DELAWARE 36-0700810
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 2001,2002, warehouse sales
were 72% of our totalmerchandise sales and bulletin sales were 3%4% of our total
merchandise sales with the balance of 25%24% being
direct shipment sales.
The following is a breakdown of our total warehouse sales for merchandise purchases among various general classes of
merchandise
for each of the past three fiscal years:
Class of Merchandise2002 2001 20001999
Paint, cleaning and related supplies 22% 21% 20% 20%
Plumbing and heating supplies 15% 15% 15%
Hand and power tools 14%13% 14% 14%
Garden, rural equipment and related supplies 15% 14% 14% 13%
Electrical supplies 11% 12% 12% 13%
General hardware 11% 12%11% 12%
Sundry 7% 8% 7% 7%
Housewares and appliances 6% 5% 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 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)
$1,00.00 to $999.99 2.00%$1,000.00 $1,000.00 to $1,999.99 1.75%$2,000.00 $2,000.00 to $2,999.99$ 2,999.99 1.50%$3,000.00 $3,000.00 to $3,999.99$ 3,999.99 1.25%$4,000.00 $4,000.00 to $4,999.99$ 4,999.99 1.00%$5,000.00 $5,000.00 to $5,999.99 .75%$ 5,999.99 ..75%$6,000.00 $6,000.00 to $6,999.99 .50%$ 6,999.99 ..50%$7,000.00 $7,000.00 to $7,999.99 .25%$ 7,999.99 ..25%$8,000.00 $8,000.00 and over.00%
We make bulletin sales based upon notices from dealers that they wish to participate in one of our
special bulletin 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.
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 with or without the
addition of freight charges and with an adder (if any) of up to 5%, determined
on an item by item basis. Management has 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, inin determining the forms of patronage dividend distributions. (See the heading "Business," subheading"Forms "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. (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 "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, offersbroker 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.
Our wholly owned subsidiary,On February 13, 2003, we sold all of the issued and outstanding shares of Ace Hardware Canada Limited operates as a wholesaler of hardware("Aceand related merchandise in Canada. It has two distribution facilities located in Calgary, Albertaand Brantford, Ontario. In November 2001, the Company announced the closure of the Calgaryfacility.Canada"), our wholly owned subsidiary, to Sodisco-Howden Group Inc. Ace Hardware Canada Limited generated less than one percent (1%) of
our consolidatedrevenue revenues during fiscal year 2001.2002.
We operate our Company-owned retail hardware stores through our wholly owned subsidiary 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 Divisiondivision 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 manufacturingmanufacturing operations.
Our business, bothbusinesses, hardware wholesaling and paint manufacturing, isare not dependent on any major suppliers
and we feel
that seasonal fluctuations do not have a major effect on our operations. For more discussion of our
business, see "Management's
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
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 CompanyAce 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, butprograms. However, the future is difficult to forecast, especially areas such asrelated to 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 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. Lawsuits and laws,
especially laws dealing with franchising, licensing, importing,
exporting and environmental matters could affect our future
business. We cannot predict whether these uncertainties
might causegive rise to 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 segments for
future growth and
success in our competitive industry. These four segments 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 "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 Supplement and in the MemberMember 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 current strategic initiative, Vision 21, focuses on becoming a world class organization through encouraging dealersdealers to adopt certain merchandising, marketing and operational practices that are supported by some of our
most successful dealers
to improve the Company'sAce's and the dealers' overall competitiveness and efficiency. The
cornerstones to Vision 21 are to improve
retailer's sales and profits, streamline our processes, bring wholesale
and retail together as one Ace team and provide ultimate
customer satisfaction. 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. As
retailers become Vision 21 retailers they are afforded various benefits to assist them to succeed at retail.
Special Charges and Assessments
We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to
1.50% of their
purchases (except purchases of LTL Plus products, building material products and certain hardware and software computer
systems), with minimum and maximum yearly assessments of $2,223.00 and(effective January 1, 2003, $2,535.00 or 1.50% of the annual
purchase volume of required purchases in order for a store to avoid imposition of the low volume account service charge, if
greater). The maximum yearly assessment is $6,800.00 respectively, (based on
purchases) for each store location. We grant exemptions
from these assessments and make various adjustments
to them for stores located outside the continental United States, and for new
stores during their start up year
and for stores operating under an agreement that does not permit them to use "Ace" or "Ace
Hardware". Forthe year 2002, we willWe intend to also impose a flat charge of $100.00 on May 1, 2002 and November 1, 2002a per store location
event basis to pay for national sales promotions for
including, but not limited to, the Memorial Day sale and the day after Thanksgiving.Thanksgiving sale. The amount of our nationalnational 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 national advertising
assessment.
EveryThrough December 31, 2002, every two weeks, we billbilled the member store for a special low volume account service
charge of $75 if
annual purchases from us arewere less than $50,000. We will billbilled the member store for a special low volume
account service charge of $60 per bi-weekly billing statement period if purchases from us during such period were less than
$5,700. Effective January 1, 2003, we will bill the member store for a special low volume account service charge of $100 per
bi-weekly billing statement period if purchases from us during such period are less than $5,700.00.$6,500. The low volume service
charges that we bill to the store in a specific year
are automatically refunded if that store's total purchases increase to over $148,200
$169,000 during the year. The
A new 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. Stores which purchase $148,200$169,000 of merchandise from us during the year are given a credit on
the next billing
statement for any low volume charges which we billed that store earlier in the
year. We then stop billing that store for low
volume account service charges for the rest of the
year, even if its current purchases on a billing statement are less than $5,700; and
$6,500.
2. We do not bill low volume account service charges every two weeks if a store's sales volume with us
the year before
was at our minimum ($148,200)169,000), but we will bill these charges in a lump sum to a
store's last statement of the year if that
store does not reach our applicable minimum by that time.
3. We will not bill low volume account service charges to members that have signed and are in compliance with a
Vision 21 Retailer and Retail Support Commitment ("Vision 21 Agreement"), but we will bill low volume account service
charges, if applicable, to members who are not in compliance with their Vision 21 Agreements.
Low volume service charges are not included in a retailer's purchases of merchandise that qualify for patronage
dividends. 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 we are owed for merchandise,
services, or for a stock
subscription. The current rate for the late payment service charge is .77% per
bi-weekly 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 a 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.
Effective August, 2001, weWe assess members operating under a standard Membership Agreement a
mandatory monthly fee for Core Retail
Services in the amount of $197$168 per month for all single stores or
parent stores and $67$37 per month for all branch stores located
in the United States. Core Retail Services
consist of the following elements:
1. ACENET. This service is our primary communications vehicle with our members. It is an
electronic network that
allows defective goods claims processing, product search online or
through a CD-ROM catalog, electronic communications,
employee testing and training courses,
review and payment of retailer statements and numerous other applications.
2. Material Safety Data Sheet Subscription Service. This service provides members with access
24 hours per day and 7
days per week to information on the chemical ingredients of certain
products that we sell.
3. Ace Training Network. This service is one of our retail training programs. Each single store or
parent store is
credited with 16 points per month and each branch store is credited with 11 points
per month. A single store or parent store is
one that has purchased or subscribed for a share of
our Class A voting 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)By-
laws).
A store may use its points at any time to buy one of the training programs that we offer. If a store does
not have enough
points for the program that it wants, it can use the points that it has and
be billed for the difference. Multiple stores and
member groups can pool their points together
to purchase our training programs.
4. NRHA E-Tools. These include unlimited use of certain Internet-based services offered by
the National Retail
Hardware Association (NRHA), including their Advanced Course in
Hardware Retailing, the Forte International
Communications Survey and their Employee
Compensation Study.
5. Retail Pricing. This includes access to our national price shopping and ad data collected from
non-Ace stores, our
suggested retail prices, our customized retail pricing strategy services and
catalog updates to our suggested retail prices.
Members operating under a Contractor agreement are assessed a mandatory monthly fee of $53 for
ACENET and the
Material Safety Data Sheet Subsciption Service.Subscription Service; however, there are no members operating under a Contractor agreement as
of the date of this annual report.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the promotion,promotion, advertising and marketing of products and services that we sell. We have had the followingTrademark trademark and Service Mark Registrationsservice mark
registrations issued by the U.S. Patent and Trademark Office for our marks: Registration
Registration
Description of MarkType of MarkNumberExpiration Date"ACE
"ACE HARDWARE" with winged
emblem design Service Mark 840,176 December 5, 2007"ACE "ACE HARDWARE" with winged
emblem design Trademark 898,070 September 8, 2010"THE "THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 20102010)"PACE" with design Service Mark 1,208,887 September 14, 2002"ACE "ACE HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004"ACE "ACE HARDWARE" in stylized
lettering design Trademark 1,426,137 January 27, 2007"ACE" "ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007"ACE "ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008"ACE "ACE HARDWARE AND
GARDEN CENTER" in stylized
lettering design Service Mark 1,487,216 May 3, 2008"ACE "ACE NEW EXPERIENCE" in
stylized lettering design Trademark 1,554,322 September 5, 2009"ACE "ACE SEVEN STAR" in stylized
lettering design Trademark 1,556,389 September 19, 2009"ACE "ACE BEST BUYS" in circle design Service Mark 1,560,250 October 10, 2009"ACENET" "ACENET" Service Mark 1,574,019 December 26, 2009"ACE "ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2010"LUB-E" "LUB-E" Trademark 1,615,386 October 2, 2010"ASK "ASK ACE" Service Mark 1,653,263 August 6, 2010"ACE 2000" Service Mark 1,682,467 April 7, 2002"ACE" "ACE" in stylized lettering design Trademark 1,683,538 April 12, 2002"THE OAKBROOK COLLECTION"21, 2012
in stylized lettering design Trademark 1,707,986 August 18, 2002"ACE"ACE HARDWARE BROWN BAG
BONANZA" with design Service Mark 1,761,277 April 13, 2003"ACE "ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003"CELEBRATIONS" "CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005"The "The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005"ACE "ACE RENTAL PLACE"
in stylized lettering design Service Mark 1,943,140 December 19, 2005"HELPFUL "HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006"ACE "ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006"SEALTECH" "SEALTECH" Trademark 2,007,132 October 8, 2006"GREAT "GREAT FINISHES" Trademark 2,019,696 November 26, 2006"WOODROYAL" "WOODROYAL" Trademark 2,065,927 May 27, 2007"ROYAL "ROYAL SHIELD" Trademark 2,070,848 June 10, 2007"ROYAL "ROYAL TOUCH" Trademark 2,070,849 June 10, 2007"QUALITY "QUALITY SHIELD" Trademark 2,102,305 September 30, 2007"QUALITY "QUALITY TOUCH" Trademark 2,102,306 September 30, 2007"STAINHALT" "STAINHALT" Trademark 2,122,418 December 16, 2007"ACE "ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008"NHS "NHS NATIONAL
HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008"ACE "ACE COMMERCIAL &
INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008"THE "THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008"ACE "ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009"ACE "ACE ROYAL" Trademark 2,237,981 April 13, 2009"HELPFUL "HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009"THE "THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009"ACE "ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009"ILLUMINATIONS" "ILLUMINATIONS" Trademark 2,353,666 May 30, 2010"ACE "ACE YOUR NEIGHBROHOODNEIGHBORHOOD
SOLUTIONS PLACE" Service Mark 2,386,359 September 12, 2010"ACE" "ACE" with accent design Service Mark 2,378,123 August 15, 2010"ACE "ACE SOLUTIONS PLACE" Service Mark 2,394,181 October 10, 2010
"ACE" with halo design Service Mark 2,558,478 April 19, 2012
"ACE HOMEPLACE" Trademark 2,621,873 September 17, 2012
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:
MarkType of goods/services"STORE-IT-RIGHT" "Store-It-Right"hardware products, namely, hooks,
brackets, knobs, hangers and extensions extensions for support or hanging"ACE HOMEPLACE" magazines"ACE" with halo design retail hardware store services"COLOR "COLOR YOUR LIFE" indoor and outdoor paint, coatings and
varnishes"CONTRACTOR "CONTRACTOR CENTERS OF AMERICA"
and design retail store services in the field of hardware hardware and related goods"NATIONAL "NATIONAL SUPPLY NETWORK" wholesale store services; namely providing providing wholesale industrial supplies and equipment
to commercial and industrial customers
"NSN" in circle design wholesale store services; namely providing
wholesale industrial supplies and equipment to
�� commercial and
industrial customers
"SIMPLY MAGIC" interior, exterior house paints and primers
"COLOR YOUR LIFE" written and graphic advertisements and
promotional materials of paper and signage
"YOUR NEIGHBORHOOD ACE HARDWARE
THE HELPFUL PLACE" retail hardware store services
"THE HELPFUL PLACE" retail hardware store services
CompetitionCompetition
Competitive conditions in the wholesale and retail 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-dealer-ownedowned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware
Distributing Co.
EmployeesEmployees
WeAs of December 28, 2002, we have 5,2295,268 full-time employees, of which 1,5901,555 are salaried employees. Excluding our
Canadian
operations and Company-owned retail locations, we have 4,8284,824 full-time employees to support our
domestic and
international retailers. We also have, as of the end of the 20012002 fiscal year, union contracts
covering one (1) truck drivers'
bargaining unit and two (2) warehouse bargaining units. 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 CompanyAce 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. 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 patronage purchases of merchandise from us that are made by
dealers who have
become members of our Company.Ace. 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:
2002200120001999
Warehouse Sales 4.56348% 4.27330% 4.43564% 4.98172%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 10.1109% 8.9371% 8.1131% 7.8827%
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.
"Business.") The LTL Plus Program patronage dividend was .5%0.5% of
these sales for fiscal year 2002, 2001 2000 and 1999.2000.
Sales of merchandise under our Contractor and Industrial Distributor Programs are made on a
nonpatronage basis.
Patronage Dividend Determinations and Allocations
The amounts that we distribute as patronage dividends consist of our gross profits on patronage 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. The total patronage dividend paid to members is based on net earnings
calculated in accordance with accounting principles generally accepted in the United States of America after reducing or
increasing net earnings for non-member income or losses. 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 businessthat we do withor losses generated from non-shareholder international dealers and non-shareholder retail accounts served through
National Hardlines Supply, Inc. and our industrial distributor and contractor programs, profits or other customers who do not qualify for patronage dividend distributionslosses realized from Ace
Insurance Agency, Inc., New Age Insurance Limited, Ace Hardware Canada Limited, company-owned retail locations and our
share of the profits or losses realized from our minority-owned investments including Builder Marts of America, Inc. and joint
ventures. Additionally, any income or loss that we realize from the disposition of property and equipment.equipment is excluded from
patronage dividends. The amount we distribute as patronage dividends also excludes profits or losses generated from our non-
shareholder programs. (See the heading "Business" and the subheading "Non-Shareholders Programs".)
Patronage dividends are usually paid to members within 90 days after the close of Ace's fiscal year; however, the Internal
Revenue Code (the "Code") permits distribution of patronage dividends as late as the15th day of the ninth month after the
close of Ace's fiscal year, and Ace may elect to distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.
Our By-laws provide that, by virtue of dealers being "members" of our CompanyAce (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 CompanyAce 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 2001 2002
patronage dividend rate for the LTL Plus
Program is .5%0.5% of our LTL Plus sales. The 20012002 patronage dividend rates for direct
shipment and bulletin
sales are 1.0% and 2.0%, respectively, while the current 20012002 warehouse patronage warehouse dividend rate is 4.27%
4.56%.
Patronage dividends are 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" below.)
Any manufacturing profit realized on intracompany sales of products manufactured by our Paint
Division is allocated and
distributed as patronage dividends to eligible dealers in proportion to their respective
annual dollar purchases of paint and
related products from that division. The earnings we realize on wholesale
sales of the Paint Division's products to our eligible
dealers are currently distributed as patronage
dividends to them as part of the patronage dividends which they receive each
year in the basic patronage
dividend categories of warehouse sales, bulletin sales and direct shipment sales. The 20012002 paint
patronage dividend rate
is 8.94%10.11%. 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. Therefore, if a loss were to result from Paint Division
activities, it would result in a reduced patronage dividend to all members, irrespective of their paint purchases.
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 eligible participants under our Contractor
Center standards. This is not a patronage
dividend plan, but rather an allocation of the increase in our stock
investment in BMA. Under the plan, we calculate an annual
estimate of the amount by which our stock in
BMA has increased or decreased 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. The 20012002 incentive pool rate under this plan is .40%
0.57% of qualifying purchases.
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'sAce's needs.
This plan is summarized below for the purchases that our eligible dealers make from us for the year2001 2000 and subsequent
years.
1. For each of a dealer's 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 the dealer based
on the purchases made for the eligible store;
(b) 25% of the portion of the total patronage dividends allocated for that store which exceed
$5,000 but do not
exceed $7,500;
(c) 30% of the portion of the total patronage dividends allocated for that store which exceed
$7,500 but do not
exceed $10,000;
(d) 35% of the portion of the total patronage dividends allocated for that store which exceed
$10,000 but do not
exceed $12,500;
(e) 40% of the portion of the total patronage dividends allocated for that store which exceed
$12,500.
2. We distribute the portion of patronage dividends in excess of the cash 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 a dealer holds for the eligible store equals the
greater of:
(a) $20,000; or
(b) the sum of purchases in the following categories that a dealer 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 STOPStop 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 a dealer's total patronage dividends for each of the dealer's eligible stores which exceeds the
sum of:
(a) the cash amount determined under Paragraph 1 above and
(b) the amount of Class C Stock determined under Paragraph 2 above is distributed to the dealer in cash
up to
certain limits. The total amount that a dealer receives 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
a dealer owes 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 patronage refund certificates have matured within five years from the date we issued them.
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, 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
and 3) dealers located in
countries maintaining tax treaties with the United States that provide for
reduced rates of withholding.
We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend distributions.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 $25,000 per location from us for this
purpose. If a dealer obtains a loan under this program,
the dealer may either repay it in twelve payments billed on the regular
bi-weekly billing statement, or the dealer may
apply the non-cash portion of the annual patronage dividends (for up to the next
three annual patronage
dividend distributions) toward payment of the loan.
Our Board of Directors has also authorized a loan program to help qualified dealers pay for costs of
converting their
stores from another hardware distributor's program to our program. Under this loan
program, these dealers can borrow up to $95,000
$95,000 per store. If the dealer obtains a loan under this program, we will
apply the non-cash portion of the dealer's annual
patronage dividends (for up to the next three annual patronage
dividend distributions) towards payment of the loan. Unless
extended by the Board of Directors, this loan
program will remain in effect until June 1, 20022003 or until 100 loans are made,
whichever occurs first.
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��to borrow between $4,000 to $15,000$25,000 per location repayable over a period of three (3)
years.
Under these programs, members have directed us to first apply the patronage refund certificate
portion of their patronage
dividend distributions toward the balance owed on 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
conversion 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 at the end of seven (7) years from rebatepatronage distributions of the
non-cash portion of the annual patronage rebate on
the respective store during that period.
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 CompanyAce 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 (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 hehe 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 eight and one-half months after
the end of that taxable year.
By becoming one of our "members" by owning 1 share of Class A voting stock, a patron is 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 into the patron's gross income. Such consent is deemed because
of 1) the act of obtaining or retaining membership
in our Company,Ace, and 2) because our By-laws provide
that the membership constitutes this consent, and we give written notification of
that By-law provision.
Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of ourour 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.
AIf a patron receives a patronage refund certificate as part of a patron's patronage dividends (see the subheading "Forms of"Forms of Patronage Dividend Distributions"), the patron 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
the patron under the terms of the certificate. This interest income
would be taxable to a patron's "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 backup 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 backup 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
backup 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 heading "Business",
"Business", 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 CompanyAce 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. A reduced rate
of withholding may apply to dealers located in
countries maintaining tax treaties with 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 Agreements
Persons who apply to become an Ace member must sign a Subscription Agreement to purchase our
stock. They must also
sign our customary Membership Agreement and Supplement and submit
a payment of $1,500 ($2,500 for conversions or new
investor ground-ups) with yourtheir signed
Membership Agreement and Supplement. We use this fee toward our estimated costs
of processing
the membership applications. If a person submits a membership application and we accept it, we sign yourStock Subscription Agreement and your Membership Agreement and Supplement and send themback to you for your records. YourA membership may generally be terminated upon various notice
periods and for
various reasons (including voluntary termination by either of us)party). The details of these
reasons and notice periods are
contained 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
terminateterminate 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 wholly-owned
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 licenseeslicensees 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 ("AceCanada"). 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 trademarksand service marks.
In 1998, the Company began developing joint ventures with certain dealers as a way of increasing the
Ace presence in
key markets without the need for Ace to use solely its own resources to open company
stores. For each joint venture, the
Company and the dealermember enter into a Limited Liability Company
Agreement, with the dealerretailer acting as the managing
member, and form a limited liability company ("LLC")
to operate the joint venture stores. In each joint venture, the Company ownswe own 50%
or less of the LLC's
units. Currently, the CompanyAce has an ownership interest in sixseven joint ventures. In the future, we may exploreexplore other joint venture opportunities with our members; however, we consider each situation unique
and we evaluate each
opportunity on its own merits.
In our sole discretion, we may offer a member a mutually agreeable termination arrangement.
In some situations, a
member who terminates on this basis may be offered the opportunity to
purchase products from us (including Ace private
label products) for a period of up to 5 years after the
termination of membership. The former member is not required to make
any such purchases from us,
but must maintain favorable credit status in order to do so.
In 1999, we entered into an agreement with Builder Marts of America (BMA), to combine our lumber and building
materials division (the "LBM division") with BMA, a non-cooperative buying group for lumber and building materials in the
United States. Under this agreement, we contributed certain business assets (primarily vendor rebate receivables, fixed assets
and inventories) in exchange for a non-controlling (28%) interest in the combined entity. The investment in the combined
entity is accounted for under the equity method of accounting. As a result of this transaction, we have established an LBM
Retailer Incentive Pool Plan for our members who purchase LBM products through BMA. This program is not a patronage
dividend plan but rather a process for allocating the increase in the value of our investment in BMA to those qualifying
dealers who purchase LBM products through BMA. (See the heading "Business", subheading "Patronage Dividend
Determinations and Allocations".)
In 2001, we developed a non-shareholder industrial distributor program and contractor program.
These retailersindustrial distributors can purchase
selected types of products from us for resale. resale under an Industrial Distributor Agreement or Distributor Franchise Agreement.
They are not members of our
cooperative by reason of their participation in the industrial distributor program, and therefore
do not own stock or receive patronage dividends.dividends in connection with that program. These programs are made
available to
cooperative members, however, members will not receive patronage dividends for purchases
of products under these
programs.
Sales to international non-shareholder dealers accounted for approximately 4.4%1.9 % of our merchandise sales in 2002,
approximately 2.0% of our merchandise sales in 2001 and approximately 2.2% of our merchandise sales in 2000. Sales to
domestic non-shareholder locations accounted for less than 1.0 % of our total sales in2001, approximately 6.7% of our total sales in 2000 and approximately 6.5% of our total sales in 1999.Sales to domestic non-shareholder locations accounted for 2002, less than 2.0% of our total sales in
2001 and less
than 2.5%3.0% of our total sales in 2000 and less than 1.5% of our total sales in 1999.2000. (See Appendix A, Article
XXV, section 2 of our By-laws regarding
International Retail Merchants and non-member accounts.)
In connection with the sales of the shares of Ace Canada to Sodisco-Howden Group Inc. on February 13, 2003, we
signed a License Agreement granting Ace Canada the right to operate, and license others to operate, retail hardware stores
under our trademarks and service marks. These retail hardware dealers are not shareholders and do not receive patronage
dividends from us.
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)LeasedDate
General Offices:
Oak Brook, Illinois 291,816(1) 206,030 Owned
Oak Brook, Illinois 85,786 Leased September 30, 2009
Downers Grove, Illinois 23,962 Leased June 30, 2004
Markham, Ontario, Canada(1)Canada (2) 15,372 Leased February 28, 2006November 30, 2002
Distribution Warehouses:
Lincoln, Nebraska 345,440 Leased December 31, 2006
Arlington, Texas 313,091 Leased July 31, 2003
Perrysburg, Ohio 393,720 Leased December 31, 2004
Tampa, Florida 391,755 Owned
Yakima, Washington 507,030 Owned
Maumelle, Arkansas 597,253 Owned
LaCrosse, Wisconsin 591,964 Owned
Rocklin, California (4) 478,468 OwnedLeased September 30, 2004
Rocklin, California 75,000 Leased July 31, 2003
Rocklin, California (3) 82 acres Leased January 15, 2023
Gainesville, Georgia 481,013 Owned
Prescott Valley, Arizona 631,485 Owned
Princeton, Illinois 1,094,756 Owned
Chicago, Illinois (2) 18,168 Leased May 31, 2002
Summit, Illinois (2)(4) 37,236 Leased February 28, 2017
Baltimore, Maryland (2)(4) 19,600 Leased December 31, 2008
Colorado Springs, Colorado 494,219 Owned
Wilton, New York 800,525 Leased September 1, 2007
Loxley, Alabama 798,698 Leased May 27, 2009
Brantford, Ontario, Canada (3)(5) 354,000 Leased March 31, 2006 Calgary, Alberta, Canada (3) 240,000 Leased June 30, 2002
Prince George County, Virginia 798,786 Owned
Fort Worth, Texas (2)(4) 10,915 Leased December 31, 2005
Cuyahoga Heights, Ohio (4) 21,320 Leased April 30, 2017
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 20032004
Paint Manufacturing Facilities:
Matteson, Illinois 371,411 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
((1)1) This property iswas leased by our subsidiaryAce for its corporate office until purchased in June, 2002.
(2) This property was leased by Ace Hardware Canada Limited for its corporate office.(2) (3) Ace has entered into a ground lease for 82 acres of land containing a 619,688 square foot warehouse/office building,
including 75,000 square feet of building space leased by Ace. Ace intends to exercise an option to purchase this property by
September, 2003, and to develop this property for use as a distribution warehouse.
(4) This property is leased for use as a freight consolidation center.(3) (5) Our subsidiary, Ace Hardware Canada Limited,3070070 Nova Scotia Company, leases this property for a distribution warehouse. Ace Hardware Canada Limited has exercised an option to terminate the lease for the Calgary Warehouse effective April 30, 2002.(4) The Company has entered into an agreement to sell this property and plans to acquire vacant land and construct a larger replacement warehouse.
In addition to the above, we or our subsidiary, Ace Corporate Stores, Inc., lease 26 retail hardware
stores ranging from 13,000
7,000 to 25,000 square feet in size located in the following states: Colorado, Georgia,
Illinois, New Jersey, Oregon,
Washington and Wisconsin.
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
In the normal course of our business, we are a party to various legal proceedings. We do not expect
that any currently
pending proceedings will, individually or in the aggregate, have a material adverse
effect on our business, results of
operations or financial condition.
IItemtem 4. Submission of Matters to a Vote of Security Holders
None.
200220032004200520062007ThereafterTotal(000's�� (000's omitted)
Assets:
Short-term investment-
fixed rate $ -- $3,474 $1,043 - - $3,125 $9,516 $17,158$1,019 $,251 $ 630 $6,712 $11,735 $20,347
Fixed interest rate- - 6.96%-% 5.75%- - 7.98% 6.77% 6.97%2.65% 5.73% 5.73% 6.05% 5.75%
Liabilities:
Short-term borrowings-
variable rate$72,600$ 48,900 - - - - -- - - - $72,600$48,900
Average variable interest rate2.58%1.94% - - - - -- - - - 2.58%1.94%
Long-term debt-fixed rate $7,179 $6,412 $6,066 $13,1955,647 $5,454 $12,882 $17,882 $17,857$126,857 $177,566$109,000 $168,722
Average fixed interest rate7.07% 7.07% 7.09% 7.08% 7.09% 7.12% 7.07%7.16% 7.18% 7.18% 7.18% 7.21% 7.24% 7.16%
The Company Ace is exposed to credit risk on certain assets, primarily accounts receivable. The Company
Ace 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'sAce's customer base. The CompanyAce currently believes its
allowance for
doubtful accounts is sufficient to cover customer credit risks.
The Company'sAce's various currency exposures often offset each other, providing a natural hedge against
currency risk. The CompanyAce 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. Accumulated other comprehensive loss at December 29, 2001 and December 30,2000 includes gains of approximately $2.0 million related to previously settled foreign currencycontracts. The CompanyAce did not have any outstanding foreign exchange
forward contracts at December
28, 2002 or December 29, 2001. 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. None.PART III
*Attorneys-in-fact
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
I, David F. Hodnik, certify that:
1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003 By DAVID F. HODNIK
David F. Hodnik
President and Chief Executive Officer
CERTIFICATION OF EXECUTIVE VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
I, Rita D. Kahle, certify that:
1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003 By RITA D. KAHLE
Rita D. Kahle
Executive Vice President
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibits
Enclosed Description
10-P Copy of Lease dated June 19, 2002 for the Registrant's distribution center in Rocklin,
21California.
10-a-20 Copy of Fourth Amendment to Ace Hardware Corporation Restated Officer Incentive
Plan adopted December 11, 2002 and effective January 1, 2003.
10-a-21 Copy of current standard form of National Supply Network Distributor Franchise
Agreement.
10-a-22 Copy of Ground Lease dated January 13, 2003 for lease of 82 acres of real estate in
Placer County, California.
10-a-23 Copy of Lease dated February 7, 2002 for the Registrant's freight consolidation center
in Cuyahoga Heights, Ohio.
10-a-24 Copy of Option Agreement and Joint Escrow Instructions dated January 13, 2003 for
purchase of 82 acres of real estate in Placer County, California.
21 Subsidiaries of the Registrant.
2323Consent of KPMG LLP.
2424Powers of Attorney.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibits
Incorporated
by Reference Description
3-A Copy of Restated Certificate of Incorporation of the Registrant, as amended
through June 3,
1996, filed as Exhibit 3-A to Post-Effective Amendment No. 6 to
the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 22, 2001 and
incorporated herein by reference.
3-B Copy of By-laws of the Registrant as amended through January 26, 2002includedfiled as Exhibit
as Appendix A3-B to theProspectus constituting a part of theRegistrant's Form S-2
Registration Statement (Registration No. 333-84792) filed
on or about March22, 200222, 2002 andincorporated herein
by reference.
4-A Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as Exhibit
Exhibit4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1
Registration Statement(Registration
(Registration No. 2-82460) on or about 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
Statement (Registration(Registration No. 33-4299) on or about 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
toPost-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
Statement (Registration(Registration No. 33-4299) on or about 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 or about 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-E to
the Registrant's Form S-2
Registration Statement (Registration No. 333-84792) filed on or about March 22, 2002 and
andincorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with respect to purchases of
ofmerchandise made from the Registrant for the year 2000 and subsequent years
adopted by the
Board of Directors of the Registrant on December 6, 2000 and filed
as Exhibit 4-F to
Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement(Registration
(Registration No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
4-G Copy of LBMRetailer 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.
10-A Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated and
andAdopted December 7, 1993, consolidated and refiled with First, Second, Third and Fourth
FourthAmendmentsfiledas Exhibit 10-A to the Registrant's Form S-2 Registration Statement (Registration
StatementNo. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-B Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and
Restated as
of January 1, 1997 (for years 1995-2001), consolidated and refiled with First
and Second
Amendmentsfiledas Exhibit 10-B to the Registrant's Form S-2 Registration Statement (Registration
StatementNo. 333-84792) on or about March 22, 2002 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)
Plans)adopted on December 6, 2000 filed as Exhibit 10-D to Post-Effective
Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-ECopyCopy of Ace Hardware Corporation Restated Officer Incentive Plan effective
January 1, 1999
consolidated and refiled with First, Second and Third Amendmentsfiledas Exhibit 10-E to the
Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about March
March22, 2002 and incorporated herein byreference.reference .
10-F Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
AgreementAgreement 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
AmendmentNo. 3 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial Corp. dated December 17, 1997
1997establishing a $10,000,000 discretionary leasing facility for the purchase of land and
andconstruction 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) filed 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 or
about March 23, 1992 and incorporated herein by reference.ExhibitsIncorporatedby ReferenceDescription
10-J Copy of current standard form of Ace Hardware Corporation International
Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 6 to the
theRegistrant's Form S-2 Registration Statement (Registration No. 33-58191) on
or about March
22, 2001 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
(Registration No. 33-58191) on or about April 26, 1995 and
incorporated herein by reference.
10-L Copy of Supplement to Ace Hardware Membership Agreement effective April 1,
2000, filed as
Exhibit 10-L to Post-Effective Amendment No. 6 to the Registrant's
Form S-2 Registration
Statement (Registration No. 33-58191) on or about March
22, 2001 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
issuedSeptember 22, 1993 with a maturity date of June 22, 2008 and $20,000,000
Private Shelf Facility,
pursuant to Note Purchase and Private Shelf Agreement with
the Prudential Insurance
Company of America dated as of September 22, 1993
filed as Exhibit 10-R to Post-Effective
Amendment No. 2 to the Registrant's Form
S-2 Registration Statement (Registration No.
33-46449) on or about March 23,
1994 and incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop facility of 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 or about March 22, 1993 and
incorporated herein by reference.
10-PCopy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998No exhibit incorporated by reference. See Index to Exhibits, Exhibits Enclosed for the
Registrant's redistribution center in Odenton, Maryland filed as Exhibit 10-P toPost-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement(Registration No. 33-58191) on or about March 15, 1999 and incorporatedherein by reference.applicable materials.
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 or
about March 23, 1994 and
incorporated herein by reference.
10-R Copy of current standard form of Ace Hardware Corporation License Agreement for
forinternational licensees filed as Exhibit 10-R to Post-Effective Amendment No.
6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
on or about March
22, 2001 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.ExhibitsIncorporatedby ReferenceDescription
10-T Copy of Long-Term Incentive Compensation Deferral Option Plan of the
Registrant effective
January 1, 2000 filed as Exhibit 10-a-13 to the Registrant's
Form S-2 Registration Statement(Registration
(Registration No. 33-58191) on or about March
15, 2000 and incorporated herein by reference.
10-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective
January 1, 2001
filed as Exhibit 10-U to Post-Effective Amendment No. 6 to the
Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 22, 2001 and
incorporated herein by reference.
10-V Copy of Ace Hardware Corporation Long-Term Compensation Deferral Option
Plan effective
January 1, 1995 consolidated and refiled with First, Second and
Third Amendmentsfiledas Exhibit
10-V to the Registrant's Form S-2 Registration
Statement (Registration No. 333-84792) on or
about March 22, 2002 and incorporated herein by reference.
10-W Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R
Tri-RCorporation 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
(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
(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
(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 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-2 Copy of current standard form of International Retail Merchant Agreements filed
as Exhibit
10-a-2 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement(Registration
(Registration No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
10-a-3 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.ExhibitsIncorporatedby ReferenceDescription
10-a-4 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-5 Copy of First Amendment to Ace Hardware Corporation Directors' Deferral
Option Plan(effective
(effective January 1, 2001) adopted December 5, 2001 and effective
January 1, 2002 filed as
Exhibit 10-a-5 to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792)
Statementon or about March 22, 2002 and incorporated herein by reference.
10-a-6 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-7 Copy of current standard form of Industrial Distributor Agreement filed as
Exhibit 10-a-7 to the
Registrant's Form S-2 Registration Statement(Registration No. 333-84792)filed on or about
March 22, 2002 and incorporated herein by reference.
10-a-8 Copy of First Amendment to Ace Hardware Corporation Long-Term Incentive Compensation
Deferral Option Plan (effective January 1, 2000) adopted December 5, 2001 and effective
January 1, 2002 filed as Exhibit 10-a-8 to the Registrant's Form S-2 Registration Statementfiled
(Registration No. 333-84792)on or
about March 22, 2002 and incorporated herein by reference.10-a-8 Copy of First Amendment to Ace Hardware Corporation Long-Term IncentiveCompensation Deferral Option Plan (effective January 1, 2000) adoptedDecember 5, 2001 and effective January 1, 2002 filed as Exhibit 10-a-8 to theRegistrant's Form S-2 Registration Statement on or about March 22, 2002 andincorporated herein by reference.
10-a-9 Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center in
inBaltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration Statement
Statement(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-10 Copy of Amendment dated April 24, 2001 to Note Purchase and Private Shelf
Agreement dated
as of September 27, 1991, and Restated Note Purchase and Private
Shelf Agreement dated as
of August 23, 1996 with The Prudential Insurance
Company of America filed as Exhibit 10-a-10
to the Registrant's Form S-2 Registration
Statement (Registration No. 333-84792) on or about
March 22, 2002 and incorporated herein by reference.10-a-1110-a-11 Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000
filed as
Exhibit 10-a-11 to Post-Effective Amendment No. 6 to the Registrant's
Form S-2 Registration
Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by
reference.
10-a-12 Copy of Lease effective November 27, 2000 for freight consolidation center of the Registrant
Registrantin Fort Worth, Texas filed as Exhibit 10-a-12 to Post-Effective
Amendment No. 6 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March
22, 2001 and incorporated herein
by reference.
10-a-13 Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional
general office
space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois filed as
Exhibit 10-a-13 to
Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement(Registration
(Registration No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.ExhibitsIncorporatedby ReferenceDescription
10-a-14 Copy of current standard form of Limited Liability Company Agreement for retail joint
jointventures filed as Exhibit 10-a-14 to Post-Effective Amendment No. 6 to the
Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or
about March 22, 2001 and
incorporated herein by reference.
10-a-15 Copy of Amendment dated September 25, 2000 to Restated Note Purchase and
Private Shelf
Agreement dated as of August 23, 1996 with The Prudential
Insurance Company of America
filed as Exhibit 10-a-15 to Post-Effective
Amendment No. 6 to the Registrant's Form S-2
Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and
incorporated herein
by reference.
10-a-16 Copy of Lease dated June 30, 2000 for the Registrant's supplemental warehouse
space inRocklin,
Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2
Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by
reference.
10-a-17 Copy of Lease dated January 16, 2002 for the Registrant's freight consolidation
center in
Summit, Illinois filed as Exhibit 10-a-17 to the Registrant's Form S-2
Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by
reference.
10-a-18 Copy of Amendment dated September 10, 2001 to Note Purchase and Private
Shelf Agreement
dated as of September 27, 1991, and Restated Note Purchase and
Private Shelf Agreement
dated as of August 23, 1996 with The Prudential
Insurance Company of America filed as
Exhibit 10-a-18 to the Registrant's FormS-2S-2 Registration Statement (Registration No.
333-84792) on or about March 22, 2002 and incorporated herein by
reference.
10-a-19CopyCopy of Note Purchase Agreement dated April 15, 2001 for the issuance and sale
of up to
$100,000,000 of Senior Notes, under which $70,000,00 of 7.27% Senior
2001-A Notes with a
maturity date of April 30, 2013 have been sold to various
purchasers filed as Exhibit 10-a-19 to
the Registrant's Form S-2 Registration
Statement (Registration No. 333-84792) on or about
March 22, 2002 and incorporated herein by reference.
Upon request of the Commission, we agree to furnish copies of any agreements regarding indebtedness
that does not
exceed ten percent of our total assets and the assets of our subsidiaries on a consolidated basis.
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, proxy soliciting materials for our 20022003 annual meeting
have not been sent
to our shareholders. Copies of 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 December 29, 200128, 2002 and December 30, 2000 F-329, 2001
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the years in the three-year period
ended December 29, 2001 F-528, 2002
Consolidated Statements of Member Dealers' Equity for each of the years in the
three-year period ended December 29, 2001 F-628, 2002
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 29, 2001 F-728, 2002
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.
Chicago, IllinoisKPMG LLP
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 29, 200128, 2002 and December 30, 200029, 2001
ASSETS
Year Ended
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Class C Stock
Issuable to Accumulated
Dealers for Additional Retained Other Com-
Class A Class B Class C Patronage Stock Earnings ContributedComprehensiveprehensive Treasury
Stock Stock Stock Dividends Subscribed* (deficit) Capital Income/(loss) Stock Total
Balance at January2, 1999 $3,8461, 2000 $3,856 $6,499$226,571 $26,170$241,226 $21,648$498 $594 $13,485$471 $3,292 $3,295 $(818) $(7,814) $261,512- $(8,134) $279,672
Net earnings - - - - - 80,392 - - -92,562 - - - 92,56280,392
Net payments on subscriptions - -- - 1,531 - - - - 1,531 Patronage financing deductions - - - (847) - - - - - (847) Stock issued 238 - 26,616 (25,323) (1,504) - - - - 27 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 (loss)-------1,109-1,109Balance at January 1, 2000 3,856 6,499 241,226 21,648 498 594 13,485 291 (8,134) 279,963 Net earnings - - - - - 80,392 - - - 80,392 Net payments on subscriptions- - - - 1,830 - - - - - - 1,830
Patronage financing deductions - - - (158) - - - - - (158)
Stock issued 234 - 23,391 (21,490) (1,977) - - - - 158
Stock repurchased - - - - - - - - (14,804) (14,804)
Stock retired (307) - (14,137) - - - - - 14,444 -
Patronage dividends issuable - - - 24,267 - - - - - 24,267
Patronage dividends payable - - - - - (86,537) - - - (86,537)
Accumulated other comprehensive
income (loss) - - - - - - - 458 - 458
Balance at December 30, 2000 3,783 6,499 250,480 24,267Patronage dividends payable351 (5,551) 13,485 458 (8,494) 285,278
Net earnings - - - - -(86,537)73,069 - - -(86,537) Accumulated other comprehensive income (loss)-------(453)-(453)Balance at December 30, 2000 3,783 6,499 250,480 24,267 351 (5,551) 13,485 (162) (8,494) 284,658 Net earnings - - - - -73,069- - - 73,069
Net payments on subscriptions - - - - 1,479 - - - - 1,479
Patronage financing deductions - - - (1,324) - - - - - (1,324)
Stock issued 170 - 24,202 (22,943) (1,527) - - - - (98)
Stock repurchased - - - - - - - - (15,006) (15,006)
Stock retired (260) - (14,458) - - -- - - - - (15,006) (15,006) Stock retired (260) - (14,458) - - -- - 14,718 -
Patronage dividends issuable - - - 23,284 - - - - - 23,284
Patronage dividends payable - - - - - (85,109) - - - (85,109)
Accumulated other comprehensive
income (loss) - - - - - - - 129 - 129
Balance at December 29, 2001 3,693 6,499 260,224 23,284 303 (17,591) 13,485 587 (8,782) 281,702
Net earnings - - - - - 82,091 - - - 82,091
Net payments on subscriptions - - - - 1,322 - - - - 1,322
Patronage financing deductions - - - - - - - - - -
Stock issued 171 - 24,495 (23,284) (1,382) - - - - -
Stock repurchased - - - - - - - - (15,682) (15,682)
Stock retired (247) - (15,107) - - - - - 15,354 -
Patronage dividends issuable - - - 26,053 - - - - - 26,053
Patronage dividends payable - - - - -(85,109)(95,580) - - -(85,109)(95,580)
Accumulated other comprehensive
income (loss) - - - - - - -(1,077)116 -(1,077)116
Balance at December29, 2001 $3,69328, 2002 $3,617 $6,499$260,224 $23,284$269,612 $26,053 $303 $(17,591)243 $(31,080) $13,485$(1,239) $(8,782) $279,876 ======= ======= ========= ======== ======= ========= ======== ======== =========$703 $(9,110)=========$280,022
*Additional stock subscribed is comprised of the following amounts atJanuary 1, 2000,December 30, 2000, December 29, 2001 and December29, 2001:
28, 2002:
1999 2000 20012002
Class A Stock $ 118 $ 41 $ 94 $ 40
Class B Stock - - - - -
Class C Stock 1,452 975 977 874
Year Ended
December 29, December 30, January 1,200120002000(000's Omitted)
Operating Activities: Net Earnings $ 73,069 $ 80,392 $ 92,562 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 29,221 32,273 23,396 Gain on sale of property and equipment, net of deferred taxes of $1,681 (3,264) - - Decrease (increase) in accounts receivable, net 3,936 (2,092) 26,095 Increase in inventories (17,003) (22,475) (38,685) Decrease (increase) in prepaid expenses and other current assets (1,334) (1,764) 1,805 Decrease in accounts payable and accrued expenses (21,139) (7,497) (1,101) Increase in other long-term liabilities2,2612,5233,718Net Cash Provided by Operating Activities65,74781,360107,790
Investing Activities: Purchase of short-term investments (4,386) (12,314) - Purchase of property and equipment (51,430) (44,649) (43,074) Proceeds from sale of property and equipment - 9,664 349 Increase in other assets(1,229)(12,200)(21,160)Net Cash Used in Investing Activities(57,045)(59,499)(63,885)
Financing Activities: Proceeds (payments) of short-term borrowings (8,900) 31,631 24,869 Proceeds from issuance of long-term debt 70,000 - - Payments on long-term debt (5,229) (3,167) (6,892) Payment of cash portion of patronage dividend (34,764) (38,173) (34,826) Payments of patronage refund certificates and patronage financing deductions (15,713) (9,956) (34,557) Proceeds from sale of common stock 1,479 1,830 1,531 Repurchase of common stock(15,006)(14,804)(12,509)Net Cash Used in Financing Activities(8,133)(32,639)(62,384)
Increase (decrease) in Cash and Cash Equivalents 569 (10,778) (18,479) Cash and Cash Equivalents at beginning of year24,64435,42253,901
Cash and Cash Equivalents at end of year $ 25,213 $ 24,644 $ 35,422 ============ =========== ==========
See accompanying notes to consolidated financial statements.
Buildings and improvements 10-40 StraightLineline
Warehouse equipment 5-10 Accelerated
Office equipment 3-10 Various
Manufacturing equipment 3-20 StraightLineline
Transportation equipment 3-7 StraightLineline
Leasehold improvements are generally amortized on a straight-line basis over the term of the respective
lease. (g)
(h) 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 on these
foreign hedges are included in the basis of
the underlying hedged investment. Accumulated other comprehensive loss at December 29, 2001 andDecember 30, 2000 includes gains of $2.0 million related to previously settled foreign currency contracts.
Foreign currency translation adjustments, net of
gains on foreign exchange contracts, are reflected in the
accompanying Consolidated Statements of Comprehensive Income
for 2002, 2001 2000 and 1999.2000. The
Company did not have any outstanding foreign exchange forward contracts at December 28,
2002 or December 29, 2001 or2001.December 30, 2000.
(h) (i) Financial Instruments
The carrying value of assets and liabilities that meet the definition of a financial instrument included
in the accompanying
Consolidated Balance Sheets approximatesapproximate fair value. (i)
( j) 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.Directors and charged to expense in the period it is earned by employees.
(j)(k) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States
of America 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. With respect to the Company's discontinued operation, actual losses could differ
from those estimates and will be reflected as adjustments in future financial statements when probable and estimable.
(k)(l) Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Amounts incurred for shipping and
handling are included in cost of sales.
(m) Fiscal Year
The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2002, 2001 2000
and 19992000 ended on
December 28, 2002, December 29, 2001 and December 30, 2000, and January 1, 2000, respectively. (l)
(n) Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to comparablecomparable classifications followed in 2001.2002. During 2002, the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within distribution operations expenses and reclassified
certain amounts within selling, general and administrative expenses to distribution operations expenses. These
reclassifications had no effect on previously reported income.
(2) Discontinued Operations
In August of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144") which supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed O f". While SFAS 144 retains many of the fundamental recognition and measurement provisions of
SFAS 121, it changes the criteria required to be met to classify an asset as held for sale. SFAS 144 also supercedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", and
among other things, broadens reporting for discontinued operations to include a component of an entity, rather than just a
segment of a business. The Company adopted SFAS 144 in 2002, and applied its provisions in reporting discontinued
operations in 2002.(2) Inventories In 2002, the Company entered into an agreement to sell AceHardware Canada Limited, a wholly-owned subsidiary for
cash proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13, 2003, at which time the sale proceeds were received and used to repay outstanding indebtedness.
The Company recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002. Losses
from operations of AceHardware Canada Limited were US $5.4 million in 2002, US $11.1 million in 2001 and US $723,000 in 2000.
The Company has classified the assets and liabilities of AceHardware Canada Limited as held for sale in the accompanying
consolidated financial statements, and reclassified the financial statement and related notes for all periods presented to display
the operating results of this business as discontinued operations. For business segment reporting purposes, Ace Hardware
Canada Limited results were previously included in the "Wholesale" segment.
Net sales from the discontinued operation for the years 2002, 2001 and 2000 were US $24.6 million, US $27.9 million
and US $75.3 million, respectively. Total assets of the discontinued operation for the years 2002 and 2001 were US $10.3
million and US $18.1 million, respectively. Total liabilities of the discontinued operation for the 2002 and 2001 were US $6.8
million and US $3.7 million, respectively.
(3) 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 $57,295,000 and $57,809,000 at December 28, 2002 and $62,502,000 at December 29, 2001, andDecember 30, 2000, respectively. Indirect costs,
consisting primarily of warehousing costs, are absorbed
as inventory costs rather than period costs.
(4) (3) Short-Term Borrowings Short-term borrowings were utilized during 2001 and 2000. The maximum amount outstanding at anymonth-end during the period was $128.0 million in 2001 and $147.0 million in 2000. The weightedaverage interest rate effective as of December 29, 2001 and December 30, 2000 was 2.58% and 7.18%,respectively. Short-term borrowings outstanding as of December 29, 2001 and December 30, 2000 were$72.6 and $81.5 million, respectively. At December 29, 200128, 2002 the Company has available a revolving credit
facility with a group of banks providing for $175.0
million in committed lines of credit and also has available $10.0
million in uncommitted lines. The facility requires the
Company to comply with various financial covenants for which the Company was in compliance at December 28, 2002 and
December 29, 2001. The facility expires on May 2, 2005. The maximum amount outstanding at any month-end during the
period was $104.4 million in 2002 and $128.0 million in 2001. The monthly weighted average borrowing levels during 2002
and 2001 were $57.3 million and $77.9 million, respectively. The interest rate under the revolving credit facility is based
upon a spread over LIBOR based upon quarterly debt to EBITDA ratios. The weighted average interest rate effective as of
December 28, 2002 and December 29, 2001 was 1.94% and 2.58%, respectively. Short- term borrowings outstanding as of
December 28, 2002 and December 29, 2001 were $48.9 million and $72.6 million, respectively. The aggregate unused line
of credit available at December 28, 2002 and December 29, 2001 andDecember 30, 2000 was $112.4$136.1 million and $108.5$112.4 million, respectively. At
December 29, 200128, 2002 the
Company had no compensating balance requirements.
(5)
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,617 3,6933,783
Class B Stock, nonvoting, redeemable at not less than
twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 1,944 2,1082,252
Treasury stock 4,555 4,3914,247
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,696,122 2,602,2432,504,796
Issuable as patronage dividends 260,526 232,839242,671
Additional Stock Subscribed:
Class A Stock 40 9441
Class B Stock - -
Class C Stock 8,740 9,7709,750
At December 29, 200128, 2002 and December 30, 200029, 2001, there were no common shares reserved for options, warrants,
conversions or other rights; nor were any options granted or exercised during 2002, 2001 or 2000. Upon voluntary or
involuntary liquidation or bankruptcy, Class B and Class C shareholders would first receive amounts to repurchase the two years then ended.shares
at prices previously set by the Company's Board of Directors from the net assets of the Company. If the available net assets
are not sufficient, each outstanding share of Class B and Class C stock will share in the distribution of the Company's net
assets in proportion to its purchase or redemption price to the total available for payment.
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.
Treasury stock transactions during 1999, 2000, 2001 and 20012002 are summarized below:
Shares Held in Treasury
Class A Class B Class C
Balance at January 2, 19991, 2000 - 3,907- 4,067 - -
Stock issued - - - Stock repurchased 228 160 119,614 Stock retired (228) - (119,614)Balance at January 1, 2000 - 4,067 - Stock issued - - -
Stock repurchased 307 180 141,365
Stock retired (307) - - (141,365)
Balance at December 30, 2000 - - �� 4,247 - -
Stock issued - - - - - -
Stock repurchased 260 144 144,584
Stock retired (260) - - (144,584)
Balance at December 29, 2001 - - 4,391 - -
========= ========= =========Stock issued - - - - - -
Stock repurchased 247 164 151,070
Stock retired (247) - - (151,070)
Balance at December 28, 2002 - - 4,555 - -
====== ====== =======
(10) Segments(9) Segments
The Company is principally engaged as a wholesaler of hardware and related products and is a manufacturer
of paint
products. The Company's customers consist principally of its member dealers. No single customer or commonly-controlled
group of customers accounted for more than 10% of the Company's consolidated sales during 2002, 2001, or 2000.
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. The net sales from external customers included in the Other category are primarily
generated from company-owned retail locations. Information
regarding the identified segments and the related reconciliation
to consolidated information are as
follows:
December 29, 200128, 2002
(000's omitted)
Elimination of
Paint Intersegment
WholesaleManufacturingOtherActivitiesConsolidatedWholesaleManufacturingOtherActivitiesConsolidated
Net sales from external customers $2,822,727$2,961,217 $ 18,668 $52,97418,977 $48,903 $ - $2,894,369$3,029,097
Intersegment sales 27,881 110,62124,211 119,110 - (138,502) (143,321) -
Interest expense 23,156 1,094 1,459 (2,553) 23,15621,583 1,127 817 (1,944) 21,583
Depreciation and amortization 25,52028,079 1,751 1,829 - 31,659
Segment profit (loss)
from continuing operations 84,534 13,414 (4,756) (233) 92,959
Identifiable segment assets 1,032,473 60,661 69,809 (19,591) 1,143,352
Expenditures for long-lived assets 26,399 1,954 1,841 - 30,194
December 29, 2001
(000's omitted)
Elimination of
Paint Intersegment
WholesaleManufacturingOtherActivitiesConsolidated
Net sales from external customers $2,852,240 $ 18,668 $ 52,974 $ - $2,923,882
Intersegment sales 27,881 110,621 - - (138,502) - -
Interest expense 23,100 1,094 1,459 (2,553) 23,100
Depreciation and amortization 24,594 1,768 1,933 - 29,221- 28,295
Segment profit (loss) 63,504
from continuing operations 74,595 11,255 (1,330) (360) 73,06984,160
Identifiable segment assets 1,075,3581,053,139 62,205 49,74271,961 (18,514) 1,168,791
Expenditures for long-lived assets 47,165 1,673 2,592 - - 51,430
December 30, 2000
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net sales from external customers $2,879,952$2,858,988 $ 20,852 $44,347$44,347 $ - $2,945,151$2,924,187
Intersegment sales 28,641 100,780 - (129,421) -
Interest expense 21,80321,670 1,209 1,278 (2,487) 21,80321,670
Depreciation and amortization 29,17627,833 1,694 1,403 - 32,27330,930
Segment profit (loss) 73,540
from continuing operations 74,263 9,739 (2,452) (435) 80,39281,115
Identifiable segment assets 1,026,1301,013,093 68,130 48,77561,812 (19,225) 1,123,810
Expenditures for long-lived assets 39,807 937 3,905 - 44,649January 1, 2000 (000's omitted) Elimination of Paint IntersegmentWholesaleManufacturingOtherActivitiesConsolidatedNet sales from external customers $3,128,269 $ 27,268 $26,265 - $3,181,802Intersegment sales 22,647 100,758 - (123,405) -Interest expense 16,651 1,383 590 (1,973) 16,651Depreciation and amortization 21,022 1,589 785 - 23,396Segment profit (loss) 85,574 9,475 (1,819) (668) 92,562Identifiable segment assets 975,618 78,057 40,235 (12,426) 1,081,484Expenditures for long-lived assets 35,027 2,846 5,201 - 43,074
Net sales and long-lived assets by geographic region based upon customer location for 2002, 2001 and 2000 and1999 were as follows:
December 28, 2002December 29, 20012001December 30, 2000January 1, 2000
(000's omitted)
Net sales:
United States $2,767,829 $2,748,740 $2,975,567$2,930,255 $2,825,302 $2,803,116
Foreign countries 98,84298,580121,071
Total $3,029,097 $2,923,882 $2,924,187
======== ======== ========
Long-lived assets, net:
United States $284,032 $,285,345 $,258,802
Foreign countries 126,540- 196,411- 206,235
-
Total $2,894,369 $2,945,151 $3,181,802 ========== ========== ==========Long-lived assets, net: United States$ 284,032 $ 285,345 $ 258,802 $ 254,747
Foreign countries 2,162 3,088 4,431 Total $ 287,507 $ 261,890 $ 259,178 =========== =========== =================== ========= ========(10) Commitments Leased property under capital leases is included as "Property and Equipment" in the ConsolidatedBalance Sheets as follows: December 29, December 30,(11) Commitments
2001 2000 (000's omitted)Data processing equipment $3,444 $3,598Less: accumulated depreciation and amortization (3,345) (3,252) $99 $346 ============ ============
The Company primarily rents buildings, warehouse and warehouse, office space and certain other equipment under operatingoperating leases. At December 29, 200128, 2002 annual minimum rentalcommitments under leases that have
initial or remaining noncancelable
terms in excess of one year are as follows:
December 28, December 29,
Year Ending, 2001 (000's omitted)
2002 $ 27,372
(000's omitted)
2003 20,905$ 19,522
2004 16,35316,650
2005 13,48112,772
2006 11,65310,416
2007 7,969
Thereafter 39,277 27,443
Total minimum lease payments $ 129,041 94,772
============
===========
All leases expirein or prior to 2017. 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$49,336,000, $46,436,000, $49,336,000 and $45,514,000 in 2002,
2001 and $39,149,000 in 2001, 2000, and 1999, respectively. Rent expense
includes $9,276,000, $9,793,000 $9,977,000 and $7,352,000$9,977,000 in contingent rentals paid in
2002, 2001 and 2000, and 1999,
respectively, primarily for transportation equipment mileage.
(12) (11) Media ExpenseOther Information
The Company expenses mediaadvertising costs the first time the advertising takes place. Gross mediaadvertising expense,
prior to income offsets
reimbursements from dealers and suppliers, amounting to $76,898,000, $76,372,000$100,781,000, $94,553,000 and$79,639,000 $93,340,000 was charged to
operations in 2002, 2001 and 2000, respectively. Cost reimbursements from dealers and 1999,suppliers amounted to $96,261,000,
$92,376,000 and $93,535,000 for 2002, 2001 and 2000, respectively.(12) Interest Expense
Interest paid was $20,084,000, $20,574,000 and $20,256,000 in 2002, 2001 and $16,411,000 in 2001, 2000, and 1999, respectively, net
of capitalized
interest of $289,000 $715,000 and $234,000$715,000 in 2001 2000 and 1999,2000, respectively.
Other income, net consists primarily of interest income, past due and low volume retailer charges, gains on the sales of
property and equipment, and earnings, losses or adjustments of minority-owned investments as follows:
200220012000
Interest income $ 5,000 $ 6,389 $ 7,190
Past due and low volume retailer charges 4,413 5,318 4,620
Gains on the sales of property and equipment, net - 4,945 418
Earnings of minority-owned investments 1,462 1,048 764
Adjustment of minority-owned investment - - (5,000) (3,300)
Gain on pension plan termination - - 3,599
Other (820)(291)1,309
Total $ 10,055 $ 12,409 $ 14,600
======= ======= =======
In the normal course of business, the Company enters into commercial commitments including standby letters of credit
and guarantees that could become contractual obligations. Letters of credit are issued generally to insurance agencies and
financial institutions in direct support of the Company's corporate and retailer insurance programs and retailer lending
programs. As of December 28, 2002 and December 29, 2001, the Company had outstanding letters of credit with expiration
terms less than 1 year of $13,848,000 and $13,160,000, respectively. The Company enters into both limited and full
guarantees primarily to financial institutions in direct support of retailer lending programs. Outstanding guarantees were
$11,018,000 and $14,711,000 at December 28, 2002 and December 29, 2001, respectively. Aggregate expirations of
guarantees are $6,905,000 in 2003, $3,396,000 in 2004 through 2006, and $717,000 in 2007 through 2008.