SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File No. 2-55860
Ace Hardware Corporation
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-0700810
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2200 Kensington Court, Oak Brook, IL 60521
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (630) 990-6600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant. The Registrant's shares are issued only to,
and may be held only by, its dealer-stockholders, and the shares held by a
dealer-stockholder are subject to repurchase by the Registrant upon
termination of the membership agreement of a dealer-stockholder. Thus,
there is no market for the Registrant's shares. The repurchase price for
each share of Class A stock, the only voting stock issued by the
Registrant, is equal to the par value of $1,000 per share. As of February
14, 1997, the aggregate value of the Class A stock held by non-affiliates
(dealer-stockholders) calculated on the basis of such repurchase price was
$3,929,000.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No__
Indicate the number of shares outstanding of each of the RegistrantOs
classes of common stock, as of the latest practicable date (applicable only
to corporation Registrants). Outstanding shares as of February 14, 1997:
Class A (voting) Stock, $1,000 par value 3,929 shares
Class B (nonvoting) Stock, $1,000 par value 2,852 shares
Class C (nonvoting) Stock, $ 100 par value 1,955,841 shares
PART I
Item 1. Business
Ace Hardware Corporation was formally organized as a Delaware
corporation in 1964. In 1973, by means of a corporate merger, it
succeeded to the business of Ace Hardware Corporation, an Illinois
corporation organized in 1928. Until 1973, the business now being
engaged in by the Company had been conducted by the Illinois
corporation. The Company's principal executive offices are located at
2200 Kensington Court, Oak Brook, Illinois 60521. Its telephone number
is (630) 990-6600.
The Company functions as a wholesaler of hardware and related
products, and manufactures paint products. Sales of the products
distributed by it are presently made primarily to individuals,
partnerships or corporations who are engaged in business as retail
dealers of hardware or related items and who have entered into
Membership Agreements with the Company entitling them to purchase
merchandise and services from the Company and to use the Company's
marks as provided therein.
The Company operates on a cooperative basis and distributes
patronage dividends to its eligible member dealers each year in
proportion to the amount of their annual purchases of merchandise from
it. (See the subheading "Distribution of Patronage Dividends.")
At December 31, 1996 there were 5,067 retail business outlets with
respect to which such Membership Agreements had been entered into.
Those States having the largest concentration of member outlets are
California (approximately 10%), Illinois and Texas (approximately 6%
each), Florida (approximately 5%) and Michigan and Georgia
(approximately 4% each). States into which were shipped the largest
percentages of the merchandise sold by the Company in 1996 are
California (approximately 11%), Illinois (approximately 7%), Florida
and Texas (approximately 6% each), Michigan (approximately 5%) and
Georgia (approximately 4%). Approximately 4% of the Company's sales
are made to outlets located outside of the United States or its
territories.
Information as to the number of the Company's member outlets during
each of the past three calendar years is set forth in the following
table:
1996 1995 1994
---- ---- ----
Member outlets at beginning of period 5,007 4,940 4,921
New member outlets 272 285 198
Member outlets terminated 212 218 179
----- ----- -----
Member outlets at end of period 5,067 5,007 4,940
===== ===== =====
Dealers having one or more member
outlets at end of period 4,084 4,055 4,054
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
dealer price established by the Company ("dealer cost"), to which a
10% adder ("handling charge") is generally added. In 1996 warehouse
sales accounted for 61% of total sales and bulletin sales accounted
for 2% of total sales with the balance of 37% representing direct
shipment sales, including lumber and building materials.
The proportions in which the Company's total warehouse sales were
divided among the various classes of merchandise sold by it during
each of the past three calendar years are as follows:
Class of Merchandise 1996 1995 1994
-------------------- ---- ---- ----
Paint, cleaning and related
supplies 20% 19% 19%
Plumbing and heating supplies 16% 16% 16%
Hand and power tools 14% 14% 14%
Garden, rural equipment and
related supplies 13% 13% 11%
General hardware 12% 13% 13%
Electrical supplies 12% 13% 12%
Sundry 7% 7% 9%
Housewares and appliances 6% 5% 6%
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 with an adder ("handling charge")
that varies in accordance with the following schedule and is exclusive
of sales under the LTL Plus program discussed below.
Invoice Amount Adder (Handling Charge)
-------------- -----------------------
$ 0 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 1.50%
$3,000.00 to $3,999.99 1.25%
$4,000.00 to $4,999.99 1.00%
$5,000.00 to $5,999.99 .75%
$6,000.00 to $6,999.99 .50%
$7,000.00 to $7,999.99 .25%
$8,000.00 and over .00%
Bulletin sales are made based upon notification from dealers of
their participation in special bulletins offered by the Company.
Generally, the Company will give notice to all members of its
intention to purchase certain products for bulletin shipment and then
purchases only so many of such products as the members order. When the
bulletin shipment arrives at the Company, it is not warehoused, but is
broken up into appropriate quantities and delivered to members who
placed orders. A 6% adder ("handling charge") is generally applied to
this category of sales.
An additional adder of 3% applies to various categories of sales of
merchandise exported to certain dealers located outside of the United
States and its territories and possessions. Ace dealers located
outside of the United States and its territories and possessions not
subject to the additional 3% adder are assessed a flat 2% adder on all
direct shipment sales.
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 adder ("handling charge"), or national advertising
assessment on direct shipment orders for such products. The LBM
program enables the Company's dealers to realize important 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 a "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 adder
("handling charge"), if any, of not more than 5% as shall be specified
for each item. The Company's officers have authority to add items to,
and to withdraw items from, the STOP program from time to time and to
establish reasonable minimum or multiple item purchase requirements
for the items offered under the program. No allocations or
distributions of patronage dividends are made with respect to sales
under the STOP program. Purchases under the STOP program are, however,
deemed to be warehouse purchases or bulletin purchases, as the case
may be, for purposes of calculating the forms of patronage dividend
distributions. (See the subheading under this Item 1 entitled "Forms
of Patronage Dividend Distributions.")
The LTL Plus Program established by the Company is a program under
which full or partial truckloads of products are purchased by the
Company's dealers from specified vendors for delivery to such dealers
on a direct shipment basis. No adder ("handling charge") or national
advertising assessment is imposed by the Company on sales under the
LTL Plus Program, and the maximum amount of patronage dividends
allocated or distributed to the Company's dealers with respect to
their purchases of products in the LTL Plus category is .5% of such
sales. (See the subheading under this Item 1 entitled "Patronage
Dividend Determinations and Allocations.")
The Company, in addition to conducting semi-annual and other
conventions and product exhibits for its dealers, also provides them
with numerous special services (on a voluntary basis and at an
established cost), such as inventory control systems, as well as price
and bin ticketing. In order for them to have on hand current pricing
and other information concerning the merchandise obtainable from the
Company, the Company further provides to each of its dealers either a
catalogue checklist service or a microfiche film service (whichever
the dealer selects), for either of which services the dealer must pay
a monthly charge. The Company also provides on a full-participation
basis videotapes and related materials for educational and training
programs for which dealers must pay an established monthly charge.
(See the subheading under this Item 1 entitled "Special Charges and
Assessments.")
The Company has an ongoing strategic planning process and has
focused its 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. The Company has
accelerated its 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 generally applicable 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. As of the date hereof, the Company
operates two company-owned stores through its wholly-owned subsidiary,
AHC Store Development, Inc.
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., another 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".
During 1996 the Company commenced operations through Ace Hardware
Canada, Limited, a wholly-owned subsidiary, as a wholesaler of
hardware and related merchandise through two distribution facilities
located in Calgary, Alberta and Brantford, Ontario. Ace Hardware
Canada, Limited generated less than two percent of the Company's
consolidated revenue during 1996.
The Company manufactures paint and related products at facilities
owned by it in Matteson and Chicago Heights, Illinois. These
facilities now constitute the primary source of such products offered
for sale by the Company to its dealers. The Company's paint
manufacturing business 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in Item 7 hereof.
The Company makes available some services to members which are
related to the operation of their retail businesses. 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 pay the
Company the established charge for such services.
Special Charges and Assessments
The Company sponsors a national advertising program for which its
dealers are assessed an amount equal to 1.25% (1.3% effective January
1, 1997) of their purchases (exclusive of purchases of lumber, LTL,
LTL Plus, building materials products and PACE hardware and software
computer systems), with the minimum annual assessment for each dealer
location being established at $1,560.00 for the year ending December
31, 1996 and $1,622.40 effective January 1, 1997 (or such greater
amount as would be required to maintain the foregoing minimum
applicable assessments at 1.25% and 1.3%, respectively) subject to: 1)
a maximum annual assessment for each dealer location for which a
membership agreement has been entered into with the Company of
$5,000.00 for 1996 ($5,500.00 for 1997); 2) a maximum total annual
assessment for any one dealer determined by multiplying the number of
such dealer's retail outlets supplied by the Company which serve the
general public by $5,000.00 for 1996 and $5,500.00 for 1997 with
certain exemptions from or adjustments to the national advertising
assessment for dealer outlets located outside of the contiguous 48
states of the United States and the District of Columbia, based on the
evaluation by the Company's management 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.
A special low volume account service charge of $50.00 per bi-weekly
billing statement period is imposed on all stores whose annual
purchases (exclusive of lumber and LTL purchases) are less than
$50,000 and $30.00 per bi-weekly billing for annual purchases between
$50,000 and $124,800. Any such charges imposed on a store during a
specified year will be automatically refunded to the store if its
total purchases (exclusive of lumber and LTL purchases) exceed
$124,800.00 during the year. All stores are exempt from such special
charge during the first 12 months from the date that they are
affiliated as Ace dealers. Exceptions to the low volume account
service charge are as follows:
1. when a dealer has purchased $124,800.00 of merchandise
(exclusive of carload lumber purchases) during the applicable
year, the dealer will be given credit on the next bi-weekly
billing statement for any low volume charges which have been
added to the account during such year and the low volume
charge shall no longer be added on any of such dealer's bi-
weekly billing statements during the remainder of such period
even if the current purchases shown on the billing statement
are less than $5,000.00; and
2. the low volume account service charge will not be billed
on a bi-weekly basis to those accounts whose previous year's
sales volume exceeded the low volume purchases minimum
($124,800.00) for the previous year, but the full annual low
volume account service charge will be billed on the last
billing statement of the year to those accounts if the
minimum purchases to avoid imposition of the charge have not
been met for the current 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 $16 for each single store or parent store and
$11 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.
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 $20 for each single store or parent store and $10 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:
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------------ ---------------
"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
"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*
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000
"HARDWARE UNIVERSITY"
with Design Service Mark 1,180,539 December 1, 2001
"SUPER STRIKER" 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 stylized
lettering 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
"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
"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 PRO" Trademark 1,632,078 January 22, 2001
"ASK ACE" Service Mark 1,653,263 August 6, 2001
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 OAKBROOK 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 OAKBROOK 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
"CELEBRATIONS" Service Mark 1,918,785 September 12,
2005
Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005
"THE NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE" in
stylized lettering design Service Mark 1,943,140 December 19, 2005
"HELPFULHARDWAREFOLKS" Service Mark 1,970,828 April 30, 2006
"ACEHOMECENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREATFINISHES" Trademark 2,019,696 November 26, 2006
*The Company has amendments pending before the U.S. Patent and
Trademark office to change the word "MAN" to "FOLKS".
Currently, the Company has applications pending before the U.S.
Patent and Trademark Office for Registration of "WOOD ROYAL" for
paint, exterior stains and wood cleaners, "ROYAL SHIELD" for paints,
primers, stains, lacquers and varnishes, "ROYAL TOUCH" for paints,
primers, stains, lacquers and varnishes, "ACE ROYAL" for exterior and
interior paint, "QUALITY SHIELD" for exterior and interior paints,
primers, stains, lacquers and varnishes, "QUALITY TOUCH" for exterior
and interior paints, primers, stains, lacquers and varnishes, "STAIN
HALT" for paint primers and sealers, and "ACE DRY GUARD" for
waterproofing paint. In addition, the Company also has service mark
applications pending for "ACE COMMERCIAL & INDUSTRIAL SUPPLY" for retail
store services in the field of hardware and related goods, "NHS NATIONAL
HARDLINES SUPPLY" for hardware wholesaling and "HELPFUL HARDWARE CLUB" for
club services, namely providing benefits to preferred customers.
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,
Sears, and Lowe's, 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 and Servistar
Corporation (which announced the signing of a merger agreement in
December, 1996), as well as with Hardware Wholesalers, Inc., Our Own
Hardware Company, and United Hardware Distributing Co., all of which
companies are also dealer-owned wholesalers.
Employees
The Company employs 4,352 full-time employees, of which 1,282 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.
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 the dealer, 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:
1996 1995 1994
---- ---- ----
Warehouse Sales 4.53912% 4.42965% 4.64117%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 7.9773% 6.8725% 8.2205%
In addition to the dividends described above, patronage dividends
are calculated separately and distributed on sales of lumber products,
building material and millwork products and less-than-truckload (LTL)
sales of lumber and building material products. Patronage dividends
equal to .4328%, .3560%, and .4073% of the total sales of these
products (calculated separately by each of these three sales
categories) were distributed to the Company's dealers who purchased
those products in 1996, 1995 and 1994, respectively. Under the LTL
Plus Program, patronage dividends are also calculated separately on
sales of full or partial truckloads of products purchased by eligible
dealers from specified vendors (see discussion of LTL Plus Program set
forth above in this Item 1). The maximum amount of patronage dividends
allocable to LTL Plus sales is .5% of such sales. The LTL Plus Program
dividend was .5% of such sales for 1996, 1995 and 1994.
Patronage Dividend Determinations and Allocations
The amounts distributed by the Company as patronage dividends
consist of its gross profits on business done with dealers who qualify
for patronage dividend distributions after deducting from said gross
profits a proportionate share of the Company's expenses for
administration and operations. Such gross profits consist of the
difference between the price at which merchandise is sold to such
dealers and the cost of such merchandise to the Company. All income
and expenses associated with activities not directly related to
patronage transactions are excluded from the computation of patronage
dividends. Generally these include profits on business done with
dealers who do not qualify for patronage dividend distributions and
any income (loss) realized by the Company from the disposition of
property and equipment (except that, to the extent that depreciation
on such assets has been deducted as an expense during the time that
the Company has been operating on a cooperative basis and is
recaptured in connection with such a disposition, the income derived
from such recapture would be included in computing patronage
dividends).
The By-laws of the Company provide that, by virtue of a dealer
being a "member" of the Company (that is, by virtue of his ownership
of 1 share of Class A Voting Stock), he will be deemed to have
consented to include in his gross income for federal income tax
purposes for the dealer's taxable year in which they are received by
him all patronage dividends distributed to him by the Company in
connection with his purchases of merchandise from the Company. A
dealer who has not yet paid an amount which at least equals the $1,000
purchase price of the 1 share of Class A Voting Stock subscribed for
by him will also be required to include all patronage dividends
distributed to him by the Company in his gross income for federal
income tax purposes in the year in which they are received by him.
This is required by virtue of a provision in the Subscription
Agreement executed by him under which he expressly consents to take
all such patronage dividends into his gross income for such purposes.
The amount of the patronage dividends which must be included in a
dealer's gross income includes both the portion of such patronage
dividends received by him in cash or applied against indebtedness
owing by him to the Company in accordance with Section 7 of Article
XXIV of the Company's By-laws and the portion or portions thereof
which he receives in shares of Class C Non-voting 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 LTL Plus Program sales is an amount no greater than .5%
of such sales, the maximum amount of patronage dividends allocable to
direct shipment sales exclusive of LTL Plus Program sales is an amount
equal to 1% of such sales and the maximum amount of patronage
dividends allocable to bulletin sales is an amount equal to 2% of that
category of sales. All remaining patronage dividends resulting from
sales made under these programs are allocated by the Company to
warehouse sales. The Company feels that this allocation procedure
provides a practical and understandable method for the distribution of
these patronage dividends in a fair and equitable manner.
Sales of lumber and building materials products are not included as
part of warehouse sales, bulletin sales or direct shipment sales for
patronage dividend purposes. Patronage dividends are calculated
separately and distributed to the Company's dealers with respect to
their purchases within each of four sales categories involving these
types of products. These four categories are (a) lumber products
(other than less-than-truckload sales); (b) building materials
products (other than less-than-truckload sales); (c) millwork products
and (d) less-than-truckload ("LTL") sales of lumber and building
material products. Patronage dividends are also calculated separately
and distributed to the Company's dealers for full and partial
truckloads of products purchased under the LTL Plus Program. (See the
discussion of the LTL Plus Program set forth above in this Item 1 and
under the subheading "Forms of Patronage Dividend Distributions,"
subparagraphs 2(a)-(b) below).
Any manufacturing profit realized on intracompany sales of the
products manufactured by the Company's Paint Division is allocated
among and distributed as patronage dividends to those member dealers
who are eligible to receive patronage dividends from the Company in
proportion to their respective annual dollar purchases of paint and
related products manufactured by said Division. The earnings realized
by the Company on wholesale sales of such products made by it to its
member dealers are distributed as patronage dividends to all of its
dealers who are eligible to receive patronage dividends from it as
part of the patronage dividends which they receive each year with
respect to the basic patronage dividend categories established for
warehouse sales, bulletin sales, and direct shipment sales. Under
Section 8 of Article XXIV of the Company's By-laws, if the Paint
Division's manufacturing operations for any year result in a net loss,
rather than a profit, to the Paint Division, such loss would be netted
against the earnings realized by the Company from its other activities
during the year, with the result that the earnings available from such
other activities for distribution as patronage dividends for such year
would be correspondingly reduced.
Forms of Patronage Dividend Distributions
Patronage dividend distributions will be made to the eligible and
qualified member dealers of the Company in cash, shares of the
Company's Class C stock and patronage refund certificates in
accordance with the following plan which has been adopted by the
Company's Board of Directors with respect to purchases of merchandise
made by such dealers from the Company on or after January 1, 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 exceeds
$7,500 but does not exceed $10,000;
(d) an amount equal to 35% of the portion of
the total patronage dividends allocated for distribution
each year to such dealer for such store which exceeds
$10,000 but does not exceed $12,500;
(e) an amount equal to 40% of the portion of
the total patronage dividends allocated for distribution
each year to such dealer for such store which exceeds
$12,500;
2. The portion of the total annual distribution allocated
to any such dealer for each store owned or controlled by such
dealer in excess of the amount to be distributed to such
dealer for such store in cash shall be distributed 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
(iv) 4% of the volume of lumber, building material and
millwork (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.
With certain modifications, the above Plan is applied separately in
determining the form in which patronage dividends accrued with respect
to sales of lumber and building materials products are distributed. In
this connection the combined patronage dividends allocated annually to
a store from (a) sales of lumber products (other than LTL sales), (b)
sales of building materials (other than LTL sales), (c) sales of
millwork products, and (d) LTL sales to the store are used in
determining the minimum cash distribution percentages to be applied
under Paragraph 1 of the above Plan. A store's patronage dividends
from any other sales category with respect to which patronage
dividends are distributed by the Company are not taken into account in
determining either the minimum portion or any additional portion of
the store's patronage dividends derived from its purchases of lumber
and building materials products which is to be distributed in cash.
Also, Paragraphs 2 and 3 of the above Plan is applied separately to
patronage dividends on lumber and building materials sales and the
requirements of Paragraph 2 of the Plan shall not be deemed to have
been complied with in the cases of (a) purchases of lumber products
(other than LTL purchases), (b) purchases of building materials
products (other than LTL purchases) or (c) purchases of millwork
products until the store's holdings of Class C non-voting Stock of the
Company resulting from patronage dividends on the Company's sales to
it within the particular one of those two sales categories for which a
patronage dividend distribution is to be made equal 4% of the volume
of the store's purchases within such category during the most recent
calendar year. However, no such special Class C Stock requirement
applies to patronage dividends accrued on LTL purchases.
Notwithstanding the provisions of the above-described Plan,
however, under Section 7 of Article XXIV of the Company's By-laws the
portion of any patronage dividends which would otherwise be
distributable in cash with respect to a retail dealer outlet which is
a member of the Company will instead be applied against any
indebtedness owing by the dealer to the Company to the extent of such
indebtedness in any case where the membership for such outlet is
cancelled or terminated prior to the distribution of such patronage
dividends except that an amount equal to 20% of the dealer's total
annual patronage dividends for such outlet will be paid in cash if a
timely request for the payment of such amount in cash is submitted to
the Company by the dealer.
Because of the requirement of the U. S. Internal Revenue Code that
the Company withhold 30% of the annual patronage dividends distributed
to member dealers of the Company whose places of business are located
in foreign countries or Puerto Rico (except in the case of
unincorporated Puerto Rico dealers owned by individuals who are U.S.
citizens and certain dealers incorporated in Guam, American Samoa, the
Northern Mariana Islands, or the U.S. Virgin Islands, if less than 25%
of its stock is owned by foreign persons, and at least 65% of the
Corporation's gross income for the last three years has been
effectively connected with the conduct of a trade or business in such
possession or in the United States), the cash portion of the annual
patronage dividends of such dealers shall in no event be less than
30%.
It is anticipated that the terms of any patronage refund
certificates issued pursuant to Paragraph 3. of the foregoing Plan
would include provisions giving the Company a first lien thereon for
the amount of any indebtedness owing to it at any time by the owner of
any such certificate and provisions subordinating the certificates to
all the rights and claims of secured, general and bank creditors
against the Company. It is further anticipated that all such patronage
refund certificates will have maturity dates which will be no later
than five years from the dates of issuance thereof.
In order to aid the Company's dealers in acquiring and installing
standardized exterior signs identifying the retail stores operated by
them as member outlets supplied by the Company, the Board of Directors
of the Company has authorized a program under which a dealer may
borrow from the Company within a range of $100 to $20,000 per location
the funds required for such purpose. A dealer who obtains a loan under
this program may either repay the loan in twelve substantially equal
payments billed on such dealer's regular by-weekly billing statement,
or may execute a direction to have the portion of the dealer's annual
patronage dividends which would otherwise be distributed under the
above plan in a form other than cash from no more than the next three
annual distributions of such dividends applied toward payment of the
principal and interest on the loan.
In order to aid the Company's dealers in acquiring and installing
PACE and PAINTMAKER computer systems purchased from the Company and to
finance capital improvements, 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 per location repayable over a period of three (3) years, in
the case of a PACE computer, within the range of $5,000 to $50,000 per
location repayable over a period of five (5) years for such purpose
and in the case of capital improvements, up to $2.00 per square foot
of retail space repayable over a period of three (3) years for such
purpose. Dealers who obtain financing from the Company for these
purposes direct the Company, during the financing term, to first apply
toward the principal and interest due on such loans, the patronage
dividends which would otherwise be payable in the form of patronage
refund certificates for each year, and then to apply the patronage
dividends which would otherwise be payable for the same year in the
form of the Company's Class C stock.
The aforementioned signage, computer financing and store retrofit
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 income tax treatment
of cooperatives and their patrons and which have been in effect since
1963. The stated dollar amounts of such qualified written notices of
allocation must be taken into the gross income of each of the
recipients thereof for the taxable years in which they are received,
not withstanding the fact that stated dollar amounts may not be
received in such taxable years.
In order for the Company to receive a deduction from its gross
income for federal income tax purposes for the amount of any patronage
dividends paid by it to a patron (that is, to one of its eligible and
qualifying dealers) in the form of qualified written notices of
allocation, it is necessary that the Company pay (or apply against
indebtedness owing to the Company by such patron in accordance with
Section 7 of Article XXIV of the Company's By-laws) not less than 20%
of the total patronage dividends distributable to such patron in cash
and that the patron consent to having the written notices of
allocation, at their stated dollar amounts, included in his gross
income for the taxable year in which they are received by him. It is
also required under the Code that any patronage dividend distributions
deducted by the Company on its federal income tax return with respect
to business done by it with patrons during the year for which such
deduction is taken must be made to the Company's patrons within 8
months after the end of such year.
Dealers who have become "members" of the Company by owning 1 share
of Class A Voting Stock are deemed under the U.S. Internal Revenue
Code to have consented to take any written notices of allocation
distributed to them into their gross income by their act of obtaining
or retaining membership in the Company and by having received from the
Company a written notification of the By-law provision providing that
membership in the Company constitutes such consent. In accordance with
another provision in the Internal Revenue Code, nonmember dealers who
have subscribed for shares of the Company's stock will also be deemed
to have consented, by virtue of the consent provisions included in
their Subscription Agreements, to take any written notices of
allocation distributed to them into their gross income.
A dealer receiving a patronage refund certificate as part of the
dealer's patronage dividends in accordance with the last clause of
Paragraph 3 of the patronage dividend distribution plan previously
described under the 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 back-up withholding. It is the opinion of the council 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 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 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 as a member-shareholder. Membership may be terminated upon
various notice periods and for various reasons (including voluntary
termination by either party) as prescribed in the Membership
Agreement, except to the extent that special laws or regulations
applicable to specific locations may limit the Company's right to
terminate memberships, or may prescribe greater periods of notice
under particular circumstances.
International Retail Merchants and Non-Member Accounts
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, 1996, 1995 and 1994,
International Retail Merchant volume accounted for approximately 3% of
the Company's total sales in each such year. In 1995, the Company's
Board of Directors authorized the Company to affiliate non-member
retail accounts, which are not entitled to membership in the
cooperative, and which therefore will neither own stock in the
Company, nor receive patronage dividends. (See Article XXV, Sections 3
and 4 of the By-laws regarding International Retail Merchants and non-
member accounts.) In 1996, the Company commenced operations through
Ace Canada Limited. Ace Canada merchants are not shareholders of the
Company, nor do they receive distribution of patronage dividends.
Item 2. Properties
The Company's general offices are located at 2200 Kensington Court,
Oak Brook, Illinois 60521. Information with respect to the Company's
principal properties follows:
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
-------- --------------- ------ ----------
General Offices:
Oak Brook, Illinois 206,030 Leased September 30, 2009
Oak Brook, Illinois 70,508 Owned
Markham, Ontario, Canada (1) 15,372 Leased February 28, 2006
Distribution Warehouses:
Lincoln, Nebraska 346,000 Leased December 31, 2006
Arlington, Texas 313,000 Leased July 31, 2002
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, 1998
Brantford,Ontario, Canada (4) 354,000 Leased March 31, 2006
Baltimore, Maryland (5) 158,485 Leased March 31, 1998
Colorado Springs, Colorado 493,000 Owned
Wilton, New York (8) 130 acres Leased September 1, 2007
Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased January 31, 1998
Paint Manufacturing Facilities:
Matteson, Illinois 356,000 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
LaCrosse, Wisconsin (6) 3 acres Owned
Yorkville, Illinois (7) 12,500 Leased July 31, 2005
Arlington Heights,
Illinois (7) 22,095 Leased December 31, 2001
Pleasant Prairie, Wisconsin (7) 14,914 Leased February 28, 2006
-------
(1) This facility is leased by the Company's wholly owned
subsidiary, Ace Hardware Canada, Limited for use as its corporate
office.
(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 is leased by the Company's wholly owned
subsidiary, Ace Hardware Canada, Limited for use as a distribution
warehouse.
(5) This facility was leased by the Company in February, 1995 for
use as a redistribution center.
(6) This land is adjacent to the Company's LaCrosse, Wisconsin
warehouse.
(7) These facilities are retail hardware stores leased by the
Company's wholly owned subsidiary, A.H.C. Store Development Corp.
The Pleasant Prairie, Wisconsin property is being remodeled. Its
lease term is 10 years from the time the remodeling is
substantially completed, estimated to occur during the first
quarter of 1997.
(8) This property was purchased by the Company in October, 1996,
then sold to and leased back from the County of Saratoga
Industrial Development Agency. A distribution warehouse containing
approximately 792,000 square feet is currently under construction
and expected to be in operation during the third quarter of 1997.
The Company also leases a fleet of transportation equipment for the
primary purpose of delivering merchandise from the Company's warehouses to
its dealers.
Item 3. Legal Proceedings
There are no material pending legal proceedings which either
individually or in the aggregate involve claims for damages that
exceed 10% of the current assets of the Company and its subsidiaries
on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for The Registrant's Common Equity and Related
Stockholder Matters
There is no existing market for the stock of the Company and there
is no expectation that any market will develop. The Company is
organized and operates as a cooperative corporation, and its stock is
owned exclusively by retailers of hardware and related merchandise who
are members of the Company.
The number of holders of record as of February 14, 1997 of each
class of stock of the Company is as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Class A stock, $1,000 par value 3,929
Class B stock, $1,000 par value 2,852
Class C stock, $100 par value 4,828
Dividends, other than patronage dividends are prohibited by the
Company's Articles of Incorporation and By-laws. See the discussion of
patronage dividends under Item 1. Business.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
Income Statement Data:
For the Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(000's omitted)
Net sales $2,742,451 $2,436,012 $2,326,115 $2,017,763 $1,870,625
Cost of sales 2,535,014 2,253,430 2,152,322 1,866,768 1,722,493
---------- ---------- ---------- ---------- ----------
Gross profit 207,437 182,582 173,793 150,995 148,132
Total expenses 135,130 118,840 109,271 93,903 87,365
---------- ---------- ---------- ---------- ----------
Net earnings $ 72,307 $ 63,742 $ 64,522 $ 57,092 $ 60,767
========== ========== ========== ========== ==========
Patronage dividends
(Notes A, B,
5 and 8) $ 73,837 $ 64,716 $ 64,520 $ 59,023 $ 63,207
========== ========== ========== ========== ==========
Balance Sheet Data:
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(000's omitted)
Total assets $916,375 $759,133 $723,610 $666,022 $593,399
Working capital 148,468 139,805 150,514 138,652 108,794
Long-term debt 71,837 57,795 64,287 71,286 51,696
Patronage refund
certificates payable,
long-term 49,639 54,741 63,666 56,270 55,389
Member dealers' equity 233,363 217,245 199,827 186,028 175,681
(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, 1996, patronage dividends were payable as
follows:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(000's omitted)
In cash $28,178 $23,522 $27,302 $25,766 $27,538
In patronage refund
certificates payable 9,500 5,032 9,920 12,728 14,598
In Class C Stock 26,474 27,506 21,766 19,064 20,301
In patronage financing
deductions 9,685 8,656 5,532 1,465 770
------- ------- ------- ------- -------
Total patronage
dividends $73,837 $64,716 $64,520 $59,023 $63,207
======= ======= ======= ======= =======
(C) Numbered notes refer to Notes to Consolidated Financial
Statements, beginning on page F-8.
(5) & (8) refers to Notes (5) and (8) of the Consolidated Financial
Statements beginning on page F-8 of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs
("liquidity") results from internally generated funds, short-term
lines of credit and long-term financings (see Notes 3 and 4 to the
financial statements).
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 led 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 renewed 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." The
Company believes that these changes and the retail growth of the
membership will provide adequate liquidity for the long-term.
The Company has an established unsecured revolving credit facility
with a group of banks. The Company has unsecured lines of credit of
$180.0 million of which $109.0 million was available at December 31,
1996. 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 $40.4,
$31.3 and $28.3 million in 1996, 1995 and 1994, respectively. During
1996, the Company financed the $40.4 million of capital expenditures
out of current and accumulated internally generated funds, short-term
borrowings and long-term borrowings. 1997 capital expenditures are
anticipated to be approximately $57.3 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. Accord-
ingly, 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.
No adverse trends in revenue 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 working capital requirements
and patronage dividend and capital expenditure programs.
Operations-1996 Compared to 1995
Net sales increased 12.6% due to increases in existing retailer
volume, targeted efforts on new store development and conversions, and
the start-up of Canadian operations. 1996 domestic same store sales
increased 9.8% due to retailer store upgrades and continued emphasis
on retail success. Sales of basic hardware and paint merchandise
(including warehouse, bulletin and direct shipments) increased 11.6%.
Lumber and building material sales experienced slightly higher
percentage increases in 1996 due to accelerated sales efforts and
industry-wide lumber price increases. Net dealer outlets increased in
1996 due to targeted sales efforts on new store development and
conversions to the Ace program and continued emphasis on retail
success.
Gross profit increased $24.9 million or 13.6% and increased as a
percent of sales to 7.56% vs 7.50% in 1995 due primarily to gross
profit from Canadian operations. Domestic gross profit as a percent of
sales is comparable to 1995 as higher merchandise discounts and
allowances were completely offset by lower levels of dealer price
increases in 1996. Emphasis on low upfront pricing continued with
total upfront rebates increasing 16.9% in 1996.
Warehouse and distribution expenses increased $6.6 million or 22.1%
due to start-up costs for the opening of one domestic and two Canadian
facilities in 1996. Excluding Canadian operations, warehouse and
distribution expenses increased 13.5% and increased slightly as a
percent of sales due to wage increases to support the sales growth and
start-up costs for the new facility.
Selling, general and administrative expenses increased by $8.4
million or 14% due to personnel costs for the start-up operations and
increased data processing expenses. Excluding Canadian operations,
selling, general and administrative expenses increased 8.3% and declined
as a percent of sales due to reduced corporate administrative expenses
resulting from 1996 re-engineering efforts.
Retail success and development expenses increased $2.8 million or
15% due to increased new business development costs, increased retail
training expenses and reduced retail systems income. Increases in this
category are directly related to retail support of the Ace retailer as
the Company continues to make retail investments in our dealer base.
Paint Division sales increased 16.5% to $103.3 million. As a
separate division of the Company, the Paint Division produced net
manufacturing profits of $8.0 million in 1996 vs. $5.8 million in
1995. The increased net manufacturing profit results from the 16.5%
sales increase and resulting gross margin and improved utilization of
the Company's second facility partially offset by increased 1996
advertising expenses. Paint is the only product manufactured by the
Company. As discussed on page 8, patronage dividends are calculated
separately for paint sales and increased to 7.98% in 1996 vs 6.87% in
1995.
Interest expense decreased $1.3 million or 9.8% due to lower
inventory levels resulting from improved inventory turnover in 1996.
Additional dealer dating programs and long-term debt to fund 1996
capital investments partially offset the interest expense decline.
Operations-1995 Compared to 1994
Net sales increased 4.7% in 1995 due to increases in existing
dealer volume, new store development and increased store conversions.
1995 net sales were affected by slow retail and economic growth,
moderate seasonal sales primarily related to late spring weather, and
lumber price declines. International sales also decreased in 1995 due
to the peso devaluation resulting in lower export sales to Mexico.
Sales of basic hardware and paint merchandise (including warehouse,
bulletin and direct shipments) increased 4.3%. Lumber and building
material sales experienced slightly higher percentage increases in
1995 due to accelerated sales efforts, but were affected by
industrywide lumber price declines. Net dealer outlets increased in
1995 due to targeted sales efforts on new store development and
conversions to the Ace program and increased emphasis on dealer retail
success.
Gross profit increased $8.8 million or 5.1% and increased as a
percent of sales to 7.50% from 7.47% in 1994 due primarily to shifts
in the Company's sales mix towards the warehouse categories and higher
merchandise discounts and allowances. Growth in competitively priced
and promotional items within the overall sales mix moderated resulting
in a slight gross profit improvement as a percent of sales. However,
emphasis on upfront rebates through reduced handling charges and low
upfront pricing programs and discounts continued with total upfront
rebates increasing 9.5% in 1995.
Warehouse and distribution expenses increased $975,000 or 3.4% due
to increased building and distribution costs to support the sales
growth. Warehouse productivity improvements and increased freight
consolidation revenue offset these increases resulting in total
warehouse and distribution expenses remaining comparable to 1994
levels as a percent of sales.
Selling, general and administrative expenses increased by $5.6
million or 10.3% and as a percent of sales due to increased data
processing and personnel costs.
Retail success and development expenses increased by $3.6 million
or 24.6% due to increased personnel costs for field retail support and
new business development. Decreased advertising income resulting from
industrywide paper price increases also contributed to the 1995
expense increase. Increases in this category are directly related to
retail support of the Ace dealer as the Company continues to make
retail investments in our dealer base.
Paint Division sales increased 6.2% to $90.2 million due to strong
dealer support. As a separate division of the Company, the Paint
Division produced net manufacturing profits of $5.8 million in 1995
vs. $6.7 million in 1994. The decreased net manufacturing profit is a
result of increased raw material prices and costs associated with
opening a second facility. Paint is the only product manufactured by
the Company. As discussed on page 8, patronage dividends are
calculated separately for paint sales and decreased to 6.87% in 1995
from 8.22% in 1994.
Interest expense decreased $337,000 or 2.5% due to lower borrowing
levels resulting from improved inventory turnover. Other income
increased $354,000 or 10.5% due primarily to the growth in dealer
financing programs.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that
establish prices substantially in advance of the receipt of goods or
services. As vendors increase their prices for merchandise supplied to
the Company, the Company increases the price to its dealers in an
equal amount plus the normal handling charge on such amounts. In the
past, these increases have provided adequate gross profit to offset
the impact of inflation on operating expenses.
Item 8. Financial Statements and Supplementary Data
Financial statements covered by the report of the Company's
independent certified public accountants are listed on Page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Company
The directors and the executive officers of the Company are:
Position(s) Held
Name Age and Business Experience
---- --- -----------------------
Jennifer C. Anderson 46 Director since June 6, 1994;
term expires 1997; President of Davis
Lumber and Ace Hardware, Inc., Davis,
California.
Michael C. Bodzewski 47 Vice President-Merchandising
effective June, 1990; General
Merchandise Manager effective April,
1988.
Lawrence R. Bowman 50 Director since February 4,
1991; term expires 1998; Vice President
of Owenhouse Hardware Co., Inc.,
Bozeman, Montana.
James T. Glenn 37 Director since June 3, 1996;
term expires 1999; President of Ace
Hardware of Chatanooga, Chatanooga,
Tennessee.
David F. Hodnik 49 President and Chief Executive
Officer effective January 1, 1996;
President and Chief Operating Officer
effective January 1, 1995; Executive
Vice President and Chief Operating
Officer effective January, 1994;
Executive Vice President and Treasurer
effective January, 1991; Senior Vice
President and Treasurer effective
January, 1988; Vice President-Finance
and Management Information Systems and
Treasurer effective September, 1986;
Vice President-Finance and Treasurer
effective December, 1982.
Paul M. Ingevaldson 51 Vice President-Corporate
Strategy and International Business
effective September, 1992; Vice
President-Retail Support Services
effective August, 1989; Vice
President-Western Region effective
September 1, 1988; Vice
President-Distribution effective
September, 1986; Vice
President-Management Information Systems
effective October, 1985; Director of
Data Processing effective October, 1982.
Mark Jeronimus 48 Director since June 3, 1991;
term expires 1997; President of Duluth
Hardware, Inc., Duluth, Minnesota.
Rita D. Kahle 40 Vice President-Finance
effective January, 1994;
Vice President-Controller effective
January, 1992; Controller effective
July, 1988.
John E. Kingrey 53 Director since May 17, 1992;
term expires 1999; President of WK&K
Corp., Wimberley, Texas.
Richard E. Laskowski 55 Chairman of the Board since
February 18, 1992 and Director since
June 1, 1987; term expires 1998; Pres-
ident of Ace Hardware Home Center of
Round Lake, Inc., Round Lake, Illinois.
David W. League 57 Vice President-General Counsel
and Secretary effective June, 1990;
General Counsel and Secretary effective
January, 1990; General Counsel
effective January, 1989.
William A. Loftus 58 Senior Vice President-Retail
Operations and Marketing effective
October, 1994; Senior Vice
President-Marketing and Advertising
effective September, 1992; Senior Vice
President since January 1, 1991;
Vice President-Retail Support
Operations effective August,
1989; Vice President-Eastern Region
effective September 1, 1988; Vice
President-Sales effective October, 1983;
National Sales Manager effective
October, 1976.
David F. Myer 51 Vice President-Retail Support
and New Business effective October,
1994; Vice President-Retail Support
effective August, 1992; Vice
President-Distribution effective July,
1989.
Fred J. Neer 57 Vice President-Human Resources
effective April, 1989; Director
of Human Resources effective
April, 1986.
Ray W. Osborne 60 Director since June 6, 1988;
term expires 1997; President of Cook &
Sons Ace Hardware Company, Inc.,
Albertville, Alabama.
Roger E. Peterson 59 Director since June 5, 1995;
Chief Executive Officer (CEO) effective
January 1, 1995; President and Chief
Executive Officer (CEO) effective
December, 1989; President effective
August, 1986; Executive Vice President
effective March, 1985; Vice
President-Operations effective December,
1982.
Donald L. Schuman 58 Vice President-Information
Systems effective
June, 1990; Director-Information Systems
effective January, 1987.
Jon R. Weiss 61 Director since June 4, 1990;
term expires 1999; President of John W.
Weiss Hardware Company, Glenview,
Illinois.
Don S. Williams 55 Director since June 6, 1988;
term expires 1997; President of
Williams Lumber, Inc., Rhinebeck, New
York.
James R. Williams, Jr. 49 Director since June 5, 1989;
term expires 1998; Vice President of
Williams Ace Hardware, Inc., Wichita,
Kansas.
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, but non-
dealer directors may not exceed 25% of the total number of directors
in office at any one time. 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. 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.
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 2,
1997, as directors of the classes, from the regions, and for terms as
indicated below:
Nominee Class Region Term
- ------- ----- ------ ----
Jennifer C. Anderson 1 8 3 years
Mark Jeronimus 1 9 3 years
Mr. Ray Osborne and Mr. Don Williams are not eligible for
reelection as a director commencing in 1997. The person(s) named below
have been selected as the nominee for election to the Board for the
first time at the 1997 annual meeting as a dealer director of the
class, and for the term indicated.
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Eric R. Bibens II 40 1 1 3 years
D. William Hagan 39 1 3 3 years
Reference should be made to Article IV of the By-laws for
information concerning the qualifications required for membership on
the Board of Directors, the terms of directors, the limitations on the
total period of time for which a director may hold office, the
procedure established for the designation of Nominating Committees to
select certain persons as nominees for election to the Board of
Directors, and the procedure for filling vacancies on the Board for
the remaining portion of unexpired terms.
None of the events described under Item 401(f) of Regulation S-K
occurred during the past 5 years with respect to any director of the
Registrant, any nominee for membership on the Board of Directors of
the Registrant or any executive or staff officer of the Registrant.
Item 11. Executive Compensation
The following information is set forth with respect to the cash
compensation paid by the Company to each of the five highest paid
executive officers of the Company whose cash compensation exceeded
$100,000, for services rendered by them in all capacities to the
Company and its subsidiaries during the fiscal year ended December 31,
1996 and the two previous fiscal years:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
(2)
Other (4)
Name Annual (3) All Other
and (1) Compen- Long-Term Compen
Principal Salary Bonus sation Payouts sation
Position Year ($) ($) ($) ($) ($)
--------- ---- ------ ----- ------- --------- ---------
David F. Hodnik 1996 $500,000 - $20,110 $173,223 $104,989
President and Chief 1995 450,000 - 17,021 105,870 97,624
Executive Officer 1994 350,000 61,250 17,561 15,583 77,782
(CEO effective 1/1/96)
William A. Loftus 1996 290,000 39,440 8,442 81,132 60,644
Senior Vice 1995 275,000 42,350 6,298 80,204 59,153
President-Retail 1994 260,000 45,500 10,163 12,000 61,308
Operations and
Marketing
Paul M. Ingevaldson 1996 257,000 30,840 11,188 72,450 49,579
Vice President- 1995 247,000 33,100 7,215 71,221 49,466
Corporate Strategy and 1994 232,000 41,760 7,190 10,583 59,111
International Business
Michael C. Bodzewski 1996 217,250 28,990 7,312 52,107 36,384
Vice President- 1995 192,500 36,800 9,555 48,158 36,523
Merchandising 1994 165,000 28,900 7,946 6,926 37,739
Rita D. Kahle 1996 218,000 28,558 6,826 50,436 33,122
Vice President- 1995 195,000 32,175 9,012 44,807 35,573
Finance 1994 160,000 29,600 7,874 6,104 36,670
(1) The Incentive Compensation Plan covers each of the executive
officers (except Mr. Hodnik). The bonus amounts awarded to
participants in the Plan are determined in accordance with
achievement of individual performance based objectives and
achievement of corporate goals. The maximum short-term incentive
award for each executive officer is 20% of their respective salary.
The short-term bonus award becomes payable to each participant as
early as practicable at or after the end of the fiscal year.
(2) The Company provided automobiles to certain of its executive
officers. The Company requires them to maintain records with
respect to any business automobile use. Such officers pay, both
directly and by reimbursement to the Company, personal automobile
expenses. During 1996, Company provided automobiles were replaced
with automobile allowances. Country club memberships granted prior
to 1994 to some officers have been eliminated, except for the
President. The compensation table set forth above includes the
value of these items and such value for any officer did not exceed
the lesser of $25,000 or 10% of the compensation reported for each
in said table.
(3) Includes the long-term incentive award under the Long-Term
Incentive Compensation Deferral Option Plan effective in 1995. The
long-term Officer incentive plan is based upon corporate
performance over a three year period with emphasis on total
shareholder return through maximizing both year-end patronage
dividends and upfront dividends (throughout the year) through
pricing programs and discounts. This plan maintains the commitment
to long-term performance and shareholder return in a cooperative
environment. One third of the total long-term incentive award is
subject to a one year vesting provision. Total awards paid in 1996
were $173,223, $81,132, $72,450, $52,107 and $50,436 for Messrs.
Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle, respectively.
Effective January 1, 1995, executive officers may elect to defer a
portion (20% to 100%, in 20% increments) of the annual award
granted. Participants' compensation deferrals are credited with a
specified rate of interest to provide a means to accumulate
supplemental retirement benefits. Deferred benefits are payable
over a period of 5 to 20 years. Annual elections are required for
the upcoming deferral year by December of the preceding year. Of
the total 1996 awards, amounts deferred were $115,482, $64,906,
$72,450, $34,738 and $50,436 for Messrs. Hodnik, Loftus,
Ingevaldson, Bodzewski and Ms. Kahle, respectively.
(4) Includes contributions to the Company's Profit Sharing Plan
which has been in existence since January 1, 1953, and
contributions to the Company's Retirement Benefits Replacement
Plan. All active employees are eligible to participate in the
Company's profit sharing plan after one year of service. Those
active employees covered by a collective bargaining agreement
regarding retirement benefits, which were the subject of good faith
bargaining, are not eligible if such agreement does not include
them in the plan. For the year 1996, the Company contributed 10.4%
of each participant's eligible compensation to the Plan. During the
year 1996, $15,600 was expensed by the Company pursuant to the Plan
for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle.
The Company has also established a Retirement Benefits Replacement
Plan covering all executive officers of the Company. This is an
unfunded Plan under which the participants therein are eligible to
receive retirement benefits equal to the amounts by which the
benefits they would otherwise have been entitled to receive under
the Company's Profit Sharing Plan may be reduced by reason of the
limitations on contributions and benefits imposed by any current or
future provisions of the U.S. Internal Revenue Code or other
federal legislation. During the year 1996, amounts expensed by the
Company pursuant to the Plan were $89,389 for Mr. Hodnik, $45,044
for Mr. Loftus, $33,979 for Mr. Ingevaldson, $20,784 for Mr.
Bodzewski and $17,522 for Ms. Kahle.
The Company also funds the base premium for a supplemental
universal life insurance policy for each officer but does not
contribute to supplemental retirement benefits through this
vehicle. Participants may elect to deposit a portion (up to one-
third) of the long term incentive award into the variable annuity
insurance policy in their name or may elect to defer this portion
under the Deferral Option Plan.
(5) As a cooperative whereby all stockholders are member dealers,
the Company does not grant or issue stock awards of any kind.
Messrs. Hodnik, Loftus, and Ingevaldson are employed under
contracts, each dated January 1, 1997 for respective terms of two
years, terminating December 31, 1998. Mr. Bodzewski and Ms. Kahle are
employed under contracts dated April 1, 1996 and January 1, 1996 for a
two year term terminating March 31, 1998 and December 31, 1997,
respectively. The contracts provide for annual compensation effective
January 1, 1997 of $600,000, $305,000, $269,000, $223,000 and
$240,000, respectively or such increased amount, if any, as shall be
approved by the Board of Directors.
The Company also maintains a Pension Plan which has been in
existence since December 31, 1970. All active employees are eligible
to participate in this Plan on the first January 1 that they are
working for the Company. Those active employees covered by a
collective bargaining agreement regarding retirement benefits, which
were the subject of good faith bargaining are not eligible if such
agreement does not include them in the plan. The Plan provides
benefits at retirement at or after age 65 determined under a formula
which takes into account 60% of a participant's average base pay
(including overtime) during the 5 highest consecutive calendar years
of employment and years of service prior to age 65, and under which an
offset is applied for the straight life annuity equivalent of the
vested portion of the participant in the amount of benefits provided
for them by the Company under the Profit Sharing Plan. In December
1995, the Company settled a portion of its pension liability to
retirees and vested terminated participants through lump sum payments
and the purchase of single premium annuity contracts. The plan was
closed to new entrants on December 31, 1995 and pension benefits were
frozen to active participants on January 1, 1996.
Examples of yearly benefits provided by the Pension Plan (prior to
reduction by the Profit Sharing Plan offset) are as follows:
Years of Service
Remuneration 10 15 20 25 30 or more
- ------------ -- -- -- -- ----------
$150,000 $30,000 $45,000 $60,000 $75,000 $90,000
$100,000 20,000 30,000 40,000 50,000 60,000
$ 50,000 10,000 15,000 20,000 25,000 30,000
The amounts shown above represent straight life annuity amounts.
Maximum benefits from the Pension Plan are attained after 30 years of
service and attainment of age 65. The compensation covered by the
Pension Plan consists of base compensation (exclusive of bonuses and
non-recurring salary or wage payments) and shall not exceed $150,000
of such total remuneration paid to a participant during any plan year.
Remuneration and yearly benefits under the Plan are limited, and
subject to adjustment, under Sections 415(d) and 401(a)17 of the U.S.
Internal Revenue Code. The amount of covered compensation under the
Pension Plan, therefore is $150,000 for each Executive Officer named
in the Compensation table. The present credited years of service under
the Pension Plan for the currently employed executive officers named
in the compensation table are as follows: David F. Hodnik-24 years;
William A. Loftus-20 years; Paul M. Ingevaldson-17 years; Michael C.
Bodzewski-19 years and Rita D. Kahle-10 years.
Compensation Committee Report
The Compensation Committee reviews and approves compensation and
benefits provided to all senior executives. The corporation's
Executive Compensation philosophy is one that supports the Company's
fundamental business strategies. We stress long term measured results,
focus on teamwork, accepting prudent risks, and are strongly committed
to fulfilling dealer/consumer needs.
Our compensation program reflects a policy of market place
comparisons and corporate and individual performance based pay. Our
competitors for talented people include publicly owned for profit
retail corporations, privately owned for profit retail enterprises,
and other national hardware/LBM cooperatives. Each of these
comparative groupings has quite a different compensation
practice/philosophy. An annual review is performed of executive cash
compensation provided by competitors and by participating in various
executive compensation surveys. Our orientation is to be cognizant of
their respective practices and pay levels, but to give greater
emphasis to that which supports our strategic business objectives and
the needs of our dealer network.
The Compensation Committee changed the compensation mix in 1994 to
one which stresses the provision of more significant performance based
incentives, particularly long term. Annual and long term incentive
opportunities have increased, with substantive changes in long term
performance criteria. Long-term performance is evaluated heavily on a
measurement of total shareholder return including both year-end
patronage dividends and upfront dividends through low-upfront pricing
programs and discounts. This criteria maximizes total return to our
membership.
As it relates to the President/CEO compensation, the President's
compensation includes a competitive base salary and a long-term
incentive award to maintain the commitment to long-term Company
performance and shareholder return.
Compensation of Directors
Effective January 1, 1997, and January 1, 1996, each member of the
Board of Directors receives a monthly fee of $2,850 and $2,750,
respectively, for their services. Effective as of the foregoing
dates, Mr. Laskowski is paid a total annual fee of $135,000 and
$120,000 per year, respectively, in his capacity as Chairman of the Board.
In 1994, the previous Deferred Director Fee Plan was amended,
restated and retitled the Directors' Deferral Option Plan. Like the
Officers' Long Term Incentive Compensation Deferral Option Plan, under
this Directors' Plan, directors may elect to defer a portion (5% to
100%, in 5% increments) of their annual director's fee. Deferred
benefits are payable over a period of 5 to 20 years, as elected.
Annual elections are required for the upcoming deferral year by
December of the preceding year.
Each member of the Board is also reimbursed for the amount of
travel and lodging expenses incurred in attending meetings of the
Board and of the Committees of the Board. The expenses incurred by
them in attending the semi-annual conventions and exhibits which the
Company sponsors are also paid by the Company. Each member of the
Board is also paid $200.00 per diem compensation for special committee
meetings and nominating committee regional trips attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
With the exception of Mr. Laskowski, no shares of the Company's
stock were held by any of its officers. No person owns of record or is
known by the Company to own beneficially more than five percent of the
outstanding voting securities of the Company.
The following table sets forth the shares of Class B Stock and
Class C Stock of the Company held beneficially, directly or
indirectly, by each director (and nominee) owning such shares,
individually itemized, and by all officers and directors as a group,
as of February 14, 1997:
Class B Stock Owned Class C Stock Owned
Number Percent Number Percent
of Shares of Class of Shares of Class
--------- -------- --------- --------
Jennifer C. Anderson 4 .140 2,968 .152
Eric R. Bibens II - - 437 .022
Lawrence R. Bowman 4 .140 1,718 .088
James T. Glenn 4 .140 6,246 .319
D. William Hagan - - 1,536 .079
Mark Jeronimus - - 730 .037
John E. Kingrey 4 .140 945 .048
Richard E. Laskowski 4 .140 12,403 .634
Ray W. Osborne 4 .140 1,048 .054
Jon R. Weiss 4 .140 2,660 .136
Don S. Williams - - 4,466 .228
James R. Williams, Jr. 4 .140 772 .039
------- ------- ------- -------
All above directors and
officers as a group 32 1.120 35,929 1.836
======= ======= ======= =======
There are no known contractual arrangements nor any pledge of
securities of the Company which may at a subsequent date result in a
change in control of the Company.
Item 13. Certain Relationships and Related Transactions
No director, executive officer or security holder who is known to
the Registrant to own of record or beneficially more than five percent
of any class of the Registrant's voting securities, or any member of
the immediate family of any of the foregoing persons, had during the
last fiscal year or is currently proposed to have any material
interest, direct or indirect, in any transaction in which the amount
involved exceeds $60,000 and to which the Registrant was or is to be a
party, except that each of the directors purchased merchandise and
services from the Registrant in the ordinary course of business on
behalf of the retail hardware businesses in which they have ownership
interests. None of such persons received benefits not shared by other
hardware retailers supplied by the Registrant.
No director has had any business relationship which is required to
be disclosed pursuant to Item 404(b) of Regulation S-K of the
Securities and Exchange Commission, during the Registrant's last
fiscal year. Mr. Peterson, who was elected as an outside Director
effective June 5, 1995 and retired as CEO of the Company effective
May 31, 1995 is subject to an agreement through May 31, 2000 providing
for non-competition within the industry, participation in designated
Company functions and total renumeration of $150,000 per year over the
5 year term.
No director, director nominee, executive officer, any member of the
immediate family of any of the foregoing, or any corporation or
organization of which any of the foregoing is an executive officer,
partner, or, directly or indirectly, the beneficial owner of ten
percent or more of any class of equity securities, or any trust or
other estate in which any of the foregoing has a substantial
beneficial interest or as to which such person serves as a trustee or
in a similar capacity, has been indebted to the Registrant or its
subsidiaries at any time since the beginning of the Registrant's last
fiscal year in an amount in excess of $60,000, except for indebtedness
incurred in connection with purchases of merchandise and services made
from the Registrant in the ordinary course of business by the retail
hardware businesses in which the directors have ownership interest.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying index
(page F-1) to the consolidated financial statements are filed
as part of this annual report.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits listed on the accompanying index to exhibits
(pages E-1 through E-6) are filed as part of this annual
report.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ACE HARDWARE CORPORATION
By RICHARD E. LASKOWSKI
Richard E. Laskowski
Chairman of the Board and Director
DATED: March 12, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
RICHARD E. LASKOWSKI Chairman of the Board March 12, 1997
(Richard E. Laskowski) and Director
DAVID F. HODNIK President and March 12, 1997
(David F. Hodnik) Chief Executive Officer
RITA D. KAHLE Vice President-Finance March 12, 1997
(Rita D. Kahle) (Principal Financial
and Accounting
Officer)
Jennifer C. Anderson, Directors
Lawrence R. Bowman,
James T. Glenn, Mark
Jeronimus, John E.
Kingrey, Ray W. Osborne,
Roger E. Peterson, Jon
R. Weiss, Don S. Williams,
and James R. Williams, Jr.
*By DAVID F. HODNIK
David F. Hodnik
*By RITA D. KAHLE March 12, 1997
Rita D. Kahle
*Attorneys-in-fact
Item 14(a). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Earnings for each of the years in
the three-year period ended December 31, 1996 F-5
Consolidated Statements of Member Dealers' Equity for each
of the years in the three-year period ended
December 31, 1996 F-6
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1996 F-7
Notes to Consolidated Financial Statements F-8
All schedules have been omitted because the required information is
not present or is not present in amounts sufficient to require
submission of the schedule or the required information is included in
the financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace
Hardware Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of earnings, member dealers' equity and
cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ace
Hardware Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 30, 1997
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
---- ----
(000's omitted)
Current assets:
Cash and cash equivalents $ 12,657 $ 12,853
Receivables:
Trade 305,742 248,572
Other 43,206 39,916
---------- ----------
348,948 288,488
Less allowance for doubtful receivables (1,700) (1,410)
---------- ----------
Net receivables 347,248 287,078
Inventories (Note 2) 327,145 254,451
Prepaid expenses and other current assets 11,880 9,324
---------- ----------
Total current assets 698,930 563,706
Property and equipment (Note 9):
Land 17,464 16,063
Buildings and improvements 162,100 145,359
Warehouse equipment 57,246 51,457
Office equipment 71,689 61,568
Manufacturing equipment 13,132 12,636
Transportation equipment 14,609 14,763
Leasehold improvements 15,654 13,498
Construction in progress 12,501 12,449
---------- ----------
364,395 327,793
Less accumulated depreciation and
amortization (150,861) (136,289)
---------- ----------
Net property and equipment 213,534 191,504
Other assets 3,911 3,923
---------- ----------
$ 916,375 $ 759,133
========== ==========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
LIABILITIES AND MEMBER DEALERS' EQUITY
1996 1995
---- ----
(000's omitted)
Current liabilities:
Current installments of long-term
debt (Note 4) $ 6,727 $ 7,378
Short-term borrowings (Note 3) 71,000 13,000
Accounts payable 394,070 338,577
Patronage dividends payable in
cash (Note 5) 28,178 23,522
Patronage refund certificates
payable (Note 5) 14,138 12,641
Accrued expenses 36,349 28,783
---------- ----------
Total current liabilities 550,462 423,901
Long-term debt (Note 4) 71,837 57,795
Patronage refund certificates
payable (Note 5) 49,639 54,741
Other long-term liabilities 11,074 5,451
---------- ----------
Total liabilities 683,012 541,888
---------- ----------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,937 3,905
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 196,742 177,817
Class C Stock of $100 par value,
issuable to dealers for patronage
dividends 26,474 27,506
Additional stock subscribed, net 502 515
Retained earnings 3,120 4,650
Contributed capital 3,295 3,295
----------- -----------
240,569 224,187
Less: Treasury stock, at cost (7,206) (6,942)
----------- -----------
Total member dealers' equity 233,363 217,245
Commitments (Notes 6 and 9)
---------- ----------
$ 916,375 $ 759,133
========== ==========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(000's omitted)
Net sales $2,742,451 $2,436,012 $2,326,115
Cost of sales 2,535,014 2,253,430 2,152,322
------------ ------------ ------------
Gross profit 207,437 182,582 173,793
------------ ------------ ------------
Operating expenses:
Warehouse and distribution 36,442 29,849 28,874
Selling, general and administrative 68,323 59,929 54,357
Retail success and development 21,198 18,439 14,798
------------ ----------- -----------
Total operating expenses 125,963 108,217 98,029
------------ ----------- -----------
Operating income 81,474 74,365 75,764
Interest expense (Note 11) (11,855) (13,137) (13,474)
Other income, net 3,806 3,715 3,361
Income taxes (Note 7) (1,118) (1,201) (1,129)
------------ ------------ ------------
Net earnings $ 72,307 $ 63,742 $ 64,522
============ ============ ============
Retained earnings at
beginning of year $ 4,650 $ 5,624 $ 5,622
Net earnings 72,307 63,742 64,522
Patronage dividends (Notes 5 and 8) (73,837) (64,716) (64,520)
------------ ------------ ------------
Retained earnings at end of year $ 3,120 $ 4,650 $ 5,624
============ ============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1996
(000's omitted)
Class C Stock
Issuable to
Dealers for Additional
Class A Class B Class C Patronage Stock
Stock Stock Stock Dividends Subscribed*
------- ------- -------- --------- -----------
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
Net earnings - - - - -
Net payments on subscriptions - - - - 1,580
Patronage financing deductions - - - (15) -
Stock issued 237 - 23,149 (21,751) (1,620)
Stock repurchased - - - - -
Stock retired (256) - (9,998) - -
Stock issuable as patronage
dividends - - - 27,506 -
Patronage dividends payable - - - - -
------- ------- --------- -------- -------
Balance at December 31, 1995 $3,905 $6,499 $177,817 $27,506 $ 515
Net earnings - - - - -
Net payments on subscriptions - - - - 1,603
Patronage financing deductions - - - (43) -
Stock issued 268 - 28,854 (27,463) (1,616)
Stock repurchased - - - - -
Stock retired (236) - (9,929) - -
Stock issuable as patronage
dividends - - - 26,474 -
Patronage dividends payable - - - - -
------- ------- --------- -------- -------
Balance at December 31, 1996 $3,937 $6,499 $196,742 $26,474 $ 502
======= ======= ========= ======== =======
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1996
(000's omitted)
Retained Contributed Treasury C
Earnings Capital Stock Total
-------- ----------- ---------- -----
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
Patronage financing deductions - - - (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
Net earnings 63,742 - - 63,742
Net payments on subscriptions - - - 1,580
Patronage financing deductions - - - (15)
Stock issued - - - 15
Stock repurchased - - (10,694) (10,694)
Stock retired - - 10,254 -
Stock issuable as patronage
dividends - - - 27,506
Patronage dividends payable (64,716) - - (64,716)
-------- ------- --------- ---------
Balance at December 31, 1995 $ 4,650 $3,295 $ (6,942) $217,245
Net earnings 72,307 - - 72,307
Net payments on subscriptions - - - 1,603
Patronage financing deductions - - - (43)
Stock issued - - - 43
Stock repurchased - - (10,429) (10,429)
Stock retired - - 10,165 -
Stock issuable as patronage
dividends - - - 26,474
Patronage dividends payable (73,837) - - (73,837)
-------- ------- --------- ---------
Balance at December 31, 1996 $ 3,120 $3,295 $ (7,206) $233,363
======== ======= ========= =========
*Additional stock subscribed is comprised of the following amounts at December
31, 1994, 1995 and 1996:
1994 1995 1996
---- ---- ----
Class A Stock $ 291 $ 332 $ 337
Class B Stock - - -
Class C Stock 2,180 2,332 2,450
------ ------ ------
2,471 2,664 2,787
Less unpaid portion 1,916 2,149 2,285
------ ------ ------
$ 555 $ 515 $ 502
====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
(000's omitted)
Operating Activities:
Net Earnings $ 72,307 $ 63,742 $ 64,522
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 17,517 16,837 16,963
Loss on sale of property
and equipment 712 3 175
Increase in accounts
receivable, net (60,170) (27,526) (46,950)
Decrease (increase) in inventories (72,694) 15,940 (6,815)
Decrease (increase) in prepaids and
other current assets (2,556) (2,135) 153
Increase in accounts payable and
accrued expenses 63,059 41,860 62,521
Increase in other long-term
liabilities 5,623 1,107 916
----------- ----------- -----------
Net Cash Provided by Operating
Activities 23,798 109,828 91,485
----------- ----------- -----------
Investing Activities:
Purchase of property
and equipment (40,379) (31,263) (28,285)
Proceeds from sale of property
and equipment 120 27 187
Decrease in other assets 12 579 7,711
----------- ----------- -----------
Net Cash Used in
Investing Activities (40,247) (30,657) (20,387)
----------- ----------- -----------
Financing Activities:
Proceeds (payments) of short-term
borrowings 58,000 (17,000) (8,500)
Proceeds from notes payable 20,000 - -
Payments on long-term debt (6,609) (6,483) (10,337)
Payment of cash portion of
patronage dividend (23,522) (27,302) (25,766)
Payments of patronage refund
certificates and patronage
financing deductions (22,790) (11,287) (18,886)
Proceeds from sale of common stock 1,603 1,580 1,394
Repurchase of common stock (10,429) (10,694) (8,277)
----------- ----------- -----------
Net Cash Provided by (Used in)
Financing Activities 16,253 (71,186) (70,372)
----------- ----------- -----------
Increase (Decrease) in
Cash and Cash Equivalents (196) 7,985 726
Cash and Cash Equivalents at
beginning of year 12,853 4,868 4,142
----------- ----------- -----------
Cash and Cash Equivalents at
end of year $ 12,657 $ 12,853 $ 4,868
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) The Company and Its Business
Ace Hardware Corporation (the Company) operates as a wholesaler of
hardware and related products primarily in the United States, 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 member dealers based on their volume of
merchandise purchases. The accompanying consolidated financial statements
include the accounts of the Company and subsidiaries, all of which are
wholly-owned. All significant intercompany transactions have been eliminated.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) Receivables
Receivables from dealers include amounts due from the sale of
merchandise and special equipment used in the operation 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 are generally 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 Accelerated
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 lease.
(f) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are
translated at the rate of exchange in effect at the balance sheet date
while revenues and expenses are translated at the average monthly exchange
rates prevailing during the year. The Company has utilized foreign
exchange forward contracts to hedge non-U.S. equity investments. Foreign
currency translation adjustments were insignificant for 1996. The fair
market value of the forward contracts approximates carrying cost at
December 31, 1996.
(g) 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.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
(i) Reclassifications
Certain financial statement reclassifications have been made to prior
year amounts to conform to comparable classifications followed in 1996.
(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 $69,867,000 and $66,319,000 at December 31, 1996 and 1995,
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 1996 and 1995. The maximum
amount outstanding at any month-end during the period was $97,500,000 in
1996 and $95,000,000 in 1995. The weighted average interest rate effective
as of December 31, 1996 and 1995 was 7.13% and 6.13%, respectively. Short-
term borrowings outstanding as of December 31, 1996 and 1995 were
$71,000,000 and $13,000,000, respectively. At December 31, 1996 the Company
has available a revolving credit facility with a group of banks providing
for $75 million in committed lines and also has available $105 million in
uncommitted lines. The aggregate unused line of credit available at
December 31, 1996 and 1995 was $109 million and $172 million, respectively.
At December 31, 1996 the Company had no compensating balance requirements.
(4) Long-Term Debt
Long-term debt is comprised of the following:
December 31,
----------------------
1996 1995
---- ----
(000's omitted)
Notes Payable:
$20,000,000 due in quarterly installments
of $540,500 with interest payable quarterly
at a fixed rate of 8.74% $14,595 $16,757
$20,000,000 due in quarterly installments
of $952,400 with interest payable quarterly
at a fixed rate of 6.89% 12,381 16,190
$30,000,000 due in semi-annual installments
of $2,000,000 commencing June 22, 2001
with interest payable quarterly
at a fixed rate of 6.47% 30,000 30,000
$20,000,000 due in quarterly installments
of $714,285 commencing September 15, 2004 with
interest payable quarterly beginning
December 15, 1996 at a fixed rate of 7.49% 20,000 -
Industrial Development Revenue Bond -
$125,000 payable quarterly through
December 1, 1996 with interest at 65%
of the prime rate - 500
Liability under capitalized leases (see Note 9) 664 816
Installment notes with maturities through 1999
with various interest rates 924 910
------- -------
78,564 65,173
Less current installments 6,727 7,378
------- -------
$71,837 $57,795
======= =======
Aggregate maturities of long-term debt are $6,727,000, $6,507,000,
6,161,000, $3,216,000 and $6,162,000 in 1997 through 2001, respectively,
and $49,791,000 thereafter.
The fair value of the Company's debt based upon discounting future cash
flows does not materially vary from the carrying value of such debt as of
December 31, 1996 and 1995.
(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 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, computer equipment and
store retrofit financing.
The patronage dividend composition for 1996, 1995 and 1994 follows:
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
------- ------------ ----- ---------- ---------
(000's omitted)
1996 $28,178 $ 9,500 $26,474 $9,685 $73,837
1995 23,522 5,032 27,506 8,656 64,716
1994 27,302 9,920 21,766 5,532 64,520
Patronage dividends are allocated on a calendar year basis with
issuance in the following year.
The patronage refund certificates outstanding or issuable at
December 31, 1996 are payable as follows:
Interest
January 1, Amount Rate
---------- ------ --------
(000's omitted)
1997 $14,138 6.25%
1998 13,782 6.0
1999 11,690 6.0
2000 9,518 7.0
2001 5,149 6.0
2002 9,500 6.25
(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, 1996 plan assets were held primarily in
equities, mutual funds and group annuity contracts.
Pension expense for the years 1996, 1995 and 1994 included the following
components:
1996 1995 1994
---- ---- ----
(000's omitted)
Service cost - benefits earned during
the period $ 72 $ 355 $ 323
Interest cost on projected benefit
obligation 486 845 805
Actual return on plan assets (786) (2,288) (121)
Net amortization and deferral 292 1,257 (1,073)
-------- ------- --------
Net periodic pension expense (income) $ 64 $ 169 $ (66)
======== ======= ========
In 1995 and 1996, the plan settled a portion of the liability
to retirees and vested terminated participants through lump sum payments
and the purchase of single premium annuity contracts. In addition to the
net periodic pension expense, the Company recognized a net loss of $475,000
and $1,380,000 in 1996 and 1995, respectively, related to this settlement.
The following table sets forth the funded status of the plans and
amounts recognized in the Company's Consolidated Balance Sheet at December
31, 1996 and 1995 (December 31st measurement date):
December 31,
1996 1995
---- ----
(000's omitted)
Accumulated benefit obligation,
including vested benefits of
$6,185,000 and $7,383,000 $ 6,196 $ 7,613
========= =========
Plan assets at fair value $ 7,965 $ 9,932
Projected benefit obligation for
service rendered to date 6,487 8,832
--------- ---------
Plan assets in excess of
projected benefit obligation $ 1,478 $ 1,100
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions 107 1,775
Remaining unrecognized net asset being
amortized over participants average
remaining service period (845) (1,672)
--------- ---------
Prepaid pension cost included in other assets $ 740 $ 1,203
========= =========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1996 and 7.0%
in 1995. The related expected long-term rate of return was 8.0% in 1996 and
1995. The rate of increase in future compensation was projected using
actuarial salary tables plus 1.0% in 1996 and 1995.
The Company also participates in several multi-employer plans covering
union employees. Amounts charged to expense and contributed to the plans
totaled approximately $265,000, $275,000 and $282,000, in 1996, 1995 and
1994, respectively.
The Company's profit sharing plan contribution for the years ended 1996,
1995 and 1994 was approximately $11,357,000, $9,902,000 and $9,381,000,
respectively.
(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 1996, 1995 and 1994 provisions for federal income taxes were
$860,000, $939,000 and $924,000, respectively, and for state income taxes
were $258,000, $262,000 and $205,000, respectively.
The Company made tax payments of $1,524,000, $1,625,000 and $1,222,000
during 1996, 1995 and 1994, respectively.
(8) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares
at December 31,
--------------------
1996 1995
---- ----
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,937 3,905
Class B Stock, nonvoting, redeemable at not less
than twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,896 3,028
Treasury stock 3,603 3,471
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 2,000,000
Issued and outstanding 1,967,420 1,778,173
Issuable as patronage dividends 264,740 275,059
Additional Stock Subscribed:
Class A Stock 337 332
Class B Stock - -
Class C Stock 24,500 23,320
At December 31, 1996 and 1995 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. Class C stock issuable as patronage dividends are issued in the
following year and are not issued in excess of amounts authorized.
Additional Stock Subscribed in the accompanying statements represents the
par value of shares subscribed, reduced by the unpaid portion.
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 1994, 1995 and 1996 affecting treasury shares
follow:
Shares Held in Treasury
------------------------
Class A Class B Class C
------- ------- -------
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 -
Stock issued - - -
Stock repurchased 256 220 99,975
Stock retired (256) - (99,975)
-------- -------- ---------
Balance at December 31, 1995 - 3,471 -
Stock issued - - -
Stock repurchased 236 132 99,290
Stock retired (236) - (99,290)
-------- -------- ---------
Balance at December 31, 1996 - 3,603 -
======== ======== ========
(9) Commitments
Leased property under capital leases is included as "Property and
Equipment" in the consolidated balance sheets as follows:
December 31,
------------
1996 1995
---- ----
(000's omitted)
Buildings and improvements $3,422 $3,422
Data processing equipment 1,783 1,441
Less: Accumulated depreciation
and amortization (4,678) (4,106)
------- -------
$ 527 $ 757
======= =======
The Company rents buildings and warehouse, office and certain other
equipment under capital and operating leases. At December 31, 1996 annual
minimum rental commitments under leases that have initial or remaining
noncancelable terms in excess of one year are as follows:
Year Ending
December 31, Capital Operating
- ------------- ------- ---------
(000's omitted)
1997 $ 437 $16,185
1998 257 14,570
1999 - 11,915
2000 - 10,020
2001 - 8,811
Thereafter - 28,449
------- -------
Total minimum lease payments 694 $89,950
Less amount representing interest 30 =======
-------
Present value of total minimum lease payments $ 664
=======
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 $29,747,000, $25,024,000 and $21,814,000 in 1996, 1995 and
1994, respectively. Rent expense includes $5,503,000, $4,724,000 and
$4,382,000 in contingent rentals paid in 1996, 1995 and 1994, respectively,
primarily for transportation equipment mileage.
(10) Media Expense
The Company expenses media costs the first time the advertising takes
place. Gross media expense, prior to income offsets from dealers and
suppliers, amounting to $64,333,000, $58,765,000 and $52,185,000 was
charged to operations in 1996, 1995 and 1994, respectively.
(11) Interest Expense
Capitalized interest totaled $523,000, $497,000 and $213,000 in 1996,
1995 and 1994, respectively. Interest paid was $12,452,000, $13,574,000 and
$13,518,000 in 1996, 1995 and 1994, respectively.
INDEX TO EXHIBITS
Exhibits
Enclosed Description
- -------- -----------
21 Subsidiaries of the Registrant
24 Powers of Attorney
Exhibits
Incorporated
by Reference Description
- ------------ -----------
2 Not Applicable
3-A Restated Certificate of Incorporation of the Registrant dated
September 18, 1974 filed as Exhibit 3-A to the Registrant's Form
S-1 Registration Statement (Registration No. 2-55860) on March
30, 1976 and incorporated herein by reference.
3-B By-laws of the Registrant as amended through September 19, 1995
included as Appendix A to the Prospectus constituting a part of
the Post Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement filed on or about March 12, 1997
(Registration No. 33-58191) and incorporated herein by reference.
3-C Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 19, 1976 filed as
Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1
Registration Statement (Registration No. 2-55860) on June 10,
1976 and incorporated herein by reference.
3-D Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 21, 1979 filed as
Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1
Registration Statement (Registration No. 2-63880) on May 23, 1979
and incorporated herein by reference.
3-E Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 7, 1982 filed as
Exhibit 3-G to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and incorporated
herein by reference.
3-F Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 5, 1987 filed as
Exhibit 3-F to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and incorporated by
reference.
3-G Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 16, 1989 filed as
Exhibit 4-G to Post Effective Amendment No. 1 to the Registrant's
S-2 Registration Statement filed on or about March 20, 1990 and
incorporated by reference.
3-H Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant filed as Exhibit 4-H to Post-
Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) filed on or
about March 12, 1997 and incorporated herein by reference.
4-A Specimen copy of Class B stock certificate as revised as of
November, 1984, filed as Exhibit 4-A to Post-Effective Amendment
No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 15, 1985 and incorporated
herein by reference.
4-B Specimen copy of Patronage Refund Certificate as revised in 1988
filed as Exhibit 4-B to Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement (Registration No. 33-
4299) on March 29, 1988 and incorporated herein by reference.
4-C Specimen copy of Class A stock certificate as revised in 1987
filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement (Registration No. 33-
4299) on March 29, 1988 and incorporated herein by reference.
4-D Specimen copy of Class C stock certificate filed as Exhibit 4-I
to the Registrant's Form S-1 Registration Statement (Registration
No. 2-82460) on March 16, 1983 and incorporated herein by
reference.
4-E Copy of current standard form of Subscription for Capital Stock
Agreement to be used for dealers to subscribe for shares of the
Registrant's stock in conjunction with new membership agreements
submitted to the Registrant filed as Exhibit 4-L to Post-
Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or about
March 23, 1994 and incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant on
or after January 1, 1995 adopted by the Board of Directors of the
Registrant on July 26, 1994 filed as Exhibit 4-M to the
Registrant's Form S-2 Registration Statement on or about March
15, 1996 (Registration No. 33-58191) and incorporated herein by
reference.
9 No Exhibit
10-A Copy of Retirement Benefits Replacement Plan of the Registrant,
restated as of January 1, 1989, filed as Exhibit 10-A to Post-
Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or about
March 23, 1994 and incorporated herein by reference.
10-B Copy of resolutions amending the 1990 Incentive Compensation
Plans for Executives and establishing the Executive Supplemental
Benefit Plans of the Registrant adopted by its Board of Directors
on December 11, 1990 and filed as Exhibit 10-G to Post Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-27790) on March 20, 1991 and
incorporated herein by reference.
10-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 or about March 23, 1994 and incorporated herein
by reference.
10-F Copy of Employment Agreement dated October 4, 1994 between Ace
Hardware Corporation and Paul M. Ingevaldson filed as Exhibit 10-
F to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about 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 (Registration
No. 33-58191) on or about 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 (Registration
No. 33-58191) on or about March 23, 1995 and incorporated herein
by reference.
10-I 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 (Registration
No. 33-58191) on or about March 23, 1995 and incorporated herein
by reference.
10-J 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
(Registration No. 33-58191) or about March 23, 1995 and
incorporated herein by reference.
10-K 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
(Registration No. 33-58191) on or about March 23, 1995 and
incorporated herein by reference.
10-L Copy of Form of Executive Officer Employment Agreement effective
January 1, 1996 filed as Exhibit 10-a-17 to Post-Effective
Amendment No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 15, 1996
and incorporated herein by reference.
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 $9,000,000 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 (Regis-
tration 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 Pre-Effective Amendment No. 2
to the Registrant's form S-2 Registration Statement (Registration
No. 33-58191) on or about 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 and filed as Exhibit 10-A-r to Post Effective
Amendment No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
10-R Copy of 6.47% Senior Series A notes in the aggregate principal
amount of $30,000,000 issued September 22, 1993 with a maturity
date of June 22, 2008, and $20,000,000 Private Shelf Facility,
pursuant to Note Purchase and Private Shelf Agreement with the
Prudential Insurance Company of America dated as of September 22,
1993, filed as Exhibit 10-R to Post-Effective Amendment No. 2 to
the Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on or about March 23, 1994 and incorporated herein
by reference.
10-S Assignment and Assumption dated October 22, 1992 of Lease dated
August 31, 1992 with MTI Vacations, Inc. filed as Exhibit 10-A-s
to Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-T Copy of Amendment to the Executive Supplemental Benefit Plans of
the Registrant adopted by its Board of Directors on March 17,
1992 and filed as Exhibit 10-A-t to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-U Copy of Lease dated September 30, 1992 for general offices of the
Registrant in Oak Brook, Illinois filed as Exhibit 10-A-u to the
Registrant's Form S-2 Registration Statement (Registration No. 33-
46449) on March 22, 1993 and incorporated herein by reference.
10-V Copy of Fourth Amendment to Executive Supplemental Benefit Plans
effective January 1, 1994 filed as Exhibit 10-V to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on or about March 23, 1994
and incorporated herein by reference.
10-W Copy of Ace Hardware Corporation Deferred Director Fee Plan as
amended on June 8, 1993, filed as Exhibit 10-W to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on or about March 23, 1994
and incorporated herein by reference.
10-X Copy of Ace Hardware Corporation Deferred Compensation Plan
effective January 1, 1994, filed as Exhibit 10-X to Post-
Effective Amendment No. 2 to the Registrants Form S-2
Registration Statement (Registration No. 33-46449) on or about
March 23, 1994 and incorporated herein by reference.
10-Y Copy of Lease dated September 22, 1994 for bulk merchandise
redistribution center of the Registrant in Carol Stream, Illinois
filed as Exhibit 10-Y to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about 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 (Registration
No. 33-58191) on or about 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 (Registration No. 33-
58191) on or about March 23, 1995 and incorporated herein by
reference.
10-a-2 Copy of Directors' 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 (Registration No. 33-58191) on or
about March 23, 1995 and incorporated herein by reference.
10-a-3 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 (Registration No. 33-
58191) on or about March 23, 1995 and incorporated herein by
reference.
10-a-4 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 (Registration No. 33-58191) on or
about March 23, 1995 and incorporated herein by reference.
10-a-5 Copy of Lease dated July 28, 1995 between A.H.C. Store
Development Corp. and Tri-R Corporation for retail hardware store
premises located in Yorkville, Illinois filed as Exhibit 10-a-11
to Post-Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 1996 and incorporated herein by reference.
10-a-6 Copy of Lease dated October 31, 1995 between Brant Trade &
Industrial Park, Inc. and Ace Hardware Canada Limited for
warehouse space in Brantford, Ontario, Canada filed as Exhibit 10-
a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S-
2 Registration Statement (Registration No. 33-58191) on or about
March 15, 1996 and incorporated herein by reference.
10-a-7 Copy of Lease dated November 27, 1995 between 674573 Ontario
Limited and Ace Hardware Canada Limited for general office space
in Markham, Ontario, Canada filed as Exhibit 10-a-13 to Post-
Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 1996 and incorporated herein by reference.
10-a-8 Copy of Lease dated February 9, 1995 between Leroy M. Merritt and
the Registrant for its Baltimore, Maryland redistribution center
filed as Exhibit 10-a-14 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 15, 1996 and incorporated herein by
reference.
10-a-9 Copy of First Amendment to the Ace Hardware Corporation Long-Term
Incentive Compensation Deferral Option Plan effective December 5,
1995 filed as Exhibit 10-a-15 to Post-Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 15, 1996 and incorporated herein
by reference.
10-a-10 Copy of First Amendment to the Ace Hardware Corporation
Directors' Deferral Option Plan effective December 5, 1995 filed
as Exhibit 10-a-16 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 15, 1996 and incorporated herein by
reference.
10-a-11 Copy of Ace Hardware Corporation Executive Benefit Security Trust
Agreement effective July 19, 1995 filed as Exhibit 10-a-18 to
Post-Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 1996 and incorporated herein by reference.
10-a-12 Copy of current standard form License Agreement for International
Retail Merchants adopted in 1996 filed as Exhibit 10-a-12 to Post-
Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 12, 1997 and incorporated herein by reference.
10-a-13 Copy of Lease Agreement dated as of September 1, 1996 for the
Registrant's project facility in Wilton, New York filed as
Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 12, 1997 and incorporated herein by
reference.
10-a-14 Copy of 6.47% Series A Senior Notes in the aggregate principal
amount of $30,000,000 issued August 23, 1996 with a maturity date
of June 22, 2008, and $70,000,000 Private Shelf Facility,
pursuant to Amended and Restated Note Purchase and Private Shelf
Agreement with the Prudential Insurance Company dated August 23,
1996 and filed as Exhibit 10-a-14 to Post-Effective Amendment No.
2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 12, 1997 and
incorporated herein by reference.
11 No Exhibit.
12 No Exhibit.
13 No Exhibit.
16 Not Applicable.
18 No Exhibit.
22 Not Applicable.
23 Consent of KPMG Peat Marwick LLP, dated March 10, 1997, filed as
Exhibit 23(a) to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-
58191) filed on or about March 12, 1997 and incorporated herein
by reference.
27 Financial Data Schedule filed as Exhibit 27 to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) filed on or about March 12,
1997 and incorporated herein by reference.
28 Not Applicable.
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants which have not Registered
Securities Pursuant to Section 12 of the Act.
As of the date of the foregoing Report, no annual report for the
Registrant's year ended December 31, 1996, nor any proxy soliciting
materials for the Registrant's 1997 annual meeting have been sent to
security holders. Copies of such Annual Report and proxy soliciting
materials will subsequently be sent to security holders and furnished to
the Securities and Exchange Commission.
EXHIBIT 21
ACE HARDWARE CORPORATION
LIST OF SUBSIDIARIES
(as of March 12, 1997)
NAME UNDER
STATE OF WHICH SUBSIDIARY
SUBSIDIARY INCORPORATION DOES BUSINESS
- ---------- ------------- ----------------
Ace Insurance Agency, Inc. Illinois Ace Insurance Agency, Inc.
AHC Realty Corporation Illinois AHC Realty Corporation
Loss Prevention Services, Illinois Loss Prevention Services,
Inc. Inc.
A.H.C. Store Development Illinois A.H.C. Store Development
Corp. Corp.
Ace Hardware Canada Limited Canada Ace Hardware Canada Limited
National Hardlines Supply, Illinois National Hardlines Supply,
Inc. Inc.
New Age Insurance Limited Bermuda New Age Insurance Limited
Ace Hardware de Mexico, Mexico Ace Hardware de Mexico,
S.A. de C.V. S.A. de C.V.
EXHIBIT 24
ACE HARDWARE CORPORATION: POWER OF ATTORNEY
--------------------------------------------
KNOW ALL MEN BY THESE PRESENTS that each of the
undersigned directors of ACE HARDWARE CORPORATION, a
Delaware corporation, hereby constitutes and appoints DAVID
F. HODNIK and RITA D. KAHLE, and each of them, his true and
lawful attorneys-in-fact and agents, each with full power to
act without the other, with full power of substitution, for
him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K, and any
and all amendments thereto, and to file the same with all
exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission,
granting unto said attorneys and agents full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might
or could do in person, hereby ratifying and confirming all
that said attorneys and agents, or either of them, or their
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has set his or
her hand and seal as of this 12th day of March, 1997.
JENNIFER C. ANDERSON RAY W. OSBORNE
Jennifer C. Anderson Ray W. Osborne
LAWRENCE R. BOWMAN ROGER E. PETERSON
Lawrence R. Bowman Roger E. Peterson
MARK JERONIMUS JON R. WEISS
Mark Jeronimus Jon R. Weiss
JAMES T. GLENN DON S. WILLIAMS
James T. Glenn Don S. Williams
JOHN E. KINGERY JAMES R. WILLIAMS, JR.
John E. Kingrey James R. Williams, Jr.
RICHARD E. LASKOWSKI
Richard E. Laskowski
