SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File No. 2-55860
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 60521
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (708) 990-6600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant. The Registrant's shares are issued only
to, and may be held only by, its dealer-stockholders, and the shares held
by a dealer-stockholder are subject to repurchase by the Registrant upon
termination of the membership agreement of a dealer-stockholder. Thus,
there is no market for the Registrant's shares. The repurchase price for
each share of Class A stock, the only voting stock issued by the
Registrant, is equal to the par value of $1,000 per share. As of February
28, 1994, the aggregate value of the Class A stock held by non-affiliates
(dealer-stockholders) calculated on the basis of such repurchase price was
$3,933,000.
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 Registrant's
classes of common stock, as of the latest practicable date (applicable only
to corporation Registrants). Outstanding Shares as of February 28, 1994:
Class A (voting) Stock, $1,000 par value 3,933 shares
Class B (nonvoting) Stock, $1,000 par value 3,400 shares
Class C (nonvoting) Stock, $ 100 par value 1,523,707 shares
PART I
Item 1. Business
Ace Hardware Corporation was formally organized as a Delaware
corporation in 1964. In 1973, by means of a corporate merger, it succeeded
to the business of Ace Hardware Corporation, an Illinois corporation
organized in 1928. Until 1973, the business now being engaged in by the
Company had been conducted by the Illinois corporation. The Company's
principal executive offices are located at 2200 Kensington Court, Oak Brook,
Illinois 60521. Its telephone number is (708) 990-6600.
The Company functions as a wholesaler of hardware and related products,
and manufactures paint products. Sales of the products distributed by it
are presently made primarily to individuals, partnerships or corporations
who are engaged in business as retail dealers of hardware or related items
and who have entered into Membership Agreements with the Company entitling
them to purchase merchandise and services from the Company and to use the
Company's marks as provided therein.
The Company operates on a cooperative basis and distributes patronage
dividends to its eligible member dealers each year in proportion to the
amount of their annual purchases of merchandise from it. (See the
subheading "Distribution of Patronage Dividends".)
At December 31, 1993 there were 4,921 retail business outlets with
respect to which such Membership Agreements had been entered into. Those
States having the largest concentration of member outlets are California
(approximately 10%), Illinois and Texas (approximately 7% each), Florida
(approximately 5%), and Michigan and Georgia (approximately 4% each).
States into which were shipped the largest percentages of the merchandise
sold by the Company in 1993 are California (approximately 12%), Illinois
(approximately 9%), Florida and Texas (approximately 6% each) and Michigan
and Georgia (approximately 4% each). Less than 3% of the Company's sales
are made to outlets located outside of the United States or its
territories.
Information as to the number of the Company's member outlets during
each of the past three calendar years is set forth in the following table:
1993 1992 1991
Member outlets at beginning of period 4,986 5,111 5,206
New member outlets 158 183 253
Member outlets terminated 223 308 348
Member outlets at end of period 4,921 4,986 5,111
Dealers having one or more
member outlets at end of period 4,045 4,134 4,266
The Company services its dealers by purchasing merchandise in quantity
lots, primarily from manufacturers, by warehousing substantial quantities
of said merchandise and by selling the same in smaller lots to the dealers.
Most of the products that the Company distributes to its dealers from its
regional warehouses are sold at a 10% markup. In 1993 warehouse sales
accounted for 61.7% of total sales and bulletin sales accounted for 3.4% of
total sales with the balance of 34.9% representing direct shipment,
including lumber and building material sales.
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The proportions in which the Company's total warehouse sales were
divided among the various classes of merchandise sold by it during each of
the past three calendar years are as follows:
Class of Merchandise 1993 1992 1991
Paint, cleaning and related supplies 19% 18% 18%
Hand and power tools 14% 15% 14%
Electrical supplies 12% 13% 12%
Plumbing and heating supplies 15% 15% 16%
General hardware 12% 12% 12%
Housewares and appliances 7% 7% 8%
Garden, rural equipment and related supplies 12% 11% 11%
Sundry 9% 9% 9%
The Company sponsors two major conventions annually (one in the Spring
and one in the Autumn) at various locations. Dealers and vendors are
invited to attend, and dealers generally place substantial orders for
delivery during the period prior to the next convention. During the
convention regular merchandise, new merchandise and seasonal merchandise
for the coming season are displayed to attending dealers. Lawn and garden
supplies, building materials and exterior paints are seasonal merchandise
in many parts of the country, as are certain sundries such as holiday
decorations.
Warehouse sales involve the purchase of merchandise from the Company
that is maintained in inventory by the Company at its warehouses. Direct
shipment sales involve the purchase of merchandise from the Company with
shipment directly from the vendors. Bulletin sales involve the purchase of
merchandise from the Company pursuant to special bulletin offers by the
Company.
Direct shipment sales are orders placed by dealers directly with
vendors, using special purchase orders. Such vendors bill the Company for
such orders, which are shipped directly to dealers. The Company, in turn,
bills the ordering dealers at a markup. The markup on this category of
sales varies with invoice amounts in accordance with the following schedule
and is exclusive of sales under the LTL Plus program discussed below.
Invoice Amount Handling Charge (Markup)
$ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.00 1.50%
$3,000.00 to $3,999.00 1.25%
$4,000.00 to $4,999.00 1.00%
$5,000.00 to $5,999.00 .75%
$6,000.00 to $6,999.00 .50%
$7,000.00 to $7,999.00 .25%
$8,000.00 and over .00%
Bulletin sales are made based upon notification from dealers of their
participation in special bulletins offered by the Company. Generally, the
Company will give notice to all members of its intention to purchase
certain products for bulletin shipment and then purchases only so many of
such products as the members order. When the bulletin shipment arrives at
the Company, it is not warehoused, but is broken up into appropriate
quantities and delivered to members who placed orders. A 6% markup is
generally applied to this category of sales.
An additional markup of 3% is applied on the various categories of sales
of merchandise exported to certain dealers located outside of the United
States and its territories and possessions.
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The Company maintains inventories to meet only normal resupply orders.
Resupply orders are orders from members for merchandise to keep inventories
at normal levels. Generally, such orders are filled within one week of
receipt. Bulletin orders (which are in the nature of resupply orders) may
be for future delivery. The Company does not backlog normal resupply orders
and, accordingly, no significant backlog exists at any point in time.
The Company also has established special sales programs for lumber and
building materials products and for products assigned from time to time to
an "extreme competitive price sales" classification and for products
purchased from specified vendors for delivery to certain of the Company's
dealers on a direct shipment basis ("LTL Plus"). Under its lumber and
building materials ("LBM") program, the Company imposes no handling charge,
markup or national advertising assessment on direct shipment orders for
such products. The LBM program also enables the Company's dealers to
purchase these products at net invoice prices which pass on to them
important cost savings resulting from the Company's closely monitored
lumber and building materials purchasing procedures. Additionally, the LBM
program offers dealers the opportunity to order less than truckload
quantities of many lumber and building materials products at economical
prices under the LTL warehouse redistribution procedure which the Company
has established with certain major vendors.
The Store Traffic Opportunity Program ("STOP") established by the
Company is a program under which certain stockkeeping units of specific
products assigned to an "extreme competitive price sales" classification
are offered for sale to its dealers for delivery from designated Company
retail support centers. Sales under this program are made without the
addition of freight charges and with such handling charge or markup (if
any) of not more than 5% as shall be specified for each item. The Company's
officers have authority to add items to, and to withdraw items from, the
STOP program from time to time and to establish reasonable minimum or
multiple item purchase requirements for the items offered under the
program. No allocations or distributions of patronage dividends are made
with respect to sales under the STOP program. Purchases under the STOP
program are, however, deemed to be warehouse purchases or bulletin
purchases, as the case may be, for purposes of calculating the forms of
patronage dividend distributions. (See the subheading under this Item 1
entitled "Forms of Patronage Dividend Distributions.)
The LTL Plus Program, established by the Company effective as of
September, 1990 is a program under which full or partial truckloads of
products are purchased by the Company's dealers from specific vendors for
delivery to such dealers on a direct shipment basis. No markup, handling
charge or national advertising assessment is imposed by the Company on
sales under the LTL Plus Program, and the maximum amount of patronage
dividends allocated or distributed to the Company's dealers with respect to
their purchases of products in the LTL Plus category is .5% of such sales.
(See the subheading under this Item 1 entitled "Patronage Dividend
Determinations and Allocations.")
The Company, in addition to conducting semi-annual and other
conventions and product exhibits for its dealers, also provides them with
numerous special services (on a voluntary basis and at a cost to cover its
related expenses), such as inventory control systems, price and bin
ticketing, and an electronic ordering system. In order for them to have on
hand current pricing and other information concerning the merchandise
obtainable from the Company, the Company further provides to each of its
dealers either a catalogue checklist service or a microfiche film service
(whichever the dealer selects), for either of which services the dealer
must pay a monthly charge. The Company also provides on a
full-participation basis videotapes and related materials for educational
and training programs for which dealers must pay an established monthly
charge. (See the subheading under this Item 1 entitled "Special Charges and
Assessments.")
Through its wholly-owned subsidiary, Ace Insurance Agency, Inc., the
Company makes available to its dealers a Group Dealer Insurance Program
under which they can purchase a package of insurance coverages, including
"all risk" property insurance and business interruption, crime, liability
and workers' compensation coverages, as well as medical expense coverage
for their employees. AHC Realty Corporation, another wholly-owned
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subsidiary of the Company, provides the services of a broker to those
dealers who desire to sell or seek a new location for a presently owned
store or to acquire an additional store. In addition, the Company offers to
its dealers retail computer systems consisting of computer equipment,
maintenance service and certain software programs and services. These are
marketed by the Company under its registered service mark "PACE".
The Company manufactures paint and related products at a facility
owned by it in Matteson, Illinois. This facility now constitutes the
primary source of such products offered for sale by the Company to its
dealers. It is operated as a separate Division of the Company for
accounting purposes. All raw materials used by the Company to manufacture
paint are purchased from outside sources. The Company has had adequate
sources of raw materials, and no shortages of any materials which would
materially impact operations are currently anticipated. The manufacturing
of paint is seasonal to the extent that greater paint sales are found in
the months of April through September. Historically, compliance with
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment have not had any material
impact.
The Company's business, either in hardware wholesaling or paint
manufacturing activities is not dependent on any major suppliers and the
Company feels that any seasonal fluctuations do not have a significant
impact upon operations. For further discussion of Company's business, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations", in Item 7 hereof.
Special Charges and Assessments
The Company sponsors a national advertising program for which its
dealers are currently assessed an amount equal to 1.25% of their purchases
(exclusive of lumber, building materials, purchases of PACE computer
systems (hardware and software), less than truckload lumber and building
material program purchases and LTL Plus Program purchases as described here
in above in this Item 1) from the Company during each bi-weekly period,
with the current minimum annual assessment being $975.00 and with the
maximum annual assessment being $4,750 for each business location of any
one dealer which has become a member of the Company. The total annual
amount of advertising assessments payable by any one dealer is also
subject to a further maximum limit which is determined by multiplying the
number of such dealer's member retail store outlets serving the general
public by $4,750. In the case of a dealer whose place of business is
located outside the contiguous States of the United States, the Company's
management has authority to determine the extent, if any, to which such
dealer shall be required to pay the annual national advertising assessment
based upon its evaluation of the amount and nature of the television
broadcasts received in the dealer's area. The percentage of bi-weekly
purchases to be assessed for the Company's national advertising program and
the amount of the maximum annual assessment for such program are both
subject to being changed from time to time by action of the Board of
Directors of the Company. The Company also has the authority, effective
January 1, 1993 to impose a regional advertising assessment (for select
geographic regions) not to exceed 2% of annual purchases with the same
minimum and maximum assessments imposed by the National Advertising
assessment.
Each dealer must pay a low volume service charge if the dealer's
purchases during the calendar year are less than the minimum purchase
levels described below. Minimum purchase levels and the amount of the low
volume service charge are subject to change from time to time by the
Company's Board of Directors. Presently, the low volume service charge is
$30.00 and applies beginning one (1) year after the granting of the
membership, if the dealer's purchases from the Company (exclusive of
carload lumber purchases) are less than $4,000.00 per bi-weekly billing
period. If the dealer's purchases from the Company reach $104,000 during
the calendar year, then the dealer receives credit on its next bi-weekly
billing statement for all low volume service charges imposed on that
account earlier in the same calendar year, and the account is not subject
to any further low volume service charges for the rest of the calendar
year. The low volume service charge is not billed on a bi-monthly basis to
those accounts whose previous year's sales volume exceeded the minimum
purchases level for the previous year, but the full annual low volume
4
service charge will be billed at year end to those accounts if the minimum
purchase level to avoid imposition of the charge has not been met for the
current year. For the calendar year in which the first anniversary of the
store's membership occurs, the $104,000 purchase requirement is pro-rated
from the first billing statement after that anniversary through December 31,
if less than a full calendar year. An Ace store that falls below minimum
purchase levels is also subject to termination.
A late payment service charge is added on any past due balance owing by
a dealer to the Company for purchases of merchandise and services or for
the purchase price of the capital stock of the Company subscribed for by
the dealer. The late payment service charge currently in effect is an
amount equal to .77% per bi-weekly statement period, except in Texas where
the charge is .384% and Georgia where the charge is .692%. A past due
balance is created whenever payment of the amounts shown as due on any such
statement is not received by the Company within 10 days following the date
of the statement. The percentage for determining the amount of the late
payment service charge may be changed from time to time by the Company.
Subscriptions to a retail training program consisting of video tapes and
related course materials (the "S.T.A.R. Program") are mandatory for all
stores located in the United States and U.S. Territories. The initial
monthly assessment imposed on such stores for such subscriptions is $14.50
for each single store or parent store and $10.00 for each branch store. A
single store or parent store is an initial retail outlet for which a dealer
owns, or has subscribed for, one (1) share of Class A stock and forty (40)
shares of Class C stock of the Company. A branch store is an additional
retail outlet for which a dealer owns, or has subscribed for, fifty (50)
shares of Class C stock of the Company. (See Article XXV, Section 2 of the
By-laws.) Branch stores may, upon request, be granted an exemption from the
monthly subscription fee.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by the Company
and by its member-dealers in connection with the promotion, advertising
and marketing of products distributed by the Company.
The Company also uses the names "Bright & Easy" and "Weather Shedder"
for promotion of the sale of certain paints and paint primers, the name
"Super Striker" for promotion of the sale of a packaged assortment
containing fishing rods and lures (other than big game trolling lures) and
the name "LUB-E" for the promotion of the sale of lubricant. In addition,
the Company uses several service marks as an aid in the establishment and
operation of stores owned and operated by its member-dealers and uses the
service mark "Hardware University" for certain seminars and workshops
conducted for its dealers and the service mark "PACE" for in-store computer
systems which it markets for use by them in their store operations.
The Company holds the following Trademark and Service Mark
Registrations issued by the U.S. Patent and Trademark Office for the marks
used by it for the above-described purposes:
<TABLE>
<CAPTION>
Registration
Description of Mark Type of Mark Number Expiration Date
<S> <C> <C> <C>
Name "ACE" in stylized
lettering design Service Mark 1,464,025 November 3, 2007
Name "ACE Hardware" and
winged emblem containing same Service Mark 840,176 December 5, 2007
"ACE Hardware--
The More Store" Service Mark 1,003,523 January 28, 1995
"ACE Is The Place With The
Helpful Hardware Man" Service Mark 1,055,743 January 4, 1997
5
"The Helpful Hardware Man" Service Mark 1,055,741 January 4, 1997
"Ace Is the Place" Service Mark 1,602,715 June 19, 2000
"LUB-E" Trademark 1,615,386 October 2, 2000
"Ace Five Star" Trademark 1,627,887 December 18, 2000
"The Paintin' Place" Service Mark 1,138,654 August 12, 2000
"Hardware University" with design Service Mark 1,180,539 December 1, 2001
Name "PACE" with design Service Mark 1,208,887 September 14, 2002
Name "ACE Hardware" and winged
emblem containing same Trademark 898,070 September 8, 2000
Name "ACE Hardware" and winged
emblem containing same Trademark 1,277,581 May 15, 2004
"Super Striker" Trademark 1,182,330 December 15, 2001
"Bright & Easy" Trademark 1,058,117 February 8, 1997
"Weather Shedder" Trademark 1,053,816 December 7, 1996
Name "ACE Hardware" in slanted
bar design Trademark 1,426,137 January 27, 2007
Name "ACE Hardware" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
Name "ACE Hardware and Garden
Center" Service Mark 1,487,216 May 3, 2008
Name "ACE New Experience" in
stylized lettering design Trademark 1,554,322 September 5, 2009
Name "ACE Seven Star" in
stylized lettering design Trademark 1,556,389 September 19, 2009
Name "FLO-SOFT" Trademark 1,532,900 April 14, 2009
Name "ACE Best Buys" in
circle design Service Mark 1,560,250 October 10, 2009
Name "PACER" Trademark 1,570,820 December 12, 1999
Name "ACENET" Service Mark 1,574,019 December 26, 1999
"ASK ACE" Service Mark 1,653,263 August 6, 2001
Name "ACE Three Star" in
stylized lettering design Trademark 1,631,237 January 15, 2001
Name "ACE Pro" in
stylized lettering design Trademark 1,632,078 January 22, 2001
Christmas Elves design Trademark 1,669,306 December 24, 2001
"ACE 2000" Service Mark 1,682,467 April 7, 2002
Name "ACE" in stylized
lettering design Trademark 1,683,538 April 21, 2002
Name "HARMONY" in stylized
lettering design Trademark 1,700,526 July 14, 2002
Seven Star Satisfaction Guaranteed
Quality Ace Paints Design Service Mark 1,705,321 August 4, 2002
Name "THE OAK BROOK COLLECTION"
in stylized lettering design Trademark 1,707,986 August 18, 2002
Name "THE OAK BROOK COLLECTION"
in stylized lettering design Trademark 1,783,335 July 20, 2003
Name "ACE HARDWARE BROWN
BAG BONANZA" with design Service Mark 1,761,277 April 13, 2003
Name "STORE 2000 THE
STORE OF THE FUTURE" Trademark 1,811,032 December 14, 2003
Name "ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003
"ACE HARDWARE COMMITTED
TO A QUALITY ENVIRONMENT" Service Mark 1,764,803 April 13, 2003
</TABLE>
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Currently the Company has a pending application before the U.S. Patent
and Trademark Office for registration of "ACE RENTAL PLACE" in stylized
lettering design for use in connection with the rental of equipment,
merchandise and supplies.
Competition
The competitive conditions in the wholesale hardware industry can be
characterized as intensive due to the fact that independent retailers are
required to remain competitive with discount stores and chain stores such
as Wal-Mart, Home Depot and Sears and with other mass merchandisers. The
gradual shift of retail operations to high rent shopping center locations
and the trend toward longer store hours have also intensified pressures to
obtain low cost wholesale supply sources. The Company directly competes in
several U.S. markets with Cotter & Company, Servistar Corporation, Hardware
Wholesalers, Inc., Our Own Hardware Company, and United Hardware
Distributing Co., all of which companies are also dealer-owned
wholesalers. Of the aforementioned companies, only Cotter & Company,
headquartered in Chicago, Illinois, has a larger sales volume than the
Company.
Employees
The Company employs 3,405 full-time employees, of which 981 are
salaried employees. Collective bargaining agreements covering one truck
drivers' bargaining unit and four warehouse bargaining units are currently
in effect at certain of the Company's distribution warehouses. The
Company's employee relations with both union and non-union employees are
considered to be good, and the Company has experienced only one
employee-related work stoppage in the past five years. All employees are
covered either by negotiated or non-negotiated employee benefit plans which
include hospitalization, death benefits and, with few exceptions,
retirement benefits.
Limitations on Ownership of Stock
All of the issued and outstanding shares of capital stock of the
Company are owned by its dealers. Only approved retail and other dealers in
hardware and related products having Membership Agreements with the Company
are eligible to own or purchase shares of any class of the Company's stock.
No dealer, regardless of the number of member business outlets owned
or controlled by him, shall be entitled to own more than 1 share of Class A
Stock, which is the only class of voting stock which can be issued by the
Company. This ensures that each stockholder-dealer will have an equal voice
in the management of the Company. An unincorporated person or partnership
shall be deemed to be controlled by another person, partnership or
corporation if 50% or more of the assets or profit shares therein are owned
(i) by such other person, partnership or corporation or (ii) by the owner
or owners of 50% or more of the assets or profit shares of another
unincorporated business firm or (iii) by the owner or owners of 50% or more
of the capital stock of an incorporated business firm. A corporation shall
be deemed to be controlled by another person, partnership or corporation if
50% or more of the capital stock of said corporation is owned (i) by such
person, partnership or corporation or (ii) by the owner or owners of 50% or
more of the capital stock of another incorporated business firm or (iii) by
the owner or owners of 50% or more of the assets or profit shares of an
unincorporated business firm.
Distribution of Patronage Dividends
The Company operates on a cooperative basis with respect to purchases
of merchandise made from it by those of its dealers who have become
"members" of the Company as described below and in the Company's By-laws.
In addition, the Company operates on a cooperative basis with respect to
all dealers who have subscribed for shares but who have not as yet become
"members" by reason of the fact that the payments made by them on account
of the purchase price of their shares have not yet reached an amount equal
to the $1,000 purchase price of 1 share of Class A Voting Stock. All member
dealers falling into either of the foregoing classifications are entitled
to receive patronage dividend distributions once each year from the
Company in proportion to the amount of their annual purchases of
merchandise from it.
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The patronage dividends distributed on wholesale warehouse, bulletin
and direct shipment sales made by the Company and on total sales of
products manufactured by the Paint Division represented the following
percentages of each of said categories of sales during each of the past
three calendar years:
1993 1992 1991
Warehouse Sales 4.94434% 5.26838% 4.99516%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 7.9389% 8.9440% 8.6463%
In addition to the dividends described above, patronage dividends are
calculated separately and distributed on sales of lumber products,
building material products and less-than-truckload (LTL) sales of lumber
and building material products. Patronage dividends equal to .1763%, .1260%
and .2098% of the total sales of these products (calculated separately by
each of these three sales categories) were distributed to the Company's
dealers who purchased those products in 1993, 1992 and 1991, respectively.
Under the LTL Plus Program, patronage dividends are also calculated
separately on sales of full or partial truckloads of products purchased by
eligible dealers from specified vendors (see discussion of LTL Plus Program
set forth above in this Item 1). The maximum amount of patronage dividends
allocable to LTL Plus sales is .5% of such sales. The LTL Plus Program
dividend was .5% of such sales for 1993, 1992 and 1991.
Patronage Dividend Determinations and Allocations
The amounts distributed by the Company as patronage dividends consist
of its gross profits on business done with dealers who qualify for
patronage dividend distributions after deducting from said gross profits a
proportionate share of the Company's expenses for administration and
operations. Such gross profits consist of the difference between the price
at which merchandise is sold to such dealers and the cost of such
merchandise to the Company. All income and expenses associated with
activities not directly related to patronage transactions are excluded from
the computation of patronage dividends. Generally these include profits on
business done with dealers who do not qualify for patronage dividend
distributions and any income (loss) realized by the Company from the
disposition of property and equipment (except that, to the extent that
depreciation on such assets has been deducted as an expense during the time
that the Company has been operating on a cooperative basis and is
recaptured in connection with such a disposition, the income derived from
such recapture would be included in computing patronage dividends).
The By-laws of the Company provide that, by virtue of a dealer being a
"member" of the Company (that is, by virtue of his ownership of 1 share of
Class A Voting Stock), he will be deemed to have consented to include in
his gross income for federal income tax purposes for the dealer's taxable
year in which they are received by him all patronage dividends
distributed to him by the Company in connection with his purchases of
merchandise from the Company. A dealer who has not yet paid an amount which
at least equals the $1,000 purchase price of the 1 share of Class A Voting
Stock subscribed for by him will also be required to include all patronage
dividends distributed to him by the Company in his gross income for federal
income tax purposes in the year in which they are received by him. This is
required by virtue of a provision in the Subscription Agreement executed by
him under which he expressly consents to take all such patronage dividends
into his gross income for such purposes. The amount of the patronage
dividends which must be included in a dealer's gross income includes both
the portion of such patronage dividends received by him in cash or applied
against indebtedness owing by him to the Company in accordance with Section
7 of Article XXIV of the Company's By-laws and the portion or portions
thereof which he receives in shares of Class C Nonvoting Stock of the
Company or in patronage refund certificates.
8
Patronage dividends on each of the Company's three basic categories of
sales (warehouse sales, bulletin sales and direct shipment sales) are
allocated separately, as are patronage dividends under the LTL Plus
Program. However, the maximum amount of patronage dividends allocable to
LTL Plus Program sales is an amount no greater than .5% of such sales, the
maximum amount of patronage dividends allocable to direct shipment sales
exclusive of LTL Plus Program sales is an amount equal to 1% of such sales
and the maximum amount of patronage dividends allocable to bulletin sales
is an amount equal to 2% of that category of sales. All remaining patronage
dividends resulting from sales made under these programs are allocated by
the Company to warehouse sales. The Company feels that this allocation
procedure provides a practical and understandable method for the
distribution of these patronage dividends in a fair and equitable manner.
Sales of lumber and building materials products are not included as
part of warehouse sales, bulletin sales, or direct shipment sales for
patronage dividend purposes. Patronage dividends are calculated separately
and distributed to the Company's dealers with respect to their purchases
within each of three sales categories involving these types of products.
These three categories are (a) lumber products (other than
less-than-truckload sales); (b) building materials products (other than
less-than-truckload sales); and (c) less-than-truckload ("LTL") sales of
lumber and building material products. Patronage dividends are also
calculated separately and distributed to the Company's dealers for full and
partial truckloads of products purchased under the LTL Plus Program. (See
the discussion of the LTL Plus Program set forth above in this Item 1 and
under the subheading "Forms of Patronage Dividend Distributions,"
subparagraphs 2(a)-(b) below).
Any manufacturing profit realized on intracompany sales of the products
manufactured by the Company's Paint Division is allocated among and
distributed as patronage dividends to those member dealers who are eligible
to receive patronage dividends from the Company in proportion to their
respective annual dollar purchases of paint and related products
manufactured by said Division. The earnings realized by the Company on
wholesale sales of such products made by it to its member dealers are
distributed as patronage dividends to all of its dealers who are eligible
to receive patronage dividends from it as part of the patronage dividends
which they receive each year with respect to the basic patronage dividend
categories established for warehouse sales, bulletin sales, and direct
shipment sales. Under Section 8 of Article XXIV of the Company's By-laws,
if the Paint Division's manufacturing operations for any year result in a
net loss, rather than a profit, to the Paint Division, such loss would be
netted against the earnings realized by the Company from its other
activities during the year, with the result that the earnings available
from such other activities for distribution as patronage dividends for such
year would be correspondingly reduced.
Forms of Patronage Dividend Distributions
Patronage dividend distributions will be made to the eligible and
qualified member dealers of the Company in cash, shares of the Company's
Class C stock and patronage refund certificates in accordance with the
following plan which has been adopted by the Company's Board of Directors
with respect to purchases of merchandise made by such dealers from the
Company on or after January 1, 1993, and which will continue to be in
effect until such time as the Board of Directors, in the exercise of their
authority and discretion based upon business conditions from time to time
and the requirements of the Company, shall determine that such plan should
be altered or amended:
1. With respect to each store owned or controlled by each eligible and
qualifying dealer, such dealer shall receive a minimum cash distribution
determined as follows:
(a) an amount equal to 20% of the first $5,000 of the total
patronage dividends allocated for distribution each year to such dealer
in connection with the purchases made for such store;
(b) an amount equal to 25% of the portion of the total patronage
dividends allocated for distribution each year to such dealer for such
store which exceeds $5,000 but does not exceed $7,500;
9
(c) an amount equal to 30% of the portion of the total patronage
dividends allocated for distribution each year to such dealer for
such store which exceeds $7,500 but does not exceed $10,000;
(d) an amount equal to 35% of the portion of the total patronage
dividends allocated for distribution each year to such dealer for
such store which exceeds $10,000 but does not exceed $12,500;
(e) an amount equal to 40% of the portion of the total patronage
dividends allocated for distribution each year to such dealer for
such store which exceeds $12,500.
2. The portion of the total annual distribution allocated to any such
dealer for each store owned or controlled by such dealer in excess of the
amount to be distributed to such dealer for such store in cash shall be
distributed to him each year in the form of shares of Class C Non-voting
Stock of Ace Hardware Corporation (par value $100 per share), valued at
the par value thereof, until the total par value of all shares of all
classes of capital stock of the corporation held by such dealer with
respect to such store equals the greater of:
(a) $20,000; or
(b) a sum equal to the total of the following categories of
purchases made by such dealer for such store during the most recent
calendar year:
(i) 10% of the volume of Ace manufactured paint and related
products purchases, plus
(ii) 3% of the volume of drop-shipment or direct purchases
(excluding Ace manufactured paint and related products),
plus
(iii) 13% of the volume of warehouse (including STOP and
excluding Ace manufactured paint and related products)
and bulletin purchases, plus
(iv) 4% of the volume of lumber and building material
(excluding LTL) purchases, plus
(v) 4% of the volume of LTL Plus purchases;
provided, however, that no fractional shares of Class C Non-voting
Stock shall be issued to any dealer and that any amount which would have
otherwise been distributable as a fractional share of such stock shall
instead be distributed to such dealer in cash.
3. The portion of the total patronage dividends allocated each year
to any such dealer for each store owned or controlled by such dealer
which exceeds the sum of (a) the amount to be distributed to such dealer
for such store in cash pursuant to Paragraph 1. above and (b) any amount
to be distributed to him in the form of shares of Class C Non-voting
Stock of Ace Hardware Corporation (par value $100 per share) pursuant to
Paragraph 2. above shall be distributed to such dealer in cash; provided,
however, that in no event shall the total amount distributed under this
plan to any such dealer for any such store in cash exceed 49.9% of the
total patronage dividends allocated for such store for such year, and to
the extent that any distribution to be made to any such dealer for any
store pursuant to this Paragraph 3. would otherwise cause the total cash
distribution to such dealer for such store to exceed 49.9% of the total
patronage dividends allocated for such store for such year, the
distribution to be made under this Paragraph 3. shall instead be made in
the form of a non-negotiable patronage refund certificate having such a
maturity date and bearing interest at such an annual rate as shall be
determined by the Board of Directors prior to the issuance thereof.
With certain modifications, the above Plan is applied separately in
determining the form in which patronage dividends accrued with respect to
sales of lumber and building materials products are distributed. In this
connection the combined patronage dividends allocated annually to a store
from (a) sales of lumber products (other than LTL sales) to the store, (b)
sales of building materials (other than LTL sales) to the store, and (c)
LTL sales to the store are used in determining the minimum cash
distribution percentages to be applied under Paragraph 1 of the above
Plan. A store's patronage dividends from any other sales category with
10
respect to which patronage dividends are distributed by the Company are not
taken into account in determining either the minimum portion or any
additional portion of the store's patronage dividends derived from its
purchases of lumber and building materials products which is to be
distributed in cash. Also, Paragraphs 2 and 3 of the above Plan are applied
separately to patronage dividends on lumber and building materials sales and
the requirements of Paragraph 2 of the Plan shall not be deemed to have been
complied with in the cases of (a) purchases of lumber products (other than
LTL purchases) or (b) purchases of building materials products (other than
LTL purchases) until the store's holdings of Class C Non-voting Stock of the
Company resulting from patronage dividends on the Company's sales to it
within the particular one of those two sales categories for which a patronage
dividend distribution is to be made equal 4% of the volume of the store's
purchases within such category during the most recent calendar year. However,
no such special Class C Stock requirement applies to patronage dividends
accrued on LTL purchases.
Notwithstanding the provisions of the above-described Plan, however,
under Section 7 of Article XXIV of the Company's By-laws the portion of any
patronage dividends which would otherwise be distributable in cash with
respect to a retail dealer outlet which is a member of the Company will
instead be applied against any indebtedness owing by the dealer to the
Company to the extent of such indebtedness in any case where the membership
for such outlet is cancelled or terminated prior to the distribution of
such patronage dividends except that an amount equal to 20% of the dealer's
total annual patronage dividends for such outlet will be paid in cash if a
timely request for the payment of such amount in cash is submitted to the
Company by the dealer.
Because of the requirement of the U. S. Internal Revenue Code that the
Company withhold 30% of the annual patronage dividends distributed to
member dealers of the Company whose places of business are located in
foreign countries or Puerto Rico (except in the case of unincorporated
Puerto Rico dealers owned by individuals who are U.S. citizens and certain
dealers incorporated in Guam, American Samoa, the Northern Mariana Islands,
or the U.S. Virgin Islands, if less than 25% of its stock is owned by
foreign persons, and at least 65% of the Corporation's gross income for the
last three years has been effectively connected with the conduct of a trade
or business in such possession or in the United States), the cash portion
of the annual patronage dividends of such dealers shall in no event be less
than 30%.
It is anticipated that the terms of any patronage refund certificates
issued pursuant to Paragraph 3. of the foregoing Plan would include
provisions giving the Company a first lien thereon for the amount of any
indebtedness owing to it at any time by the owner of any such certificate
and provisions subordinating the certificates to all the rights and claims
of secured, general and bank creditors against the Company. It is further
anticipated that all such patronage refund certificates will have maturity
dates which will be no later than five years from the dates of issuance
thereof.
In order to aid the Company's dealers in acquiring and installing
standardized exterior signs identifying the retail stores operated by them
as member outlets supplied by the Company, the Board of Directors of the
Company has authorized a program under which a dealer may borrow from the
Company within a range of $100 to $20,000 the funds required for such
purpose. A dealer who obtains a loan under this program may either repay
the loan in twelve substantially equal payments billed on such dealer's
regular by-weekly billing statement, or may execute a direction to have the
portion of the dealer's annual patronage dividends which would otherwise be
distributed under the above plan in a form other than cash from no more
than the next three annual distributions of such dividends applied toward
payment of the principal and interest on the loan.
In order to aid the Company's dealers in acquiring and installing PACE
and PAINTMAKER computer systems purchased from the Company, the Board of
Directors of the Company has also authorized programs under which
the Company will finance qualified dealers in the case of a PAINTMAKER
computer, within the range of $1,000 to $15,000 repayable over a period of
three (3) years, and in the case of a PACE computer, within the range of
11
$5,000 to $50,000 repayable over a period of five (5) years for such purpose.
Dealers who obtain financing from the Company for these purposes direct the
Company, during the financing term, to first apply toward the principal and
interest due on such loans, the patronage dividends which would otherwise
be payable in the form of patronage refund certificates for each year, and
then to apply the patronage dividends which would otherwise be payable for
the same year in the form of the Company's Class C stock.
The aforementioned signage and computer financing programs may be revised
or discontinued by the Board at any time.
Federal Income Tax Treatment of Patronage Dividends
Both the shares of Class C Non-voting Stock and the patronage refund
certificates used by the Company to pay patronage dividends that accrue to
its eligible and qualifying dealers constitute "qualified written notices
of allocation" within the meaning of that term as used in Sections 1381
through 1388 of the U.S. Internal Revenue Code, which specifically provide
for the income tax treatment of cooperatives and their patrons and which
have been in effect since 1963. The stated dollar amounts of such qualified
written notices of allocation must be taken into the gross income of each
of the recipients thereof for the taxable years in which they are
received, not withstanding the fact that stated dollar amounts may not be
received in such taxable years.
In order for the Company to receive a deduction from its gross income
for federal income tax purposes for the amount of any patronage dividends
paid by it to a patron (that is, to one of its eligible and qualifying
dealers) in the form of qualified written notices of allocation, it is
necessary that the Company pay (or apply against indebtedness owing to the
Company by such patron in accordance with Section 7 of Article XXIV of the
Company's By-laws) not less than 20% of the total patronage dividends
distributable to such patron in cash and that the patron consent to having
the written notices of allocation, at their stated dollar amounts, included
in his gross income for the taxable year in which they are received by him.
It is also required under the Code that any patronage dividend distributions
deducted by the Company on its federal income tax return with respect to
business done by it with patrons during the year for which such deduction
is taken must be made to the Company's patrons within 8 1/2 months after
the end of such year.
Dealers who have become "members" of the Company by owning 1 share of
Class A Voting Stock are deemed under the U.S. Internal Revenue Code to
have consented to take any written notices of allocation distributed to
them into their gross income by their act of obtaining or retaining
membership in the Company and by having received from the Company a written
notification of the By-law provision providing that membership in the
Company constitutes such consent. In accordance with another provision in
the Internal Revenue Code, nonmember dealers who have subscribed for shares
of the Company's stock will also be deemed to have consented, by virtue of
the consent provisions included in their Subscription Agreements, to take
any written notices of allocation distributed to them into their gross
income.
A dealer receiving a patronage refund certificate as part of the
dealer's patronage dividends in accordance with the last clause of
Paragraph 3 of the patronage dividend distribution plan previously
described under the subheading "Forms of Patronage Dividend Distributions"
in this Item 1, may be deemed to have received interest income in the form
of an original issue discount to the extent of any excess of the face
amount of the certificate over the present value of the stated principal
and interest payments to be made by the Company under the terms of the
certificate. Such income would be taxable to the dealer ratably over the
term of the certificate under Section 7872(b) (2) of the U. S. Internal
Revenue Code. The present value for this purpose is to be determined by
using a discount rate equal to the applicable Federal rate in effect as of
the day of issuance of the certificate, compounded semi-annually.
12
The Company will be required to withhold for federal income tax on the
patronage dividend distribution which is made to a payee who has not
furnished his taxpayer identification number to the Company or as to whom
the Company has notice of the fact that the number furnished to it is
incorrect. A cooperative organization may also be required to withhold on
the cash portion of each patronage dividend distribution made to a payee
who becomes a member of the cooperative if the payee fails to certify to
the cooperative that he is not subject to backup withholding. It is the
opinion of counsel for the Company that this provision is not applicable to
any patronage dividend distribution to a payee unless 50% or more of the
total distribution is made in cash. Since all of the Company's patronage
dividends for a given year are distributed at the same time and the
Company's currently effective patronage dividend plan does not permit any
store which is a member of the Company to receive more than 49.9% of its
patronage dividends for the year in the form of cash, it is said counsel's
further opinion that such a certification failure would ordinarily have no
effect on the Company or any of its dealers.
Patronage dividends distributed by a cooperative organization to its
patrons who are located in foreign countries or certain U. S. possessions
have been held to constitute fixed or determinable annual or periodic
income on which such patrons are required to pay a tax of 30% of the amount
received in accordance with the provisions of Sections 871(a)(1)(A) and
881(a) (1) of the Internal Revenue Code, as do patronage dividends
distributed to patrons which are incorporated in Puerto Rico or who reside
in Puerto Rico but have not become citizens of the United States. With
respect to its dealers who are subject to such 30% tax, the Company is also
obligated to withhold from their patronage dividends and pay over to the
U. S. Internal Revenue Service an amount equal to the tax. The foregoing
provisions do not apply to a corporation organized in Guam, American
Samoa, the Northern Mariana Islands, or the U. S. Virgin Islands if less
than 25% of its stock is owned by foreign persons and at least 65% of its
gross income for the last three years has been effectively connected with
the conduct of a trade or business in such possession or in the United
States.
The 20% minimum portion of the patronage dividends to be paid in cash to
a patron with respect to whom the Company is neither required to withhold
30% of his total patronage dividend distribution nor permitted to apply
such minimum portion against indebtedness owing to it by him may be
insufficient depending upon the income tax bracket of each individual
patron, to provide funds for the full payment of the federal income tax for
which such patron will be liable as a result of the receipt of the total
patronage dividends distributed to him during the year, including cash,
patronage refund certificates and/or Class C Non-voting Stock.
In the opinion of the Company's management, payment in cash of not less
than 20% of the total patronage dividends distributable each year to the
Company's eligible and qualifying dealers will not have a material adverse
effect on the operations of the Company or its ability to obtain adequate
working capital for the normal requirements of its business.
Membership Agreement
In addition to signing a Subscription Agreement for the purchase of
shares of the Company's stock, each retail dealer who applies to become an
Ace dealer (excluding the firms which are "International Retail Merchants"
as discussed below under the subheading "International Retail Merchants" in
this Item 1) must sign the Company's customary Membership Agreement. A
payment of $400 must accompany the signed Membership Agreement to defray
the Company's estimated costs of processing the membership application. If
the application is accepted, copies of both the Membership Agreement and
the Stock Subscription Agreement, signed on behalf of the Company to
evidence its acceptance, are forwarded to the dealer. No royalties are
payable at any time by a dealer for an outlet which the Company accepts for
affiliation into its dealer network. Membership may be terminated upon
various notice periods and for various reasons (including voluntary
termination by either party) as prescribed in the membership agreement,
except to the extent that special laws or regulations applicable to specific
locations may limit the Company's right to terminate memberships, or may
prescribe greater periods of notice under particular circumstances.
13
International Retail Merchants
In 1989, the Company's Board of Directors authorized the Company to
affiliate International Retail Merchants, who operate retail businesses
outside the United States, its territories and possessions. International
Retail Merchants sign an International Retail Merchants Agreement in lieu
of the Company's Regular Membership Agreement, and are generally granted a
license to use certain of the Company's service marks. They do not,
however, sign Stock Subscription Agreements or become shareholders of the
Company by reason of their International Retail Merchants Agreements, nor
do they receive distributions of patronage dividends. As of December 31,
1993, 1992 and 1991 International Retail Merchant volume with the Company
accounts for less than 3% of the Company's total sales in each such year.
Item 2. Properties
The Company's general offices are located at 2200 Kensington Court, Oak
Brook, Illinois 60521. Information with respect to the Company's principal
properties follows:
<TABLE>
<CAPTION>
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
General Offices:
<S> <C> <C> <C>
Oak Brook, Illinois 206,030 Leased September 30, 2009
Oak Brook, Illinois (1) 70,508 Owned
Distribution Warehouses:
Lincoln, Nebraska 346,000 Leased October 31, 1996
Arlington, Texas 313,000 Leased July 31, 1996
Perrysburg, Ohio 396,000 Leased November 1, 2004
Tampa, Florida 391,760 Owned
Harmans, Maryland 277,000 Owned
Yakima, Washington 502,400 Owned
Maumelle, Arkansas 350,000 Owned
LaCrosse, Wisconsin 363,000 Owned
Bloomfield, Connecticut(2) 449,820 Owned
Huntersville, North Carolina 354,000 Owned
Rocklin, California 470,000 Owned
Gainesville, Georgia 478,000 Owned
Prescott Valley, Arizona 633,000 Owned
Princeton, Illinois 1,080,000 Owned
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased January 31, 1995
Paint Manufacturing Facility:
Matteson, Illinois 356,000 Owned
Other Property (Land):
Aurora, Illinois 72 acres Owned
LaCrosse, Wisconsin(3) 3 acres Owned
</TABLE>
(1) Includes 35,254 square feet leased to tenant until July 31, 1996.
The subject property is adjacent to the Company's general offices.
(2) Includes an 80,820 sq. ft. warehouse expansion project, scheduled
for completion later in 1994.
(3) This land is adjacent to the Company's LaCrosse, Wisconsin
warehouse.
The Company also leases a fleet of transportation equipment for the
primary purpose of delivering merchandise from the Company's warehouses to
its dealers.
14
Item 3. Legal Proceedings
There are no material pending legal proceedings which either
individually or in the aggregate involve claims for damages that exceed 10%
of the current assets of the Company and its subsidiaries on a consolidated
basis.
Item 4. Submission To A Vote Of Security Holders
None.
PART II
Item 5. Market For The Registrant's Common Equity And Related Stockhoder
Matters
There is no existing market for the stock of the Company and there is
no expectation that any market will develop. The Company is organized and
operates as a cooperative corporation, and its stock is owned exclusively
by retailers of hardware and related merchandise who are members of the
Company.
The number of holders of record as of February 28, 1994 of each class of
stock of the Company is as follows:
Title of Class Number of Record Holders
Class A stock, $1,000 par value 3,933
Class B stock, $1,000 par value 850
Class C stock, $100 par value 4,756
Dividends, other than patronage dividends are prohibited by the
Company's Articles of Incorporation and By-laws. See the discussion of
patronage dividends under Item 1. Business.
15
Item 6. Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
(Not Covered by Auditors' Report)
Income Statement Data:
Year Ended December 31,
<CAPTION>
1993 1992 1991 1990 1989
(000's omitted)
<S> <C> <C> <C> <C> <C>
Net sales $ 2,017,763 $ 1,870,625 $ 1,704,203 $ 1,625,029 $ 1,546,450
Cost of sales 1,867,326 1,723,017 1,569,871 1,497,147 1,426,322
Gross profit 150,437 147,608 134,332 127,882 120,128
Total expenses 93,345 86,841 75,175 67,470 69,557
Earnings before patronage dividends 57,092 60,767 59,157 60,412 50,571
Patronage dividends (Note A, B, 5 and 8) 59,023 63,207 57,729 57,519 53,128
Net earnings $ (1,931) $ (2,440) $ 1,428 $ 2,893 $ (2,557)
</TABLE>
<TABLE>
Balance Sheet Data:
Year Ended December 31,
<CAPTION>
1993 1992 1991 1990 1989
(000's omitted)
<S> <C> <C> <C> <C> <C>
Total assets $ 667,488 $ 594,676 $ 540,953 $ 479,202 $ 496,834
Working capital 133,287 103,952 105,899 92,376 76,683
Long-term debt 71,286 51,696 38,737 22,521 28,622
Patronage refund certificates payable, long-term 56,270 55,389 58,559 52,134 45,669
Member dealers' equity 186,028 175,681 164,411 154,563 139,545
</TABLE>
(A) The Company operates as a cooperative organization, and pays
patronage dividends to member dealers on earnings derived from business
done with such dealers. It is the practice of the Company to distribute
all patronage sourced earnings in the form of patronage dividends.
Earnings before patronage dividends and patronage dividends will
normally be the same, except for differences caused by the timing of
the recognition of certain items for income tax purposes.
(B) The form in which patronage dividends are to be distributed can only
be determined at the end of each year when the amount distributable to
each of the member dealers is known. For the five years ended
December 31, 1993, patronage dividends were payable as follows:
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
(000's omitted)
<S> <C> <C> <C> <C> <C>
In cash $25,766 $27,538 $26,864 $26,462 $24,359
In patronage refund certificates payable 12,728 14,598 15,176 13,597 12,310
In Class C Stock 19,064 20,301 14,841 16,322 15,328
In patronage finanacing deductions 1,465 770 848 1,138 1,131
Total patronage dividends $59,023 $63,207 $57,729 $57,519 $53,128
</TABLE>
(C) Numbered notes refer to Notes to Financial Statements, beginning
on page F-8.
16
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs
("liquidity") results from internally generated funds, short-term lines of
credit and long-term financings (see Notes 3 and 4 to the financial
statements). These sources have been sufficient to finance the Company's
seasonal and other working capital requirements and its capital expenditure
programs.
The Company had unused unsecured lines of credit of $69.0 million at
December 31, 1993. Any borrowings under these lines of credit would bear
interest at the prime rate or less. Long-term financings are arranged as
determined necessary to meet the Company's capital or other requirements,
with principal amount, timing and form dependent on prevailing debt markets
and general economic conditions.
Capital expenditures for new and improved facilities were $16.3, $34.6
and $37.9 million in 1993, 1992 and 1991, respectively. During 1993, the
Company financed the $16.3 million of capital expenditures out of current
and accumulated internally generated funds, and short-term and long-term
borrowings. 1994 capital expenditures are anticipated to be approximately
$30.9 million primarily for improvements to existing facilities.
As a cooperative, the Company distributes substantially all of its
patronage source earnings to its members in the form of patronage dividends,
which are deductible for income tax purposes (see headings "Patronage
Dividend Determinations And Allocations" and "Federal Tax Treatment of
Patronage Dividends"). The 1991 capital gain from the sale and leaseback of
the Los Angeles, California facility constitutes nonpatronage-sourced income
and is not available for distribution as patronage dividends.
The Company expects that existing and new internally generated funds,
along with established lines of credit and long-term financings, will
continue to be sufficient to finance the Company's patronage dividend and
capital expenditure programs.
Operations--1993 Compared to 1992
Net sales increased 7.9% in 1993 primarily due to increases in volume
from existing dealers. Sales of basic hardware and paint merchandise
(including warehouse, bulletin, and direct shipments) increased 6.8%.
Lumber and building material sales experienced a higher percentage increase
in 1993. Net dealer outlets decreased as set forth on page 1 as a result of
increased sales and marketing efforts with existing dealers and increased
competition.
Gross profit increased $2,829,000 or 1.9% vs. 1992 due primarily to
higher net merchandise discounts and allowances. Gross profit decreased as
a percent of sales, however, due to reduced handling charges on
competitively priced items and shifts in the Company's sales mix.
Warehouse and distribution expenses decreased by $641,000 or 2.0% due to
decreased building rental and facility costs and increased levels of
warehousing costs absorbed into cost of sales, partially offset by
increased personnel and equipment costs and traffic freight subsidies.
Selling, general, and administration expenses increased by $5,927,000 or
12.2% due to higher personnel costs and marketing expenses partially
offset by higher advertising and retail support income.
17
Interest expense increased $1,418,000 in 1993 despite lower interest
rates due to increased long-term debt resulting from the financing of
planned capital expenditures and increased inventory levels. The use of
both short-term borrowings and long-term financing is expected to continue
to fund planned capital expenditures (see liquidity and capital resources
and Notes 3 and 4 to the financial statements).
Operations--1992 Compared to 1991
Net sales increased 9.8% in 1992 primarily due to increases in volume
from existing dealers. Sales of basic hardware and paint merchandise
(including warehouse, bulletin, and direct shipments) increased 6.9%.
Lumber and building material sales experienced a higher percentage increase
in 1992. Total paint sales increased 12.3%. Net dealer outlets decreased as
set forth on page 1 as a result of increased sales and marketing efforts
with existing dealers and increased competition.
Gross profit increased $13,276,000 or 9.9% vs. 1991 but is comparable as
a percentage of sales primarily due to higher net merchandise discounts
and allowances and a lower LIFO provision partially offset by reduced
handling charges as a percent of sales caused by a shift in the sales mix.
Warehouse and distribution expenses increased by $3,310,000 or 11.4% due
to higher personnel costs related to volume increases, increased building
rental costs and higher 1992 start-up and closing costs incurred in
conjunction with the replacement of a facility.
Selling, general, and administration expenses increased by $4,013,000 or
9.0% due to higher personnel costs and marketing expenses partially offset
by higher advertising income.
Interest expense increased $1,370,000 in 1992 despite lower interest
rates due to increased long and short-term debt resulting from the
financing of planned capital expenditures and increased inventory levels.
The use of both short-term borrowings and long-term financing is expected
to continue to fund planned capital expenditures (see liquidity and capital
resources and Notes 3 and 4 to the financial statements).
Other income, net decreased $2,973,000 in 1992 due primarily to the 1991
gain on the sale of the Los Angeles facility (see Note 11 to the financial
statements).
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that
establish prices substantially in advance of the receipt of goods or
services. As vendors increase their prices for merchandise supplied to the
Company, the Company increases the price to its dealers in an equal amount
plus the normal handling charge on such amounts. In the past, these
increases have provided adequate gross profit to offset the impact of
inflation on operating expenses.
Item 8. Financial Statements And Supplementary Data
Financial statements and financial statement schedules covered by
the report of the Company's certified public accountants are listed on
Page F-1.
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosures
None.
18
PART III
Item 10. Directors And Executive Officers Of The Company
The directors and the executive officers of the Company are:
Position(s) Held
Name Age and Business Experience
Lawrence R. Bowman 47 Director since February 4, 1991; term
expires 1995; Vice President of Owenhouse
Hardware Co., Inc., Bozeman, Montana
David F. Hodnik 46 Executive Vice President and Chief
Operating Officer since January, 1994;
Executive Vice President and Treasurer
since January, 1991; Senior Vice President
and Treasurer since January, 1988; Vice
President--Finance and Management
Information Systems and Treasurer since
September, 1986; Vice President--Finance
and Treasurer from December, 1982.
Paul M. Ingevaldson 48 Vice President--Corporate Strategy and
International Business since September,
1992; Vice President--Retail Support
Services since August, 1989; Vice
President--Western Region since
September 1, 1988; Vice President--
Distribution since September, 1986;
Vice President--Management Information
Systems from October, 1985; Director of
Data Processing from October, 1982.
Mark Jeronimus 45 Director since June 3, 1991; term expires
1994; President of Duluth Hardware, Inc.,
Duluth, Minnesota.
Howard J. Jung 46 Director since June 1, 1987; term expires
1996; Vice President of Ace Hardware &
Home Center, Inc., Raleigh, North Carolina.
Rita D. Kahle 37 Vice President--Finance since January, 1994;
Vice President--Controller since
January, 1992; Controller from July, 1988.
John E. Kingrey 50 Director since May 17, 1992; term expires
1996; President of WK&K Corp., Wimberley,
Texas.
Richard E. Laskowski 52 Chairman of the Board since February 18,
1992 and Director since June 1, 1987;
term expires 1995; President of Ace
Hardware Home Center of Round Lake, Inc.,
Round Lake, Illinois.
William A. Loftus 55 Senior Vice President--Marketing and
Advertising since September, 1992; Senior
Vice President since January 1, 1991; Vice
President--Retail Support Operations since
August, 1989; Vice President--Eastern
Region since September 1, 1988; Vice
President--Sales since October, 1983;
National Sales Manager from October, 1976.
Fred J. Neer 54 Vice President--Human Resources since
April, 1989; Director of Human Resources
from April, 1986.
19
Ray W. Osborne 57 Director since June 6, 1988; term expires
1994; President of Cook & Sons Ace Hardware
Company, Inc., Albertville, Alabama.
Roger E. Peterson 56 President and Chief Executive Officer (CEO)
since December, 1989; President since
August, 1986; Executive Vice President from
March, 1985; Vice President--Operations
from December, 1982.
Jon R. Weiss 58 Director since June 4, 1990; term expires
1996; President of John W. Weiss Hardware
Company, Glenview, Illinois.
Don S. Williams 52 Director since June 6, 1988; term expires
1994; President of Williams Lumber, Inc.,
Rhinebeck, New York.
James R. Williams 46 Director since June 5, 1989; term expires
1995; Vice-President of Williams Ace
Hardware, Inc., Wichita, Kansas.
Gary R. Meyer whose term was to have expired in 1994, resigned from the
Board of Directors for personal reasons in November, 1993 and no successor
has yet been elected for the balance of his term.
The By-laws of the Company provide that its Board of Directors shall be
comprised of such number of persons, not less than 9, as shall be fixed
from time to time by the Board of Directors. The By-laws also provide for
three classes of directors who are to be elected for staggered 3-year
terms.
The By-laws provide that, except for one position on the Board which
may, at the discretion of the directors, be filled by the President of the
Company, no person is eligible to serve as a director unless such person is
either the owner of a retail business organization holding stock in the
Company or an executive officer, general partner or general manager of
such a retail business organization. Such directors are referred to as
"dealer directors", and are elected from geographic regions of the United
States established by the Board.
In accordance with the applicable procedure established by the By-laws,
the following directors have been selected as nominees for reelection at
the annual stockholders meeting to be held on June 6, 1994, as directors of
the classes, from the regions, and for terms as indicated below:
Nominee Class Region Term
Don S. Williams First 1 3 years
Ray W. Osborne First 3 3 years
Mark Jeronimus First 9 3 years
The person named below has been selected as the nominee for election to
the Board for the first time at the 1994 annual meeting as director of
the class, from the region, and for the term indicated.
Nominee Age Class Region Term
Jennifer Anderson 43 First 8 3 years
Reference should be made to Article IV of the By-laws for information
concerning the qualifications required for membership on the Board of
Directors, the terms of directors, the limitations on the total period of
20
time for which a director may hold office, the procedure established for
the designation of Nominating Committees to select certain persons as
nominees for election to the Board of Directors, and the procedure for
filling vacancies on the Board for the remaining portion of unexpired terms.
None of the events described under Item 401(f) of Regulation S-K
occurred during the past 5 years with respect to any director of the
Registrant, any nominee for membership on the Board of Directors of the
Registrant or any executive or staff officer of the Registrant.
Item 11. Executive Compensation
The following information is set forth with respect to the cash
compensation paid by the Company to each of the five highest paid executive
officers of the Company whose cash compensation exceeded $100,000, for
services rendered by them in all capacities to the Company and its
subsidiaries during the fiscal year ended December 31, 1993 and the two
previous fiscal years:
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
<CAPTION>
(2)
Name Other (4)
and Annual (3) All Other
Principal (1) Compen- Long-Term Compen-
Position Year Salary ($) Bonus ($) sation ($) Payouts ($) sation ($)
<S> <C> <C> <C> <C> <C> <C>
Roger E. Peterson 1993 $670,000 $100,000 $19,001 $ -- $139,598
President and Chief 1992 635,000 -- 17,174 -- 115,758
Executive Officer (CEO) 1991 600,000 -- -- -- --
David F. Hodnik 1993 328,000 50,840 14,794 15,500 75,210
Executive Vice President 1992 312,000 49,920 13,929 -- 66,943
and Chief Operating Officer 1991 295,000 48,675 -- -- --
William A. Loftus 1993 250,000 37,500 32,881 12,000 61,560
Senior Vice President- 1992 240,000 24,000 16,447 -- 51,918
Marketing & Advertising 1991 230,000 36,800 -- -- --
Paul M. Ingevaldson 1993 222,000 31,080 23,915 10,700 53,457
Vice President- 1992 212,000 30,740 9,584 -- 46,522
Corporate Strategy and 1991 201,000 32,160 -- -- --
International Business
Fred J. Neer 1993 157,000 17,490 5,760 7,500 37,361
Vice President- 1992 148,000 18,531 6,459 -- 33,222
Human Resources 1991 141,000 16,243 -- -- --
</TABLE>
(1) The Incentive Compensation Plan covers each of the executive officers
(except Mr. Peterson). The bonus amounts awarded to participants in
the Plan are determined in accordance with individual performance and
achievement of corporate goals. For 1991 to 1993, the maximum incentive
award for each of Messrs. Hodnik, Loftus and Ingevaldson was 18% of their
respective annual salaries and for other executive officers was 15% of
their annual salary for the short-term incentive awards. The short-term
bonus award becomes payable to each participant as early as practicable
after the end of the fiscal year. The 1993 bonus amount for Mr. Peterson
was a one time incentive award as described in the Compensation
Committee Report. For 1994, the maximum short-term incentive award for
each executive officer is 20% of their respective salary.
21
(2) The Company provides automobiles and prior to 1993 provided club
memberships to certain of its executive officers. The Company requires
them to maintain records with respect to any business automobile use.
Such officers pay, both directly and by reimbursement to the Company,
personal automobile expenses and personal charges at clubs. The
compensation table set forth above includes the value of these items
and such value for any officer did not exceed the lesser of $25,000 or
10% of the compensation reported for him in said table.
(3) Includes the long-term incentive award under the Incentive Compensation
Plan paid in 1993. The long-term executive award is based on corporate
performance over a three year time frame. The maximum long-term
incentive award for Messrs. Hodnik, Loftus, Ingevaldson, and Neer and
other executive officers is 8.7% of their respective average 3 year
annual salaries. The long term incentive award is determined and
becomes payable to each participant as early as practicable each year
if the participant is still employed by the Company on the preceding
31st of December.
(4) Includes compensation for the Executive Supplemental Benefit Plan
(ESBP), contributions to the Company's Profit Sharing Plan which has
been in existence since January 1,1953, and contributions to the
Company's Retirement Benefits Replacement Plan.
The Board of Directors adopted the Executive Supplemental Benefit Plan
(ESBP) in 1991. ESBP provides supplemental life insurance through a
universal life insurance policy, supplemental long-term disability and
supplemental retirement benefits to the executive officers. Under the
supplemental retirement benefits portion of ESBP a formula equal to
.02 of 1% of the total corporate annual Patronage Dividend times the
number of executive officers participating determines the total annual
supplemental retirement benefits under ESBP. This total sum for all
executive officers allocated to the supplemental retirement benefits
portion of ESBP cannot exceed $200,000 in any year. The sum is
allocated, by tier, to the executive officers and placed in the cash
value portion of each participant's variable annuity insurance policy
as soon as practicable in each subsequent year. During the year 1993,
total contributions were $14,365 for Messrs. Peterson, Hodnik and
Ingevaldson and $11,485 for Mr. Neer.
All active employees are eligible to participate in the Company's
profit sharing plan after one year of service but those active
employees covered by a collective bargaining agreement regarding
retirement benefits which were the subject of good faith bargaining
are not eligible if such agreement does not include them in the plan.
For the year 1993, the Company contributed 10.9% of each participant's
eligible compensation to the Plan. During the year 1993, $25,707 was
expensed by the Company pursuant to the Plan for Messrs. Peterson,
Hodnik, Loftus and Ingevaldson and $21,896 for Mr. Neer.
The Company has also established a Retirement Benefits Replacement
Plan covering Messrs. Peterson, Hodnik, Loftus and Ingevaldson.
Effective January 1, 1994, the plan will cover all executive officers
of the Company. This is an unfunded Plan under which the participants
therein are eligible to receive retirement benefits equal to the
amounts by which the benefits they would otherwise have been entitled
to receive under the Company's Profit Sharing Plan may be reduced by
reason of the limitations on contributions and benefits imposed by any
current or future provisions of the U.S. Internal Revenue Code or other
federal legislation. During the year 1993, amounts expensed by the
Company pursuant to the Plan were $94,253 for Mr. Peterson, $31,517
for Mr. Hodnik, $17,413 for Mr. Loftus, and $9,792 for Mr. Ingevaldson.
(5) As a cooperative whereby all stockholders are member dealers, the
Company does not grant or issue stock awards of any kind.
Messrs. Peterson, Hodnik, Loftus and Ingevaldson are employed under
contracts, each dated October, 1992 for respective terms of two years,
terminating December 31, 1994. The contracts provide for annual compensation
22
effective January 1, 1994 of $800,000, $350,000, $260,000, and $232,000,
respectively or such increased amount, if any, as shall be approved by the
Board of Directors.
The Company also maintains a Pension Plan which has been in existence
since December 31, 1970. All active employees are eligible to participate
in this Plan on the first January 1 that they are working for the Company
but those active employees covered by a collective bargaining agreement
regarding which retirement benefits were the subject of good faith
bargaining are not eligible if such agreement does not include them in
the plan. The Plan provides benefits at retirement at or after age 65
determined under a formula which takes into account 60% of a participant's
average base pay (including overtime) during the 5 highest consecutive
calendar years of his employment and his years of service prior to age 65,
and under which an offset is applied for the straight life annuity
equivalent of the vested portion of the participant in the amount of
benefits provided for him by the Company under the Profit Sharing Plan.
Examples of yearly benefits provided by the Pension Plan (prior to
reduction by the Profit Sharing Plan offset) are as follows:
Years of Service
Remuneration 10 15 20 25 30 or more
$200,000 $40,000 $60,000 $80,000 $90,000 $112,221
150,000 30,000 45,000 60,000 75,000 90,000
100,000 20,000 30,000 40,000 50,000 60,000
50,000 10,000 15,000 20,000 25,000 30,000
The amounts shown above represent straight life annuity amounts.
Maximum benefits from the Pension Plan are attained after 30 years of
service and attainment of age 65. The compensation covered by the Pension
Plan consists of base compensation (exclusive of bonuses and non-recurring
salary or wage payments) and shall not exceed $235,840 of such total
remuneration paid to a participant during any plan year. Remuneration and
yearly benefits under the Plan are limited, and subject to adjustment,
under Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The
present credited years of service under the Pension Plan for the currently
employed executive officers named in the compensation table are as follows:
Roger E. Peterson--17 years; David F. Hodnik--21 years; William A.
Loftus--17 years; Paul M. Ingevaldson--14 years; Fred J. Neer--7 years.
Compensation Committee Report
The corporation's Executive Compensation philosophy is one that
supports the Company's fundamental business strategies. Like our dealers,
we stress long term measured results, focus on teamwork, accepting prudent
risks, and are strongly committed to fulfilling dealer/consumer needs.
Our compensation program reflects a policy of competitive performance
based pay. Our competitors for Human Resources include publicly owned for
profit retail corporations, privately owned for profit retail enterprises,
and other national cooperatives. Each of these comparative groupings has
quite a different compensation practice/philosophy. Therefore, our
orientation is to be cognizant of their respective practices and pay
levels, but to give greater emphasis to that which supports the needs of
our dealer network.
The Compensation Committee is in the process of changing the compensation
mix to one which stresses the provision of more significant performance
based incentives, particularly long term. 1993 salary increases for
executive officers averaged 5.3% per eligible executive. Annual and long
term incentive opportunities for 1993 were maintained at previous levels
while both programs were increased beginning in 1994.
The Committee has agreed, in principle to more substantive changes to
the existing long term incentive plan. This involves selecting appropriate
long term performance criteria; possibly stretching the performance period
23
to a time frame greater than its current three year time frame, or
obligating plan eligible participants to a minimum of three to five years
service from date of performance award. We expect to complete these plan
redesign changes in early 1994.
As it relates to the President/CEO compensation, the Committee in the
past has relied on providing the President/CEO with a base salary without
either annual or long term incentives. The Committee's primary rationale
for this was to allow the President/CEO to make objective recommendations
pertaining to incentive eligible officers without the incumbrance of a
personal stake associated with the same performance criteria. This too is
under review and likely to change, so as to ensure the long term commitment
of the President/CEO position to the longer term interest of our dealer
network.
The Committee also concluded that the corporation's performance results
for 1993 were of such a significant milestone that a special one time
incentive award to the President/CEO of $100,000 was granted. This was
warranted based upon total sales exceeding $2 billion and distribution of a
total patronage dividend of $59 million. Both represented excellent
results for the company. The Compensation Committee approved a 19.4% salary
increase for the President/CEO to take effect January 1, 1994. This was
based upon comparison of CEO cash compensation at competitor enterprises
and a desire to maintain Mr. Peterson's salary at a level consistent with
his long-term contribution to the success of Ace and its over 4,900
retailers.
The Committee also reviews the executive benefits provided to either the
CEO and other senior executives. Country club memberships previously
granted to some officers have been eliminated, except for the President/CEO
and Chief Operating Officer.
Compensation of Directors
Effective January 1, 1993, and January 1, 1994, each member of the
Board of Directors receives a fee of $2,300 and $2,500 per month,
respectively, for their services. Effective as of the foregoing dates, Mr.
Laskowski is paid a total annual fee of $80,000 and $100,000 per year,
respectively, in his capacity as Chairman of the Board. Under a Deferred
Director Fee Plan adopted by the Board, each director may elect to defer
payment of 10% to 100% of his monthly director's fee, in 10% increments,
until whichever of the following dates shall be selected by him at the time
he makes such deferral election: (a) the first day of the month coinciding
with or next following his 70th birthday or (b) the first day of the month
coinciding with or next following such director's final day of service as
a director, or (c) the first day of the month coinciding with or next
following such director's 75th birthday, or (d) the first day of the month
coinciding with or next following the date designated, which date must be
after the date of the deferred election.
Each member of the Board is also reimbursed for the amount of the travel
and lodging expenses incurred by him in attending meetings of the Board and
of the Committees of the Board. The expenses incurred by them in attending
the semi-annual conventions and exhibits which the Company sponsors are
also paid by the Company. Each member of the Board is also paid $200.00 per
diem compensation for special committee meetings and nominating committee
regional trips which he attends.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
With the exception of Mr. Laskowski, no shares of the Company's
stock were held by any of its officers. No person owns of record or is
known by the Company to own beneficially more than five percent of the
outstanding voting securities of the Company.
The following table sets forth the shares of Class B Stock and Class C
Stock of the Company held beneficially, directly or indirectly, by each
director owning such shares, individually itemized, and by all officers
and directors as a group, as of February 28, 1994:
24
<TABLE>
<CAPTION>
Class B Stock Owned Class C Stock Owned
Number Percent Number Percent
of Shares of Class of Shares of Class
<S> <C> <C> <C> <C>
Lawrence R. Bowman 4 0.118% 1,176 0.077%
Mark Jeronimus -- -- 730 0.048
Howard J. Jung -- -- 3,261 0.214
John E. Kingrey 4 0.118 680 0.045
Richard E. Laskowski 4 0.118 10,213 0.670
Ray W. Osborne 4 0.118 705 0.046
Jon R. Weiss 4 0.118 2,037 0.134
Don S. Williams -- -- 2,529 0.166
James R. Williams 4 0.118 671 0.044
All above directors and
officers as a group 24 0.708% 22,002 1.444%
</TABLE>
There are no known contractual arrangements nor any pledge of
securities of the Company which may at a subsequent date result in a change
in control of the Company.
Item 13. Certain Relationships And Related Transactions
No director, director nominee, executive officer, security holder
who is known to the Registrant to own of record or beneficially more than
five percent of any class of the Registrant's voting securities, or any
member of the immediate family of any of the foregoing persons, had during
the last fiscal year or is currently proposed to have any material
interest, direct or indirect, in any transaction in which the amount
involved exceeds $60,000.00 and to which the Registrant was or is to be a
party, except that each of the directors and director nominees, purchased
merchandise and services from the Registrant in the ordinary course of
business on behalf of the retail hardware businesses in which they have
ownership interests. None of such persons received benefits not shared by
other hardware retailers supplied by the Registrant.
No director or director nominee has had any business relationship which
is required to be disclosed pursuant to Item 404(b) of Regulation S-K of
the Securities and Exchange Commission, during the Registrant's last
fiscal year nor is any such relationship proposed during the Registrant's
current fiscal year.
No director, director nominee, executive officer, any member of the
immediate family of any of the foregoing, or any corporation or
organization of which any of the foregoing is an executive officer, partner,
or, directly or indirectly, the beneficial owner of ten percent or
more of any class of equity securities, or any trust or other estate in
which any of the foregoing has a substantial beneficial interest or as to
which such person serves as a trustee or in a similar capacity, has been
indebted to the Registrant or its subsidiaries at any time since the
beginning of the Registrant's last fiscal year in an amount in excess of
$60,000.00, except for indebtedness incurred in connection with purchases
of merchandise and services made from the Registrant in the ordinary course
of business by the retail hardware businesses in which the directors and
director nominees have ownership interest.
25
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying index
(page F-1) to the financial statements are filed as part of
this annual report.
2. Financial Statement Schedules
The financial statement schedules listed in the accompanying
index (page F-1) to the financial statements are filed as part
of this annual report.
3. Exhibits
The exhibits listed on the accompanying index to exhibits
(pages E-1 through E-5) are filed as part of this annual report.
(b) Reports on Form 8-K
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ACE HARDWARE CORPORATION
By RICHARD E. LASKOWSKI
Richard E. Laskowski
Chairman of the Board and Director
DATED: March 23, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
RICHARD E. LASKOWSKI Chairman of the Board March 23,1994
Richard E. Laskowski and Director
ROGER E. PETERSON President and Chief March 23, 1994
Roger E. Peterson Executive Officer
DAVID F. HODNIK Executive Vice President March 23, 1994
David F. Hodnik and Chief Operating Officer
RITA D. KAHLE Vice President-Finance March 23, 1994
Rita D. Kahle (Principal Financial Officer)
Lawrence R. Bowman, Mark Jeronimus, Directors
Howard J. Jung, John E. Kingrey,
Ray W. Osborne, Don S. Williams,
Jon R. Weiss and James R. Williams
*By DAVID F. HODNIK
David F. Hodnik
*By RITA D. KAHLE March 23, 1994
Rita D. Kahle
*Attorneys-in-fact
27
Item 14(a). Index To Financial Statements And Financial Statement Schedules
Page(s)
Independent Auditors' Report F-2
Balance Sheets at December 31, 1993 and 1992 F-3
Statements of Earnings for each of the three years in the period
ended December 31, 1993 F-5
Statements of Member Dealers' Equity for each of the three years in
the period ended December 31, 1993 F-6
Statements of Cash Flows for each of the three years in the period
ended December 31, 1993 F-7
Notes to Financial Statements F-8
Financial Statement Schedules for each of the three years in the
period ended December 31, 1993:
V--Property, plant and equipment F-16
VI--Accumulated depreciation and amortization of property,
plant and equipment F-17
VIII--Valuation and qualifying accounts -- Allowance for
doubtful accounts F-18
All other schedules have been omitted because the required information
is not present or is not present in amounts sufficient to require
submission of the schedule or the required information is included in the
financial statements or the notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the balance sheets of Ace Hardware Corporation as of
December 31, 1993 and 1992, and the related statements of earnings, member
dealers' equity, and cash flows for each of the years in the three-year
period ended December 31, 1993. In connection with our audits of the
financial statements, we also have audited the financial statement
schedules as listed in the accompanying index. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ace Hardware
Corporation at December 31, 1993 and 1992, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1993 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK
Chicago, Illinois
January 31, 1994
F-2
<TABLE>
ACE HARDWARE CORPORATION
BALANCE SHEEET
December 31, 1993 and 1992
ASSETS
<CAPTION>
1993 1992
(000's omitted)
<S> <C> <C>
Current assets:
Cash $ 4,142 $ 2,144
Receivables:
Dealers 183,493 170,137
Others 29,831 24,287
213,324 194,424
Less Allowance for doubtful receivables (720) (700)
Net receivables 212,604 193,724
Inventories (Note 2) 263,576 213,477
Prepaid expenses and other current assets 6,869 6,517
Total current assets 487,191 415,862
Property and equipment (Notes 4 and 9):
Land 13,673 13,673
Buildings and improvements 131,794 128,838
Warehouse equipment 47,146 48,840
Office equipment 48,842 42,171
Manufacturing equipment 12,012 11,783
Transportation equipment 12,508 11,414
Leasehold improvements 6,553 6,495
Construction in progress 2,319 120
274,847 263,334
Less accumulated depreciation and amortization (108,710) (96,689)
Net property and equipment 166,137 166,645
Other assets 14,160 12,169
$ 667,488 $ 594,676
See accompanying notes to financial statements.
</TABLE>
F-3
<TABLE>
ACE HARDWARE CORPORATION
BALANCE SHEETS
December 31, 1993 and 1992
LIABILITIES AND MEMBER DEALERS' EQUITY
<CAPTION>
1993 1992
(000's omitted)
<S> <C> <C>
Current Liabilities:
Current installments of long-term debt (Note 4) $ 10,707 $ 1,389
Short-term borrowings (Note 3) 38,500 56,000
Accounts payable 234,190 181,105
Patronage dividends payable in cash (Note 5) 25,766 27,538
Patronage refund certificates payable (Note 5) 11,059 17,198
Accrued expenses 33,682 28,680
Total current liabilities 353,904 311,910
Long-term debt (Note 4) 71,286 51,696
Patronage refund certificates payable (Note 5) 56,270 55,389
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,946 4,060
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 153,155 139,014
Class C Stock of $100 par value, issuable to dealers for
patronage dividends 19,064 20,301
Additional stock subscribed, net 613 797
Retained earnings 5,622 7,553
Contributed capital 3,295 3,295
192,194 181,519
Less: Treasury stock, at cost (6,166) (5,838)
Total member dealers' equity 186,028 175,681
Commitments (Notes 6 and 9) -- --
$ 667,488 $ 594,676
See accompanying notes to financial statements.
</TABLE>
F-4
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF EARNINGS
Year Ended December 31,
<CAPTION>
1993 1992 1991
(000's omitted)
<S> <C> <C> <C>
Net sales $ 2,017,763 $ 1,870,625 $ 1,704,203
Cost of sales 1,867,326 1,723,017 1,569,871
Gross Profit 150,437 147,608 134,332
Operating expenses:
Warehouse and distribution 31,650 32,291 28,981
Selling, general and administration 54,378 48,451 44,438
Total operating expenses 86,028 80,742 73,419
Operating income 64,409 66,866 60,913
Interest expense (Note 11) (9,798) (8,380) (7,010)
Other income, net (Note 11) 2,481 2,281 5,254
Earnings before patronage dividends 57,092 60,767 59,157
Patronage dividends 59,023 63,207 57,729
Net earnings $ (1,931) $ (2,440) $ 1,428
See accompanying notes to financial statements.
</TABLE>
F-5
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1993
(000's omitted)
<CAPTION>
Class C
Stock
Issuable to
Dealers for Additional
Class A Class B Class C Patronage Stock
Stock Stock Stock Dividends Subscribed*
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $ 4,244 $ 6,499 $ 119,496 $ 16,322 $ 1,308
Earnings before patronage dividends -- -- -- -- --
Net payments on subscriptions -- -- -- -- 1,526
Stock issued 287 -- 17,800 (16,322) (1,765)
Stock repurchased -- -- -- -- --
Stock retired (366) -- (7,213) -- --
Stock issuable as patronage dividends -- -- -- 14,841 --
Patronage dividends payable -- -- -- -- --
Balance at December 31, 1991 $ 4,165 $ 6,499 $ 130,083 $ 14,841 $ 1,069
Earnings before patronage dividends -- -- -- -- --
Net payments on subscriptions -- -- -- -- 1,302
Stock issued 224 -- 16,191 (14,841) (1,574)
Stock repurchased -- -- -- -- --
Stock retired (329) -- (7,260) -- --
Stock issuable as patronage dividends -- -- -- 20,301 --
Patronage dividends payable -- -- -- -- --
Balance at December 31, 1992 $ 4,060 $ 6,499 $ 139,014 $ 20,301 $ 797
Earnings before patronage dividends -- -- -- -- --
Net payments on subscriptions -- -- -- -- 1,049
Stock issued 157 -- 21,377 (20,301) (1,233)
Stock repurchased -- -- -- -- --
Stock retired (271) -- (7,236) -- --
Stock issuable as patronage dividends -- -- -- 19,064 --
Patronage dividends payable -- -- -- -- --
Balance at December 31, 1993 $ 3,946 $ 6,499 $ 153,155 $ 19,064 $ 613
* Additional stock subscribed is comprised of the following amounts at December 31, 1991, 1992 and 1993:
</TABLE>
<TABLE>
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
Class A Stock . . . . . . . . . $ 219 $ 185 $ 223
Class B Stock . . . . . . . . . -- -- --
Class C Stock . . . . . . . . . 2,876 2,184 1,952
3,095 2,369 2,175
Less unpaid portion . . . . . . 2,026 1,572 1,562
$1,069 $ 797 $ 613
</TABLE>
<TABLE>
<CAPTION>
Retained Contributed Treasury
Earnings Capital Stock Total
<S> <C> <C> <C> <C>
Balance at December 31, 1990 $ 8,565 $ 3,295 $ (5,166) $ 154,563
Earnings before patronage dividends 59,157 -- -- 59,157
Net payments on subscriptions -- -- -- 1,526
Stock issued -- -- -- --
Stock repurchased -- -- (7,947) (7,947)
Stock retired -- -- 7,579 --
Stock issuable as patronage dividends -- -- -- 14,841
Patronage dividends payable (57,729) -- -- (57,729)
Balance at December 31, 1991 $ 9,993 $ 3,295 $ (5,534) $ 164,411
Earnings before patronage dividends 60,767 -- -- 60,767
Net payments on subscriptions -- -- -- 1,302
Stock issued -- -- -- --
Stock repurchased -- -- (7,893) (7,893)
Stock retired -- -- 7,589 --
Stock issuable as patronage dividends -- -- -- 20,301
Patronage dividends payable (63,207) -- -- (63,207)
Balance at December 31, 1992 $ 7,553 $ 3,295 $ (5,838) $ 175,681
Earnings before patronage dividends 57,092 -- -- 57,092
Net payments on subscriptions -- -- -- 1,049
Stock issued -- -- -- --
Stock repurchased -- -- (7,835) (7,835)
Stock retired -- -- 7,507 --
Stock issuable as patronage dividends -- -- -- 19,064
Patronage dividends payable (59,023) -- -- (59,023)
Balance at December 31, 1993 $ 5,622 $ 3,295 $ (6,166) $ 186,028
See accompanying notes to financial statements.
</TABLE>
F-6
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
<CAPTION>
(000's omitted)
Operating Activities: 1993 1992 1991
<S> <C> <C> <C>
Earnings before patronage dividends $ 57,092 $ 60,767 $ 59,157
Patronage dividends (59,023) (63,207) (57,729)
Net Earnings (1,931) (2,440) 1,428
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 16,156 14,817 13,086
Loss (Gain) on sale of property and equipment 460 507 (3,880)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (18,880) (32,783) (9,002)
Increase in inventories (50,099) (2,091) (34,571)
Increase in prepaids and other current assets (352) (632) (235)
Increase (Decrease) in accounts payable and accrued expenses 58,087 (2,237) 1,202
Net Cash Provided by (Used for) Operating Activities 3,441 (24,859) (31,972)
Investing Activities:
Purchase of property, plant and equipment (16,346) (34,582) (37,851)
Proceeds from sale of property and equipment 238 83 10,878
Increase in other assets (1,991) (3,831) (1,202)
Net Cash Used in Investing Activities (18,099) (38,330) (28,175)
Financing Activities:
(Payments of) Proceeds from short-term borrowings (17,500) 34,000 21,000
Proceeds from Notes Payable 30,000 20,000 27,000
Principal payments on long-term debt and patronage
refund certificates (19,078) (24,582) (12,875)
Patronage dividends payable in cash 25,766 27,538 26,864
Patronage refund certificates 12,728 14,598 15,176
Class C stock issuable to dealers for patronage dividends 19,064 20,301 14,841
Proceeds from sale of common stock 1,049 1,302 1,526
Repurchase of common stock (7,835) (7,893) (7,947)
Payment of cash portion of patronage dividend (27,538) (26,864) (26,462)
Net Cash Provided by Financing Activities 16,656 58,400 59,123
Increase (Decrease) in Cash and Cash Equivalents 1,998 (4,789) (1,024)
Cash and Cash Equivalents at beginning of year 2,144 6,933 7,957
Cash and Cash Equivalents at end of year $ 4,142 $ 2,144 $ 6,933
See accompanying notes to financial statements.
</TABLE>
F-7
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) The Company and Its Business
The Company operates as a wholesaler of hardware and related products,
and manufactures paint products. As a dealer-owned cooperative, the Company
distributes substantially all of its earnings in the form of patronage
dividends to its member dealers based on their volume of merchandise
purchases.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of one month or less when purchased to be cash equivalents.
(c) Receivables
Receivables from dealers include amounts due from the sale of
merchandise and special equipment used in the operations of dealers'
businesses. Other receivables are principally amounts due from suppliers
for promotional and advertising allowances.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined using the last-in, first-out method on substantially all
inventories.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Expenditures for maintenance, repairs and
renewals of relatively minor items generally are charged to earnings.
Significant improvements or renewals are capitalized.
Depreciation expense is computed on both straight-line and accelerated
methods based on estimated useful lives as follows:
Useful Life Principal
Years Depreciation Method
Buildings and improvements 10-40 Straight line
Warehouse equipment 5-10 Sum of years
Office equipment 3-10 Various
Manufacturing equipment 3-20 Straight line
Transportation equipment 3-7 Straight line
Leasehold improvements are generally amortized on a straight-line
basis over the term of the respective leases.
(f) Retirement Plans
The Company has retirement plans covering substantially all non-union
employees. Costs with respect to the noncontributory pension plans are
determined actuarially and consist of current costs and amounts to amortize
prior service costs and unrecognized gains and losses. The Company
contribution under the profit sharing plan is determined annually by the
Board of Directors.
F-8
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially
all of the Company's inventory is valued on the last-in, first-out (LIFO)
method; the excess of replacement cost over the LIFO value of inventory was
approximately $63,615,000 and $60,806,000 at December 31, 1993 and 1992,
respectively. Indirect costs, consisting primarily of warehousing costs,
are absorbed as inventory costs rather than period costs.
(3) Short-Term Borrowings
Short-term borrowings were utilized during 1993 and 1992. The maximum
amount outstanding at any month-end during the period was $91,000,000 in
1993 and $69,000,000 in 1992. The weighted average interest rate was 3.56%,
4.1%, and 6.28% for the years ended December 31, 1993, 1992 and 1991,
respectively. Short term borrowings outstanding as of December 31, 1993,
1992 and 1991 were $38,500,000, $56,000,000 and $22,000,000, respectively.
The aggregate unused line of credit available at December 31, 1993, 1992
and 1991 was $69,000,000, $41,500,000 and $54,500,000, respectively. The
aggregate compensating balances (not legally restricted) at December 31,
1993, 1992 and 1991 were $600,000, $850,000 and $664,000, respectively.
(4) Long-Term Debt
Long-term debt is comprised of the following:
<TABLE>
December 31,
<CAPTION>
1993 1992
(000's omitted)
<S> <C> <C>
Industrial Development Revenue and Variable Rate Bonds:
$125,000 payable quarterly through December 1, 1996 with interest
at 65% of the prime rate $ 1,500 $ 2,000
$8,250,000 due on February 1, 1994 with interest payable monthly
beginning September 1, 1988 at variable rates ranging from 1.95%
to 4.95% 8,250 8,250
Notes Payable:
$20,000,000 due in quarterly installments of $540,500, commencing
July 1, 1994 with interest payable quarterly beginning January 1,
1992 at a fixed rate of 8.74% 20,000 20,000
$20,000,000 due in quarterly installments of $952,400, commencing
January 1, 1995 with interest payable quarterly beginning October
1, 1992 at a fixed rate of 6.89% 20,000 20,000
$30,000,000 due in semi-annual installments of $2,000,000,
commencing June 22, 2001 with interest payable quarterly
beginning December 22, 1993 at a fixed rate of 6.47% 30,000 --
Liability under capitalized leases (see Note 9) 1,197 1,632
Installment notes with maturities through 1997 with various interest
rates 1,046 1,203
81,993 53,085
Less current installments 10,707 1,389
$ 71,286 $ 51,696
</TABLE>
F-9
Prime interest rates in effect were 6.0% in 1993 and ranged from 6.0%
to 6.5% in 1992.
Aggregate maturities of long-term debt are $10,707,000, $7,283,000,
$6,965,000, $6,034,000 and $5,972,000 in 1994 through 1998, respectively.
Under the most restrictive covenants of the loan agreements the Company
must not permit its working capital to be less than $33,000,000 and
maintain current assets of at least 110% of current liabilities.
The fair value of the Company's debt based upon discounting of future
cash flows did not materially vary from the carrying value of such debt as
of December 31, 1993.
(5) Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or
will pay patronage dividends to member dealers on the portion of earnings
derived from business done with such dealers. Patronage dividends are
allocated in proportion to the volume of purchases by member dealers during
the period. For the years ended December 31, 1993 and 1992, the amount of
patronage dividends to be remitted in cash depends upon the level of
dividends earned by each member outlet, varying from 20% on the total
dividends under $5,000 and increasing by 5% on total dividends for each
subsequent $2,500 earned to a maximum of 40% on total dividends exceeding
$12,500. For the year ended December 31, 1991, the amount of patronage
dividends to be remitted in cash depended upon the level of dividends
earned by each member outlet, varying from 20% on the total dividends under
$2,000 and increasing by 5% on total dividends for each subsequent $1,000
earned to a maximum of 40% on total dividends exceeding $5,000. All amounts
exceeding the cash portions, as defined above, will be distributed in the
form of Class C $100 par value stock, to a maximum based upon the current
year's purchase volume or $20,000 ($10,000 in 1991), whichever is greater,
and thereafter in a combination of additional cash and patronage refund
certificates having maturity dates and bearing interest as determined by
the Board of Directors. A portion of the dealer's annual patronage
dividends distributed under the above plan in a form other than cash can be
applied toward payment of principal and interest on any balances outstanding
for approved exterior signage and in 1994 toward the payment of principal
and interest on any outstanding computer equipments financing.
The patronage dividend composition for 1993, 1992 and 1991 follows:
<TABLE>
<CAPTION>
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividends
(000's omitted)
<S> <C> <C> <C> <C> <C>
1993 $25,766 $12,728 $19,064 $1,465 $59,023
1992 27,538 14,598 20,301 770 63,207
1991 26,864 15,176 14,841 848 57,729
</TABLE>
Patronage dividends are allocated on a calandar year basis with
issuance in the following year.
The patronage refund certificates outstanding at December 31, 1993
are payable as follows:
<TABLE>
<CAPTION>
Interest
January 1, Amount Rate
(000's omitted)
<S> <C> <C>
1994 $ 1,120 7.5 %
1995 11,292 7.0
1996 13,041 7.0
1997 14,764 6.25
1998 14,384 6.0
1999 12,728 6.0
</TABLE>
F-10
On January 1, 1993 the Company prepaid a portion of the patronage
refund certificates payable on January 1, 1994. The remaining patronage
refund certificates payable on January 1, 1994 and a portion of the
patronage refund certificates payable on January 1, 1995 will be paid in
January 1994 and accordingly, are classified as current liabilities in the
accompanying December 31, 1993 balance sheet.
(6) Retirement Plans
The Company has defined benefit pension plans covering substantially
all non-union employees. Benefits are based on years of service, highest
average compensation (as defined) and the related profit sharing and
primary social security benefit. Contributions to the plan are based on the
Entry Age Normal, Frozen Initial Liability actuarial funding method and are
limited to amounts that are currently deductible for tax reporting
purposes. As of December 31, 1993, plan assets were held primarily in group
annuity and guaranteed interest contracts, equities and mutual funds.
Pension income for the years 1993, 1992 and 1991 included the following
components:
<TABLE>
<CAPTION>
1993 1992 1991
(000's omitted)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 292 $ 338 $ 372
Interest cost on projected benefit obligation 752 722 602
Actual return on plan assets (1,104) (975) (1,120)
Net amortization and deferral (169) (313) (233)
Net periodic pension income $ (229) $ (228) $ (379)
</TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's Balance Sheet at December 31, 1993 and 1992
(September 30th measurement date):
<TABLE>
<CAPTION>
1993 1992
(000's omitted)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits
of $8,500,000 and $8,009,000 $ 9,515 $ 9,251
Plan assets at fair value $ 14,023 $ 13,364
Projected benefit obligation for service rendered to date 10,897 10,451
Plan assets in excess of projected benefit obligation $ 3,126 $ 2,913
Unrecognized net gain (loss) from past experience
different from that assumed and effects of changes in
assumptions 1,544 1,611
Remaining unrecognized net asset being amortized over
participants average remaining service period (2,148) (2,318)
Prepaid pension cost included in other assets $ 2,522 $ 2,206
</TABLE>
F-11
The weighted average discount rate and rate of increase in future
compensation used in determining the actuarial present value of the
projected benefit obligation was 7.5% and 6.0%, respectively, in 1993 and
1992. The related expected long-term rate of return was 8.5% in 1993 and 9%
in 1992.
The Company also participates in several multi-employer plans covering
union employees. Amounts charged to expense and contributed to the plans
totaled approximately $275,000, $426,000, and $485,000 in 1993, 1992 and
1991, respectively.
The Company's profit sharing plan contribution for the years ended 1993,
1992, and 1991 was approximately $8,690,000, $7,374,000 and $6,824,000,
respectively.
The Company has no significant post-retirement benefit liabilities as
defined under Financial Accounting Standard No. 106.
(7) Income Taxes
As a cooperative, the Company distributes substantially all of its
patronage sourced earnings to its members in the form of patronage
dividends. Accordingly, provisions for income taxes have been historically
insignificant and are generally comprised primarily of state income taxes.
The 1993 and 1992 provisions for federal income taxes were $177,000 and
$299,000, respectively, and state income taxes were $267,000 and $126,000,
repectively. As described in Note 11, the Company completed a sale and
leaseback of its Los Angeles, California distribution facility in 1991.
The 1991 tax provision totals $1,158,000 for federal income taxes and
$236,000 for state income taxes.
The Company made tax payments of $357,000, $728,000, and $5,017,000
during 1993, 1992 and 1991, respectively.
(8) Member Dealers' Equity
The Company's founders for many years contemplated that the ownership
of the Company would eventually be with the Company's member dealers. Prior
to November 30, 1976, dealers deposited monies to the Ace Dealer's
Perpetuation Fund for the purpose of accumulating funds for the purchase of
stock when such ownership became available. The Company registered its
stock with the Securities and Exchange Commission on October 1, 1976 and
existing dealers who subscribed for stock applied their deposits toward
payment of such shares. The small number of dealers who did not subscribe
for shares had their respective deposits refunded during 1977.
F-12
The Company's classes of stock are described below:
<TABLE>
Number of Shares
at December 31,
<CAPTION>
1993 1992
<S> <C> <C>
Class A Stock, Voting, redeemable at par value --
Authorized 10,000 10,000
Issued and outstanding 3,946 4,060
Class B Stock, nonvoting, redeemable at not less than
twice par value --
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 3,416 3,580
Treasury stock 3,083 2,919
Class C Stock, nonvoting, redeemable at not less
than par value --
Authorized 2,000,000 2,000,000
Issued and outstanding 1,531,549 1,390,137
Issuable as patronage dividends 190,635 203,013
Additional Stock Subscribed:
Class A Stock 223 185
Class B Stock -- --
Class C Stock 19,520 21,840
</TABLE>
At December 31, 1993 and 1992 there were no common shares reserved
for options, warrants, conversions or other rights; nor were any options
granted or exercised during the two years then ended.
Member dealers may subscribe for the Company's stock in various
prescribed combinations. Only one share of Class A Stock may be owned by a
dealer with respect to the first member retail outlet controlled by such
dealer. Only four shares of Class B Stock may be owned by a dealer with
respect to each retail outlet controlled by such dealer, but only if such
outlet was a member of the Company on or before February 20, 1974. An
appropriate number of shares of Class C Stock must be included in any
subscription by a dealer in an amount to provide that such dealer has a par
value of all shares subscribed for equal to $5,000 for each retail outlet.
Unregistered shares of Class C Stock are also issued to dealers in
connection with patronage dividends. No dividends can be declared on any
shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail
outlet, all shares of stock of the Company, held by the dealer owning or
controlling such outlet, must be sold back to the Company, unless a
transfer of such shares is made to another party accepted by the Company as
a member dealer with respect to the same outlet.
A Class A share is issued to a member dealer only when the share
subscribed has been fully paid. Class B and Class C shares are only issued
when all such shares subscribed with respect to a retail outlet have been
fully paid. Additional Stock Subscribed in the accompanying statements
represents the par value of shares subscribed, reduced by the unpaid portion.
F-13
All shares of stock are currently issued and repurchased at par value,
except for Class B Stock which is repurchased at twice its par value, or
$2,000 per share. Upon retirement of Class B shares held in treasury, the
excess of redemption price over par is allocated equally between
contributed capital and retained earnings.
Transactions during 1992 and 1993 affecting treasury shares follow:
<TABLE>
Shares Held in Treasury
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Balance at December 31, 1991 -- 2,767 --
Stock issued -- -- --
Stock repurchased 329 152 72,600
Stock retired (329) -- (72,600)
Balance at December 31, 1992 -- 2,919 --
Stock issued -- -- --
Stock repurchased 271 164 72,359
Stock retired (271) -- (72,359)
Balance at December 31, 1993 -- 3,083 --
</TABLE>
(9) Commitments
Leased property under capital leases included under "Property and
Equipment" in the balance sheets as follows:
<TABLE>
<CAPTION>
December 31,
(000's omitted)
1993 1992
<S> <C> <C>
Buildings and improvements $ 3,422 $ 3,422
Data processing equipment 723 723
Less: Accumulated depreciation and amortization (3,291) (2,973)
$ 854 $ 1,172
</TABLE>
F-14
The Company rents buildings and warehouse, office and certain other
equipment under operating and capital leases. At December 31, 1993 annual
minimum rental commitments under leases that have initial or remaining
noncancelable terms in excess of one year were as follows:
Year Ending Capital Operating
December 31, Leases Leases
(000's omitted)
1994 $ 518 $ 8,917
1995 510 6,548
1996 271 4,982
1997 -- 3,689
1998 -- 3,110
Thereafter -- 26,191
Total minimum lease payments $1,299 $53,437
Less amount representing interest 102
Present value of total minimum lease payments $1,197
All leases expire prior to 2009. Under certain leases, the Company pays
real estate taxes, insurance and maintenance expenses in addition to rental
expense. Management expects that in the normal course of business, leases
that expire will be renewed or replaced by other leases. Rent expense was
approximately $21,444,000, $21,073,000 and $17,753,000 in 1993, 1992 and
1991, respectively. Rent expense includes $4,282,000, $3,706,000 and
$3,289,000 in contingent rentals paid in 1993, 1992 and 1991, respectively,
primarily for transportation equipment mileage.
(10) Supplementary Income Statement Information
Gross media expense, prior to income offsets from dealers and
suppliers, amounting to $48,293,000, $47,813,000 and $46,167,000 were
charged to operations in 1993, 1992, and 1991, respectively.
(11) Interest Expense and Other Income, Net
Capitalized interest totaled $29,000, $836,000 and $417,000 in 1993,
1992 and 1991, respectively. Interest paid was $10,670,000, $9,149,000 and
$6,409,000 in 1993, 1992 and 1991, respectively.
In November 1991, the Company completed a sale and leaseback of its Los
Angeles, California facility resulting in a gain of $2.5 million, net of
$1.4 million in federal and state income taxes. The facility was leased
back for a term which expired on October 31, 1992. The gain on the sale and
leaseback is included in other income for the year ended December 31, 1991.
The capital gain from the sale constitutes nonpatronage-sourced income and
is not available for distribution as patronage dividends.
F-15
<TABLE>
Schedule V
ACE HARDWARE CORPORATION
PROPERTY, PLANT AND EQUIPMENT
(000's omitted)
<CAPTION>
Balance at Balance
Beginning Additions Retirements Other at End
Description of Period at Cost or Sales Changes of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Land $ 14,915 $ 586 $ 3,328 $ -- $ 12,173
Buildings and improvements 84,814 12,157 5,548 4,535 95,958
Warehouse equipment 42,619 5,688 875 -- 47,432
Office equipment 33,074 6,488 1,327 3 38,238
Manufacturing equipment 11,992 507 -- 41 12,540
Transportation equipment 9,219 599 177 -- 9,641
Leasehold improvements 5,243 8 36 205 5,420
Construction in progress 4,784 11,818 -- (4,784) 11,818
$206,660 $ 37,851 $ 11,291 $ -- $ 233,220
Year Ended December 31, 1992:
Land $ 12,173 $ 1,500 $ -- $ -- 13,673
Buildings and improvements 95,958 21,387 191 11,684 128,838
Warehouse equipment 47,432 3,406 1,998 -- 48,840
Office equipment 38,238 4,899 1,100 134 42,171
Manufacturing equipment 12,540 216 973 -- 11,783
Transportation equipment 9,641 1,950 177 -- 11,414
Leasehold improvements 5,420 1,104 29 -- 6,495
Construction in progress 11,818 120 -- (11,818) 120
$233,220 $ 34,582 $ 4,468 $ -- $ 263,334
Year ended December 31, 1993:
Land $ 13,673 $ -- $ -- $ -- $ 13,673
Buildings and improvements 128,838 3,474 519 1 131,794
Warehouse equipment 48,840 1,180 2,874 -- 47,146
Office equipment 42,171 7,394 723 -- 48,842
Manufacturing equipment 11,783 229 -- -- 12,012
Transportation equipment 11,414 1,393 299 -- 12,508
Leasehold improvements 6,495 356 417 119 6,553
Construction in progress 120 2,320 1 (120) 2,319
$263,334 $ 16,346 $ 4,833 $ -- $ 274,847
</TABLE>
F-16
<TABLE>
Schedule VI
ACE HARDWARE CORPORATION
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(000's omitted)
<CAPTION>
Balance at Balance
Beginning Additions Retirements Other at End
Description of Period at Cost or Sales Changes of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Buildings and improvements $ 14,640 $ 2,408 $ 2,055 $ -- $ 14,993
Warehouse equipment 28,904 3,732 848 -- 31,788
Office equipment 20,499 4,476 1,293 -- 23,682
Manufacturing equipment 5,246 931 -- -- 6,177
Transportation equipment 4,520 1,031 60 -- 5,491
Leasehold improvements 3,146 508 35 -- 3,619
$ 76,955 $13,086 $ 4,291 $ -- $ 85,750
Year Ended December 31, 1992:
Buildings and improvements $ 14,993 $ 2,949 $ 41 $ -- $ 17,901
Warehouse equipment 31,788 3,781 1,918 -- 33,651
Office equipment 23,682 5,365 1,066 -- 27,981
Manufacturing equipment 6,177 941 718 -- 6,400
Transportation equipment 5,491 1,182 107 -- 6,566
Leasehold improvements 3,619 599 28 -- 4,190
$ 85,750 $14,817 $ 3,878 $ -- $ 96,689
Year ended December 31, 1993:
Buildings and improvements $ 17,901 $ 3,507 $ 175 $ -- $ 21,233
Warehouse equipment 33,651 3,533 2,682 -- 34,502
Office equipment 27,981 6,117 665 -- 33,433
Manufacturing equipment 6,400 915 -- -- 7,315
Transportation equipment 6,566 1,379 255 -- 7,690
Leasehold improvements 4,190 705 358 -- 4,537
$ 96,689 $16,156 $ 4,135 $ -- $ 108,710
</TABLE>
F-17
<TABLE>
Schedule VIII
ACE HARDWARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS -
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(000's omitted)
<CAPTION>
Provision Collections Uncollectible
Balance at for Losses on Receivables Accounts Balance
Beginning Charged to Previously Written at End
Description of Period Income Written Off Off Of Period
<S> <C> <C> <C> <C>
1991 $650 676 26 (692) $660
1992 $660 1,387 20 (1,367) $700
1993 $700 1,412 46 (1,438) $720
</TABLE>
F-18
INDEX TO EXHIBITS
Exhibits
Enclosed Description
21 Subsidiaries of the Registrant.
24 Powers of Attorney.
Exhibits
Incorporated
by Reference
2 Not Applicable
3-A Restated Certificate of Incorporation of the Registrant
dated September 18, 1974 filed as Exhibit 3-A to the
Registrant's Form S-1 Registration Statement
(Registration No. 2-55860) on March 30, 1976 and
incorporated herein by reference.
3-B By-laws of the Registrant as amended on January 24, 1994
included as Appendix A to the Prospectus constituting a
part of Post Effective Amendment No. 2 to the Registrant's
Form S-2 Registration Statement (Registration
No. 33-46449) filed on or about March 23, 1994 and
incorporated herein by reference.
3-C Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 19, 1976 filed
as Exhibit 3-D to Amendment No. 1 to the Registrant's
Form S-1 Registration Statement (Registration No. 2-55860)
on June 10, 1976 and incorporated herein by reference.
3-D Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 21, 1979 filed
as Exhibit 3-F to Amendment No. 1 to the Registrant's
Form S-1 Registration Statement (Registration No. 2-63880)
on May 23, 1979 and incorporated herein by reference.
3-E Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 7, 1982 filed
as Exhibit 3-G to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 16, 1983
and incorporated herein by reference.
3-F Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 5, 1987 filed
as Exhibit 3-F to the Registrant's Form S-1 Registration
Statement (Registration No. 33-4299) on March 29, 1988
and incorporated by reference.
3-G Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 16, 1989 filed
as Exhibit 4-G to Post Effective Amendment No. 1 to the
Registrant's S-2 Registration Statement filed on or about
March 20, 1990 and incorporated by reference.
4-A Specimen copy of Class B stock certificate as revised as
of November, 1984, filed as Exhibit 4-A to Post-Effective
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 15, 1985
and incorporated herein by reference.
4-B Specimen copy of Patronage Refund Certificate as revised
in 1988 filed as Exhibit 4-B to Post-Effective Amendment
No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and
incorporated herein by reference.
E-1
4-C Specimen copy of Class A stock certificate as revised in
1987 filed as Exhibit 4-C to Post-Effective Amendment
No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and
incorporated herein by reference.
4-D Specimen copy of Class C stock certificate filed as
Exhibit 4-I to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 16, 1983
and incorporated herein by reference.
4-E Copy of current standard form of Subscription for
Capital Stock Agreement to be used for dealers to
subscribe for shares of the Registrant's stock in
conjunction with new membership agreements submitted
to the Registrant filed as Exhibit 4-L to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on or about
March 23, 1994 and incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends
with respect to purchases of merchandise made from the
Registrant on or after January 1, 1993, adopted by the
Board of Directors of the Registrant on December 8, 1992,
filed as Exhibit 4-M to Post-Effective Amendment No. 2
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 23, 1994
and incorporated herein by reference.
9 No Exhibit
10-A Copy of Retirement Benefits Replacement Plan of the
Registrant, restated as of January 1, 1989, filed as
Exhibit 10-A to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 23, 1994
and incorporated herein by reference.
10-B Copy of resolutions establishing 1990 Incentive
Compensation Plan for Executives and amending the 1989
Incentive Compensation Plans for Executives of the
Registrant adopted by its Board of Directors on January
30, 1991 and filed as Exhibit 10-F to Post Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-27790) on March 20, 1991
and incorporated herein by reference.
10-C Copy of resolutions amending the 1990 Incentive
Compensation Plans for Executives and establishing the
Executive Supplemental Benefit Plans of the Registrant
adopted by its Board of Directors on December 11, 1990
and filed as Exhibit 10-G to Post Effective Amendment
No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-27790) on March 20, 1991 and
incorporated herein by reference.
10-D Copy of amendment to the Executive Supplemental Benefits
Plan of the Registrant adopted by its Board of Directors
on July 30, 1991 filed as Exhibit 10-E to the Registrant's
Form S-2 Registration Statement (Registration
No. 33-46449) on March 23, 1992 and incorporated herein by
reference.
10-E Copy of amendment to the Executive Supplemental Benefits
Plan of the Registrant adopted by its Board of Directors
on December 9, 1991 filed as Exhibit 10-F to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 23, 1992 and incorporated herein by
reference.
E-2
10-F Copy of amendment to the 1990 Incentive Compensation Plan
for Executives of the Registrant, filed as Exhibit 10-H
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 23, 1992 and
incorporated herein by reference.
10-G Copy of the "Ace Hardware Corportation Officer's (sic)
Incentive Compensation Plan" as amended and restated
effective January 1, 1994, filed as Exhibit 10-G to
Post-Effective Amendment No. 2 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449)
on or about March 23, 1994 and incorporated herein by
reference.
10-H Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and Paul Ingevaldson
filed as Exhibit 10-I to Post Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
10-I Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and David F. Hodnik
filed as Exhibit 10-J to Post Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
10-J Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and Roger E. Peterson
filed as Exhibit 10-K to Post Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
10-K Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and William A. Loftus
filed as Exhibit 10-L to Post Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 22, 1993
and incorporated herein by reference.
10-L Copy of Loan Agreement with Anne Arundel County, Maryland
dated December 1, 1981 securing 15-year floating rate
industrial development revenue bonds in the principal sum
of $9 million held by The Northern Trust Company, Chicago,
Illinois, for itself and other participating lenders filed
as Exhibit 10-A-k to Post-Effective Amendment No. 3 to the
Registrant's Form S-1 Registration Statement (Registration
No. 2-63880) on March 9, 1982 and incorporated herein by
reference.
10-M Copy of Loan Agreement with Pulaski County, Arkansas dated
July 1, 1988 securing a variable rate demand Industrial
Development Revenue Refunding Bond with a maturity date
of February 1, 1994 in the principal sum of $8,250,000.00
filed as Exhibit 10-V to the Registrant's Form S-2
Registration Statement (Registration No. 33-27790) filed
on March 28, 1989 and incorporated herein by reference.
E-3
10-N Copy of Note Purchase and Private Shelf Agreement with
the Prudential Insurance Company of America dated
September 27, 1991 securing 8.74% Senior Series A Notes
in the principal sum of $20,000,000.00 with a maturity
date of July 1, 2003 filed as Exhibit 10-A-q to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 23, 1992 and incorporated herein
by reference.
10-O Copy of Standard Form of Ace Hardware International
Retail Merchant Agreement adopted in 1990, filed as
Exhibit 10-A-q to Post Effective Amendment No. 2 to
the Registrant's Form S-2 Registration Statement
(Registration No. 33-27790) on March 20, 1991 and
incorporated herein by reference.
10-P Copy of current standard form of Ace Hardware Membership
Agreement filed as Exhibit 10-P to Post-Effective
Amendment No. 2 to the Registrant's form S-2 Registration
Statement (Registration No. 33-46449) on or about
March 23, 1994 and incorporated herein by reference.
10-Q Copy of 6.89% Senior Series B notes in the aggregate
principal sum of $20,000,000 issued July 29, 1992 with
a maturity date of January 1, 2000 pursuant to Note
Purchase and Private Shelf Agreement with the Prudential
Insurance Company of America dated September 27, 1991
and filed as Exhibit 10-A-r to Post Effective Amendment
No. 1 to the Registrant's Form S-2 Registration Statement
on March 22, 1993 and incorporated herein by reference.
10-R Copy of 6.47% Senior Series A notes in the aggregate
principal amount of $30,000,000 issued September 22, 1993
with a maturity date of June 22, 2008, and $20,000,000
Private Shelf Facility, pursuant to Note Purchase and
Private Shelf Agreement with the Prudential Insurance
Company of America dated as of September 22, 1993, filed
as Exhibit 10-R to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on or about March 23, 1994 and incorporated
herein by reference.
10-S Assignment and Assumption dated October 22, 1992 of Lease
dated August 31, 1992 with MTI Vacations, Inc. filed as
Exhibit 10-A-s to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 22, 1993 and incorporated herein
by reference.
10-T Copy of Amendment to the Executive Supplemental Benefit
Plans of the Registrant adopted by its Board of Directors
on March 17, 1992 and filed as Exhibit 10-A-t to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 22, 1993 and incorporated herein by
reference.
10-U Copy of Lease dated September 30, 1992 for general offices
of the Registrant in Oak Brook, Illinois filed as Exhibit
10-A-u to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
E-4
10-V Copy of Fourth Amendment to Executive Supplemental Benefit
Plans effective January 1, 1994 filed as Exhibit 10-V to
Post-Effective Amendment No. 2 to the Registrant's
Form S-2 Registration Statement (Registration
No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-W Copy of Ace Hardware Corporation Deferred Director Fee
Plan as amended on June 8, 1993, filed as Exhibit 10-W
to Post-Effective Amendment No. 2 to the Registrant's
Form S-2 Registration Statement (Registration
No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-X Copy of Ace Hardware Corporation Deferred Compensation
Plan January, 1994, filed as Exhibit 10-X to
Post-Effective Amendment No. 2 to the Registrants Form S-2
Registration Statement (Registration No. 33-46449) on or
about March 23, 1994 and incorporated herein by reference.
11 No Exhibit.
12 No Exhibit.
13 No Exhibit.
16 Not Applicable.
18 No Exhibit.
22 Not Applicable.
23 Auditors' Consent, dated March 23, 1994, filed as
Exhibit 24(a) to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) filed on or about
March 23, 1994 and incorporated herein by reference.
27 No Exhibit.
28 Not Applicable.
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants which have not Registered
Securities Pursuant to Section 12 of the Act.
As of the date of the foregoing Report, no annual report for the
Registrant's year ended December 31, 1993, nor any proxy soliciting
materials for the Registrant's 1994 annual meeting have been sent to
security holders. Copies of such Annual Report and proxy soliciting
materials will subsequently be sent to security holders and furnished
to the Securities and Exchange Commission.
E-5
Exhibit 21
ACE HARDWARE CORPORATION
LIST OF SUBSIDIARIES
(as of March 23, 1994)
NAME UNDER
STATE OF WHICH SUBSIDIARY
SUBSIDIARY INCORPORATION DOES BUSINESS
Ace Insurance
Agency, Inc. Illinois Ace Insurance Agency, Inc.
AHC Realty Illinois AHC Realty Corporation
Exhibit 24
ACE HARDWARE CORPORATION: POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned
directors of ACE HARDWARE CORPORATION, a Delaware corporation, hereby
constitutes and appoints DAVID F. HODNIK and RITA D. KAHLE, and each
of them, his true and lawful attorneys-in-fact and agents, each with
full power to act without the other, with full power of substitution,
for him and in his name, place and stead, in any and all capacities,
to sign the Annual Report on Form 10-K, and any and all amendments
thereto, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all
intents and purposes as they might or could do in person, hereby
ratifying and confirming all that said attorneys and agents, or
either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has set his or her
hand and seal as of this 23rd day of March, 1994.
LAWRENCE R. BOWMAN
Lawrence R. Bowman
MARK JERONIMUS RAY W. OSBORNE
Mark Jeronimus Ray W. Osborne
HOWARD J. JUNG JON R. WEISS
Howard J. Jung Jon R. Weiss
JOHN E. KINGREY DON S. WILLIAMS
John E. Kingrey Don S. Williams
RICHARD E. LASKOWSKI JAMES R. WILLIAMS
Richard E. Laskowski James R. Williams, Jr.
