As filed with the Securities and Exchange Commission--subject to change.
REGISTRATION NO. 33-58191
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Pre-Effective Amendment No. 3
To
Form S-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
Ace Hardware Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of Incorporation)
36-0700810
(I.R.S. Employer Identification No.)
2200 Kensington Court
Oak Brook, Illinois 60521
(708) 990-6600
(Address and telephone number of registrant's principal executive offices)
David W. League
Vice President, General Counsel
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60521
(708) 990-6600
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Pre-Effective
Amendment to the Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. X
If the registrant elects to deliver its latest annual report to security-
holders, or a complete and legible facsimile thereof,
pursuant to Item 11(a)(1) of this form, check the
following box.
ACE HARDWARE CORPORATION
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Between Items in Part I of Form S-2 and the Prospectus
Item Number and Caption Heading in Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Inside Front and Outside
Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges Factors To Be Considered;
Summary
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution Plan and
Offering Terms
9. Description of Securities to be Registered Outside Front Cover Page;
Description of Capital
Stock
10. Interests of Named Experts and Counsel Opinions of Experts
11. Information with Respect to the Registrant The Company's Business;
Properties; Index to
Financial Statements;
Selected Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Management.
12. Incorporation of Certain Information
by Reference Documents Incorporated by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Indemnification Obligations
of Company and S.E.C.
Position on Securities
Act Indemnification
PROSPECTUS
ACE HARDWARE CORPORATION
2200 Kensington Court
Oak Brook, Illinois 60521
(708) 990-6600
2,126 Shares Class A (Voting) Stock, $1,000 par value
92,750 Shares Class C (Non-Voting) Stock, $100 par value
Class A Stock is offered only in combination with Class C Stock to
retailers of hardware and related or similar merchandise in connection with
their initial business outlets that become members of the Company. Class C
Stock is also offered separately to such retailers in connection with each
additional business outlet that becomes a member of the Company.
(See "Distribution Plan and Offering Terms" herein)
There is no existing market for the Capital Stock offered hereunder,
and there is no expectation that any market will develop.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions (5) Company
Class A Stock
Per share(1)(2) $ 1,000 None $ 1,000
Total $2,126,000 None $2,126,000
Class C Stock
Per Share(1)(3)(4)(6) $ 100 None $ 100
Total $9,275,000 None $9,275,000
(1) The shares are offered in a unit of $5,000 to each retail dealer,
with 1 share of Class A Stock being included only in the unit offered
to dealers having no retail business outlet that is already a member
of the Company.
(2) 1 share (with 40 shares of Class C Stock) to each retail dealer in
connection with such dealer's first retail business outlet which
becomes a member of the Company.
(3) 40 shares (with 1 share of Class A Stock) to each retail dealer for
such dealer's first member outlet.
(4) 50 shares to each member dealer for each of such dealer's retail
business outlets, over and above the first such outlet, which become
a member of the Company.
(5) There will be no underwriters. The subject stock will be offered for
sale directly by the Company. Applicants for new memberships are
charged $400 to defray estimated costs of processing their membership
applications. Assuming the sale of all of the stock offered hereunder,
and before deduction of approximately $28,000 estimated expenses in
connection with this offering, the total proceeds will be as shown
above.
(6) All of the shares of Class C Stock included in this offering have
been reserved for sale for cash but, unless the purchaser elects to
prepay the purchase price, such price is to be paid in bi-weekly
installments. However, the Company also intends to issue additional
authorized shares of Class C Stock each year to its member dealers as
a part of patronage dividends with respect to business done with
dealers in 1994 and subsequent years.
This offering is exempt from the registration provisions of the New
York Franchise/Disclosure Statute. The Company's agent for service of
process in connection with the offering pursuant to such exemption is C T
Corporation, 1633 Broadway, New York, New York 10019. See back cover page
regarding revocation rights of Florida purchasers.
REFERENCE IS MADE TO FACTORS TO BE CONSIDERED ON PAGE 2 OF THIS PROSPECTUS.
This is a continuous offering terminating not later than April 30, 1996.
The date of this Prospectus is ,1995
AVAILABLE INFORMATION
The Company is subject to the informational requirements of Section 15(d)
of the Securities Exchange Act of 1934. Accordingly, it files annual and
quarterly reports and other information with the Securities and Exchange
Commission. Such reports and other information can be inspected and copied
at the public reference facilities maintained by the Commission at 450 5th
Street, N.W., Judiciary Plaza, Washington, D. C. 20549, and copies of such
material can be obtained from the Public Reference Section of the Commission,
Washington, D. C. 20549 at prescribed rates. The material can also be
inspected and copied at the following Regional Offices of the Commission:
219 South Dearborn Street, Room 1204, Chicago, Illinois 60604; 26 Federal
Plaza, Room 1028, New York, New York 10278; and 5757 Wilshire Boulevard,
Suite 500 East, Los Angeles, California 90036.
REPORTS TO SECURITY HOLDERS
Within a reasonable time following the end of each calendar year, the
Company furnishes to its stockholders an annual report containing financial
information that has been examined and reported upon, with an opinion
expressed by, a certified public accounting firm.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1994 filed pursuant to Section 15(d) of the Exchange Act is incorporated
herein by reference. The Company will provide without charge to each person
to whom a Prospectus is delivered, upon written or oral request of such
person, a copy of any and all of the documents incorporated by reference in
the Registration Statement (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference into the documents that
the Registration Statement incorporates). Requests for such copies should be
directed to David League, Vice President, General Counsel and Secretary, Ace
Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60521,
(708) 990-6600.
FACTORS TO BE CONSIDERED
Limitations on Value and Marketability of Stock
Although Ace Hardware Corporation ("the Company") is obligated to pay
patronage dividends to its stockholders in proportion to the respective
purchases of merchandise made by them from the Company, the payment of
dividends on shares of the Company's capital stock is prohibited and transfer
of the shares is limited so that no trading market for them exists. The
shares can be sold only to another retail hardware dealer whom the Company
has approved as a member for the retail outlet for which the shares were
purchased or to the Company which must repurchase the shares if said retail
outlet closes down or if its Company membership is otherwise terminated. (See
the heading "Description of Capital Stock".) However, no amounts to fund
repurchase of shares by the Company are expressly set aside for such purpose
and repurchases can be made only as permitted under the General Corporation
Law of Delaware. (See the heading "Summary," subheading "Repurchase of
Shares by Company".) Accordingly, except for the voting rights attached to
the Class A Stock, the stock has value to a purchaser thereof only in the
event of the liquidation of the Company or upon termination of the Company
membership for the retail outlet for which the stock has been purchased.
Income Tax Liability Incidental to Patronage Dividends
A purchaser of shares will be required to report as gross income for
federal income tax purposes the total amount of patronage dividends
distributed by the Company to such purchaser, including shares of Class C
Stock and patronage refund certificates distributed in the form of written
notices of allocation at their stated dollar amounts. Patronage refund
certificates are non-negotiable having a maturity date and bearing interest
2
at an annual rate to be determined by the Board of Directors prior to
issuance. Although a minimum of 20% of each recipient's total annual
patronage dividends is required to be paid in cash in all cases except those
in which the cash portion has been applied against indebtedness owed to the
Company by a stockholder whose Company membership has terminated and who has
not requested payment of such 20% minimum portion in cash, the cash portion
may be insufficient, depending upon the income tax bracket of each recipient,
to provide funds for the full payment of the federal income tax liability
incurred by the recipient with respect to such patronage dividends. (See the
heading "The Company's Business", subheading "Federal Income Tax Treatment of
Patronage Dividends".)
Sale of All Shares Offered Not Assured
Since the shares offered hereby are available for purchase only by
retailers of hardware and related merchandise with respect to particular
retail outlets for which a Company membership is approved, it is not certain
that all of the shares offered will be sold.
Company's First Lien Rights on Shares
The shares held by any purchaser, including any shares of Class C Stock
distributed as patronage dividends, will be subject to a first lien in favor
of the Company for the amount of any indebtedness payable to the Company by
such holder. (See the heading "Description of Capital Stock", subheading
"Other Restrictions and Rights".) Any patronage refund certificates which
are distributed as patronage dividends will also be subject to a similar first
lien. (See the heading "The Company's Business", subheading "Forms of
Patronage Dividend Distributions".)
Full Payment Required for Issuance of Shares
Unless a purchaser of shares chooses to prepay the purchase price of the
shares, the purchase price is to be paid by charges added to the purchaser's
bi-weekly billing statements from the Company for merchandise and services. A
purchaser will receive a certificate for each class of stock included in his
subscription for shares only upon the completion of payment of the purchase
price for the share or shares of that class. (See the heading "Distribution
Plan and Offering Terms".)
By-law Provisions Constitute a Legal Contract with the Company
It is provided in Article XXVI of the By-laws of the Company that said
By-laws shall constitute a legal contract between the Company and its
stockholders. A copy of the By-laws of the Company, as amended as of
September 20, 1994, is attached to this Prospectus as Appendix A. Those
By-law provisions having special significance with respect to the operations
of the Company include Sections 5 through 12 of Article XVI which set forth
limitations on the transfer of the Company's stock and the circumstances
under which shares thereof will be repurchased by the Company;) Article XXIV
entitled "Members' Patronage Dividends"; and Article XXV dealing with the
membership rights and obligations of the Company's dealers.
Documents Accompanying Prospectus
The Company's most recent annual report to security holders and Company's
current standard form of Membership Agreement accompany this Prospectus. (See
the heading "The Company's Business," subheading "Membership Agreement.")
SUMMARY
The Company and Its Business
The mailing address and telephone number of the Company's principal
executive offices are: 2200 Kensington Court, Oak Brook, Illinois 60521,
(708) 990-6600.
3
The Company is a wholesaler of hardware and related products, and
manufactures paint products. Sales of such products are made almost
exclusively to retail hardware dealers having Membership Agreements with the
Company entitling them to purchase merchandise and services from it and to
use the Company's marks as provided in the Membership Agreement. (See the
heading "The Company's Business," subheading "Membership Agreement.") Also
see further description under "The Company's Business" for a discussion of
member operational requirements and material requirements on purchases of the
Company's securities. The number of retail business outlets for which
Membership Agreements have been executed as of December 31, 1994 were
4,940. (See the heading "The Company's Business.")
Basic Distinctions Between Classes of Stock
The issued and outstanding shares of capital stock of the Company are
divided into three classes. Class A Stock is the only class of stock having
voting rights with respect to the election of directors and most other
matters. Class B Stock had been offered to retail dealers with respect to
each business outlet owned or controlled by them for which a membership was
granted by the Company on or before February 20, 1974, but the offering of
Class B Stock terminated on March 31, 1979 and no shares of such stock are
being offered by this Prospectus.
The Board of Directors has authority to redeem the whole or any part of
the outstanding shares of Class B Stock, or the whole or any part of the
outstanding shares of Class C Stock which have been issued to the Company's
member dealers in partial payment of their patronage dividend distributions
from the Company. In the event of the Company's liquidation, the outstanding
shares of Class B Stock and Class C Stock have priority over the outstanding
shares of Class A Stock in the distribution of the Company's net assets to
the extent of an amount equal to the total amount which the Company would
have been required to pay to purchase or redeem all of its outstanding shares
of Class B Stock and Class C Stock. If the net assets of the Company exceed
the total amount which the Company would have been required to pay for such
purpose, such excess is to be distributed in equal portions to each holder of
an outstanding share of Class A Stock up to an amount equal to the par value
of the Class A Stock.
Any net assets still remaining are to be distributed among the holders of
all three classes of issued and outstanding stock of the Company. Each share
of Class A Stock will participate in such distribution in the proportion which
the par value of such share bears to the sum of the total par value of the
outstanding shares of Class A Stock and the total amount which the Company
would have been required to pay to purchase or redeem all of its outstanding
shares of Class B Stock and Class C Stock. Each share of Class B Stock and
Class C Stock will participate in such distribution in the proportion which
the then applicable purchase or redemption prices thereof bear to the
aforementioned sum. (See the heading "Description of Capital Stock",
subheadings "Voting Rights","Liquidation Rights", and "Redemption Provisions.")
By virtue of express prohibitions contained in the Company's Certificate of
Incorporation and Bylaws, no dividends can be declared on any of the shares of
any class of stock of the Company. (See the heading "Description of Capital
Stock", subheading "Dividend Rights.")
Basic Features of Offering
The shares of the Company's stock being offered hereby are offered only to
approved retail and other dealers in hardware and related products who submit
applications for Ace Hardware Corporation memberships. The offering price for
each share of Class A Stock is $1,000 and the offering price for each share of
Class C Stock is $100.
The offering enables dealers in hardware or similar merchandise to obtain
membership in the Company. Membership entitles a dealer to use the Company's
marks as provided in the Membership Agreement, to purchase merchandise from
the Company under the various sales classes and programs described under the
4
heading "The Company's Business," and also to receive patronage dividends
based upon the dealer's purchases from the Company.
A dealer who applies for an initial Company membership must subscribe for
a combination of 1 share of Class A Stock plus 40 shares of Class C Stock. If
a membership is applied for with respect to an additional outlet owned or
controlled by the same dealer, the dealer must subscribe for 50 shares of
Class C Stock for such outlet. Any application for a membership must be
accompanied by a $400 payment constituting a handling charge to defray the
estimated cost of processing such application.
The shares subscribed for by a dealer are to be paid for by means of
charges to be added to the biweekly billing statements of the Company for
merchandise and services purchased from it by its dealers. The dealer shall
also have the right at any time to make prepayments on account of the purchase
price. For a detailed explanation of the offering reference is made to the
information set forth under the heading "Distribution Plan and Offering
Terms".
Repurchase of Shares by Company
Upon termination of the Ace Hardware Corporation membership for any retail
business outlet, all of the shares with respect to such outlet held by the
dealer must be sold back to the Company, unless the shares are to be
transferred to another party whom the Company agrees to accept as a member
dealer with regard to such outlet. In any repurchase of its shares, the
Company must pay a price equal to the $1,000 par value for Class A Stock, a
price which cannot be less than twice the $1,000 par value for Class B Stock,
and a price which cannot be less than the $100 par value for Class C Stock.
(See the heading "Description of Capital Stock", subheading "Other
Restrictions and Rights", paragraph (g).) A portion of the repurchase price
to be paid by the Company will be paid by means of an interest-bearing 4-year
installment note if the dealer's membership with the Company terminates in
either of two basic types of situations. Reference is made to the heading
"Description of Capital Stock", subheading "Other Restrictions and Rights",
paragraph (h), of this Prospectus and to Section 12 of Article XVI of the
By-laws, set forth in Appendix A of this Prospectus, for further details
concerning the situations in which part of such repurchase price will be paid
by means of an installment note and the terms and conditions which will be
applicable to such notes.
As of December 31, 1994 the number of outstanding shares of the Company's
stock is Class A stock - 3,924 shares, Class B stock - 3,248 shares and Class
C stock - 1,646,656 shares. As of the completion of this offering, assuming
that all Class A stock is sold, the number of outstanding shares of the
Company's stock will be Class A stock - 6,027 shares, Class B stock - 3,212
shares and Class C stock - 1,724,670 shares.
Under the applicable provisions of the General Corporation Law of Delaware,
however, the Company would be prohibited from repurchasing any of its shares
at any time when its assets are less than the amount represented by the
aggregate outstanding shares of its capital stock or would be reduced below
said amount as a result of a repurchase of its shares.
The number of shares of stock repurchased by the Company and the price
per share paid by it during each of the past three calendar years were as
follows:
<TABLE>
<CAPTION>
Class of Stock
A B C
No. of Purchase No. of Purchase No. of Purchase Aggregate
Shares Price Shares Price Shares Price Cost
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994 240 $1,000 168 $2,000 77,013 $100 $8,277,300
Year ended December 31, 1993 271 $1,000 164 $2,000 72,359 $100 $7,834,900
Year ended December 31, 1992 329 $1,000 152 $2,000 72,600 $100 $7,893,000
</TABLE>
5
Patronage Dividends and Income Tax Treatment Thereof
The Company operates on a cooperative basis with respect to purchases of
merchandise made from it by its member dealers who are either the owners of
shares of its capital stock or who are subscribers for shares which are being
paid for by charges added to the Company's bi-weekly billing statements for
merchandise purchased from it, and makes annual distributions of patronage
dividends to such dealers in proportion to the amount of purchases made by
each of them during the year. Reference is made to the table under the
heading "The Company's Business," subheading "Distribution of Patronage
Dividends" for information as to the percentages of sales of merchandise made
by the Company during the years 1992 through 1994 which were distributed as
patronage dividends. Under the Company's patronage dividend plan which is
currently in effect, a portion of such patronage dividends (which can never
be less than 20% nor more than 45% of the total annual patronage dividends
distributed to each eligible and qualifying dealer) will be paid in cash,
except that the portion of any patronage dividends which would otherwise
have been paid in cash to a dealer whose membership with the Company has
terminated will instead be applied against any indebtedness owing by such
dealer to the Company to the extent of such indebtedness unless a timely
request for the payment of the minimum 20% cash portion thereof is submitted
to the Company by the dealer. The entire remaining portion will be paid
in the form of shares of Class C Stock of the Company or non-negotiable
patronage refund certificates, or in a combination of Class C shares and
such patronage refund certificates. Those dealers whose volume of
purchases entitles them to larger total annual patronage dividend
distributions will receive larger percentages of their patronage
dividends in cash. (See the heading "The Company's Business",
subheadings "Distribution of Patronage Dividends", "Patronage
Dividend Determinations and Allocations", and "Forms of Patronage Dividend
Distributions.") The amount of patronage dividends allocated over the past
five fiscal years is set forth in Note (C) to Selected Financial Data.
The cash payments and the stated dollar amounts of shares of the Company's
Class C Stock and of any patronage refund certificates which are distributed
by the Company as a part of patronage dividends must all be taken into the
gross income of each of the recipients thereof for federal income tax purposes
in the taxable years in which they are received. (See the heading "The
Company's Business", subheading "Federal Income Tax Treatment of Patronage
Dividends.")
In the case of member dealers whose places of business are located in
foreign countries or Puerto Rico (except for unincorporated Puerto Rico
dealers owned by individuals having U.S. citizenship) who are subject to the
special 30% U.S. income tax imposed on nonresident alien individuals and
foreign corporations (not including certain Guam, American Samoa, Northern
Mariana Islands, or U.S. Virgin Islands corporations) receiving fixed or
determinable annual income from sources within the United States, the minimum
portion of the annual patronage dividends to be distributed in cash is 30%,
and that amount will be withheld by the Company for payment of the U.S.
income tax imposed on such dealers. (See the heading "The Company's
Business", subheadings "Forms of Patronage Dividend Distributions", and
"Federal Income Tax Treatment of Patronage Dividends.")
USE OF PROCEEDS
The proceeds to be received from the shares of stock of the Company
offered hereby will be used by the Company primarily for general working
capital purposes (including the purchase of merchandise to be resold by the
Company to its member dealers and the maintenance of adequate inventories of
such merchandise) and also for capital expenditures as required in order to
serve the retail business outlets having Membership Agreements with the
Company. The Company has no current specific plan for the proceeds or a
significant portion thereof. The Company has no plan if less than all shares
offered are sold, as the principal reason for the offering is to enable the
Company to accept new dealer outlets in accordance with the Company's
By-laws. See the heading "The Company's Business," subheadings "Patronage
Dividend Determinations and Allocations" and "Forms of Patronage Dividend
Distributions", for a description of the method by which the Company will
obtain most of the balance of its operating capital. (See the heading
"Factors to be Considered," subheading "Sale of All Shares Offered Not
Assured.")
6
DISTRIBUTION PLAN AND OFFERING TERMS
Offering Made Through Company Officers
Sales of each class of stock offered by the Company are made by the
officers of the Company to dealers whose applications for Ace memberships
have been accepted by the Company. The Company also employs approximately
163 field sales personnel including retail consultants, management and retail
development personnel whose duties include initial contact with potential new
retail dealer outlets and promotion of the Company's business and the dealer
services offered by it. The field sales personnel, however, do not and are
not empowered to accept new dealer outlets on behalf of the Company, nor are
they authorized to make sales of any shares of the stock offered by the
Company. Also, no commission, bonus or other separate compensation is to be
paid to any officer, field sales personnel, or other employee of the Company
in connection with the sale of its stock.
Limitation of Offering to Applicants for Ace Dealer Memberships
The offering of the Company's stock being made by this Prospectus is
limited to dealers in hardware or similar merchandise who submit membership
applications to the Company with respect to designated retail outlets which
are accepted by the Company. In connection with each such application with
respect to any retail outlet owned or controlled by a dealer, there must be
submitted to the Company:
1. A membership agreement executed by the applicant in the form
submitted by the Company. On a case by case basis, the membership
agreement may be modified to meet certain requirements, such as state
laws or to assist the dealer in obtaining financing;
2. A check in the sum of $400 in payment of a processing charge which
is imposed to defray the estimated cost of processing the application; and
3. An executed Subscription Agreement for the purchase of shares of the
Company's stock.
Offering Price and Terms of Payment
Each retail dealer who applies for Ace membership privileges with respect
to any retail business outlet must subscribe for shares of the Company's
stock having a total purchase price of $5,000. In the case of a dealer who
does not already have a Membership Agreement with the Company with respect to
any retail outlet, the shares to be subscribed for on behalf of such dealer's
first retail outlet will include 1 share of Class A Voting Stock at a price of
$1,000 per share plus 40 shares of Class C Non-voting Stock at a price of $100
per share. The shares of stock to be subscribed for by a dealer on behalf of
each additional retail outlet owned or controlled by the same dealer will
consist entirely of 50 shares of Class C Non-voting Stock at a price of $100
per share.
Unless the right of prepayment described below is exercised, the entire
purchase price of all shares of stock of the Company subscribed for by a
dealer for any retail business outlet owned or controlled by such dealer shall
be paid by means of a stock subscription payment charge to be added to such
outlet's bi-weekly billing statement from the Company in the amount of $40 or
in an amount equal to 2% of the purchase price of the merchandise and services
purchased by such outlet from the Company during each bi-weekly period (if
such percentage amount is greater than $40). Such charge shall be continued
until the full purchase price for all shares of the stock of the Company
subscribed for with respect to such outlet has been paid. Upon the acceptance
by the Company of the Membership Agreement and the Stock Subscription
Agreement executed by a dealer for a prospective member outlet, such outlet
will be entitled to participate in the patronage dividend distributions made
by the Company even though the full purchase price for the shares of stock
subscribed for has not yet been paid.
7
Right of Prepayment
All dealers subscribing for shares of any class of stock of the Company
shall also have the right at any time to pay all or any portion of the then
unpaid balance of the purchase price payable by them for the shares of any
class of the stock of the Company subscribed for by them with respect to any
member business outlet. However, no interest or other finance charge shall
accrue upon or be added to the unpaid balance so long as all payments are made
when the same are due in accordance with the terms described above.
Time of Issuance of Stock Certificates
Immediately upon the completion of the payment by a dealer of the full
purchase price of $1,000 for the 1 share of Class A Voting Stock of the
Company subscribed for by such dealer, a certificate for such share will be
issued to him. In the case of a dealer whose subscription for shares includes
1 share of Class A Stock, all payments made by him under his Stock
Subscription Agreement will be applied first toward the $1,000 purchase price
for such Class A Stock. No dealer shall have any voting rights until such
share of Class A Voting Stock has been issued to him. Certificates for the
shares of Class C Stock of the Company subscribed for by a dealer with respect
to any member business outlet owned or controlled by such dealer will be
issued to him only upon the completion of the payment by him of the full
purchase price of all of the Class C shares subscribed for by him with respect
to such outlet.
If any store or other business outlet with respect to which a dealer has
subscribed for shares of stock of the Company ceases to be a member business
outlet of the Company before such shares have been issued and paid for in
full, the amount paid in by such dealer on account of the purchase price of
such shares will thereupon be refunded to him.
Termination of Membership Upon Transfer or Repurchase of Shares
Unless the Company expressly consents at such time to the continuation of
such membership, the Ace Hardware Membership Agreement for any store or other
business outlet shall automatically be deemed to have terminated as of the
time when any of the shares of capital stock of the Company owned for such
outlet by a dealer (regardless of whether the shares were purchased by the
dealer or were received by him as patronage dividends) are transferred by him
to another eligible holder or are purchased from him by the Company.
Federal Income Tax Status of Class A and Class C Shares (See the Heading
"Opinions of Experts").
If the Ace Hardware Corporation membership for a particular business outlet
owned by a dealer who has only one member outlet is terminated, or if the
memberships for all of a dealer's business outlets having memberships with the
Company are terminated, and the shares of the Company's stock owned by such
dealer are then repurchased by the Company, such dealer's 1 share of Class A
Stock would be included among the shares so repurchased. Since the Class A
Stock can never be repurchased by the Company at a price other than the
$1,000 par value, no taxable income would be realized by a dealer upon the
Company's repurchase of his share of Class A Stock.
Upon the purchase by the Company of shares of Class C Stock previously sold
or distributed to a dealer, taxable income would be realized by such dealer
under the present provisions of the U.S. Internal Revenue Code to the extent
that the price to be paid by the Company for such shares is established by the
Board of Directors at some time in the future at a figure in excess of the
$100 par value offering price of the shares. Unless the dealer whose shares
of Class C Stock are purchased by the Company still owns shares of the
Company's stock in connection with one or more other outlets that are members
of the Company, the taxable income realized by such dealer at the time of the
Company's purchase of Class C shares from him would probably qualify for
capital gain treatment. In the case of a dealer who continues to own shares
of the Company's stock for one or more other member outlets after his shares
with respect to a member outlet have been purchased or redeemed by the Company,
the entire amount paid to such dealer for the shares purchased by the Company
might be treated under applicable provisions of the Internal Revenue Code as
a distribution essentially equivalent to a dividend which would be taxable to
the dealer as ordinary income. In such case the income tax basis of the shares
of the Company's stock still held by such dealer would be increased by an amount
equal to the original basis of the shares purchased from him by the Company.
8
The provisions of Section 483 of the U.S. Internal Revenue Code may be
applicable to sales of the Company's stock to dealers who make payment for
said shares in periodic installments extending more than 1 year after the date
of the sale. In any such case, all payments which are due to be made by a
dealer more than 6 months after the date of the sale may be deemed to include
"unstated interest" which would be tax deductible by the dealer, but would
also reduce the cost basis of his shares.
"Unstated interest" constituting taxable income may be imputed under
Section 483 of the U.S. Internal Revenue Code to a dealer whose Company
membership is terminated and who receives a 4-year installment note (See the
heading "Description of Capital Stock," subheading "Other Restrictions and
Rights," subparagraph (h)) in partial payment of the repurchase price of his
Company stock if the sum of the total payments to be made to the dealer by
the Company with respect to such repurchase exceeds the sum of the present
values of such payments and the present values of any interest payments due
under the note. For this purpose, the present value of a payment is to be
determined by using a discount rate equal to the applicable Federal rate in
effect as of the date of the note, compounded semi-annually.
DESCRIPTION OF CAPITAL STOCK
Dividend Rights
The Company's Certificate of Incorporation and By-laws prohibit the
declaration of dividends on any of the shares of any class of stock of the
Company. However, the Company may distribute shares of its Class C Stock as
a part of the annual patronage dividends to be paid to its eligible and
qualifying dealers. (See the heading "The Company's Business," subheading
"Forms of Patronage Dividend Distributions," as well as Note 5 to Financial
Statements, and Note (B) to "Selected Financial Data.")
Voting Rights
All rights to vote and all voting powers are vested solely in the Class A
Stock, provided, however, that holders of shares of $1,000 par value Class B
Stock and shares of $100 par value Class C Stock shall be entitled to vote
separately as a class upon any proposed amendment to the Company's Certificate
of Incorporation which would increase or decrease the number of authorized
shares of such class, increase or decrease the par value of the shares of such
class, or alter or change the power, preferences or special rights of the
shares of such class so as to affect them adversely. Each holder of any class
of stock having the right to vote at any meeting of the stockholders of the
Company shall be entitled to one vote for every share of such stock standing
in the name of such holder on the books of the Company. Cumulative voting of
shares with respect to the election of directors or otherwise is expressly
prohibited.
Liquidation Rights
In the event of any liquidation or winding up of the affairs of the
Company, whether voluntary or involuntary, the net assets of the Company
shall be distributed among the holders of all classes of issued and
outstanding stock of the Company. In such event, there shall first be
distributed to the holders of outstanding shares of Class B Stock and Class C
Stock amounts equal to the total amounts which the Company would have been
required to pay to them to purchase or redeem all of their outstanding shares
of such stock in accordance with the purchase or redemption prices for said
shares as last determined by the Board of Directors, but if the net assets
9
are insufficient to pay such amounts to the holders of said shares, each
outstanding share of Class B Stock and each outstanding share of Class C
Stock shall share in the distribution of the Company's net assets in the
proportion which its purchase or redemption price bears to such total amount.
(See the subheading "Redemption Provisions" below). If the net assets exceed
said total amount, the excess is to be distributed in equal portions to each
holder of an outstanding share of Class A Stock, but the amount so distributed
to each holder of a share of Class A Stock cannot exceed such share's $1,000
par value. Any net assets still remaining are to be distributed among the
holders of all classes of issued and outstanding shares of stock of the
Company pursuant to the following procedure:
(a) there shall first be determined the sum of the total $1,000 par
value of all of the outstanding shares of Class A Stock and the total
amount which the Company would have been required to pay to purchase or
redeem all of its outstanding shares of Class B Stock and Class C Stock in
accordance with the purchase or redemption price thereof last determined
by the Board of Directors;
(b) each outstanding share of Class A Stock shall share in said
remaining net assets in the proportion which the $1,000 par value thereof
bears to the sum determined in the foregoing manner; and
(c) each outstanding share of Class B Stock and each outstanding share
of Class C Stock shall share in said remaining net assets in the proportion
which the purchase or redemption prices thereof last determined by the
Board of Directors bear to said sum.
Preemptive Rights
No stockholder of the Company shall, by reason of his holding shares of any
class of stock of the Company, have any preemptive or preferential right to
purchase or to subscribe to any shares of any class of the Company, now or to
be hereafter authorized, or any notes, debentures, bonds or other securities
convertible into or carrying options or warrants to purchase any shares of any
class, now or hereafter to be authorized.
Redemption Provisions
There are no redemption provisions applicable to any of the shares of Class
A Stock or to any of the shares of Class C Stock other than shares of Class C
Stock which have been issued to the Company's member dealers in partial
payment of their annual patronage dividends. The Company may, at the option
of its Board of Directors, redeem the whole or any part of the outstanding
shares of its Class B Stock or the whole or any part of the outstanding shares
of its Class C Stock which have been issued as patronage dividend
distributions. Such redemptions may be made at any time or from time to time.
The redemption price in each instance shall be determined by the Board of
Directors, but the redemption price to be paid for Class C Stock shall in no
event be less than the $100 par value of such stock and the redemption price
to be paid for Class B Stock shall at all times be no less than twice the
$1,000 par value of the Class B Stock and shall always be equal to twenty
times the per share price last established by the Board of Directors with
respect to purchases or redemptions by the Company of its Class C Stock.
Notice of any election to redeem shall be mailed to each holder of the class
of stock so to be redeemed at his address as it appears on the books of the
Company not less than 30 days prior to the date upon which the stock is to be
redeemed. In case less than all of the outstanding shares of Class B Stock
are redeemed, or in case less than all of the eligible outstanding shares of
Class C Stock are redeemed, the number of shares to be redeemed and the method
of effecting such redemption, whether by lot or prorata or otherwise, may be
determined by the Board of Directors.
Other Restrictions and Rights
(a) There are no conversion rights, sinking fund provisions, or
liability to further calls or assessment by the Company in regard to any
of its shares of stock.
(b) As security for the payment of any indebtedness owing to the Company
by any stockholder or any subscriber for shares of the Company's stock, the
Company retains a first lien upon all shares of its stock held by each
10
stockholder and upon all amounts which have been paid to the Company
pursuant to a Stock Subscription agreement for shares to be issued upon the
completion of payment of the purchase price of the shares. The interest of
each holder of shares of the Company's stock in and to the shares issued to
such holder and the interest of each subscriber for shares of the Company's
stock in and to the funds paid to the Company by such subscriber shall at
all times be deemed to be offset by the amount of any indebtedness payable
to the Company by such holder or subscriber. In no event shall any
transfer of the shares owned by any stockholder or any transfer of the
stock subscription account of any subscriber for shares be made unless and
until the stockholder whose shares are being transferred or the subscriber
whose subscription account is being transferred is free from all
indebtedness to the Company. If an installment note would be issuable in
payment of a portion of the total purchase price to be paid by the Company
for shares of its capital stock held by a dealer for a retail outlet whose
Company membership is terminated in one of the situations described in
subparagraph (h) below, the cash portion of the purchase price of said
shares will be applied first toward any indebtedness payable to the Company
by such dealer and the portion of the purchase price which would otherwise
be paid by the issuance of an installment note will then be applied against
any such indebtedness which still remains.
(c) From and after the date on which shares of the Company's stock are
first issued to its member dealers who subscribe for such shares, ownership
of the shares of all classes of stock of the Company shall be limited to
approved retail or other dealers in hardware and related products having
membership agreements with the Company, and ownership of shares of Class B
Stock shall be limited to dealers having membership agreements with the
Company which were entered into on or before February 20, 1974. No
certificate representing any issued and outstanding share or shares of any
class of stock of the Company shall be pledged, mortgaged, hypothecated,
sold, assigned or transferred without the prior consent of the Board of
Directors of the Company. In the event that the Board of Directors shall
refuse to consent to any transfer or assignment of any certificate or
certificates representing any share or shares of issued and outstanding
stock of the Company of any class, then the Company shall have the right
and shall be obligated to purchase such stock from its owner at a price
determined in accordance with the provisions of subparagraph (g) below.
In no event shall any transfer or assignment of shares of any class of
stock of the Company be made to any transferee who is not eligible to be a
holder of such shares, that is, a dealer having a membership agreement
with the Company. In the case of a proposed transfer of ownership of a
store or other business outlet owned by a holder of shares of stock of the
Company to a transferee which the Company has accepted or is willing to
accept as a member Ace Hardware dealer, then the owner of such stock shall
have the option of either (i) selling or otherwise transferring to such
transferee such number of shares of stock of the Company of any class
which the Company would otherwise have been required to offer to such
transferee in connection with the membership granted to such transferee
with respect to such store or other business outlet, or (ii) selling such
shares to the Company. However, the following types of transfers of
ownership of a store or other business outlet will not be recognized for
purposes of determining the availability of the option of selling to the
Company shares of its capital stock: (i) any transfer which is not
complete, unconditional and irrevocable; (ii) any transfer to an entity in
which the transferor retains an ownership interest; or (iii) any transfer
to the spouse of the transferor.
(d) Subject to the Company's first lien and set-off rights as described
in subparagraph (b) above, in the event of the termination of the Company
membership granted for a retail hardware store or other business unit for
which shares of stock of the Company are held, the Company shall be
obligated to purchase such shares. The Company shall also be obligated to
refund all amounts which have been paid to it pursuant to a Stock
Subscription Agreement for the purchase of shares which have not as yet
been issued to the subscriber, subject only to the Company's first lien
and set-off rights as described in subparagraph (b) above. Termination of
the membership granted for a particular retail hardware store or other
business outlet shall include not only any termination pursuant to a formal
notice of termination given by either the Company or the holder of the
membership but shall also include each of the following situations which
shall be deemed to constitute such a termination:
11
(i) The closing down of the store or other business unit with
respect to which such shares of stock of the Company are held, unless
such store or other business unit is merely being moved, with the
Company's consent and approval, to another location or is being acquired
by another dealer which the Company has accepted or is willing to accept
as a member dealer for operation pursuant to the same membership at
another location;
(ii) The death of an individual holder of the shares of stock of the
Company held for such retail store or other business unit, or of a
member of a partnership which is a holder of such shares, except in a
case where the store or other business unit with respect to which such
shares are held continues, with the approval of the officers of the
Company (which approval shall not be unreasonably withheld), to be
operated under a membership from the Company by the decedent's estate
or by the person or persons to whom such shares are to be distributed
by the decedent's estate or by the successor or successors to the
decedent's interest in the partnership holding such shares (it being
immaterial for this purpose that, in connection with such continuation
of operation, the legal form of ownership of the member dealer has been
changed from an individual proprietorship or partnership to a
corporation or from a partnership to an individual proprietorship);
(iii) An adjudication of the insolvency of the dealer or of the store
or other business unit for which the shares of stock of the Company are
held, or the making of an assignment for the benefit of creditors or the
filing of a voluntary petition in bankruptcy or similar petition under
the U. S. Bankruptcy Code by or on behalf of such dealer or retail
business unit, or the filing of an involuntary petition in bankruptcy or
similar petition under the U.S. Bankruptcy Code against the dealer or
against said business unit.
(e) A transfer of shares of stock of the Company requiring the consent
of the Board of Directors shall not be deemed to have occurred upon the
death of a person who is the holder of shares of stock of the Company
jointly with one or more other persons under circumstances whereby ownership
of such shares passes automatically by operation of law to the surviving
holder or holders of such shares, nor shall the Company become obligated to
purchase such shares upon the death of such person unless the store or other
business outlet with respect to which such shares are held either (i) closes
down, or (ii) ceases to be operated under a membership from the Company.
(f) In any case where the holder or holders of 50% or more of the
outstanding voting stock of a corporation having a membership from the
Company for one or more business outlets, or the holder or holders of 50%
or more of the outstanding voting stock of a corporation owning 80% or more
of the outstanding stock of a corporation having such a membership, propose
to sell or otherwise transfer all of the shares of capital stock (both
voting and non-voting) of such corporation held by them, written notice of
such proposal shall be given to the Company. Upon the consummation of such
sale or transfer, the corporation whose shares have been sold or transferred
shall have the option of either retaining all the shares of the capital
stock of the Company then held by it with respect to each member business
outlet operated by it or of selling such shares to the Company and having
each Company membership held by it deemed to have been terminated by the
voluntary action of said corporation, in which case no business unit for
which said corporation has held a Company membership shall thereafter
operate as a member of the Company unless said corporation submits a new
application for a membership for such business unit and such application
is accepted by the Company. However, the following types of transfers of
ownership of shares of the capital stock of a corporation having a
membership from the Company will not be recognized for purposes of
determining the availability of the option of selling to the Company
shares of its capital stock: (i) any transfer which is not complete,
unconditional and irrevocable; (ii) any transfer to an entity in which
the transferor retains an ownership interest; or (iii) any transfer to the
spouse of the transferor.
12
(g) The price to be paid by the Company in connection with the purchase
by it of any shares of its stock shall be as follows:
(i) in the case of Class A Stock, the $1,000 par value of the
shares;
(ii) in the case of Class B Stock, an amount per share equal to the
per share price last established by the Board of Directors as the price
to be paid by the Company in the event of redemption of shares of its
Class B Stock (currently $2,000 per share), which price shall in no
event be less than twice the $1,000 par value of the Class B Stock and
shall also at all times be equal to twenty times the per share purchase
price last established by the Board of Directors with respect to
purchases by it of shares of its Class C Stock;
(iii) in the case of Class C Stock, an amount per share equal to the
per share price last established by the Board of Directors as the
purchase price to be paid by the Company for shares of its Class C Stock
(currently $100 per share), which price shall in no event be less than
the $100 par value thereof.
There is no market for the Company's stock. The redemption prices
last established by the Board of Directors for Class A, B and C stock have
not been adjusted since 1974 when the Company first became a cooperative
organization.
(h) In case of the purchase by the Company of the shares of its stock
held by a dealer for a business outlet whose Company membership is
terminated in either of the following situations, a portion of the
purchase price will be paid in the form of an installment note payable in
four equal annual installments plus accrued interest:
(i) voluntary termination of the membership by the dealer under
circumstances whereby the member outlet continues to engage in
substantially the same business and continues to be controlled to the
extent of more than 50% by the same person, partnership or corporation;
(ii) termination of the membership by the Company due to a
delinquency on the dealer's part in paying for goods or services
supplied by the Company or due to a default on the dealer's part in
performing some other obligation under his membership agreement with
the Company.
Even in the above situations, though, the portion of the total purchase
price represented by the amount actually paid in by the dealer under a Stock
Subscription Agreement for Class A Stock, Class B Stock and Class C Stock
will be paid in cash, and the entire remaining portion of the total purchase
price for the shares being purchased by the Company from the dealer will also
be paid in cash if such remaining portion is less that $5,000. Where such
remaining portion of the total purchase price is $5,000 or more in any of the
above situations, then only the amount actually paid in by the dealer under
the dealer's Stock Subscription Agreement will be paid in cash and the entire
remaining portion of the purchase price will be paid by means of an
installment note as described above. The interest rate on any such
installment note will be such rate as shall have been established by the
Company's Board of Directors for such purpose as of the date of the issuance
of the note, but the interest rate shall in no event be less than the latest
interest rate established for patronage refund certificates to be issued as a
part of the annual patronage dividends payable to the Company's dealers, nor
shall the interest rate ever be less than 6% per annum. After considering
the financial condition and requirements of the Company, the Company's Board
of Directors may authorize that payment be made in cash of all or any portion
of the total purchase price which would otherwise be payable by means of such
an installment note if the Board determines that the installment payment
method would impose an undue hardship on the dealer.
(i) There is no restriction on the repurchase or redemption of any of its
shares of stock by the Company in the event that the Company shall at any
time be in arrears in making any sinking fund installment payments which it
may hereafter incur an obligation to make. Since the Company is prohibited
from paying dividends on any of its shares of stock, there can be no
arrearage in the payment of any such dividends which would impose any
restriction on the repurchase or redemption of any of its shares of stock by
13
the Company. Under the General Corporation Law of Delaware, the Company
cannot repurchase any of its shares at any time when its assets are less than
the amount represented by the aggregate outstanding shares of its capital
stock or would be reduced below said amount as a result of a repurchase of
its shares.
OPINIONS OF EXPERTS
The validity of shares of stock of the Company offered hereby has been
passed upon for the Company by the Company's Vice President, General Counsel,
David W. League. The statements made under the subheading "Federal Income
Tax Status of Class A and Class C Shares," as well as those made under the
subheading "Federal Income Tax Treatment of Patronage Dividends" are also
his opinions. Said counsel has also passed upon legal questions relating
to the effect upon the surplus or retained earnings of the Company
of the fact that, in the event of the involuntary liquidation of the Company,
shares of its Class B stock will have a preference exceeding the par value of
said shares in the distribution of the net assets of the Company.
The financial statements of Ace Hardware Corporation as of December 31,
1994 and 1993 and for each of the years in the three-year period ended
December 31, 1994, included herein and elsewhere in the Registration Statement
have been included herein and in the Registration Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
THE COMPANY'S 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 dealers in hardware or related items and who have
entered into Membership Agreements with the Company. The Membership
Agreements entitle members to purchase merchandise and services from the
Company and to use the Company's trademarks and trade names. (See the heading
"Factors To Be Considered," subheading "Documents Accompanying Prospectus,"
and the heading "The Company's Business" subheading "Membership Agreement").
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, 1994 there were 4,940 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%), Texas (approximately 6%), Illinois and Florida
(approximately 5% each), Michigan (approximately 4%) and Georgia
(approximately 3%). States into which were shipped the largest percentages
of the merchandise sold by the Company in 1994 are California (approximately
11%), Illinois (approximately 9%), Florida and Texas (approximately 6% each)
and Michigan and Georgia (approximately 4% each). Less than 4% of the
Company's sales are made to outlets located outside of the United States or
its territories.
14
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:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Member outlets at beginning of period 4,921 4,986 5,111
New member outlets 198 158 183
Member outlets terminated 179 223 308
Member outlets at end of period 4,940 4,921 4,986
Dealers having one or more member outlets at end of period 4,054 4,045 4,134
</TABLE>
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 1994 warehouse sales accounted for
62% of total sales and bulletin sales accounted for 2% of total sales with
the balance of 36% representing direct shipment sales, including lumber and
building material.
The proportions in which the Company's total warehouse sales were divided
among the various general classes of merchandise sold by it during each of
the past three calendar years are as follows:
<TABLE>
<CAPTION>
Class of Merchandise 1994 1993 1992
<S> <C> <C> <C>
Paint, cleaning and related supplies 19% 19% 18%
Hand and power tools 14% 14% 15%
Electrical supplies 12% 12% 13%
Plumbing and heating supplies 16% 15% 15%
General hardware 13% 12% 12%
Housewares and appliances 6% 7% 7%
Garden, rural equipment and related supplies 11% 12% 11%
Sundry 9% 9% 9%
</TABLE>
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 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.
15
Invoice Amount Handling Charge (Markup)
$1,000.00 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 deliveried 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. Effective April 1995, a flat 2%
markup is applied to all direct shipments placed by all dealers located
outside of the United States.
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 Program). 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 form of patronage dividend distributions. (See the heading
"The Company's Business" subheading, "Forms of Patronage Dividend
Distributions").
16
The LTL Plus Program established by the Company is a program under which
full or partial truckloads of products are purchased by certain of the
Company's dealers from specified 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 heading "The Company's Business,"
subheading "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 heading "The Company's Business,"
subheading "Special Charges and Assessments.")
In 1994, the Company continued its ongoing strategic planning process and
focused it's strategic plans around four cornerstones for future growth and
success in this competitive industry. The four cornerstones are: Retail
Success (store operations), Wholesale Success (distribution), International
growth and new member growth. Dealer retail success is a primary objective
since it drives both retail performance and wholesale growth of the Company.
In 1994, the Company accellerated it's efforts in assisting member dealers
in "retail success initiatives" designed to document and improve their retail
performance and competitiveness. The retail success initiatives include
retail goals which each dealer should strive for within their store and local
competitive environment, but do not dictate material restrictions or
requirements on member dealers. Minimum requirements for acceptance of a
member dealer by the Company are outlined only in the Membership Agreement
and in the Member Operational Requirements under the Ace Hardware Membership
Agreement. The Operational Requirements do require that, within one year
from the Company's acceptance of the Agreement, the member dealer make Ace
their primary source of supply and terminate participation in the program
of any other major hardware wholesaler. There are currently no specific
requirements as to percentage of purchases required through Ace or minimum
retail performance which must be achieved (i.e. sales dollars per square foot).
This strategic plan, referred to as "The New Age of Ace" is an extension of
previous strategic efforts under Ace 2000 and is not in conflict with these
efforts.
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 insurance coverage for their
employees. AHC Realty Corporation, another wholly-owned 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. Loss Prevention Services, Inc., a third wholly-owned subsidiary
provides security training and services for all dealers desiring security
assistance. 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 and will begin manufacturing paint and related
products at a Chicago Heights, Illinois facility in mid 1995. These
facilities now constitute 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 the Company's business, see the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which appears following the "Notes to Financial
Statements" in this prospectus.
Special Charges and Assessments
The Company makes available some services to members which are related
to the operation of their retail business. These services (such as
advertising, store supplies and training programs) are provided in order to
assist members and/or to utilize the centralized buying power of the Company.
Members are rebilled in order to reimburse the Company for related expenses
paid on their behalf. The special charges and assessments described below
are similar in nature and are intended only to reimburse the Company for
related expenses.
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 in previous paragraphs
under the heading "The Company's Business") from the Company during each
17
bi-weekly period with the current minimum annual assessment being $975.00
and with the maximum annual assessment being $4,750 for each member 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 biweekly 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 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 may also be 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, set forth in
Appendix A). Branch stores may, upon request, be granted an exemption from
the monthly subscription fee.
18
Subscriptions to a Material Safety Data Sheet information service are also
mandatory for all stores located in the United States. The initial annual
assessment imposed on such stores for such subscriptions is $30.00 for each
single store or parent store and $15.00 for each branch store.
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 and services sold by the Company. 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:
<TABLE>
<CAPTION>
Registration
Description of Mark Type of Mark Number Expiration Date
<S> <C> <C> <C>
"ACE HARDWARE" with
winged emblem design Service Mark 840,176 December 5, 2007
"ACE HARDWARE" with winged
emblem design Trademark 898,070 September 8, 2000
"WEATHER SHEDDER" Trademark 1,053,816 December 7, 1996
"THE HELPFUL HARDWARE MAN" Service Mark 1,055,741 January 4, 1997
"ACE IS THE PLACE WITH THE
HELPFUL HARDWARE MAN" Service Mark 1,055,743 January 4, 1997
"BRIGHT & EASY" Trademark 1,058,117 February 8, 1997
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000
"HARDWARE UNIVERSITY" with design Service Mark 1,180,539 December 1, 2001
"SUPER STRICKER" Trademark 1,182,330 December 15, 2001
"PACE" with design Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in slanted
bar design Trademark 1,426,137 January 27, 2007
"ACE" in stylized
lettering design Service Mark 1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND GARDEN
CENTER" in stylized
lettering design Service Mark 1,487,216 May 3, 2008
"FLO-SOFT" Trademark 1,532,900 April 14, 2009
"ACE NEW EXPERIENCE" in
stylized lettering design Trademark 1,554,322 September 5, 2009
"ACE SEVEN STAR" in
stylized lettering design Trademark 1,556,389 September 19, 2009
"ACE BEST BUYS" in
circle design Service Mark 1,560,250 October 10, 2009
"PACER" Trademark 1,570,820 December 12, 1999
"ACENET" Service Mark 1,574,019 December 26, 1999
"ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2000
"LUB-E" Trademark 1,615,386 October 2, 2000
"Ace FIVE STAR"
in stylized lettering design Trademark 1,627,887 December 18, 2000
"ACE THREE STAR" in
stylized lettering design Trademark 1,631,237 January 15, 2001
"ACE PRO" Trademark 1,632,078 January 22, 2001
"ASK ACE" Service Mark 1,653,263 August 6, 2001
19
Christmas Elves design Trademark 1,669,306 December 24, 2001
"ACE 2000" Service Mark 1,682,467 April 7, 2002
"ACE" in stylized
lettering design Trademark 1,683,538 April 21, 2002
"HARMONY" in stylized
lettering design Trademark 1,700,526 July 14, 2002
"SEVEN STAR SATISFACTION GUARANTEED
QUALITY ACE PAINTS" with design Service Mark 1,705,321 August 4, 2002
"THE OAK BROOK COLLECTION"
in stylized lettering design Trademark 1,707,986 August 18, 2002
"ACE HARDWARE BROWN
BAG BONANZA" with design Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE COMMITTED
TO A QUALITY ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003
"THE OAK BROOK COLLECTION"
in stylized lettering design Trademark 1,783,335 July 20, 2003
"STORE 2000 THE
STORE OF THE FUTURE" Service Mark 1,811,032 December 14, 2003
"ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003
</TABLE>
Currently, the Company has a applications pending 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; "THE NEW AGE OF ACE" with design for business
consulting and retail store services; "CELEBRATIONS" for Christmas lights and
light fixtures and "GREAT FINISHES" for paints, paint-like coatings, primers,
lacquers, stains and varnishes. In addition, the Company also has service
mark applications pending for "ACE HOME CENTER," "HELPFUL HARDWARE FOLKS,"
Repeating "A" in stylized lettering design and Repeating "A" in stylized
lettering design with "ACE" in stylized lettering design for retail stores
services.
Competition
The competitive conditions in the wholesale hardware industry can be
characterized as intensive and increasing due to the fact that independent
retailers are required to remain competitive with discount stores and chain
stores, such as Wal-Mart, Home Depot, Menard's 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 3,664 full-time employees, of which 1,083 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 no significant 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.
20
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.
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:
1994 1993 1992
Warehouse Sales 4.64117% 4.94434% 5.26838%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 8.2205% 7.9389% 8.9440%
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 .4073%, .1763% and .1260% 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 these products in 1994, 1993 and 1992 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 under the heading "The
Company's Business.") 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 1994, 1993 and 1992.
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
21
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.
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 the LTL Plus
Program 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 heading "The Company's Business", discussion
of LTL Plus program, and the subheading "Forms of Patronage Dividend
Distributions", subparagraphs 2(a)-(b).)
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
22
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, 1995, 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;
(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 exceed $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) 15% of the volume of warehouse (including STOP
and excluding Ace manufactured paint and related
products) and bulletin purchases, plus
(ii) 15% of the volume of Ace manufactured paint and
related products purchases, plus
(iii) 3% of the volume of drop-shipment or direct
purchases (excluding Ace manufactured paint and
related products), plus
23
(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 45% 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 45%
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.
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, through and including December 31, 1994:
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;
(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 exceed $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
24
(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) 13% of the volume of warehouse (including STOP
and excluding Ace manufactured paint and
related products) and bulletin purchases, plus
(ii) 10% of the volume of Ace manufactured paint and
related products purchases, plus
(iii) 3% of the volume of drop-shipment or direct
purchases (excluding Ace manufactured paint and
related products), 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 Plans are 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 Plans. A store's
patronage dividends from any other sales category with 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 Plans are applied separately to patronage dividends on
lumber and building materials sales and the requirements of Paragraph 2 of
the Plans 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 Plans, 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
25
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 Plans 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 bi-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, for qualified dealers (but not to exceed 80% of the cost of any
system), 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 $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 balances, 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 (See Previous Heading
"Opinions of Experts")
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
26
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 such written notices of
allocation are received, notwithstanding the fact that the 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 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 plans previously described under the heading
"The Company's Business," subheading, "Forms of Patronage Dividend
Distributions," 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.
The Company will be required to withhold for federal income tax on the
total 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 45% 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
27
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 firms which are "International Retail Merchants" as discussed
below under the subheading "International Retail Merchants") 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 advance notice under particular
circumstances.
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 do not sign the Company's regular Membership Agreement but
may, depending on the circumstances, be granted a license to use certain of
the Company's trademarks and service marks. They do not sign stock
subscription agreements or become shareholders of the Company, nor do they
receive distribution of patronage dividends. As of December 31, 1994, 1993
and 1992, International Retail Merchant volume accounted for less than 4%
of the Company's total sales in each such year.
28
PROPERTIES
The Company's general offices are located at 2200 Kensington Court, Oak Brook,
lllinois 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 December 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 585,500 Owned
LaCrosse, Wisconsin 363,000 Owned
Bloomfield, Connecticut 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
Carol Stream, Illinois (2) 250,000 Leased September 30, 1999
Chicago, Illinois (3) 18,168 Leased May 31, 1997
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased January 31, 1998
Paint Manufacturing Facility:
Matteson, Illinois 356,000 Owned
Chicago Heights, Illinois (4) 194,000 Owned
Other Property (Land):
Aurora, Illinois 72 acres Owned
LaCrosse, Wisconsin (5) 3 acres Owned
Colorado Spring, Colorado (6) 42 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) This facility was leased by the Company in October, 1994, for use as
a bulk merchandise redistribution center.
(3) This facility was leased by the Company in June, 1994 for use as a
freight consolidation center.
(4) This facility was purchased by the Company in December, 1994 and is
currently being remodeled. The Company anticipates that
production will commence the second quarter of 1995.
(5) This land is adjacent to the Company's LaCrosse, Wisconsin warehouse.
(6) Land purchased for Colorado distribution center to be constructed in
1995/1996.
The Company also leases a fleet of transportation equipment for the
primary purpose of delivering merchandise from the Company's warehouses to
its dealers.
29
THIS PAGE INTENTIONALLY
LEFT BLANK
30
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 32
Balance Sheets as of December 31, 1994 and 1993 33
Statements of Earnings for the three years in the period
ended December 31, 1994 35
Statements of Member Dealers' Equity for the three years
in the period ended December 31, 1994 36
Statements of Cash Flows for the three years in the period
ended December 31, 1994 37
Notes to Financial Statements 38
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the balance sheets of Ace Hardware Corporation as of
December 31, 1994 and 1993, 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, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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, 1994 and 1993, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1994
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 31, 1995
32
<TABLE>
ACE HARDWARE CORPORATION
BALANCE SHEEET
December 31, 1994 and 1993
ASSETS
<CAPTION>
1994 1993
(000's omitted)
<S>
Current assets: <C> <C>
Cash, and Cash Equivalents $ 4,868 $ 4,142
Receivables:
Dealers 228,584 183,493
Others 32,377 29,831
260,961 213,324
Less Allowance for doubtful receivables (1,350) (720)
Net receivables 259,611 212,604
Inventories (Note 2) 270,391 263,576
Prepaid expenses and other current assets 6,810 6,869
Total current assets 541,680 487,191
Property and equipment (Notes 4 and 9):
Land 14,219 13,673
Buildings and improvements 135,252 131,794
Warehouse equipment 48,947 47,146
Office equipment 53,965 48,842
Manufacturing equipment 12,165 12,012
Transportation equipment 14,557 12,508
Leasehold improvements 10,925 6,553
Construction in progress 7,561 2,319
297,591 274,847
Less accumulated depreciation and amortization (120,493) (108,710)
Net property and equipment 177,098 166,137
Other assets 6,703 14,160
$ 725,481 $ 667,488
See accompanying notes to financial statements.
</TABLE>
33
<TABLE>
ACE HARDWARE CORPORATION
BALANCE SHEETS
December 31, 1994 and 1993
LIABILITIES AND MEMBER DEALERS' EQUITY
<CAPTION>
1994 1993
(000's omitted)
<S>
Current Liabilities: <C> <C>
Current installments of long-term debt (Note 4) $ 7,369 $ 10,707
Short-term borrowings (Note 3) 30,000 38,500
Accounts payable 293,088 234,190
Patronage dividends payable in cash (Note 5) 27,302 25,766
Patronage refund certificates payable (Note 5) 1,315 11,059
Accrued expenses 38,627 33,682
Total current liabilities 397,701 353,904
Long-term debt (Note 4) 64,287 71,286
Patronage refund certificates payable (Note 5) 63,666 56,270
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,924 3,946
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 164,666 153,155
Class C Stock of $100 par value, issuable to dealers for
patronage dividends 21,766 19,064
Additional stock subscribed, net 555 613
Retained earnings 5,624 5,622
Contributed capital 3,295 3,295
206,329 192,194
Less: Treasury stock, at cost (6,502) (6,166)
Total member dealers' equity 199,827 186,028
Commitments (Notes 6 and 9) -- --
$ 725,481 $ 667,488
See accompanying notes to financial statements.
</TABLE>
34
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF EARNINGS
<CAPTION>
Year Ended December 31,
1994 1993 1992
(000's omitted)
<S> <C> <C> <C>
Net sales $ 2,326,115 $ 2,017,763 $ 1,870,625
Cost of sales 2,158,896 1,867,326 1,723,017
Gross Profit 167,219 150,437 147,608
Operating expenses:
Warehouse and distribution (Note 2) 29,379 31,650 32,291
Selling, general and administration 63,515 54,378 48,451
Total operating expenses 92,894 86,028 80,742
Operating income 74,325 64,409 66,866
Interest expense (Note 11) (12,035) (9,798) (8,380)
Other income, net (Note 11) 3,716 2,909 2,852
Income taxes (Note 7) (1,484) (428) (571)
Net earnings 64,522 57,092 60,767
Retained earnings at beginning of year 5,622 7,553 9,993
Net earnings 64,522 57,092 60,767
Patronage Dividends (Notes 5 and 8) (64,520) (59,023) (63,207)
Retained earnings at end of year $ 5,624 $ 5,622 $ 7,553
See accompanying notes to financial statements.
</TABLE>
35
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1994
(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, 1991 $ 4,165 $ 6,499 $ 130,083 $ 14,841 $ 1,069
Net earnings -- -- -- -- --
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
Net earnings -- -- -- -- --
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
Net earnings -- -- -- -- --
Net payments on subscriptions -- -- -- -- 1,394
Patronage financing deductions -- -- -- (1,086) --
Stock issued 218 -- 19,212 (17,978) (1,452)
Stock repurchased -- -- -- -- --
Stock retired (240) -- (7,701) -- --
Stock issuable as patronage dividends -- -- -- 21,766 --
Patronage dividends payable -- -- -- -- --
Balance at December 31, 1994 $ 3,924 $ 6,499 $ 164,666 $ 21,766 $ 555
</TABLE>
(Table Continued on following page)
<TABLE>
* Additional stock subscribed is comprised of the following amounts at December 31, 1992, 1993 and 1994:
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Class A Stock . . . . . . . . . $ 185 $ 223 $ 291
Class B Stock . . . . . . . . . -- -- --
Class C Stock . . . . . . . . . 2,184 1,952 2,180
2,369 2,175 2,471
Less unpaid portion . . . . . . 1,572 1,562 1,916
$ 797 $ 613 $ 555
</TABLE>
<TABLE>
<CAPTION>
Retained Contributed Treasury
Earnings Capital Stock Total
<S> <C> <C> <C> <C>
Balance at December 31, 1991 $ 9,993 $ 3,295 $ (5,534) $ 164,411
Net earnings 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
Net earnings 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
Net earnings 64,522 -- -- 64,522
Net payments on subscriptions -- -- -- 1,394
Net payments on patronage
financing programs -- -- -- (1,086)
Stock issued -- -- -- --
Stock repurchased -- -- (8,277) (8,277)
Stock retired -- -- 7,941 --
Stock issuable as patronage dividends -- -- -- 21,766
Patronage dividends payable (64,520) -- -- (64,520)
Balance at December 31, 1994 $ 5,624 $ 3,295 $ (6,502) $ 199,827
See accompanying notes to financial statements.
</TABLE>
36
<TABLE>
ACE HARDWARE CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
<CAPTION>
(000's omitted)
Operating Activities: 1994 1993 1992
<S> <C> <C> <C>
Net earnings $ 64,522 $ 57,092 $ 60,767
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 16,954 16,156 14,817
Loss on sale of property and equipment 175 460 507
Increase in accounts receivable, net (47,007) (18,880) (32,783)
Increase in inventories (6,815) (50,099) (2,091)
(Increase) Decrease in prepaids and other current assets 59 (352) (632)
Increase (Decrease) in accounts payable and accrued expenses 63,843 58,087 (2,237)
Net Cash Provided by Operating Activities 91,731 62,464 38,348
Investing Activities:
Purchase of property, plant and equipment (28,277) (16,346) (34,582)
Proceeds from sale of property and equipment 187 238 83
(Increase) Decrease in other assets 7,457 (1,991) (3,831)
Net Cash Used in Investing Activities (20,633) (18,099) (38,330)
Financing Activities:
(Payments of) Proceeds from short-term borrowings (8,500) (17,500) 34,000
Proceeds from Notes Payable -- 30,000 20,000
Principal payments on long-term debt (10,337) (1,092) (16,170)
Payment of cash portion of patronage dividend (25,766) (27,538) (26,864)
Payments of Patronage refund certificates
and patronage financing deductions (18,886) (19,451) (9,182)
Proceeds from sale of common stock 1,394 1,049 1,302
Repurchase of common stock (8,277) (7,835) (7,893)
Net Cash Used by Financing Activities (70,372) (42,367) (4,807)
Increase (Decrease) in Cash and Cash Equivalents 726 1,998 (4,789)
Cash and Cash Equivalents at beginning of year 4,142 2,144 6,933
Cash and Cash Equivalents at end of year $ 4,868 $ 4,142 $ 2,144
See accompanying notes to financial statements.
</TABLE>
37
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 patronage sourced 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 three months 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.
(g) Reclassifications
Certain financial statement reclassifications have been made to prior year
amounts to conform to comparable classifications followed in 1994.
38
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
(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 $65,052,000 and $63,615,000 at December 31, 1994 and 1993,
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 1994 and 1993. The maximum
amount outstanding at any month-end during the period was $115,500,000 in
1994 and $91,000,000 in 1993. The interest rate effective as of December 31,
1994 and 1993 was 6.5% and 3.6%, respectively. Short term borrowings
outstanding as of December 31, 1994 and 1993 were $30,000,000 and $38,500,000,
respectively. At December 31, 1994 the Company has available a revolving
credit facility with a group of banks providing for $100 million in committed
lines and $50 million in uncommitted lines. The aggregate unused line of
credit available at December 31, 1994 and 1993 was $120,000,000 and
$69,000,000, respectively. At December 31, 1994, the Company had no
compensating balance requirements. Aggregate compensating balances (not
legally restricted) at December 31, 1993 was $600,000.
(4) Long-Term Debt
Long-term debt is comprised of the following:
<TABLE>
December 31,
<CAPTION>
1994 1993
(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 $ 1,000 $ 1,500
$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
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% 18,919 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 30,000
Liability under capitalized leases (see Note 9) 726 1,197
Installment notes with maturities through 1998 with various
interest rates 1,011 1,046
71,656 81,993
Less current installments 7,369 10,707
$64,287 $71,286
</TABLE>
39
ACE HARDWARE CORPORATION
NOTES TO FINANCIALSTATEMENTS-(Continued)
Prime interest rates in effect ranged from 6.0% to 8.5% in 1994 and were
6.0% in 1993.
Aggregate maturities of long-term debt are $7,369,000, $7,060,000,
$6,131,000, $6,064,000 and $5,972,000 in 1995 through 1999, respectively.
The fair value of the Company's debt based upon discounting of future
cash flows does not materially vary from the carrying value of such debt as
of December 31, 1994.
(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.
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. All amounts exceeding the cash portions 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 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 computer equipment financing.
The patronage dividend composition for 1994, 1993 and 1992 follows:
<TABLE>
<CAPTION>
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
(000's omitted)
<S> <C> <C> <C> <C> <C>
1994 $27,302 $ 9,920 $21,766 $5,532 $64,520
1993 25,766 12,728 19,064 1,465 59,023
1992 27,538 14,598 20,301 770 63,207
</TABLE>
Patronage dividends are allocated on a calendar year basis with issuance
in the following year.
The patronage refund certificates outstanding at December 31, 1994 are
payable as follows:
<TABLE>
<CAPTION>
Interest
January 1, Amount Rate
(000's omitted)
<S> <C> <C>
1995 $ 1,315 7.0%
1996 12,868 7.0
1997 14,570 6.25
1998 14,227 6.0
1999 12,081 6.0
2000 9,920 7.0
</TABLE>
40
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
On January 1, 1994 the Company prepaid a portion of the patronage refund
certificates payable on January 1, 1995 and accordingly, these certificates
are classified as current liabilities in the December 31, 1993 balance sheet.
The remaining patronage refund certificates payable on January 1, 1995 will
be paid in January 1995.
(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, 1994, plan assets were held primarily in group annuity and
guaranteed interest contracts, equities and mutual funds.
Pension income for the years 1994, 1993 and 1992 included the following
components:
<TABLE>
<CAPTION>
1994 1993 1992
(000's omitted)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 323 $ 292 $ 338
Interest cost on projected benefit obligation 805 752 722
Actual return on plan assets (121) (1,104) (975)
Net amortization and deferral (1,073) (169) (313)
Net periodic pension income $ (66) $ (229) $ (228)
</TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's Balance Sheet at December 31, 1994 and 1993
(September 30th measurement date):
<TABLE>
<CAPTION>
1994 1993
(000's omitted)
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $10,919,000 and $8,500,000 $11,384 $ 9,515
Plan assets at fair value $13,654 $14,023
Projected benefit obligation for service rendered to date 12,364 10,897
Plan assets in excess of projected benefit obligation $ 1,290 $ 3,126
Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes
in assumptions 3,361 1,544
Remaining unrecognized net asset being amortized
over participants average remaining service period (1,983) (2,148)
Prepaid pension cost included in other assets $ 2,668 $ 2,522
</TABLE>
41
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0% in 1994 and 7.5%
in 1993. The related expected long-term rate of return was 8.0% in 1994 and
8.5% in 1993. The rate of increase in future compensation was projected
using actuarial salary tables plus 1% in 1994 and using a rate of 6% in 1993.
The Company also participates in several multi-employer plans covering
union employees. Amounts charged to expense and contributed to the plans
totaled approximately $282,000, $275,000, and $426,000 in 1994, 1993 and
1992, respectively.
The Company's profit sharing plan contribution for the years ended 1994,
1993, and 1992 was approximately $9,381,000, $8,690,000 and $7,374,000,
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.
The 1994, 1993 and 1992 provisions for federal income taxes were $924,000,
$141,000 and $162,000, respectively, and for state income taxes were
$560,000, $287,000 and $409,000, respectively.
The Company made tax payments of $1,428,000, $357,000, and $728,000 during
1994, 1993 and 1992, 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.
42
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
The Company's classes of stock are described below:
<TABLE>
<CAPTION>
Number of Shares
at December 31,
1994 1993
<S> <C> <C>
Class A Stock, voting, redeemable at par value --
Authorized 10,000 10,000
Issued and outstanding 3,924 3,946
Class B Stock, nonvoting, redeemable at not less than
twice par value --
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 3,248 3,416
Treasury stock 3,251 3,083
Class C Stock, nonvoting, redeemable at not less than
par value --
Authorized 2,000,000 2,000,000
Issued and outstanding 1,646,656 1,531,549
Issuable as patronage dividends 217,658 190,635
Additional Stock Subscribed:
Class A Stock 291 223
Class B Stock -- --
Class C Stock 21,800 19,520
</TABLE>
At December 31, 1994 and 1993 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.
43
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
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 1993 and 1994 affecting treasury shares follow:
<TABLE>
<CAPTION>
Shares Held in Treasury
Class A Class B Class C
<S> <C> <C> <C>
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 --
Stock issued -- -- --
Stock repurchased 240 168 77,013
Stock retired (240) -- (77,013)
Balance at December 31, 1994 -- 3,251 --
</TABLE>
(9) Commitments
Leased property under capital leases is included under "Property and
Equipment" in the balance sheets as follows:
<TABLE>
<CAPTION>
December 31,
(000's omitted)
1994 1993
<S> <C> <C>
Buildings and improvements $ 3,422 $ 3,422
Data processing equipment 723 723
Less: Accumulated depreciation and amortization (3,609) (3,291)
$ 536 $ 854
</TABLE>
44
ACE HARDWARE CORPORATION
NOTES TO FINANCIALSTATEMENTS-(Continued)
The Company rents buildings and warehouse, office and certain other
equipment under operating and capital leases. At December 31, 1994 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)
1995 $502 $ 9,421
1996 271 7,746
1997 -- 5,768
1998 -- 4,502
1999 -- 3,448
Thereafter -- 24,780
Total minimum lease payments $773 $55,665
Less amount representing interest 47
Present value of total minimum lease payments $726
All leases expire prior to 2010. 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 $21,814,000, $21,444,000 and $21,073,000 in 1994, 1993 and
1992, respectively. Rent expense includes $4,382,000, $4,282,000 and
$3,706,000 in contingent rentals paid in 1994, 1993 and 1992, respectively,
primarily for transportation equipment mileage.
(10) Supplementary Income Statement Information
Gross media expense, prior to income offsets from dealers and suppliers,
amounting to $52,185,000, $48,293,000 and $47,813,000 were charged to
operations in 1994, 1993, and 1992, respectively.
(11) Interest Expense and Other Income, Net
Capitalized interest totaled $213,000, $29,000 and $836,000 in 1994, 1993
and 1992, respectively. Interest paid was $13,518,000, $10,670,000 and
$9,149,000 in 1994, 1993 and 1992, respectively.
45
Item 6. Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
Income Statement Data:
<CAPTION>
Year Ended December 31,
1994 1993 1992 1991 1990
(000's omitted)
<S> <C> <C> <C> <C> <C>
Net sales $2,326,115 $2,017,763 $1,870,625 $1,704,203 $1,625,029
Cost of sales 2,158,896 1,867,326 1,723,017 1,569,871 1,497,147
Gross profit 167,219 150,437 147,608 134,332 127,882
Total expenses 102,697 93,345 86,841 75,175 67,470
Net earnings $64,522 $57,092 $60,767 $59,157 $60,412
Patronage dividends (Notes A, B, 5 and 8) $64,520 $59,023 $63,207 $57,729 $57,519
</TABLE>
<TABLE>
Balance Sheet Data:
<CAPTION>
Year Ended December 31,
1994 1993 1992 1991 1990
(000's omitted)
<S> <C> <C> <C> <C> <C>
Total assets $725,481 $667,488 $594,676 $540,953 $479,202
Working capital 143,979 133,287 103,952 105,899 92,376
Long-term debt 64,287 71,286 51,696 38,737 22,521
Patronage refund certificates payable, long-term 63,666 56,270 55,389 58,559 52,134
Member dealers' equity 199,827 186,028 175,681 164,411 154,563
</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 substantially all
patronage sourced earnings in the form of patronage dividends.
(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, 1994,
patronage dividends were payable as follows:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
(000's omitted)
<S> <C> <C> <C> <C> <C>
In cash $ 27,302 $ 25,766 $ 27,538 $ 26,864 $ 26,462
In patronage refund certificates payable 9,920 12,728 14,598 15,176 13,597
In Class C Stock 21,766 19,064 20,301 14,841 16,322
In patronage financing deductions 5,532 1,465 770 848 1,138
Total patronage dividends $ 64,520 $ 59,023 $ 63,207 $ 57,729 $ 57,519
</TABLE>
(C) Numbered notes refer to Notes to Financial Statements, beginning on
page 38.
(5) and (8) Refers to Notes 5 and 8 to the financial statements included in
pages 40, 42, and 43 of this Form S-2.
46
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's long and short-term liquidity is dependent on retail
growth as described under the "Company's Business". Nothing in the
Company's plans as discussed under the "Company's Business" has lead
or is expected to lead to any material change in pricing, margins or
product focus or is expected to materially impact the results or operations
or liquidity of the Company. The Company's long-term strategic plan is
only for a renewal focus on supporting retail growth. Retail growth provides
equity growth for the Company. Recognizing the need for equity growth in
order to properly capitalize the Company, the patronage stock formula for
years beginning in 1995 was changed. See "Forms of Patronage Dividend
Distributions." Also, beginning in 1994, patronage dividend distributions
are made on the basis of the lesser of book or taxable income. The Company's
working capital (as defined by Current Assets less Current Liabilities) has
shown steady increases since 1992. Additionally, to help ensure adequate
accessibility to cash, the Company entered into a $100 million committed
revolving credit agreement in 1994. The Company believes that these changes
and the retail growth of the membership will provide adequate liquidity for
the long-term.
Additionally, in the second quarter of 1994, the Company established a
committed unsecured revolving credit facility for $100 million with a group of
banks. The Company had unused unsecured lines of credit of $120.0 million at
December 31, 1994. 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. The Company's credit facilities provide that
certain ratios be maintained with the only material covenant related to fixed
charge coverage. The Company is in compliance with all debt covenants.
Capital expenditures for new and improved facilities were $28.3, $16.3
and $34.6 million in 1994, 1993 and 1992, respectively. During 1994, the
Company financed the $28.3 million of capital expenditures out of current
and accumulated internally generated funds, and short-term borrowings.
1995 capital expenditures are anticipated to be approximately $44.3 million
primarily for a new distribution facility and 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"). Prior to 1994, patronage dividends were
distributed on the basis of taxable income. Accordingly, patronage dividends
can exceed net income or be less than net income due to the timing of certain
items for income tax purposes. The Board of Directors does have the authority
to determine reasonable reserves for the purpose of ensuring the welfare of the
Company, but it has been the practice of the Company to distribute
substantially all patronage sourced earnings in the form of patronage dividends.
Non-patronage sourced earnings (including international earnings) have been
minimal in all years presented except for capital gains related to the sale
and leaseback of two distribution centers in 1990 and 1991 which resulted in
nonpatronage sourced income not available for distribution as patronage
dividends.
No adverse trends in revenues or net income have occurred since the end of
the Company's last reported financial period. 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-1994 Compared to 1993
Net sales increased 15.3% in 1994 primarily due to increases in volume
from existing dealers (12.1% increase) and increased International sales.
Sales of basic hardware and paint merchandise (including warehouse, bulletin,
and direct shipments) increased 13.5%. Increased advertising activity fueled
strong 1994 promotional increases, particularly in the warehouse sales
categories. Lumber and building material sales experienced higher percentage
increases in 1994 as sales efforts were accelerated. Net dealer outlets
increased in 1994 as set forth on page 15 partially reversing previous year
declines. Targeted sales efforts on new store development and conversions to
the Ace program and increased emphasis on dealer retail success resulted in
positive 1994 dealer growth.
Gross profit increased $16.8 million or 11.2% vs. 1993 due primarily
to the strong sales results in the basic sales categories and strong
manufacturing profits. As a percent of sales, however, gross profit
declined due to continued growth of competitively priced and promotional
items within the overall sales mix. Upfront rebates through reduced
handling charges and low upfront pricing programs and discounts have
accelerated and reduced gross profit as a percent of sales. The impact of
LIFO inventory accounting on gross profit and results of operations was
immaterial in both 1994 and 1993.
Warehouse and distribution expenses decreased by $2.3 million or 7.2%,
and as a percent of sales due to increased traffic revenues and reduced
building and operating costs due to the replacement of a facility in
1993.
47
Selling, general, and administration expenses increased by $9.1
million or 16.8% and as a percent of sales due to reduced net advertising
income, increased personnel costs for field retail support and increased
marketing costs. Increases within these expense categories are directly
related to retail support of Ace dealers.
As a separate Division of the Company, the Paint Division produced net
income of $6.7 million in 1994 vs. $5.1 million in 1993.
Interest expense increased $2.2 million in 1994 due to increased
borrowing levels to fund the sales growth and increased interest rates.
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 increased $807,000 or 27.7% in 1994 due to increased
interest income related to dealer financing programs and 1993 losses on
asset disposals at a replaced facility which did not re-occur in 1994.
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 15 as a result
of increased competition and more sales and marketing emphasis with existing
dealers rather than new store development.
Gross profit increased $2.8 million 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 $5.9 million
or 12.2% due to higher personnel costs and marketing expenses partially
offset by higher advertising and retail support income.
Interest expense increased $1.4 million in 1993 despite lower interest
rates due to increased borrowing levels resulting from the financing of
planned capital expenditures and increased inventory levels.
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.
48
MANAGEMENT
The directors and the executive officers of the Company are:
Name Age Position(s) Held
Jennifer C. Anderson 44 Director
Michael C. Bodzewski 45 Vice President-Merchandising
Lawrence R. Bowman 48 Director
David F. Hodnik 47 President and Chief Operating Officer
Paul M. Ingevaldson 49 Vice President-Corporate Strategy and
International Business
Mark Jeronimus 46 Director
Howard J. Jung 47 Director
Rita D. Kahle 38 Vice President-Finance
John E. Kingrey 51 Director
Richard E. Laskowski 53 Chairman of the Board and Director
David W. League 55 Vice President-General Counsel
William A. Loftus 56 Senior Vice President-Retail Operations
and Marketing
David F. Myer 49 Vice President-Retail Support and New
Business
Fred J. Neer 55 Vice President-Human Resources
Ray W. Osborne 58 Director
Roger E. Peterson 57 Chief Executive Officer (CEO)
Donald L. Schuman 56 Vice President-Information Systems
Jon R. Weiss 59 Director
Don S. Williams 53 Director
James R. Williams 47 Director
The primary type of business in which each director has been engaged during
the past 5 years is that of the operation of one or more retail hardware
stores.
The By-laws of the Company provide that its Board of Directors shall be
comprised of such number of persons, not less than 9 and not greater than 12,
as shall be fixed from time to time by the Board of Directors. A minimum of
9 of the directors shall be dealer directors. A maximum of two of the
directors may be non-dealer directors. A person shall be eligible for
election or appointment as a non-dealer director without regard to whether
or not such person is the owner of a retail business organization which is a
stockholder of Ace Hardware Corporation, or an executive officer, general
partner or general manager of such a retail business organization. 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 no person is eligible to serve as a dealer
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. Regional
dealer directors are elected from geographic regions of the United States
established by the Board in accordance with Article IV, Section 1 of the
Company's By-laws. (See Appendix A). If the Board determines that all
regions have representation by regional dealer directors and the maximum
number of directors would not thereby be exceeded, then dealer directors
at large may also be elected.
The current geographic composition of each of the regions established by
the Board of Directors for the election of directors pursuant to the
applicable By-law provisions is as follows:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode
Island, New York, Pennsylvania, New Jersey;
49
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee,
North Carolina, South Carolina, District of Columbia;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Ohio, Indiana, Illinois;
Region 5 - Iowa, Missouri, Nebraska, Kansas, Colorado;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas;
Region 7 - Alaska, Washington, Oregon, Idaho, Montana, Wyoming, Utah;
Region 8 - Arizona, New Mexico, Nevada, California, Hawaii;
Region 9 - Michigan, Minnesota, North Dakota, South Dakota, Wisconsin.
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 5, 1995 as directors of the
classes, from the regions, and for terms as indicated below:
Nominee Class Region Term
Richard E. Laskowski Third 4 3 years
James R. Williams Third 5 3 years
Lawrence R. Bowman Third 7 3 years
The person named below has been selected as the nominee for election to
the Board for the first time at the 1995 annual meeting as a non-dealer
director of the class, and for the term indicated:
Nominee Age Class Region Term
Roger E. Peterson 57 Third None 3 years
Reference should be made to Article IV of the copy of the By-laws in
Appendix A for information concerning the qualifications required for
membership on the Board of Directors, the terms of directors, the limitations
on the total period of 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.
INDEMNIFICATION OBLIGATIONS OF COMPANY AND
S.E.C. POSITION ON SECURITIES ACT INDEMNIFICATION
Under Article EIGHTH (b) of the restated Certificate of Incorporation of
the Company, and Article XV, Section 1 of the By-laws of the Company, persons
serving as directors, officers, employees or agents of or at the request of
the Company are required to be indemnified by the Company against all
expenses, liabilities and losses (including attorneys' fees, judgments,
fines, excise taxes, or penalties under the U.S. Employee Retirement Income
Security Act, as amended, and amounts paid or to be paid in settlement)
reasonably incurred or suffered by them in connection with any action, suit
or proceeding (whether civil, criminal, administrative or investigative)
instituted or threatened to be instituted against them by reason of their
service in any of the aforementioned capacities on behalf of the Company or
at its request. The same section of the restated Certificate of Incorporation
also authorizes the advancement of litigation expenses to any such person
without specific approval of the Board of Directors in each specific case
under certain circumstances.
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Also, Article EIGHTH (a) of the restated Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or to its stockholders for monetary damages arising solely out of
such director's breach of fiduciary duty as a director. This provision does
not affect a director's liability for monetary damages based upon such
grounds as a breach of the duty of loyalty, a failure to act in good faith,
intentional misconduct, a knowing violation of law, or the receipt of an
improper personal benefit.
The indemnification provisions described above would extend to and include
proceedings under the federal Securities Act of 1933. However, insofar as
indemnification for liabilities arising under said Act may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in said Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being offered by this Prospectus, the Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in said Act and
will be governed by the final adjudication of such issue.
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APPENDIX A
BY-LAWS
OF
ACE HARDWARE CORPORATION
(As Amended on September 20, 1994)
ARTICLE I
OFFICES
SECTION 1. The registered office of the corporation in the State of
Delaware shall be in the City of Wilmington in said State, and the registered
agent in charge thereof shall be Corporation Service Company, 4305 Lancaster
Pike. In the event that the business address of said registered agent in said
State shall at any time be changed, the address of the corporation's
registered office shall be deemed to have changed correspondingly.
SECTION 2. The corporation may also have an office or offices in the
Village of Oak Brook, Illinois, and at such other places as the Board of
Directors may from time to time designate.
ARTICLE II
CORPORATE SEAL
SECTION 1. The corporate seal shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Delaware".
ARTICLE III
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of stockholders for the election of
directors shall be held on such date between April 10 and June 10 of each
year as shall be designated in a written communication mailed not less than
160 days prior to the designated date to each holder of record of a share of
Class A stock of the corporation as of a date no earlier than 40 days
preceding the date of such mailing. The Board of Directors shall adopt a
resolution establishing each annual meeting date as designated in such
communication, the purpose of which is to inform the Class A stockholders of
the annual meeting date in advance of the commencement of the time period
specified in Article XXIII, Section 3 of the By-laws for the submission to
the President or Secretary of the corporation of proposed By-law amendments,
director nominations, or other matters by a stockholder or stockholders. At
each annual meeting the stockholders shall elect by plurality vote (and by
written ballot unless the same shall be waived or dispensed with by a
majority vote of the stockholders represented at the meeting) members of the
class of directors whose terms expire at that time, and all directors so
elected shall hold office until the date of the next annual meeting of the
stockholders for the election of directors of such class or until their
respective successors shall have been elected and qualified.
SECTION 2. Special meetings of the stockholders may be called at any time
by the President and shall be called by the President or Secretary on the
request in writing or by vote of a majority of the whole Board of Directors
or at the request in writing of stockholders of record owning ten percent
(10%) in amount of the capital stock outstanding and entitled to vote. Any
special meeting may be called for any specified purpose or purposes permitted
by the General Corporation Law of Delaware and the Certificate of
Incorporation of the corporation.
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SECTION 3. All meetings of the stockholders for the election of directors
shall be held at the office of the corporation in Oak Brook, Illinois, or at
such other place within the United States of America as may from time to time
be designated by the Board of Directors and stated in the notice of the
meeting to be given under Article III, Section 6 of the By-laws. All other
meetings of the stockholders shall be held at such place or places in the
United States of America as may from time to time be designated by the Board
of Directors and stated in the notice of meeting. Each meeting of the
stockholders shall be held at such time of day as shall be approved by the
Board of Directors.
SECTION 4. A complete list of the stockholders entitled to vote at any
meeting thereof, arranged in alphabetical order and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder, shall be prepared by the Secretary or by such person as shall
be designated by him to prepare such list. The list shall be kept on file at
the registered office of the corporation in the State of Illinois and shall
be subject to inspection by any stockholder at any time during usual business
hours for a period of ten (10) days prior to the meeting, and the same shall
also be produced and kept open at the time and place of the meeting and shall
be subject to the inspection of any stockholder during the whole time of the
meeting.
SECTION 5. Each stockholder entitled to vote shall, at every meeting of
the stockholders, be entitled to one vote in person or by proxy, signed by
him, for each share of voting stock held by him. Such right to vote shall be
subject to the right of the Board of Directors to close the transfer books or
to fix a record date for voting stockholders not more than sixty (60) nor
less than ten (10) days before the date of the meeting as hereinafter
provided, and if the directors shall not have exercised such right, no share
of stock shall be voted on at any election for directors which shall have
been issued or transferred on the books of the corporation within twenty (20)
days next preceding such election.
SECTION 6. Written notice of the time and place of the annual meeting and
of any special meeting of stockholders shall be mailed or personally
delivered to each stockholder entitled to vote thereat not less than thirty
(30) nor more than sixty (60) days prior to the date of the meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail in a sealed envelope addressed to the stockholder at his
address as it appears on the records of the corporation, with postage prepaid
thereon. Notice of any special meeting shall state in general terms the
purposes for which the meeting is to be held.
SECTION 7. The holders of a majority of the stock outstanding and entitled
to vote at any meeting of the stockholders, represented in person or by
proxy, shall constitute a quorum for the transaction of business at such
meeting. In the absence of a quorum, the stockholders attending or
represented at the time and place for such meeting may adjourn the meeting
from time to time, without notice other than announcement of the time and
place of the adjourned meeting at the meeting at which the adjournment is
taken, until a quorum shall be present. At any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally scheduled.
ARTICLE IV
DIRECTORS
SECTION 1. The property and business of the corporation shall be managed
and controlled by a Board of Directors, which shall be comprised of no fewer
than 9 and no greater than 12 directors, as shall be fixed from time to time
by the Board of Directors. A minimum of 9 of the directors shall be dealer
directors. No person shall be eligible for election or appointment as a
dealer director (whether as a regional dealer director or as a dealer
director at large), or to continue to hold office as a dealer director,
unless such person is either the owner of a retail business organization
which is a stockholder of Ace Hardware Corporation, or an executive officer,
general partner or general manager of such a retail business organization.
Dealer directors representing the regions established under Article IV,
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Section 4 hereof, shall be regional dealer directors. Subject to Article IV,
Section 4(b) hereof, any additional dealer director(s) may be dealer
director(s) at large, rather than regional dealer director(s). A maximum of
2 of the directors of Ace Hardware Corporation may be non-dealer directors.
A person shall be eligible for election or appointment as a non-dealer
director without regard to whether or not such person is the owner of a
retail business organization which is a stockholder of Ace Hardware
Corporation, or an executive officer, general partner or general manager of
such a retail business organization.
SECTION 2. The directors shall be divided into three classes, as nearly
equal in number as possible, as determined by the Board of Directors. The
first of said classes shall include 4 dealer directors elected for 3-year
terms at the annual meeting of stockholders held in 1994. The second of
said classes shall include 3 dealer directors, elected for 3-year terms at
the annual meeting of stockholders held in 1993. The third of said classes
shall include 3 dealer directors, elected for 3-year terms at the annual
meeting of stockholders held in 1992, plus 1 non-dealer director position
for a 3-year term to be filled at the 1995 annual meeting of stockholders.
At each subsequent annual meeting of the stockholders, as the terms of each
class of directors expire, directors of the class whose terms expire shall
be elected for terms of 3 years. The directors shall be elected by the
stockholders, except that if there be any vacancies in the Board by reason
of death, resignation or otherwise, or if there be any newly created
directorships resulting from any increase in the authorized number of
directors which is to take effect prior to the next annual meeting of
stockholders, a majority of the directors then in office (though less than a
quorum) shall have authority to fill any such vacancy or any newly created
directorship for the unexpired term. In no event shall any term for which
any director is elected exceed three years.
SECTION 3. In the event that, for any reason other than a revision made
by the Board of Directors as to the States to be included within particular
regions or a change made by the Board in the number of regions, a dealer
director ceases to satisfy the eligibility requirements which are applicable
to his/her position as a director, his/her membership on the Board of
Directors shall thereupon immediately terminate. No director elected or
appointed shall be eligible for subsequent election or appointment to any
position on the Board if such election or appointment would result in his/her
being elected or appointed to serve a total of more than 9 years as such a
director, except (1) that a dealer director that has been elected and holds
the office of Chairman of the Board shall be eligible for election for one
additional 3-year term, and (2) the President of the Corporation, if elected
as a director, shall be eligible for election or reelection or appointment
as a director at any time without regard to the period of time during which
he has previously served as a director. At all annual meetings of the
stockholders, all holders of Class A stock of Ace Hardware Corporation as of
the record date established for voting at the meeting shall be eligible to
vote in the election for each position on the Board of Directors to be filled
at such meeting.
SECTION 4. The following procedure shall be utilized in determining dealer
director regions:
(a) The Board of Directors shall divide the United States into such
number of geographic regions as it shall deem appropriate as regions from
which regional dealer directors shall be chosen.
(b) No later than the fifteenth day of October preceding the date of
each annual meeting of stockholders, the Board shall determine the regions
from which each regional dealer director to be elected at such meeting
shall be chosen. No dealer director shall be eligible to serve as a
regional dealer director from a particular region unless the headquarters
store or office of the stockholder of Ace Hardware Corporation of which he
is an owner, executive officer, general partner, or general manager is
located in such region. If the Board determines that all regions have
representation by regional dealer director(s) and the maximum number of
directors would not thereby be exceeded, then dealer director(s) at large
may be elected.
(c) Each region shall consist of such of the States of the United
States as shall be determined by the Board of Directors, which shall have
authority from time to time to make revisions as to the States included
within particular regions as well as to change the number of regions,
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provided that no such revision or change shall deprive any director
holding office at the time the revision or change is made from continuing
to serve for the balance of the term for which he was elected or otherwise
chosen.
SECTION 5. Without affecting the right of any Class A stockholder to
nominate as a candidate for election to membership on the Board of Directors
any person who would be eligible to serve as a director in accordance with
the procedure specified in Article XXIII, the Board of Directors shall cause
nominees to be selected for election as directors at each annual meeting of
stockholders for whom proxies will be solicited on behalf of the Board. At
the time that the Board determines the regions from which regional dealer
directors are to be elected at the next annual meeting of the stockholders,
the Board shall also determine whether each incumbent director who is
eligible to be reelected for another term at such annual meeting shall be
selected as a Board-endorsed nominee for reelection from any such region at
said meeting. Each such determination shall be made by the Board without
participation in its proceedings by the director who is eligible to be
reelected at such next annual meeting. If the Board determines that proxies
shall be solicited on its behalf for the election of a director at the next
annual meeting of stockholders of a non dealer director or a dealer director
at large, the Board shall make a timely determination to this effect. The
following procedure shall be applied by the Board in selecting all other
Board-endorsed regional dealer director nominees for whom proxies will be
solicited on the Board's behalf at the next annual meeting.
(a) A standing Nominating Committee established by the Board shall
submit to the Board as soon as practicable prior to the last regularly
scheduled meeting of the directors in each calendar year a list of such
number of persons as the Board shall determine who are recommended by
such Committee to be considered as members of a candidate selection
committee for each director region from which the Board has determined
that a new regional dealer director should be elected at the next
annual meeting of the stockholders.
(b) At or prior to its last regularly scheduled meeting in each
calendar year, the Board shall create such a candidate selection committee
for each such director region and shall select as members of each such
candidate selection committee five of the persons recommended by the
Nominating Committee plus two incumbent members of the Board. The Board
may also select such alternate members, if any, of any such candidate
selection committee as it deems appropriate.
(c) Each candidate selection committee shall make a timely designation
of one of its eligible members as the person on whose behalf proxies will
be solicited at the next annual meeting as a Board-endorsed nominee for
election as a regional dealer director.
SECTION 6. Notwithstanding any of the foregoing provisions, in any
instance where a board-endorsed nominee for election as a director becomes
ineligible under the provisions of the By-Laws for election as a dealer
director or shall decline to run or seek reelection or shall be unable to
run or seek reelection by reason of death or disability, or shall, in the
case of an incumbent director have resigned or been removed from the Board
of Directors subsequent to having been named a board-endorsed nominee, or
in any instance where the Board of Directors, having endorsed a nominee for
election as a director shall withdraw or revoke such endorsement, then in
the case of a non-dealer director nominee or a dealer director at large
nominee, the Board may endorse another non-dealer candidate or dealer
director at large candidate, as the case may be, on whose behalf proxies
will be solicited at the next annual meeting as a Board-endorsed nominee
for election as a director. In case of a regional dealer director nominee,
the standing Nominating Committee established by the Board shall submit to
the Board as soon as practicable, a list of such number of persons as the
Board shall determine who are recommended by such committee to be considered
as members of a candidate selection committee for that particular director
region. The Board shall at a regularly scheduled meeting or a special
meeting of the directors as soon as practicable, create a candidate selection
committee for that director region and shall select as members of the
candidate selection committee five persons recommended by the nominating
committee plus two incumbent members of the Board. The Board may also select
such alternate members, if any, of any such candidate selection committee as
it deems appropriate. The candidate selection committee shall then make a
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timely designation of one of its eligible members as the person on whose
behalf proxies will be solicited at the next annual meeting as a Board-
endorsed nominee for election as a regional dealer director.
ARTICLE V
POWERS OF DIRECTORS
SECTION 1. The Board of Directors shall have, in addition to such powers
as are hereinafter expressly conferred on it, all such powers as may be
exercised by the corporation, subject to the provisions of the statute, the
Certificate of Incorporation and the By-Laws.
SECTION 2. The following powers are hereby expressly conferred upon the
Board of Directors:
(a) to purchase or otherwise acquire property, rights or privileges
for the corporation, which the corporation has power to take, at such
prices and on such terms as the Board of Directors may deem proper;
(b) to pay for such property, rights or privileges in whole or in part
with money, stock, bonds, debentures or other securities of the
corporation (secured by mortgages or otherwise), or by the delivery of
other property of the corporation;
(c) to create, make and issue mortgages, bonds, deeds, leases, trust
agreements and negotiable or transferable instruments and securities, and
to do every act and thing necessary to effectuate the same;
(d) to appoint agents, consultants, advisors and trustees, and to
dismiss them at its discretion, to fix their duties and emoluments and to
change them from time to time and to require such security as it may deem
proper;
(e) to confer on any officer or officers of the corporation the power
of selecting, discharging or suspending any of the persons referred to in
subsection (d) of this Section;
(f) to determine by whom and in what manner the corporation's bills,
notes, receipts, acceptances, endorsements, checks, releases, contracts
or other documents shall be signed;
(g) irrespective of any personal interest of any of its members, to
determine the amount of compensation, if any, to be paid to directors and
to members of the Executive Committee and other Committees established by
the Board of Directors for their services to the corporation as directors
or Committee members.
ARTICLE VI
MEETINGS OF DIRECTORS
SECTION 1. An annual organizational meeting of the Board of Directors as
constituted after the election of directors at each annual meeting of the
stockholders shall be held without call or formal notice at a time later in
the same day as the annual meeting of the stockholders or during the day next
following such stockholders meeting. The specific date of each such meeting
of the Board, as well as the time and place thereof, shall be determined at
one of the meetings of the Board held during the time between the most
recently conducted annual stockholders meeting and the next scheduled annual
stockholders meeting. In addition to electing officers of the corporation as
provided for in Article VIII, Section 2, the Board shall select the members
of its standing committees for the period until its next annual organizational
meeting and shall give voting directions to the President as to the persons
to be elected by the corporation as members of the Boards of Directors of
each of its wholly-owned subsidiary corporations at their respective annual
meeting times.
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SECTION 2. Additional regular meetings of the Board of Directors may be
held upon such notice, or without notice, and at such time and at such place
as shall from time to time be determined by the Board.
SECTION 3. Special meetings of the directors may be called by the Chairman
of the Board on four (4) days' notice by mail (calculated from the date of
mailing) or on two days' notice by telephone to each director and shall be
called by the Chairman of the Board in like manner on the written request of
not less than four (4) directors. Special meetings of the directors may be
held within or without the State of Delaware at such place as is indicated in
the notice or waiver of notice thereof.
SECTION 4. A majority of the total number of directors then holding office
shall constitute a quorum for the transaction of business. If at any meeting
of the Board there shall be less than a quorum present, a majority of the
directors present may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is secured.
ARTICLE VII
COMMITTEES ESTABLISHED BY THE BOARD
SECTION 1. The Board of Directors shall establish as standing committees
of the Board an executive committee and such other committees as it shall
deem from time to time to be appropriate. The Chairman of the Board shall
be an ex-officio member of any standing committee if the resolution adopted
by the Board with regard to the membership of such committee so provides,
except for any committee authorized to grant or withhold consent to the
transfer of shares of the corporation's stock pursuant to Article XVI,
Section 9 of these By-laws. Each such committee shall have such
responsibilities and duties as shall be described in a resolution or
resolutions adopted by a majority of the whole Board. Such resolution or
resolutions may also establish the number (or the minimum and maximum
numbers) of persons to be selected to serve on each of said committees, the
voting members of each of which shall be members of the Board. The Board
shall also have authority from time to time to establish special ad hoc
committees comprised of two or more directors, the specific responsibilities
of which shall be described in the resolutions creating them.
SECTION 2. One or more directors may be designated by the Board as
alternate members of any standing or special ad hoc committee, who may
replace any absent or disqualified committee member at any meeting of the
committee. Vacancies in the membership of any committee established by the
Board shall be filled only by the Board.
SECTION 3. In no event shall the executive committee or any other
committee established by the Board have the power or authority at any time
to take any final action on behalf of the Board with respect to (a) proposing
amendments to the corporation's certificates of incorporation, (b) the
adoption of any amendments to the By-laws of the corporation, (c) the
adoption of an agreement of merger or consolidation, (d) the making of
recommendations to the stockholders for the sale, lease, or exchange of all
or substantially all of the corporation's property or assets, (e) the making
of recommendations to the stockholders for the dissolution of the corporation
or the revocation of a dissolution, (f) the making of any proposals submitted
to the Board with respect to the purchase of all or a controlling portion of
the outstanding capital stock of the corporation, (g) the authorization of
issuance of shares of capital stock of the corporation or (h) the filling of
vacancies in the membership of the Board or any committee thereof.
SECTION 4. Each standing committee of the Board (with the exception of any
committee authorized to grant or withhold consent to the transfer of shares
of the corporation's stock pursuant to Article XVI, Section 9 of these
By-laws) shall select one of its members to act as Chairman thereof as
promptly as feasible after the members of the committee are selected at each
annual organizational meeting of the Board. At the time of establishment of
any special ad hoc committee of the Board, the Board shall designate a member
of such committee to act as its Chairman.
SECTION 5. Regular meetings of each standing committee established by the
Board shall be held as provided for in a resolution adopted by the Board, or
by a particular committee or its Chairman if authorized in a resolution of
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the Board. Special meetings of any standing committee, and all meetings of
any special ad hoc committee, shall be held on reasonable notice given to all
members thereof by the Chairman of the committee. Even if he has not been
made a member of a particular standing committee, the Chairman of the Board
shall be provided with the same notice of all regular or special meetings of
such committee as is provided to members of the committee, and he shall have
the right to attend any of the meetings held by the committee in an advisory
non-voting capacity. Subject to the provisions of the resolution describing
the responsibilities and duties of a particular committee established by the
Board, any such committee shall have authority to establish its own rules of
procedure. The Chairman of each committee of the Board which is required by
these By-laws to have one of its members designated as its Chairman shall be
responsible for assuring that: (a) an appropriate agenda is prepared for each
formal meeting of the Committee; (b) minutes of the proceedings of each such
meeting are kept; and (c) either a copy of such minutes or a summarized
written report of the meeting is submitted to the Board at or prior to the
next meeting of the Board.
SECTION 6. A majority of the voting members of any committee hereunder
shall constitute a quorum for meetings thereof, but the affirmative vote of
a majority of all voting members of the whole committee shall be necessary
with respect to all actions taken by the committee.
SECTION 7. With the exception of the Chairman of any committee of the type
described in the first sentence of Section 4 of this Article VII, the Board
may authorize the payment to the Chairman of any standing or special ad hoc
committee of compensation for the services rendered by him in his capacity as
Chairman in such amount as the Board shall deem to be appropriate. Such
compensation shall be in addition to the compensation paid to dealer
directors for their regular services as members of the Board.
ARTICLE VIII
OFFICERS OF THE CORPORATION
SECTION 1. There shall be elected by the Board of Directors the following
executive officers of the corporation: (a) a Chairman of the Board and, if
deemed appropriate by the directors, a Vice Chairman of the Board, each of
whom shall be elected from the membership of the Board of Directors; (b) a
President; (c) a Treasurer; and (d) one or more Executive Vice Presidents,
Senior Vice Presidents, or Vice Presidents as the Board shall deem the
business of the corporation to require from time to time. In addition the
Board of Directors shall elect as corporate (but not executive) officers of
the corporation a Secretary and such Assistant Secretaries as the Board shall
determine to be appropriate. The board shall also elect from time to time
such other additional executive or corporate officers as in its opinion are
desirable for the conduct of the business of the corporation. Any number of
offices filled by election of the Board may be held by the same person,
except the offices of President and Secretary. Any executive officer of the
corporation may bestow upon any employee of the corporation under his
supervision such title or titles descriptive of the position held by such
employee as such executive officer shall deem to be appropriate, provided
that no such title shall be the same as or confusingly similar to the title
of any officer elected by the Board, and provided further that no such title
shall be deemed to bestow the status of an executive officer or corporate
officer upon such employee nor to empower him with any authority to act on
behalf of the corporation other than such authority as shall have expressly
been assigned to him by the executive officer bestowing such title upon him.
SECTION 2. All executive officers and corporate officers of the
corporation shall be elected by the Board of Directors for one-year terms at
the regular meeting thereof following the annual meeting of stockholders,
provided that, in any event, any such officer shall hold office until his
successor has been elected and qualified or until his death, resignation or
removal from office. In the case of any officer with whom an employment
contract employing him to perform the functions of a specific office for a
period extending beyond one year has been entered into, the office or offices
to which he is elected at each such meeting of the Board of Directors shall
constitute the office or offices with respect to which he is employed under
such employment contract during the ensuing year. The Board of Directors
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shall have authority to direct that the corporation enter into an employment
contract with any executive officer or other employee for the purpose of
employing him for a specified period of time, and no such contract shall be
legally binding upon the corporation unless the same has been expressly
authorized by the Board and has been executed on behalf of the corporation
by the Chairman of the Board, the President, an Executive Vice President, a
Senior Vice President or a Vice President of the corporation. In no event
shall any such employment contract extend for an initial term of more than
five years, but any such contract may contain a provision whereby the
contract is automatically renewed for additional successive terms of not less
than three years each, provided that the corporation is given the right to
terminate the contract at the end of the initial term or renewal term by
giving notice to the executive officer or other employee involved of its
intention to do so by such specific period of time prior to the last day of
the initial term or the then current renewal term as shall be set forth in
the contract. Authorization of any such employment contract shall require
the affirmative vote of a majority of the whole Board of Directors then in
office. Subject to such contractual rights (if any) as may exist with
respect to his employment, any executive officer or other officer elected or
appointed by the Board of Directors may be removed from office at any time,
with or without cause, by the affirmative vote of a majority of the whole
Board of Directors then in office. If the office of any executive officer
or other officer elected or appointed by the Board of Directors becomes
vacant for any reason, the vacancy shall be filled by the affirmative vote
of a majority of the whole Board of Directors then in office.
SECTION 3. In case of the absence or disability of any executive officer
or any other officer of the corporation elected or appointed by the Board of
Directors, or for any other reason deemed sufficient by a majority of the
whole Board of Directors then in office, and subject to such contractual
rights as may exist with respect to the employment of any such officer, the
Board of Directors may delegate the powers or duties of any such officer to
any other officer, or to any director, for the time being.
SECTION 4. In addition to executive officers, certain employees of the
corporation may be designated from time to time by the President as staff
officers, that is, officers upon whom responsibility is conferred with
respect to the operations of a particular department, division, branch or
function of the corporation. Any such staff officer shall be appointed by the
President and may thereafter be removed at any time, with or without cause,
by the President. However, if the Board of Directors elects or appoints an
Executive Vice President, Senior Vice President, Vice President or other
officer pursuant to the authority vested in it by Section 1. above, such
officer may thereafter be removed only by the affirmative vote of a majority
of the whole Board of Directors then in office even though such officer's
title includes one or more words which are descriptive of the particular
department, division, branch or function of the corporation managed by such
officer. The removal of any officer shall be subject to such contractual
rights (if any) as may exist under any contract of employment which has been
entered into with him.
SECTION 5. Unless his compensation has been expressly specified by a
contract of employment entered into with him, the compensation of any
executive officer shall be such amount as shall be determined from time to
time by the Board of Directors. The President shall have sole authority to
determine from time to time the amount of compensation to be paid to any
other officer, except in the case of an officer whose compensation has been
expressly specified in a contract of employment which has been entered into
with him and except in the case of any such officer whose basic annual
compensation would be or is in an amount which equals or exceeds the basic
annual compensation then being paid to any executive officer (exclusive of
the Secretary or any Assistant Secretary or Assistant Treasurer).
ARTICLE IX
DUTIES OF THE CHAIRMAN OF THE BOARD,
VICE CHAIRMAN OF THE BOARD AND PRESIDENT
SECTION 1. The Chairman of the Board shall preside at all meetings of the
stockholders and the Board of Directors and shall perform such other duties
as may be prescribed from time to time by the Board of Directors or by the
By-laws. His specific duties and responsibilities shall include (a) acting
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as the primary liaison between the executive officers of the corporation on
the one hand and its Board of Directors and its dealer-stockholders on the
other hand; (b) bringing to the attention of and consulting with the
corporation's executive officers with respect to any special concerns of the
corporation's dealer-stockholders which come to his attention or to the
attention of the Board of Directors; (c) reviewing from the perspective of
the Board of Directors and the corporation's dealer-stockholders all reports,
financial budgets, and corporate plans as developed and submitted to him from
time to time by the corporation's executive officers; (d) overseeing and
aiding in the implementation of plans for orderly successions to the
positions held by the corporation's executive officers and other important
staff personnel; and (e) seeing that the efforts of the various executive
officers and other key management personnel of the corporation are carried
out in a coordinated manner, particularly in periods when transitions in
important officer or management positions occur. Except where it is provided
by law that the signature of the President is required, the Chairman of the
Board shall possess all of the same powers as the President to sign all
certificates for shares of stock of the corporation and all contracts and
other instruments of the corporation which may be authorized by the Board of
Directors.
SECTION 2. If the Board has elected a Vice Chairman of the Board, he shall
preside at all meetings of the stockholders and the Board of Directors in the
absence of the Chairman of the Board, and he shall be empowered to perform
the other duties and exercise the other powers vested in the Chairman of the
Board in the event that the Chairman of the Board is prevented by his absence,
by disability, or otherwise from being able to perform such duties and powers
in connection with a particular matter within the legally permitted period of
time or within such period of time as shall be deemed to be reasonable and
appropriate for action to be taken by the Chairman with regard to such matter.
If there is no director holding the position of Vice Chairman of the Board,
but there is a director (other than the Chairman of the Board) holding the
position of Chairman of the Executive Committee of the Board, then the
Chairman of the Executive Committee shall perform the duties and exercise the
powers described above for the Vice Chairman of the Board whenever necessary;
otherwise, upon the occurrence of any circumstance in which a Vice Chairman
of the Board would have been vested with authority to perform the duties and
exercise the powers of Chairman of the Board, the Board shall select one of
its members as acting Chairman of the Board who shall be vested with the same
authority.
SECTION 3. The President shall be charged with the general and active
management of the day-to-day operations of the corporation and with seeing
that all orders and resolutions of the Board of Directors are carried into
effect. His specific duties and responsibilities shall include (a) reporting
from time to time to the Chairman of the Board on all significant matters
affecting the operations and interests of the corporation which fall within
his knowledge; (b) seeing that short-term and long-term corporate plans and
budgets consistent with the directions of the Board of Directors are prepared
and developed on a regular basis; (c) seeing that the corporation continually
maintains competent personnel at all levels in order to adequately serve the
needs of the retail hardware dealers supplied by it; (d) consulting with the
Chairman of the Board from time to time with respect to the types of programs,
products and services to be made available to the corporation's retail
hardware dealers in order to serve the best interests of the corporation's
entire network of dealers; (e) submitting to the stockholders at their annual
meetings and/or at dealer conventions sponsored by the corporation such
reports on the operations and affairs of the corporation as shall be
appropriate in order to provide them with information of importance to them
as both customers and stockholders of the corporation; and (f) executing on
behalf of the corporation contracts and other instruments in writing,
including mortgages, bonds and governmental reports of various kinds, in all
instances wherein the signature of the President of the corporation is
required or has been authorized by the Board of Directors or is otherwise
deemed to be appropriate. The Board of Directors, in its discretion, may
vest the person holding the office of President of the corporation at any
given time with the additional title of Chief Executive Officer. Whenever
the title of Chief Executive Officer is used as an additional title for the
person holding the office of President, it shall be deemed to relate
specifically to the duties and responsibilities dealing with the development
of plans for orderly successions to the positions held by the corporation's
executive officers and other management personnel and to the ongoing
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development of short-term and long-term strategic plans for the corporation
to be presented to and reviewed by the Board of Directors and to the
execution of all such plans as are approved by the Board.
ARTICLE X
DUTIES OF EXECUTIVE VICE PRESIDENTS, SENIOR
VICE PRESIDENTS AND OTHER VICE PRESIDENTS
SECTION 1. Any Executive Vice President elected by the Board of Directors
shall possess the power and may perform the duties of the President in his
absence or disability. Each officer having the title of Executive Vice
President shall perform such other duties as may be prescribed from time to
the time by the Board of Directors.
SECTION 2. Any Senior Vice President elected by the Board of Directors
shall possess the power and may perform the duties herein authorized to be
performed by an Executive Vice President in the event that there is no person
holding the office of Executive Vice President at the time, or in the event
of the absence or disability of all persons then holding the office of
Executive Vice President. Each officer having the title of Senior Vice
President shall perform such other duties as may be prescribed from time to
time by the Board of Directors.
SECTION 3. Any Vice President elected by the Board of Directors shall
possess the power and may perform the duties herein authorized to be
performed by a Senior Vice President in the event that there is no person
holding the office of Senior Vice President at the time, or in the event of
the absence or disability of all persons then holding the office of Senior
Vice President. Each officer having the title of Vice President shall
perform such other duties as may be prescribed from time to time by the Board
of Directors.
SECTION 4. If there shall be more than one person holding the office of
Executive Vice President at any time, or if there shall be more than one
person holding the office of Senior Vice President at any time, or if there
shall be more than one person holding the office of Vice President at any
time, in each such instance the Board of Directors shall designate the order
in which each of them shall possess the power and perform the duties of an
officer of the next higher rank under the applicable one of the above
Sections in the event of the nonexistence, absence or disability of all such
higher ranking officers.
SECTION 5. Notwithstanding any of the above provisions of this Article X,
if the title given to any Executive Vice President, Senior Vice President, or
Vice President also includes one or more words that are descriptive of a
particular department, division, branch or function of the corporation
managed by such officer, the duties of such officer shall consist only of the
general and active management of the operations or activities of such
department, division, branch or function and such other duties as shall have
been specifically assigned to such officer by the Board of Directors.
ARTICLE XI
DUTIES OF CONTROLLER
SECTION 1. In the event that a Controller shall be elected or appointed at
any time by the Board of Directors, or in the event that a staff officer
having the title of Controller is appointed at any time by the President,
such officer shall be responsible to the Board of Directors, the President,
and the Vice President-Finance (if such office has been created and filled),
for all financial control and internal audit of the corporation and its
subsidiaries. He shall also perform such other duties as may be assigned to
him by the Board of Directors or the President.
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ARTICLE XII
DUTIES OF THE SECRETARY AND ASSISTANT SECRETARIES
SECTION 1. The Secretary (or an Assistant Secretary) shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the
Board of Directors in a book to be kept for that purpose and shall perform
like duties for the standing committees when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as
may be prescribed by the Board of Directors or President, under whose
supervision he shall be. He shall have custody of the corporate seal of the
corporation and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary.
The Board of Directors may give general authority to any other officer to
affix the seal of the corporation and to attest the affixing by his signature.
SECTION 2. The Secretary shall also keep, or cause to be kept by such
person or persons to whom he shall delegate such duty, a register of all
shares of capital stock issued by the corporation and all transfers of such
shares. Such register shall be maintained in such manner and subject to such
regulations as the Board of Directors may prescribe.
SECTION 3. The Assistant Secretary, or if there be more than one (1), the
Assistant Secretaries in the order determined by the Board of Directors,
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
ARTICLE XIII
DUTIES OF THE TREASURER
SECTION 1. The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of
Directors.
SECTION 2. He shall disburse the funds of the corporation, taking proper
vouchers for such disbursements, and shall render to the President and the
Board of Directors at its regular meetings, or when the Board of Directors so
requires, an account of all his transactions as Treasurer and of the financial
condition of the corporation.
SECTION 3. If required by the Board of Directors, he shall give the
corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the corporation.
ARTICLE XIV
WRITTEN CONSENTS AND CONFERENCE TELEPHONE MEETINGS
SECTION 1. To the extent permitted by the General Corporation Law of the
State of Delaware, and in accordance with the applicable procedure prescribed
by the provisions thereof, whenever a vote or resolution of stockholders, the
Board of Directors, or a committee of the Board at a meeting is required or
permitted in connection with any corporate action by any provision of law,
the Certificate of Incorporation, these By-laws, or any unrevoked resolution
previously adopted by the Board, the meeting and vote or resolution may be
dispensed with and the corporate action may be taken pursuant to written
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consent. The writing evidencing such consent shall be filed with the minutes
of the proceedings of the stockholders, Board, or committee.
SECTION 2. In accordance with the applicable procedure prescribed by the
General Corporation Law of the State of Delaware, members of the Board of
Directors, or of any committee of the board, may participate in a meeting of
the Board, or of any such committee, by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at such meeting.
ARTICLE XV
INDEMNIFICATION OF OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS
SECTION 1. In accordance with the provisions of Section 145 of the General
Corporation Law of the State of Delaware, and as more fully provided for in
Article EIGHTH (b) of the restated Certificate of Incorporation of Ace
Hardware Corporation, as amended, persons serving as directors, officers,
employees or agents of or at the request of the corporation shall be
indemnified against all expenses, liabilities and losses (including attorneys'
fees, judgments, fines, excise taxes or penalties under the U.S. Employee
Retirement Income Security Act, as amended, and amounts paid or to be paid in
settlement) reasonably incurred or suffered by them in connection with any
action, suit or proceeding (whether civil, criminal, administrative or
investigative) instituted or threatened to be instituted against them by
reason of their service in any of the aforementioned capacities on behalf of
the corporation or at its request.
ARTICLE XVI
CERTIFICATES OF STOCK AND TRANSFER THEREOF
SECTION 1. The shares of the corporation shall be represented by
certificates signed by the Chairman of the Board or the President and the
Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer of the corporation and may be sealed with the seal of the
corporation or a facsimile thereof.
SECTION 2. The signatures of the officers of the corporation upon a
certificate may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer at the date of
its issue.
SECTION 3. Each certificate of stock shall have conspicuously noted or
stated thereon a statement of the liens, restrictions and limitations upon
the voting power, ownership, transfer or other rights and privileges of the
holder thereof. All shares of stock in the corporation shall be issued and
accepted in accordance with and subject to the conditions, restrictions, and
offsetting liens stipulated in the Certificate of Incorporation and By-laws
of this corporation and amendments thereto.
SECTION 4. If a certificate of stock be lost or destroyed, another may be
issued in its stead upon proof of such loss or destruction and the giving of
a satisfactory bond of indemnity, in an amount sufficient to indemnify the
corporation against any claim. A new certificate may be issued without
requiring bond when, in the judgment of the directors, it is proper to do so.
SECTION 5. The corporation shall have a first lien upon each share of its
issued and outstanding stock of any class, and upon each certificate of stock
representing a share or shares of stock of any class of the corporation, for
the amount of any indebtedness payable to the corporation by the holder
thereof, and shall have a similar first lien upon all amounts which have been
paid to the corporation pursuant to a subscription agreement for the purchase
of shares of stock of the corporation which will be issuable to the subscriber
upon the completion of payment of the purchase price of the shares. The
interest of each holder of shares of the corporation's stock in and to the
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shares issued to such holder and the interest of each subscriber for shares
of the corporation's stock in and to the funds paid to the corporation by
such subscriber on account of the purchase price of the shares being purchased
by such subscriber shall at all times be deemed to be offset by the amount of
any indebtedness payable to the corporation by such holder or subscriber. In
no event shall any transfer of any of the shares owned by any holder or any
transfer of the stock subscription account of any subscriber for shares of
stock of the corporation be made unless and until the stockholder whose
shares are being transferred or the subscriber whose subscription account is
being transferred is free from all indebtedness to the corporation.
SECTION 6. No certificate representing any issued and outstanding share or
shares of any class of stock of the corporation shall be pledged, mortgaged,
hypothecated, sold, assigned or transferred without the prior consent of the
Board of Directors of the corporation. In the event that the Board of
Directors shall refuse to consent to any transfer or assignment of any
certificate or certificates representing any share or shares of issued and
outstanding stock of the corporation of any class, then the corporation shall
have the right and shall be obligated to purchase from the owner thereof all
of the shares of its stock of any class held for the store or other retail
business unit with respect to which the corporation issued the share or
shares as to which such consent has been refused and the franchise granted by
this corporation with regard to the operation of such retail business unit
shall thereby be terminated. In no event shall any transfer or assignment of
shares of any class of stock of the corporation be made to any transferee who
is not eligible to be a holder of such shares under the provisions of Article
Fourth of the restated Certificate of Incorporation of the corporation. In
the case of a proposed transfer of ownership of a store or other retail
business unit owned by a holder of shares of stock of the corporation to a
transferee which the corporation has accepted or is willing to accept as a
franchised Ace Hardware dealer, then the owner of such stock shall have the
option of either (a) selling or otherwise transferring to such transferee
such number of shares of stock of this corporation of any class which the
corporation would otherwise have been required to offer to such transferee in
connection with the franchise granted to such transferee with respect to such
store or other retail business unit, or (b) selling such shares to the
corporation. In any case where the holder or holders of 50% or more of the
outstanding voting stock of a corporation having a franchise from this
corporation for one or more retail business outlets, or the holder or holders
of 50% or more of the outstanding voting stock of a corporation owning 80% or
more of the outstanding voting stock of a corporation having such a
franchise, propose to sell or otherwise transfer all of the shares of capital
stock (both voting and non-voting) of such corporation held by them, written
notice of such proposal shall be given to this corporation, and upon the
consummation of any such sale or transfer, such corporation shall have the
option of either (a) retaining all of the shares of the capital stock of this
corporation then held by it or (b) selling such shares to this corporation,
but in the case of such a sale of said shares to this corporation, the
franchise granted to said corporation by this corporation for each retail
business unit operated by said corporation shall thereupon be deemed to have
terminated by the voluntary action of said corporation and no such retail
business unit shall thereafter operate as a franchise of this corporation
unless a new application for a franchise for such retail business unit has
been submitted to and accepted by this corporation. Notwithstanding any of
the foregoing provisions, this corporation shall in no event be obligated to
treat any of the following types of transfers as qualifying for purposes of
the options provided for in this Section 6 of selling to this corporation
shares of its capital stock: (a) any transfer of ownership of a retail
business outlet or unit or of shares of the capital stock of a corporation
directly or indirectly owning such outlet or unit which is not complete,
unconditional and irrevocable; (b) any such transfer to an entity in which
the transferor retains an ownership interest; or (c) any such transfer to the
spouse of the transferor.
SECTION 7. Subject to the provisions of Section 5 of this Article XVI of
these By-laws, in the event of the termination of the franchise granted by
this corporation with regard to the operation of a retail hardware store or
other retail business unit for which shares of stock of the corporation are
held, the corporation shall be obligated to purchase such shares. Unissued
shares which have been subscribed for with respect to any such store or other
retail business unit shall also be covered by the provisions of this Section
to the extent of the amounts which have been paid on account of the purchase
price thereof, and the corporation shall be obligated to refund all such
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amounts, subject only to the provisions of Section 5 of this Article XVI. For
purposes of this Section, termination of the franchise granted for a
particular retail hardware store or other retail business outlet shall include
not only any termination pursuant to formal notice of termination given by
either this corporation or the holder of the franchise but shall also include
each of the following situations which shall be deemed to constitute such a
termination:
(a) The closing down of the store or other retail business unit with
respect to which such shares of stock of the corporation are held, unless
such store or other retail business unit is merely being moved, with the
corporation's consent and approval, to another location or is being
acquired by another dealer which this corporation has accepted or is
willing to accept as a franchised dealer for operation pursuant to the
same franchise at another location;
(b) The death of an individual holder of the shares of stock of this
corporation held for such retail store or other retail business unit, or
of a member of a partnership which is a holder of such shares, except in a
case where the store or other retail business unit with respect to which
such shares are held continues, with the approval of the officers of the
corporation (which approval shall not be unreasonably withheld), to be
operated under a franchise from the corporation by the decedent's estate
or by the person or persons to whom such shares are to be distributed by
the decedent's estate or by the successor or successors to the decedent's
interest in the partnership holding such shares (it being immaterial for
this purpose that, in connection with such continuation of operation, the
legal form of ownership of the franchised dealer has been changed from an
individual proprietorship or partnership to a corporation or from a
partnership to an individual proprietorship);
(c) An adjudication of the insolvency of the dealer or of the store or
other retail business unit for which the shares of stock of this
corporation are held, or the making of an assignment for the benefit of
creditors or the filing of a voluntary petition in bankruptcy or similar
petition under the U.S. Bankruptcy Code by or on behalf of such dealer or
retail business unit, or the filing of an involuntary petition in
bankruptcy or similar petition under the U.S. Bankruptcy Code against the
dealer or against said retail business unit.
SECTION 8. A transfer of shares of stock of the corporation requiring the
consent of the Board of Directors shall not be deemed to have occurred upon
the death of a person who is the holder of shares of stock of the corporation
jointly with one or more other persons under circumstances whereby ownership
of such shares passes automatically by operation of law to the surviving
holder or holders of such shares, nor shall the corporation become obligated
to purchase such shares upon the death of such person unless the store or
other retail business unit with respect to which such shares are held either
(a) closes down, or (b) ceases to be operated under a franchise from this
corporation.
SECTION 9. The Board of Directors may delegate to a committee composed of
two (2) or more members of the Board authority to act on its behalf with
respect to all matters where the consent of the Board is required in
connection with the transfer or assignment of any shares of any class of
stock of the corporation.
SECTION 10. The price to be paid by the corporation in connection with the
purchase by it of any shares of its stock shall be as follows:
(a) in the case of Class A stock, the par value of the shares;
(b) in the case of Class B stock, an amount per share equal to the per
share price last established by the Board of Directors as the price to be
paid by the corporation in the event of redemption of shares of its Class
B stock, which shall in no event be less than twice the par value of the
Class B stock and shall also at all times be equal to twenty (20) times
the per share purchase price last established by the Board of Directors
with respect to purchases by it of Shares of its Class C Stock;
(c) in the case of Class C stock, an amount per share equal to the per
share price last established by the Board of Directors as the purchase
price to be paid by the Corporation for shares of its Class C stock, which
price shall in no event be less than the par value thereof.
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SECTION 11. Any shares of any class of stock of the corporation which are
purchased by it from any stockholder shall become treasury shares which shall
be eligible for sale to any other person, persons or firm which shall be
qualified to hold such shares.
SECTION 12. Effective with respect to all purchases and redemptions of
shares of its capital stock made by the corporation from its stockholders on
or after December 31, 1981, the entire purchase or redemption price to be
paid by the corporation for such shares shall be paid in cash except that, in
any of the situations described in subsection (a) hereof, the purchase or
redemption price for such shares shall be paid in the manner set forth in
subsection (b) hereof.
(a) The situations in which such price shall be paid in the manner set
forth in subsection (b) of this Section are as follows:
(1) the voluntary termination by a stockholder of this corporation
of the franchise from this corporation held by such stockholder for a
retail business outlet under circumstances whereby such outlet continues
to engage in substantially the same business under the ownership or
control of the same person, partnership or corporation that owned or
controlled it immediately prior to such termination; for purposes of
this paragraph:
(A) control of an outlet owned by an unincorporated person
or partnership shall be deemed to be the same if more than
fifty per cent (50%) of the assets or profit shares therein,
or more than fifty per cent (50%) of the capital stock of a
corporation becoming the owner of such outlet, continues to
be legally or equitably owned by the same person, partnership
or corporation; and
(B) control of an outlet owned by a corporation shall be
deemed to be the same if more than fifty per cent (50%) of the
capital stock of said corporation, or more than fifty per cent
(50%) of the assets or profit shares of an unincorporated
person or partnership becoming the owner of such outlet,
continues to be owned by the same person, partnership or
corporation.
(2) the termination by this corporation of the franchise from this
corporation for a retail business outlet pursuant to the provisions of
the Ace Dealer Franchise Agreement authorizing such termination by
reason of:
(A) the failure of such retail business outlet to make any
payment owing to the corporation for merchandise or services
supplied by it within the time period specified in such
provisions; or
(B) any default of such retail business outlet in
performing any obligation of such outlet under the Ace Dealer
Franchise Agreement of such outlet other than the obligation
to pay for merchandise or services supplied by the corporation,
provided that such default is described in the corporation's
notice of termination in such a manner as to reasonably apprise
such retail business outlet as to the nature of such default.
(b) In each of the situations described in subsection (a) above, the
purchase or redemption price to be paid by the corporation for the shares
of its stock being purchased or redeemed by it shall be paid in the
following manner:
(1) in the case of Class A stock, the entire price shall be paid by
the corporation in cash;
(2) in the case of Class B stock or Class C stock purchased by a
stockholder as part of the shares of capital stock of the corporation
subscribed for in connection with the granting of a franchise by the
corporation for a retail business outlet, that portion of the purchase
or redemption price to be paid by the corporation which equals the
amount paid to the corporation pursuant to such subscription shall be
paid by the corporation in cash and any remaining balance of the price
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(with interest thereon) shall be paid by the corporation in equal annual
installments over a period of four years;
(3) in the case of Class C stock received by a stockholder as part
of the patronage dividends distributed by the corporation for a retail
business outlet, the entire price (with interest thereon) shall be paid
by the corporation in equal annual installments over a period of four
years;
(4) if the total portion of the purchase or redemption price which
would otherwise be payable under the foregoing paragraphs in equal
annual installments over a period of four years is less than $5,000, the
entire purchase or redemption price shall be paid by the corporation in
cash, notwithstanding the installment provisions of said paragraphs;
(5) in any situation where a stockholder whose shares of capital
stock of the corporation are to be purchased or redeemed by it is
indebted to the corporation at such time, then, in accordance with the
corporation's first lien and offset rights under Article XVI, Section 5,
of these By-laws and Article Fourth (1) of the restated Certificate of
Incorporation of the corporation, the purchase or redemption price shall
in all cases be applied against such indebtedness to the extent thereof,
with the portion of such price which would otherwise have been payable
in cash being first applied for such purpose and, if any indebtedness to
the corporation still remains, the portion of the price which would
otherwise have been payable in equal annual installments then being
applied for such purpose to the extent of any such remaining
indebtedness;
(6) the corporation's obligation to pay any portion of the purchase
or redemption price of its shares in equal annual installments shall be
evidenced by an installment promissory note of the corporation
delivered to the stockholder whose shares are being purchased or
redeemed, which note shall provide for the payment of the principal
thereof in four equal annual installments commencing one year from the
date of the repurchase or redemption of the shares and for the payment
of interest with each annual installment payment of principal on the
unpaid balance of principal from time to time at such rate as shall
have been established by the Board of Directors as of the date of
issuance thereof, provided, however, that said rate of interest shall
in no event be less than the greater of (A) the latest interest rate as
of the date of issuance of such note determined by the Board of
Directors as the rate to be paid on patronage refund certificates
distributed to the corporation's member-stockholders as part of their
annual patronage dividends or (B) 6% per annum;
(7) notwithstanding any of the foregoing provisions, the Board of
Directors, in its discretion and after considering the financial
condition and requirements of the corporation, may authorize and cause
payment to be made in cash for all or any portion of the purchase or
redemption price which would otherwise be payable in four equal annual
installments if the Board of Directors determines that the prescribed
method of payment would impose an undue hardship upon the stockholder
whose shares are being repurchased or redeemed;
(8) the Board of Directors may adopt hardship guidelines to
implement the provisions of paragraph (7) of this Section and may
delegate the authority to make determinations pursuant to said
provisions to a committee comprised of two or more directors or to a
committee comprised of two or more executive officers of the
corporation.
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ARTICLE XVII
CLOSING OF TRANSFER BOOKS AND
DETERMINATION OF RECORD DATE
SECTION 1. The Board of Directors shall have power to close the stock
transfer books of the corporation for a period not exceeding sixty (60) days
preceding the date of any meeting of stockholders or the date for the
allotment of rights or the dates when any change or conversion or exchange of
capital stock shall go into effect or for a period of not exceeding sixty
(60) days in connection with obtaining the consent of stockholders for any
purpose.
SECTION 2. Notwithstanding the foregoing, in lieu of closing the stock
transfer books as aforesaid, the Board of Directors may fix in advance a
date, not exceeding sixty (60) days preceding the date of any meeting of
stockholders, or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote, at any
such meeting and any adjournment thereof, or to any such allotment of rights,
or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, or to give such consent, and in such case such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at such meeting and any adjournment
thereof, or to receive such allotment of rights, or to exercise such rights,
or to give such consent, as the case may be, notwithstanding any transfer of
any stock on the books of the corporation after any such record date fixed as
aforesaid.
SECTION 3. The corporation shall be entitled to treat the holder of record
of any share or shares of stock as the holder in fact thereof and accordingly
shall not be bound to recognize any equitable or other claim to or interest
in such share on the part of any other person whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of
Delaware.
ARTICLE XVIII
FISCAL YEAR
SECTION 1. Except as from time to time otherwise provided for by the Board
of Directors, the fiscal year of the corporation shall end on the 3lst day of
December in each year.
ARTICLE XIX
DIVIDENDS
SECTION 1. No dividends shall ever be declared on any of the shares of any
class of stock of the corporation.
ARTICLE XX
CHECKS FOR MONEY
SECTION 1. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the Board of Directors may from time to time designate.
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ARTICLE XXI
BOOKS AND RECORDS
SECTION 1. The books, accounts and records of the corporation, except as
otherwise required by the laws of the State of Delaware, may be kept within
or without the State of Delaware, at such place or places as may from time to
time be designated by the By-laws or by resolution of the directors.
ARTICLE XXII
NOTICES
SECTION 1. Notice required to be given under the provisions of these
By-laws to any director, officer or stockholder shall not be construed to
mean personal notice, but may be given in writing by depositing the same in a
post office or letter box, in a postpaid sealed wrapper, addressed to such
stockholder, officer or director at such address as appears on the books of
the corporation, and such notice shall be deemed to be given at the time when
the same shall be thus mailed. Any stockholder, officer or director may waive,
in writing, any notice required to be given under these By-laws, whether before
or after the time stated therein.
ARTICLE XXIII
AMENDMENTS OF BY-LAWS AND ADVANCE NOTIFICATION BY
STOCKHOLDERS OF PROPOSALS FOR AMENDMENTS, DIRECTOR
NOMINATIONS OR OTHER CORPORATE ACTIONS
SECTION 1. Except for any provisions hereof which shall at any time have
been adopted by the stockholders in the manner prescribed in Section 2, these
By-laws may be amended or repealed or added to, or new By-laws may be adopted,
by the affirmative vote of a majority of the Board of Directors at any regular
meeting of the Board or at any special meeting thereof called for that
purpose. If any By-law regulating an impending election of directors is
adopted, amended or repealed by the Board of Directors, there shall be set
forth in the notice of the next meeting of stockholders for the election of
directors the By-law so adopted, amended or repealed, together with a precise
statement of the changes made.
SECTION 2. These By-laws may also be amended or repealed or added to, or
new By-laws may be adopted, at any regular or special meeting of stockholders
at which a quorum is present or represented by the affirmative vote of a
majority of the issued and outstanding shares of Class A stock of the
corporation. Any amendment, repeal, addition to the By-laws, or any new
By-laws, adopted by the stockholders may be further amended, repealed, or
added to only at a regular or special meeting of the stockholders at which a
quorum is present or represented by the affirmative vote of a majority of the
issued and outstanding shares of Class A stock of the corporation in the
manner prescribed herein.
SECTION 3. A written notice shall be given to the President or Secretary
of the corporation of the intent of one or more stockholders to submit at a
forthcoming stockholders meeting (a) a proposed amendment to these By-laws;
(b) the nomination of an eligible person for election as a director; or (c)
any other stockholder proposal for corporate action. Such notice must be
received, either by mail or by personal delivery, not less than seventy-five
(75) nor more than one hundred fifty (150) days prior to the date of the
annual meeting or, in the event of a special meeting of stockholders, not
later than the close of the fifteenth (15th) day following the day on which
notice of the meeting is first mailed to stockholders. In the case of an
annual meeting, the intention of one or more stockholders to submit a proposed
By-law amendment, nomination or other proposal for corporate action which is
so received in proper order shall be mentioned in the formal notice of the
meeting, but neither the name or names of the stockholder or stockholders
intending to make any such submission nor the name of any director nominee
proposed by one or more stockholders shall be mentioned in the notice. No
reference of any kind to any proposal or nomination to be submitted by any
stockholder pursuant to this Section shall be made in the proxy materials
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caused to be sent to stockholders by the Board of Directors. At all annual
or special meetings the Chairman shall declare out of order any proposed
amendment, any nomination, or any other stockholder proposal not presented in
accordance with this Section. Every notice given by a stockholder or
stockholders under this Section shall set forth:
(a) the name and the business and residence addresses of the stockholder
(or person authorized by such stockholder as the stockholder's voting
representative) intending to submit the proposed amendment, nomination, or
other matter;
(b) with respect to such notice of intent to submit a nomination,
information concerning the proposed nominee's business and residence
addresses, age and eligibility to serve as a director; and
(c) with respect to notice of an intent to propose a By-law amendment
or some other corporate action, a description of the proposed amendment or
other action.
Notice of intent to submit a nomination shall be accompanied by the written
consent of each nominee to serve as a director of the corporation if so
elected.
ARTICLE XXIV
MEMBERS' PATRONAGE DIVIDENDS
SECTION 1. A "membership" in the corporation within the meaning of the
term "membership" as used in Section 1388(c)(2)(B) of the U.S. Internal
Revenue Code of 1954, as amended, shall be deemed to be held by (a) each
retail hardware dealer owning a share of Class A stock of the corporation and
(b) each other dealer in hardware or related products which becomes an owner
of a share of Class A stock of the corporation after having been expressly
approved as an Ace Hardware dealer by the Board of Directors of the
corporation. The term "retail hardware dealer" as used in clause (a) of the
preceding sentence shall mean any person or firm purchasing merchandise from
this corporation for the purpose of reselling such merchandise at retail.
However, whenever the term "retail hardware dealer" is used in any of the
subsequent Sections of this Article XXIV of the By-laws, such term shall be
deemed to include all dealers holding memberships in this corporation except
where the context in which such term appears is of such a nature that it is
not practical for such term to be applied to "other dealers" as referred to
in clause (b) of the first sentence of this Section. For purposes of this
Article XXIV of the By-laws a "retail hardware store" shall be deemed to
refer to a business location to which there is delivered for resale from such
location at the retail level any merchandise purchased from this corporation.
Each such retail hardware store owned or controlled, directly or indirectly,
by the same person, partnership or corporation, shall be deemed to constitute
only one (1) retail hardware dealer. An unincorporated person or partnership
shall be deemed controlled by another person, partnership or corporation if
fifty per cent (50%) or more of the assets or profit shares therein are
legally or equitably owned by such other person, partnership or corporation,
or by the legal or equitable owner or owners of fifty per cent (50%) or more
of such other person, partnership or corporation's assets or profit shares
(if unincorporated) or shares of capital stock (if incorporated). A
corporation shall be deemed controlled by another person, partnership or
corporation if fifty per cent (50%) or more of the capital stock of said
corporation is owned by such other person, partnership or corporation, or by
the owner or owners of fifty per cent (50%) or more of its capital stock (if
incorporated) or fifty per cent (50%) or more of its assets or profit shares
(if unincorporated).
SECTION 2. In accordance with the policy heretofore established by the
corporation in the Amendment to its By-laws adding Article XXIV thereto by
the resolution adopted by the Board of Directors on July 20, 1973, there
shall be distributed on a patronage basis to such members (that is, dealers
holding memberships, as hereinabove defined, in the corporation) in a manner
taking into account the amount of business done by the corporation with each
of them, all the net savings and overcharges effected by or resulting from
the operations conducted and carried on by the corporation in connection with
sales of merchandise made by the corporation after May 31, 1974, to such
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members which remain after paying all operating and administration expenses
of the corporation and all interest on its indebtedness and after the setting
aside by the Board of Directors of such reasonable reserves as they shall
determine from time to time to be appropriate for the purpose of insuring the
safety and welfare of the corporation and for the purpose of providing for
the expectancy of any losses or contingencies. Said distributions shall be
made no later than eight and one-half (8 1/2) months following the close of
the year of the corporation during which the patronage occurred with respect
to which each such distribution is made. In no event shall less than twenty
per cent (20%) of the total patronage distributions made each year to each
member be distributed in cash. The remaining portion shall be distributed in
cash or in written notices of allocation (as defined in Section 1388 of the
U.S. Internal Revenue Code) in whatever proportions shall be determined each
year by the Board of Directors.
SECTION 3. Notwithstanding the foregoing, every such member on becoming
such authorizes and directs that all net savings of every character effected
by this corporation which are distributable to such member, to the extent of
the excess thereof over the twenty per cent (20%) minimum portion of such
distributable amount required to be distributed in cash, may first be applied
by the corporation to the payment of any indebtedness owed to the corporation
by such member. Any such net savings which become distributable with respect
to merchandise sold by this corporation for delivery to any retail hardware
store owned or controlled, directly or indirectly, by the same person,
partnership or corporation which so owns or controls one (1) or more other
retail hardware stores may be so applied against any indebtedness owing with
respect to merchandise sold by this corporation for delivery to any store
which is part of any group deemed hereunder to constitute one (1) retail
hardware dealer. The balance of any such net savings not so applied shall
then be distributed as patronage dividends in the manner set forth in Article
XXIV, Section 2, of these By-laws.
SECTION 4. Each retail hardware dealer who applies for and is accepted as
a member of this corporation shall, by his act of subscribing for a share of
Class A stock of the corporation entitling such dealer to become such a
member, consent that the amount of any patronage dividends with respect to
his purchases of merchandise from this corporation occurring on or after June
1, 1974, which are made in written notices of allocation (as defined in
Section 1388 of the U.S. Internal Revenue Code, as amended) and which are
received by such member from this corporation will be taken into account by
him at their stated dollar amounts in the manner provided in Section 1385(a)
of said Code in the taxable year in which such notices of allocation are
received by said member. The term "written notice of allocation" as used
here shall be deemed to include, but not to be limited to, a letter of advice
to a member which discloses to such member an amount which the corporation has
elected to apply against indebtedness owed to the corporation in accordance
with the first sentence of Article XXIV, Section 3, of these By-laws.
SECTION 5. The aforesaid written notices of allocation shall be redeemable
by the corporation in cash at the discretion of the Board of Directors and/or
in accordance with the restated Certificate of Incorporation of the
corporation and these By-laws. As security for the payment to the corporation
of any indebtedness owing at any time to the corporation by any retail
hardware dealer having membership in the corporation or by any retail hardware
dealer who has subscribed for the 1 share of Class A stock of the corporation
which is required to be owned in order to become a member of the corporation,
the corporation shall have a first lien upon any written notice of allocation
held by any such dealer (including all retail hardware stores treated as being
part of a group constituting one "member" or "dealer"). The interest of each
holder of any written notice of allocation in and to the same shall at all
times be deemed to be offset by the amount of any indebtedness payable to the
corporation by such holder.
SECTION 6. Notwithstanding any other provision of these By-laws, and in
accordance with the policy heretofore established by the corporation in the
Amendment to its By-laws adding Section 6 to Article XXIV thereof by the
resolution adopted by the Board of Directors on April 24, 1974, commencing
with respect to purchases of merchandise made from the corporation after
May 31, 1974 the corporation shall also make distributions on a patronage
basis to those of its dealers who have franchise or membership agreements
with the corporation and who have executed unrevoked and unexpired written
consents of the type referred to in Section 1388 (c)(2) (A) of the U. S.
Internal Revenue Code to include in their gross income all patronage dividends
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distributed to them in the form of written notices of allocation (as defined
in Section 1388 of the U.S. Internal Revenue Code), even though such dealers
do not then own any shares of any class of the capital stock of the
corporation. Such patronage dividend distributions shall be made to such
dealers in a manner taking into account the amount of business done by the
corporation with each of them during the periods with respect to which said
written consents are effective for each of them and shall consist of all the
net savings and overcharges effected by or resulting from the business done
by the corporation with such dealers which remain after paying all of the
operating and administration expenses and interest on indebtedness of the
corporation allocable to such business and after the setting aside by the
Board of Directors of such reasonable reserves as they shall determine from
time to time to be appropriate for the purpose of insuring the safety and
welfare of the corporation and for the purpose of providing for the expectancy
of any losses or contingencies. Each such written consent shall provide that
it may be revoked at any time by the dealer, effective with respect to
business done by the corporation with such dealer after the close of the
taxable year of this corporation during which the revocation is filed with it.
Each such written consent shall cease to be effective with respect to all
business done by this corporation with any dealer who has furnished such a
written consent to this corporation immediately upon said dealer's becoming
an owner of a share of Class A stock of this corporation, as of which date
such consent shall expire and such dealer shall be deemed to hold a
"membership" in this corporation so that the provisions of this Article XXIV
which are applicable to the distribution of patronage dividends to its
members then become effective with respect to such dealer. Unless the same
shall have been revoked or otherwise terminated, any such consent which has
theretofore been executed by a dealer shall in any event be deemed to have
expired and been rendered ineffective at the end of one hundred twenty (120)
days following the later of (a) the date as of which an initial Registration
Statement and Prospectus with respect to an offer to sell shares of the
capital stock of the corporation (including shares of its Class A stock) to
its dealers have become effective under the U.S. Securities Act of 1933, or
(b) the date as of which such Prospectus can be used under the securities law
of any state in which state registration of such stock is required. No such
dealer shall be eligible to receive distributions of patronage dividends from
the corporation with respect to business done by the corporation with such
dealer after the expiration of such 120-day period unless such dealer either
has become a member of the corporation by owning a share of its Class A stock
(in which case such dealer shall thereupon be entitled to patronage dividends
as provided for in Section 2 of this Article XXIV) or has executed a
subscription agreement for the purchase of shares of capital stock of the
corporation (including one (1) share of its Class A stock) which has been
accepted by the corporation. There shall be incorporated in all such
subscription agreements which include a subscription for a share of the
Class A stock of the corporation a provision whereby the subscribing dealer
consents to include in his gross income all patronage dividends distributed
to such dealer in the form of written notices of allocation (as defined in
Section 1388 of the U.S. Internal Revenue Code), and any dealer who has
executed such a subscription agreement but who is not entitled to become the
owner of a share of Class A stock of this corporation until he has completed
payment of the purchase price for such share in accordance with such
subscription agreement shall be entitled to receive patronage dividends
pursuant to this Section 6 during the period for which he makes payments on
account of such purchase price as required by the subscription agreement.
Upon the completion of such payments and the issuance of such share of stock
to him, such dealer shall then be entitled to receive patronage dividends
pursuant to Section 2 of this Article XXIV. In no event shall less than
twenty per cent (20%) of the total patronage dividend distributions made each
year to any dealer who is entitled to receive such distributions pursuant to
this Section 6 be distributed in cash. Any amount in excess of said twenty
per cent (20%) minimum portion of the patronage dividends otherwise
distributable to a dealer under this Section 6 may first be applied by the
corporation to the payment of any indebtedness owed to the corporation by
such dealer in the same manner as set forth in Section 3 of this Article XXIV.
Any patronage dividends distributed in the form of written notices of
allocation pursuant to this Section 6 shall be subject to all of the
provisions with respect to distributions made in the form of written notices
of allocation which are set forth in Section 5 of this Article XXIV.
SECTION 7. Notwithstanding any of the foregoing provisions, the portion of
any patronage dividends which would otherwise be distributable in cash under
any provision of this Article XXIV to a retail hardware dealer with respect
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to a retail hardware store having a franchise or membership agreement with
this corporation which has been cancelled or terminated at any time subsequent
to the date of the annual meeting of stockholders to be held on the third
Monday of May in 1980 by any means or for any reason whatsoever prior to the
time of distribution of such patronage dividends shall be applied by the
corporation to the payment of any indebtedness owed to the corporation by or
on behalf of such store to the extent of such indebtedness instead of being
distributed in cash, provided, however, that an amount equal to 20% of the
total patronage dividends distributable for the applicable year to any such
dealer with respect to such store shall nevertheless be paid in cash within
8 months following the close of such year if a timely written request for the
payment of such amount in cash is submitted to the corporation by the dealer.
However, in all events no less than 30% of the total annual patronage
dividends distributable to a retail hardware dealer with respect to a retail
business outlet pursuant to any provision of these By-laws shall be paid in
cash if the retail business outlet is located in a jurisdiction as to which
the 30% income tax withholding provisions of Section 1441 or Section 1442 of
the U.S. Internal Revenue Code are applicable.
SECTION 8. Effective with respect to business done by them with this
corporation after December 31, 1982, each retail hardware dealer having
membership in this corporation on that date and each retail hardware dealer
who is a subscriber on that date or who becomes a subscriber after that date
for the 1 share of Class A stock of this corporation which is required to be
owned in order to become a member of this corporation shall, solely by such
dealer's act of commencing or continuing to do business with this corporation
after said date, be deemed to have authorized and directed that,
notwithstanding any other provision of this Article XXIV of these By-laws,
the distributions to be made on a patronage basis as provided for in Section 2
and Section 6 of this Article XXIV shall be made in a manner taking into
account the quantity or value of business done with each dealer by each
separate division of the corporation as shall be established on the books of
the corporation with respect to its operations and/or the quantity or value
of business done by the corporation or each such division of the corporation
with each of its dealers with respect to each category of sales as shall be
established on the books of the corporation. Each such dealer shall further
thereby be deemed to have authorized and directed that, in any taxable year
of this corporation during which it incurs a loss in connection with the
operations of any such division or in connection with any such category of
sales, (i) a proportionate share of such loss shall be deducted from the net
earnings of the corporation on the business done during such year by each of
its other divisions or with respect to each of its other sales categories
with its dealers and (ii) the amount of patronage dividends which the
corporation would otherwise be obligated to distribute to its dealers in
connection with their purchases from each such other division of the
corporation or in connection with each of the other sales categories
established by the corporation (as the case may be) shall be reduced by such
proportionate share of said loss. For the foregoing purposes the proportionate
share of any such loss in connection with the operations of
any such division of the corporation or in connection with any such category of
sales which shall be deducted from the net earnings realized by it with respect
to business done by each other division of the corporation or with respect to
each of the other sales categories established by the corporation shall be
determined by multiplying the total amount of such loss by a fraction having as
its numerator the net earnings which would otherwise be distributable as
patronage dividends in connection with the business done with its members by
denominator the total of the net earnings which would otherwise be distributable
as patronage dividends in connection with the business done with its members by
all such divisions of this corporation and/or all such sales categories.
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ARTICLE XXV
ESTABLISHMENT OF ACE HARDWARE CORPORATION
DEALERSHIPS AND INTERNATIONAL DISTRIBUTORSHIPS
SECTION 1. Except as provided in Article XXV, Section 3 hereof, no person,
partnership or corporation shall be authorized or permitted to use the name
"Ace Hardware" or any trademark or trade name including the word "Ace" in
conjunction with the sale of hardware or related merchandise, to display any
identification sign or emblem indicating that said person, partnership or
corporation is an authorized Ace Hardware dealer, or to purchase merchandise
(including items carried under the Ace brand name) from Ace Hardware
Corporation unless such person, partnership or corporation has first been
accepted by Ace Hardware Corporation as a duly licensed or franchised dealer
and has executed the membership or similar agreement then utilized by Ace
Hardware Corporation for the establishment of such a dealer relationship and
has otherwise complied with the usual requirements of Ace Hardware Corporation
with respect thereto. Any such agreement may contain such reasonable
provisions with respect to the termination thereof as shall be legally
permitted by the laws of the United States of America and by the laws of the
state or other jurisdiction in which the business of the dealer is located.
SECTION 2. In order for any person, partnership or corporation to be
accepted by Ace Hardware Corporation as a licensed dealer, such person,
partnership or corporation shall also be required to purchase the necessary
number of shares of capital stock of the corporation as required by Article
Fourth (c) and Article Fourth (e) of the restated Certificate of Incorporation
of Ace Hardware Corporation filed with the Secretary of State of Delaware on
September 18, 1974. Accordingly, each such person, partnership or corporation
shall, concurrently with the execution by such person, partnership or
corporation of the Ace Dealer Membership Agreement then utilized by the
corporation, also agree in writing to purchase one (1) share of Class A stock
of the corporation at a price equal to the par value thereof of $1,000 per
share, and forty (40) shares of Class C stock of the corporation at a price
equal to the par value thereof of $100 per share or, when the store which is
licensed under such Membership Agreement is not the first store owned or
controlled by said person, partnership or corporation which has become
accepted by Ace Hardware Corporation as a licensed dealer, to purchase fifty
(50) shares of Class C stock at a price equal to the par value thereof of
$100 per share. The terms of payment with respect to any shares of capital
stock of the corporation purchased by any such person, partnership or
corporation shall be as set forth in such resolution as shall be adopted from
time to time by the Board of Directors of the corporation for the purpose of
establishing such terms of payment.
SECTION 3. In the case of a person, partnership or corporation operating
one or more business outlets located outside the United States of America,
its territories and possessions, Ace Hardware Corporation may approve the
sale of merchandise for delivery to such an outlet under the terms of an
international distributor agreement entered into with it by such party in
lieu of the membership or similar agreement utilized with respect to business
outlets by parties who are accepted by Ace Hardware Corporation as licensed
or franchised dealers. No party approved as an international distributor
shall be entitled to purchase or own any shares of the capital stock of Ace
Hardware Corporation, nor shall any patronage dividends be paid on account of
any purchases made from Ace Hardware Corporation by international
distributors. Purchases of merchandise by international distributors shall
be made in accordance with the applicable terms of the international
distributor agreement and such other terms as may be imposed by Ace Hardware
Corporation from time to time with regard to particular international
distributors. Such purchases may include items carried under "Ace" or "Ace
Hardware" brand names or under other private label names owned by, or
licensed to, Ace Hardware Corporation only with the express written consent
of an executive officer whom its President has vested with authority to grant
such consents. No international distributor shall have authority or be
permitted to use names "Ace" or "Ace Hardware" or any other trade name,
trademark or service mark owned or registered by, or licensed to, Ace
Hardware Corporation in the United States of America or elsewhere (including
any translations of any of said names or marks) unless a separate written
license agreement granting such distributor the right to such use is entered
into between it and Ace Hardware Corporation. All of the terms and conditions
A-23
contained in international distributor or license agreements or imposed upon
international distributors (including, but not limited to, those dealing with
territorial rights, duration, and service, handling, or license fees or
charges, as well as any terms which vary among particular international
distributors) shall be established solely by the executive officer or officers
of Ace Hardware Corporation vested with such authority by its President,
provided, however, that no international distributor shall be granted any
exclusive area or territorial rights without the prior approval of the Board
of Directors or a committee of the Board to which the Board has delegated the
authority to approve the granting of such rights. In establishing such terms,
consideration shall be given to the relevant business circumstances,
including, but not limited to, specific legal requirements and various costs
associated with serving an international distributor in a particular location.
SECTION 4. Each person, partnership or corporation accepted by Ace Hardware
Corporation as a duly licensed dealer or international distributor shall, by
virtue of such acceptance, be deemed to have agreed to assume liability for
and indemnify Ace Hardware Corporation and hold it harmless from and against
any and all claims which may be asserted against it and from any losses
sustained by it (including attorneys' fees and expenses incurred by it in
defending such claims or in attempting to avoid or mitigate such losses) in
connection with or resulting from billings by suppliers of merchandise
purchased by or at the request of such dealer or distributor from or through
Ace Hardware Corporation in cases where such merchandise is not to be supplied
from the corporation's own inventories.
ARTICLE XXVI
BY-LAWS TO CONSTITUTE BINDING CONTRACT
SECTION 1. These By-laws, as amended from time to time, shall constitute a
binding legal contract between Ace Hardware Corporation and its stockholders,
and shall be legally binding on all stockholders of Ace Hardware Corporation
and the successors, heirs, executors, administrators, assigns and personal
representatives of such stockholders.
SECTION 2. The purchase of shares of any class of stock of this corporation
and the issuance thereof to any stockholder shall constitute and be equivalent
to a consent of the part of the stockholder to whom said shares are issued to
be bound by these By-laws, as amended from time to time, and an agreement on
such stockholder's part to be bound thereby.
SECTION 3. The invalidity of any portion of these By-laws, as amended from
time to time, shall in no way affect any other portion of the By-laws which
can be given effect without such invalidated part, and the remaining portions
of the By-laws shall continue to constitute a legally binding contract between
this corporation and its stockholders.
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No dealer, salesman, or any other person
has been authorized by the Company to give
ACE HARDWARE CORPORATION any information or make any representations
in connection with the offering described
herein. This Prospectus does not constitute
an offer to sell, or a solicitation of an
2,126 Shares of Class A offer to buy, to any person in any state in
(Voting) Stock which it is unlawful to make such
$1,000 par value solicitation. The delivery of this
Prospectus at any time does not imply that
there has been no change in the affairs of
the Company subsequent to its date of
issue.
92,750 Shares of Class C In Florida the securities covered by this
(Non-voting) Stock Prospectus are being offered pursuant to a
$100 par value limited offering exemption which extends to
Florida purchasers the privilege of electing
to void their purchases within 3 days after
making any payment on account of the
purchase price.
TABLE OF CONTENTS
Item Page
Available Information 2
Reports to Security Holders 2
Factors to be Considered 2
Summary 3
Use of Proceeds 6
PROSPECTUS Distribution Plan and Offering Terms 7
Description of Capital Stock 9
Opinions of Experts 14
The Company's Business 14
Properties 29
Index to Financial Statements 31
Independent Auditors' Report 32
Financial Statements 33
Selected Financial Data 46
Dated: ,1995 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 47
Management 49
Indemnification Obligations of Company
and S.E.C. Position on Securities
Act Indemnification 50
Appendix A--By-laws of Ace Hardware
Corporation A-1
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit
No.
1 No exhibit.
2 No exhibit.
3 Not applicable.
4-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.
4-B By-laws of the Registrant as amended on September 20, 1994
(included as Appendix A to the Prospectus constituting a
part of this Pre-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement).
4-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.
4-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.
4-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.
4-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.
4-G Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant dated June 16, 1989 filed
as Exhibit 4-G to the Post-Effective Amendment No. 1 to
the Registrant's Form S-2 Registration Statement (Regis-
tration No. 33-27790) on March 20, 1990 and incorporated
herein by reference.
4-H 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-I 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.
S-1
Exhibit
No.
4-J 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-K 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-L 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 March 23, 1994 and incorporated herein by
reference.
4-M Copy of plan for the distribution of patronage dividends
with respect to purchases of merchandise made from the
Registrant on and after January 1, 1995, adopted by the
Board of Directors of the Registrant on July 26, 1994
(the text of which plan is set forth under the heading
"The Company's Business," subheading "Forms of Patronage
Dividend Distributions" in the Prospectus constituting a
part of this Pre-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement).
4-N 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 through December
31, 1994 adopted by the Board of Directors of the
Registrant on December 8, 1992, (the text of which plan
is set forth under the heading "The Company's Business,"
subheading "Forms of Patronage Dividend Distributions" in
the Prospectus constituting a part of this Pre-Effective
Amendment No. 1 to the Registrant's Form S-2
Registration Statement).
5 Opinion of David W. League, Vice President, General Counsel
of the Registrant, as to legality of securities being
registered, filed as Exhibit 5 to the Pre-effective
Amendment No. 3 to the Registrant's Form S-2 Registration
Statement.
6 No exhibit.
7 Opinion of Messrs. Gatenbey, Law & League filed as Exhibit
7 to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and
incorporated herein by reference.
8 Exhibit 5 addresses tax matters as required in Exhibit 8;
the opinions of David W. League, Vice-President, General
Counsel of the Registrant, as to certain tax matters are
also set forth in statements attributed to him under the
subheading "Federal Income Tax Status of Class A and Class
C Shares" and subheading "Federal Income Tax Treatment
of Patronage Dividends" in the Prospectus constituting a
part of the Pre-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement.
9 Not applicable.
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 March 23, 1994 and incorporated herein by
reference.
S-2
Exhibit
No.
10-B Copy of resolutions amending the 1990 Incentive Plans for
Executives and establishing the Executive Supplement
Benefit Plans of the Registrant adopted by its Board of
Directors on December 11, 1990, 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-C 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-D 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.
10-E Copy of the "Ace Hardware Corporation 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
March 23, 1994 and incorporated herein by reference.
10-F Copy of Employment Agreement dated October 4, 1994
between Ace Hardware Corporation and Paul Ingevaldson
filed as Exhibit 10-F to the Registrant's Form S-2
Registration Statement on March 23, 1995 and incorporated
herein by reference.
10-G Copy of Employment Agreement dated October 4, 1994 between
Ace Hardware Corporation and David F. Hodnik filed as
Exhibit 10-G to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-H Copy of Employment Agreement dated October 12, 1994
between Ace Hardware Corporation and William A. Loftus
filed as Exhibit 10-H to the Registrant's Form S-2
Registration Statement on March 23, 1995 and incorporated
herein by reference.
10-I Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and Roger E. Peterson
filed as Exhibit 10-K to the 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 Paul Ingevaldson
filed as Exhibit 10-I to the Post-Effective Amendment
No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-464489) on March 22, 1993 and
incorporated herein by reference.
10-K Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and David F. Hodnik filed
as Exhibit 10-J to the 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-L Copy of Employment Agreement effective January 1, 1993
between Ace Hardware Corporation and William A. Loftus
filed as Exhibit 10-L to the 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.
S-3
Exhibit
No.
10-M 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-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 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 the Pre-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement on April 26, 1995 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 filed as
Exhibit 10-Q to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 23, 1994 and incorporated herein by
reference.
10-R Copy of 6.47% Senior Series A notes in the aggregate
principal sum 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 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 the 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 filed as Exhibit 10-A-t to the 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-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 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.
S-4
Exhibit
No.
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
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
March 23, 1994 and incorporated herein by reference.
10-X Copy of Ace Hardware Corporation Deferred Compensation
Plan effective January 1, 1994 filed as Exhibit 10-X to
Post-Effective Amendment No. 2 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449)
on March 23, 1994 and incorporated herein by reference.
10-Y Copy of Lease dated September 22, 1994 for bulk
merchandise redistribution center of Registrant in Carol
Stream, Illinois filed as Exhibit 10-Y to the Registrant's
Form S-2 Registration Statement on March 23, 1995 and
incorporated herein by reference.
10-Z Copy of Lease dated May 4, 1994 for freight consolidation
center of the Registrant in Chicago, Illinois filed as
Exhibit 10-Z to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-a-1 Copy of Long Term Incentive Compensation Deferral Option
Plan of the Registrant effective January 1, 1995 adopted
by its Board of Directors on December 6, 1994 filed as
Exhibit 10-a-1 to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-a-2 Copy of Director's Deferral Option Plan of the Registrant
effective January 1, 1995 adopted by its Board of
Directors on December 6, 1994 filed as Exhibit 10-a-2
to the Registrant's Form S-2 Registration Statement on
March 23, 1995 and incorporated herein by reference.
10-a-3 Copy of Employment Agreement dated March 22, 1994 between
Ace Hardware Corporation and Fred J. Neer filed as Exhibit
10-a-3 to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-a-4 Copy of Employment Agreement dated March 22, 1994 between
Ace Hardware Corporation and Donald L. Schuman filed as
Exhibit 10-a-4 to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-a-5 Copy of Employment Agreement dated December 13, 1993
between Ace Hardware Corporation and David W. League
filed as Exhibit 10-a-5 to the Registrant's Form S-2
Registration Statement on March 23, 1995 and incorporated
herein by reference.
10-a-6 Copy of Employment Agreement dated December 15, 1993
between Ace Hardware Corporation and David F. Myer filed
as Exhibit 10-a-6 to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
S-5
Exhibit
No.
10-a-7 Copy of Employment Agreement dated March 24, 1994 between
Ace Hardware Corporation and Michael C. Bodzewski filed
as Exhibit 10-a-7 to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-a-8 Copy of Employment Agreement dated December 15, 1993
between Ace Hardware Corporation and Rita D. Kahle
filed as Exhibit 10-a-8 to the Registrant's Form S-2
Registration Statement on March 23, 1995 and incorporated
herein by reference.
10-a-9 Copy of Agreement dated January 6, 1995 between Ace
Hardware Corporation and Roger E. Peterson filed as
Exhibit 10-a-9 to the Registrant's Form S-2 Registration
Statement on March 23, 1995 and incorporated herein by
reference.
10-a-10 Copy of Ace Hardware Corporation Officer Incentive Plan
for Fiscal Year 1994 filed as Exhibit 10-a-10 to the
Registrant's Form S-2 Registration Statement on March 23,
1995 and incorporated herein by reference.
11 No exhibit.
12 No exhibit.
13 Not applicable.
14 Not applicable.
15 No exhibit.
16 Not applicable.
17 Not applicable.
18 Not applicable.
19 Not applicable.
20 Not applicable.
21 Not applicable.
22 Not applicable.
23 (a) Auditors' Consent, Dated April 25, 1995 filed as
Exhibit 23(a) to the Pre-Effective Amendment No. 2 to
the Registrant's Form S-2 Registration Statement on
April 26, 1995 and incorporated herein by
reference.
(b) Consent of Counsel, Legal Opinions-Exhibit 5 and
Exhibit 7 filed as Exhibit 23(b) to the Registrant's
Form S-2 Registration Statement on March 23, 1995 and
incorporated herein by reference.
24 Powers of Attorney filed as Exhibit 24 to the Registrant's
Form S-2 Registration Statement on March 23, 1995 and
incorporated herein by reference.
25 No exhibit.
26 No exhibit.
27 No exhibit.
28 Not applicable.
S-6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on this Pre-Effective
Amendment No. 3 to the Registrant Form S-2 Registration Statement and
has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Village of Oak
Brook, State of Illinois, on the 3rd day of May, 1995.
ACE HARDWARE CORPORATION
By
Richard E. Laskowski
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1933,
this Pre-effective Amendment No. 3 to the Registrant's Form S-2 Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
Signature Title Date
RICHARD E. LASKOWSKI Chairman of the Board May 3, 1995
Richard E. Laskowski and Director
ROGER E. PETERSON Chief Executive Officer May 3, 1995
Roger E. Peterson
DAVID F. HODNIK President and Chief May 3, 1995
David F. Hodnik Operating Officer
RITA D. KAHLE Vice President-Finance May 3, 1995
Rita D. Kahle (Principal Financial and
Accounting Officer)
Jennifer C. Anderson, Directors
Lawrence R. Bowman, Mark
Jeronimus, 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
Rita D. Kahle
*Attorneys-in-fact
May 3, 1995
S-7
INDEX TO EXHIBITS FILED TO
THE PRE-EFFECTIVE AMENDMENT
NO.3 TO REGISTRATION STATEMENT
ON FORM S-2 OF ACE HARDWARE CORPORATION
Exhibit
Number Exhibit
5 Opinion of David W. League, General Counsel
of the Registrant as to the legality of
securities being registered.
The various exhibits incorporated by reference are listed in Item 16 of
this Pre-Effective Amendment No. 3 to the Form S-2 Registration Statement
of Ace Hardware Corporation.
S-8
May 3, 1995
To the Board of Directors
Ace Hardware Corporation
2200 Kensington Court
Oak Brook, Illinois 60521
Re: Total Shares Offered By Prospectus
2,126 Class A
92,750 Class B
Gentlemen:
This opinion relates to the legality of the 1,500 shares of Class A
voting stock (par value $1,000 per share) and 40,000 shares of Class C
nonvoting stock (par value $100 per share) of Ace Hardware Corporation
(the "Company"), a Delaware corporation, which are being registered
with the Securities and Exchange Commission under the Securities Act
of 1933 under a Registration Statement (Form S-2) with respect to
which Registration Statement this opinion is furnished. Said opinion
further relates to the legality of 626 unsold shares of Class A stock
and 52,750 unsold Class C stock previously registered under
Registration Statement No. 33-46449 which, pursuant to Rule 429 of
Regulation C of the Securities Act of 1933, are included among the
shares being offered by the Prospectus constituting a part of the
Registration Statement with respect to which said opinion is
furnished.
As General Counsel of the Company since January 1, 1989 and as a
former partner in the firm of Gatenbey, Law & League which acted as
general counsel to the Company and its Illinois predecessor
corporation for many years prior to that date, I have examined the
Company's restated Certificate of Incorporation (as amended to date),
the By-laws of the Company (as amended to date), and its corporate
proceedings, and have made such other investigations as I have deemed
necessary or appropriate for the purpose of this opinion.
VALIDITY OF SHARES OF STOCK
Based upon the foregoing, I am of the opinion that:
(1) The Company is duly organized and validly existing as a
corporation in good standing under the laws of the State of
Delaware and is also duly qualified to do business as a
foreign corporation in, and is in good standing under the
laws of, the States of Arizona, Arkansas, California,
Colorado, Connecticut, Florida, Georgia, Idaho, Illinois,
Maryland, Mississippi, Nebraska, New York, North Carolina,
Ohio, Oregon, Texas, Washington and Wisconsin.
(2) The total authorized capital stock of the Company consists
of 10,000 shares of Class A Voting Stock (par value $1,000
per share), 6,500 shares of Class B Nonvoting Stock (par
value $1,000 per share) and 2,000,000 shares of Class C
Nonvoting Stock (par value $100 per share).
(3) All of the shares of capital stock of the Company which are
to be offered by the Prospectus filed as a part of the
aforesaid Registration Statement with respect to which this
opinion is furnished (including any shares which may have
heretofore been issued but are not presently outstanding),
will, upon issuance in accordance with the terms set forth
in said Prospectus, constitute legally and validly issued,
fully paid and non-assessable shares.
This opinion also relates to the preference in excess of par value to
which shares of Class "B" stock (par value $1,000.00 per share) of Ace
Hardware Corporation (the "Company"), a Delaware corporation, are
entitled in the event of the involuntary liquidation of the Company.
The restated Certificate of Incorporation authorizes the Company to
issue 6,500 shares of Class "B" stock, of which 3,248 shares are
presently issued and outstanding.
I have examined the restated Certificate of Incorporation and the By-
laws of the Company, and note that the matter of distribution of the
net assets of the Company in the event of a involuntary liquidation is
provided for in Article Fourth (j) of the restated Certificate of
Incorporation. It is stated therein that, in the event of a
liquidation (voluntary or involuntary), there shall be added together
the total par value of all of the issued and outstanding shares of
Class "A" stock, the total purchase or redemption price of all of the
shares of Class "A" stock, the total purchase or redemption price of
all of the issued and outstanding shares of Class "B" stock as last
determined by the Board of Directors, and the total purchase price of
all of the issued and outstanding shares of Class "C" stock as last
determined by the Board of Directors. It is further provided that
each share of Class "B" stock shall share in the distribution of the
net assets in the proportion which the purchase price or redemption
price thereof last determined by the Board of Directors bears to said
total dollar amount.
Since Article Fourth (g) and Article Fourth (h) of the restated
Certificate of Incorporation of the Company provide that the purchase
or redemption price to be paid by the Company for shares of its Class
"B" stock must at all times be equal to 20 times the per share
purchase price last established by the Board of Directors with respect
to purchases by the Company of its Class "C" stock and that the
purchase or redemption price to be paid by the Company for its Class
"B" stock shall in no event be less than twice the par value thereof,
the shares of Class "B" stock could have a preference in excess of par
value in the event of involuntary liquidation.
PREFERENCE OF CLASS B STOCK IN VOLUNTARY LIQUIDATION
In my opinion the provisions of the restated Certificate of
Incorporation providing for such preference with respect to the shares
of Class "B" stock of the Company are legally permitted and have been
legally adopted in accordance with Section 151(d) of the General
Corporation Law of Delaware.
It is my further opinion that the aforementioned preference of the
Class "B" stock in the event of involuntary liquidation of the Company
does not require, and does not have the effect of, placing any
restrictions upon surplus by reason of the potential preference in
excess of par value attached to the Class "B" shares. In view of the
fact that Article Fourth (f) of the restated Certificate of
Incorporation expressly prohibits the Company from declaring dividends
on any of the shares of any class of stock of the Company, it is also
my opinion that the holders of any shares of the Company would have
any remedies before or after payment of any dividend which would
reduce surplus to an amount less than the amount of such excess.
TAX ISSUES
Statements made under subheadings "Federal Income Tax Status of Class
A and Class C Shares," p. 8-9 and "Federal Income Tax Treatment of
Patronage Dividends," p. 26-28 of the Prospectus that is part of the
aforesaid Registration Statement also represent my opinion concerning
said matters.
CONSENT
I understand that this opinion is to be used in connection with the
aforesaid Registration Statement, and I consent to the filing of this
opinion with the Registration Statement and to the reference to me in
the Prospectus under the heading "Opinion of Experts".
10-K CONSENT
I further consent to "Federal Income Tax Treatment of Patronage
Dividends," pages 13-14 of the 10-K which is incorporated by reference
into the Company's S-2 Registration Statement and which also
represents my opinion concerning said matters.
Very truly yours,
David W. League
General Counsel
Ace Hardware Corporation
