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 September 30, 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 NOT APPLICABLE 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 September 30, 2000 --------------------------------------- --------------------------------- Class A Voting Stock - $1,000 par value 4,045 shares Class B Stock - $1,000 par value 6,499 shares Class C Stock - $ 100 par value 2,642,648 shares ACE HARDWARE CORPORATION INDEX Part I. - Financial Information: Page No. -------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - September 30, 2000 and January 1, 2000 1 Condensed Consolidated Statements of Earnings and Condensed Consolidated Statements of Comprehensive Income - Thirty-nine Weeks and Thirteen Weeks Ended September 30, 2000 and October 2, 1999 2 Condensed Consolidated Statements of Cash Flows - Thirty-nine Weeks Ended September 30, 2000 and October 2, 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 1. Legal Proceedings 11 Item 2. Changes in Securities and Use of Proceeds 11 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 PART I. FINANCIAL INFORMATION ACE HARDWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) September 30, January 1, 2000 2000 ------------- ------------- (Unaudited) ASSETS [S] [C] [C] Current Assets: Cash and Cash Equivalents $ 47,573 $ 35,422 Accounts Receivable, Net 370,188 370,879 Merchandise Inventory 442,837 373,090 Prepaid Expenses and Other Current Assets 15,455 13,341 ------------- ------------ Total Current Assets 876,053 792,732 Property and Equipment, Net 256,100 247,174 Other Assets 54,601 41,578 ------------- ------------ Total Assets $ 1,186,754 $ 1,081,484 ============= ============ LIABILITIES AND MEMBER DEALERS' EQUITY Current Liabilities: Current Installment of Long-Term Debt $ 4,874 $ 4,067 Short-Term Borrowings 148,797 49,869 Accounts Payable 453,206 449,497 Patronage Dividends Payable in Cash 26,132 38,173 Patronage Refund Certificates Payable 4,792 373 Accrued Expenses 68,128 69,990 ------------ ------------ Total Current Liabilities 705,928 611,969 Notes Payable 108,409 111,895 Patronage Refund Certificates Payable 63,616 55,257 Other Long-Term Liabilities 24,714 22,400 ------------ ------------ Total Liabilities 902,667 801,521 Member Dealers' Equity: Class A Stock of $1,000 Par Value 4,045 3,856 Class B Stock of $1,000 Par Value 6,499 6,499 Class C Stock of $100 Par Value 264,265 241,226 Class C Stock of $100 Par Value, Issuable 17,008 21,648 Additional Stock Subscribed, Net of Unpaid Portion 395 498 Retained Earnings (Deficit) (1,949) 594 Contributed Capital 13,485 13,485 Accumulated Other Comprehensive Income (668) 291 ------------ ------------ Total Member Dealers' Equity 303,080 288,097 Less: Treasury Stock, at Cost 18,993 8,134 ------------ ------------ Total Member Dealers' Equity 284,087 279,963 Total Liabilities and Member Dealers' Equity $ 1,186,754 $ 1,081,484 ============ ============ See accompanying notes to condensed consolidated financial statements. ACE HARDWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (000's omitted) (Unaudited) Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------- ----------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 -------------- ------------- -------------- ------------- Net Sales $ 718,933 $ 787,104 $ 2,227,058 $ 2,468,637 Cost of Sales 648,615 714,281 2,019,848 2,263,100 -------------- ------------- -------------- ------------- Gross Profit 70,318 72,823 207,210 205,537 Operating Expenses: Warehouse and Distribution 7,282 5,720 21,398 19,394 Selling, General and Administration 21,197 22,284 66,131 65,928 Retail Success and Development 16,715 15,512 52,332 38,972 -------------- ------------- -------------- ------------- Total Operating Expenses 45,194 43,516 139,861 124,294 -------------- ------------- -------------- ------------- Operating Income 25,124 29,307 67,349 81,243 Interest Expense (5,842) (4,088) (15,808) (12,525) Other Income, net 3,043 1,490 10,016 7,426 Income Taxes 60 (352) 718 (1,189) -------------- ------------- -------------- ------------- Net Earnings $ 22,385 $ 26,357 $ 62,275 $ 74,955 ============== ============= ============== ============= Distribution of Net Earnings: Patronage Dividends $ 23,153 $ 27,129 $ 64,818 $ 77,021 Retained Earnings (768) (772) (2,543) (2,066) -------------- ------------- -------------- ------------- Net Earnings $ 22,385 $ 26,357 $ 62,275 $ 74,955 ============== ============= ============== ============= CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000's omitted) (Unaudited) Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------- ----------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 -------------- -------------- -------------- -------------- Net Earnings $ 22,385 $ 26,357 $ 62,275 $ 74,955 Foreign currency translation, net (402) 766 (959) 868 -------------- -------------- -------------- -------------- Comprehensive Income $ 21,983 $ 27,123 $ 61,316 $ 75,823 ============== ============== ============== ============== See accompanying notes to condensed consolidated financial statements. ACE HARDWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (Unaudited) Thirty-nine Weeks Ended Thirty-nine Weeks Ended September 30, October 2, 2000 1999 ------------- ------------- Operating Activities: Net Earnings $ 62,275 $ 74,955 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 18,384 17,396 Decrease in accounts receivable, net 691 30,131 Increase in merchandise inventory (69,747) (37,290) Increase in prepaid expenses and other (2,114) (2,869) current assets Increase (Decrease) in accounts payable and 1,846 (3,934) accrued expenses Increase in other long-term liabilities 2,314 2,793 ------------- ------------- Net Cash Provided by Operating Activities 13,649 81,182 Investing Activities: Purchases of property and equipment, net (36,974) (27,723) Proceeds from sale of property and equipment 9,664 325 Increase in other assets (13,982) (19,421) ------------- ------------- Net Cash Used In Investing Activities (41,292) (46,819) Financing Activities: Proceeds of short-term borrowings, net 98,928 30,000 Principal payments on long-term debt (2,679) (6,207) Payments on refund certificates and patronage financing programs (8,900) (32,643) Proceeds from sale of common stock 1,477 147 Repurchase of common stock (10,859) (9,170) Payments of cash portion of patronage dividend (38,173) (34,826) ------------- ------------- Net Cash Provided By (Used In) Financing Activities 39,794 (52,699) ------------- ------------- Increase (Decrease) in Cash and Cash Equivalents 12,151 (18,336) Cash and Cash Equivalents at Beginning of Period 35,422 53,901 ------------- ------------- Cash and Cash Equivalents at End of Period $ 47,573 $ 35,565 ============= ============= See accompanying notes to condensed consolidated financial statements. 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 required 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 Ace Hardware Corporation Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 17, 2000. 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 September 30, 2000 and October 2, 1999 and of it's financial position as of September 30, 2000. All such adjustments are of a normal recurring nature. The results of operations for the thirteen week and thirty-nine week periods ended September 30, 2000 and October 2, 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 segment 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: Thirty-nine Weeks Ended September 30, 2000 ---------------------------------------------------------------------------- Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- ---------- ------------ Net Sales from External Customers 2,177,560 16,687 32,811 - 2,227,058 Intersegment Sales 19,211 83,051 - (102,262) - Segment Earnings (Loss) 56,035 8,463 (2,048) (175) 62,275 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 Thirteen Weeks Ended September 30, 2000 --------------------------------------------------------------------------- Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- ---------- ------------ Net Sales from External Customers 702,241 4,979 11,713 - 718,933 Intersegment Sales 7,245 26,397 - (33,642) - Segment Earnings (Loss) 20,181 2,815 (551) (60) 22,385 Thirteen Weeks Ended October 2, 1999 --------------------------------------------------------------------------- Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- ---------- ------------ Net Sales from External Customers 772,690 6,370 8,045 - 787,104 Intersegment Sales 7,073 28,593 - (35,666) - Segment Earnings (Loss) 23,871 3,186 (610) (90) 26,357 -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 is 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 thirty-nine weeks ended September 30, 2000 do not include activity for the LBM Division of the Company. -6- ACE HARDWARE CORPORATION ------------------------ PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ------------------------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Thirteen Weeks Ended September 30, 2000 compared to Thirteen - ----------------------------------------------------------------- Weeks Ended October 2, 1999. - ---------------------------- Results of Operations The total sales decrease for the quarter of 8.7% 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. Excluding LBM, sales increased 1.0% in 2000 primarily due to retailer conversions to the Ace program. Domestically, basic business sales increased 1.5% while international basic business sales declined 9.8% for the quarter. Gross profit decreased $2.5 million but increased as a percent of total sales from 9.3% 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 gross profit decreased slightly for the quarter as a percent of basic business sales due to higher warehousing costs absorbed into inventory and sales mix shifts towards the lower margin direct ship sales category. Higher vendor rebates combined with higher Corporate store gross profit partially offset the gross profit decline for the quarter. Warehouse and distribution expenses increased $1.6 million over 1999 and increased as a percent of total sales from 0.7% in 1999 to 1.0% in 2000. As a percent to basic business sales, these costs increased from 0.8% in 1999 to 1.0% in 2000. Pre-opening costs for the Loxley, Alabama distribution facility and higher distribution wages due to rate increases drove the higher warehouse expenses for the quarter. Selling, general and administrative expenses decreased $1.1 million or 4.9% due to decreased printing costs and lower LBM Division costs. Higher information technology costs partially offset these expense decreases. Retail success and development expenses increased $1.2 million due to higher Corporate store expenses resulting from operating additional Corporate stores in 2000. Additional costs to merchandise Ace retailer stores also contributed to the current quarter increase. Interest expense increased $1.8 million due to higher average borrowing levels and increased interest rates. The increased borrowing levels result from the construction and stocking of the Loxley, Alabama distribution center and increased retailer dating programs. -7- ACE HARDWARE CORPORATION ------------------------ PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ------------------------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Thirty-nine Weeks Ended September 30, 2000 compared to Thirty- - ----------------------------------------------------------------- nine Weeks Ended October 2, 1999. - --------------------------------- Results of Operations The total sales decrease of 9.8% 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. Excluding LBM, sales increased 6.2% 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 6.4% and 1.6%, respectively. Gross profit increased $1.7 million and increased as a percent of total sales from 8.3% in 1999 to 9.3% 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 (9.3% in 2000 vs. 9.5% in 1999) due to a sales mix shift towards the lower margin direct ship sales category and higher warehousing costs absorbed into inventory. Increased Corporate store gross profit driven by higher sales volume partially offset the year-to-date gross profit decline. Warehouse and distribution expenses increased $2.0 million over 1999 and increased as a percent of total sales from 0.8% in 1999 to 1.0% in 2000. As a percent of basic business sales, these costs increased from 0.9% in 1999 to 1.0% in 2000. 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 $203,000, or 0.3% and increased as a percent of total sales due to higher information technology costs 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 $13.4 million primarily due to operating costs associated with operating additional Corporate stores. Excluding Corporate store operating expenses, retail success and development expenses are up $7.0 million or 21.4% due to increased retail field personnel costs, costs to support retail computer initiatives and costs to merchandise Ace retailer stores. Additional paint advertising costs also contribute to the year-to-date expense increase. -8- Interest expense increased $3.3 million due to higher average borrowing levels and increased interest rates. The increased borrowing levels result from the construction of the Loxley, Alabama distribution center and increased retailer dating programs. Other income increased $2.6 million primarily due to income realized on non-controlling investments in affiliates and higher income on retailer loan programs. Income tax expense decreased due to lower income from non- patronage activities. Operating losses from non-patronage activities resulted in a net income tax benefit in 2000. 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. -9- Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the Company's market risk during the thirty-nine week period ended September 30, 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. -10- PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K None. -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 ------------------------ RITA D. KAHLE DATE November 14, 2000 Rita D. Kahle Executive Vice President (Principal Finance Officer, and duly authorized Officer of the registrant) -12-