-----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, HiXnYVir3oXRzTmj2+vDR/4iCj4VR00y9BPS3sP2j50dBIA/UQ889DqTivE9Mt+s X0A3GGnHytxTfzh80y7m7A== 0000002024-99-000019.txt : 19991117 0000002024-99-000019.hdr.sgml : 19991117 ACCESSION NUMBER: 0000002024-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991115 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: 99756886 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, 3RD 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 October 2, 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 October 2, 1999 _____________________________________ _______________________________ Class A Voting Stock - $1,000 par value 3,838 shares Class B Stock - $1,000 par value 2,460 shares Class C Stock - $ 100 par value 2,440,436 shares ACE HARDWARE CORPORATION INDEX Part I. - Financial Information: Page No. ________ Item 1. Financial Statements Consolidated Balance Sheets - October 2, 1999 and January 2, 1999 1 Consolidated Statements of Earnings and Consolidated Statements of Comprehensive Income- Thirty-nine Weeks and Thirteen Weeks Ended October 2, 1999 and October 3, 1998 2 Consolidated Statements of Cash Flows - Thirty-nine Weeks Ended October 2, 1999 and October 3, 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 6. Exhibits and Reports on Form 8-K 12 PART I. ITEM 1. FINANCIAL INFORMATION ACE HARDWARE CORPORATION CONSOLIDATED BALANCE SHEETS October 2, January 2, 1999 1999 _______________ ______________ (000's omitted) ASSETS Current Assets: Cash $ 35,565 $ 53,901 Accounts Receivable, Net 369,262 397,120 Merchandise Inventory 371,695 334,405 Prepaid Expenses and Other Current Assets 18,015 15,146 _____________ _____________ Total Current Assets 794,537 800,572 Property and Equipment, Net 250,127 239,845 Other Assets 27,318 7,309 _____________ _____________ Total Assets $ 1,071,982 $ 1,047,726 ============= ============= LIABILITIES AND MEMBER DEALERS' EQUITY Current Liabilities: Current Installment of Long-Term Debt $ 4,299 $ 7,433 Short-Term Borrowings 55,000 25,000 Accounts Payable 444,958 466,008 Patronage Dividends Payable in Cash 29,955 34,826 Patronage Refund Certificates Payable 399 20,655 Accrued Expenses 74,113 54,724 _____________ _____________ Total Current Liabilities 608,724 608,646 Notes Payable 112,348 115,421 Patronage Refund Certificates Payable 57,957 43,465 Other Long-Term Liabilities 21,475 18,682 _____________ _____________ Total Liabilities 800,504 786,214 Member Dealers' Equity: Class A Stock of $1,000 Par Value 4,013 3,846 Class B Stock of $1,000 Par Value 6,499 6,499 Class C Stock of $100 Par Value 252,768 226,571 Class C Stock of $100 Par Value, Issue 20,186 26,170 Additional Stock Subscribed, Net of Unpaid Portion 425 471 Retained Earnings and Contributed Capital 4,521 6,587 Accumulated Other Comprehensive Income 50 (818) _____________ _____________ Total Member Dealers' Equity 288,462 269,326 Less: Treasury Stock, at Cost 16,984 7,814 _____________ _____________ Total Member Dealers' Equity 271,478 261,512 Total Liabilities and Member Dealers Equity $ 1,071,982 $ 1,047,726 ============= ============= See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS Thirteen Weeks Ended Thirteen Weeks Ended Thirty-nine Weeks Ended Thirty-nine Weeks Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ________________ ________________ __________________ __________________ (000's omitted) (000's omitted) Net Sales $ 787,104 $ 782,002 $ 2,468,637 $ 2,332,974 Cost of Sales 710,452 714,694 2,250,758 2,141,372 _______________ ________________ __________________ __________________ Gross Profit 76,652 67,308 217,879 191,602 Operating Expenses: Warehouse and Distribution 9,755 9,201 29,129 28,711 Selling, General and Administrative 23,135 20,975 67,746 62,787 Retail Success and Development 15,292 9,703 38,972 24,050 _______________ _______________ __________________ __________________ Total Operating Expenses 48,182 39,879 135,847 115,548 _______________ _______________ __________________ __________________ Operating Income 28,470 27,429 82,032 76,054 Interest Expense (4,138) (4,941) (12,525) (13,090) Other Income, net 2,377 1,917 6,637 5,037 Income Taxes (352) (514) (1,189) (1,862) _______________ _______________ __________________ __________________ Net Earnings $ 26,357 $ 23,891 $ 74,955 $ 66,139 =============== =============== ================== ================== Distribution of Net Earnings: Patronage Dividend $ 27,129 $ 23,638 $ 77,021 $ 65,794 Retained Earnings (772) 253 (2,066) 345 _______________ _______________ __________________ __________________ Net Earnings $ 26,357 $ 23,891 $ 74,955 $ 66,139 =============== =============== ================== ================== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Thirteen Weeks Ended Thirteen Weeks Ended Thirty-nine Weeks Ended Thirty-nine Weeks Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 ________________ ________________ ___________________ ___________________ (000's omitted) (000's omitted) Net Earnings $ 26,357 $ 23,891 $ 74,955 $ 66,139 Foreign currency translation, net 766 (36) 868 (654) ________________ ________________ ___________________ ___________________ Comprehensive Income $ 27,123 $ 23,855 $ 75,823 $ 65,485 ================ ================ =================== =================== See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Thirty-nine Weeks Ended Thirty-nine Weeks Ended October 2, October 3, 1999 1998 __________________ ___________________ (000's omitted) Operating Activities: Net Earnings $ 74,955 $ 66,139 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 17,396 16,124 Loss on sale of property and equipment 52 417 Decrease (Increase) in accounts receivable 27,734 (22,054) Increase in merchandise inventory (36,560) (24,879) Increase in prepaid expenses and other (2,869) (4,162) current assets Increase (Decrease) in accounts payable and accrued expenses (1,396) 36,944 Increase in other long-term liabilities 2,793 2,964 __________________ ___________________ Net Cash Provided By Operating Activities 82,105 71,493 Investing Activities: Purchases of property and equipment, net (28,055) (17,697) Proceeds from sale of property and equipment 325 8,149 Increase in other assets (20,009) (5,754) __________________ ___________________ Net Cash Used In Investing Activities (47,739) (15,302) Financing Activities: Proceeds (payments) of short-term borrowings 30,000 (2,995) Proceeds from notes payable - 26,022 Principal payments on long-term debt (6,207) (7,402) Payments on refund certificates and patronage financing programs (33,467) (21,266) Proceeds from sale of common stock 968 993 Repurchase of common stock (9,170) (9,311) Payments of cash portion of patronage dividend (34,826) (29,943) __________________ ___________________ Net Cash Used In Financing Activities (52,702) (43,902) __________________ ___________________ Increase (Decrease) in Cash and Cash Equivalents (18,336) 12,289 Cash and Cash Equivalents at Beginning of Period 53,901 14,171 __________________ ___________________ Cash and Cash Equivalents at End of Period $ 35,565 $ 26,460 ================== =================== 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 October 2, 1999 and October 3, 1998 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 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 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 third 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. 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 October 2, 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. The Company has expended approximately $5.1 million through October 2, 1999. Remaining costs to be incurred are anticipated to be minimal. 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. -5- 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: Thirty-nine Weeks Ended October 2, 1999 _________________________________________________________________________________ Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated _________ _____________ ______ __________ ____________ Net Sales from External Customers 2,432,348 18,763 17,526 - 2,468,637 Intersegment Sales 18,298 85,107 - (103,405) - Segment Earnings (Loss) 68,195 8,544 (1,474) (310) 74,955 Identifiable Segment Assets 991,825 37,985 50,522 (8,350) 1,071,982 Thirty-nine Weeks Ended October 3, 1998 _________________________________________________________________________________ Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated _________ _____________ ______ __________ ____________ Net Sales from External Customers 2,306,372 18,396 8,206 - 2,332,974 Intersegment Sales 8,370 76,889 - (85,259) - Segment Earnings (Loss) 57,980 8,741 (138) (444) 66,139 Identifiable Segment Assets 972,803 33,113 35,402 (2,348) 1,038,969 Thirteen Weeks Ended October 2, 1999 _________________________________________________________________________________ Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated _________ _____________ _____ __________ ____________ Net Sales from External Customers 772,690 6,370 8,044 - 787,104 Intersegment Sales 7,073 28,593 - (35,666) - Segment Earnings (Loss) 23,871 3,186 (610) (90) 26,357 Thirteen Weeks Ended October 3, 1998 _________________________________________________________________________________ Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated _________ _____________ _____ __________ ____________ Net Sales from External Customers 775,739 3,387 2,876 - 782,002 Intersegment Sales 3,357 26,030 - (29,387) - Segment Earnings (Loss) 20,839 3,296 (120) (124) 23,891
-6- 7) 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. ACE HARDWARE CORPORATION PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Thirteen Weeks Ended October 2, 1999 compared to Thirteen Weeks Ended October 3, 1998. Results of Operations The total sales increase of .7% was effected 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 10.2% 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. A slight decline in International business negatively impacted basic sales for the quarter. Gross profit increased $9.3 million and increased as a percent of total sales from 8.6% in 1998 to 9.7% in 1999. The increase as a percent of sales results primarily from the loss of lower margin LBM sales volume since August 1999. Basic business gross profit was positively impacted for the quarter by higher vendor rebates and increased margin from retail and import operations. Higher costs absorbed into inventory partially offset this positive improvement for the quarter. Warehouse and distribution expenses increased $554,000 over 1998 and increased as a percent of total sales from 1.18% in 1998 to 1.24% in 1999. As a percent to basic business sales, these costs decreased from 1.42% in 1998 to 1.37% in 1999. Increased warehouse and distribution costs required to support increased handled sales are partially offset by higher traffic and freight consolidations income for the quarter. Selling, general and administrative expenses increased $2.2 million or 10.3% and increased as a percent of total sales. Increased information technology costs and the timing of convention and printing income resulted in the third quarter increase. Retail success and development expenses increased $5.6 million due to costs associated with additional company-owned stores, costs to support retail computer initiatives and new business development costs. Interest expense decreased as a result of lower borrowing levels due to the settlement of LBM retailer receivables. Thirty-nine Weeks Ended October 2, 1999 compared to Thirty-nine Weeks Ended October 3, 1998. Results of Operations The total sales increase of 5.8% was effected 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 7.8% 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. A decline in International business negatively impacted basic sales. Excluding International, basic business domestic sales are up 8.7%. 1999 includes three fewer working days than 1998. Gross profit increased $26.3 million and increased as a percent of sales from 8.2% in 1998 to 8.8% in 1999. This increase as a percent of sales results partially from the loss of lower margin LBM volume. Higher cash discounts and vendor rebates and increased margin from retail and import operations resulted in the year-to-date gross profit increase. Warehouse and distribution expenses increased slightly vs. 1998 but decreased as a percent of total sales from 1.23% in 1998 to 1.18% in 1999. Expenses also decreased as a percent to basic business sales from 1.47% in 1998 to 1.39% 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 $5.0 million or 7.9% and increased as a percent of sales due to increased information technology costs to support our year 2000 efforts. Retail success and development expenses increased $14.9 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. - -7- 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 October 2, 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 rate $ 17,497 $ - $ - $ - $ - $ - $ 17,497 Fixed interest rate 5.21% 5.21% Liabilities: Short-term borrowings-fixed rate $ 55,000 $ - $ - $ - $ - $ - $ 55,000 Average fixed interest rate 5.66% 5.66% Long-term debt-fixed rate $ 4,299 $ 5,028 $ 6,164 $ 6,156 $ 4,000 $ 91,000 $116,647 Average fixed interest rate 7.76% 8.02% 7.27% 7.27% 6.47% 7.09% 7.14%
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. -10- 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. During the thirteen weeks ended October 2, 1999, the Company sold $30.5 million of Canadian dollars to settle all outstanding foreign currency contracts. This resulted in an unrecognized gain of approximately $2.0 million reflected within accumulated other comprehensive income at October 2, 1999. Settlement of foreign sales and purchases are generally denominated in U.S. currency resulting in limited foreign currency transaction exposure. The Company does not have any outstanding foreign exchange forward contracts at October 2, 1999. -11- 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 for the thirteen weeks ended October 2, 1999. -12- 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 _11/15/99___________ Lori L. Bossmann Vice President, Finance (Principal Accounting Officer, and duly authorized Officer of the registrant) - -13- EX-27 2 ART.5 FDS FOR 3RD 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-2-1999 OCT-2-1999 35565 0 372632 3370 371695 794537 428662 178535 1071982 608724 0 0 0 283466 4996 1071982 2468637 2468637 2250758 2250758 0 0 12525 76144 1189 74955 0 0 0 74955 0 0
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