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 April 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
2200 Kensington Court, Oak Brook, IL 60521, January 1, 1997-December31, 1997
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 April 4, 1998
Class A Voting Stock - $1,000 par value 3,850 shares
Class B Stock - $1,000 par value 2,670 shares
Class C Stock - $ 100 par value 2,107,880 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
Consolidated Balance Sheets -
April 4, 1998 and December 31, 1997 1
Consolidated Statements of Earnings - Thirteen Weeks Ended
April 4, 1998 and Three Months Ended March 31, 1997 2
Consolidated Statements of Cash Flows - Thirteen Weeks Ended
April 4, 1998 and Three Months Ended March 31, 1997 3
Notes to Consolidated Financial Statements 4 & 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Part II. - Other Information 7
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
April 4, December 31,
1998 1997
(000's omitted)
ASSETS
Current Assets:
Cash $ 22,715 $ 14,171
Accounts Receivable, Net 407,229 363,634
Merchandise Inventory 349,190 338,509
Prepaid Expenses and Other Current Assets 14,578 12,873
-------------- --------------
Total Current Assets 793,712 729,187
Property and Equipment, Net 242,427 242,979
Other Assets 6,832 4,405
-------------- --------------
Total Assets $ 1,042,971 $ 976,571
============== ==============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 7,496 $ 7,515
Short-Term Borrowings 64,904 42,000
Accounts Payable 451,615 423,499
Patronage Dividends Payable in Cash 34,452 29,943
Patronage Refund Certificates Payable 11,552 13,636
Accrued Expenses 52,568 53,583
-------------- --------------
Total Current Liabilities 622,587 570,176
Notes Payable 118,924 96,815
Patronage Refund Certificates Payable 39,565 49,044
Other Long-Term Liabilities 15,688 14,722
-------------- --------------
Total Liabilities 796,764 730,757
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 3,932 3,874
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 214,557 213,609
Class C Stock of $100 Par Value, Issuable 25,773 22,366
Additional Stock Subscribed, Net
of Unpaid Portion 246 383
Retained Earnings and Contributed Capital 6,439 6,649
-------------- --------------
Total Member Dealers' Equity 257,446 253,380
Less: Treasury Stock, at Cost 11,239 7,566
-------------- --------------
Total Member Dealers' Equity 246,207 245,814
-------------- --------------
Total Liabilities and Member Dealers Equity $ 1,042,971 $ 976,571
============== ==============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Three Months Ended
April 4, March 31,
1998 1997
(000's omitted)
Net Sales $ 721,403 $ 642,137
Cost of Sales 668,897 595,858
-------------- -------------
Gross Profit 52,506 46,279
Operating Expenses:
Warehouse and Distribution 11,101 11,468
Selling, General and Administration 19,302 17,850
Retail Success and Development 6,810 5,946
-------------- --------------
Total Operating Expenses 37,213 35,264
Operating Income 15,293 11,015
Interest Expense (3,855) (3,607)
Other Income, Net 1,623 1,204
Income Taxes (683) (310)
-------------- --------------
Net Earnings $ 12,378 $ 8,302
============== ==============
Distribution of Net Earnings:
Patronage Dividend $ 12,588 $ 8,221
Retained Earnings (210) 81
-------------- --------------
Net Earnings $ 12,378 $ 8,302
============== ==============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirteen Weeks Ended Three Month Ended
April 4, March 31,
1998 1997
(000's omitted)
Operating Activities:
Net Earnings $ 12,378 $ 8,302
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 5,260 4,620
Loss on sale of property and equipment - 113
Increase in accounts receivable, net (43,595) (19,384)
(Increase) Decrease in merchandise inventory (10,681) 9,820
Increase in prepaid expenses and other (1,705) (370)
Increase (Decrease) in accounts payable and
accrued expenses 27,101 (19,688)
Increase in other long-term liabilities 966 1,122
----------- ----------
Net Cash Used In Operating Activities (10,276) (15,465)
Investing Activities:
Purchases of property and equipment (4,708) (12,239)
Proceeds from sale of property and equipment - 135
Increase in other assets (2,427) (2,413)
----------- ----------
Net Cash Used In Investing Activities (7,135) (14,517)
Financing Activities:
Proceeds from short-term borrowings 22,904 15,968
Proceeds from notes payable 25,481 30,000
Principal payments on long-term debt (3,391) (1,055)
Payments on refund certificates and
patronage financing programs (16,235) (16,605)
Proceeds from sale of common stock 869 474
Repurchase of common stock (3,673) (2,586)
----------- -----------
Net Cash Provided By Financing Activities 25,955 26,196
Increase (Decrease) in Cash and Cash Equivalents 8,544 (3,786)
Cash and Cash Equivalents at Beginning of Period 14,171 12,657
----------- -----------
Cash and Cash Equivalents at End of Period $ 22,715 $ 8,871
=========== ===========
See accompanying notes to consolidated financial statements.
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
April 4, 1998 and March 31, 1997 and the results of operations and cash
flows for the thirteen 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 31st to the Saturday nearest
December 31st. Accordingly, the first quarter of 1998 consists of
thirteen weeks ending April 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 April 4, 1998 compared to Three Months Ended
March 31, 1997.
Results of Operations
Net sales increased 12.3% in 1998 primarily due to increased existing dealer
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 13.5% vs. 1997, and increased as a percent of sales due
to increased cash and vendor discounts, gross profit from the Company's retail
operations, and reduced warehouse costs absorbed into inventory.
Warehouse and distribution expenses decreased 3.2% or $367,000 vs. 1997 due to
increased traffic and freight consolidations income, partially offset by
increased distribution center costs to support increased warehouse sales.
Selling, general and administrative expenses increased $1.5 million or 8.1%,
however, decreased as a percent of sales due primarily to increased data
processing expenses.
Retail success and development expenses increased $864,000 or 14.5%, and
increased slightly as a percent of sales. The increased expenses were due to
additional store development costs partially offset by increased advertising
income.
Interest expense increased $248,000 vs. 1997 due to increased inventory levels,
additional dealer dating programs and long-term debt issued during 1998 to
fund long-term capital investments.
Other income increased $419,000 vs. 1997 due to increased retailer financing
interest income.
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 5. Other Information
Effective January 1st, 1998, the Board of Directors approved a
change to the Company's fiscal year from December 31st to the
Saturday nearest to December 31st. Accordingly, the first quarter
of 1998 consists of thirteen weeks ending April 4th, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(b) There were no reports on Form 8-K filed for the thirteen weeks
ended April 4th, 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: 05/15/98
Lori L. Bossmann
Vice President, Controller
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
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