-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rz7LdNl+ZAFexHPLjgsechH0+Xapwfwcob+eQvnl1vrIJ7RsI5tAJ7ZMLFASVAJ2 Yx999RzeIPfiX2rqkj7SaA== 0000002024-99-000015.txt : 19990818 0000002024-99-000015.hdr.sgml : 19990818 ACCESSION NUMBER: 0000002024-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE HARDWARE CORP CENTRAL INDEX KEY: 0000002024 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] IRS NUMBER: 360700810 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-55860 FILM NUMBER: 99694252 BUSINESS ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7089906600 MAIL ADDRESS: STREET 1: 1300 KENSINGTON RD CITY: OAKBROOK STATE: IL ZIP: 60521 10-Q 1 FORM 10-Q, 2ND QUARTER 1999 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 3, 1999 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 3, 1999 Class A Voting Stock - $1,000 par value 3,840 shares Class B Stock - $1,000 par value 2,496 shares Class C Stock - $ 100 par value 2,462,033 shares ACE HARDWARE CORPORATION INDEX Part I. - Financial Information: Page No. Item 1. Financial Statements Consolidated Balance Sheets - July 3, 1999 and January 2, 1999 1 Consolidated Statements of Earnings and Consolidated Statements of Comprehensive Income - Twenty-six Weeks and Thirteen Weeks Ended July 3, 1999 and July 4, 1998 2 Consolidated Statements of Cash Flows - Twenty-six Weeks Ended July 3, 1999 and July 4, 1998 3 Notes to Consolidated Financial Statements 4 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 - 11 Part II. - Other Information Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 PART I. ITEM 1. FINANCIAL INFORMATION ACE HARDWARE CORPORATION CONSOLIDATED BALANCE SHEETS July 3, January 2, 1999 1999 (000's omitted) ASSETS Current Assets: Cash $ 29,398 $ 53,901 Accounts Receivable, Net 476,044 397,120 Merchandise Inventory 335,292 334,405 Prepaid Expenses and Other Current Assets 18,287 15,146 ------------ ------------ Total Current Assets 859,021 800,572 Property and Equipment, Net 243,670 239,845 Other Assets 15,698 7,309 ------------ ------------ Total Assets $ 1,118,389 $ 1,047,726 ============ ============ LIABILITIES AND MEMBER DEALERS' EQUITY Current Liabilities: Current Installment of Long-Term Debt $ 5,443 $ 7,433 Short-Term Borrowings 55,000 25,000 Accounts Payable 516,134 466,008 Patronage Dividends Payable in Cash 19,286 34,826 Patronage Refund Certificates Payable 399 20,655 Accrued Expenses 68,777 54,724 ------------ ------------ Total Current Liabilities 665,039 608,646 Notes Payable 112,472 115,421 Patronage Refund Certificates Payable 51,898 43,465 Other Long-Term Liabilities 20,784 18,682 ------------ ------------ Total Liabilities 850,193 786,214 Member Dealers' Equity: Class A Stock of $1,000 Par Value 3,965 3,846 Class B Stock of $1,000 Par Value 6,499 6,499 Class C Stock of $100 Par Value 252,566 226,571 Class C Stock of $100 Par Value, Issuable 14,509 26,170 Additional Stock Subscribed, Net of Unpaid Portion 517 471 Retained Earnings and Contributed Capital 5,293 6,587 Accumulated Other Comprehensive Income (716) (818) ------------ ------------ Total Member Dealers' Equity 282,633 269,326 Less: Treasury Stock, at Cost 14,437 7,814 ------------ ------------ Total Member Dealers' Equity 268,196 261,512 ------------ ------------ Total Liabilities and Member Dealers' Equity $ 1,118,389 $ 1,047,726 ============ ============ See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS Thirteen Weeks Ended Thirteen Weeks Ended Twenty-six Weeks Ended Twenty-six Weeks Ended July 3, July 4, July 3, July 4, 1999 1998 1999 1998 (000's omitted) (000's omitted) Net Sales $ 907,308 $ 829,569 $ 1,681,533 $ 1,550,972 Cost of Sales 829,256 758,501 1,540,306 1,426,678 ------------------ ------------------ -------------------- -------------------- Gross Profit 78,052 71,068 141,227 124,294 Operating Expenses: Warehouse and Distribution 9,207 9,039 19,374 19,510 Selling, General and Administrative 21,945 20,995 44,611 41,812 Retail Success and Development 12,550 7,537 23,680 14,347 ------------------ ------------------ -------------------- -------------------- Total Operating Expenses 43,702 37,571 87,665 75,669 Operating Income 34,350 33,497 53,562 48,625 Interest Expense (4,570) (4,294) (8,386) (8,149) Other Income, net 2,096 1,332 4,259 3,120 Income Taxes (587) (665) (837) (1,348) ------------------ ------------------ -------------------- -------------------- Net Earnings $ 31,289 $ 29,870 $ 48,598 $ 42,248 ================== ================== ==================== ==================== Distribution of Net Earnings: Patronage Dividends $ 31,154 $ 29,568 $ 49,892 $ 42,156 Retained Earnings 135 302 (1,294) 92 ------------------ ------------------ -------------------- -------------------- Net Earnings $ 31,289 $ 29,870 $ 48,598 $ 42,248 ================== ================== ==================== ==================== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Thirteen Weeks Ended Thirteen Weeks Ended Twenty-six Weeks Ended Twenty-six Weeks Ended July 3, July 4, July 3, July 4, 1999 1998 1999 1998 (000's omitted) (000's omitted) Net Earnings $ 31,289 $ 29,870 $ 48,598 $ 42,248 Foreign currency translation, net 58 (741) 102 (618) ------------------ ---------------------- ------------------ -------------------- Comprehensive Income $ 31,347 $ 29,129 $ 48,700 $ 41,630 ================== ====================== =================== ==================== See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Twenty-six Weeks Ended Twenty-six Weeks Ended July 3, July 4, 1999 1998 (000's omitted) Operating Activities: Net Earnings $ 48,598 $ 42,248 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 11,026 10,812 Loss on sale of property and equipment - 415 Increase in accounts receivable, net (79,454) (87,366) Decrease in merchandise inventory 4 6,205 Increase in prepaid expenses and other (3,141) (3,060) current assets Increase in accounts payable and accrued expenses 63,920 99,023 Increase in other long-term liabilities 2,102 2,347 ---------------- ---------------- Net Cash Provided By Operating Activities 43,055 70,624 Investing Activities: Purchases of property and equipment (14,851) (11,460) Proceeds from sale of property and equipment - 8,143 Increase in other assets (8,389) (2,466) ---------------- ---------------- Net Cash Used In Investing Activities (23,240) (5,783) Financing Activities: Proceeds of short-term borrowings 30,000 1,990 Proceeds from notes payable - 25,713 Principal payments on long-term debt (4,939) (5,420) Payments on refund certificates and patronage financing programs (28,741) (18,983) Proceeds from sale of common stock 811 564 Repurchase of common stock (6,623) (6,441) Payments of cash portion of patronage dividend (34,826) (29,943) ---------------- ---------------- Net Cash Used In Financing Activities (44,318) (32,520) ---------------- ---------------- Increase (Decrease) in Cash and Cash Equivalents (24,503) 32,321 Cash and Cash Equivalents at Beginning of Period 53,901 14,171 ---------------- ---------------- Cash and Cash Equivalents at End of Period $ 29,398 $ 46,492 ================ ================ 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 January 2, 1999 balance sheet but in the opinion of the Company reflect all adjustments necessary to present fairly the financial position as of July 3, 1999 and July 4, 1998 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 1999. 4) 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 1999 and 1998 consists of thirteen weeks. 5) 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 nearly 100% complete with the project as of July 3, 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. The Company has expended approximately $5.1 million through July 3, 1999. 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 has developed a Business Recovery Plan to address specific business risks related to year 2000. This plan includes specific direction, including but not limited to, trigger events to invoking the Plan, length of period that could be sustained under the Plan, implementation procedures, training, data security and integrity and resource requirements in the unlikely event that the plan will be implemented. 6) 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 interest expense and income taxes. Information regarding the identified segments and the related reconciliation to consolidated information is as follows: Twenty-six Weeks Ended July 3, 1999 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated 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 Identifiable Segment Assets 1,050,165 36,602 45,243 (13,621) 1,118,389 Twenty-six Weeks Ended July 4, 1998 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated Net Sales from External Customers 1,530,633 15,009 5,330 1,550,972 Intersegment Sales 5,013 50,859 (55,872) Segment Earnings (Loss) 37,141 5,445 (18) (320) 42,248 Identifiable Segment Assets 1,030,379 32,902 27,900 (3,254) 1,087,927 - - Thirteen Weeks Ended July 3, 1999 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated 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 Thirteen Weeks Ended July 4, 1998 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated Net Sales from External Customers 817,982 8,058 3,529 829,569 Intersegment Sales 2,636 29,689 (32,325) Segment Earnings (Loss) 25,001 4,829 131 (91) 29,870
7) BMA 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 will contribute 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 July 3, 1999 as the closing is scheduled for August 2, 1999. ACE HARDWARE CORPORATION PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Thirteen Weeks Ended July 3, 1999 compared to Thirteen Weeks Ended July 4, 1998. Results of Operations Net sales increased 9.4% in 1999 primarily due to increased existing retailer volume, targeted efforts on new store development within our retailer base and conversions to the Ace program. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 6.8% for the quarter. A decline in International business negatively impacted basic sales for the quarter. Gross profit increased $7.0 million and increased as a percent of sales from 8.57% in 1998 to 8.60% in 1999. Increased handling charges from warehouse shipments, higher cash discounts, increased margin from retail operations and lower costs absorbed into inventory resulted in the increase. Warehouse and distribution expenses increased slightly vs. 1998 but decreased as a percent of total sales from 1.09% in 1998 to 1.01% in 1999. Increased warehouse and distribution costs required to support increased handled sales partially offset higher traffic and freight consolidations income. Selling, general and administrative expenses increased $950,000 or 4.5% but decreased as a percent of sales due to increased information technology costs to support our year 2000 efforts partially offset by increased Spring convention income. Retail success and development expenses increased $5.0 million due to costs associated with additional company-owned stores, costs to support retail computer initiatives, new business development costs and decreased advertising income. Twenty-six Weeks Ended July 3, 1999 compared to Twenty-six Weeks Ended July 4, 1998. Results of Operations Net sales increased 8.4% in 1999 primarily due to increased existing retailer volume, targeted efforts on new store development within our retailer base and conversions to the Ace program. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 6.8%. A decline in International business negatively impacted basic sales. Excluding International, basic sales are up 7.6%. The rebound of lumber prices has also contributed to the total sales increase. 1999 includes three fewer working days than 1998. Gross profit increased $16.9 million and increased as a percent of sales from 8.01% in 1998 to 8.40% in 1999. Increased handling charges from warehouse shipments, higher cash discounts and increased margin from retail operations resulted in the year-to-date increase. Warehouse and distribution expenses decreased slightly vs. 1998 and decreased as a percent of total sales from 1.26% in 1998 to 1.15% in 1999. Increased warehouse and distribution costs required to support increased handled sales are partially offset by higher traffic and freight consolidations income. Selling, general and administrative expenses increased $2.8 million or 6.7% but decreased as a percent of sales due to increased information technology costs to support our year 2000 efforts. Retail success and development expenses increased $9.3 million due to costs associated with additional company-owned stores, costs to support retail computer initiatives, new business development costs and decreased advertising income. Income taxes decreased due to decreased income from non-patronage activities. 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 to finance the Company's working capital requirements and patronage dividend and capital expenditures programs. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to certain market risks, including foreign currency and interest rates. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposure is to changes in exchange rates from the U.S. dollar versus the Canadian dollar. Interest rate risk is managed through a combination of fixed rate debt and variable rate short-term borrowings with varying maturities. At July 3, 1999, all short-term and long-term debt was issued at fixed rates. The table below presents principal amounts and related weighted average interest rates by year of maturity of the Company's investments and debt obligations: 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Thereafter Total (dollars in thousands) Assets: Short-term investment-fixed $ 5,381 $ $ $ $ $ $ 5,381 Fixed interest rate 4.82% 4.82% Liabilities: Short-term borrowings-fixed $ 55,000 $ 55,000 Average fixed interest rate 5.42% 5.42% Long-term debt-fixed rate $ 5,443 $ 5,152 $ 6,164 $ 6,156 $ 4,000 $ 91,000 $117,915 Average fixed interest rate 7.87% 7.65% 7.27% 7.27% 6.47% 7.09% 7.13%
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks. The Company's various currency exposures often offset each other, providing a natural hedge against currency risk. The Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these foreign hedges are included in the basis of the underlying hedged investment. As of July 3, 1999, the Company has outstanding foreign currency contracts to sell the equivalent of $30.5 million of Canadian dollars to hedge a portion of a foreign investment. All contracts mature within one year. The fair value of these agreements result in an unrecognized gain of $1.4 million reflected within accumulated other comprehensive income at July 3, 1999. Settlement of foreign sales and purchases are generally denominated in U.S. currency resulting in limited foreign currency transaction exposure. 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 7, 1999 - said meeting was an annual meeting. (b) 1. The following directors were elected at said meeting for a three year term expiring in 2002: Richard F. Baalmann, Jr. Richard W. Stine 2. The following directors were reelected at said meeting for a three year term expiring in 2002: J. Thomas Glenn 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 Daniel L. Gust Lawrence R. Bowman Howard J. Jung Mario R. Nathusius Roger E. Peterson Item 6. Exhibits and Reports on Form 8-K. (b) A Form 8-K was filed on April 30, 1999 containing Notice of Annual Meeting of Stockholders on June 7, 1999 and Proxy solicited by Board of Directors and related information. 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 16, 1999 Lori L. Bossmann Vice President, Controller (Principal Accounting Officer, and duly authorized Officer of the registrant) EX-27 2 ART.5 FDS FOR 2ND QUARTER 1999
5 This schedule contains summary financial information extracted from SEC Form 10-Q and is qualified in its entirety by reference to such financial statements. 1000 OTHER JAN-1-2000 JUL-3-1999 29398 0 479279 3235 335292 859021 418087 174417 1118389 664318 0 0 0 276997 6682 1118389 1681533 1681533 1540306 1540306 0 0 8386 49435 837 48598 0 0 0 48598 0 0
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