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 October 3, 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 October 3, 1998
Class A Voting Stock - $1,000 par value 3,820 shares
Class B Stock - $1,000 par value 2,610 shares
Class C Stock - $ 100 par value 2,281,160 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
Consolidated Balance Sheets -
October 3, 1998 and December 31, 1997 1
Consolidated Statements of Earnings - Thirty-nine Weeks and
Thirteen Weeks Ended October 3, 1998 and Nine Months and
Three Months Ended September 30, 1997 2
Consolidated Statements of Cash Flows - Thirty-nine
Weeks Ended October 3, 1998 and Nine Months Ended
September 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
October 3, December 31,
1998 1997
(000's omitted)
ASSETS
Current Assets:
Cash $ 26,460 $ 14,171
Accounts Receivable, Net 386,643 364,541
Merchandise Inventory 361,688 338,509
Prepaid Expenses and Other Current Assets 17,777 11,966
------------- ------------
Total Current Assets 792,568 729,187
Property and Equipment, Net 235,986 242,979
Other Assets 10,415 4,405
------------- ------------
Total Assets $ 1,038,969 $ 976,571
============= ============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 7,401 $ 7,515
Short-Term Borrowings 39,005 42,000
Accounts Payable 462,274 423,499
Patronage Dividends Payable in Cash 25,801 29,943
Patronage Refund Certificates Payable 10,324 13,636
Accrued Expenses 52,005 53,583
------------- ------------
Total Current Liabilities 596,810 570,176
Notes Payable 115,549 96,815
Patronage Refund Certificates Payable 51,113 49,044
Other Long-Term Liabilities 17,686 14,722
------------- ------------
Total Liabilities 781,158 730,757
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 4,020 3,874
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 236,983 213,609
Class C Stock of $100 Par Value, Issuable 19,970 22,366
Additional Stock Subscribed, Net of Unpaid Portion 222 383
Retained Earnings and Contributed Capital 6,994 6,649
------------- ------------
Total Member Dealers' Equity 274,688 253,380
Less: Treasury Stock, at Cost 16,877 7,566
------------- ------------
Total Member Dealers' Equity 257,811 245,814
------------- ------------
Total Liabilities and Member Dealers' Equity $ 1,038,969 $ 976,571
============= ============
See accompanying notes to consolidated financial statements.
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Endeed Three Months Ended Thirty-nine Weeks Ended Nine Months Ended
October 3, September 30, October 3, September 30,
1998 1997 1998 1997
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Net Sales $ 782,002 $ 734,353 $ 2,332,974 $ 2,165,057
Cost of Sales 716,163 673,932 2,146,068 1,995,059
------------ ------------ ------------ ------------
Gross Profit 65,839 60,421 186,906 169,998
Operating Expenses:
Warehouse and Distribution 9,228 9,764 28,540 29,521
Selling, General and Administrative 19,140 18,224 57,585 54,331
Retail Success and Development 9,703 7,764 24,050 20,314
------------- ------------- ------------ ------------
Total Operating Expenses 38,071 35,752 110,175 104,166
------------- ------------- ------------ ------------
Operating Income 27,768 24,669 76,731 65,832
Interest Expense (4,941) (3,537) (13,090) (11,202)
Other Income, Net 1,578 1,285 4,360 4,143
Income Taxes (514) (505) (1,862) (1,687)
------------ ------------ ------------ ------------
Net Earnings $ 23,891 $ 21,912 $ 66,139 $ 57,086
============ ============ ============ ============
Distribution of Net Earnings:
Patronage Dividend $ 23,638 $ 21,785 $ 65,794 $ 56,349
Retained Earnings 253 127 345 737
------------ ------------ ------------ ------------
Net Earnings $ 23,891 $ 21,912 $ 66,139 $ 57,086
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine Weeks Ended Nine Months Ended
October 3, September 30,
1998 1997
(000's omitted)
<S> <C> <C>
Operating Activities:
Net Earnings $ 66,139 $ 57,086
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 16,124 14,296
Loss on sale of property and equipment 417 212
Increase in accounts receivable, net (22,102) (3,203)
Increase in merchandise inventory (23,179) (2,173)
Increase in prepaid expenses and other current assets (5,811) (1,837)
Increase in accounts payable and
accrued expenses 37,197 706
Increase in other long-term liabilities 2,964 4,049
----------- -----------
Net Cash Provided By Operating Activities 71,749 69,136
Investing Activities:
Purchases of property and equipment (17,697) (43,161)
Proceeds from sale of property and equipment 8,149 154
Increase in other assets (6,010) (5,966)
----------- -----------
Net Cash Used In Investing Activities (15,558) (48,973)
Financing Activities:
Proceeds (Payments) of short-term borrowings (2,995) 6,500
Proceeds from notes payable 26,022 33,016
Principal payments on long-term debt (7,402) (5,492)
Payments on refund certificates and
patronage financing programs (21,266) (20,974)
Proceeds from sale of common stock 993 1,781
Repurchase of common stock (9,311) (8,661)
Payments of cash portion of patronage dividend (29,943) (28,178)
----------- -----------
Net Cash Provided By Financing Activities (43,902) (22,008)
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 12,289 (1,845)
Cash and Cash Equivalents at Beginning of Period 14,171 12,657
----------- -----------
Cash and Cash Equivalents at End of Period $ 26,460 $ 10,812
=========== ===========
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 October 3, 1998
and September 30, 1997 and the results of operations and cash flows for
the thirty-nine 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 third quarter of 1998 consists of thirteen
weeks ending October 3, 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 has been developed for
all devices (time clocks, power systems, etc.) within the Company. The
Company is approximately 40% complete with the project as of the 3rd
quarter. An additional 20% is anticipated to be completed by year-end.
The remaining 40% will be dedicated to the Enterprise testing in the first
half of 1999. 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 current estimates,
such costs could range between $5.0 million and $6.5 million. As of
October 3, 1998 the Company has expended approximately $2.4 million. 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 affect on the Company's systems. The Company is in the
process of identifying specific business risks as they relate to Year 2000
and is developing a Contingency Plan. It is anticipated that the
Contingency plan will be completed in the first half of 1999.
ACE HARDWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended October 3, 1998 compared to Three Months Ended
September 30, 1997.
Results of Operations
Net sales increased 6.5% in 1998 primarily due to increased existing retailer
volume, targeted efforts on new store development within our retailer base and
conversions to the Ace program. 1998 includes one less working day than 1997.
Gross profit increased 9.0% vs. 1997, and increased as a percent of sales due
to increased handling charges from sales mix shifts, higher vendor allowances,
increased gross profit from the Company's retail operations and lower
warehouse costs absorbed into inventory. Decreased paint manufacturing profit
partially offsets these increases.
Warehouse and distribution expenses decreased 5.5% vs. 1997 due to increased
traffic and freight consolidations income and efficiencies realized due to
the replacement of an existing facility in the third quarter of 1997.
Selling, general and administrative expenses increased $916,000 or 5.0%,
however, decreased as a percent of sales due primarily to continued cost
control measures.
Retail success and development expenses increased $1.9 million or 25.0%, and
increased as a percent of sales. Retail store development costs combined with
lower advertising income generated the third quarter expense increase.
Interest expense increased $1.4 million vs. 1997 due to additional dealer
dating programs and long-term debt issued during 1998 to fund long-term
capital investments.
Thirty-nine Weeks Ended October 3, 1998 compared to Nine Months Ended
September 30, 1997.
Results of Operations
Net sales increased 7.8% in 1998 primarily due to increased existing retailer
volume, targeted efforts on new store development within our retailer base and
conversions to the Ace program. Additionally, three additional workdays are
included in the 1998 results.
Gross profit increased 9.9% vs. 1997, and increased as a percent of sales due
to increased handling charges from sales mix shifts, increased vendor
discounts and lower distribution costs absorbed into inventory. Gross profit
from the Company's retail operations is partially offset by lower paint
manufacturing gross profit year-to-date.
Warehouse and distribution expenses decreased $981,000 or 3.3% vs. 1997 due to
increased traffic and freight consolidations income, partially offset by wage
increases to support the increased warehouse sales volume. Year-to-date wages
as a percent of sales have declined due to the replacement of a facility in
1997 and productivity improvements.
Selling, general and administrative expenses increased $3.3 million or 6.0%,
however, decreased as a percent of sales. Increased information technology
costs to support our year 2000 efforts results in the year-to-date expense
increase.
Retail success and development expenses increased $3.7 million or 18.4%.
Retail store development costs partially offset by increased advertising
income generated the year-to-date expense increase.
Interest expense increased $1.9 million vs. 1997 due to additional dealer
dating programs and long-term debt issued during 1998 to fund long-term
capital investments.
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 6. Exhibits and Reports on Form 8-K.
(b) There were no reports on Form 8-K filed for the thirty-nine weeks
ended October 3, 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 NOVEMBER 16, 1998
Lori L. Bossmann
Vice President, Controller
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
<TABLE> <S> <C>
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<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.
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