negatively impacted second
quarter sales results.
Gross profit increased 8.3% vs. 1997, and increased as a percent of sales due
to increased handling charges from sales mix shifts, increased cash and vendor
discounts and gross profit from the Company's manufacturing, retail and Cana-
dian operations.
Warehouse and distribution expenses decreased slightly vs. 1997 due to
increased traffic and freight consolidations income, partially offset by
increased warehousing costs absorbed into inventory and wage increases to sup-
port increased warehouse sales volume.
Selling, general and administrative expenses increased $841,000 or 4.6%,
however, decreased as a percent of sales due primarily to increased data
processing expenses offset by increased convention income.
Retail success and development expenses increased $933,000 or 14.1%, and
increased as a percent of sales. Retail store development costs partially
offset by increased advertising income generated the second quarter expense
increase.
Interest expense increased $235,000 vs. 1997 due to additional long-term debt
issued during 1998 to fund long-term capital investments.
Other income decreased $494,000 vs. 1997 primarily due to a loss on the sale
of property and equipment and lower retailer service charges.
Twenty-six Weeks Ended July 4, 1998 compared to Six Months Ended June 30, 1997.
Results of Operations
Net sales increased 8.4% in 1998 primarily due to increased existing retailer
volume, targeted efforts on new store development and conversions to the Ace
program. Additionally, four additional workdays are included in the 1998
results.
Gross profit increased 10.5% vs. 1997, and increased as a percent of sales
due to increased handling charges from sales mix shifts, and higher cash and
vendor discounts. Gross profit from the Company's retail and Canadian operations
also contributed to increased year-to-date gross profit.
Warehouse and distribution expenses decreased $445,000 vs. 1997 due to
increased traffic and freight consolidations income, partially offset by
wage increases to support increased warehouse sales volume.
Selling, general and administrative expenses increased $2.3 million or 6.5%,
however, decreased as a percent of sales due primarily to increased data
processing expenses.
Retail success and development expenses increased $1.8 million or 14.3%.
Retail store development costs partially offset by increased advertising income
generated the year-to-date expense increase.
Interest expense increased $483,000 vs. 1997 due to additional dealer dating
programs and long-term debt issued during 1998 to fund long-term capital
investments.
Income taxes increased $167,000 primarily 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.
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 1, 1998 - said meeting was an annual meeting.
(b) 1. The following directors were elected at said
meeting for a three year term expiring in 2001:
Daniel L. Gust
Howard J. Jung
Mario R. Nathusius
2. The following directors were reelected at said
meeting for a three year term expiring in 2001:
Lawrence R. Bowman
Roger E. Peterson
3. The names of the other directors other than the
above elected directors whose terms of office as directors
continue after the meeting are:
Eric R. Bibbens, II
D. William Hagan
Jennifer C. Anderson
Mark Jeronimus
Jon R. Weiss
John E. Kingrey
J. Thomas Glenn
Item 6. Exhibits and Reports on Form 8-K.
(b) There were no reports on Form 8-K filed for the twenty-six
weeks ended July 4, 1998.
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 AUGUST 14, 1998
Lori L. Bossmann
Vice President, Controller
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-2-1999
<PERIOD-END> JUL-4-1998
<CASH> 46492
<SECURITIES> 0
<RECEIVABLES> 453291
<ALLOWANCES> 2451
<INVENTORY> 331747
<CURRENT-ASSETS> 845754
<PP&E> 391856
<DEPRECIATION> 156787
<TOTAL-ASSETS> 1087927
<CURRENT-LIABILITIES> 654838
<BONDS> 0
0
0
<COMMON> 259708
<OTHER-SE> 6961
<TOTAL-LIABILITY-AND-EQUITY> 1087927
<SALES> 1550972
<TOTAL-REVENUES> 1550972
<CGS> 1429905
<TOTAL-COSTS> 1429905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8149
<INCOME-PRETAX> 43596
<INCOME-TAX> 1348
<INCOME-CONTINUING> 42248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42248
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
