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, 1997 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 60523
(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 13, 1998, the aggregate value of the Class A
stock held by non-affiliates (dealer-stockholders) calculated on the
basis of such repurchase price was $3,872,000.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes x No
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable date
(applicable only to corporation Registrants). Outstanding shares as of
February 13, 1998:
Class A (voting) Stock, $1,000 par value 3,872 shares
Class B (nonvoting) Stock, $1,000 par value 2,704 shares
Class C (nonvoting) Stock, $1,100 par value 2,124,608 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 60523. Its telephone number
is (630) 990-6600.
The Company primarily 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, 1997 there were 5,032 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 and Michigan (approximately 5% each) and Georgia
(approximately 4%). States into which were shipped the largest
percentages of the merchandise sold by the Company in fiscal year 1997
are California (approximately 11%), Illinois and Florida
(approximately 7% each), Texas (approximately 5%), Michigan and
Georgia (approximately 4% each). Approximately 7% 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 fiscal years is set forth in the following table:
1997 1996 1995
----- ----- -----
Member outlets at beginning of period 5,067 5,007 4,940
New member outlets 208 272 285
Member outlets terminated 243 212 218
----- ----- -----
Member outlets at end of period 5,032 5,067 5,007
===== ===== =====
Dealers having one or more member 4,022 4,084 4,055
outlets at the end of period
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 fiscal year 1997
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 fiscal years are as follows:
Class of Merchandise 1997 1996 1995
------------------- ---- ---- ----
Paint, cleaning and related supplies 21% 20% 19%
Plumbing and heating supplies 15% 16% 16%
Hand and power tools 14% 14% 14%
Garden, rural equipment and related supplies 13% 13% 13%
General hardware 12% 12% 13%
Electrical supplies 12% 12% 13%
Sundry 7% 7% 7%
Housewares and appliances 6% 6% 5%
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)
-------------- -----------------------
0.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 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 day 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 or CD 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 materials for educational and training programs
for which dealers must pay an established monthly charge. (See the
subheading under this Item 1 entitled "Special Charges and
Assessments.")
Through its wholly-owned subsidiary, Ace Insurance Agency, Inc.,
the Company makes available to its dealers a Group Dealer Insurance
Program under which they can purchase a package of insurance
coverages, including "all risk" property insurance and business
interruption, crime, liability and workers' compensation coverages, as
well as medical 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 three percent of the Company's
consolidated revenue during fiscal year 1997.
As of the date hereof, the Company operates, through A.H.C. Store
Development Corp. and Ace Corporate Stores, Inc., its wholly owned
subsidiaries, six company-owned retail hardware stores. In
addition, three other locations are being developed for company-owned
retail hardware stores. Two of the newly acquired locations are expected
to be operational by the close of the second quarter of 1998. The third
location is under construction and is expected to be operational in the
beginning of the fourth quarter of 1998. (See the heading "Properties.")
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.
Strategic Planning
This section summarizes the Company's strategic planning initiatives.
By reason of the nature of strategic plans, this section contains a number
for forward looking statements, all of which are based on current
expectations. Actual results may differ materially. The Company believes
that it has the facilities, personnel and competitive and financial
resources for continued business success in the implementation of these
plans, but future developments, including revenues, costs, margins and
profits are all influenced by a number of factors, including but not
limited to the following, all of which are inherently difficult to
forecast. These factors include the uncertain impact of future growth
in the hardware and hardlines-related industries, including the
lumber/building materials, home center, do-it-yourself, rental and
commercial/industrial categories, as well as the condition of the
economy domestically, internationally and in specific geographical regions.
These factors also include potential changes in merchandise and inventory
prices, the impact of increasingly intense competition, potential shifts
in market demand, the potential impact of future litigation, and the
potential impact of environmental, franchising and licensing laws on the
Company's business operations. The Company is presently unable to predict
whether, or to what extent such factors may result in future costs or
liabilities that are not presently known, or the impact of such
factors on the Company's future ability to achieve its plans.
The Company has an ongoing strategic planning process and has
focused its 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 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 must make Ace
its primary source of supply and terminate participation in the program
of any other major hardware wholesaler. There are currently no generally
applicable requirements for Ace member-shareholders as to percentage of
purchases required through Ace or minimum retail performance which must
be achieved (i.e. sales dollars per square foot). The four cornerstones
also include present strategic initiatives to focus on the consumer through
research, target marketing and the development of an appropriate long-
term advertising strategy, as well as the review by the Company of
merger and acquisition opportunities and the development of
international and domestic non-shareholder franchise programs. "The
New Retail Age of Ace" is an extension of previous strategic efforts
under "the New Age of Ace" and "Ace 2000" and is not in conflict with
these efforts.
Special Charges and Assessments
The Company sponsors a national advertising program for which its
dealers are assessed an amount equal to 1.3% 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 $1,622.40 effective January 1, 1997 (or such greater amount as
would be required to maintain the foregoing minimum applicable
assessment at 1.3%) subject to: 1) a maximum annual assessment for
each dealer location for which a membership agreement has been entered
into with the Company of $5,500.00; 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 $5,500.00 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 auto-
matically 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 $4,800.00; 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 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
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------ ---------------
"ACE RENTAL PLACE" in
stylized lettering design Service Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREAT FINISHES" Trademark 2,019,696 November 26, 2006
"WOODROYAL" Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD" Trademark 2,070,848 June 10, 2007
"ROYAL TOUCH" Trademark 2,070,849 June 10, 2007
"QUALITY SHIELD" Trademark 2,012,305 September 30, 2007
"QUALITY TOUCH" Trademark 2,102,306 September 30, 2007
"STAIN HALT" Trademark 2,122,418 December 16, 2007
Currently, the Company has applications pending before the U.S.
Patent and Trademark Office for Registration of "ACE ROYAL" for exterior
and interior paint, "ACE DRY GUARD" for waterproofing paint, "ACE
CONTRACTOR PRO" for paints, primers and varnishes and "THE OAKBROOK
COLLECTION" for bathroom faucets. 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 retail store services in the field of
hardware and related goods, "HELPFUL HARDWARE CLUB" for promoting the goods
and services of others through various incentive programs offered to
preferred customers, "ACE CONTRACTOR CENTER" for retail store services for
identifying dealers who sell lumber and building materials, "ACE GARDEN
PLACE" for retail store services in the field of hardware, garden products
and building materials and "THE FOLKS IN THE RED VEST" for retail store
services in the field of hardware and related goods.
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 TruServ Corporation, as well as with Hardware Wholesalers,
Inc., and United Hardware Distributing Co., all of which companies are
also dealer-owned wholesalers.
Employees
The Company employs 4,685 full-time employees, of which 1,353 are
salaried employees. Collective bargaining agreements covering one
truck drivers' bargaining unit and three 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 fiscal years:
1997 1996 1995
-------- -------- --------
Warehouse Sales 4.32753% 4.53912% 4.42965%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 10.3088% 7.9773% 6.8725%
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 .4593%, .4328% and .3560% 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
fiscal years 1997, 1996 and 1995, 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 fiscal years 1997, 1996 and 1995.
Patronage Dividend Determinations and Allocations
The amounts distributed by the Company as patronage dividends
consist of its gross profits on business done with dealers who qualify
for patronage dividend distributions after deducting from said gross
profits a proportionate share of the Company's expenses for administration
and operations. Such gross profits consist of the difference between the
price at which merchandise is sold to such dealers and the cost of such
merchandise to the Company. All income and expenses associated with
activities not directly related to patronage transactions are excluded
from the computation of patronage dividends. Generally these include
profits on business done with dealers who do not qualify for patronage
dividend distributions and any income (loss) realized by the Company from
the disposition of property and equipment (except that, to the extent that
depreciation on such assets has been deducted as an expense during the time
that the Company has been operating on a cooperative basis and is recaptured
in connection with such a disposition, the income derived from such recapture
would be included in computing patronage dividends).
The By-laws of the Company provide that, by virtue of a dealer being
a "member" of the Company (that is, by virtue of his ownership of 1 share
of Class A Voting Stock), he will be deemed to have consented to include
in his gross income for federal income tax purposes for the dealer's
taxable year in which they are received by him all patronage dividends
distributed to him by the Company in connection with his purchases of
merchandise from the Company. A dealer who has not yet paid an amount
which at least equals the $1,000 purchase price of the 1 share of Class A
Voting Stock subscribed for by him will also be required to include all
patronage dividends distributed to him by the Company in his gross income
for federal income tax purposes in the year in which they are received by
him. This is required by virtue of a provision in the Subscription Agreement
executed by him under which he expressly consents to take all such patronage
dividends into his gross income for such purposes. The amount of the
patronage dividends which must be included in a dealer's gross income
includes both the portion of such patronage dividends received by him in cash
or applied against indebtedness owing by him to the Company in accordance
with Section 7 of Article XXIV of the Company's By-laws and the portion or
portions thereof which he receives in shares of Class C Nonvoting Stock of
the Company or in patronage refund certificates.
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 understand-
able 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 plans which have 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 the dates indicated, 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:
A. For purchases made on or after January 1, 1998,
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 Ace manufactured paint and
related products purchases, plus
(ii) 3% of the volume of drop-shipment or direct
purchases (excluding Ace manufactured paint and
related products), plus
(iii) 15% of the volume of warehouse (including STOP
and excluding Ace manufactured paint and related
products) and bulletin purchases, plus
(iv) 3% of the volume of lumber and building material
(excluding LTL) purchases, subject to a maximum
lumber and building material capital stock
requirement of $25,000, plus
(v ) 4% of the volume of LTL Plus purchases;
provided, however, that no fractional shares of Class C nonvoting
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 Nonvoting 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.
B. For purchases made between January 1, 1995-December 31, 1997,
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 nonvoting 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 nonvoting
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 plans are applied separately
in determining the form in which patronage dividends accrued with respect to
sales of lumber and building materials products are distributed. In this
connection the combined patronage dividends allocated annually to a store
from (a) sales of lumber products (other than LTL sales), (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 plans.
A store's patronage dividends from any other sales category with respect to
which patronage dividends are distributed by the Company are not taken into
account in determining either the minimum portion or any additional portion
of the store's patronage dividends derived from its purchases of lumber and
building materials products which is to be distributed in cash. Also,
Paragraphs 2 and 3 of the above plans are applied separately to patronage
dividends on lumber and building materials sales and the requirements of
Paragraph 2 of the plans shall not be deemed to have been complied with in
the cases of (a) purchases of lumber products (other than LTL purchases),
(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 3% of the
volume of the store's purchases within such category during the most recent
calendar year, subject to a maximum lumber and building materials capital
stock requirement of $25,000 under the 1998 plan and 4% of the volume of the
store's purchases within such category during the most recent applicable
calendar year (not subject to a maximum lumber and building materials capital
stock requirement) under the 1995-1997 plan. However, no such special Class C
Stock requirement applies to patronage dividends accrued on LTL purchases.
Notwithstanding the provisions of the above-described plans, however,
under Section 7 of Article XXIV of the Company's By-laws the portion of any
patronage dividends which would otherwise be distributable in cash with
respect to a retail dealer outlet which is a member of the Company will
instead be applied against any indebtedness owing by the dealer to the
Company to the extent of such indebtedness in any case where the membership
for such outlet is cancelled or terminated prior to the distribution of such
patronage dividends except that an amount equal to 20% of the dealer's total
annual patronage dividends for such outlet will be paid in cash if a timely
request for the payment of such amount in cash is submitted to the Company by
the dealer.
Because of the requirement of the U. S. Internal Revenue Code that
the Company withhold 30% of the annual patronage dividends distributed
to member dealers of the Company whose places of business are located
in foreign countries or Puerto Rico (except in the case of unincorporated
Puerto Rico dealers owned by individuals who are U.S. citizens and certain
dealers incorporated in Guam, American Samoa, the Northern Mariana Islands,
or the U.S. Virgin Islands, if less than 25% of its stock is owned by foreign
persons, and at least 65% of the Corporation's gross income for the last
three years has been effectively connected with the conduct of a trade or
business in such possession or in the United States), the cash portion of
the annual patronage dividends of such dealers shall in no event be less than
30%.
It is anticipated that the terms of any patronage refund certificates
issued pursuant to Paragraph 3. of the foregoing plans would include
provisions giving the Company a first lien thereon for the amount of any
indebtedness owing to it at any time by the owner of any such certificate and
provisions subordinating the certificates to all the rights and claims of
secured, general and bank creditors against the Company. It is further anti-
cipated 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 such written notices of
allocation 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 Para-
graph 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 certif-
icates 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 sub-
heading "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 member-
ship application. If the application is accepted, copies of both the Member-
ship 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 the end of fiscal
years 1997, 1996 and 1995, International Retail Merchant volume accounted
for approximately 4% 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.
Year 2000
A detailed plan has been established to identify and track progress on
the identification of systems, changing of non-compliant systems and testing
of those systems for Year 2000 compliant status. The assessment to identify
the systems affected by the Year 2000 issue will be completed by the end of
the first quarter 1998. Project completion is planned for the middle of 1999.
In addition, a plan is being developed for all devices (time clocks, power
systems, etc.) within the Company. The Company expects its Year 2000 date
conversion project to be completed on a timely basis.
The Company expects to incur internal staff costs as well as incremental
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the Year 2000. A
significant portion of these costs will represent the re-deployment of
existing information technology resources. However, management has not yet
fully assessed the Year 2000 compliance expense.
To date, correspondence has been received from the Company's primary
vendors that plans are being developed to address processing of transactions
in the Year 2000. However, there can be no assurance that the systems of
other companies on which the Company's systems rely will be converted timely
or that any such failure to convert by another company would not have an
adverse effect on the Company's systems.
Item 2. Properties
The Company's general offices are located at 2200 Kensington Court,
Oak Brook, Illinois 60523. 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 (2) 449,820 Owned
Huntersville, North Carolina 354,000 Owned
Rocklin, California 470,000 Owned
Gainesville, Georgia 478,000 Owned
Prescott Valley, Arizona 633,000 Owned
Princeton, Illinois 1,080,000 Owned
Carol Stream, Illinois (3) 250,000 Leased September 30, 1999
Chicago, Illinois (4) 18,168 Leased May 31, 1999
Brantford, Ontario, Canada (5) 434,000 Leased March 31, 2006
Baltimore, Maryland (6) 158,485 Leased March 31, 1998
Colorado Springs, Colorado 493,000 Owned
Wilton, New York 795,000 Leased September 1, 2007
Calgary, Alberta, Canada (5) 240,000 Leased December 31, 2001
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
------------------------- ----------- ------ ----------
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 2002
Paint Manufacturing Facilities:
Matteson, Illinois 356,000 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
LaCrosse, Wisconsin (7) 3 acres Owned
(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 no longer operates as a distribution warehouse and
is for sale.
(3) This facility was leased by the Company in October, 1994, for
use as a bulk merchandise redistribution center.
(4) This facility was leased by the Company in June, 1994 for use as
a freight consolidation center.
(5) This facility is leased by the Company's wholly owned
subsidiary, Ace Hardware Canada, Limited for use as a distribution
warehouse. The Brantford facility includes 80,000 square feet leased
for a two year period commencing January 1, 1998 and expiring
December 31, 2000.
(6) This facility was leased by the Company in February, 1995 for
use as a redistribution center. The Company does not intend to
renew this lease.
(7) This land is adjacent to the Company's LaCrosse, Wisconsin
warehouse.
In addition to the above principal properties, the Company also
leases other property for the purpose of operating retail hardware stores
through its wholly owned subsidiaries, A.H.C. Store Development Corp. and
Ace Corporate Stores, Inc. A.H.C. Store Development Corp. leases two
properties in Illinois, one in Wisconsin, one in Michigan and two in Georgia.
Ace Corporate Stores, Inc. leases one property in Illinois. The Company is
also leasing real estate in Georgia for the purpose of operating a company-
owned retail hardware store. This property is under construction.
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 exclu-
sively by retailers of hardware and related merchandise who are members of
the Company.
The number of holders of record as of February 13, 1998 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 3,872
Class B stock, $1,000 par value 2,704
Class C stock, $100 par value 4,824
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,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(000's omitted)
Net sales $2,907,259 $2,742,451 $2,436,012 $2,326,115 $2,017,763
Cost of sales 2,682,863 2,535,014 2,253,430 2,152,322 1,866,768
---------- ---------- ---------- ---------- ----------
Gross profit 224,396 207,437 182,582 173,793 150,995
Total expenses 148,009 135,130 118,840 109,271 93,903
---------- ---------- ---------- ---------- ----------
Net earnings $ 76,387 $ 72,307 $ 63,742 $ 64,522 $ 57,092
========== ========== ========== ========== ==========
Patronage
dividends
(Notes A, B,
5 and 8) $ 76,153 $ 73,837 $ 64,716 $ 64,520 $ 59,023
========== ========== ========== ========== ==========
Balance Sheet Data:
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(000's omitted)
Total assets $ 976,571 $ 916,375 $ 759,133 $ 723,610 $ 666,022
Working capital 159,011 146,911 139,805 150,514 138,652
Long-term debt 96,815 71,837 57,795 64,287 71,286
Patronage refund
certificates
payable, long-
term 49,044 49,639 54,741 63,666 56,270
Member dealers'
equity 245,814 233,363 217,245 199,827 186,028
(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 substan-
tially 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,
1997, patronage dividends were payable as follows:
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(000's omitted)
In cash $29,943 $28,178 $23,522 $27,302 $25,766
In patronage
refund
certificates
payable 13,726 9,500 5,032 9,920 12,728
In Class C Stock 22,366 26,474 27,506 21,766 19,064
In patronage
financing
deductions 10,118 9,685 8,656 5,532 1,465
Total patronage ------- ------- ------- ------- -------
dividends $76,153 $73,837 $64,716 $64,520 $59,023
======= ======= ======= ======= =======
(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 financing (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 $175.0
million of which $133.0 million was available at December 31, 1997. 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 $49.4, $40.4
and $31.3 million in 1997, 1996 and 1995, respectively. During 1997, the
Company financed the $49.4 million of capital expenditures out of current
and accumulated internally generated funds and short-term and long-term
borrowings. 1998 capital expenditures are anticipated to be approximately
$32.0 million primarily for improvements to existing facilities.
As a cooperative, the Company distributes substantially all of its
patronage sourced earnings to its members in the form of patronage dividends,
which are deductible for income tax purposes (see headings "Patronage
Dividend Determinations And Allocations" and "Federal Tax Treatment of
Patronage Dividends"). Prior to 1994, patronage dividends were distributed
on the basis of taxable income. Accordingly, patronage dividends can exceed
net income or be less than net income due to the timing of certain items for
income tax purposes. The Board of Directors does have the authority to
determine reasonable reserves for the purpose of ensuring the welfare of the
Company, but it has been the practice of the Company to distribute
substantially all patronage sourced earnings in the form of patronage
dividends.
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 financing, will continue to be sufficient to
finance the Company's working capital requirements and patronage dividend
and capital expenditure programs.
Operations-1997 Compared to 1996
Net sales increased 6% due to increases in existing retailer volume,
targeted efforts on new store development and conversions, and a full year
of Canadian operations. Sales of basic hardware and paint merchandise
(including warehouse, bulletin and direct shipments) increased 5.1% while
lumber and building material sales increased 10.3% due to accelerated sales
efforts. Excluding Canadian operations, international sales increased 27.5%
primarily due to new international store development.
Gross profit increased $17.0 million or 8.2% and increased as a percent
of sales to 7.72% vs. 7.56% in 1996. Domestic gross profit as a percent of
sales increased over 1996 due to increased manufacturing gross profit and
additional company-owned stores. Canadian operations also contributed to
the increased gross profit due to a full year of operation.
Warehouse and distribution expenses increased $2.6 million or 7.2%
due to the operation of one additional domestic facility and two Canadian
facilities in 1997. The replacement of an existing facility also contributed
to the increase, partially offset by increased traffic revenues.
Selling, general and administrative expenses increased $4.6 million
or 6.7% due to increased data processing costs and additional costs for a
full year of Canadian operations. Excluding Canadian operations, selling,
general and administrative expenses increased 4.8% and decreased slightly
as a percent of sales resulting from continued cost containment and re-
engineering efforts.
Retail success and development expenses increased $3.9 million or 18.2%
due to increased new business development costs, reduced retail systems
income and costs associated with additional company-owned stores. Increases
in this category are directly related to retail support of the Ace retailer
as the Company continues to make investments in our dealer base.
Paint Division sales increased 5.0% to $108.3 million. As a separate
division of the Company, the Paint Division produced net manufacturing
profits of $11.3 million in 1997 vs. $8.3 million in 1996. The increased net
manufacturing profit results from the 5.0% sales increase and resulting
gross margin and improved utilization of the Company's second facility.
Paint is the only product manufactured by the Company. As discussed on page
9, patronage dividends are calculated separately for paint sales and
increased to 10.31% in 1997 vs. 7.98% in 1996.
Interest expense increased $2.9 million due to increased borrowings
for the addition of a new facility in 1996 and 1997 and additional dealer
dating programs. Other income increased due to increased past due service
charges and reduced losses from the sale of property and equipment. Income
taxes increased $792,000 due to improved profitability of the company's non-
patronage operations.
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 $6.8 million or 22.8%
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 13.6% 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 $7.9 million
or 13.2% due to personnel costs for the start-up operations and increased
data processing expenses. Excluding Canadian operations, selling, general
and administrative expenses increased 7.5% 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 $3.0 million or
16.4% 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 investments in our dealer base.
Paint Division sales increased 16.5% to $103.1 million. As a separate
division of the Company, the Paint Division produced net manufacturing
profits of $8.3 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 9, 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.
Impact of New Accounting Standards
In June, 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
the prominent display of comprehensive income and its components in the
financial statements. The Company is required to comply with SFAS No. 130
in fiscal year 1998 and estimates its adoption will not have a material
effect on the consolidated financial statements.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments in annual financial
statements. The Company is required to comply with SFAS No. 131 in fiscal
year 1998 and estimates its adoption will not have a material effect on the
consolidated financial statements.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that
establish prices substantially in advance of the receipt of goods or
services. As vendors increase their prices for merchandise supplied to the
Company, the Company increases the price to its dealers in an equal amount
plus the normal handling charge on such amounts. In the past, these increases
have provided adequate gross profit to offset the impact of inflation on
operating expenses.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
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 47 Director since June 6, 1994; term
expires 2000; President of Davis
Lumber and Ace Hardware, Inc.,
Davis, California.
Eric R. Bibens II 41 Director since June 2, 1997; term
expires 2000; President of Bibens
Home Center, Inc., Springfield,
Vermont.
Lori L. Bossmann 37 Vice President-Controller effective
September, 1997; Controller
effective January, 1994; Assistant
Controller effective November, 1990.
Michael C. Bodzewski 48 Vice President-Merchandising
effective June, 1990; General
Merchandise Manager effective
April, 1988.
Lawrence R. Bowman 51 Director since February 4, 1991;
term expires 1998; President
of Owenhouse Hardware Co., Inc.,
Bozeman, Montana.
James T. Glenn 38 Director since June 3, 1996; term
expires 1999; President of Ace
Hardware of Chattanooga,
Chattanooga, Tennessee.
Ray A. Griffith 44 Vice President-Retail Development
and Marketing effective September,
1997; Director-Retail Operations,
Western Division effective
September, 1994; from July, 1993-
April, 1994, President and Chief
Executive Officer of Servistar/
Coast to Coast Corporation; from
July, 1992-June, 1993, Executive
Vice President and Chief Operating
Officer of Servistar/Coast to Coast
Corporation; from January, 1990-June,
1992, Vice President-General Manager
of the Northern Division of
Servistar/Coast to Coast Corporation.
Position(s) Held
Name Age and Business Experience
---- --- -----------------------
D. William Hagan 40 Director since June 2, 1997; term
expires 2000; President of Hagan
Ace Hardware, Orange Park, Florida.
David F. Hodnik 50 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 Pres-
ident-Finance and Management Infor-
mation Systems and Treasurer
effective September, 1986; Vice
President-Finance and Treasurer
effective December, 1982.
Paul M. Ingevaldson 52 Senior Vice President-International
and Technology effective September,
1997; 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 49 Director since June 3, 1991; term
expires 2000; President of Duluth
Hardware, Inc., Duluth, Minnesota.
Rita D. Kahle 41 Senior Vice President-Wholesale
effective September, 1997; Vice
President-Finance effective January,
1994; Vice President-Controller
effective January, 1992; Controller
effective July, 1988.
John E. Kingrey 54 Director since May 17, 1992; term
expires 1999; President of WK&K
Corp., Wimberley, Texas.
Richard E. Laskowski 56 Chairman of the Board since
February 18, 1992 and Director
since June 1, 1987;
term expires 1998; President of Ace
Hardware Home Center of Round Lake,
Inc., Round Lake, Illinois.
David W. League 58 Vice President-General Counsel and
Secretary effective June, 1990;
General Counsel and Secretary
effective January, 1990;
General Counsel effective January,
1989.
William A. Loftus 59 Executive Vice President-Retail
effective September, 1997; 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.
Position(s) Held
Name Age and Business Experience
---- --- -----------------------
David F. Myer 52 Vice President-Retail Support
effective September, 1997; Vice
President-Retail Support and
New Business effective October,
1994; Vice President-Retail Support
effective August, 1992; Vice Pres-
ident-Distribution effective July,
1989.
Fred J. Neer 58 Vice President-Human Resources
effective April, 1989; Director
of Human Resources effective
April, 1986.
Roger E. Peterson 60 Director since June 5, 1995; term
expires 1998; Chief Executive
Officer effective January
1, 1995; President and
Chief Executive Officer effective
December, 1989; President
effective August, 1986;
Executive Vice President
effective March, 1985; Vice
President-Operations effective
December, 1982.
Donald L. Schuman 59 Vice President-Information Technology
effective June, 1990;
Director-Information Systems
effective January, 1987.
Jon R. Weiss 62 Director since June 4, 1990; term
expires 1999; President of John W.
Weiss Hardware Company,
Glenview, Illinois.
James R. Williams, Jr. 50 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 organ-
ization 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 there-
by 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 1, 1998, as a dealer director
and a non-dealer director, respectively, of the classes, from the regions and
for terms as indicated below:
Nominee Class Region Term
------- ----- ------ ----
Lawrence R. Bowman 3 7 3 years
Roger E. Peterson 3 N/A* 3 years
Mr. James R. Williams is not eligible for reelection as a director
commencing in 1998. The person named below has been selected as the nominee
for election to the Board for the first time at the 1998 annual meeting as a
dealer director of the class, from the region and for the term indicated:
Nominee Age Class Region Term
------- --- ----- ------ ----
Daniel L. Gust 48 3 5 3 years
In addition, Chairman of the Board Richard E. Laskowski is not eligible
for reelection as a director commencing in 1998. The person named below has
been selected as the nominee for election to the Board at the 1998 annual
meeting as a director from the class, from the region and for the term
indicated:
Nominee Age Class Region Term
------- --- ----- ------ ----
Mario R. Nathusius 54 3 N/A* 3 years
The person named below has been selected as the nominee for the election
to the Board at the 1998 annual meeting as a dealer director at large from
the class, from the region and for the term indicated:
Nominee Age Class Region Term
------- --- ----- ------ ----
Howard J. Jung 50 3 N/A* 3 years
Mr. Jung previously served on the Board of Directors from 1987 through
May, 1996. If elected, Mr. Jung has been selected to serve as Chairman of
the Board effective June 1, 1998 when Mr. Laskowski's term expires.
*Non-dealer directors and dealer directors at large are not elected with
respect to particular geographic regions.
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 compensa-
tion paid by the Company to each of the five highest paid executive officers
of the Company whose cash compensation exceeded $100,000, for services ren-
dered by them in all capacities to the Company and its subsidiaries during
the fiscal year ended December 31, 1997 and the two previous fiscal years:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------- --------------------
(2) (4)
Other (3) All
Name Annual Long- Other
and (1) Compen- Term Compen-
Principal Salary Bonus sation Payouts sation
Position Year ($) ($) ($) ($) ($)
-------- ---- ------ ----- ------ ------- -------
David F. Hodnik 1997 $600,000 - $14,147 $195,666 $133,167
President and Chief 1996 500,000 - 20,110 173,223 104,989
Executive Officer 1995 450,000 - 17,021 105,870 97,624
(CEO effective 1/1/96)
William A. Loftus 1997 308,300 53,628 12,853 83,241 71,778
Executive Vice 1996 290,000 49,880 8,442 81,132 60,644
President-Retail 1995 275,000 42,350 6,298 80,204 59,153
Paul M. Ingevaldson 1997 272,300 49,453 11,738 74,259 46,922
Senior Vice 1996 257,000 40,092 11,188 72,450 49,579
President- 1995 247,000 33,100 7,215 71,221 49,466
International and
Technology
Rita D. Kahle 1997 250,000 46,237 8,647 57,813 46,733
Senior Vice 1996 218,000 36,406 6,826 50,436 33,122
President- 1995 195,000 32,175 9,012 44,807 35,573
Wholesale
Michael C. Bodzewski 1997 235,750 45,420 9,988 57,990 34,785
Vice President- 1996 217,250 37,018 7,312 52,107 36,384
Merchandising 1995 192,500 36,800 9,555 48,158 36,523
(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 per-
formance based objectives and achievement of corporate goals. The max-
imum 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 bus-
iness automobile use. Such officers pay, both directly and by reim-
bursement to the Company, personal automobile expenses. During 1997,
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 co-
operative environment. One third of the total long-term incentive award
is subject to a one year vesting provision. Total awards paid in 1997
were $195,666, $83,241, $74,259, $57,990 and $57,813 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. Par-
ticipants' 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 elec-
tions are required for the upcoming deferral year by December of the pre-
ceding year. Of the total 1997 awards, amounts deferred were $104,355,
$61,043, $74,259, $38,660 and $57,813 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 for the period of January 1, 1953 through December 31,
1996, the Company's Profit Sharing Plus Plan which has been in existence
since January 1, 1997, and contributions to the Company's Retirement
Benefits Replacement Plan. All active employees are eligible to partic-
ipate 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 bar-
gaining, are not eligible if such agreement does not include them in the
plan. For the year 1997, the Company contributed a maximum of 10.5% of
each participant's eligible compensation to the Profit Sharing Plus Plan
(9.5% profit sharing and 1% Company 401-K match). During the year 1997,
$16,800 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 1997, amounts expensed
by the Company pursuant to the Plan were $116,367 for Mr. Hodnik, $54,978
for Mr. Loftus, $30,122 for Mr. Ingevaldson, $17,985 for Mr. Bodzewski
and $29,933 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 var-
iable 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, 1997 and January 1, 1998 for a two year term terminating March
31, 1999 and December 31, 1999, respectively. The contracts provide for annual
compensation effective January 1, 1998 of $600,000, $315,000, $279,000,
$240,000 and $270,000, 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.
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 compen-
sation table are as follows: David F. Hodnik-25 years; William A. Loftus-21
years; Paul M. Ingevaldson-18 years; Michael C. Bodzewski-20 years and Rita D.
Kahle-11 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.
The Committee stresses 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 pro-
vided by competitors and by participating in various executive compensation sur-
veys. Our orientation is to be cognizant of their respective practices and pay
levels, but to give greater emphasis to that which supports our strategic busi-
ness objectives and the needs of our dealer network.
The Compensation Committee changed the compensation mix in 1994 and again
in 1998 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 compen-
sation 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, 1998, and January 1, 1997, each member of the Board of
Directors receives a monthly fee of $2,500 and $2,850, respectively, for their
services. Effective January 1, 1998 each member of the Board of Directors
receives $1,500 per Board of Directors meeting attended. In addition
effective March 1, 1998 each Board of Director Committee Chairperson receives
$500 per meeting chaired. Effective as of the foregoing dates, Mr. Laskowski
is paid a total annual fee of $150,000 and $135,000 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, direc-
tors 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 Commit-
tees 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 Com-
pany. Each member of the Board is also paid $200 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 Com-
pany 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 direc-
tor (and nominee) owning such shares, individually itemized, and by all
officers and directors as a group, as of February 13, 1998:
Class B Stock Owned Class C Stock Owned
--------------------- --------------------
Number Percent Number Percent
of Shares of Class of Shares of Class
--------- -------- --------- --------
Jennifer C. Anderson 4 0.148 3,224 .152
Eric R. Bibens II - - 531 .025
Lawrence R. Bowman 4 0.148 2,049 .096
James T. Glenn 4 0.148 7,873 .371
Daniel Gust - - 246 .012
D. William Hagan 4 0.148 2,235 .105
Mark Jeronimus - - 730 .034
Howard J. Jung - - 555 .026
John E. Kingrey 4 0.148 1,263 .059
Richard E. Laskowski 4 0.148 13,163 .620
Mario Nathusius - - 2,943 .139
Jon R. Weiss 4 0.148 2,754 .130
James R. Williams, Jr. 4 0.148 772 .036
All above directors and ---- ------- ------- -------
officers as a group 32 1.184 38,338 1.805
==== ======= ======= =======
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 dis-
closed 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 immed-
iate 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 in-
directly, 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 subsid-
iaries 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 ord-
inary course of business by the retail hardware businesses in which the direc-
tors 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 18, 1998
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 18, 1998
---------------------- and Director
(Richard E. Laskowski)
DAVID F. HODNIK President and Chief March 18, 1998
---------------------- Executive Officer
(David F. Hodnik)
LORI L. BOSSMANN Vice President- March 18, 1998
---------------------- Controller
(Lori L. Bossmann) (Principal Financial
and Accounting Officer)
Jennifer C. Anderson, Eric R. Bibens II, Directors
Lawrence R. Bowman, James T. Glenn,
D. William Hagan, Mark Jeronimus,
John E. Kingrey, Roger E. Peterson,
Jon R. Weiss, and James R. Williams, Jr.
*By DAVID F. HODNIK
------------------------
(David F. Hodnik)
*By LORI L. BOSSMANN March 18, 1998
------------------------
(Lori L. Bossmann)
*Attorneys-in-fact
THIS PAGE INTENTIOANLLY LEFT BLANK
INDEX TO EXHIBITS
Exhibits
Enclosed Description
------------ -----------
21 Subsidiaries of the Registrant
24 Powers of Attorney
Exhibits
Incorporated
by Reference Description
------------ -----------
2 No Exhibit
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 (Regis-
tration No. 2-55860) on March 30, 1976 and incorporated
herein by reference.
3-B By-laws of the Registrant as amended through August 19, 1997
included as Appendix A to the Prospectus constituting a part
of the Post Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement filed on or about March 18, 1998
(Registration No. 33-58191) and incorporated herein by
reference.
3-C Certificate of Amendment to the restated Certificate of Incor-
poration of the Registrant dated May 19, 1976 filed as Exhibit
3-D to Amendment No. 1 to the Registrant's Form S-1 Registra-
tion Statement (Registration No. 2-55860) on June 10, 1976 and
incorporated herein by reference.
3-D Certificate of Amendment to the restated Certificate of Incor-
poration of the Registrant dated May 21, 1979 filed as Exhibit
3-F to Amendment No. 1 to the Registrant's Form S-1 Registra-
tion Statement (Registration No. 2-63880) on May 23, 1979 and
incorporated herein by reference.
3-E Certificate of Amendment to the restated Certificate of Incor-
poration of the Registrant dated June 7, 1982 filed as Exhibit
3-G to the Registrant's Form S-1 Registration Statement (Regis-
tration No. 2-82460) on March 16, 1983 and incorporated herein
by reference.
3-F Certificate of Amendment to the restated Certificate of Incor-
poration of the Registrant dated June 5, 1987 filed as Exhibit
3-F to the Registrant's Form S-1 Registration Statement (Regis-
tration No. 33-4299) on March 29, 1988 and incorporated herein
by reference.
3-G Certificate of Amendment to the restated Certificate of Incor-
poration 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 Incor-
poration of the Registrant dated June 3, 1996 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 Amend-
ment No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 15, 1985 and incorporated
herein by reference.
Exhibits
Incorporated
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 (Registra-
tion 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 (Registra-
tion 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 agree-
ments submitted to the Registrant filed as Exhibit 4-L to Post-
Effective Amendment No. 2 to the Registrant's Form S-2 Regis-
tration 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
from January 1, 1995-December 31, 1997 adopted by the Board of
Directors of the Registrant on July 26, 1994 filed as Exhibit
4-F to Post-Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement on or about March 18, 1998 (Regis-
tration No. 33-58191) and incorporated herein by reference.
4-G Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant on
and after January 1, 1998 adopted by the Board of Directors of
the Registrant filed as Exhibit 4-G to Post-Effective Amend-
ment No. 3 to the Registrant's Form S-2 Registration Statement
on or about March 18, 1998 (Registration No. 33-58191) and
incorporated herein by reference.
9 No Exhibit
10-A Copy of Ace Hardware Corporation Retirement Benefits Replace-
ment Plan Restated and Adopted December 7, 1993 filed as Ex-
hibit 10-A to Post-Effective Amendment No. 3 to the Regis-
trant's Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 18, 1998 and incorporated herein by
reference.
10-B Copy of First Amendment to Restated Ace Hardware Corporation
Retirement Benefits Replacement Plan adopted on August 19, 1997
filed as Exhibit 10-B to Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 18, 1998 and incorporated herein
by reference.
10-C Copy of First Amendment to Ace Hardware Corporation Deferred
Compensation Plan adopted on August 19, 1997 filed as Exhibit
10-C to Post-Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
Exhibits
Incorporated
by Reference
------------
10-D Copy of Restated PREP Plan (formerly known as Executive Supple-
mental Benefit Plans) adopted August 19, 1997 filed as Exhibit
10-D to Post-Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 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 (Regis-
tration No. 33-46449) on or about March 23, 1994 and incorpor-
ated herein by reference.
10-F Second Modification of Amended and Restated Note Purchase and
Private Shelf Agreement dated as of August 23, 1996, as amended
by the First Modification of Amended and Restated Purchase and
Private Shelf Agreement dated as of April 2, 1997, with the
Prudential Insurance Company of America filed as Exhibit 10-F
to Post-Effective Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 18, 1998, and incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial Corp.
dated December 17, 1997 establishing a $10,000,000
discretionary leasing facility for the purchase of land and
construction of retail hardware stores filed as Exhibit 10-G
to Post-Effective Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-H Copy of Form of Executive Officer Employment Agreement effec-
tive 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-I 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 State-
ment (Registration No. 33-46449) on March 23, 1992 and incor-
porated herein by reference.
10-J Copy of Standard Form of Ace Hardware International Retail Mer-
chant 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-K Copy of current standard form of Ace Hardware Membership Agree-
ment 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-L 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 Regis-
tration Statement (Registration No. 33-46449) on March 22, 1993
and incorporated herein by reference.
Exhibits
Incorporated
by Reference
------------
10-M 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-N Copy of Lease dated March 24, 1997 for print shop facility of
the Registrant in Downers Grove, Illinois filed as Exhibit 10-N
to Post-Effective Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 18, 1998 and incorporated herein by reference.
10-O 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 (Registra-
tion No. 33-46449) on March 22, 1993 and incorporated herein
by reference.
10-P Copy of Ace Hardware Corporation Deferred Director Fee Plan as
amended on June 8, 1993, filed as Exhibit 10-W to Post-Effec-
tive Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on or about March 23,
1994 and incorporated herein by reference.
10-Q Copy of 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 Registra-
tion Statement (Registration No. 33-46449) on or about March
23, 1994 and incorporated herein by reference.
10-R 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-S 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-T 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 (Registra-
tion No. 33-58191) on or about March 23, 1995 and incorporated
herein by reference.
10-U 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.
Exhibits
Incorporated
by Reference
------------
10-V 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-W Copy of Lease dated July 28, 1995 between A.H.C. Store Develop-
ment 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-X Copy of Lease dated October 31, 1995 between Brant Trade &
Industrial Park, Inc. and Ace Hardware Canada Limited for ware-
house 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-Y 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-Z 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 (Regis-
tration No. 33-58191) on or about March 15, 1996 and
incorporated herein by reference.
10-a-1 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-2 Copy of First Amendment to the Ace Hardware Corporation Direc-
tors' Deferral Option Plan effective December 5, 1995 filed as
Exhibit 10-a-16 to Post-Effective Amendment No. 1 to the Regis-
trant's Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 15, 1996 and incorporated herein by
reference.
10-a-3 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-4 Copy of current standard form License Agreement for Interna-
tional 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.
Exhibits
Incorporated
by Reference
------------
10-a-5 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 Regi-
strant's Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 12, 1997 and incorporated herein by
reference.
10-a-6 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.
10-a-7 Copy of First Amendment to Ace Hardware Corporation Officer
Incentive Plan adopted on August 19, 1997 filed as Exhibit 10-
a-7 to Post-Effective Amendment No. 3 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998, and incorporated herein by reference.
11 No Exhibit.
12 No Exhibit.
13 No Exhibit.
16 No Exhibit.
18 No Exhibit.
22 No Exhibit.
23 Consent of KPMG Peat Marwick LLP, dated March 16, 1998, filed
as Exhibit 23(a) to Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) filed on or about March 18, 1998 and incorporated
herein by reference.
27 Financial Data Schedule filed as Exhibit 27 to Post-Effective
Amendment No. 3 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) filed on or about March
18, 1998 and incorporated herein by reference.
99 No Exhibit.
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 Regis-
trant's year ended December 31, 1997, nor any proxy soliciting materials for the
Registrant's 1998 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.
Item 14(a). Index to Consolidated Financial Statements and Financial Statement
Schedules
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Earnings for each of the years in the
three-year period ended December 31, 1997 F-5
Consolidated Statements of Member Dealers' Equity for each of the
years in the three-year period ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997 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 consolidated 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, 1997 and 1996 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, 1997. These con-
solidated financial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these consolidated finan-
cial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. 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 Corpor-
ation and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 28, 1998
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
-------- --------
(000's omitted)
Current assets:
Cash and cash equivalents $ 14,171 $ 12,657
Receivables:
Trade 320,166 305,742
Other 45,554 43,206
-------- --------
365,720 348,948
Less allowance for doubtful receivables (2,086) (1,700)
--------- --------
Net receivables 363,634 347,248
Inventories (Note 2) 338,509 327,145
Prepaid expenses and other current assets 12,873 11,880
-------- --------
Total current assets 729,187 698,930
-------- --------
Property and equipment (Note 9):
Land 17,480 17,464
Buildings and improvements 188,967 162,100
Warehouse equipment 66,330 57,246
Office equipment 71,578 71,689
Manufacturing equipment 15,312 13,132
Transportation equipment 13,686 14,609
Leasehold improvements 16,110 15,654
Construction in progress 6,686 12,501
-------- --------
396,149 364,395
Less accumulated depreciation and amortization (153,170) (150,861)
-------- --------
Net property and equipment 242,979 213,534
Other assets 4,405 3,911
-------- --------
$976,571 $916,375
======== ========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND MEMBER DEALERS' EQUITY
1997 1996
--------- --------
(000's omitted)
Current liabilities:
Current installments of long-term debt (Note 4) $ 7,515 $ 6,727
Short-term borrowings (Note 3) 42,000 71,000
Accounts payable 423,499 394,070
Patronage dividends payable in cash (Note 5) 29,943 28,178
Patronage refund certificates payable (Note 5) 13,636 14,138
Accrued expenses 53,583 37,906
-------- --------
Total current liabilities 570,176 552,019
Long-term debt (Note 4) 96,815 71,837
Patronage refund certificates payable (Note 5) 49,044 49,639
Other long-term liabilities 14,722 9,517
-------- --------
Total liabilities 730,757 683,012
-------- --------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,874 3,937
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 213,609 196,742
Class C Stock of $100 par value, issuable to
dealers for patronage dividends 22,366 26,474
Additional stock subscribed, net 383 502
Retained earnings 3,354 3,120
Contributed capital 3,295 3,295
-------- --------
253,380 240,569
Less: Treasury stock, at cost (7,566) (7,206)
-------- --------
Total member dealers' equity 245,814 233,363
Commitments (Notes 6 and 9)
-------- --------
$976,571 $916,375
======== ========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ---------
(000's omitted)
Net sales $2,907,259 $2,742,451 $2,436,012
Cost of sales 2,682,863 2,535,014 2,253,430
---------- ---------- ----------
Gross profit 224,396 207,437 182,582
---------- ---------- ----------
Operating expenses:
Warehouse and distribution 39,292 36,658 29,849
Selling, general and administrative 72,218 67,661 59,772
Retail success and development 25,573 21,644 18,596
---------- ---------- ----------
Total operating expenses 137,083 125,963 108,217
---------- ---------- ----------
Operating income 87,313 81,474 74,365
Interest expense (Note 11) (14,751) (11,855) (13,137)
Other income, net 5,735 3,806 3,715
Income taxes (Note 7) (1,910) (1,118) (1,201)
---------- ---------- ----------
Net earnings 76,387 72,307 63,742
========== ========== ==========
Retained earnings at beginning of year 3,120 4,650 5,624
Net earnings 76,387 72,307 63,742
Patronage dividends (Notes 5 and 8) (76,153) (73,837) (64,716)
---------- ---------- ----------
Retained earnings at end of year 3,354 3,120 4,650
========== ========== ==========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1997
(000's omitted)
Class C Stock
Issuable to
Dealers for
Class A Class B Class C Patronage
Stock Stock Stock Dividends
------- ------- -------- -------------
Balance at December 31, 1994 $3,924 $6,499 $164,666 $21,766
Net earnings - - - -
Net payments on subscriptions - - - -
Patronage financing deductions - - - (15)
Stock issued 237 - 23,149 (21,751)
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
Net earnings - - - -
Net payments on subscriptions - - - -
Patronage financing deductions - - - (43)
Stock issued 268 - 28,854 (27,463)
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
Net earnings - - - -
Net payments on subscriptions - - - -
Patronage financing deductions - - - (119)
Stock issued 236 - 29,263 (26,355)
Stock repurchased - - - -
Stock retired (299) - (12,396) -
Stock issuable as patronage
dividends - - - 22,366
Patronage dividends payable - - - -
------- ------- -------- --------
Balance at December 31, 1997 $3,874 $6,499 $213,609 $22,366
======= ======= ======== ========
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALER'S EQUITY
Three Years Ended December 31, 1997
(000s omitted)
Additional Retained Contributed Treasury
Stock Earnings Capital Stock Total
---------- -------- ----------- -------- --------
Balance at December
31, 1994 $ 555 $ 5,624 $3,295 $(6,502) $199,827
Net Earnings - 63,742 - - 63,742
Net Payments on
Subscriptions 1,580 - - - 1,580
Patronage financing
deductions - - - - (15)
Stock issued (1,620) - - - 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 $ 515 $ 4,650 $3,295 $ (6,942) $217,245
31, 1995
Net Earnings - 72,307 - - 72,307
Net Payments on
Subscriptions 1,603 - - - 1,603
Patronage financing
deductions - - - - (43)
Stock issued (1,616) - - - 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 $ 502 $ 3,120 $3,295 $ (7,206) $233,363
31,1996
Net Earnings - 76,387 - - 76,387
Net Payments on
Subscriptions 2,906 - - - 2,906
Patronage financing
deductions - - - - (119)
Stock issued (3,025) - - - 119
Stock repurchased - - - (13,055) (13,055)
Stock retired - - - 12,695 -
Stock issuable as
patronage dividends - - - - 22,366
Patronage dividends
payable - (76,153) - - (76,153)
---------- -------- ----------- -------- --------
Balance at December $ 383 $ 3,354 $3,295 $ (7,566) $245,814
31, 1997 ========== ======== =========== ======== ========
* Additional stock subscribed is comprised of the following amounts at
December 31, 1995, 1996 and 1997:
1995 1996 1997
------ ------ ------
Class A Stock $ 332 $ 337 $ 387
Class B Stock - - -
Class C Stock 2,332 2,450 2,329
------ ------ ------
2,664 2,787 2,716
Less unpaid portion 2,149 2,285 2,333
------ ------ ------
$ 515 $ 502 $ 383
====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
(000's omitted)
1997 1996 1995
---------- --------- ----------
Operating Activities:
Net Earnings $76,387 $72,307 $63,742
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 19,494 17,517 16,837
Loss on sale of property and equipment 285 712 3
Increase in accounts receivable, net (16,386) (60,170) (27,526)
Decrease (increase) in inventories (11,364) (72,694) 15,940
Increase in prepaid expenses and
other current assets (993) (2,556) (2,135)
Increase in accounts payable and
accrued expenses 45,106 64,616 41,860
Increase in other long-term
liabilities 5,205 4,066 1,107
---------- --------- --------
Net Cash Provided by
Operating Activities 117,734 23,798 109,828
Investing Activities:
Purchase of property and equipment (49,373) (40,379) (31,263)
Proceeds from sale of property
and equipment 149 120 27
Decrease (increase) in other assets (494) 12 579
---------- --------- --------
Net Cash Used in
Investing Activities (49,718) (40,247) (30,657)
Financing Activities:
Proceeds (payments) of short-term
borrowings (29,000) 58,000 (17,000)
Proceeds from notes payable 32,994 20,853 -
Payments on long-term debt (7,228) (7,462) (6,483)
Payment of cash portion of
patronage dividend (28,178) (23,522) (27,302)
Payments of patronage
refund certificates and patronage
financing deductions (24,941) (22,790) (11,287)
Proceeds from sale of common stock 2,906 1,603 1,580
Repurchase of common stock (13,055) (10,429) (10,694)
---------- --------- --------
Net Cash Provided by
(Used in) Financing Activities (66,502) 16,253 (71,186)
---------- --------- --------
Increase (Decrease) in Cash
and Cash Equivalents 1,514 (196) 7,985
Cash and Cash Equivalents
at beginning of year 12,657 12,853 4,868
---------- --------- --------
Cash and Cash Equivalents at
end of year $14,171 $12,657 $12,853
========== ========= ========
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 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 state-
ments 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 merchan-
dise and special equipment used in the operation of dealers' businesses. Other
receivables are principally amounts due from suppliers for promotional and ad-
vertising allowances.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined primarily using the last-in, first-out method.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Expenditures for maintenance, repairs and renewals of rel-
atively 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 in 1997 and 1996.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(g) Financial Instruments
The carrying value of assets and liabilities that meet the definition
of a financial instrument included in the accompanying Consolidated Balance
Sheets approximate fair value. The fair market value of foreign exchange
forward contracts approximates carrying cost at December 31, 1997 and 1996.
(h) Retirement Plans
The Company has retirement plans covering substantially all non-union
employees. Costs with respect to the noncontributory pension plans are deter-
mined 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.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses dur-
ing the reporting period. Actual results could differ from those estimates.
(j) Reclassifications
Certain financial statement reclassifications have been made to prior
year amounts to conform to comparable classifications followed in 1997.
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially all
of the Company's domestic inventories are valued on the last-in, first-out
(LIFO) method; the excess of replacement cost over the LIFO value of inventory
was approximately $67,151,000 and $69,867,000 at December 31, 1997 and 1996,
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 1997 and 1996. The maximum
amount outstanding at any month-end during the period was $113.0 million in 1997
and $97.5 million in 1996. The weighted average interest rate effective as of
December 31, 1997 and 1996 was 6.60% and 7.13%, respectively. Short-term borrow-
ings outstanding as of December 31, 1997 and 1996 were $42.0 million and $71.0
million, respectively. At December 31, 1997 the Company has available a revol-
ving credit facility with a group of banks providing for $100 million in commit-
ted lines and also has available $75 million in uncommitted lines. The aggre-
gate unused line of credit available at December 31, 1997 and 1996 was $133
million and $109 million, respectively. At December 31, 1997 the Company had no
compensating balance requirements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(4) Long-Term Debt
Long-term debt is comprised of the following:
December 31,
-------------------------
1997 1996
-------- --------
(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% $ 12,432 $14,595
$20,000,000 due in quarterly installments
of $952,400 with interest payable quarterly
at a fixed rate of 6.89% 8,571 12,381
$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 $714,300 commencing September 15, 2004
with interest payable quarterly at a fixed
rate of 7.49% 20,000 20,000
$30,000,000 due in annual installments of
$6,000,000 commencing March 25, 2005 with
interest payable quarterly at a fixed rate
of 7.55% 30,000 -
Liability under capitalized leases (see Note 9) 2,171 664
Installment notes with maturities through 2001
with various interest rates 1,156 924
-------- --------
104,330 78,564
Less current installments 7,515 6,727
-------- --------
$ 96,815 $71,837
======== ========
Aggregate maturities of long-term debt are $7,515,000, $7,092,000,
$3,657,000, $6,282,000, $6,162,000 in 1998 through 2002, respectively and
$73,622,000 thereafter.
(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.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The patronage dividend composition for 1997, 1996 and 1995 follows:
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
--------- -------------- ------- ------------ ---------
(000's omitted)
1997 $29,943 $13,726 $22,366 $10,118 $76,153
1996 28,178 9,500 26,474 9,685 73,837
1995 23,522 5,032 27,506 8,656 64,716
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,
1997 are payable as follows:
Interest
January 1, Amount Rate
---------- --------------- --------
(000's omitted)
1998 $13,636 6.00%
1999 11,377 6.00
2000 9,415 7.00
2001 5,079 6.00
2002 9,447 6.25
2003 13,726 6.00
(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,
1997 plan assets were held primarily in equities, mutual funds and group annuity
contracts.
Pension expense for the years 1997, 1996 and 1995 included the following
components:
1997 1996 1995
------ ------ -------
(000's omitted)
Service cost - benefits earned
during the period 358 72 355
Interest cost on projected
benefit obligation 351 486 845
Actual return on plan assets (1,820) (786) (2,288)
Net amortization and deferral 1,243 292 1,257
------ ----- -------
Net periodic pension expense $132 $ 64 $169
====== ===== =======
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.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table sets forth the funded status of the plans and amounts
recognized in the Company's Consolidated Balance Sheet at December 31, 1997 and
1996 (December 31st measurement date):
1997 1996
-------- --------
(000's omitted)
Accumulated benefit obligation,
including vested benefits of
$4,072,000 and $3,953,000 $ 4,305 $ 4,189
======== =========
Plan assets at fair value $ 9,122 $ 7,965
Projected benefit obligation
for service renderedto date 5,041 4,814
Plan assets in excess of
-------- ---------
projected benefit obligation $ 4,081 $ 3,151
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions (2,661) (1,538)
Remaining unrecognized net asset
being amortized over participants
average remaining service period (784) (845)
-------- ---------
Prepaid pension cost included in other assets $ 636 $ 768
======== =========
The weighted average discount rate used in determining the actuarial pre-
sent value of the projected benefit obligation was 7.25% in 1997 and 7.5% in
1996. The related expected long-term rate of return was 8.0% in 1997 and 1996.
The rate of increase in future compensation was projected using actuarial salary
tables plus 1.0% in 1997 and 1996.
The Company also participates in several multi-employer plans covering
union employees. Amounts charged to expense and contributed to the plans totaled
approximately $225,000, $265,000 and $275,000, in 1997, 1996 and 1995, respec-
tively.
The Company's profit sharing plan contribution for the years ended 1997,
1996 and 1995 was approximately $12,240,000, $11,357,000 and $9,902,000, re-
spectively.
(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 1997, 1996 and 1995 provisions for federal income taxes were $1,501,000,
$860,000 and $939,000, respectively, and for state income taxes were $409,000,
$258,000 and $262,000, respectively.
The Company made tax payments of $2,807,000, $1,524,000 and $1,625,000
during 1997, 1996 and 1995, respectively.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(8) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares
at December 31,
-------------------
1997 1996
------ ------
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,874 3,937
Class B Stock, nonvoting, redeemable at not less
than twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,716 2,896
Treasury stock 3,783 3,603
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,136,085 1,967,420
Issuable as patronage dividends 223,600 264,740
Additional Stock Subscribed:
Class A Stock 387 337
Class B Stock - -
Class C Stock 23,920 24,500
At December 31, 1997 and 1996 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 con-
trolling 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.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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. Addi-
tional 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, ex-
cept 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 re-
demption price over par is allocated equally between contributed capital and
retained earnings.
Transactions during 1995, 1996 and 1997 affecting treasury shares follow:
Shares Held in Treasury
---------------------------
Class A Class B Class C
------- ------- -------
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 -
Stock issued - - -
Stock repurchased 299 180 123,964
Stock retired (299) - (123,964)
------- ------- -------
Balance at December 31, 1997 - 3,783 -
======= ======= =======
(9) Commitments
Leased property under capital leases is included as "Property and Equip-
ment" in the consolidated balance sheets as follows:
December 31,
----------------------
1997 1996
-------- --------
(000's omitted)
Buildings and improvements - $3,422
Data processing equipment 3,633 1,783
Less: accumulated depreciation and amortization (1,506) (4,678)
-------- --------
$2,127 $ 527
======== ========
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company rents buildings and warehouse, office and certain other equip-
ment under capital and operating leases. At December 31, 1997 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)
1998 $ 1,170 $17,372
1999 832 15,648
2000 257 12,831
2001 - 10,613
2002 - 7,697
Thereafter - 25,674
---------- ------------
Total minimum lease payments 2,259 $89,835
============
Less amount representing interest 88
----------
Present value of total minimum lease payments $2,171
==========
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 approx-
imately $33,343,000, $29,747,000 and $25,024,000 in 1997, 1996 and 1995, respec-
tively. Rent expense includes $5,956,000, $5,503,000 and $4,724,000 in contin-
gent rentals paid in 1997, 1996 and 1995, respectively, primarily for transpor-
tation 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 $65,013,000, $64,551,000 and $58,963,000 was charged to operations
in 1997, 1996 and 1995, respectively.
(11) Interest Expense
Interest paid was $15,281,000, $12,481,000 and $13,631,000 in 1997, 1996
and 1995, respectively, net of capitalized interest of $1,022,000, $523,000 and
$497,000.
Exhibit 21
ACE HARDWARE CORPORATION
LIST OF SUBSIDIARIES
STATE/COUNTRY NAME UNDER WHICH
SUBSIDIARY OF INCORPORATION SUBSIDIARY DOES BUSINESS
- ---------- ---------------- ------------------------
Ace Insurance Agency, Inc. Illinois Ace Insurance Agency, Inc.
AHC Realty Corporation Illinois AHC Realty Corporation
Loss Prevention Services, Inc. Illinois Loss Prevention Services,
Inc.
A.H.C. Store Development Corp. Illinois A.H.C. Store Development
Corp.
Ace Hardware Canada Limited Canada Ace Hardware Canada Limited
National Hardlines Supply, Illinois National Hardlines Supply,
Inc. Inc.
Ace Hardware de Mexico, S.A. Mexico Ace Hardware de Mexico,
de C.V. S.A. de C.V.
Ace Hardware Foundation Illinois Ace Hardware Foundation
New Age Insurance Ltd. Bermuda New Age Insurance Ltd.
Ace Hardware International, Barbados Ace Hardware International,
Inc. Inc.
Ace Corporate Stores, Inc. Illinois Ace Corporate Stores, Inc.
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 LORI L. BOSSMANN, 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 18th day of March, 1998.
JENNIFER C. ANDERSON JOHN E. KINGREY
Jennifer C. Anderson John E. Kingrey
ERIC R. BIBENS II RICHARD E. LASKOWSKI
Eric R. Bibens II Richard E. Laskowski
LAWRENCE R. BOWMAN ROGER E. PETERSON
Lawrence R. Bowman Roger E. Peterson
JAMES T. GLENN JON R. WEISS
James T. Glenn Jon R. Weiss
D. WILLIAM HAGAN JAMES R. WILLIAMS, JR.
D. William Hagan James R. Williams, Jr.
MARK JERONIMUS
Mark Jeronimus
