DELAWARE
36-0700810
2200 Kensington Court, Oak Brook, IL
60523
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 [x] NO []
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as
of the close of the latest practicable date.
Class
Outstanding at November 5, 2002
Class A Voting Stock - $1,000 par value
3,620 shares
Class B
$1,000 par value
1,976 shares
Class C
$ 100 par value
2,719,613 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information
Page No.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 28, 2002 and December 29, 2001
1
Condensed Consolidated Statements of Earnings and
Condensed Consolidated Statements of Comprehensive
Income - Thirteen Weeks Ended and Thirty-nine Weeks Ended
September 28, 2002 and September 29, 2001
2
Condensed Consolidated Statements of Cash Flows -
Thirty-nine Weeks Ended September 28, 2002
and September 29, 2001
3
Notes to 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
9
Item 4. Controls and Procedures
9
Part II. - Other Information
Item 6. Exhibits and Reports on Form 8-K
10
PART I. FINANCIAL
INFORMATION
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
September 28,
December 29,
2002
2001
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents
$ 24,178
$ 25,213
Short-term investments
16,489
17,158
Accounts receivable,
net 316,049
369,035
Merchandise inventory
401,517
412,568
Prepaid expenses and other current assets
16,684
16,295
Total current assets
774,917
840,269
Property and equipment, net
287,255
287,507
Other assets
45,259
41,015
$ 1,107,431
$ 1,168,791
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities
Current installment of long-term debt
$
6,162
$ 7,179
Short-term borrowings
41,900
72,600
Accounts payable
370,430
409,789
Patronage dividends payable in cash
32,192
34,229
Patronage refund certificates payable
13,165
9,084
Accrued expenses
81,847
81,062
Total current liabilities
545,696
613,943
Long-term debt
165,020
170,387
Patronage refund certificates payable
81,097
77,401
Other long-term
liabilities
29,084
27,184
Total liabilities
820,897
888,915
Member dealers' equity
Class A Stock of $1,000 par
value
3,815
3,693
Class B Stock of $1,000 par value
6,499
6,499
Class C Stock of $100 par value
284,445
260,224
Class C Stock of $100 par value, issuable to dealers
for patronage dividends
21,893
23,284
Additional stock subscribed, net
263
303
Retained deficit
(23,837)
(17,591)
Contributed capital
13,485
13,485
Accumulated other comprehensive income
(789)
(1,239)
305,774
288,658
Less: Treasury Stock, at cost
(19,240)
(8,782)
Total member dealers' equity
286,534
279,876
Total liabilities and member dealers'
equity
$ 1,107,431
$ 1,168,791
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 28, September 29, September 28, September
29,
2002
2001
2002
2001
Net sales
$ 749,811
$ 722,981 $
2,298,131 $ 2,204,095
Cost of sales
669,146 648,918
2,074,861
1,993,509
Gross profit
80,665 74,063
223,270
210,586
Operating expenses:
Distribution operations
14,132 15,771
42,242
48,441
Selling, general and administrative 15,209
14,897
47,015
48,034
Retail success and development 16,007
17,510
51,108
55,574
Total operating expenses
45,348
48,178
140,365
152,049
Operating income
35,317 25,885
82,905
58,537
Interest expense
(5,347) (5,715)
(16,909) (17,311)
Other income, net
2,710
3,096
7,562
10,629
Income taxes
(638)
(412)
252
(1,790)
Net earnings
$ 32,042 $
22,854 $
73,810 $
50,065
Distribution of Net Earnings
Patronage dividends
32,035 23,715
80,056
56,574
Retained earnings
7
(861)
(6,246)
(6,509)
Net earnings
$ 32,042 $
22,854 $
73,810 $
50,065
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000's omitted)
(Unaudited)
Thirteen Weeks
Ended
Thirty-nine Weeks Ended
September 28, September 29, September 28, September
29,
2002
2001
2002
2001
Net earnings
$ 32,042
$ 22,854
$ 73,810
$ 50,065
Unrealized gains on securities
436
133
345
53
Foreign currency translation, net
(432)
(769)
105
(1,125)
Comprehensive income $
32,046 $ 22,218
$ 74,260
$ 48,993
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
September 28, September
29,
2002
2001
Operating Activities
Net earnings
$ 73,810
$ 50,065
Adjustments
to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization
23,983
21,240
Gain on sale of property and
equipment,
net of
deferred taxes of $1,587
- -
(3,079)
Decrease in accounts receivable, net
52,986
43,636
Decrease (increase) in inventories
11,051
(61,195)
Increase in prepaid expenses and
other current
assets
(500)
(2,849)
Decrease in accounts payable and
accrued
expenses
(38,574)
(2,978)
Increase in other long-term
liabilities
1,900
2,847
Net Cash Provided by Operating Activities
124,656
47,687
Investing Activities:
Proceeds from sale of (purchase of)
short-term
investments
669
(88)
Purchase of property and equipment
(23,620)
(48,838)
Increase in other assets
(3,794)
(2,205)
Net Cash
Used in Investing Activities
(26,745)
(51,131)
Financing Activities:
Payments of short-term borrowings
(30,700)
(3,000)
Proceeds from issuance of long-term
debt
-
70,000
Principal payments on long-term debt
(6,384)
(2,840)
Payments of patronage refund
certificates
and patronage
financing deductions
(18,194)
(13,633)
Proceeds from sale of common stock
1,019
1,161
Repurchase of common stock
(10,458)
(12,498)
Payments of cash portion of patronage
dividend
(34,229)
(34,764)
Net Cash Provided by (Used in) Financing Activities
(98,946)
4,426
Increase (decrease) in Cash and Cash Equivalents
(1,035)
982
Cash and Cash Equivalents at beginning of period
25,213
24,644
Cash and Cash Equivalents at end of period
$ 24,178
$ 25,626
See accompanying notes 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/A as filed with the
Securities and Exchange Commission on May 31, 2002. In the opinion of management,
these financial statements have been prepared in conformity with accounting principles
generally accepted in the United States and reflect all adjustments necessary for a fair
presentation of the results of operations and cash flows for the interim periods ended
September 28, 2002 and September 29, 2001, and of the Company's financial position
as of September 28, 2002. All such adjustments are of a normal recurring nature. The
results of operations for the thirteen week and thirty-nine week periods ended
September 28, 2002 and September 29, 2001 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 substantially all
patronage sourced net earnings are 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
interim period amounts to conform to comparable classifications followed in 2002.
During 2002, the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within distribution
operations expenses and reclassified certain amounts within selling, general and
administrative expenses to distribution operations expenses.
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. The net sales from external customers included in the other category
are primarily generated from company-owned retail locations. Information
regarding the identified segments and the related reconciliation to the consolidated
financial information is as follows:
Thirty-Nine Weeks Ended
September 28, 2002
Elimination
Paint
Intersegment
Wholesale Manufacturing
Other Activities Consolidated
Net Sales from External Customers $2,245,168 $
15,455 $ 37,508 $
- $2,298,131
Intersegment Sales
17,557 95,757
- (113,314)
-
Segment Earnings (Loss)
63,400 13,708
(3,065) (233)
73,810
Thirty-Nine Weeks Ended
September 29, 2001
Elimination
Paint
Intersegment
Wholesale Manufacturing Other
Activities Consolidated
Net Sales from External Customers $2,149,826
$ 13,921 $ 40,348
$ -
$2,204,095
Intersegment Sales
19,850 89,628
- (109,478)
-
Segment Earnings (Loss)
41,707 10,420
(1,822) (240)
50,065
Thirteen Weeks Ended
September 28, 2002
Elimination
Paint
Intersegment
Wholesale Manufacturing Other
Activities Consolidated
Net Sales from External Customers
$ 732,970
$ 3,345 $ 13,496
$ -
$ 749,811
Intersegment Sales
6,441 31,676
- (38,117)
-
Segment Earnings (Loss)
26,838
4,770 467
(33)
32,042
Thirteen Weeks Ended
September 29, 2001
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities
Consolidated
Net Sales from External Customers $ 705,162
$ 3,399 $ 14,420
$ -
$ 722,981
Intersegment Sales
7,509 32,788
- (40,297)
-
Segment Earnings (Loss)
19,311
3,581
82 (120)
22,854
5) Subsequent Event
On October 22, 2002, the Company announced that it had entered into a letter of
intent to sell all of the issued and outstanding shares of Ace Hardware Canada
Limited, a wholly-owned subsidiary. Proceeds from the sale are expected to be
approximately US $14 million, reflecting the value of inventory, trade receivables and
net tax operating losses. Additionally, the Company will receive ongoing royalties
for the use of the Ace name. The transaction is expected to close in December 2002.
Based on the terms of the letter of intent, the Company expects to record a fiscal
2002 fourth quarter loss in discontinued operations in the range of US $1.0 to US $5.0
million, net of tax, related to the operation and disposal of its interest in Ace Canada,
including all related shut-down costs, severance and contractual lease commitments.
ACE HARDWARE CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated sales increased 3.7%. Domestic sales increased 4.0% primarily due to
conversions of new stores to the Ace program and continued growth of same store
sales
together with lower retailer cancellations partially offset by a decrease in sales
to non-coop
members. International sales declined 2.6% primarily due to lower sales
to our existing
customers.
Gross profit increased $6.6 million and increased as a percent of total sales from 10.24% in
2001 to 10.76% in 2002. Excluding company-owned retail stores, gross
profit was 10.22%
of sales in 2002. The increase as a percent of sales resulted primarily
from increased
handling charges due to a shift toward handled sales, lower retailer
product returns and
increased paint margin due to lower raw material costs.
Distribution operations expenses decreased $1.6 million from 2001 and decreased
as a
percent of handled sales from 2.80% in 2001 to 2.38% in 2002 primarily due
to improved
productivity, continued cost controls and the closure of a Canadian
distribution center.
Selling, general and administrative expenses increased $312,000 over 2001; however,
decreased as a percent of total sales from 2.06% in 2001 to 2.03% in 2002 driven by a
continued focus on cost controls together
with a reduction of expenses within the Canadian
operations and lease savings due to the purchase of the corporate
office location.
Retail success and development expenses decreased $1.5 million from 2001 primarily
due to
continued cost control measures put in place in 2001 and the timing of retailer
and vendor
advertising cost reimbursements. These expenses consist primarily of
field personnel and
related costs, marketing, advertising, and training programs
for Ace retailers and expenses of
company-owned retail operations. Ace continues
to make investments in retail initiatives
under its Vision 21 strategy to support Ace Retailers.
Interest expense decreased $368,000 due to lower interest rates and lower average
borrowing levels under the revolving credit facility.
Other income decreased $386,000 primarily due to a decline in retailer past due and low
volume service charges and lower interest income.
Income taxes increased $226,000 primarily due to increased income recognized on
non-
patronage activities.
Thirty-nine Weeks Ended September 28, 2002 compared to Thirty-Nine Weeks Ended Interest expense decreased $402,000 due to lower interest rates and lower average
September 29, 2001
Results of Operations
Consolidated sales increased 4.3%. Domestic sales increased 4.5% while International sales
were affected by lower sales in Canada. The increase in
domestic sales was primarily due to
higher sales to our existing retailer base, lower retailer cancellations and sales to newly
affiliated retailers. This increase was partially offset by a decrease in sales to non-coop
members.
Gross profit increased $12.7 million and increased as a percent of total sales from 9.55% in
2001 to 9.72% in 2002. The increase primarily resulted from higher handling charges due to
a shift in sales mix towards handled sales, lower retailer product returns and freight costs
and increased paint margin due to lower raw material costs partially offset by inventory
adjustments.
Distribution operations expenses decreased $6.2 million from 2001 and decreased as a
percent of handled sales from 2.98% in 2001 to 2.45% in 2002 primarily due to improved
productivity, continued cost controls, lower fixed costs as a result of the east coast
distribution center reconfiguration, the closure of a Canadian distribution center and
additional volume from logistics operations.
Selling, general and administrative expenses decreased $1.0 million due to continued
cost
control measures put in place in 2001, lease savings due to the purchase of the corporate
office location and the closure of a Canadian distribution center.
Retail success and development expenses decreased $4.5 million from 2001 primarily
due to
favorable timing of advertising cost reimbursements, continued cost control
measures put in
place in 2001 and lower retail technology costs. These expenses
consist primarily of field
personnel and related costs, marketing, advertising, and
training programs for Ace retailers
and expenses of company-owned retail operations. Ace continues to make investments in
retail initiatives under its Vision 21 strategy to support Ace Retailers.
borrowing levels under the revolving credit facility.
Other income decreased $3.1 million primarily due to 2001 non-recurring gains
recognized
on the sale of two distribution centers offset by a 2001 partial write-down of a
minority-
owned investment of $3.0 million. Other income was
also impacted by increased income
from non-controlling investments of $1.4 million offset by a decline in retailer past due and
low volume charges and lower interest income.
Income taxes decreased $2.0 million primarily due to the taxes incurred on the sale of two
retail support centers in 2001 and higher tax benefits from non-patronage activities in 2002.
Liquidity and Capital Resources
generated funds, short-term lines of credit and long-term financing.
Cash flow generated from operations provides a significant source of liquidity. Through
the third quarter of 2002, cash provided by operations increased to
$124.7 million
compared to $47.7 million in the same period of 2001. The increase was primarily due to
an increase in net earnings, improved receivable collections, and a reduction of inventory.
Cash used in investing activities through the third quarter of 2002 was $26.7 million
compared to $51.1 million in the same period of the prior year. The decrease was
primarily due to decreased expenditures for the distribution network as 2001 included
expenditures for the acquisition of Prince George, Virginia distribution center. Net capital
expenditures of $23.6 million in 2001 were financed out of current and accumulated
internally generated funds and short-term borrowings.
Cash used in financing activities through the third quarter of 2002 was $98.9 million
compared to $4.4 million provided in the comparable period last year. In the second
quarter of 2001, Ace obtained proceeds of $70 million from the issuance of Senior Notes.
Ace has an established, unsecured revolving credit facility with a group of banks.
Ace has
unsecured lines of credit of $185.0 million of which $143.1 million was available at
September 28, 2002. Borrowing under these lines of credit bear interest
at a spread over
LIBOR based upon quarterly debt to EBITDA ratios. Long-term
financing is arranged as
determined necessary to meet Ace's capital or other requirements, with principal amount,
timing and form dependent on prevailing debt markets and general economic conditions.
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 expenditure programs.
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 28, 2002. For additional information,
refer to Item 7a in the Company's Annual Report on Form 10-K/A for the year
ended December 29, 2001.
Item 4. Controls and Procedures
Our Chief Executive Officer and Principal Financial Officer have concluded, based
on their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information we are required to disclose in our reports filed under the
Securities Exchange Act of 1934. There have been no significant changes in our
internal controls or in other factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A letter of intent entered into by Ace Hardware Corporation to sell all
issued and outstanding shares of its wholly-owned subsidiary Ace Hardware
Canada, Limited.
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
Date: November 12, 2002
/s/ Rita D. Kahle
Rita D. Kahle
Executive Vice President
(Principal Financial and Accounting
Officer, and duly authorized
Officer of the registrant)
Certification of President and Chief Executive Officer
Certification of Executive Vice President (Principal Financial and Accounting
Officer)