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 1999 fiscal year ended January 1, 2000 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 16, 2000, the aggregate value of the
Class A Stock held by non-affiliates (dealer-stockholders) calculated on the
basis of this repurchase price was $3,832,000.
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.YesX 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 16, 2000:
Class A (voting) Stock, $1,000 par value 3,832 shares
Class B (non-voting) Stock, $1,000 par value 2,408 shares
Class C (non-voting) Stock, $1,100 par value 2,395,406 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 1999 fiscal year on January 1, 2000, there
were 5,082 stores having Membership Agreements with us. The States with the
largest concentration of members are California (approximately 10%), Texas and
Illinois (approximately 6% each), Florida (approximately 5%), and Michigan and
Georgia (approximately 4% each). The States where we shipped the largest
percentages of merchandise in fiscal year 1999 are California (approximately
11%), Illinois (approximately 8%), Florida (approximately 6%), Texas
(approximately 5%), and Michigan and Georgia (approximately 4% each).
Approximately 6.5% 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:
1999 1998 1997
------ ------ ------
Member outlets at beginning of period 5,039 5,032 5,067
New member outlets 264 231 208
Member outlets terminated 221 224 243
------ ------ ------
Member outlets at end of period 5,082 5,039 5,032
Dealers having one or more member ====== ====== ======
outlets at end of period 3,932 3,963 4,022
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 1999, warehouse sales were 63% of our total sales and bulletin sales were
3% of our total sales with the balance of 34% 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 1999 1998 1997
------ ------ ------
Paint, cleaning and related supplies 20% 20% 21%
Plumbing and heating supplies 15% 15% 15%
Hand and power tools 14% 14% 14%
Garden, rural equipment and related supplies 13% 13% 13%
Electrical supplies 13% 13% 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. 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:
Invoice Amount Adder (Handling Charge)
-------------- -----------------------
$ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 1.50%
$3,000.00 to $3,999.99 1.25%
$4,000.00 to $4,999.99 1.00%
$5,000.00 to $5,999.99 .75%
$6,000.00 to $6,999.99 .50%
$7,000.00 to $7,999.99 .25%
$8,000.00 and over .00%
We make bulletin sales based upon notices from dealers that they wish to
participate in one of the special bulletins offers. 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 previous lumber and building materials ("LBM") program, we did not impose
any adder or national advertising assessment on direct shipment orders for
these products. Our LBM program enabled our dealers to realize important
savings from our closely monitored lumber and building materials purchasing
procedures. Also, our LBM program offered 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
had with certain major vendors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," for a description of our LBM
Division.
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 1999.
We operate our Company-owned retail hardware stores through 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.
Our latest strategic initiative, which we call Vision 21, focuses on
encouraging dealers to adopt certain merchandising, marketing and operational
practices that are supported by some of our most successful dealers to improve
the Company's and the dealers' overall competitiveness and efficiency. Vision
21 goals include minimizing disparities between retail and wholesale,
developing dealer-friendly procedures that take duplication and costs out of
dealers' operations, achieving consistent implementation of programs more
rapidly and improving the dealers' financial performance and their ability to
pursue new stores and store expansions.
Special Charges and Assessments
We sponsor a national advertising program. To pay for this program, we
assess dealers an amount equal to 1.365% of their purchases (except purchases
of LTL Plus and certain computer systems), with minimum and maximum yearly
assessments for each store location. Effective January 1, 2000, the minimum
assessment is $1,916.46 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 at a flat
monthly rate or based on a percentage of sales for regional advertising not to
exceed 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 $75 if your annual purchases from us are less than $50,000.
Effective January 1, 2000, every two weeks, we will bill your store for a
special low volume account service charge of $60 if your annual purchases from
us are between $50,000 and $140,400. The low volume service charges that we
bill to your store in a specific year are automatically refunded if that
store's total purchases increase to over $140,400 during the year. 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 during the year, 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; 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), 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 "Ace Training Network" 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. (See Article XXV, Section 2 of our By-laws.) 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.
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
"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(1)
"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
Registration
Description of Mark Type of Mark Number Expiration Date
------------------- ------------ ------------ ---------------
"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 2,102,305 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
"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
"ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009
"ACE ROYAL" Trademark 2,237,981 April 13, 2009
"HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009
"THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009
"ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009
(1) Application for renewal of registration filed January 28, 2000.
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 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
"ILLUMINATIONS" paint color chip display rack kits,
consisting primarily of display
racks, paint color charts, architect
kits and decals for use in
determining color schemes
"STORE-IT-RIGHT" hardware products, namely, hooks,
brackets, knobs, hangers and
extensions for support or hanging
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 5,180 full-time employees, of which 1,610 are salaried employees. We
also have union contracts covering one (1) truck drivers' bargaining unit 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:
1999 1998 1997
---- ---- ----
Warehouse Sales 4.98172% 4.78251% 4.32753%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 7.8827% 9.1653% 10.3088%
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 .4595%, .4668% and
.4593% of the total sales of these categories (calculated separately by
category) to our members who purchased these products in fiscal years 1999,
1998 and 1997. The 1999 dividend pertains to the activity of the LBM Division
through August 2, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," for a description of our LBM Division.
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 1999, 1998 and 1997.
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 or other customers 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 the 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 nonvoting stock, other property and patronage refund
certificates. The Company also has the authority to issue a portion of the
patronage dividend in the form of other property.
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 1999 patronage
dividend rate for the LTL Plus Program is .5% of our LTL Plus sales. The 1999
dividend rates for direct shipment and bulletin sales are 1% and 2%,
respectively, while the current 1999 warehouse dividend rate is 4.98%.
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 materials 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.) See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations," for a description of our LBM Division.
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.)
We have established a LBM Retailer Incentive Pool Plan for our members who
purchase LBM products through Builder Marts of America, Inc. ("BMA") and are
participants in the Ace Contractor Center program. Under the plan, we calculate
an annual estimate of the amount by which our stock in BMA has increased or
deceased in value from our initial investment, net of certain expenses. We
allocate this estimate to eligible members annually based on their qualifying
purchases of LBM products. A member's pool allocation only becomes vested and
can only be redeemed upon the termination of the member's Ace membership which
results in the sale or redemption of Ace stock held for that location, Ace's
termination of the LBM Retailer Incentive Pool Plan, or Ace's liquidation,
whichever occurs first. Negative pool balances are not charged to members.
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, 1999.
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.
1A. The portion of the total annual distribution allocated to any such dealer
for each store owned or controlled by such dealer in excess of the
minimum cash distribution shall be distributed to him for the year 1999
payable in the year 2000 as follows:
(a) To the extent there is an excess amount over a store's minimum cash
distribution, each such eligible store shall receive stock options of
OurHouse, Inc. (valued at $3.40 each) rounded to the nearest multiple
of 50 but not to exceed 150 stock options.
(b) Next, to the extent there is an excess over a store's minimum cash
distribution and allocation under (a) above, each such eligible store
shall receive its prorata share of 3,000,000 stock options less the
number of stock options allocated under (a) above. Allocation to
each eligible store shall be based on each store's total patronage
dividend as a percentage of the Company's total patronage dividend
rounded to nearest multiple of 50.
(c) The eligible stores include change of ownership stores, but exclude
canceled stores.
2. We distribute the portion of patronage dividends in excess of the cash or
property amounts above in the form of shares of our Class C nonvoting
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) 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 to be distributed to you in property under Paragraph 1A
above and
(c) 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.
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. 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. Members also have the ability
to apply for a Capital Stock loan which is designed to provide them with access
to their future patronage dividends to assist them in opening new retail stores
or to assist in significant store expansions. These loans are repaid by the
first seven rebate distributions of the non-cash portion of the annual rebate
on the respective store.
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. The Company may pay a portion of its dividend in
the form of other qualified property pursuant to Section 1382 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 and fair market value of other qualified property 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 or other qualified property, 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, and other qualified property at the fair market value, 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 and other qualified property 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 and other qualified property 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 $1,500 with your signed Membership Agreement. We
use the $1,500 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"). Ace Canada's customers are non-shareholders
who do not receive patronage dividends from us. Only customers signed under the
Ace Canada Franchise Agreement are 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 operates 11 leased stores in Massachusetts, New Hampshire and
Rhode Island. In January, 1999, we entered into another joint venture with
another Ace dealer. This joint venture operates 2 leased stores in southwest
Florida. In January, 2000, we entered into a third joint venture with another
Ace dealer. This joint venture plans to open 3 stores in Oregon over the next 2
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 1999, 1998 and 1997 sales to international
non-shareholder dealers accounted for approximately 6.5% of our total sales for
fiscal year 1999, 1998 and 1997. As of the end of fiscal years 1999, 1998 and
1997, sales to domestic non-shareholder locations accounted for less than 1.5%
of our total sales in 1999 and less than 1% in 1998 and 1997. (See Appendix A,
Article XXV, Sections 3 and 4 of our By-laws regarding International Retail
Merchants and non-member accounts.)
Year 2000
The Company established a detailed plan to identify and track progress on
the identification of systems, changing of non-compliant systems and testing
of those systems for Year 2000 compliance. In addition, a plan was also
implemented for all devices (time clocks, power systems, etc.) within the
Company. The Company successfully completed its Year 2000 rollover without any
mission-critical information technology or non-information technology system
disruptions. The Company is not aware of any Year 2000 related problems with
third-party vendors of mission-cricital information technology systems.
However, it will continue to maintain contingency plans with respect to its
third-party vendor relationships. Although the Year 2000 event has occurred,
there can be no assurance that there will be no problems related to the Year
2000 for a period of time after January 1, 2000.
The Company incurred 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 represented the re-deployment of existing information technology
resources. The Company has expended approximately $5.1 million through
January 1, 2000 for Year 2000 compliance. To date, the Company's systems have
experienced no material disruption related to Year 2000 compliance issues.
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
Downers Grove, Illinois 23,962 Leased June 30, 2004
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
Chicago, Illinois (2) 18,168 Leased May 31, 2001
Hanover, Maryland (2) 57,500 Leased June 26, 2003
Colorado Springs, Colorado 493,000 Owned
Wilton, New York 795,000 Leased September 1, 2007
Loxley, Alabama (3) 103.6 acres Leased May 27, 2009
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) This property is leased for use as a freight consolidation center.
(3) This property was purchased by the Company in May, 1999 then sold and
leased back from the Industrial Development Board of the Town of Loxley. A
distribution warehouse of approximately 800,000 square feet is under
construction and expected to be in operation during the third quarter of
2000.
(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 adjacent 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
----- -------------------
Colorado 1
Georgia 6
Illinois 6
New Jersey 1
Washington 8
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 consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for The Registrant's Common Equity and Related Stockholder
Matters
There is no existing market for 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 16, 2000:
Title of Class Number of Record Holders
-------------- ------------------------
Class A Stock, $1,000 par value 3,832
Class B Stock, $1,000 par value 2,408
Class C Stock, $100 par value 4,862
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
<TABLE>
SELECTED FINANCIAL DATA
Income Statement Data:
January 1, January 2, December 31, December 31, December 31,
2000 1999 1997 1996 1995
---------- ---------- ------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C> <C>
Net sales $3,181,802 $3,120,380 $2,907,259 $2,742,451 $2,436,012
Cost of sales 2,892,287 2,863,156 2,677,537 2,528,767 2,247,354
---------- ---------- ---------- ---------- ----------
Gross profit 289,515 257,224 229,722 213,684 188,658
Total expenses 196,953 169,264 153,335 141,377 124,916
---------- ---------- ---------- ---------- ----------
Net earnings $ 92,562 $ 87,960 $ 76,387 $ 72,307 $ 63,742
========== ========== ========== ========== ==========
Patronage dividends
(Notes A, B, 5 and 8) $ 95,260 $ 88,022 $ 76,153 $ 73,837 $ 64,716
========== ========== ========== ========== ==========
Balance Sheet Data:
January 1, January 2, December 31, December 31, December 31,
2000 1999 1997 1996 1995
---------- ---------- ------------ ------------ ------------
(000's omitted)
Total assets $1,081,484 $1,047,580 $ 977,478 $ 916,375 $ 759,133
Working capital 180,763 191,926 158,676 146,862 139,805
Long-term debt 111,895 115,421 96,815 71,837 57,795
Patronage refund certificates
payable, long-term 55,257 43,465 49,044 49,639 54,741
Member dealers' equity 279,963 261,512 245,479 233,313 217,245
(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 1, January 2, December 31, December 31, December 31,
2000 1999 1997 1996 1995
---------- ---------- ------------ ------------ ------------
(000's omitted)
<S> <C> <C> <C> <C> <C>
In cash $ 38,173 $ 34,826 $ 29,943 $ 28,178 $ 23,522
In patronage refund certificates
payable 12,249 15,720 13,726 9,500 5,032
In Class C Stock 21,648 26,170 22,366 26,474 27,506
In other property 10,190 -- -- -- --
In patronage financing deductions 13,000 11,306 10,118 9,685 8,656
---------- ---------- ------------ ------------ ------------
Total patronage dividends $ 95,260 $ 88,022 $ 76,153 $ 73,837 $ 64,716
========== ========== ============ ============ ============
(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.
</TABLE>
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 $210.0 million of
which $160.1 million was available at January 1, 2000. 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 $43.5, $21.0 and
$42.9 million in 1999, 1998 and 1997, respectively. During 1999, the Company
financed the $43.5 million of capital expenditures out of current and
accumulated internally generated funds and short-term borrowings. Capital
expenditures for 2000 are anticipated to be approximately $60.3 million
primarily for a new distribution facility, improvements to existing facilities
and technology investments.
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 1999 Compared to 1998
On June 30, 1999 the Company entered into a business combination agreement
with Builder Marts of America, Inc. (BMA) to combine the LBM Division of the
Company with BMA. Under this agreement, the Company contributed defined
business assets (primarily vendor rebate receivables, fixed assets and
inventories) for a non-controlling interest in the combined entity. The
investment in the combined entity is accounted for under the equity method of
accounting. The accompanying consolidated financial statements include the
financial results of the LBM Division through the closing date of
August 2, 1999.
The total sales increase of 2.0% was effected by the business combination of
Ace LBM with BMA. As a result of this transaction, LBM sales are not reported
within the Company's sales results after August 2, 1999. Sales of basic
hardware and paint merchandise (including warehouse, bulletin and direct
shipments) increased 7.8% in 1999 primarily due to increased existing retailer
volume, targeted efforts on new store development within our retailer base and
conversions to the Ace program. Excluding international, domestic basic
business sales are up 8.6%. Sales were negatively impacted by a decline in
international sales. Net dealer outlets increased in 1999 due to targeted sales
efforts on new store development and conversions to the Ace program and
continued emphasis on retail success.
Gross profit increased $32.3 million or 12.6% and increased as a percent of
sales to 9.10% vs. 8.24% in 1998. This increase as a percent of sales results
partially from the loss of lower margin LBM volume. Higher cash discounts and
vendor rebates and increased margin from import products and retail operations
resulted in the gross profit increase.
Warehouse and distribution expenses increased $1.3 million and increased as
a percent of sales from 1.25% to 1.26%. Increased warehouse and distribution
costs required to support higher handled sales are partially offset by
increased logistics income. Higher logistics income combined with improvements
in productivity drove expenses as a percent of basic business sales down to
1.43% in 1999 from 1.49% in 1998.
Selling, general and administrative expenses increased by $5.0 million or
5.9% and increased as a percent to sales due to increased information
technology costs to support our Year 2000 efforts.
Retail success and development expenses increased $24.2 million or 73.7%
due to increased new business development costs, costs associated with
additional company-owned stores and costs to support retail initiatives.
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.
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 and increased sales
from company-owned retail locations. Sales of basic hardware and paint
merchandise (including warehouse, bulletin and direct shipments) increased 8.1%
while lumber and building materials 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 $27.5 million or 12.0% and increased as a percent of
sales to 8.24% vs. 7.90% 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 costs absorbed into inventory. Gross profit
from additional company-owned stores also contributed to the increase.
Warehouse and distribution expenses decreased $384,000 and decreased as a
percent of sales from 1.35% to 1.25%. The decrease was due to increased traffic
and cross dock revenues and non-recurring start-up facility costs.
Selling, general and administrative expenses increased $7.6 million or 9.7%
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 increased new business development costs 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
retail investments in our dealer base.
Interest expense increased $2.5 million or 17.1% due to increased dealer
dating programs and long-term debt issued during 1998 to fund the replacement
of a facility.
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. In June, 1999 the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133 - An Amendment of FASB Statement 133." This
statement delays the effective date for this standard until fiscal years
beginning after June 15, 2000. The Company is required to comply with SFAS No.
133 and SFAS No. 137 in fiscal year 2001. The Company has not evaluated the
impact of SFAS No. 133 or SFAS No. 137 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 1, 2000, 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:
<TABLE>
2000 2001 2002 2003 2004 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(000's omitted)
Assets:
Short-term investment-
fixed rate $18,699 $ -- $ -- $ -- $ -- $ -- $ 18,699
Fixed interest rate 5.35% 5.35%
Liabilities:
Short-term borrowings-
fixed rate $49,869 -- -- -- -- -- $ 49,869
Average fixed interest rate 6.84% 6.84%
Long-term debt-fixed rate $ 4,067 $6,678 $6,467 $5,750 $5,429 $ 87,571 $111,895
Average fixed interest rate 8.17% 7.27% 7.27% 7.12% 6.74% 7.10% 7.13%
</TABLE>
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. During 1999, the Company settled all outstanding
foreign currency contracts that resulted in a gain of approximately $2.0
million reflected within accumulated other comprehensive income at
January 1, 2000. The Company does not have any outstanding foreign exchange
forward contracts at January 1, 2000. Settlement of foreign sales and purchases
are generally denominated in U.S. currency resulting in limited foreign
currency transaction exposure.
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 49 Director since June 6, 1994; term expires
2000; President of Davis Lumber and Ace
Hardware, Inc., Davis, California since
November, 1985.
Richard F. Baalmann, Jr. 40 Director since June 7, 1999; term expires
2002; President of Homart, Inc., Centralia,
Illinois since May, 1988.
Eric R. Bibens II 43 Director since June 2, 1997; term expires
2000; President of Bibens Home Center, Inc.,
Springfield, Vermont since 1983.
Michael C. Bodzewski 50 Vice President, Marketing, Advertising and
Retail Operations East effective October,
1999; Vice President - Sales and Marketing
effective October, 1998; Vice President -
Merchandising effective June, 1990.
Lori L. Bossmann 39 Vice President - Finance effective October
1999; Vice President-Controller effective
September, 1997; Controller effective
January, 1994.
Lawrence R. Bowman 53 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 40 Director since June 3, 1996; term expires
2002; President of Ace Hardware of
Chattanooga, Chattanooga, Tennessee since
January, 1990.
Ray A. Griffith 46 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 50 Director since June 1, 1998; term expires
2001; President of Garden Acres Ace
Hardware, Longmont, Colorado since
January, 1991.
D. William Hagan 42 Director since June 2, 1997; term expires
2000; President of Hagan Ace Hardware,
Orange Park, Florida since February, 1980.
David F. Hodnik 52 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.
Position(s) Currently Held
Name Age and Business Experience (for the past 5 years)
---- --- ----------------------------------------------
Paul M. Ingevaldson 54 Senior Vice President - International and
Technology effective September, 1997; Vice
President - Corporate Strategy and
International Business effective September,
1992.
Mark Jeronimus 51 Director since June 3, 1991; term expires
2000; President of Duluth Hardware, Inc.,
Duluth, Minnesota since February, 1984.
Howard J. Jung 52 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 43 Senior Vice President - Wholesale effective
September, 1997; Vice President - Finance
effective January, 1994.
David W. League 60 Vice President-General Counsel and Secretary
effective June, 1990.
David F. Myer 54 Vice President-Retail Support effective
September, 1997; Vice President - Retail
Support and New Business effective October,
1994; Vice President - Retail Support
effective August, 1992.
Mario R. Nathusius 56 Director since June 1, 1998; term expires
2001; President of Cemaco S.A. Guatemala
City, Guatemala since March, 1978.
Fred J. Neer 60 Vice President - Human Resources effective
April, 1989.
Ken L. Nichols 51 Vice President, Retail Operations West
effective October, 1999; Vice President, New
Business effective October, 1998; Director,
Retail Operations, Eastern Division effective
October, 1994.
Roger E. Peterson 62 Director since June 5, 1995; term expires
2001; Chief Executive Officer effective
January 1, 1995 through May 31, 1995.
Richard W. Stine 54 Director since June 7, 1999; term expires
2002; Vice President of Stine, Inc., Sulphur,
Louisiana since September, 1976.
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 2000 annual stockholders meeting to be held on June 5, 2000 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 directors have
been selected as nominees for reelection as dealer directors at the 2000 annual
stockholders meeting:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Eric R. Bibens II 43 First 1 3 years
D. William Hagan 42 First 3 3 years
Jennifer C. Anderson 49 First 7 3 years
Mark Jeronimus is not eligible for reelection as a director beginning in 2000.
The person named below has been selected as a nominee for election to the Board
for the first time at the 2000 annual meeting as a dealer director of the
class, from the region and for the term indicated:
Nominee Age Class Region Term
- ------- --- ----- ------ ----
Richard A. Karp 48 First N/A* 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 $100,000 for their services in
all capacities to us and our subsidiaries during fiscal years 1999, 1998 and
1997:
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
(2)
Name Other (4)
and Annual (3) All Other
Principal (1) Compen- Long-Term Compen-
Position Year Salary ($) Bonus ($) sation ($) Payouts ($) sation ($)
-------- ---- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
David F. Hodnik 1999 $600,000 - $16,723 $478,104 $170,450
President and Chief 1998 600,000 - 16,723 230,268 151,997
Executive Officer 1997 600,000 - 14,147 195,666 133,167
William A. Loftus 1999 $325,000 $149,453 $11,563 $96,315 $77,378
Executive Vice President- 1998 315,000 132,804 11,563 86,157 80,873
Retail 1997 308,300 53,628 12,853 83,241 71,778
Paul M. Ingevaldson 1999 $287,000 $99,662 $11,563 $85,242 $56,121
Senior Vice President- 1998 279,000 85,430 12,260 76,590 64,702
International and Technology 1997 272,300 49,453 11,738 74,259 46,922
Rita D. Kahle 1999 $285,000 $128,685 $11,563 $77,826 $47,256
Senior Vice President- 1998 270,000 114,372 11,563 65,409 53,852
Wholesale 1997 250,000 46,237 8,647 57,813 46,733
Michael C. Bodzewski 1999 $261,000 $94,472 $11,563 $73,923 $40,066
Vice President- 1998 248,000 85,450 11,563 63,681 53,658
Marketing, Advertising and 1997 235,750 45,420 9,988 57,990 34,785
Retail Operations East
</TABLE>
(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 1997, 25% to 35% of their respective salary in 1998 and 30% to
40% of their respective salary in 1999. 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 1999 were $478,104, $96,315,
$85,242, $73,923 and $77,826 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 1999 awards, amounts deferred were $249,120, $0, $89,479,
$79,437 and $85,921 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 1999, 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 1999, $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 1999, amounts expensed
by the Company pursuant to the Plan were $170,450 for Mr. Hodnik, $77,378
for Mr. Loftus, $56,121 for Mr. Ingevaldson, $40,066 for Mr. Bodzewski and
$47,256 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 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, 2000 for a two year term terminating
March 31, 2000 and December 31, 2001, respectively. The contracts provide for
annual compensation effective January 1, 2000 of $630,000, $295,000, $268,000
and $298,000, respectively or such increased amount, if any, as shall be
approved by the Board of Directors. Mr. Loftus retired from the Company on
December 31, 1999.
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. Pension Plan benefit accruals have
been frozen as of February 29, 2000. It is the Company's intent to terminate
the Pension Plan on or around April 30, 2000.
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
$250,000 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-27 years; Paul M. Ingevaldson-20 years;
Michael C. Bodzewski-22 years and Rita D. Kahle-13 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 Executive 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 (shareholders) 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 compensation consultant
and other marketplace data to determine the competitiveness of Ace's total
compensation package.
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's 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 an
individual, team performance and a retail sales component. This is used to
reflect the results of the organization unit and for overall Company wholesale
and retail 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 achieves 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 retail sales
annual 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, 2000, and January 1, 1999, each member of the Board of
Directors (other than the Chairman of the Board) receives a monthly fee of
$2,833 and $2,667, respectively, for their services. Effective January 1, 1998
each member of the Board of Directors (other than the Chairman of the Board)
receives $1,500 per Board of Directors meeting attended. In addition, effective
January 1, 1999, each Board of Director Committee Chairperson received $750 per
meeting chaired, which was increased to $1,000 effective January 1, 2000.
Mr. Jung is paid a total annual fee of $130,000 effective June 1, 1999, and
$110,000 effective June 1, 1998 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 16, 2000:
Class B Stock Owned Class C Stock Owned
------------------- -------------------
Number Percent Number Percent
of Shares of Class of Shares of Class
--------- -------- --------- --------
Jennifer C. Anderson 4 .166 3,528 .147
Richard F. Baalmann, Jr. 4 .166 2,841 .119
Eric R. Bibens II - - 834 .035
Lawrence R. Bowman 4 .166 2,594 .108
James T. Glenn 4 .166 9,994 .417
Daniel L. Gust - - 530 .022
D. William Hagan - - 1,508 .063
Mark Jeronimus - - 820 .034
Howard J. Jung - - 555 .023
Richard A. Karp - - - -
Mario R. Nathusius - - 4,779 .200
Richard W. Stine 4 .166 6,613 .276
--------- -------- --------- --------
All above directors and
officers as a group 20 .830 34,596 1.444
========= ======== ========= ========
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 1999 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
1999 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. None of our executive officers has had any business
relationship during fiscal year 1999 that we must disclose under Item 404(b) of
Regulation S-K of the Securities and Exchange Commissions except Mr. Loftus.
He retired as Executive Vice President-Retail effective December 31, 1999. He
has an agreement with us that continues through December 31, 2000. This
agreement provides for non-competition by Mr. Loftus within the industry and
for consulting services and his participation in certain Company functions.
This agreement also provides for our payment to Mr. Loftus of $96,000 during
its one-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 1999 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-7) are filed as part of this annual report.
(b) Reports on Form 8-K
A Form 8-K was filed on April 30, 1999 containing Notice of Annual
Meeting of Stockholders on June 7, 1999 and Proxy solicited by Board
of Directors and related information.
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, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
HOWARD J. JUNG Chairman of the Board March 15, 2000
------------------------
Howard J. Jung and Director
DAVID F. HODNIK President and Chief March 15, 2000
------------------------
David F. Hodnik Executive Officer
LORI L. BOSSMANN Vice President-Finance March 15, 2000
------------------------
Lori L. Bossmann (Principal Financial and
Accounting Officer)
Jennifer C. Anderson, Richard F. Baalmann, Jr., Directors
Eric R. Bibens II, Lawrence R. Bowman,
James T. Glenn, Daniel L. Gust, D. William
Hagan, Mark Jeronimus, Mario R. Nathusius,
Roger E. Peterson and Richard W. Stine
*By DAVID F. HODNIK
------------------------
David F. Hodnik
*By LORI L. BOSSMANN
------------------------
Lori L. Bossmann March 15, 2000
*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 January 25,
2000 included as Appendix A to the Prospectus constituting a part
of the Post-Effective Amendment No. 5 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) filed on or
about March 15, 2000 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, 1999 adopted by the Board of Directors of the
Registrant filed as Exhibit 4-F to Post-Effective Amendment No. 5
to the Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 15, 2000 and incorporated herein
by reference.
4-G Copy of LBM Retailer Incentive Pool Plan adopted on December 8,
1999 by the Board of Directors of the Registrant filed as Exhibit
4-G to Post-Effective Amendment No. 5 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) filed on or
about March 15, 2000 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 (RegistrationNo. 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-Q to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 23, 1994 and
incorporated herein by reference.
10-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.
10-a-7 Copy of Second Amendment to the Ace Hardware Corporation Long-Term
Incentive Compensation Deferral Option Plan adopted and effective
March 23, 1999 filed as Exhibit 10-a-7 to Post-Effective Amendment
No. 5 to Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 2000 and
incorporated herein by reference.
10-a-8 Copy of First Amendment to Ace Hardware Corporation Directors'
Deferral Option Plan adopted and effective March 23, 1999 filed as
Exhibit 10-a-8 to Post-Effective Amendment No. 5 to Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 15, 2000 and incorporated herein by reference.
10-a-9 Copy of Lease Agreement dated May 27, 1999 for the Registrant's
project facility in Loxley, Alabama filed as Exhibit 10-a-9 to
Post-Effective Amendment No. 5 to Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 2000 and incorporated herein by reference.
10-a-10 Copy of Agreement dated October 29, 1999 between Registrant and
William A. Loftus filed as Exhibit 10-a-10 to Post-Effective
Amendment No. 5 to Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 2000 and
incorporated herein by reference.
10-a-11 Copy of Third Amendment to Restated Ace Hardware Corporation
Retirement Benefits Replacement Plan adopted December 8, 1999 and
effective January 1, 2000 filed as Exhibit 10-a-11 to
Post-Effective Amendment No. 5 to Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 2000 and incorporated herein by reference.
10-a-12 Copy of First Amendment to Ace Hardware Corporation Restated
Officer Incentive Plan adopted on December 8, 1999 and effective
January 1, 2000 filed as Exhibit 10-a-12 to Post-Effective
Amendment No. 5 to Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 2000 and
incorporated herein by reference.
10-a-13 Copy of Ace Hardware Corporation Long-Term Incentive Compensation
Deferral Option Plan adopted December 8, 1999 and effective
January 1, 2000 filed as Exhibit 10-a-13 to Post-Effective
Amendment No. 5 to Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 2000 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 13, 2000 filed as
Exhibit 23(a) to Post-Effective Amendment No. 5 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 15, 2000 and incorporated
herein by reference.
27 Copy of Financial Data Schedule filed as Exhibit 27 to
Post-Effective Amend-ment No. 5 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about
March 15, 2000 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 2000 nor any proxy soliciting materials for our 2000 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 1, 2000 and January 2, 1999 F-3
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the years in the three-year
period ended January 1, 2000 F-5
Consolidated Statements of Member Dealers' Equity for each of the
years in the three-year period ended January 1, 2000 F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended January 1, 2000 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 1, 2000 and January 2, 1999 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 1, 2000. 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 1, 2000 and
January 2, 1999, and the results of their operations and their cash flows for
each of the years in the three-year period ended January 1, 2000 in conformity
with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
January 26, 2000
ACE HARDWARE CORPORATION
----------
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and January 2, 1999
ASSETS
January 1, January 2,
2000 1999
---------- ----------
(000's omitted)
Current assets:
Cash and cash equivalents $ 35,422 $ 53,901
Receivables:
Trade 319,722 345,182
Other 53,782 54,517
----------- -----------
$ 373,504 $ 399,699
Less allowance for doubtful receivables (2,625) (2,725)
----------- -----------
Net receivables $ 370,879 $ 396,974
Inventories (Note 2) 373,090 334,405
Prepaid expenses and other current assets 13,341 15,146
----------- -----------
Total current assets $ 792,732 $ 800,426
----------- -----------
Property and equipment (Note 10):
Land 18,210 16,952
Buildings and improvements 187,709 180,854
Warehouse equipment 79,573 70,315
Office equipment 82,373 74,567
Manufacturing equipment 15,446 13,817
Transportation equipment 16,426 16,076
Leasehold improvements 17,400 18,049
Construction in progress 14,456 --
----------- -----------
$ 431,593 $ 390,630
Less accumulated depreciation and
amortization (184,419) (163,176)
----------- -----------
Net property and equipment $ 247,174 $ 227,454
Other assets 41,578 19,700
----------- -----------
$1,081,484 $1,047,580
=========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and January 2, 1999
LIABILITIES AND MEMBER DEALERS' EQUITY
January 1, January 2,
2000 1999
----------- -----------
(000's omitted)
Current liabilities:
Current installments of long-term debt
(Note 4) $ 4,067 $ 7,433
Short-term borrowings (Note 3) 49,869 25,000
Accounts payable 449,497 465,862
Patronage dividends payable in cash (Note 5) 38,173 34,826
Patronage refund certificates payable (Note 5) 373 20,655
Accrued expenses 69,990 54,724
----------- -----------
Total current liabilities $ 611,969 $ 608,500
Long-term debt (Note 4) 111,895 115,421
Patronage refund certificates payable (Note 5) 55,257 43,465
Other long-term liabilities 22,400 18,682
----------- -----------
Total liabilities $ 801,521 $ 786,068
----------- -----------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value $ 3,856 $ 3,846
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 241,226 226,571
Class C Stock of $100 par value, issuable
to dealers for patronage dividends 21,648 26,170
Additional stock subscribed, net 498 471
Retained earnings 594 3,292
Contributed capital 13,485 3,295
Accumulated other comprehensive income 291 (818)
----------- -----------
$ 288,097 $ 269,326
Less: Treasury stock, at cost (8,134) (7,814)
----------- -----------
Total member dealers' equity $ 279,963 $ 261,512
Commitments (Notes 6 and 10) ----------- -----------
$1,081,484 $1,047,580
=========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
---------
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
--------------------------------------------
January 1, January 2, December 31,
2000 1999 1997
------------- ------------- ----------------
(000's omitted)
Net sales $3,181,802 $3,120,380 $2,907,259
Cost of sales 2,892,287 2,863,156 2,677,537
----------- ----------- -----------
Gross profit $ 289,515 $ 257,224 $ 229,722
----------- ----------- -----------
Operating expenses:
Warehouse and distribution 40,232 38,980 39,364
Selling, general and administrative 90,513 85,504 77,917
Retail success and development 57,149 32,907 25,573
----------- ----------- -----------
Total operating expenses 187,894 157,391 142,854
----------- ----------- -----------
Operating income 101,621 99,833 86,868
Interest expense (Note 12) (16,651) (17,350) (14,816)
Other income, net 9,425 7,213 6,245
Income taxes (Note 7) (1,833) (1,736) (1,910)
----------- ----------- -----------
Net earnings $ 92,562 $ 87,960 $ 76,387
=========== =========== ===========
Retained earnings at beginning
of year $ 3,292 $ 3,354 $ 3,120
Net earnings 92,562 87,960 76,387
Patronage dividends (Notes 5 and 8) (95,260) (88,022) (76,153)
----------- ----------- -----------
Retained earnings at end of year $ 594 $ 3,292 $ 3,354
=========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
-------------------------------------------
January 1, January 2, December 31,
2000 1999 1997
-------------------------------------------
(000's omitted)
Net earnings $ 92,562 $ 87,960 $ 76,387
Foreign currency translation, net 1,109 (483) (285)
----------- ----------- -----------
Comprehensive income $ 93,671 $ 87,477 $ 76,102
=========== =========== ===========
See accompanying notes to consolidated financial statements
<TABLE>
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended January 1, 2000 (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> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 --
Patronage dividends issuable -- -- -- 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 --
Patronage dividends issuable -- -- -- 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
Net earnings -- -- -- -- -- 92,562 -- -- -- 92,562
Net payments on
subscriptions -- -- -- -- 711 -- -- -- -- 711
Patronage financing
deductions -- -- -- (847) -- -- -- -- -- (847)
Stock issued 238 -- 26,616 (25,323) (684) -- -- -- -- 847
Stock repurchased -- -- -- -- -- -- -- -- (12,509) (12,509)
Stock retired (228) -- (11,961) -- -- -- -- -- 12,189 --
Patronage dividends issuable -- -- -- 21,648 -- -- 10,190 -- -- 31,838
Patronage dividends payable -- -- -- -- -- (95,260) -- -- -- (95,260)
Accumulated other
comprehensive income -- -- -- -- -- -- -- 1,109 -- 1,109
------- ------- --------- -------- ------- --------- -------- ------ --------- ---------
Balance at January 1, 2000 $3,856 $6,499 $241,226 $21,648 $ 498 $ 594 $13,485 $ 291 $ (8,134) $279,963
======= ======= ========= ======== ======= ========= ======== ====== ========= =========
*Additional stock subscribed is comprised of the following amounts at December 31, 1997, January 2,
1999 and January 1, 2000:
</TABLE>
1997 1998 1999
------ ------ ------
Class A Stock $ 86 $ 60 $ 118
Class B Stock -- -- --
Class C Stock 1,085 955 1,452
------ ------ ------
1,171 1,015 1,570
Less unpaid portion 788 544 1,072
------ ------ ------
$ 383 $ 471 $ 498
====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------
January 1, January 2, December 31,
2000 1999 1997
---------- ---------- ------------
(000's omitted)
Operating Activities:
Net earnings $ 92,562 $ 87,960 $ 76,387
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation 23,396 21,536 19,494
Loss on sale of property and
equipment 28 425 285
Decrease (Increase) in
accounts receivable, net 26,174 (32,061) (15,835)
Decrease (Increase) in
inventories (37,549) 2,689 (12,067)
Decrease (Increase) in
prepaid expenses and other
current assets 1,805 (1,531) (1,735)
Increase (Decrease) in
accounts payable and accrued
expenses (1,203) 42,082 46,000
Increase in other long-term
liabilities 3,718 3,960 5,205
----------- ----------- -------------
Net Cash Provided by
Operating Activities 108,931 125,060 117,734
----------- ----------- ------------
Investing Activities:
Purchase of property and
equipment (43,497) (21,036) (42,921)
Proceeds from sale of property
and equipment 349 8,148 149
Increase in other assets (21,878) (8,843) (6,946)
----------- ----------- -------------
Net Cash Used in Investing
Activities (65,026) (21,731) (49,718)
----------- ----------- -------------
Financing Activities:
Proceeds (payments) of
short-term borrowings 24,869 (17,000) (29,000)
Proceeds from notes payable -- 26,117 32,994
Payments on long-term debt (6,892) (7,593) (7,228)
Payment of cash portion of
patronage dividend (34,826) (29,943) (28,178)
Payments of patronage refund
certificates and patronage
financing deductions (34,557) (25,588) (24,941)
Proceeds from sale of common
stock 1,531 1,463 2,906
Repurchase of common stock (12,509) (11,055) (13,055)
----------- ----------- -------------
Net Cash Used in Financing
Activities (62,384) (63,599) (66,502)
----------- ----------- -------------
Increase (Decrease) in Cash and
Cash Equivalents (18,479) 39,730 1,514
Cash and Cash Equivalents at
beginning of year 53,901 14,171 12,657
----------- ----------- -------------
Cash and Cash Equivalents at
end of year $ 35,422 $ 53,901 $ 14,171
=========== =========== =============
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.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) Consolidations
The accompanying consolidated financial statements include the accounts of
the Company and subsidiaries. All significant intercompany transactions
have been eliminated. The equity method of accounting is used for the
Company's 50% or less owned affiliates over which the Company has the
ability to exercise significant influence. The Company has other
investments that are accounted for at cost.
(d) 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. The Company recognizes revenue from product sales
upon the shipment to customers.
(e) Inventories
Inventories are valued at the lower of cost or net realizable value. Cost
is determined primarily using the last-in, first-out method.
(f) 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.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(g) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are
translated at the rate of exchange in effect at the balance sheet date while
revenues and expenses are translated at the average monthly exchange rates
prevailing during the year. The Company has utilized foreign exchange forward
contracts to hedge non-U.S. equity investments. Gains and losses in these
foreign hedges are included in the basis of the underlying hedged investment.
During 1999 the Company settled all outstanding foreign currency contracts that
resulted in a gain of approximately $2.0 million reflected within accumulated
other comprehensive income at January 1, 2000. Foreign currency translation
adjustments, net of gains on foreign exchange contracts, are reflected in the
accompanying Consolidated Statement of Comprehensive Income for 1999, 1998 and
1997. The Company does not have any outstanding foreign exchange forward
contracts at January 1, 2000.
(h) 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.
(i) 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.
(j) 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.
(k) Fiscal Year
Effective January 1, 1998 the Company changed its fiscal year from December
31st to the Saturday nearest December 31st. Accordingly, 1999 and 1998 ended on
January 1, 2000 and January 2, 1999, respectively.
(l) Reclassifications
Certain financial statement reclassifications have been made to prior year
amounts to conform to comparable classifications followed in 1999.
(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 $61,483,000 and $62,093,000 at January 1, 2000 and January 2,
1999, respectively. Indirect costs, consisting primarily of warehousing costs,
are absorbed as inventory costs rather than period costs.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(3) Short-Term Borrowings
Short-term borrowings were utilized during 1999 and 1998. The maximum
amount outstanding at any month-end during the period was $108.0 million in
1999 and $67.0 million in 1998. The weighted average interest rate effective as
of January 1, 2000 and January 2, 1999 was 6.84% and 5.03%, respectively.
Short-term borrowings outstanding as of January 1, 2000 and January 2, 1999
were $49.9 and $25.0 million, respectively. At January 1, 2000 the Company has
available a revolving credit facility with a group of banks providing for $125
million in committed lines and also has available $85 million in uncommitted
lines. The aggregate unused line of credit available at January 1, 2000 and
January 2, 1999 was $160.1 million and $185.0 million, respectively. At January
1, 2000 the Company had no compensating balance requirements.
(4) Long-Term Debt
Long-term debt is comprised of the following:
January 1, January 2,
2000 1999
---------- ----------
(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% $ 8,108 $ 10,270
$20,000,000 due in quarterly
installments of $952,400 with
interest payable quarterly at a
fixed rate of 6.89% 952 4,762
$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 25,000
Liability under capitalized leases
(see Note 10) 510 1,370
Installment notes with maturities
through 2003 with various interest
rates 1,392 1,452
---------- ----------
115,962 122,854
Less current installments 4,067 7,433
---------- ----------
$ 111,895 $ 115,421
========== ==========
Aggregate maturities of long-term debt are $4,067,000, $6,678,000,
$6,467,000, $5,750,000 and $5,429,000 in 2000 through 2004, respectively, and
$87,571,000 thereafter.
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(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. In 1999,
amounts exceeding the cash portion will be distributed in the form of options
(i.e. other property) excercisable by the dealers at a future date to acquire
shares of the Company's ownership in a minority-owned investment. Amounts
exceeding the cash and option 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 patronage financing programs.
The patronage dividend composition for 1999, 1998 and 1997 follows:
Subordinated Class Patronage Total
Cash Refund C Other Financing Patronage
Portion Certificates Stock Property Deductions Dividend
------- ------------ ----- -------- ---------- --------
(000's omitted)
1999 $38,173 $12,249 $21,648 $10,190 $13,000 $95,260
1998 34,826 15,720 26,170 -- 11,306 88,022
1997 29,943 13,726 22,366 -- 10,118 76,153
Patronage dividends are allocated on a fiscal year basis with issuance in
the following year.
The patronage refund certificates outstanding or issuable at January 1,
2000 are payable as follows:
Interest
January 1, Amount Rate
---------- ------ --------
(000's omitted)
2000 $ 373 7.00%
2001 4,838 6.00
2002 9,202 6.25
2003 13,484 6.00
2004 15,484 6.00
2005 12,249 6.25
A portion of the patronage refund certificates payable on January 1, 2000
were prepaid in 1999. Patronage refund certificates due on January 1, 2001 are
classified as non-current liabilities as the due date extends beyond fiscal
year ending December 30, 2000.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(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 1, 2000
plan assets were held primarily in equities, mutual funds and group annuity
contracts.
Pension expense for the years included the following components:
January 1, January 2, December 31,
2000 1999 1997
----------- ----------- -----------
(000's omitted)
Service cost - benefits earned
during the period $ 309 $ 293 $ 358
Interest cost on projected
benefit obligation 399 428 351
Expected return on plan assets (733) (710) (630)
Net amortization and deferral 125 87 53
----------- ----------- -----------
Net periodic pension expense $ 100 $ 98 $ 132
=========== =========== ===========
The following table sets forth the funded status of the plans and amounts
recognized in the Company's Consolidated Balance Sheets at January 1, 2000 and
January 2, 1999:
January 1, January 2,
2000 1999
----------- -----------
(000's omitted)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,341 $ 5,041
Service cost 309 293
Interest cost 399 428
Actuarial losses (gains) (213) 325
Benefits paid (424) (746)
----------- -----------
Benefit obligation at end of year 5,412 5,341
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning
of year 9,448 9,122
Actual return on plan assets 1,198 1,001
Employer contribution 71 71
Benefits paid (424) (746)
----------- -----------
Fair value of plan assets at end of year 10,293 9,448
----------- -----------
Funded status 4,881 4,107
Unrecognized transition asset (78) (91)
Unamortized prior service cost (583) (631)
Unrecognized net actuarial gains (3,634) (2,776)
----------- -----------
Prepaid pension cost included in other
assets $ 586 $ 609
=========== ===========
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.75% in 1999 and 7.0% in 1998.
The related expected long-term rate of return was 8.0% in 1999 and 1998. The
rate of increase in future compensation was projected using actuarial salary
tables plus 1.0% in 1999 and 1998. The Company will terminate the Employees'
Pension Plan and Trust effective April 30, 2000. The Company does not believe
that the termination will have a material adverse effect upon the financial
condition or results of operations of the Company.
The Company also participates in several multi-employer plans covering union
employees. Amounts charged to expense and contributed to the plans totaled
approximately $233,000, $216,000 and $225,000 in 1999, 1998 and 1997,
respectively.
The Company's profit sharing plan contribution for the years ended 1999,
1998 and 1997 was approximately $15,071,000, $13,746,000 and $12,240,000,
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 1999, 1998 and 1997 provisions for federal income taxes were $1,000,000,
$1,105,000 and $1,501,000, respectively, and for state income taxes were
$833,000, $631,000 and $409,000, respectively.
The Company made tax payments of $2,755,000, $1,374,000 and $2,807,000
during 1999, 1998 and 1997, respectively.
(8)Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares at
-------------------
January 1, January 2,
2000 1999
------------ ------------
Class A Stock, voting, redeemable at
par value -
Authorized 10,000 10,000
Issued and outstanding 3,856 3,846
Class B Stock, nonvoting, redeemable
at not less than twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,432 2,592
Treasury stock 4,067 3,907
Class C Stock, nonvoting, redeemable at
not less than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,412,255 2,265,718
Issuable as patronage dividends 216,480 261,700
Additional stock subscribed:
Class A Stock 118 60
Class B Stock -- --
Class C Stock 14,520 9,550
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
At January 1, 2000 and January 2, 1999 there were no common shares reserved
for options, warrants, conversions or other rights; nor were any options
granted or exercised during the two years then ended.
Member dealers may subscribe for the Company's stock in various prescribed
combinations. Only one share of Class A Stock may be owned by a dealer with
respect to the first member retail outlet controlled by such dealer. Only four
shares of Class B Stock may be owned by a dealer with respect to each retail
outlet controlled by such dealer, but only if such outlet was a member of the
Company on or before February 20, 1974. An appropriate number of shares of
Class C Stock must be included in any subscription by a dealer in an amount to
provide that such dealer has a par value of all shares subscribed for equal to
$5,000 for each retail outlet. Unregistered shares of Class C Stock are also
issued to dealers in connection with patronage dividends. No dividends can be
declared on any shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail
outlet, all shares of stock of the Company, held by the dealer owning or
controlling such outlet, must be sold back to the Company, unless a transfer
of such shares is made to another party accepted by the Company as a member
dealer with respect to the same outlet.
A Class A share is issued to a member dealer only when the share subscribed
has been fully paid. Class B and Class C shares are only issued when all such
shares subscribed with respect to a retail outlet have been fully paid.
Additional stock subscribed in the accompanying statements represents the par
value of shares subscribed, reduced by the unpaid portion.
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 1997, 1998 and 1999 affecting treasury shares follow:
Shares Held in Treasury
-----------------------
Class A Class B Class C
-------- -------- ---------
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 --
Stock issued -- -- --
Stock repurchased 228 160 119,614
Stock retired (228) -- (119,614)
-------- -------- ---------
Balance at January 1, 2000 -- 4,067 --
======== ======== =========
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(9)Segments
The Company is principally engaged as a wholesaler of hardware and related
products and manufacturer of paint products. 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:
<TABLE>
January 1, 2000
---------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales from external customers $3,128,269 $ 27,268 $26,265 -- $3,181,802
Intersegment sales 22,647 100,758 -- (123,405) --
Interest expense 16,651 1,383 590 (1,973) 16,651
Depreciation 21,022 1,589 785 -- 23,396
Segment earnings (loss) 85,574 9,475 (1,819) (668) 92,562
Identifiable segment assets 1,010,754 42,921 40,235 (12,426) 1,081,484
Expenditures for long-lived assets 35,446 2,846 5,201 -- 43,493
</TABLE>
January 2, 1999
---------------
(000's omitted)
<TABLE>
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
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 17,350 1,464 244 (1,708) 17,350
Depreciation 19,808 1,392 336 -- 21,536
Segment earnings (loss) 78,442 10,364 (382) (464) 87,960
Identifiable segment assets 983,354 34,215 39,030 (9,019) 1,047,580
Expenditures for long-lived assets 16,331 937 3,768 -- 21,036
</TABLE>
<TABLE>
December 31, 1997
-----------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
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 14,816 1,005 88 (1,093) 14,816
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 40,860 806 1,255 -- 42,921
</TABLE>
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Net sales and long-lived assets by geographic region based upon customer
location for 1999, 1998 and 1997 were as follows:
January 1, 2000 January 2, 1999 December 31, 1997
--------------- --------------- -----------------
(000's omitted)
Net sales:
United States $2,975,567 $2,903,906 $2,717,881
Foreign countries 206,235 216,474 189,378
--------------- --------------- -----------------
Total $3,181,802 $3,120,380 $2,907,259
=============== =============== =================
Long-lived assets,
net:
United States $ 242,743 $ 222,148 $ 230,036
Foreign countries 4,431 5,306 6,491
--------------- --------------- -----------------
Total $ 247,174 $ 227,454 $ 236,527
=============== =============== =================
(10)Commitments
Leased property under capital leases is included as "Property and Equipment"
in the Consolidated Balance Sheets as follows:
January 1, January 2,
2000 1999
---------- ----------
(000's omitted)
Data processing equipment $3,598 $3,600
Less: accumulated depreciation and
amortization (2,711) (1,905)
---------- ----------
$ 887 $1,695
========== ==========
The Company rents buildings and warehouse, office and certain other
equipment under capital and operating leases. At January 1, 2000 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)
2000 $ 454 $17,313
2001 93 15,407
2002 -- 10,454
2003 -- 7,429
2004 -- 6,352
Thereafter -- 18,073
------- ---------
Total minimum lease payments 547 $75,028
=========
Less amount representing interest 37
-------
Present value of total minimum lease payments $ 510
=======
ACE HARDWARE CORPORATION
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
All leases expire prior to 2014. 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
$39,149,000, $37,023,000 and $33,343,000 in 1999, 1998 and 1997, respectively.
Rent expense includes $7,352,000, $6,004,000 and $5,956,000 in contingent
rentals paid in 1999, 1998 and 1997, 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 $79,639,000, $70,254,000 and $65,013,000 was charged to operations
in 1999, 1998 and 1997, respectively.
(12)Interest Expense
Interest paid was $16,326,000, $16,553,000 and $15,281,000 in 1999, 1998 and
1997, respectively, net of capitalized interest of $234,000 and $1,022,000 in
1999 and 1997.
ACE HARDWARE CORPORATION
LIST OF SUBSIDIARIES
STATE/COUNTRY NAME UNDER WHICH
SUBSIDIARY OF INCORPORATION SUBSIDIARY DOES BUSINESS
- ---------- ---------------- ------------------------
Ace Insurancy 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. Sore 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, 2000.
JENNIFER C. ANDERSON D. WILLIAM HAGAN
Jennifer C. Anderson D. William Hagan
RICHARD F. BAALMANN, JR. MARK JERONIMUS
Richard F. Baalmann, Jr. Mark Jeronimus
ERIC R. BIBENS II HOWARD J. JUNG
Eric R. Bibens II Howard J. Jung
LAWRENCE R. BOWMAN MARIO R. NATHUSIUS
Lawrence R. Bowman Mario R. Nathusius
JAMES T. GLENN ROGER E. PETERSON
James T. Glenn Roger E. Peterson
DANIEL L. GUST RICHARD W. STINE
Daniel L. Gust Richard W. Stine
