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 1998 fiscal year ended January 2, 1999 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 nonaffiliates
of the Registrant. This Company's shares are only issued to and held by, its
dealer-stockholders. All shares held by these stockholders can be repurchased
by the Company when the dealer-stockholder's membership agreement terminates.
Thus, there is no market for these shares. The repurchase price for each
share of Class A Stock, which is the only voting stock issued, is equal to
the par value of $1,000 per share. As of February 23, 1999, the aggregate
value of the Class A Stock held by non-affiliates (dealer-stockholders)
calculated on the basis of this repurchase price was $3,874,000.
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 23, 1999:
Class A (voting) Stock, $1,000 par value 3,847 shares
Class B (non-voting) Stock, $1,000 par value 2,576 shares
Class C (non-voting) Stock, $ 100 par value 2,255,207 shares
PART I
Item 1. Business
The terms "Ace," "Company," "cooperative," "we," "us," "our" and similar
words refer to Ace Hardware Corporation. The terms "member," "retailer,"
"dealer," " you," "your" and similar words refer to someone who purchases our
stock.
Ace Hardware Corporation was formally organized as a Delaware corporation in
1964. In 1973, as the result of a corporate merger, it became the successor of
Ace Hardware Corporation, an Illinois corporation that was organized in 1928.
Until 1973, the Illinois corporation conducted the business now being engaged
in by our Company. Our main executive offices are located at 2200 Kensington
Court, Oak Brook, Illinois 60523. Our main telephone number is (630) 990-6600.
We operate primarily as a wholesaler of hardware and related products, and
we also manufacture paint products. We mainly sell our products to hardware
dealers who have Membership Agreements with us. These Membership Agreements
allow the hardware dealers to purchase merchandise and services from us and
to license some of our marks, such as "Ace" and "Ace Hardware." (See the
heading "Business" subheading "Membership Agreement").
We operate on a cooperative basis and distribute patronage dividends to our
eligible member dealers each year on the basis of quantity or value of business
that we do with them. (See the subheading "Distribution of Patronage
Dividends").
As of the end of our 1998 fiscal year on January 2, 1999, there were 5,039
stores having Membership Agreements with us. The States with the largest
concentration of members are California (approximately 10%), Texas
(approximately 7%), Illinois (approximately 6%), Florida (approximately 5%),
and Michigan and Georgia (approximately 4% each). The States where we shipped
the largest percentages of merchandise in fiscal year 1998 are California
(approximately 11%), Illinois (approximately 7%), Florida (approximately 6%),
Texas (approximately 5%), and Michigan and Georgia (approximately 4% each).
Approximately 7% of our sales are made to locations outside of the United
States and its territories.
The number of member locations that we had during each of our past three
fiscal years is summarized in the following table:
1998 1997 1996
------ ------ ------
Member outlets at beginning of period 5,032 5,067 5,007
New member outlets 231 208 272
Member outlets terminated 224 243 212
------ ------ ------
Member outlets at end of period 5,039 5,032 5,067
Dealers having one or more member ====== ====== ======
outlets at end of period 3,963 4,022 4,084
We service our dealers by buying merchandise in quantity lots, mainly from
manufacturers. We then warehouse large quantities of this merchandise and sell
it in smaller lots to our dealers. Most of the products that we distribute to
our members from our warehouses are sold at a price that we establish ("dealer
cost"), to which a 10% adder ("handling charge") is generally added. In fiscal
year 1998, warehouse sales were 61% of our total sales and bulletin sales were
3% of our total sales with the balance of 36% being direct shipment sales,
including lumber and building materials.
The following is a breakdown of our total warehouse sales among various
general classes of merchandise for each of the past three fiscal years:
Class of Merchandise 1998 1997 1996
-------------------- ---- ---- ----
Paint, cleaning and related supplies 20% 21% 20%
Plumbing and heating supplies 15% 15% 16%
Hand and power tools 14% 14% 14%
Garden, rural equipment and related supplies 13% 13% 13%
Electrical supplies 13% 12% 12%
General hardware 12% 12% 12%
Sundry 7% 7% 7%
Housewares and appliances 6% 6% 6%
We sponsor two major hardware conventions each year at various locations,
as well as one lumber convention. We invite dealers and vendors to attend, and
dealers generally place orders that are delivered before the next convention.
During the convention, there are exhibits of regular merchandise, new
merchandise and seasonal merchandise. Lawn and garden supplies, building
materials and exterior paints are seasonal merchandise in many parts of the
country. Some types of goods such as holiday decorations are also seasonal.
Warehouse sales involve the sale of merchandise that we inventory at our
warehouses. Direct shipment sales involve sales where the merchandise is
shipped directly to dealers by vendors. Bulletin sales involve our special
bulletin offers where we order specific merchandise after dealers sign up to
buy particular quantities of it.
Dealers place direct shipment orders with our vendors using special purchase
orders. The vendors then bill us for these orders, which are shipped directly
to dealers. We, in turn, bill the ordering dealers with an adder ("handling
charge") that varies according to the following schedule (except for sales
under the LTL Plus Program discussed below):
Invoice Amount Adder (Handling Charge)
-------------- -----------------------
$ 000.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 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%
We make bulletin sales based upon notices from dealers that they wish to
participate in one of the special bulletins offer. Generally, we notify
dealers of our intention to purchase certain products for bulletin shipment.
We then purchase these products in the quantities that the dealers order.
When the bulletin shipment arrives, we do not place it into warehouse
inventory. Rather, we break it up into smaller quantities and deliver it to
the dealers who ordered it. We generally apply a 6% adder ("handling charge")
to this category of sales.
We typically apply an additional adder of 3% to merchandise that is
exported outside of the United States, its territories and possessions. Ace
dealers located outside of the United States, its territories and possessions
who are not subject to the additional 3% adder are assessed a flat 2% adder on
all direct shipment sales. We maintain inventories to meet only normal
resupply orders. Resupply orders help keep our inventories at normal levels.
Usually these resupply orders are filled within one day of receipt. Bulletin
orders are somewhat similar to resupply orders, but can be for future delivery.
We do not backlog normal resupply orders and therefore, no significant backlog
exists at any point in time.
We have also created special sales programs for lumber and building
materials products, for products that we periodically assign to an "extreme
competitive price sales" classification, and for products from specified
vendors for delivery to our dealers on a direct shipment basis (LTL Plus
Program). Under our lumber and building materials ("LBM") program, we do not
impose any adder or national advertising assessment on direct shipment orders
for these products. Our LBM program enables our dealers to realize important
savings from our closely monitored lumber and building materials purchasing
procedures. Also, our LBM program offers our 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 we
have with certain major vendors.
Our Store Traffic Opportunity Program ("STOP") is a program where we offer
our dealers specific products that we assign to a "competitive price sales"
classification. These products are delivered from our warehouses without the
addition of freight charges and with an adder (if any) of up to 5%, determined
on an item by item basis. Our officers have the authority to add and withdraw
items from the STOP program, and to establish reasonable minimum or multiple
item purchase requirements for this program. We do not make any patronage
dividend distributions for purchases under the STOP program. We do, however,
consider STOP purchases to be either warehouse purchases or bulletin purchases,
as applicable, in determining the forms of patronage dividend distributions.
(See the heading "Business" subheading, "Forms of Patronage Dividend
Distributions.")
Our LTL Plus Program allows dealers to purchase full or partial truckloads
of products from specific vendors for direct shipment delivery. No adder or
national advertising assessment applies to these purchases. The current
maximum amount of patronage dividends for products in the LTL Plus category
is .5% of these sales. (See heading "Business," subheading "Patronage Dividend
Determinations and Allocations.")
In addition to hosting conventions as well as other shows and product
exhibits for our dealers, we also provide many special services. We offer
these services at established charges. These services include inventory
control systems, as well as price and bin ticketing. We also provide dealers
with a checklist service so that they can have current information about the
merchandise that we offer. We also provide a choice of ongoing educational and
training programs for dealers. (See the heading "Business," subheading
"Special Charges and Assessments.")
Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group
Dealer Insurance Program so that dealers can purchase different types of
insurance coverage. This program offers "all risk" property insurance and
business interruption, crime, liability and workers' compensation insurance,
in addition to medical insurance for store employees. AHC Realty Corporation,
another wholly owned subsidiary, offers broker services to dealers who want
to buy or sell stores. Loss Prevention Services, Inc., another wholly owned
subsidiary, offers security training and other loss prevention services to
dealers.
During 1996, our wholly owned subsidiary, Ace Hardware Canada, Limited,
began operations as a wholesaler of hardware and related merchandise in Canada.
It has two distribution facilities located in Calgary, Alberta and Brantford,
Ontario. Ace Hardware Canada, Limited generated less than three percent (3%)
of our consolidated revenue during fiscal year 1998.
We operate our Company-owned retail hardware stores though our wholly owned
subsidiaries A.H.C. Store Development Corp. and Ace Corporate Stores, Inc. For
further information about these stores, please see the heading "Properties."
We manufacture paint and similar coating products at our factories in
Matteson and Chicago Heights, Illinois. These factories are the main source of
the paint products that we offer for sale. We operate our paint manufacturing
business as a separate Division of our Company for accounting purposes. We
purchase all our raw materials for paint manufacturing from outside sources.
We have had adequate sources of raw materials in the past, and we do not
currently expect any shortages of raw materials that would have a major impact
on our paint operations. Paint manufacturing is seasonal in the sense that
greater paint sales occur from April through September. Historically, our need
to comply with environmental laws and regulations has not had a major effect
on our ability to conduct our paint manufacturing operations.
Our business, both hardware wholesaling and paint manufacturing, is not
dependent on any major suppliers and we feel that any seasonal fluctuations
do not have a major effect on our operations. For more discussion of our
business, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which appears after the "Notes to Financial Statements."
We also offer services to members that relate to the operation of their
retail businesses. We provide these services (such as advertising,
merchandising and training programs) to assist our members and in some cases,
to maximize our centralized buying power.
Strategic Planning
We have a strategic planning process that results in goals, objectives and
programs that we want to develop in the future for our Company and our members.
Because strategic plans deal with the future, this discussion of them contains
"forward looking statements," which are based on our current expectations. The
actual results of our efforts can differ greatly from the results that we might
desire. We believe that we have the facilities, the employees and the resources
for ongoing success as we implement our plans and programs, but the future is
difficult to forecast, especially things like revenues, costs, margins and
profits which are influenced by many factors. Some of these factors are
discussed below.
The effects of future growth in the hardware and hardlines-related
industries, are uncertain. By "hardlines-related industries" we mean
lumber/building materials, home center, do-it-yourself, rental and
commercial/industrial categories. The future condition of the economy is
also uncertain, when viewed domestically, internationally or in specific
geographical regions. Some other uncertainties that could affect our plans
include possible future changes in merchandise and inventory prices, and the
effect of increasingly intense competition. There could be potential shifts
in market demand for some products. Future lawsuits and laws, especially laws
dealing with franchising, licensing and environmental matters could affect our
business. We cannot predict whether these uncertainties might cause future
costs or liabilities or have some other effect on our future ability to
achieve our plans.
Through our ongoing strategic planning process we have focused our plans
around four cornerstones for future growth and success in our competitive
industry. These four cornerstones are: Retail Success (store operations),
Wholesale Success (distribution), International growth and new member growth.
Retail success for our dealers is a primary objective because, in our opinion,
it drives both their retail performance and our wholesale growth. We have
therefore increased our efforts to assist members in our "retail success
initiatives," which are designed to improve their retail performance and
competitiveness. These retail success initiatives include retail goals that
we urge dealers to strive for within their stores and in locally competitive
markets. These goals do not, however, impose major restrictions or requirements
on members. Our minimum requirements for the acceptance of new members are
outlined in the current Membership Agreement and in the Member Operational
Requirements that apply under that Agreement. The Operational Requirements do
require that, within one year the member must make us the primary source of
supply and terminate any previous participation in the program of any other
major hardware wholesaler. There are currently no general requirements (apart
from special voluntary programs) where members have to make particular
percentages of purchases from us or have to achieve minimum retail performance
levels, such as sales dollars per square foot.
The four cornerstones described above also include our strategic plans to
focus on the consumer through research, target marketing and the development
of a suitable long-term advertising strategy. They also include our review of
merger and acquisition opportunities and our development of international and
domestic nonshareholder programs. The term "Encore Growth" refers to an
extension of our earlier efforts which we called "The New Retail Age of Ace,"
"The New Age of Ace" and "Ace 2000." Our present strategy is a further
development of these earlier efforts and is not in conflict with them.
Special Charges and Assessments
We sponsor a national advertising program. To pay for this program, we assess
dealers an amount equal to 1.3% of their purchases (except purchases of lumber,
LTL, LTL Plus, building materials products and certain computer systems), with
minimum and maximum yearly assessments for each store location. Through
December 31, 1998, the minimum assessment was $1,622.40 and the maximum
assessment was $5,500.00 for each store location. Effective January 1, 1999,
the minimum assessment is $1,825.20 and the maximum assessment is $6,500.00
for each store location. We grant exemptions from these assessments and make
various adjustments to them for stores located outside the continental United
States. These exemptions and adjustments are based on our management"s
evaluation of the number and types of television broadcasts that are received
in these areas. The amount of our national advertising assessment can be
changed from time to time by our Board of Directors. We can also impose
assessments for regional advertising of up to 2% of a dealer's annual
purchases. Regional advertising assessments are subject to the same minimum
and maximum amounts as the National Advertising assessment.
Every two weeks, we bill your member store for a special low volume account
service charge of $50 if your annual purchases from us (except for lumber and
LTL purchases) are less than $50,000. Effective January 1, 1999, every two
weeks, we will bill your store for a special low volume account service charge
of $30 if your annual purchases from us are between $50,000 and $140,400.
(Through December 31, 1998, we billed your store for this charge if your
annual purchases from us were between $50,000 and $124,800.) The low volume
service charges that we bill to your store in a specific year are automatically
refunded if that store's total purchases (not including lumber and LTL
purchases) increase to over $140,400 during the year. (This limit was $124,800
through December 31, 1998). Your store is excused from this low volume account
service charge during the first 12 months that it is a member. There are some
exceptions to our low volume account service charges that are described below:
1. If you purchase $140,400 of merchandise from us (not counting
carload lumber purchases) during the year (or $124,800 through
December 31,1998), we give you credit on your next billing
statement for any low volume charges which we billed to you earlier
in the year. We then stop billing you for low volume account service
charges for the rest of the year, even if your current purchases on
a billing statement are less than $5,400 (or $4,800 through December
31, 1998); and
2. We do not bill low volume account service charges every two weeks
if your store's sales volume with us the year before was at our
minimum ($140,400 effective January 1, 1999 and $124,800 through
December 31, 1998), but we will bill these charges in a lump sum
to your last statement of the year if you do not reach our
applicable minimum by that time.
An Ace store that falls below our minimum purchase levels can also be
subject to termination.
We add a late payment service charge on any past due balance that you owe
us for merchandise, services, or your stock subscription. The current rate for
the late payment service charge is .77% per biweekly statement period, except
in Texas where the charge is .384% and Georgia where the charge is .692%. We
consider a past due balance to exist whenever we do not receive payment of
the amount shown as due on your billing statement within 10 days after the
date of that statement. We can change the rate of our late payment service
charge from time to time.
Our retail training program called the "S.T.A.R. Program" was in effect
through June 30, 1998. Under this program, our members were required to
subscribe to video training tapes and related course materials if their stores
were located in the United States or U.S. Territories. The initial monthly
charge for this program was $16 for a single store or parent store and $11 for
each branch store. A single store or parent store is one that has a share of
our Class A voting stock (or one that involves a stock subscription for a share
of our Class A Stock.) A branch store is one whose membership involves only
shares (or a subscription for shares) of our nonvoting Class C Stock. Branch
stores could request an exemption from this monthly charge.
The "S.T.A.R. Program" was replaced by a new retail training program called
the "Ace Training Network" effective July 1,1998. This new program, like the
"S.T.A.R. Program" is required for all member stores in the United States and
U.S. Territories. Under the "Ace Training Network," we will bill you a monthly
fee which we call a "monthly training assessment." This assessment is $16 per
month for each single store or parent store and $11 for each branch store. A
single store or parent store is one that has a share of our Class A voting
stock (or one that involves a stock subscription for a share of our Class A
Stock.) A branch store is one whose membership involves only shares (or a
subscription for shares) of our nonvoting Class C Stock. Branch stores can
request an exemption from the monthly training assessment.
With the Ace Training Network, you have the option of choosing how your
monthly training assessment dollars will be spent. Under this program, you are
initially issued 200 points, and one point equals one dollar in your training
account. We credit you with another point for each dollar you pay for your
monthly training assessment. Thus, a single store or parent store can earn 16
points per month and a branch store can earn 11 points per month. You may use
your points at any time to buy one of the training programs that we offer. If
you do not have enough points for the program that you want, you can use the
points that you have and we will bill you for the difference. Multiple stores
and member groups can pool their points together to purchase our training
programs. As of July 1, 1998, there were over 10 of these training programs
available at a variety of prices.
We also have a mandatory subscription service for Material Safety Data Sheet
information for all member stores located in the United States. As of the date
of this filing, the initial yearly assessment for these 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 members and
ourselves in the promotion, advertising and marketing of products and services
that we sell. We have had the following Trademark and Service Mark
Registrations issued by the U.S. Patent and Trademark Office for our marks:
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
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------------ ---------------
"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
"LUBE" 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
"ENVIROCHOICE" Trademark 1,811,392 December 14, 2003
"CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005
"The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE"
in stylized lettering design Service Mark 1,943,140 December 19, 2005
"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
"STAINHALT" Trademark 2,122,418 December 16, 2007
"ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ----------- ---------------
"NHS NATIONAL
HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008
"THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008
As of the date of this filing, we also have the following applications for
new registrations pending in the U.S. Patent and Trademark Office:
Mark Type of goods/services
---- ----------------------
"ACE ROYAL" interior and exterior paint
"ACE CONTRACTOR PRO" paints, primers and varnishes
"ACE DRY GUARD" waterproofing paint
"HEALTHY HOME" interior and exterior paint
"HELPFUL HARDWARE CLUB" promoting the goods and services of
others through various incentive
programs offered to preferred customers
"ACE GARDEN PLACE" retail store services in the field of
hardware, garden products and building
materials
"SEE THE FOLKS IN THE RED VEST" retail store services in the field of
hardware and related goods
"ACE SOLUTIONS PLACE" retail store services in the field of
hardware and related goods
"YOUR NEIGHBORHOOD SOLUTIONS PLACE" retail store services in the field of
hardware and related goods
"ACE" with accent design retail store services in the field of
hardware and related goods
Competition
Competitive conditions in the wholesale hardware industry are intense and
increasing. Independent hardware retailers must remain competitive with
discount stores and chain stores, such as WalMart, Home Depot, Menard's,
Sears, and Lowe's, and with other mass merchandisers. Retail hardware stores
have been slowly shifting their locations to high rent shopping centers. There
has also been a trend toward longer store hours. There is intense pressure on
hardware retailers to obtain low cost wholesale supply sources. In several
markets in the United States, we also compete directly with other dealer-owned
wholesalers such as TruServ Corporation, Do it Best Corporation, and United
Hardware Distributing Co.
Employees
We have 4,672 full-time employees, of which 1,399 are salaried employees.
We also have union contracts covering one (1) truck drivers' bargaining unit(s)
and three (3) warehouse bargaining unit(s). We consider our employee relations
with both union and non-union employees to be good, and we have had no strikes
in the past five years. In general, our employees are covered by either
negotiated or nonnegotiated benefit plans that include hospitalization, death
benefits and, with few exceptions, retirement benefits.
Limitations on Ownership of Stock
Our members own all of our outstanding shares of capital stock. Membership
in our Company is limited to approved dealers in hardware and related products
who have Membership Agreements with us. These are the only ones eligible to
own or purchase shares of any class of our stock.
No dealer is allowed to own more than 1 share of our Class A voting stock,
no matter how many store locations that dealer owns or controls. This ensures
that each stockholder in our cooperative has equal voting power no matter how
many member store locations the stockholder owns or controls. We treat an
unincorporated member or a partnership member as being controlled by someone
else if 50% or more of the assets or profit shares of that member are owned
by (i) another person, partnership or corporation; or (ii) the owner(s) of 50%
or more of the assets or profit shares of another unincorporated business firm
or (iii) the owner(s) of at least 50% of the capital stock of a corporation.
We treat a member that is a corporation as being controlled by someone else
if at least 50% of the capital stock of that member is owned by (i) another
person, partnership or corporation; or (ii) the owner(s) of at least 50% of
the capital stock of another corporation; or (iii) the owner(s) of at least
50% of the assets or profit shares of another unincorporated business.
Distribution of Patronage Dividends
We operate on a cooperative basis for purchases of merchandise from us that
are made by dealers who have become members of our Company. We also operate on
a cooperative basis with dealers who have subscribed for shares of our stock
but who have not yet actually become "members" because they have not yet fully
paid for their $1,000 par value shares of our Class A voting stock. The dealers
in either of these two categories are entitled to receive patronage dividends
once a year on an equitable basis.
We made patronage dividend distributions at the following percentages of our
sales in the warehouse, bulletin and direct shipment categories and on the total
sales of products manufactured by our Paint Division during the past three
fiscal years:
1998 1997 1996
---- ---- ----
Warehouse Sales 4.78251% 4.32753% 4.53912%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 9.1653% 10.3088% 7.9773%
There are other patronage dividends that are calculated separately for
distribution on sales of lumber products, building material and millwork
products and less-than-truckload (LTL) sales of lumber and building material
products. We distributed patronage dividends equal to .4668%, .4593%, and
.4328% of the total sales of these categories (calculated separately by
category) to our members who purchased these products in fiscal years 1998,
1997, and 1996. Under our LTL Plus Program, we also calculate patronage
dividends separately on sales of full or partial truckloads of products
purchased by eligible dealers from certain vendors (see discussion of LTL Plus
Program under the heading "Business.") The amount of patronage dividends that
we currently allocate to LTL Plus sales is .5% of these sales. The LTL Plus
Program patronage dividend was .5% of these sales for fiscal year 1998, 1997,
and 1996.
Patronage Dividend Determinations and Allocations
The amounts that we distribute as patronage dividends consist of our gross
profits on business that we do with dealers who qualify for patronage dividend
distributions, less a proportionate share of our expenses for administration
and operations. Our gross profits consist of the difference between our selling
price for the merchandise that these dealers buy from us and our purchase price
for that merchandise. Our computation of patronage dividends excludes all of our
income and expenses from activities that are not directly related to patronage
transactions. The excluded items primarily consist of profits on business that
we do with dealers who do not qualify for patronage dividend distributions and
any income or loss that we realize from the disposition of property and
equipment. If that occurred, then the income we would derive from this type
of recapture would be included in computing patronage dividends.
Our By-laws provide that, by virtue of dealers being "members" of our Company
(that is, by owning shares of our Class A voting stock), they consent to include
in their gross income for federal income tax purposes all patronage dividends
that we distribute to them. These distributions must be included in gross income
for taxable year in which the dealer receives them. Dealers who have not yet
fully paid the $1,000 purchase price for their shares of our Class A voting
stock are also required to include all patronage dividends we distribute to
them in their gross income as explained above. Under our Stock Subscription
Agreement, dealers must expressly consent to take these patronage dividend
distributions into their gross incomes.
The amount of the patronage dividends which dealers must include in their
gross incomes includes both the cash portion of patronage dividends and any
portion of patronage dividends that we apply against any indebtedness the
dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws.
It also includes any portion of patronage dividends that they receive in shares
of our Class C non-voting stock and in patronage refund certificates.
Under our present program, patronage dividends on each of our three basic
categories of sales (warehouse sales, bulletin sales and direct shipment sales)
are allocated separately, as are patronage dividends under our LTL Plus Program.
Dividend percentage calculations are made with reference to the net earnings
derived from each of the respective categories. The 1998 patronage dividend
rate for the LTL Plus Program is currently .5% of our LTL Plus sales. The 1998
dividend rates for direct shipment and bulletin sales are 1% and 2%,
respectively, while the current warehouse dividend rate is 4.78%.
We do not include sales of lumber and building materials products as part of
warehouse sales, bulletin sales, or direct shipment sales for patronage
dividend purposes. Patronage dividends for lumber and building materials are
calculated separately for 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 for full and partial
truckloads of products purchased under the LTL Plus program. (See the heading
"Business", discussion of LTL Plus program, and the subheading "Forms of
Patronage Dividend Distributions", subparagraphs 2(a)-(b) below.)
Any manufacturing profit realized on intracompany sales of products
manufactured by our Paint Division is allocated and distributed as patronage
dividends to eligible dealers in proportion to their respective annual dollar
purchases of paint and related products from that division. The earnings we
realize on wholesale sales of the Paint Division's products to our eligible
dealers are currently distributed as patronage dividends to them as part of
the patronage dividends which they receive each year in the basic patronage
dividend categories of warehouse sales, bulletin sales, and direct shipment
sales. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's
manufacturing operations for any year result in a net loss instead of a profit
to the Paint Division, this loss would be netted against the earnings we
realized from our other activities during the year, so that the earnings
available for distribution as patronage dividends from these other activities
would be reduced for the year.
Forms of Patronage Dividend Distributions
We make patronage dividend distributions to our eligible dealers in cash,
shares of our Class C Stock and patronage refund certificates according to a
specific plan that has been adopted by our Board of Directors. This plan can
be changed from time to time by the Board as they deem fit depending on business
conditions and our Company's needs.
This plan is summarized below for the purchases that our eligible dealers
make from us on or after January 1, 1998.
1. For each of your eligible stores, we initially calculate the minimum cash
patronage dividend distribution as follows:
(a) 20% of the first $5,000 of the total patronage dividends allocated
for distribution each year to you based on the purchases made for
the eligible store;
(b) 25% of the portion of the total patronage dividends allocated for
that store which exceed $5,000 but do not exceed $7,500;
(c) 30% of the portion of the total patronage dividends allocated for
that store which exceed $7,500 but do not exceed $10,000;
(d) 35% of the portion of the total patronage dividends allocated for
that store which exceed $10,000 but do not exceed $12,500;
(e) 40% of the portion of the total patronage dividends allocated for
that store which exceed $12,500.
2. We distribute the portion of patronage dividends in excess of the cash
amount above in the form of shares of our Class C Non-voting Stock (par
value $100 per share) until the total par value of all shares of all
classes of our capital stock that you hold for the eligible store equals
the greater of:
(a) $20,000; or
(b) the sum of purchases in the following categories that you made for
the eligible 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 and bulletin purchases
(including STOP and excluding Ace manufactured paint and
related products), 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.
Please note, however, that we do not issue fractional shares of Class C
Stock. We take any amount that would result in a fractional share of
stock and distribute it in cash or patronage refund certificates
instead.
3. The portion of your total patronage dividends for each of your eligible
stores which exceeds the sum of:
(a) the cash amount determined under Paragraph 1 above and
(b) the amount of Class C Stock determined under Paragraph 2 above is
distributed to you in cash up to certain limits. The total amount
that you receive in cash for an eligible store cannot exceed 45%
of that store's total patronage dividends for the year. If a
store's total cash distribution would exceed this 45% limit, then
the distribution over that amount is made instead in the form of a
non-negotiable patronage refund certificate. Our Board of Directors
determines the maturity dates and interest rates of these patronage
refund certificates before they are issued. These certificates
include provisions that give us a first lien on the amount of
any indebtedness that you owe us. The certificates also contain
language subordinating them to all the rights and claims of our
secured creditors, general creditors and our bank creditors.
Historically, these patronage refund certificates have matured
within five years from the date we issued them.
With some modifications, the plan described above is applied separately in
determining patronage dividends on our sales of lumber and building materials.
The combined patronage dividends allocated annually to a store from:
* sales of lumber products (other than LTL sales),
* sales of building materials (other than LTL sales),
* sales of millwork product, and
* LTL sales to the store
are used to calculate the minimum cash distribution percentages that we apply
under Paragraph 1 above. A store's patronage dividends from any other sales
category are not taken into account in determining either the minimum portion
or any additional portion of the store's patronage dividends from its purchases
of lumber and building materials products that are distributed in cash. Also,
Paragraphs 2 and 3 above are applied separately for patronage dividends on
lumber and building materials. We do not consider the requirements of
Paragraph 2 to be satisfied in the cases of:
* purchases of lumber products (other than LTL purchases)
* purchases of building materials products (other than LTL purchases), or
* purchases of millwork product
until the store's holdings of our Class C Stock from patronage dividends or our
sales to that store from other eligible categories equal 3% of the store's
purchases within the category during the most recent calendar year. This is
subject to a maximum of lumber and building materials capital stock requirement
of $25,000 under the 1998 plan. No similar special Class C Stock requirement
applies to patronage dividends accrued on LTL purchases, however.
Article XXIV, Section 7 of our By-laws requires the cash portion of any
patronage dividends to be applied against any indebtedness a member owes us
where the membership for his store is terminated before the distribution of
patronage dividends. Despite this, however, 20% of a terminated store's total
annual patronage dividends will be paid in cash if we receive a timely request
for this form of payment.
Because of the requirement of the U. S. Internal Revenue Code that we
withhold 30% of the annual patronage dividends distributed to eligible dealers
whose places of business are located in foreign countries or Puerto Rico, the
cash portion of patronage dividends to these dealers is a minimum of 30%. There
are exceptions to this 30% cash payment in the case of 1) unincorporated Puerto
Rico dealers owned by individuals who are U.S. citizens, and 2) certain dealers
incorporated in Guam, American Samoa, the Northern Mariana Islands, or the U.S.
Virgin Islands. These exceptions apply if less than 25% of the stock of these
dealers is owned by foreign persons, and at least 65% of their gross income for
the last three years has been sufficiently connected with a trade or business
in one of these locations or in the United States.
We also have certain loan programs that allow dealers to pay us back with
part of their patronage dividend distributions. For example, to help members buy
standardized exterior signs identifying their stores, our Board of Directors
has authorized a loan program. Under this program, a dealer may apply to borrow
between $100 to $20,000 per location from us for this purpose. If you obtain a
loan under this program, you may either repay it in twelve payments billed on
your regular bi-weekly billing statement, or you may apply the non-cash portion
of your annual patronage dividends (for up to the next three annual patronage
dividend distributions) toward payment of your loan.
Our Board of Directors has also authorized finance programs to help qualified
dealers buy certain computer systems from us and to finance capital improvements
with patronage dividends. The amount financed cannot exceed 80% of the cost of
any system. For PAINTMAKER computers, members have applied to borrow between
$1,000 to $15,000 per location repayable over a period of three (3) years.
For PACE computers, members have applied to borrow between $5,000 to $50,000
per location repayable over a period of five (5) years. For capital
improvements, members have applied to borrow up to $2.00 per square foot of
retail space repayable over a period of three (3) years. Under these programs,
members have directed us to first apply the patronage refund certificate portion
of their patronage dividend distributions toward the balance owed on these
financed items and next to apply patronage dividends which would otherwise be
payable for the same year in the form of our Class C Stock. These signage,
computer financing and store retrofit programs may be revised or discontinued
by our Board at any time.
Federal Income Tax Treatment of Patronage Dividends
Both the shares of Class C nonvoting Stock and the patronage refund
certificates that we use to pay patronage dividends are "qualified written
notices of allocation" within the meaning of Sections 1381 through 1388 of the
U.S. Internal Revenue Code. These Sections of the Internal Revenue Code deal
with the income tax treatment of cooperatives and their patrons, and have been
in effect since 1963. The dollar amount stated on a qualified written notice of
allocation must be taken into the gross income of the person to whom the notice
is issued, even though this dollar amount may not actually be paid to the person
in the same year that it is taxed.
In order for us to receive a deduction from our gross income for federal
income tax purposes for the amount of any patronage dividends that we pay to
a patron (that is, to one of our eligible and qualifying dealers) in the form
of qualified written notices of allocation, we have to pay (or apply against
any indebtedness that the patron owes us in accordance with Section 7 of Article
XXIV of our By-laws) not less than 20% of each patron's total patronage dividend
distribution in cash and the patron also has to consent to having the written
notices of allocation, at their stated dollar amounts, included in his gross
income for the taxable year in which he receives them. The Internal Revenue
Code also requires that any patronage dividend distributions that we deduct
on our federal income tax return for business we do with patrons must be paid
to those patrons within 8 months after the end of that taxable year.
If you become one of our "members" by owning 1 share of Class A Voting Stock,
you are deemed under the U.S. Internal Revenue Code to have consented to take
the written notices of allocation that we distribute to you into your gross
income. Your consent is deemed because of 1) your act of obtaining or retaining
membership in our Company and 2) because our By-laws provide that your
membership constitutes this consent, and we give you written notification of
that By-law provision. Under another provision of the Internal Revenue Code,
dealers who have subscribed for shares of our stock are also deemed to have
consented to take the dollar amounts of their written notices of allocation into
their gross incomes. This occurs because of the consent provisions included in
the Subscription Agreement for our stock.
If you receive a patronage refund certificate as part of your patronage
dividends (see the subheading "Forms of Patronage Dividend Distributions"),
you may be deemed to have received interest income. This interest would arise
in the form of an original issue discount to the extent that the face amount
of the certificate exceeds the present value of the stated principal and
interest payments that we have to pay you under the terms of the certificate.
This interest income would be taxable to you "ratably" over the term of the
certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code.
Present value for this purpose is determined by using a discount rate equal
to the applicable Federal rate in effect as of the day of issuance of the
certificate, compounded twice a year.
We are required to withhold for federal income tax on the total patronage
dividend distribution we make to anyone who has not furnished us with a
correct taxpayer identification number. We can also be required to
withhold federal taxes on the cash portion of each patronage dividend
distribution made to someone who fails to certify to us that he is not subject
to backup withholding. This withholding obligation based on a failure to
certify may not be applicable, however, unless 50% or more of the total
distribution is made in cash. Since we distribute all of our patronage
dividends for a given year at the same time and since our current patronage
dividend plan (see the subheading "Forms of Patronage Dividend Distributions")
does not permit any member store to receive more than 45% of its patronage
dividends for the year in cash, we believe that a certification failure like
this should not ordinarily have any effect on our Company or any of its dealers.
Patronage dividends that we distribute to patrons who are located in foreign
countries or certain U. S. possessions (including those who are incorporated in
Puerto Rico or who reside in Puerto Rico but have not become citizens of the
United States) have been held to be "fixed or determinable annual or periodic
income." Patrons who receive this type of income are currently required to
pay a tax of 30% of the amount received under Sections 871(a)(1)(A) and 881(a)
(1) of the Internal Revenue Code. When dealers are subject to this 30% tax, we
must withhold it from their patronage dividends and pay it over to the U.S.
Internal Revenue Service. The above does 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 that location or in the United
States.
The 20% minimum portion of the patronage dividends that must be paid in cash
to patrons other than those discussed above may not be enough, depending upon
the patron's income tax bracket, to pay all of the patron's federal income tax
on his annual patronage dividend distributions. In our management's opinion,
the payment of a minimum of 20% of total patronage dividends in cash each year
will not have a material adverse affect on our operations or on our ability to
obtain sufficient working capital for the normal requirements of our business.
Membership Agreement
If you apply to become an Ace member, you must sign a Subscription Agreement
to purchase our stock. You must also sign our customary Membership Agreement.
You must submit a payment of $400 with your signed Membership Agreement. We use
the $400 fee toward our estimated costs of processing your membership
application. If you submit a membership application and we accept it, we sign
both your Membership Agreement and Stock Subscription Agreement and send them
back to you for your records. Your membership may generally be terminated upon
various notice periods and for various reasons (including voluntary termination
by either of us). The details of these reasons and notice periods are in the
Membership Agreement. These reasons for termination and notice periods apply
except where special laws or regulations in certain locations limit our right
to terminate memberships, or require longer notice periods.
Non-Shareholder Programs
In 1989, our Board of Directors first authorized us to affiliate non-
shareholder international dealers who operate retail businesses outside the
United States, its territories and possessions. These international dealers
sign agreements that differ from our regular Membership Agreement. They may
be granted a license to use certain of our trademarks and service marks, but
they do not sign stock subscription agreements or become shareholders, nor do
they receive patronage dividends.
In 1995, our Board of Directors first authorized us to affiliate non-
shareholder retail accounts other than international dealers. These accounts,
which are generally served through our subsidiary National Hardlines Supply,
Inc. ("NHS"), are not granted an ongoing license to use our trademarks and
service marks. They can purchase selected types of products from us for resale.
They are not members of our cooperative, and therefore do not own our stock or
receive patronage dividends.
In 1996, we established a license program for international non-shareholder
dealers. These international licensees typically receive the exclusive right to
use our trademarks and service marks, as well as exclusive rights to distribute
the merchandise they purchase from us in their home countries. International
licensees pay us a negotiated license fee and ongoing royalties on their retail
sales in exchange for these rights, and for our ongoing training and support.
In 1996, we also began operations through our subsidiary Ace Hardware Canada,
Limited ("Ace Canada"). The majority of Ace Canada's customers are non-
shareholders who do not receive patronage dividends from us, and who are not
licensed to use our trademarks and service marks.
In 1998, we also established a domestic franchise program whose franchisees
will not be shareholders of our cooperative, and will not therefore receive .
patronage dividends. These franchisees will pay us a franchise fee and ongoing
royalties on their retail sales. In turn, they receive exclusive rights to a
designated area, a license to use our trademarks and service marks, and various
initial and ongoing training and support.
In October, 1998, we entered into a joint venture with one of our dealers.
The joint venture will operate approximately 12 leased stores in Massachusetts,
New Hampshire and Rhode Island. In January, 1999, we announced that we had
entered into another joint venture with another Ace dealer. This joint venture
plans to open approximately 10 stores in southwest Florida over the next eight
years, and plans to open the first 3 of them within the next two years. In the
future, we will explore other joint venture opportunities with our dealers;
however, we consider each situation unique and we evaluate each opportunity on
its own merits.
As of the end of fiscal years 1998, 1997 and 1996, sales to international
non-shareholder dealers accounted for approximately 7% of our total sales for
fiscal year 1998 and 1997, and less than 5% of our total sales for fiscal year
1996. As of the end of fiscal years 1998, 1997 and 1996, sales to domestic
non-shareholder locations accounted for less than 1% of our total sales in
each year.
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 compliance. Project completion is planned for the
middle of 1999. In addition, a plan has been developed for all devices (time
clocks, power systems, etc.) within the Company. The Company is approximately
60% complete with the project as of January 2, 1999. The remaining 40% will be
dedicated to the Enterprise testing in the first half of 1999. 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. Based upon current estimates, such operating costs could
range between $5.0 million and $6.5 million. The Company has expended
approximately $3.7 million through January 2, 1999 which was primarily incurred
in 1998.
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 system rely will be converted timely or that any such
failure to convert by another company would not have an adverse affect on the
Company's systems.
The Company is in the process of identifying specific business risks as they
relate to Year 2000 and is developing a Contingency Plan. It is anticipated that
the Contingency Plan will be completed in the first half of 1999.
Item 2. Properties
Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois
60523. Information about our main properties appears below:
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
Huntersville, North Carolina 354,000 Owned
Rocklin, California 470,000 Owned
Gainesville, Georgia 478,000 Owned
Prescott Valley, Arizona 633,000 Owned
Princeton, Illinois 1,080,000 Owned
Carol Stream, Illinois (2) 250,000 Leased September 30, 1999
Chicago, Illinois (3) 18,168 Leased May 31, 1999
Hanover, Maryland 57,500 Leased June 26, 2003
Colorado Springs, Colorado 493,000 Owned
Wilton, New York 795,000 Leased September 1, 2007
Brantford, Ontario, Canada (4) 434,000 Leased March 31, 2006
Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001
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 (5) 3 acres Owned
(1) This property is leased by our subsidiary Ace Hardware Canada, Limited for
its corporate office.
(2) We leased this property in October, 1994, for our bulk merchandise
redistribution center.
(3) We leased this property in June, 1994 for our freight consolidation center.
(4) Our subsidiary, Ace Hardware Canada, Limited leases this property for a
distribution warehouse. The Brantford property includes 80,000 square feet
leased for a two-year period from January 1, 1998-December 31, 2000.
(5) This land is next to our LaCrosse, Wisconsin warehouse.
In addition to the above, we or our subsidiaries, A.H.C. Store Development
Corp. and Ace Corporate Stores, Inc. lease other property for retail hardware
stores ranging from approximately 13,000 to 20,000 square feet in size. The
numbers and locations of these leased retail stores as of the date of this
filing are summarized in the table below:
Number of
State Retail Store Leases
----- -------------------
Georgia 6
Illinois 3
Washington 3
Wisconsin 1
We also lease a fleet of trucks and equipment for the main purpose of
delivering merchandise from our warehouses to our dealers.
Item 3. Legal Proceedings
There are no significant pending legal proceedings that either alone or
together involve claims for damages for more than 10% of our current assets
and our subsidiaries on a combined 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 our stock and there is no expectation that
one will develop. We are organized as a Delaware corporation and operate as a
cooperative corporation, and only retailers of hardware and similar
merchandise who are our members own our stock.
The table below shows the number of stockholders of record that we had as of
February 23, 1999:
Title of Class Number of Record Holders
-------------- ------------------------
Class A Stock, $1,000 par value 3,847
Class B Stock, $1,000 par value 2,576
Class C Stock, $100 par value 4,827
Our Company's Articles of Incorporation and By-laws prohibit us from
declaring dividends (other than patronage dividends). (Please see the discussion
of patronage dividends under Item 1. Business.)
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
Income Statement Data:
January 2, December 31, December 31, December 31, December 31,
1999 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
(000's omitted)
Net sales $3,120,380 $2,907,259 $2,742,451 $2,436,012 $2,326,115
Cost of sales 2,868,974 2,682,863 2,535,014 2,253,430 2,152,322
---------- ---------- ---------- ---------- ----------
Gross profit 251,406 224,396 207,437 182,582 173,793
Total expenses 163,446 148,009 135,130 118,840 109,271
---------- ---------- ---------- ---------- ----------
Net earnings $ 87,960 $ 76,387 $ 72,307 $ 63,742 $ 64,522
========== ========== ========== ========== ==========
Patronage dividends
(Notes A, B, 5
and 8) $ 88,022 $ 76,153 $ 73,837 $ 64,716 $ 64,520
========== ========== ========== ========== ==========
Balance Sheet Data:
January 2, December 31, December 31, December 31, December 31,
1999 1997 1996 1995 1994
---------- ----------- ----------- ----------- -----------
(000's omitted)
Total assets $1,047,726 $977,478 $916,375 $759,133 $723,610
Working capital 191,926 158,676 146,862 139,805 150,514
Long-term debt 115,421 96,815 71,837 57,795 64,287
Patronage refund
certificates payable,
long-term 43,465 49,044 49,639 54,741 63,666
Member dealers' equity 261,512 245,479 233,314 217,245 199,827
(A) The Company operates as a cooperative organization, and pays patronage
dividends to member dealers on earnings derived from business done with
such dealers. It is the practice of the Company to distribute substantially
all patronage sourced earnings in the form of patronage dividends.
(B) The form in which patronage dividends are to be distributed can only be
determined at the end of each year when the amount distributable to each
of the member dealers is known. Patronage dividends were payable as
follows:
January 2, December 31, December 31, December 31, December 31,
1999 1997 1996 1995 1994
---------- ----------- --------- --------- ---------
(000's omitted)
In cash $34,826 $29,943 $28,178 $23,522 $27,302
In patronage refund
certificates payable 15,720 13,726 9,500 5,032 9,920
In Class C Stock 26,170 22,366 26,474 27,506 21,766
In patronage financing
deductions 11,306 10,118 9,685 8,656 5,532
------- ------- ------- ------- -------
Total patronage
dividends $88,022 $76,153 $73,837 $64,716 $64,520
======= ======= ======= ======= =======
(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.
The Company has an established, unsecured revolving credit facility with a
group of banks. The Company has unsecured lines of credit of $190 million of
which $165 million was available at January 2, 1999. Any borrowings under these
lines of credit would bear interest at the prime rate or less. Long-term
financing is arranged as determined necessary to meet the Company's capital
or other requirements, with principal amount, timing and form dependent on
prevailing debt markets and general economic conditions.
Capital expenditures for new and improved facilities were $27.0, $49.4 and
$40.4 million in 1998, 1997, and 1996, respectively. During 1998, the Company
financed the $27.0 million of capital expenditures out of current and
accumulated internally generated funds, short-term borrowings and long-term
borrowings. 1999 capital expenditures are anticipated to be approximately $49.3
million primarily for a new distribution facility and improvements to existing
facilities.
As a cooperative, the Company distributes substantially all of its patronage
source earnings to its members in the form of patronage dividends, which are
deductible for income tax purposes.
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 expenditures programs.
Operations 1998 Compared to 1997
Net sales increased 7.3% due to increases in existing retailer volume,
targeted efforts on new store development and conversions. Sales of basic
hardware and paint merchandise (including warehouse, bulletin and direct
shipments) increased 8.1% while lumber and building material sales increased
4.2%. Lumber sales were negatively impacted by price deflation. Excluding
Canada, international sales increased 22.2% primarily due to new international
store development. Net dealer outlets increased in 1998 due to targeted sales
efforts on new store development and conversions to the Ace program and
continued emphasis on retail success.
Gross profit increased $27.0 million or 12.0% and increased as a percent of
sales to 8.06% vs. 7.72% in 1997. Domestic gross profit increased as a percent
of sales due to increased handling charges from sales mix shifts, increased
vendor rebates and lower warehouse cost absorbed into inventory. Gross profit
from additional company-owned stores also contributed to the increase.
Warehouse and distribution expenses decreased $1.0 million and decreased as a
percent of sales from 1.35% in 1997 to 1.23% in 1998. The decrease was due to
increased logistic revenues, non-recurring start-up facility costs in 1997 and
improved warehouse productivity.
Selling, general and administrative expenses increased $7.4 million or
10.3% and increased slightly as a percent to sales due to increased information
technology costs to support our year 2000 efforts and lower costs absorbed into
inventory.
Retail success and development expenses increased $7.3 million or 28.7% due
to costs associated with additional company-owned stores, costs to support
retail initiatives and new business development costs. Increases in this
category are directly related to retail support of the Ace retailer as the
Company continues to make retail investments in our dealer base.
Paint Division sales increased 5.6% to $114.3 million. As a separate division
of the Company, the Paint Division produced net manufacturing profits of $10.4
million in 1998 vs. $11.3 million in 1997. The decrease in net manufacturing
profit is due to unfavorable production variances incurred in 1998. Paint is
the only product manufactured by the Company. As discussed on page 9, patronage
dividends are calculated separately for paint sales and decreased to 9.17% in
1998 vs. 10.31% in 1997 as a result of decreased net profit.
Interest expense increased $2.4 million or 16.3% due to increased dealer
dating programs and long-term debt issued during 1998 to fund the replacement
of a facility.
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 logistic 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.
Impact of New Accounting Standards
In June, 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting for derivative
instruments and hedging activities. The Company is required to comply with
SFAS No. 133 in fiscal year 2000. The Company has not evaluated the impact of
SFAS No. 133 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
The Company is subject to certain market risks, including foreign currency
and interest rates. The Company uses a variety of practices to manage these
market risks, including, when considered appropriate, derivative financial
instruments. The Company uses derivative financial instruments only for risk
management and does not use them for trading or speculative purposes. The
Company is exposed to potential gains or losses from foreign currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. The Company's primary exposure is to changes in exchange rates for
the U.S. dollar versus the Canadian dollar.
Interest rate risk is managed through a combination of fixed rate debt and
variable rate short-term borrowings with varying maturities. At January 2, 1999,
all short-term and long-term debt was issued at fixed rates.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investments and debt
obligations:
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(dollars in thousands)
Assets:
Short-term investment-
fixed rate $15,000 $- $- $- $- $- $15,000
Fixed interest rate 3.00% 3.00%
Liabilities:
Short-term borrowings-
fixed rate $25,000 - - - - - $25,000
Average fixed
interest rate 5.03% 5.03%
Long-term debt-
fixed rate $ 7,433 3,923 6,526 6,350 5,622 93,000 $122,854
Average fixed
interest rate 7.56% 8.17% 7.27% 7.27% 7.12% 7.08% 7.15%
The Company is exposed to credit risk on certain assets, primarily accounts
receivable. The Company provides credit to customers in the ordinary course of
business and performs ongoing credit evaluations. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company currently believes
its allowance for doubtful accounts is sufficient to cover customer credit
risks.
The Company's various currency exposures often offset each other, providing
a natural hedge against currency risk. The Company has utilized foreign exchange
forward contracts to hedge non-U.S. equity investments. Gains and losses on
these foreign currency hedges are included in the basis of the underlying hedged
investment. As of January 2, 1999, the Company has outstanding foreign currency
contracts to sell the equivalent of $30.5 million of Canadian dollars to hedge
a portion of a foreign investment. All contracts mature within one year. The
fair value of this agreement results in an unrecognized gain of $2.3 million
reflected within comprehensive income at January 2, 1999. Settlement of foreign
sales and purchases are generally denominated in U.S. currency resulting in
limited foreign currency transaction exposure.
The table below presents outstanding foreign exchange forward contracts as
of January 2, 1999:
Average
Contract Contract Fair
Amount Rate Value(a)
-------------- -------- -----------
(in thousands) (in thousands)
Foreign currency forward exchange contracts:
Canadian dollar (sell) $22,278 1.3691 $2,348
(a) Equivalent to the unrecognized gain (loss) on existing contracts.
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
Our directors and executive officers are:
Position(s) Currently Held
Name Age and Business Experience (for the past 5 years)
---- --- ----------------------------------------------
Jennifer C. Anderson 48 Director since June 6, 1994; term expires 2000;
President of Davis Lumber and Ace Hardware,
Inc., Davis, California since November, 1985.
Eric R. Bibens II 42 Director since June 2, 1997; term expires 2000;
President of Bibens Home Center, Inc.,
Springfield, Vermont since 1983.
Michael C. Bodzewski 48 Vice President - Sales and Marketing effective
October, 1998; Vice President - Merchandising
effective June, 1990.
Lori L. Bossmann 38 Vice President-Controller effective September,
1997; Controller effective January, 1994.
Lawrence R. Bowman 52 Director since February 4, 1991; term expires
2001; President of Owenhouse Hardware Co., Inc.,
Bozeman, Montana since February, 1996
and Vice President of that company from March,
1988 until February, 1996.
James T. Glenn 39 Director since June 3, 1996; term expires 1999;
President of Ace Hardware of Chattanooga,
Chattanooga, Tennessee since January, 1990.
Position(s) Currently Held
Name Age and Business Experience (for the past 5 years)
---- --- -----------------------------------------------
Ray A. Griffith 45 Vice President, Merchandising effective
October, 1998; 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.
Daniel L. Gust 49 Director since June 1, 1998; term expires 2001;
President of Garden Acres Ace Hardware,
Longmont, Colorado since January, 1991.
D. William Hagan 41 Director since June 2, 1997; term expires 2000;
President of Hagan Ace Hardware, Orange Park,
Florida since February, 1980.
David F. Hodnik 51 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.
Paul M. Ingevaldson 53 Senior Vice President - International and
Technology effective September, 1997; Vice
President - Corporate Strategy and
International Business effective September,
1992.
Mark Jeronimus 50 Director since June 3, 1991; term expires 2000;
President of Duluth Hardware, Inc., Duluth,
Minnesota since February, 1984.
Howard J. Jung 51 Chairman of the Board and Director since June,
1998; term expires 2001; Vice President of Ace
Hardware Stores, Inc., Raleigh, North Carolina
since June, 1997.
Rita D. Kahle 42 Senior Vice President - Wholesale effective
September, 1997; Vice President - Finance
effective January, 1994
John E. Kingrey 55 Director since May 17, 1992; term expires 1999;
President of WK&K Corp., Wimberley, Texas since
May, 1972.
David W. League 59 Vice President-General Counsel and Secretary
effective June, 1990.
William A. Loftus 60 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.
David F. Myer 53 Vice President-Retail Support effective
September, 1997; Vice President - Retail
Support and New Business effective October,
1994; Vice President - Retail Support
effective August, 1992.
Fred J. Neer 59 Vice President - Human Resources effective
April, 1989.
Position(s) Currently Held
Name Age and Business Experience (for the past 5 years)
---- --- ----------------------------------------------
Mario R. Nathusius 55 Director since June 1, 1998; term expires 2001;
President of Cemaco S.A. Guatemala City,
Guatemala since March, 1978.
Roger E. Peterson 61 Director since June 5, 1995; term expires 2001;
Chief Executive Officer effective January 1,
1995.
Donald L. Schuman 60 Vice President - Information Technology
effective June, 1990.
Jon R. Weiss 63 Director since June 4, 1990; term expires 1999;
President of Jon W. Weiss Hardware Company,
Glenview, Illinois since June, 1956.
Our By-laws provide that our Board shall have between 9 and 12 directors. A
minimum of 9 directors must be dealer directors. A maximum of two directors may
be non-dealer directors. Non-dealer directors cannot exceed 25% of the total
number of directors in office at any one time. Non-dealer directors may (but
do not have to be) shareholders of ours who are in the retail hardware business.
Our By-laws provide for three classes of directors who are to be elected for
staggered 3-year terms.
Our By-laws also provide that no one can serve as a dealer director unless
that person is an owner, executive officer, general partner or general manager
of a retail business organization that is a shareholder of ours. Regional
dealer directors are elected from geographic regions of the United States.
The Board under Article IV, Section 1 of our By-laws, determines these regions.
If the Board finds that regional dealer directors represent all regions, then
dealer directors at large may be elected, so long as the maximum number of
directors allowed under our By-laws is not exceeded.
A geographic breakdown of our current regions for the election of directors
at our 1999 annual stockholders meeting to be held on June 7, 1999 appears
below:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode
Island, New York, Pennsylvania, New Jersey;
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee,
North Carolina, South Carolina, District of Columbia, Ohio;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Indiana, Illinois, Michigan, Wisconsin;
Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana,
Nebraska, North Dakota, South Dakota, Utah, Wyoming;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona;
Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska
Under the procedure required by our By-laws, the following director has been
selected as a nominee for reelection as a dealer director at the 1999 annual
stockholders meeting:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
James T. Glenn 39 Second 2 3 years
Jon Weiss and John Kingrey are not eligible for reelection as directors
beginning in 1999. The persons named below have been selected as nominees for
election to the Board for the first time at the 1999 annual meeting as a dealer
director of the class, from the region and for the term indicated:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Richard F. Baalmann, Jr. 39 Second 4 3 years
Richard W. Stine 54 Second 6 3 years
Non-dealer directors and dealer directors at large are not elected from
particular geographic regions.
Article IV of our By-laws has information about the qualifications for
membership on the Board of Directors, the terms of directors, the limitations
on the total period of time that a director may hold office, the procedure for
Nominating Committees to select candidates and nominees for election to the
Board of Directors, and the procedure for filling vacancies on the Board if
one occurs during an unexpired term.
None of the events described under Item 401(f) of Regulation S-K occurred
during the past 5 years for any of our directors, nominees for directorships,
or for any of our executive or staff officers.
Item 11. Executive Compensation
Below is information about the cash compensation that we paid to our five
highest paid executive officers earning over $100,000 for their services in
all capacities to us and our subsidiaries during fiscal years 1998, 1997 and
1996:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------- --------------------
(2)
Name Other (4)
and Annual (3) All Other
Principal (1) Compen- Long-Term Compen-
Position Year Salary($) Bonus($) sation($) Payouts($) sation ($)
-------- ---- --------- -------- --------- ---------- ----------
David F. Hodnik 1998 $600,000 - $16,723 $230,268 $151,997
President and Chief 1997 600,000 - 14,147 195,666 133,167
Executive Officer 1996 500,000 - 20,110 173,223 104,989
William A. Loftus 1998 $315,000 $132,804 $11,563 $86,157 $80,873
Executive Vice President-1997 308,300 53,628 12,853 83,241 71,778
Retail 1996 290,000 49,880 8,442 81,132 60,644
Paul M. Ingevaldson 1998 $279,000 $85,430 $12,260 $76,590 $64,702
Senior Vice President- 1997 272,300 49,453 11,738 74,259 46,922
International and
Technology 1996 257,000 40,092 11,188 72,450 49,579
Rita D. Kahle 1998 $270,000 $114,372 $11,563 $65,409 $53,852
Senior Vice President- 1997 250,000 46,237 8,647 57,813 46,733
Wholesale 1996 218,000 36,406 6,826 50,436 33,122
Michael C. Bodzewski 1998 $248,000 $85,450 $11,563 $63,681 $53,658
Vice President- 1997 235,750 45,420 9,988 57,990 34,785
Sales and Marketing 1996 217,250 37,018 7,312 52,107 36,384
(1) The Incentive Compensation Plan covers each of the executive officers
(except Mr. Hodnik). The bonus amounts awarded to participants in the Plan
are determined in accordance with achievement of individual performance
based objectives and achievement of corporate goals. The maximum short-term
incentive award for each executive officer is 20% of their respective salary
in 1996 and 1997 and 25% to 35% of their respective salary in 1998. The
short-term bonus award becomes payable to each participant as early as
practicable at or after the end of the fiscal year.
(2) The Company provided automobiles to certain of its executive officers. The
Company requires them to maintain records with respect to any business
automobile use. Such officers pay, both directly and by reimbursement to
the Company, personal automobile expenses. During 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 cooperative environment.
One third of the total long-term incentive award is subject to a one year
vesting provision. Total awards paid in 1998 were $230,268, $86,157,
$76,590, $63,681 and $65,409 for Messrs. Hodnik, Loftus, Ingevaldson,
Bodzewski and Ms. Kahle, respectively.
Effective January 1, 1995, executive officers may elect to defer a portion
(20% to 100%, in 20% increments) of the annual award granted. Participants'
compensation deferrals are credited with a specified rate of interest to
provide a means to accumulate supplemental retirement benefits. Deferred
benefits are payable over a period of 5 to 20 years. Annual elections are
required for the upcoming deferral year by December of the preceding year.
Of the total 1998 awards, amounts deferred were $122,809, $80,413, $76,590,
$42,454 and $65,409 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 participate in the
Company's profit sharing plan after one year of service. Those active
employees covered by a collective bargaining agreement regarding
retirement benefits, which were the subject of good faith bargaining, are
not eligible if such agreement does not include them in the plan. For the
year 1998, the Company contributed a maximum of 10.8% of each participant's
eligible compensation to the Profit Sharing Plus Plan (9.8% profit sharing
and 1% Company 401-K match). During the year 1998, $17,280 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 1998, amounts expensed by
the Company pursuant to the Plan were $151,977 for Mr. Hodnik, $80,873 for
Mr. Loftus, $64,702 for Mr. Ingevaldson, $53,658 for Mr. Bodzewski and
$53,852 for Ms. Kahle.
The Company also funds the base premium for a supplemental universal life
insurance policy for each officer but does not contribute to supplemental
retirement benefits through this vehicle. Participants may elect to deposit
a portion (up to one-third) of the long term incentive award into the
variable annuity insurance policy in their name or may elect to defer this
portion under the Deferral Option Plan.
(5) As a cooperative whereby all stockholders are member dealers, the Company
does not grant or issue stock awards of any kind.
Messrs. Hodnik, Loftus, and Ingevaldson are employed under contracts, each
commencing January 1, 1999 for respective terms of two years, terminating
December 31, 2000. Mr. Bodzewski and Ms. Kahle are employed under contracts
commencing April 1, 1998 and January 1, 1998 for a two year term terminating
March 31, 2000 and December 31, 1999, respectively. The contracts provide for
annual compensation effective January 1, 1999 of $600,000, $325,000, $287,000,
$258,000 and $285,000, 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. 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 $160,000 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 $160,000 for each Executive Officer named in the
Compensation table. The present credited years of service under the Pension Plan
for the currently employed executive officers named in the compensation table
are as follows: David F. Hodnik-26 years; William A. Loftus-22 years; Paul M.
Ingevaldson-19 years; Michael C. Bodzewski-21 years and Rita D. Kahle-12 years.
Compensation Committee Report
The Compensation Committee is responsible for approving the compensation
guidelines for all Corporate Officers, Senior management and administering the
Company's Incentive Plans. Our decisions are based on our understanding of Ace's
business and it's long-term strategies, as well as our knowledge of the
capabilities and performance of the Company and of the executives. We stress
long-term measured results, focus on team work, accepting prudent risks and are
strongly committed to fulfilling dealer/consumer needs.
We believe that our dealers are best served by running the Company with a
long-term prospective while striving to deliver consistently good year-end
results. Therefore, the Company's Executive Compensation Program has been
designed to attract, retain, and reward superior talent that will produce
positive results and enhance Ace's position in a highly competitive hardware and
home improvement marketplace. The Company is led by exceptional managers, many
of them long-term Ace people; while others bring experiences from outside Ace.
We believe the compensation for our executives should be competitive with
other high performing companies in order to motivate and retain the talent
needed to produce superior results. In that regard, our Committee conducts an
overall review of compensation programs and philosophies biannually.
We review information supplied by an independent consultant and other
marketplace data to determine the competitiveness of Ace's total compensation
package.
We do not seek to position compensation with any particular range as
compared to the marketplace. Moreover, the Committee believes that special
management talents and sensitivities are required to balance the unique
relationship between and among the Company, its employees, dealers and
suppliers. Therefore, we go beyond a simple evaluation of competitive salary
information and Company financial results in making compensation decisions.
Our Committee annually establishes an executive salary based on our
evaluation of the executive's level of responsibility and individual performance
considered in light of competitive pay practices. We gage individual performance
in developing and executing corporate strategies; leading and developing people;
initiating and managing change; balancing the many relationships within the Ace
family; and, contributing to programs which impact the Company's performance.
Under the Annual Incentive Plan each officer is assigned a target incentive
at the beginning of the year (the greater the individual's responsibility, the
higher the percentage of target incentive to salary). This plan has both an
individual and Team performance factor. This is used to reflect the results of
the organization unit and for overall Company performance.
Consistent with our increased focus on long-term objectives, we developed
our long-term incentive plan based on total corporate performance. A three year
performance cycle is established each year with officers receiving an award
which varies if minimum pre-determined performance goals are achieved at the end
of the cycle. No payout occurs unless the Company and Ace dealers achieve
certain performance objectives. As a pay for performance plan, the long-term
incentive plan is intended to motivate and reward executives by directly linking
the amount of any award to specific long-term corporate financial goals and
total team performance.
The CEO and President, participates in the base salary and long-term
incentive compensation program described in this report consistent with our
compensation philosophy. At risk compensation represents a significant portion
of the CEO and President's total compensation package. The President's
compensation includes a competitive base salary and a long-term incentive award
to maintain the commitment to long-term company performance and shareholder
return.
Compensation of Directors
Effective January 1, 1999, and January 1, 1998, each member of the Board of
Directors receivesa monthly fee of $2,667 and $2,500, 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
January 1, 1999 and March 1, 1998 each Board of Director Committee Chairperson
receives $750 and $500, respectively, per meeting chaired. Effective as of the
foregoing dates, Mr. Jung is paid a total annual fee of $110,000 in his capacity
as Chairman of the Board.
In 1994, the previous Deferred Director Fee Plan was amended, restated and
retitled the Directors' Deferral Option Plan. Like the Officers' Long Term
Incentive Compensation Deferral Option Plan, under this Directors' Plan,
directors may elect to defer a portion (5% to 100%, in 5% increments) of their
annual director's fee. Deferred benefits are payable over a period of 5 to 20
years, as elected. Annual elections are required for the upcoming deferral year
by December of the preceding year.
Each member of the Board is also reimbursed for the amount of travel and
lodging expenses incurred in attending meetings of the Board and of the
Committees of the Board. The expenses incurred by them in attending the
semi-annual conventions and exhibits which the Company sponsors are also paid by
the Company. Each member of the Board is also paid $200 per diem compensation
for special committee meetings and nominating committee regional trips attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No shares of our stock are held by any of our officers except for the shares
held by Mr. Jung. He is a director, but his position as Chairman of the Board is
also an executive officer position under Article VIII Section 1 of our By-laws.
We are not aware of anyone who holds more than five percent of our outstanding
voting stock, whether in their own names, or on behalf of someone else.
The table below shows the shares of our Class B and Class C Stock that is
held (directly or indirectly), by our directors, officers, and nominees for
directorships as of February 23, 1999:
Class B Stock Owned Class C Stock Owned
------------------- -------------------
Number Percent Number Percent
of Shares of Class of Shares of Class
--------- -------- --------- --------
Jennifer C. Anderson 4 .155 3,528 .156
Richard F. Baalmann, Jr. 4 .155 2,791 .124
Eric R. Bibens II - - 691 .031
Lawrence R. Bowman 4 .155 2,271 .101
James T. Glenn 4 .155 8,935 .396
Daniel L. Gust - - 441 .020
D. William Hagan - - 1,508 .067
Mark Jeronimus - - 820 .036
Howard J. Jung - - 555 .025
John E. Kingrey 4 .155 1,332 .059
Mario R. Nathusius - - 3,791 .168
Jon R. Weiss 4 .155 2,754 .122
Richard W. Stine 4 .155 5,607 .249
-- ----- ------ -----
All above directors and officers as a group 28 1.085 35,024 1.554
== ===== ====== =====
We are not aware of any contracts or securities pledges that may result in a
change in control of our Company at a later date.
Item 13. Certain Relationships and Related Transactions
The term "owner" as used in this section pertains to owners of our shares.
It includes both those who are named as owners of shares on our corporate books
and records, as well as those who are not named as owners of record, but for
whose benefit someone else is holding the shares. No director, executive officer
or shareholder whom we know to be the owner of more than five percent of any
class of our voting securities or any member of their immediate families had
during fiscal year 1998 or is currently expected to have any significant
interest, (whether direct or indirect), in any transaction over $60,000 with us,
except that those of our directors who are also Ace Hardware dealers purchased
merchandise and services from us and participated in our programs for their
stores in the ordinary course of business. None of these directors received any
special terms in connection with these transactions or any benefits that were
not available to the other cooperative members that we supply.
None of our directors has had any business relationship during fiscal year
1998 that we must disclose under Item 404(b) of Regulation S-K of the Securities
and Exchange Commission, except Mr. Peterson. He retired as CEO of our Company
effective May 31, 1995 and was first elected as an outside Director on June 5,
1995. He has an agreement with us that continues through May 31, 2000. This
agreement provides for non-competition by Mr. Peterson within the industry and
for his participation in certain Company functions. This agreement also provides
for our payment to Mr. Peterson of $150,000 per year over its 5 year term.
As used below, the term "directors, director nominees and executive
officers" includes
. people in those categories as identified in Item 10 of this filing;
. members of their immediate families;
. any other company or organization where they serve as executive
officers, or partners;
. any other company or organization where they own at least ten percent
of any class of equity securities;
. any trust or estate in which they have a substantial interest as
beneficiaries; and
. any trust or estate where they serve as trustees or positions similar
to trustees.
None of our directors, director nominees and executive officers has been
indebted to us or to our subsidiaries during fiscal year 1998 for more than
$60,000, except for purchasing merchandise and services for their stores from us
in the ordinary course of business and participating in our loan and financing
programs on the same terms offered to our other cooperative members.
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 caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACE HARDWARE CORPORATION
By HOWARD J. JUNG
--------------------------------
Howard J. Jung
Chairman of the Board and Director
DATED: March 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
HOWARD J. JUNG Chairman of the Board March 15, 1999
- ------------------------ and Director
Howard J. Jung
DAVID F. HODNIK President and Chief March 15, 1999
- ------------------------ Executive Officer
David F. Hodnik
LORI L. BOSSMANN Vice President-Controller March 15, 1999
- ------------------------ (Principal Financial and
Lori L. Bossmann Accounting Officer)
Jennifer C. Anderson, Eric R. Directors
Bibens II, Lawrence R. Bowman,
James T. Glenn, Daniel L. Gust,
D. William Hagan, Mark
Jeronimus, John E. Kingrey,
Mario R. Nathusius, Roger E.
Peterson, and Jon R. Weiss
*By DAVID F. HODNIK
---------------
David F. Hodnik
*By LORI L. BOSSMANN
----------------
Lori L. Bossmann March 15, 1999
*Attorneys-in-fact
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 Copy of Restated Certificate of Incorporation of the Registrant
dated September 18, 1974 filed as Exhibit 3-A to the
Registrant's Form S-1 Registration Statement (Registration No.
2-55860) on March 30, 1976 and incorporated herein by
reference.
3-B Copy of 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. 4 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191)
filed on or about March 15, 1999 and incorporated herein by
reference.
3-C Copy of Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 19, 1976 filed as
Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1
Registration Statement (Registration No. 2-55860) on June 10,
1976 and incorporated herein by reference.
3-D Copy of Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 21, 1979 filed as
Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1
Registration Statement (Registration No. 2-63880) on May 23,
1979 and incorporated herein by reference.
3-E Copy of Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 7, 1982 filed as
Exhibit 3-G to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and incorporated
herein by reference.
3-F Copy of Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 5, 1987 filed as
Exhibit 3-F to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and incorporated
herein by reference.
3-G Copy of Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 16, 1989 filed as
Exhibit 4-G to Post-Effective Amendment No. 1 to the
Registrant's S-2 Registration Statement (Registration No.
33-27790) on March 20, 1990 and incorporated herein by
reference.
3-H Copy of Certificate of Amendment to the restated Certificate of
Incorporation 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
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 15, 1985 and
incorporated herein by reference.
4-B Specimen copy of Patronage Refund Certificate as revised in
1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2 to
the Registrant's Form S-1 Registration Statement (Registration
No. 33-4299) on March 29, 1988 and incorporated herein by
reference.
4-C Specimen copy of Class A Stock certificate as revised in 1987
filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement (Registration No.
33-4299) on March 29, 1988 and incorporated herein by
reference.
4-D Specimen copy of Class C Stock certificate filed as Exhibit 4-I
to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and incorporated
herein by reference.
4-E Copy of current standard form of Subscription for Capital Stock
Agreement to be used for dealers to subscribe for shares of the
Registrant's stock in conjunction with new membership
agreements submitted to the Registrant filed as Exhibit 4-L to
Post-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or about
March 23, 1994 and incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant on
and after January 1, 1998 adopted by the Board of Directors of
the Registrant filed as Exhibit 4-F to Post-Effective Amendment
No. 4 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1999 and
incorporated herein by reference.
9 No Exhibit
10-A Copy of Ace Hardware Corporation Retirement Benefits
Replacement Plan Restated and Adopted December 7, 1993 filed as
Exhibit 10-A 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-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.
10-D Copy of Restated PREP Plan (formerly known as Executive
Supplemental 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 Restated Officer Incentive
Plan effective January 1, 1999, filed as Exhibit 10-E to Post-
Effective Amendment No. 4 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 1999 and incorporated herein by reference.
10-F Copy of 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
effective January 1, 1996, filed as Exhibit 10-a-17 to Post-
Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 11, 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
Statement (Registration No. 33-46449) on March 23, 1992 and
incorporated herein by reference.
10-J Copy of current standard form of Ace Hardware Corporation
International Franchise Agreement filed as Exhibit 10-J to
Post-Effective Amendment No. 4 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 1999 and incorporated herein by reference.
10-K Copy of current standard form of Ace Hardware Membership
Agreement filed as Exhibit 10-P to Pre-Effective Amendment No.
2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about April 26, 1995 and
incorporated herein by reference.
10-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 filed as Exhibit 10-A-r to Post-
Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-M Copy of 6.47% Senior Series A notes in the aggregate principal
sum of $30,000,000 issued September 22, 1993 with a maturity
date of June 22, 2008, and $20,000,000 Private Shelf Facility,
pursuant to Note Purchase and Private Shelf Agreement with the
Prudential Insurance Company of America dated as of September
22, 1993 filed as Exhibit 10-R to Post-Effective Amendment No.
2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 23, 1994 and incorporated
herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop facility of
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 Post-Effective Amendment No.1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449) on March
22, 1993 and incorporated herein by reference.
10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of
January 30, 1998 for the Registrant's redistribution center in
Hanover, Maryland filed as Exhibit 10-P to Post-Effective
Amendment No. 4 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 15,
1999 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 Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 23,
1994 and incorporated herein by reference.
10-R Copy of Lease dated September 22, 1994 for bulk merchandise
redistribution center of Registrant in Carol Stream, Illinois
filed as Exhibit 10-Y to the Registrant's Form S-2 Registration
Statement (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
(Registration No. 33-58191) on or about March 23, 1995 and
incorporated herein by reference.
10-U Copy of Ace Hardware Corporation Directors' Deferral Option
Plan Amended and Restated as of January 1, 1997 filed as
Exhibit 10-U to Post-Effective Amendment No. 4 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein 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
Development Corp. and Tri-R Corporation for retail hardware
store premises located in Yorkville, Illinois, filed as Exhibit
10-a-11 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on
or about March 11, 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
warehouse space in Brantford, Ontario, Canada, filed as Exhibit
10-a-12 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on
or about March 11, 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 11, 1996 and incorporated herein by reference.
10-Z Copy of Executive Healthcare Plan adopted by the Board of
Directors of the Registrant on August 25, 1998 filed as Exhibit
10-Z to Post-Effective Amendment No. 4 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 15, 1999 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 11,
1996 and incorporated herein by reference.
10-a-2 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 11, 1996 and incorporated herein by reference.
10-a-3 Copy of current standard form License Agreement for
International Retail Merchants adopted in 1996 filed as Exhibit
10-a-12 to Post-Effective Amendment No. 2 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on
or about March 12, 1997 and incorporated herein by reference.
10-a-4 Copy of Lease Agreement dated as of September 1, 1996 for the
Registrant's project facility in Wilton, New York filed as
Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 12, 1997 and incorporated herein by
reference.
10-a-5 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 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-6 Copy of Second Amendment to the Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted on
December 8, 1998 and effective January 1, 1999, filed as
Exhibit 10-a-6 to Post-Effective Amendment No. 4 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein by
reference.
11 No Exhibit.
12 No Exhibit.
13 No Exhibit.
16 No Exhibit.
18 No Exhibit.
22 No Exhibit.
23 Copy of Consent of KPMG LLP, dated March 12, 1999, filed as
Exhibit 23(a) to Post-Effective Amendment No. 4 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein by
reference.
27 Copy of Financial Data Schedule filed as Exhibit 27 to Post-
Effective Amendment No. 4 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 1999 and incorporated herein by reference.
28 No Exhibit.
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 Report mentioned above, neither our annual report for
fiscal year 1998 nor any proxy soliciting materials for our 1998 annual meeting
have been sent to our shareholders. Copies of that annual report as well as our
proxy soliciting materials will be sent to our shareholders and furnished to the
Securities and Exchange Commission at a later date.
Item 14(a). Index to Consolidated Financial Statements and Financial Statement
Schedules
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at January 2, 1999 and December 31, 1997 F-3
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the years in the three-year period
ended January 2, 1999 F-5
Consolidated Statements of Member Dealers' Equity for each of the years
in the three-year period ended January 2, 1999 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended January 2, 1999 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 January 2, 1999 and December 31, 1997 and the
related consolidated statements of earnings, comprehensive income, member
dealers' equity and cash flows for each of the years in the three-year period
ended January 2, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ace Hardware
Corporation and subsidiaries as of January 2, 1999 and December 31, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 2, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Chicago, Illinois
January 27, 1999
ACE HARDWARE CORPORATION
----------
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and December 31, 1997
ASSETS
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Current assets:
Cash and cash equivalents $ 53,901 $ 14,171
Receivables:
Trade 345,328 320,166
Other 54,517 45,719
----------- -----------
399,845 365,885
Less allowance for doubtful
receivables (2,725) (2,086)
----------- -----------
Net receivables 397,120 363,799
Inventories (Note 2) 334,405 338,509
Prepaid expenses and other current assets 15,146 13,615
----------- -----------
Total current assets 800,572 730,094
----------- -----------
Property and equipment (Note 10):
Land 16,952 17,480
Buildings and improvements 180,850 188,967
Warehouse equipment 70,315 66,330
Office equipment 74,567 71,578
Manufacturing equipment 13,817 13,686
Transportation equipment 16,076 15,312
Leasehold improvements 18,049 16,110
Construction in progress 12,395 6,686
----------- -----------
403,021 396,149
Less accumulated depreciation and
amortization (163,176) (153,170)
----------- -----------
Net property and equipment 239,845 242,979
Other assets 7,309 4,405
----------- -----------
$1,047,726 $ 977,478
=========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and December 31, 1997
LIABILITIES AND MEMBER DEALERS' EQUITY
January 2, December 31,
1999 1997
------------ ------------
(000's omitted)
Current liabilities:
Current installments of long-term debt
(Note 4) $ 7,433 $ 7,515
Short-term borrowings (Note 3) 25,000 42,000
Accounts payable 466,008 423,762
Patronage dividends payable in cash
(Note 5) 34,826 29,943
Patronage refund certificates payable
(Note 5) 20,655 13,636
Accrued expenses 54,724 54,562
------------ ------------
Total current liabilities 608,646 571,418
Long-term debt (Note 4) 115,421 96,815
Patronage refund certificates payable
(Note 5) 43,465 49,044
Other long-term liabilities 18,682 14,722
------------ ------------
Total liabilities 786,214 731,999
------------ ------------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,846 3,874
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 226,571 213,609
Class C Stock of $100 par value,
issuable to dealers for patronage
dividends 26,170 22,366
Additional stock subscribed, net 471 383
Retained earnings 3,292 3,354
Contributed capital 3,295 3,295
Accumulated other comprehensive income (818) (335)
------------ ------------
269,326 253,045
Less: Treasury stock, at cost (7,814) (7,566)
------------ ------------
Total member dealers' equity 261,512 245,479
Commitments (Notes 6 and 10)
------------ ------------
$1,047,726 $ 977,478
============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
-------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Net sales $3,120,380 $2,907,259 $2,742,451
Cost of sales 2,868,974 2,682,863 2,535,014
------------ ------------ ------------
Gross profit 251,406 224,396 207,437
------------ ------------ ------------
Operating expenses:
Warehouse and distribution 38,289 39,292 36,658
Selling, general, and
administrative 79,650 72,218 67,661
Retail success and development 32,907 25,573 21,644
------------ ------------ -------------
Total operating expenses 150,846 137,083 125,963
------------ ------------ -------------
Operating income 100,560 87,313 81,474
Interest expense (Note 12) (17,161) (14,751) (11,855)
Other income, net 6,297 5,735 3,806
Income taxes (Note 7) (1,736) (1,910) (1,118)
----------- ------------ -------------
Net earnings $ 87,960 $ 76,387 $ 72,307
========== ========== =============
Retained earnings at beginning of
year $ 3,354 $ 3,120 $ 4,650
Net earnings 87,960 76,387 72,307
Patronage dividends (Notes 5 and 8) (88,022) (76,153) (73,837)
----------- ------------ -------------
Retained earnings at end of year $ 3,292 $ 3,354 $ 3,120
=========== ============ =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
----------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Net earnings $ 87,960 $ 76,387 $ 72,307
Foreign currency translation,
net (483) (285) (50)
----------- ----------- -----------
Comprehensive income $ 87,477 $ 76,102 $ 72,257
=========== =========== ===========
See accompanying notes to consolidated financial statements.
<TABLE>
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended January 2, 1999 (000's omitted)
Class C Stock
Issuable to Accumulated
Dealers for Additional Other
Class A Class B Class C Patronage Stock Retained Contributed Comprehensive Treasury
Stock Stock Stock Dividends Subscribed* Earnings Capital Income Stock Total
----- ----- ----- --------- ----------- -------- ------------ ------ ----- -----
<S>
Balance at December 31, <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $3,905 $6,499 $177,817 $27,506 $ 515 $4,650 $3,295 -- $(6,942) $217,245
Net earnings -- -- -- -- -- 72,307 -- -- -- 72,307
Net payments on
subscriptions -- -- -- -- 1,603 -- -- -- -- 1,603
Patronage financing
deductions -- -- -- (43) -- -- -- -- -- (43)
Stock issued 268 -- 28,854 (27,463) (1,616) -- -- -- -- 43
Stock repurchased -- -- -- -- -- -- -- -- (10,429) (10,429)
Stock retired (236) -- (9,929) -- -- -- -- -- 10,165 --
Stock issuable as patronage
dividends -- -- -- 26,474 -- -- -- -- -- 26,474
Patronage dividends payable -- -- -- -- -- (73,837) -- -- -- (73,837)
Accumulated other
comprehensive income -- -- -- -- -- -- -- (50) -- (50)
------ ------ -------- ------- ---- ------ ------ -------- ------- ---------
Balance at December 31,
1996 $3,937 $6,499 $196,742 $26,474 $502 $3,120 $3,295 $(50) $(7,206) $233,313
Net earnings -- -- -- -- -- 76,387 -- -- -- 76,387
Net payments on
subscriptions -- -- -- -- 2,906 -- -- -- -- 2,906
Patronage financing
deductions -- -- -- (119) -- -- -- -- -- (119)
Stock issued 236 -- 29,263 (26,355) (3,025) -- -- -- -- 119
Stock repurchased -- -- -- -- -- -- -- -- (13,055) (13,055)
Stock retired (299) -- (12,396) -- -- -- -- -- 12,695 --
Stock issuable as
patronage dividends -- -- -- 22,366 -- -- -- -- -- 22,366
Patronage dividends payable -- -- -- -- -- (76,153) -- -- -- (76,153)
Accumulated other
comprehensive income -- -- -- -- -- -- -- (285) -- (285)
------- ------ ------ ------ ----- ------- ----- ------- ------- ---------
Balance at December 31,
1997 $3,874 $6,499 $213,609 $22,366 $383 $3,354 $3,295 $(335) $(7,566) $245,479
Net earnings -- -- -- -- -- 87,960 -- -- -- 87,960
Net payments on
subscriptions -- -- -- -- 1,463 -- -- -- -- 1,463
Patronage financing
deductions -- -- -- (485) -- -- -- -- -- (485)
Stock issued 215 -- 23,526 (21,881) (1,375) -- -- -- -- 485
Stock repurchased -- -- -- -- -- -- -- -- (11,055) (11,055)
Stock retired (243) -- (10,564) -- -- -- -- -- 10,807 --
Stock issuable as
patronage dividends -- -- -- 26,170 -- -- -- -- -- 26,170
Patronage dividends
payable -- -- -- -- -- (88,022) -- -- -- (88,022)
Accumulated other
comprehensive income -- -- -- -- -- -- -- (483) -- (483)
------ ------ -------- ------- ---- ------ ------ ------ -------- --------
Balance at January 2,
1999 $3,846 $6,499 $226,571 $26,170 $471 $3,292 $3,295 $(818) $(7,814) $261,512
====== ====== ======== ======= ==== ====== ====== ====== ======== ========
*Additional stock subscribed is comprised of the following amounts at December
31, 1996, 1997 and January 2, 1999:
1996 1997 1998
---- ---- ----
Class A Stock $139 $ 86 $ 60
Class B Stock -- -- --
Class C Stock 1,653 1,085 955
----- ----- -----
1,792 1,171 1,015
Less unpaid portion 1,290 788 544
----- ----- -----
$ 502 $ 383 $ 471
===== ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Operating Activities:
Net Earnings $87,960 $76,387 $72,307
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation 21,536 19,494 17,517
Loss on sale of property
and equipment 425 285 712
Increase in accounts
receivable, net (32,207) (15,835) (60,170)
Decrease (Increase) in
inventories 2,713 (12,067) (72,694)
Increase in prepaid expenses
and other current assets (1,531) (1,735) (2,556)
Increase in accounts payable
and accrued expenses 42,204 46,000 64,616
Increase in other long-term
liabilities 3,960 5,205 4,066
-------- -------- --------
Net Cash Provided by
Operating Activities 125,060 117,734 23,798
-------- -------- --------
Investing Activities:
Purchase of property and
equipment (26,975) (49,373) (40,379)
Proceeds from sale of property
and equipment 8,148 149 120
Decrease(Increase) in other assets (2,904) (494) 12
--------- --------- ---------
Net Cash Used in Investing
Activities (21,731) (49,718) (40,247)
--------- --------- ---------
Financing Activities:
Proceeds (payments) of short-term
borrowings (17,000) (29,000) 58,000
Proceeds from notes payable 26,117 32,994 20,853
Payments on long-term debt (7,593) (7,228) (7,462)
Payment of cash portion of
patronage dividend (29,943) (28,178) (23,522)
Payments of patronage refund
certificates and patronage
financing deductions (25,588) (24,941) (22,790)
Proceeds from sale of common stock 1,463 2,906 1,603
Repurchase of common stock (11,055) (13,055) (10,429)
--------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities (63,599) (66,502) 16,253
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents 39,730 1,514 (196)
Cash and Cash Equivalents at
beginning of year 14,171 12,657 12,853
--------- --------- ---------
Cash and Cash Equivalents at end
of year $53,901 $14,171 $12,657
========= ========= =========
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
statements include the accounts of the Company and subsidiaries, all of which
are wholly-owned. All significant intercompany transactions have been
eliminated.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
(c) Receivables
Receivables from dealers include amounts due from the sale of merchandise and
special equipment used in the operation of dealers' businesses. Other
receivables are principally amounts due from suppliers for promotional and
advertising allowances.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is
determined 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 relatively
minor items are generally charged to earnings. Significant improvements or
renewals are capitalized.
Depreciation expense is computed on both straight-line and accelerated
methods based on estimated useful lives as follows:
Useful Life Principal
Years Depreciation Method
----------- -------------------
Buildings and improvements 10-40 Straight line
Warehouse equipment 5-10 Accelerated
Office equipment 3-10 Various
Manufacturing equipment 3-20 Straight line
Transportation equipment 3-7 Straight line
Leasehold improvements are generally amortized on a straight-line basis over
the term of the respective lease.
(f) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated
at the rate of exchange in effect at the balance sheet date while revenues and
expenses are translated at the average monthly ex-change rates prevailing
during the year. The Company has utilized foreign exchange forward contracts to
hedge non-U.S. equity investments. Foreign currency translation adjustments,
net of gains on foreign exchange contracts, are reflected in the accompanying
Consolidated Statement of Comprehensive Income for 1998, 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.
(h) Retirement Plans
The Company has retirement plans covering substantially all non-union
employees. Costs with respect to the noncontributory pension plans are
determined actuarially and consist of current costs and amounts to amortize
prior service costs and unrecognized gains and losses. The Company contribution
under the profit sharing plan is determined annually by the Board of Directors.
(i) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(j) Fiscal Year
Effective January 1, 1998 the company changed its fiscal year from
December 31st to the Saturday nearest December 31st. Accordingly, 1998 ended on
January 2, 1999.
(k) Reclassifications
Certain financial statement reclassifications have been made to prior year
amounts to conform to comparable classifications followed in 1998.
(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 $62,093,000 and $67,151,000 at January 2, 1999 and
December 31, 1997, 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 1998 and 1997. The maximum amount
outstanding at any month-end during the period was $67.0 million in 1998 and
$113.0 million in 1997. The weighted average interest rate effective as of
January 2, 1999 and December 31, 1997 was 5.03% and 6.60%, respectively.
Short-term borrowings outstanding as of January 2, 1999 and December 31, 1997
were $25.0 million and $42.0 million, respectively. At January 2, 1999 the
Company has available a revolving credit facility with a group of banks
providing for $125 million in committed lines and also has available $65
million in uncommitted lines. The aggregate unused line of credit available at
January 2, 1999 and December 31, 1997 was $165 million and $133 million,
respectively. At January 2, 1999 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:
January 2, December 31,
1999 1997
---------- ------------
(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% $10,270 $12,432
$20,000,000 due in quarterly installments of
$952,400 with interest payable quarterly at
a fixed rate of 6.89% 4,762 8,571
$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 30,000
$25,000,000 due in annual installments of
$5,000,000 commencing February 9, 2006 with
interest payable quarterly at a fixed rate
of 6.61% 25,000 --
Liability under capitalized leases (see Note 10) 1,370 2,171
Installment notes with maturities through 2002
with various interest rates 1,452 1,156
-------- --------
122,854 104,330
Less current installments 7,433 7,515
--------- --------
$115,421 $96,815
========= ========
Aggregate maturities of long-term debt are $7,433,000, $3,923,000,
$6,526,000, $6,350,000 and $5,622,000 in 1999 through 2003, respectively, and
$93,000,000 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 1998, 1997 and 1996 follows:
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
------- ------------ ----- ---------- ---------
(000's omitted)
1998 $34,826 $15,720 $26,170 $11,306 $88,022
1997 29,943 13,726 22,366 10,118 76,153
1996 28,178 9,500 26,474 9,685 73,837
Patronage dividends are allocated on a fiscal year basis with issuance in the
following year.
The patronage refund certificates outstanding or issuable at January 2, 1999
are payable as follows:
Interest
Amount Rate
------ --------
(000's omitted)
1999 $11,460 6.00%
2000 9,195 7.00
2001 4,930 6.00
2002 9,272 6.25
2003 13,543 6.00
2004 15,720 6.00
A portion of the patronage refund certificates payable on January 1, 2000
will be prepaid, and accordingly, is classified as current liabilities in the
accompanying January 2, 1999 Consolidated Balance Sheet.
(6) Retirement Plans
The Company has defined benefit pension plans covering substantially all
non-union employees. Benefits are based on years of service, highest average
compensation (as defined) and the related profit sharing and primary social
security benefit. Contributions to the plan are based on the Entry Age Normal,
Frozen Initial Liability actuarial funding method and are limited to amounts
that are currently deductible for tax reporting purposes. As of January 2, 1999
plan assets were held primarily in equities, mutual funds and group annuity
contracts.
Pension expense for the years included the following components:
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ ------------
(000's omitted)
Service cost - benefits earned
during the period $ 293 $ 358 $ 144
Interest cost on projected
benefit obligation 428 351 558
Expected return on plan assets (710) (630) (867)
Net amortization and deferral 87 53 229
-------- -------- ---------
Net periodic pension expense $ 98 $ 132 $ 64
======== ======== =========
In 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 in 1996 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 Sheets at January 2, 1999 and
1997 (December 31st measurement date):
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Change in benefit obligation:
Benefit obligation at beginning of year $5,041 $4,813
Service cost 293 358
Interest cost 428 351
Actuarial losses 325 181
Benefits paid (746) (662)
---------- ------------
Benefit obligation at end of year 5,341 5,041
---------- ------------
Change in plan assets:
Fair value of plan assets at beginning
of year 9,122 7,964
Actual return on plan assets 1,001 1,820
Employer contribution 71 -
Benefits paid (746) (662)
---------- ------------
Fair value of plan assets at end of year 9,448 9,122
---------- ------------
Funded status 4,107 4,081
Unrecognized transition asset (91) (104)
Unamortized prior service cost (631) (680)
Unrecognized net actuarial gains (2,776) (2,661)
---------- ------------
Prepaid pension cost included in other
assets $ 609 $ 636
========== ============
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% in 1998 and 7.25% in 1997.
The related expected long-term rate of return was 8.0% in 1998 and 1997. The
rate of increase in future compensation was projected using actuarial salary
tables plus 1.0% in 1998 and 1997.
The Company also participates in several multi-employer plans covering union
employees. Amounts charged to expense and contributed to the plans totaled
approximately $216,000, $225,000 and $265,000 in 1998, 1997 and 1996,
respectively.
The Company's profit sharing plan contribution for 1998, 1997 and 1996 was
approximately $13,746,000, $12,240,000 and $11,357,000, respectively.
(7) Income Taxes
As a cooperative, the Company distributes substantially all of its patronage
sourced earnings to its members in the form of patronage dividends. The 1998,
1997 and 1996 provisions for federal income taxes were $1,105,000, $1,501,000
and $860,000, respectively, and for state income taxes were $631,000, $409,000
and $258,000, respectively.
The Company made tax payments of $1,374,000, $2,807,000 and $1,524,000 during
1998, 1997 and 1996, 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
-------------------
January 2, December 31,
1999 1997
---------- ------------
Class A Stock, voting, redeemable at
par value -
Authorized 10,000 10,000
Issued and outstanding 3,846 3,874
Class B Stock, nonvoting, redeemable at
not less than twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,592 2,716
Treasury stock 3,907 3,783
Class C Stock, nonvoting, redeemable at
not less than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,265,718 2,136,085
Issuable as patronage dividends 261,700 223,660
Additional Stock Subscribed:
Class A Stock 60 86
Class B Stock - -
Class C Stock 9,550 10,850
At January 2, 1999 and December 31, 1997 there were no common shares reserved
for options, warrants, conversions or other rights; nor were any options
granted or exercised during the two years then ended.
Member dealers may subscribe for the Company's stock in various prescribed
combinations. Only one share of Class A Stock may be owned by a dealer with
respect to the first member retail outlet controlled by such dealer. Only four
shares of Class B Stock may be owned by a dealer with respect to each retail
outlet controlled by such dealer, but only if such outlet was a member of the
Company on or before February 20, 1974. An appropriate number of shares of
Class C Stock must be included in any subscription by a dealer in an amount to
provide that such dealer has a par value of all shares subscribed for equal to
$5,000 for each retail outlet. Unregistered shares of Class C Stock are also
issued to dealers in connection with patronage dividends. No dividends can be
declared on any shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail
outlet, all shares of stock of the Company, held by the dealer owning or
controlling such outlet, must be sold back to the Company, unless a transfer of
such shares is made to another party accepted by the Company as a member dealer
with respect to the same outlet.
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.
Additional Stock Subscribed in the accompanying statements represents the par
value of shares subscribed, reduced by the unpaid portion.
All shares of stock are currently issued and repurchased at par value, except
for Class B Stock which is repurchased at twice its par value, or $2,000 per
share. Upon retirement of Class B shares held in treasury, the excess of
redemption price over par is allocated equally between contributed capital and
retained earnings.
Transactions during 1996, 1997 and 1998 affecting treasury shares follow:
Shares Held in Treasury
-----------------------
Class A Class B Class C
------- ------- -------
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 --
Stock issued -- -- --
Stock repurchased 243 124 105,639
Stock retired (243) -- (105,639)
-------- -------- --------
Balance at January 2, 1999 -- 3,907 --
======== ======== ========
(9) Segments
The Company is principally engaged as a wholesaler of hardware and related
products and manufactures paint products. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which the Company has adopted in the current year.
The Company identifies segments based on management responsibility and the
nature of the business activities of each component of the Company. The Company
measures segment earnings as operating earnings including an allocation for
interest expense and income taxes. Information regarding the identified
segments and the related reconciliation to consolidated information are as
follows:
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
January 2, 1999
---------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
Net sales from
external customers $3,086,913 $20,798 $12,669 -- $3,120,380
Intersegment
sales 13,701 93,536 -- (107,237) --
Interest expense 17,161 1,464 244 (1,708) 17,161
Depreciation 19,808 1,392 336 -- 21,536
Segment earnings
(loss) 78,442 10,364 (382) (464) 87,960
Identifiable
segment assets 987,832 29,883 39,030 (9,019) 1,047,726
Expenditures for
long-lived
assets 22,270 937 3,768 -- 26,975
December 31, 1997
-----------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
Net sales from
external customers $2,882,457 $18,788 $6,014 -- $2,907,259
Intersegment
sales 4,377 89,490 -- (93,867) --
Interest expense 14,751 1,005 88 (1,093) 14,751
Depreciation 17,977 1,371 146 -- 19,494
Segment earnings
(loss) 64,844 11,306 432 (195) 76,387
Identifiable
segment assets 928,401 28,957 24,206 (4,086) 977,478
Expenditures for
long-lived
assets 47,312 806 1,255 -- 49,373
December 31, 1996
-----------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
Net sales from
external customers $2,721,531 $19,080 $1,840 -- $2,742,451
Intersegment
sales 1,119 83,992 -- (85,111) --
Interest expense 11,855 1,003 33 (1,036) 11,855
Depreciation 16,030 1,439 48 -- 17,517
Segment earnings
(loss) 63,925 8,281 176 (75) 72,307
Identifiable
segment assets 874,215 28,036 16,266 (2,142) 916,375
Expenditures for
long-lived
assets 39,056 968 355 -- 40,379
Net sales and long-lived assets by geographic region based upon customer
location for 1998, 1997 and 1996 were as follows:
January 2, 1999 December 31, 1997 December 31, 1996
--------------- ----------------- -----------------
(000's omitted)
Net sales:
United States $2,903,906 $2,717,881 $2,610,573
Foreign countries 216,474 189,378 131,878
---------- ---------- ----------
Total $3,120,380 $2,907,259 $2,742,451
========== ========== ==========
Long-lived assets, net:
United States $234,539 $236,488 $206,184
Foreign countries 5,306 6,491 7,350
---------- ---------- ----------
Total $239,845 $242,979 $213,534
========== ========== ==========
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(10) Commitments
Leased property under capital leases is included as "Property and Equipment"
in the Consolidated Balance Sheets as follows:
January 2, December 31,
1999 1997
---------- ------------
(000's omitted)
Data processing equipment $3,600 $3,633
Less: accumulated depreciation
and amortization (1,905) (1,506)
---------- ------------
$1,695 $2,127
========== ============
The Company rents buildings and warehouse, office and certain other equipment
under capital and operating leases. At January 2, 1999 annual minimum rental
commitments under leases that have initial or remaining noncancelable terms in
excess of one year are as follows:
Year Ending, Capital Operating
- ------------ ------- ---------
(000's omitted)
1999 $ 963 $18,905
2000 413 16,110
2001 76 12,520
2002 -- 8,613
2003 -- 6,636
Thereafter -- 22,984
------- ---------
Total minimum lease payments 1,452 $85,768
=========
Less amount representing interest 82
-------
Present value of total minimum lease payments $ 1,370
=======
All leases expire prior to 2013. Under certain leases, the Company pays real
estate taxes, insurance and maintenance expenses in addition to rental expense.
Management expects that in the normal course of business, leases that expire
will be renewed or replaced by other leases. Rent expense was approximately
$37,023,000, $33,343,000 and $29,747,000 in 1998, 1997 and 1996, respectively.
Rent expense includes $6,004,000, $5,956,000 and $5,503,000 in contingent
rentals paid in 1998, 1997 and 1996, respectively, primarily for transportation
equipment mileage.
(11) 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 $70,254,000, $65,013,000 and $64,551,000 was charged to operations
in 1998, 1997 and 1996, respectively.
(12) Interest Expense
Interest paid was $16,553,000, $15,281,000 and $12,481,000 in 1998, 1997 and
1996, respectively, net of capitalized interest of $1,022,000 and $523,000 in
1997 and 1996.
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 15th day of March, 1999.
JENNIFER C. ANDERSON MARK JERONIMUS
Jennifer C. Anderson Mark Jeronimus
ERIC R. BIBENS II HOWARD J. JUNG
Eric R. Bibens II Howard J. Jung
LAWRENCE R. BOWMAN JOHN E. KINGREY
Lawrence R. Bowman John E. Kingrey
JAMES T. GLENN MARIO R. NATHUSIUS
James T. Glenn Mario R. Nathusius
DANIEL L. GUST ROGER E. PETERSON
Daniel L. Gust Roger E. Peterson
D. WILLIAM HAGAN JON R. WEISS
D. William Hagan Jon R. Weiss
