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 1, 2000 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 1, 2000
--------------------------------------- ---------------------------
Class A Voting Stock - $1,000 par value 3,833 shares
Class B Stock - $1,000 par value 2,332 shares
Class C Stock - $ 100 par value 2,569,525 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
--------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
July 1, 2000 and January 1, 2000 1
Condensed Consolidated Statements of Earnings and
Condensed Consolidated Statements of Comprehensive
Income - Twenty-six Weeks and Thirteen Weeks Ended
July 1, 2000 and July 3, 1999 2
Condensed Consolidated Statements of Cash Flows -
Twenty-six Weeks Ended July 1, 2000 and
July 3, 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
Part II. - Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
(Unaudited)
July 1, January 1,
2000 2000
--------------- --------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 36,630 $ 35,422
Accounts Receivable, Net 459,725 370,879
Merchandise Inventory 413,520 373,090
Prepaid Expenses and Other Current Assets 15,072 13,341
--------------- --------------
Total Current Assets 924,947 792,732
Property and Equipment, Net 261,471 247,174
Other Assets 52,508 41,578
--------------- --------------
Total Assets $ 1,238,926 $ 1,081,484
=============== ==============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 4,970 $ 4,067
Short-Term Borrowings 91,788 49,869
Accounts Payable 579,578 449,497
Patronage Dividends Payable in Cash 16,792 38,173
Patronage Refund Certificates Payable 4,812 373
Accrued Expenses 67,128 69,990
--------------- --------------
Total Current Liabilities 765,068 611,969
Notes Payable 108,808 111,895
Patronage Refund Certificates Payable 59,010 55,257
Other Long-Term Liabilities 23,654 22,400
--------------- --------------
Total Liabilities 956,540 801,521
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 3,997 3,856
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 263,926 241,226
Class C Stock of $100 Par Value, Issuable 10,929 21,648
Additional Stock Subscribed, Net of Unpaid 450 498
Portion
Retained Earnings (1,181) 594
Contributed Capital 13,485 13,485
Accumulated Other Comprehensive Income (266) 291
--------------- --------------
Total Member Dealers' Equity 297,839 288,097
Less: Treasury Stock, at Cost 15,453 8,134
--------------- --------------
Total Member Dealers' Equity 282,386 279,963
Total Liabilities and Member Dealers Equity $ 1,238,926 $ 1,081,484
=============== ==============
See accompanying notes to condensed consolidated financial statements.
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted)
(Unaudited)
<TABLE>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 807,116 $ 907,308 $ 1,508,125 $ 1,681,533
Cost of Sales 728,224 829,256 1,362,175 1,540,306
-------------- -------------- -------------- --------------
Gross Profit 78,892 78,052 145,950 141,227
Operating Expenses:
Warehouse and Distribution 9,815 9,079 20,841 19,374
Selling, General and Administration 22,646 22,132 46,248 44,831
Retail Success and Development 18,588 12,491 35,617 23,460
-------------- -------------- -------------- --------------
Total Operating Expenses 51,049 43,702 102,706 87,665
-------------- -------------- -------------- --------------
Operating Income 27,843 34,350 43,244 53,562
Interest Expense (5,264) (4,593) (9,966) (8,437)
Other Income, net 2,817 2,119 5,954 4,310
Income Taxes 148 (587) 658 (837)
-------------- -------------- -------------- --------------
Net Earnings $ 25,544 $ 31,289 $ 39,890 $ 48,598
============== ============== ============== ==============
Distribution of Net Earnings:
Patronage Dividend $ 26,184 $ 31,154 $ 41,665 $ 49,892
Retained Earnings (640) 135 (1,775) (1,294)
-------------- -------------- -------------- --------------
Net Earnings $ 25,544 $ 31,289 $ 39,890 $ 48,598
============== ============== ============== ==============
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000's omitted)
(Unaudited)
<TABLE>
Thirteen Weeks Ended Twenty-six Weeks Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Earnings $ 25,544 $ 31,289 $ 39,890 $ 48,598
Foreign currency translation, net (501) 58 (557) 102
-------------- -------------- -------------- --------------
Comprehensive Income $ 25,043 $ 31,347 $ 39,333 $ 48,700
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
<TABLE>
Twenty-Six Weeks End Twenty-Six Weeks Ended
July 1, July 3,
2000 1999
-------------- --------------
<S> <C> <C>
Operating Activities:
Net Earnings $ 39,890 $ 48,598
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 12,221 11,026
Increase in accounts receivable, net (88,846) (70,128)
Increase in merchandise inventory (40,430) (887)
Increase in prepaid expenses
and other current assets (1,731) (3,141)
Increase in accounts payable and accrued
expense 127,219 55,866
Increase in other long-term liabilities 1,254 1,619
-------------- --------------
Net Cash Provided by Operating Activities 49,577 42,953
Investing Activities:
Purchases of property and equipment, net (26,518) (14,571)
Increase in other assets (11,487) (8,567)
-------------- --------------
Net Cash Used In Investing Activities (38,005) (23,138)
Financing Activities:
Proceeds of short-term borrowings, net 41,919 30,000
Principal payments on long-term debt (2,184) (4,939)
Payments on refund certificates and
patronage financing programs (5,752) (28,741)
Proceeds from sale of common stock 1,145 811
Repurchase of common stock (7,319) (6,623)
Payments of cash portion of patronage
dividends (38,173) (34,826)
-------------- --------------
Net Cash Used In Financing Activities (10,364) (44,318)
-------------- --------------
Increase (Decrease) in Cash and Cash Equivalents 1,208 (24,503)
Cash and Cash Equivalents at Beginning of Period 35,422 53,901
-------------- --------------
Cash and Cash Equivalents at End of Period $ 36,630 $ 29,398
============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) General
The condensed consolidated interim period financial statements presented
herein do not include all of the information and disclosures customarily
provided in annual financial statements and have not been audited, as
permitted by the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated interim period financial statements
should be read in conjunction with the annual financial statements included
in the Annual Report on Form 10-K. In the opinion of management, these
financial statements have been prepared in conformity with generally
accepted accounting principles and reflect all adjustments necessary for a
fair statement of the results of operations and cash flows for the interim
periods ended July 1, 2000 and July 3, 1999 and of it's financial position
as of July 1, 2000. All such adjustments are of a normal recurring nature.
The results of operations for the thirteen week and twenty-six week periods
ended July 1, 2000 and July 3, 1999 are not necessarily indicative of the
results of operations for a 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 losses 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 2000.
-4-
4) Segments
The Company is principally engaged as a wholesaler of hardware and related
products and manufactures paint products. The Company identifies segments
based on management responsibility and the nature of the business
activities of each component of the Company. The Company measures segments
earnings as operating earnings including an allocation for administrative
expenses, interest expense and income taxes. Information regarding the
identified segments and the related reconciliation to consolidated
information is as follows:
<TABLE>
Twenty-six Weeks Ended
July 1, 2000
-----------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 1,475,319 11,708 21,098 - 1,508,125
Intersegment Sales 11,966 56,654 - 68,620 -
Segment Earnings (Loss) 35,854 5,648 (1,497) (115) 39,890
Twenty-six Weeks Ended
July 3, 1999
-----------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 1,659,658 12,393 9,482 - 1,681,533
Intersegment Sales 11,225 56,514 - (67,739) -
Segment Earnings (Loss) 44,324 5,358 (864) (220) 48,598
Thirteen Weeks Ended
July 1, 2000
-----------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 788,538 6,707 11,871 - 807,116
Intersegment Sales 7,613 33,282 - (40,895) -
Segment Earnings (Loss) 22,731 3,477 (604) (60) 25,544
Thirteen Weeks Ended
July 3, 1999
-----------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 894,034 7,878 5,396 - 907,308
Intersegment Sales 6,226 28,918 - (35,144) -
Segment Earnings (Loss) 28,774 2,675 (60) (100) 31,289
</TABLE>
-5-
5) Business Combination
On June 30, 1999 the Company entered into a business combination agreement
with Builder Marts of America, Inc. (BMA) to combine the LBM Division of
the Company with BMA. Under this agreement, the Company contributed
defined business assets (primarily vendor rebate receivables, fixed assets
and inventories) for a non-controlling interest in the combined entity.
The investment in the combined entity will be accounted for under the
equity method of accounting. The accompanying consolidated financial
statements include the financial results of the LBM Division through the
closing date of August 2, 1999. Accordingly, the accompanying financial
statements for the twenty-six weeks ended July 1, 2000 do not include
activity for the LBM Division of the Company.
ACE HARDWARE CORPORATION
------------------------
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Thirteen Weeks Ended July 1, 2000 compared to Thirteen Weeks
------------------------------------------------------------
Ended July 3, 1999.
-------------------
Results of Operations
The total sales decrease for the quarter of 11.0% was affected by the business
combination of Ace LBM with BMA. As a result of this transaction, LBM sales are
not reported within the Company's sales results after August 2, 1999. Basic
business sales increased 8.0% in 2000 primarily due to increased existing
retailer volume, conversions to the Ace program and additional sales to
non-members. Domestic and International basic business sales increased 7.7% and
14.8%, respectively.
Gross profit increased $840,000 and increased as a percent of total sales from
8.6% in 1999 to 9.8% in 2000. The increase, as a percent of sales, results
primarily from the loss of lower margin LBM sales volume since August 1999.
Basic business (excluding LBM) gross profit decreased for the quarter as a
percent of basic business sales (9.8% in 2000 vs. 10.2% in 1999) due to higher
costs absorbed into inventory and sales mix shifts towards the lower margin
direct ship sales category. Higher vendor rebates combined with improved
Corporate store retail margins partially offset the gross profit decline for
the quarter.
Warehouse and distribution expenses increased $736,000 over 1999 and increased
as a percent of total sales from 1.0% in 1999 to 1.2% in 2000. As a percent to
basic business sales, these costs remained constant at 1.2%. Higher
distribution wages required to support the increased sales volume combined with
pre-opening costs for a new Loxley, Alabama distribution facility are partially
offset by higher logistics income for the quarter.
Selling, general and administrative expenses increased $514,000 or 2.3% and
increased as a percent of total sales due to increased information technology
costs, lower convention income and expenses associated with opening the
Loxley, Alabama distribution facility. Lower LBM Division costs partially
offset these expense increases.
Retail success and development expenses increased $6.1 million due to operating
costs associated with operating additional Corporate stores. Excluding
Corporate store operating expenses, retail success and development expenses are
up $2.9 million or 29.1% due to additional paint advertisment costs, costs to
support retail computer initiatives and increased retail field personnel costs.
-6-
ACE HARDWARE CORPORATION
------------------------
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Twenty-six Weeks Ended July 1, 2000 compared to Twenty-six Weeks
----------------------------------------------------------------
Ended July 3, 1999.
-------------------
Results of Operations
---------------------
The total sales decrease of 10.3% was affected by the business combination of
Ace LBM with BMA. As a result of this transaction, LBM sales are not reported
within the Company's sales results after August 2, 1999. Basic business sales
increased 8.2% in 2000 primarily due to increased existing retailer volume,
targeted efforts on new store development within our retailer base, conversions
to the Ace program and additional sales to non-members. Domestic and
International basic business sales increased 8.2% and 8.1%, respectively.
Gross profit increased $4.7 million and increased as a percent of total sales
from 8.4% in 1999 to 9.7% in 2000. The increase, as a percent of sales, results
primarily from the loss of lower margin LBM sales volume since August 1999.
Basic business (excluding LBM) gross profit decreased slightly as a percent of
basic business sales (9.7% in 2000 vs. 9.9% in 1999) due to a sales mix shift
towards the lower margin direct ship sales category and higher warehousing
costs absorbed into inventory. Higher vendor rebates combined with improved
Corporate store gross margin partially offset the year-to-date gross profit
decline.
Warehouse and distribution expenses increased $1.5 million over 1999 and
increased as a percent of total sales from 1.2% in 1999 to 1.4% in 2000. As a
percent of basic business sales, these costs remained constant at 1.4%.
Higher distribution wages required to support the increased sales volume
combined with pre-opening costs associated for a new Loxley, Alabama
distribution facility are partially offset by higher logistics income.
Selling, general and administrative expenses increased $1.4 million or 3.2% and
increased as a percent of total sales due to higher information technology
costs, lower convention income and expenses associated with opening the
Loxley, Alabama distribution facility. Lower LBM Division costs partially
offset these expense increases.
Retail success and development expenses increased $12.2 million due to
operating costs associated with operating additional Corporate stores.
Excluding Corporate store operating expenses, retail success and development
expenses are up $6.6 million or 36.2% due to additional paint advertising
costs, costs to support retail computer initiatives, increased retail field
personnel costs and costs to support the Vision 21 strategy.
Interest expense increased $1.5 million due to higher average borrowing levels
and interest rates. The increased borrowing levels result from the
construction of the Loxley, Alabama distribution center and increased retailer
dating programs.
Other income increased $1.6 million primarily due to income realized on
non-controlling investments in affiliates.
-7-
Income taxes decreased due to decreased income from non-patronage activities.
Operating losses from non-patronage activities resulted in a net income tax
benefit.
Liquidity and Capital Resources
-------------------------------
The Company expects that existing and internally generated funds, along with
new and established lines of credit and long-term financing, will continue to
be sufficient in the foreseeable future to finance the Company's working
capital requirements and patronage dividend and capital expenditures programs.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There have been no material changes in the Company's market risk
during the twenty-six week period ended July 1, 2000. For additional
information, refer to Item 7a in the Company's Annual Report on Form
10-K for the year ended January 1, 2000.
-8-
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 5, 2000 - said meeting was an annual
meeting.
(b) 1. The following director was elected at said meeting for a
three year term expiring in 2003:
Richard A. Karp
2. The following directors were reelected at said meeting for a
three year term expiring in 2003:
Eric R. Bibens II
D. William Hagan
Jennifer C. Anderson
3. The names of the other directors other than the above elected
directors whose terms of office as directors continue after
the meeting are:
Richard F. Baalmann, Jr.
Richard W. Stine
J. Thomas Glenn
Daniel L. Gust
Lawrence R. Bowman
Howard J. Jung
Mario R. Nathusius
Roger E. Peterson resigned from the Board of Directors on
May 31, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(b) A Form 8-K was filed on May 2, 2000 containing:
.Plan of Distribution of patronage dividends with respect to
purchases of merchandise made from the Registrant from
January 1, 1999 adopted by the Board of Directors, and
.Notice of Annual Meeting of Stockholders on June 5, 2000 and
Proxy solicited by Board of Directors and related information.
-11-
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 15, 2000
Lori L. Bossmann
Vice President, Finance
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
