SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
THE SECURITIES EXCHANGE ACT OF 1934
For the 2001 fiscal year ended December 29, 2001 Commission File No. 2-55860
DELAWARE 36-0700810
Incorporation or Organization) Identification No.)
2200 Kensington Court, Oak Brook, IL 60523
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (630) 990-6600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
State the aggregate market value of the voting and nonvoting stock held by non-affiliates of the
Registrant. This Company's shares are only issued to, and held by, its dealer-stockholders. All shares held
by these stockholders can be repurchased by the Company when the dealer-stockholder's membership
agreement terminates. Thus, there is no market for these shares. The repurchase price for each share of
Class A Stock is equal to the par value of $1,000 per share. The repurchase of Class B Stock is equal to
twice the par value or $2,000 per share. The repurchase price for each share of Class C Stock is equal to
the par value of $100. As of February 15, 2002, the aggregate value of the Class A Stock, Class B Stock
and Class C Stock held by non-affiliates (dealer-stockholders) calculated on the basis of this repurchase
price was $266,434,000.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein and will not be contained to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of
the latest practicable date (applicable only to corporation Registrants). Outstanding shares as of
February 15, 2002:
Class A (voting) Stock, $1,000 par value 3,680 shares
Class B (nonvoting) Stock, $1,000 par value 2,092 shares
Class C (nonvoting) Stock, $100 par value 2,585,700 shares
PART I
The terms "Ace," "Company," "cooperative," "we," "us," "our" and similar words refer to Ace
Hardware Corporation. The terms "member," "retailer," "dealer," "you," "your" and similar words refer to
someone who purchases our stock.
Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, as the
result of a corporate merger, it became the successor of Ace Hardware Corporation, an Illinois corporation
that was organized in 1928. Until 1973, the Illinois corporation conducted the business now being
engaged in by our Company. Our main executive offices are located at 2200 Kensington Court, Oak
Brook, Illinois 60523. Our main telephone number is (630) 990-6600.
We operate primarily as a wholesaler of hardware and related products, and we also manufacture
paint products. We mainly sell our products to hardware dealers who have Membership Agreements with
us. These Membership Agreements allow the hardware dealers to purchase merchandise and services
from us and, in most cases, to license one or more of our trademarks. (See the heading "Business",
subheading "Membership Agreements").
We operate on a cooperative basis and distribute patronage dividends to our eligible member dealers
each year on the basis of quantity or value of patronage business that we do with them. (See the heading
"Business", subheading "Distribution of Patronage Dividends").
As of the end of our 2001 fiscal year on December 29, 2001, there were 4,976 stores having Membership
Agreements with us. The states with the largest concentration of members are California (approximately
10%), Texas and Illinois (approximately 6% each), Florida (approximately 5%) and Michigan and
Georgia (approximately 4% each). The states where we shipped the largest percentages of merchandise
in fiscal year 2001 were California (approximately 12%), Illinois (approximately 9%), Florida (approximately
6%), Texas, Michigan and Georgia (approximately 4% each). Approximately 4.4% of our sales are
made to locations outside of the United States and its territories.
The number of member locations that we had during each of our past three fiscal years is summarized
in the following table:
2001 2000 1999
Member outlets at beginning of period 5,011 5,082 5,039
New member outlets 220 208 264
Member outlets terminated 255 279 221
Member outlets at end of period 4,976 5,011 5,082
===== ===== =====
Dealers having one or more member outlets at end of period 3,778 3,858 3,932
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, warehouse sales
were 72% of our total sales and bulletin sales were 3% of our total sales with the balance of 25% being
direct shipment sales.
The following is a breakdown of our total warehouse sales among various general classes of merchandise
for each of the past three fiscal years:
Class of Merchandise 2001 2000 1999
Paint, cleaning and related supplies 21% 20% 20%
Plumbing and heating supplies 15% 15% 15%
Hand and power tools 14% 14% 14%
Garden, rural equipment and related supplies 14% 14% 13%
Electrical supplies 12% 12% 13%
General hardware 11% 12% 12%
Sundry 8% 7% 7%
Housewares and appliances 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)
$ 0.00 to $ 999.99 2.00%
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 1.50%
$3,000.00 to $3,999.99 1.25%
$4,000.00 to $4,999.99 1.00%
$5,000.00 to $5,999.99 .75%
$6,000.00 to $6,999.99 .50%
$7,000.00 to $7,999.99 .25%
$8,000.00 and over .00%
We make bulletin sales based upon notices from dealers that they wish to participate in one of 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,
in determining the forms of patronage dividend distributions. (See the heading "Business," subheading
"Forms of Patronage Dividend Distributions.")
Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific
vendors for direct shipment delivery. No adder or national advertising assessment applies to these
purchases. (See heading "Business," subheading "Patronage Dividend Determinations and Allocations.")
In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also
provide many special services. We offer these services at established charges. These services include
inventory control systems, as well as price and bin ticketing. We also provide dealers with a checklist
service so that they can have current information about the merchandise that we offer. We also provide a
choice of ongoing educational and training programs for dealers. (See the heading "Business," subheading
"Special Charges and Assessments.")
Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program
so that dealers can purchase different types of insurance coverage. This program offers "all risk" property
insurance and business interruption, crime, liability and workers' compensation insurance, in addition to
medical insurance for store employees. AHC Realty Corporation, another wholly owned subsidiary, offers
broker services to dealers who want to buy or sell stores. Loss Prevention Services, Inc., another wholly
owned subsidiary, offers security training and other loss prevention services to dealers.
Our wholly owned subsidiary, Ace Hardware Canada, Limited, operates as a wholesaler of hardware
and related merchandise in Canada. It has two distribution facilities located in Calgary, Alberta
and Brantford, Ontario. In November 2001, the Company announced the closure of the Calgary
facility. Ace Hardware Canada, Limited generated less than one percent (1%) of our consolidated
revenue during fiscal year 2001.
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 Division of our Company for accounting purposes. We purchase
all our raw materials for paint manufacturing from outside sources. We have had adequate sources of raw
materials in the past, and we do not currently expect any shortages of raw materials that would have a major
impact on our paint operations. Paint manufacturing is seasonal in the sense that greater paint sales occur
from April through September. Historically, our need to comply with environmental laws and regulations
has not had a major effect on our ability to conduct our paint manufacturing operations.
Our business, both hardware wholesaling and paint manufacturing, is not dependent on any major suppliers
and we feel that seasonal fluctuations do not have a major effect on our operations. For more discussion of our
business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."
We also offer services to members that relate to the operation of their retail businesses. We provide
these services (such as advertising, merchandising and training programs) to assist our members and in
some cases, to maximize our centralized buying power.
Strategic Planning
We have a strategic planning process that results in goals, objectives and programs that we want to
develop in the future for our Company and our members. Because strategic plans deal with the future,
this discussion of them contains "forward looking statements," which are based on our current expectations.
The actual results of our efforts can differ greatly from the results that we might desire. We believe
that we have the facilities, the employees and the resources for ongoing success as we implement our
plans and programs, but the future is difficult to forecast, especially areas such as 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 cause future costs or liabilities or have some other effect on our future ability to achieve our plans.
Through our ongoing strategic planning process we have focused our plans around four 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
Member Operational Requirements that apply under that Agreement. The Operational Requirements do
require that, within one year, the member must make us the primary source of supply and terminate any
previous participation in the program of any other major hardware wholesaler. There are currently no general
requirements (apart from special voluntary programs) where members have to make particular percentages of
purchases from us or have to achieve minimum retail performance levels, such as sales dollars per square foot.
Our current strategic initiative, Vision 21, focuses on becoming a world class organization through encouraging
dealers to adopt certain merchandising, marketing and operational practices that are supported by some of our
most successful dealers to improve the Company's and the dealers' overall competitiveness and efficiency. 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 and certain hardware and software computer
systems), with minimum and maximum yearly assessments of $2,223.00 and $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". For
the year 2002, we will also impose a flat charge of $100.00 on May 1, 2002 and November 1, 2002 per store location
to pay for national sales promotions for Memorial Day and the day after Thanksgiving. The amount of our
national advertising assessment can be changed from time to time by our Board of Directors. We can also impose
assessments at a flat monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of
a dealer's annual purchases. Regional advertising assessments are subject to the same minimum and maximum
amounts as the National Advertising assessment.
Every two weeks, we bill the member store for a special low volume account service charge of $75 if
annual purchases from us are less than $50,000. We will bill 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 are less than $5,700.00. 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 during the year. The
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 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
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), 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.
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, we assess members operating under a standard Membership Agreement a
mandatory monthly fee for Core Retail Services in the amount of $197 per month for all single stores or
parent stores and $67 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).
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 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.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the
promotion, advertising and marketing of products and services that we sell. We have had the following
Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for our marks:
Registration
Description of Mark Type of Mark Number Expiration Date
"ACE HARDWARE" with winged
emblem design Service Mark 840,176 December 5, 2007
"ACE HARDWARE" with winged
emblem design Trademark 898,070 September 8, 2010
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2010
"PACE" with design Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in stylized
lettering design Trademark 1,426,137 January 27, 2007
"ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND
GARDEN CENTER" in stylized
lettering design Service Mark 1,487,216 May 3, 2008
"ACE NEW EXPERIENCE" in
stylized lettering design Trademark 1,554,322 September 5, 2009
"ACE SEVEN STAR" in stylized
lettering design Trademark 1,556,389 September 19, 2009
"ACE BEST BUYS" in circle design Service Mark 1,560,250 October 10, 2009
"ACENET" Service Mark 1,574,019 December 26, 2009
"ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2010
"LUB-E" Trademark 1,615,386 October 2, 2010
"ASK ACE" Service Mark 1,653,263 August 6, 2010
"ACE 2000" Service Mark 1,682,467 April 7, 2002
"ACE" in stylized lettering design Trademark 1,683,538 April 12, 2002
"THE OAKBROOK COLLECTION"
in stylized lettering design Trademark 1,707,986 August 18, 2002
"ACE HARDWARE BROWN BAG
BONANZA" with design Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003
"CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005
"The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE"
in stylized lettering design Service Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREAT FINISHES" Trademark 2,019,696 November 26, 2006
"WOODROYAL" Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD" Trademark 2,070,848 June 10, 2007
"ROYAL TOUCH" Trademark 2,070,849 June 10, 2007
"QUALITY SHIELD" Trademark 2,102,305 September 30, 2007
"QUALITY TOUCH" Trademark 2,102,306 September 30, 2007
"STAINHALT" Trademark 2,122,418 December 16, 2007
"ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008
"NHS NATIONAL
HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008
"THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008
"ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009
"ACE ROYAL" Trademark 2,237,981 April 13, 2009
"HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009
"THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009
"ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009
"ILLUMINATIONS" Trademark 2,353,666 May 30, 2010
"ACE YOUR NEIGHBROHOOD
SOLUTIONS PLACE" Service Mark 2,386,359 September 12, 2010
"ACE" with accent design Service Mark 2,378,123 August 15, 2010
"ACE SOLUTIONS PLACE" Service Mark 2,394,181 October 10, 2010
As of the date of this filing, we also have the following applications for new registrations pending in
the U.S. Patent and Trademark Office:
Mark Type of goods/services
"STORE-IT-RIGHT" hardware products, namely, hooks
brackets, knobs, hangers and
extensions for support or hanging
"ACE HOMEPLACE" magazines
"ACE" with halo design retail hardware store services
"COLOR YOUR LIFE" indoor and outdoor paint, coatings and
varnishes
"CONTRACTOR CENTERS OF AMERICA"
and design retail store services in the field of
hardware and related goods
"NATIONAL SUPPLY NETWORK" wholesale store services; namely
providing wholesale industrial supplies
and equipment to commercial and
industrial customers
Competition
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-owned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware
Distributing Co.
Employees
We have 5,229 full-time employees, of which 1,590 are salaried employees. Excluding our Canadian
operations and Company-owned retail locations, we have 4,828 full-time employees to support our
domestic and international retailers. We also have, as of the end of the 2001 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 Company is
limited to approved dealers in hardware and related products who have Membership Agreements with
us. These are the only ones eligible to own or purchase shares of any class of our stock.
No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store
locations that dealer owns or controls. This ensures that each stockholder in our cooperative has equal
voting power. 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. 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:
2001 2000 1999
Warehouse Sales 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 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.") The LTL Plus Program patronage dividend was .5% of
these sales for fiscal year 2001, 2000 and 1999.
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.
Our computation of patronage dividends excludes all of our income and expenses from activities that
are not directly related to patronage transactions. The excluded items primarily consist of profits on business
that we do with dealers or other customers who do not qualify for patronage dividend distributions
and any income or loss that we realize from the disposition of property and equipment.
Our By-laws provide that, by virtue of dealers being "members" of our Company (that is, by owning
shares of our Class A voting stock), they consent to include in their gross income for federal income tax
purposes all patronage dividends that we distribute to them. These distributions must be included in gross
income for the taxable year in which the dealer receives them. Dealers who have not yet fully paid the $1,000
purchase price for their shares of our Class A voting stock are also required to include all patronage dividends
we distribute to them in their gross income as explained above. Under our Stock Subscription Agreement,
dealers must expressly consent to take these patronage dividend distributions into their gross incomes.
The amount of the patronage dividends which dealers must include in their gross incomes includes
both the cash portion of patronage dividends and any portion of patronage dividends that we apply against
any indebtedness the dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws. It
also includes any portion of patronage dividends that they receive in shares of our Class C nonvoting
stock, other property and patronage refund certificates. The Company also has the authority to issue a
portion of the patronage dividend in the form of other property.
Under our present program, patronage dividends on each of our three basic categories of sales (warehouse
sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends
under our LTL Plus Program. Dividend percentage calculations are made with reference to the net earnings
derived from each of the respective categories. The 2001 patronage dividend rate for the LTL Plus
Program is .5% of our LTL Plus sales. The 2001 patronage dividend rates for direct shipment and bulletin
sales are 1.0% and 2.0%, respectively, while the current 2001 patronage warehouse dividend rate is 4.27%.
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 2001 paint dividend rate
is 8.94%. 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.
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 2001 incentive pool rate under this plan is .40%
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's needs.
This plan is summarized below for the purchases that our eligible dealers make from us for the year
2001 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 STOP and excluding
Ace manufactured paint and related products), plus
(iv) 4% of the volume of LTL Plus purchases.
Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount
that would result in a fractional share of stock and distribute it in cash or patronage refund certificates
instead.
3. The portion of 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 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. 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 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, 2002 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��borrow between $4,000 to $15,000 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 rebate distributions of the
non-cash portion of the annual 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 Company may pay a portion of its dividend in the
form of other qualified property pursuant to Section 1382 of the U.S. Internal Revenue Code. These
Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and their
patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation
and fair market value of other qualified property must be taken into the gross income of the person
to whom the notice is issued, even though this dollar amount may not actually be paid to the person in
the same year that it is taxed.
In order for us to receive a deduction from our gross income for federal income tax purposes for the
amount of any patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying
dealers) in the form of qualified written notices of allocation or other qualified property, we have to pay
(or apply against any indebtedness that the patron owes us in accordance with Section 7 of Article XXIV
of our By-laws) not less than 20% of each patron's total patronage dividend distribution in cash and the
patron also has to consent to having the written notices of allocation at their stated dollar amounts, and
other qualified property at the fair market value, included in his gross income for the taxable year in which
he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that
we deduct on our federal income tax return for business we do with patrons must be paid to those patrons
within 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, 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
our stock are also deemed to have consented to take the dollar amounts of their written notices of allocation
and other qualified property into their gross incomes. This occurs because of the consent provisions
included in the Subscription Agreement for our stock.
A patron receives a patronage refund certificate as part of a patron's patronage dividends (see the subheading
"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",
subheading "Forms of Patronage Dividend Distributions") does not permit any member store to receive
more than 45% of its patronage dividends for the year in cash, we believe that a certification failure like
this should not ordinarily have any effect on our Company or any of its dealers.
Patronage dividends that we distribute to patrons who are located in foreign countries or certain
U.S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but
have not become citizens of the United States) have been held to be "fixed or determinable annual or
periodic income." Patrons who receive this type of income are currently required to pay a tax of 30% of
the amount received under Sections 871(a)(1)(A) and 881(a)(1) of the Internal Revenue Code. When
dealers are subject to this 30% tax, we must withhold it from their patronage dividends and pay it over to
the U.S. Internal Revenue Service. The above does not apply to a corporation organized in Guam,
American Samoa, the Northern Mariana Islands or the U. S. Virgin Islands if less than 25% of its stock is
owned by foreign persons and at least 65% of its gross income for the last three years has been effectively
connected with the conduct of a trade or business in that location or in the United States. 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 your 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 your
Stock Subscription Agreement and your Membership Agreement and Supplement and send them
back to you for your records. Your membership may generally be terminated upon various notice
periods and for various reasons (including voluntary termination by either of us). The details of these
reasons and notice periods are in the Membership Agreement. These reasons for termination and
notice periods apply except where special laws or regulations in certain locations limit our right to
terminate memberships, or require longer notice periods.
Non-Shareholder Programs
In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers
who operate retail businesses outside the United States, its territories and possessions. These international
dealers sign agreements that differ from our regular Membership Agreement. They may be granted
a license to use certain of our trademarks and service marks, but they do not sign stock subscription agreements
or become shareholders, nor do they receive patronage dividends.
In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other
than international dealers. These accounts, which are generally served through our 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
licensees typically receive the exclusive right to use our trademarks and service marks, as well as
exclusive rights to distribute the merchandise they purchase from us in their home countries.
International licensees pay us a negotiated license fee and ongoing royalties on their retail sales in
exchange for these rights, and for our ongoing training and support.
In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace
Canada"). Ace Canada's customers are non-shareholders who do not receive patronage dividends from us.
Only customers signed under the Ace Canada Franchise Agreement are licensed to use our trademarks
and service marks.
In 1998, 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 dealer enter into a Limited Liability Company
Agreement, with the dealer acting as the managing member, and form a limited liability company ("LLC")
to operate the joint venture stores. In each joint venture, the Company owns 50% or less of the LLC's
units. Currently, the Company has an ownership interest in six joint ventures. In the future, we may
explore 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 2001, we developed a non-shareholder industrial distributor program and contractor program.
These retailers can purchase selected types of products from us for resale. They are not members of our
cooperative, and therefore do not own stock or receive patronage dividends. 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% of our total sales in
2001, 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 less than 2.0% of our total sales in 2001, less
than 2.5% of our total sales in 2000 and less than 1.5% of our total sales in 1999. (See Appendix A, Article
XXV, section 2 of our By-laws regarding International Retail Merchants and non-member accounts.)
Item 2. Properties
Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information
about our main properties appears below:
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
General Offices:
Oak Brook, Illinois 291,816 Leased September 30, 2009
Downers Grove, Illinois 23,962 Leased June 30, 2004
Markham, Ontario, Canada(1) 15,372 Leased February 28, 2006
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 Owned
Rocklin, California 75,000 Leased July 31, 2003
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) 37,236 Leased February 28, 2017
Baltimore, Maryland (2) 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) 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) 10,915 Leased December 31, 2005
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 2003
Paint Manufacturing Facilities:
Matteson, Illinois 371,411 Owned
Chicago Heights, Illinois 194,000 Owned
(1) This property is leased by our subsidiary Ace Hardware Canada Limited for its corporate office.
(2) This property is leased for use as a freight consolidation center.
(3) Our subsidiary, Ace Hardware Canada Limited, 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 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for The Registrant's Common Equity and Related Stockholder Matters
There is no existing market for our stock and there is no expectation that one will develop. We are
organized as a Delaware corporation and operate as a cooperative corporation, and only retailers of hardware
and similar merchandise who are our members own our stock.
The table below shows the number of stockholders of record that we had as of February 15, 2002:
Title of Class Number of Record Holders
Class A Stock, $1,000 par value 3,680
Class B Stock, $1,000 par value 523
Class C Stock, $100 par value 5,145
Our Company's Articles of Incorporation and By-laws prohibit us from declaring dividends (other
than patronage dividends). (Please see the discussion of patronage dividends under Item 1. Business.)
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
Income Statement Data:
December 29, December 30, January 1, January 2, December 31,
2001 2000 2000 1999 1997
(000's omitted)
Net sales $2,894,369 $2,945,151 $3,181,802 $3,120,380 $2,907,259
Cost of sales 2,617,069 2,665,614 2,908,138 2,879,296 2,693,362
Gross profit 277,300 279,537 273,664 241,084 213,897
Total expenses 204,231 199,145 181,102 153,124 137,510
Net earnings $ 73,069 $80,392 $92,562 $87,960 $76,387
============ ============ ========== ========== ============
Patronage dividends (Notes A, B and C) $ 85,109 $86,537 $95,260 $88,022 $76,153
============ ============ ========== ========== ============
Balance Sheet Data:
December 29, December 30, January 1, January 2, December 31,
2001 2000 2000 1999 1997
�� (000's omitted)
Total assets $1,168,791 $1,123,810 $1,081,484 $1,047,580 $ 977,478
Working capital 226,326 181,104 180,763 191,926 158,676
Long-term debt 170,387 105,891 111,895 115,421 96,815
Patronage refund certificates payable,
long-term 77,401 68,385 55,257 43,465 49,044
Member dealers' equity 279,876 284,658 279,963 261,512 245,479
(A)The Company operates as a cooperative organization, and pays patronage dividends to member
dealers on earnings derived from business done with such dealers. It is the practice of the Company
to distribute substantially all patronage sourced earnings in the form of patronage dividends.
(B)The form in which patronage dividends are to be distributed can only be determined at the end of
each year when the amount distributable to each of the member dealers is known. Patronage dividends
were payable as listed in the table below.
(C)Refer to Note 5 of the Consolidated Financial Statements beginning on page F-10 of this Form
10-K.
December 29 December 30 January 1 January 2 December 31
2001 2000 2000 1999 1997
(000's omitted)
In cash $34,229 $34,764 $38,173 $34,826 $29,943
In patronage refund certificates payable 18,739 18,029 12,249 15,720 13,726
In Class C Stock 23,284 24,267 21,648 26,170 22,366
In other property - - - - 10,190 - - -
In patronage financing deductions 8,857 9,477 13,000 11,306 10,118
Total patronage dividends $85,109 $86,537 $95,260 $88,022 $76,153
=========== =========== ========= ========= ===========
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs ("liquidity") results from internally
generated funds, short-term lines of credit and long-term financing.
The Company has an established, unsecured revolving credit facility with a group of banks. The
Company has unsecured lines of credit of $185.0 million of which $112.4 million was available at
December 29, 2001. Any borrowings under these lines of credit would bear interest at the prime rate or
less. Long-term financing is arranged as determined necessary to meet the Company's capital or other
requirements, with principal amount, timing and form dependent on prevailing debt markets and general
economic conditions.
Capital expenditures for new and improved facilities were $51.4, $44.7 and $43.1 million in 2001,
2000 and 1999, respectively. During 2001, the Company financed the $51.4 million of capital expenditures
out of current and accumulated internally generated funds, short-term borrowings and the issuance of long-term
debt. Capital expenditures for 2002 are anticipated to be approximately $65.3 million primarily for a
new distribution facility, improvements to existing facilities and technology investments.
As a cooperative, the Company distributes substantially all of its patronage sourced earnings to its
members in the form of patronage dividends, which are deductible for income tax purposes.
The Company expects that existing and new internally generated funds, along with established lines
of credit and long-term financing, will continue to be sufficient to finance the Company's working capital
requirements and patronage dividend and capital expenditures programs.
Operations 2001 Compared to 2000
Consolidated sales decreased 1.7%. Domestic sales increased .7% primarily due to conversions of
new stores to the Ace program. Sales to our existing retailer base were flat due to the soft economy and
inventory reductions at retail. International sales decreased 35.6% primarily due to a sale of Ace affiliated
stores and reduced sales in Canada.
Gross profit decreased $2.2 million; however increased slightly as a percent of total sales from 9.49% in 2000
to 9.58% in 2001. The decrease resulted primarily due to lower sales and lower cash discounts from reduced
merchandise purchases. Higher vendor rebates, paint manufacturing margins and margin from company-owned
retail locations offset the gross profit decline and contributed to the increase in gross profit as a percent of sales.
Warehouse and distribution expenses increased $2.4 million over 2000 and increased as a percent of
total sales from 1.10% in 2000 to 1.21% in 2001. Increased utilities and distribution expenses associated
with the new Loxley, Alabama distribution facility which was open for a full year in 2001 and the start-up
of the Prince George, Virginia distribution facility drove the higher expenses. Higher logistics income
partially offset the increased expenses.
Selling, general and administrative expenses decreased $1.1 million due to continued cost control
measures put into place offset by expenses related to the closure of three distribution facilities.
Retail success and development costs decreased $3.0 million due to continued cost control measures.
Expenses in this category are directly related to retail support of the Ace retailer. The Company continues
to make investments in retail initiatives under our Vision 21 strategy to support Ace retailers.
Interest expense increased $1.4 million due to higher average borrowing levels during the year
partially offset by lower interest rates. The higher borrowing levels result from the completion of the
Loxley, Alabama and Prince George, Virginia distribution centers, the expansion of the LaCrosse,
Wisconsin facility and increased retailer dating programs.
Other income decreased $2.1 million primarily due to a nonrecurring gain on pension plan termination
in 2000. 2001 other income includes a write-down of a minority owned investment offset by the gain recognized
on the sale of two distribution facilities and higher income realized on non-controlling investments in
affiliates.
Income taxes increased $3.3 million primarily due to deferred taxes recorded on the sale/exchange of
two distribution centers.
Operations 2000 Compared to 1999
On June 30, 1999 the Company entered into a business combination agreement with Builder Marts
of America, Inc. (BMA) to combine the Company's lumber and building materials division (the "LBM
Division") with BMA. Under this agreement, the Company contributed defined business assets (primarily
vendor rebate receivables, fixed assets and inventories) for a non-controlling interest in the combined
entity. The investment in the combined entity is accounted for under the equity method of accounting.
The accompanying consolidated financial statements include the financial results of the LBM Division
through the closing date of August 2, 1999.
The total sales decrease of 7.4% was affected by the business combination of the LBM Division with
BMA. As a result of this transaction, lumber and building materials (LBM) sales are not reported within
the Company's sales results after August 2, 1999. Excluding LBM, sales increased 4.7% in 2000 primarily
due to conversions to Ace membership, additional sales to non-members, increased existing retailer
volume and targeted efforts on new store development within our retailer base. Domestic basic business
sales increased 5.3%, while international basic business sales decreased 1.8%.
Gross profit increased $5.9 million and increased as a percent of total sales from 8.60% in 1999 to
9.49% in 2000. The increase, as a percent of sales, results primarily from the loss of lower margin LBM
sales volume since August 1999. Basic business (excluding LBM Division) gross profit decreased slightly as
a percent of basic business sales (9.49% in 2000 vs. 9.52% in 1999) due to a sales mix shift towards the lower
margin direct ship sales category and higher warehousing costs absorbed into inventory. Increased vendor
rebates and increased company-owned store gross profit driven by higher sales volume partially offset the
year-to-date gross profit percentage decline.
Warehouse and distribution expenses increased $4.4 million over 1999 and increased as a percent of
total sales from 0.9% in 1999 to 1.1% in 2000. As a percent of basic business sales, these costs increased
from 1.0% in 1999 to 1.1% in 2000. Higher distribution wages required to support the increased sales
volume combined with pre-opening costs associated for a new Loxley, Alabama distribution facility are
partially offset by higher logistics income.
Selling, general and administrative expenses decreased $395,000 or 0.5% due to continued cost
control measures and lower LBM Division costs. Higher information technology costs and expenses associated
with opening the Loxley, Alabama distribution facility partially offset these expense decreases and,
along with the exclusion of LBM sales in the sales base, account for the increase in general and administrative
expenses as a percent of sales.
Retail success and development expenses increased $14.4 million primarily due to costs associated
with operating additional company-owned stores and investments made at retail to support our Vision 21
strategy. As part of this strategy, the Company entered into an agreement with an outside party to co-develop
a common retail software platform for our dealers. This resulted in a write-down of prior software
development costs which will not contribute to the new system. Increased advertising income partially
offset these expense increases. Increases in this category are directly related to retail support of the Ace
retailer as the Company continues to make retail investments in our dealer base.
Interest expense increased $5.2 million due to higher average borrowing levels and increased interest
rates. The increased borrowing levels resulted from the construction of the Loxley, Alabama distribution
center, the expansion of our LaCrosse, Wisconsin facility and increased retailer dating programs.
Other income increased $3.8 million primarily due to the gain on pension plan termination and
income realized on non-controlling investments in affiliates.
Income tax expense decreased due to increased operating losses from non-patronage activities.
Impact of New Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition of intangible assets that
meet one of two specified criteria. The statement applies to all business combinations initiated after June
30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and
measured based on its fair value. The statement also provides that goodwill should not be amortized, but
shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal
periods beginning after December 15, 2001. The Company will implement the pronouncement beginning
in the first quarter of fiscal year 2002. The Company estimates that the adoption of this standard will
not have a material effect on its financial statements.
In July 2001, the FASB issued SFAS No. 144. "Accounting for the Impairment or Disposal of Long-
Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supercedes SFAS No. 121 on the same topic and the accounting and certain
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations-Reporting Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as defined in
that Opinion). This statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for fiscal periods beginning after December 15, 2001. The Company
will implement the pronouncement beginning in the first quarter of fiscal year 2002. The Company
estimates that the adoption of this standard will not have a material effect on its financial statements.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that establish prices substantially in
advance of the receipt of goods or services. As vendors increase their prices for merchandise supplied to
the Company, the Company increases the price to its dealers in an equal amount plus the normal handling
charge on such amounts. In the past, these increases have provided adequate gross profit to offset the
impact of inflation on operating expenses.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to certain market risks, including foreign currency and interest rates. The
Company uses a variety of practices to manage these market risks, including, when considered appropriate,
derivative financial instruments. The Company uses derivative financial instruments only for risk
management and does not use them for trading or speculative purposes. The Company is exposed to
potential gains or losses from foreign currency fluctuations affecting net investments and earnings
denominated in foreign currencies. The Company's primary exposure is to changes in exchange rates for
the U.S. dollar versus the Canadian dollar.
Interest rate risk is managed through a combination of fixed rate debt and variable rate short-term
borrowings with varying maturities. At December 29, 2001, all long-term debt was issued at fixed rates.
The table below presents principal amounts and related weighted average interest rates by year of
maturity for the Company's investments and debt obligations:
2002 2003 2004 2005 2006 Thereafter Total
(000's omitted)
Assets:
Short-term investment-
fixed rate - - $3,474 $1,043 - - $3,125 $9,516 $17,158
Fixed interest rate - - 6.96% 5.75% - - 7.98% 6.77% 6.97%
Liabilities:
Short-term borrowings-
variable rate $72,600 - - - - - - - - - $72,600
Average variable interest rate 2.58% - - - - - - - - - 2.58%
Long-term debt-fixed rate $ 7,179 $6,412 $6,066 $13,195 $17,857 $126,857 $177,566
Average fixed interest rate 7.07% 7.07% 7.09% 7.08% 7.09% 7.12% 7.07%
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The Company
provides credit to customers in the ordinary course of business and performs ongoing credit evaluations.
Concentrations of credit risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.
The Company's various currency exposures often offset each other, providing a natural hedge against
currency risk. The Company has utilized foreign exchange forward contracts to hedge non-U.S. equity
investments. Gains and losses on these foreign currency hedges are included in the basis of the underlying
hedged investment. Accumulated other comprehensive loss at December 29, 2001 and December 30,
2000 includes gains of approximately $2.0 million related to previously settled foreign currency
contracts. The Company did not have any outstanding foreign exchange forward contracts at 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.
Our directors and executive officers are:
Position(s) Currently Held
Name Age and Business Experience (for the past 5 years)
Jennifer C. Anderson 51 Director since June, 1994; term expires 2003;
President of Davis Lumber and Ace Hardware,
Inc., Davis, California since November, 1985.
Richard F. Baalmann, Jr. 42 Director since June, 1999; term expires 2002;
President of Homart, Inc., Centralia, Illinois since
May, 1988.
Eric R. Bibens II 45 Director since June, 1997; term expires 2003;
President of Bibens Home Center, Inc.,
Springfield, Vermont since 1983.
Michael C. Bodzewski 52 Vice President, Marketing, Advertising, Retail
Development and Company Stores effective
October, 2000; Vice President- Marketing,
Advertising and Retail Operations East effective
October, 1999; Vice President- Sales and
Marketing effective October, 1998; Vice President
- - Merchandising effective June, 1990.
Lori L. Bossmann 41 Vice President, Merchandising effective October,
2000; Vice President- Finance effective October
1999; Vice President- Controller effective September,
1997; Controller effective January, 1994.
J. Thomas Glenn 42 Director since June 1996; term expires 2002;
President of Ace Hardware of Chattanooga,
Chattanooga, Tennessee since January, 1990.
Ray A. Griffith 48 Executive Vice President, Retail effective October,
2000; Vice President- Merchandising effective
October, 1998; Vice President- Retail
Development and Marketing effective September,
1997; Director- Retail Operations, Western
Division effective September, 1994.
Daniel L. Gust 52 Director since June , 1998; term expires 2004;
President of Garden Acres Ace Hardware,
Longmont, Colorado since January, 1991.
D. William Hagan 44 Director since June, 1997; term expires 2003;
President of Hagan Ace Hardware, Orange Park,
Florida since February, 1980.
David F. Hodnik 54 President and Chief Executive Officer effective
January, 1996; President and Chief Operating Officer
effective January 1, 1995.
Paul M. Ingevaldson 56 Senior Vice President - International and Technology
effective September, 1997; Vice President- Corporate
Strategy and International Business effective
September, 1992.
Howard J. Jung 54 Chairman of the Board and Director since June, 1998;
term expires 2003; Vice President of Ace Hardware
Stores, Inc., Raleigh, North Carolina since June, 1997.
Rita D. Kahle 45 Executive Vice President effective October, 2000;
Senior Vice President- Wholesale effective
September, 1997; Vice President- Finance effective
January, 1994.
Richard A. Karp 50 Director since June, 2000; term expires 2003;
President, Cole Hardware, San Francisco, California
since June, 1979.
David F. Myer 56 Senior Vice President, Retail Support and Logistics
effective October, 2000; Vice President- Retail
Support effective September, 1997; Vice President-
Retail Support and New Business effective October,
1994.
Fred J. Neer 62 Vice President - Human Resources effective April, 1989.
Kenneth L. Nichols 53 Vice President, Retail Operations effective October,
2000; Vice President- Retail Operations West
effective October, 1999; Vice President- New
Business effective October, 1998; Director- Retail
Operations, Eastern Division effective October, 1994.
Richard W. Stine 56 Director since June, 1999; term expires 2002; Vice
President of Stine, Inc., Sulphur, Louisiana since
September, 1976.
David S. Ziegler 46 Director since June 2001; term expires 2004; Vice
President of Z Hardware Company, Elgin, Illinois
since February, 1979.
Our By-laws provide that our Board shall have between 9 and 12 directors. A minimum of 9 directors
must be dealer directors. A maximum of two directors may be non-dealer directors. Non-dealer
directors cannot exceed 25% of the total number of directors in office at any one time. Non-dealer directors
may (but do not have to be) be shareholders of ours who are in the retail hardware business. Our
By-laws provide for three classes of directors who are to be elected for staggered 3-year terms, except that
one director who would not otherwise be eligible for reelection in 2001 was elected at the 2001 annual
meeting of stockholders for a two year term under Article IV, Sections 1 through 3 of our By-laws. On
January 23, 2001, the Board of Directors passed a resolution reducing the number of directors from
eleven to ten effective with the 2001 Annual Stockholders meeting on June 4, 2001.
Our By-laws also provide that no one can serve as a dealer director unless that person is an owner,
executive officer, general partner or general manager of a retail business organization that is a shareholder
of ours. Regional dealer directors are elected from geographic regions of the United States. The Board
under Article IV, Section 1 of our By-laws, determines these regions. If the Board finds that regional
dealer directors represent all regions, then dealer directors at large may be elected, so long as the
maximum number of directors allowed under our By-laws is not exceeded.
A geographic breakdown of our current regions for the election of directors at our 2002 annual stockholders
meeting to be held on June 3, 2002 appears below:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York,
Pennsylvania, New Jersey;
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina,
South Carolina, District of Columbia, Ohio;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Indiana, Illinois, Michigan, Wisconsin;
Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota,
South Dakota, Utah, Wyoming;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona;
Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska
Under the procedure required by our By-laws, the following directors have been selected as nominees
for re-election as dealer directors at the 2002 annual stockholders meeting:
Nominee Age Class Region Term
Richard F. Baalmann, Jr. 42 Second 4 3 years
J. Thomas Glenn 42 Second 2 3 years
Richard W. Stine 56 Second 6 3 years
The person named below has been selected as a nominee for election to the Board for the first time at
the 2002 annual meeting as a dealer director of the class, from the region and for the term indicated:
Nominee Age Class Region Term
Jeffrey M. Schulein 60 Second 7* 3 years
*Jeffrey M. Schulein has been selected as a nominee to replace Jennifer C. Anderson, Region 7, who has
announced her intention to resign from the Board for personal reasons effective June 3, 2002.
Non-dealer directors and dealer directors at large are not elected from particular geographic regions.
Article IV of our By-laws has information about the qualifications for membership on the Board of
Directors, the terms of directors, the limitations on the total period of time that a director may hold office,
the procedure for Nominating Committees to select candidates and nominees for election to the Board
of Directors and the procedure for filling vacancies on the Board if one occurs during an unexpired term.
None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years
for any of our directors, nominees for directorships or for any of our executive or staff officers.
Item 11. Executive Compensation
Below is information about the cash compensation that we paid to our five highest paid executive officers
earning over $100,000 for their services in all capacities to us and our subsidiaries during fiscal years
2001, 2000 and 1999:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Name (3)
and (2) All Other
Principal (1) Long-Term Compen-
Position Year Salary ($) Bonus ($) Payouts ($) sation ($)
David F. Hodnik 2001 $649,000 $103,840 $531,474 $ 78,232
President and Chief 2000 630,000 56,700 533,829 117,568
Executive Officer 1999 600,000 - 478,104 187,730
Rita D. Kahle 2001 $313,000 $121,280 $ 99,843 $ 38,869
Executive Vice President 2000 298,000 103,704 85,921 51,455
1999 285,000 128,685 77,826 64,536
Paul M. Ingevaldson 2001 $305,000 $ 72,800 $100,779 $ 31,413
Senior Vice President, 2000 295,000 85,550 89,479 49,013
International and Technology 1999 287,000 99,662 85,242 73,401
Michael C. Bodzewski 2001 $280,500 $ 86,880 $ 91,182 $ 34,036
Vice President, Marketing, 2000 270,500 87,570 79,437 45,382
Advertising, Retail Development 1999 261,000 94,472 73,923 57,346
and Company Stores
David F. Myer 2001 $278,000 $102,980 $ 86,382 $ 33,651
Senior Vice President, 2000 263,000 80,215 73,967 42,994
Retail Support and Logistics 1999 245,000 92,453 69,180 53,849
(1) The Incentive Compensation Plan covers each of the executive officers. Mr. Hodnik participates only
in the retail sales component of the Annual Incentive Plan. The bonus amounts awarded to participants
in the Plan are determined in accordance with achievement of individual performance based
objectives and achievement of corporate goals. The maximum short-term incentive award for each
executive officer is 30% to 40% of their respective salary in 1999 and 35% to 45% of their respective
salary in 2000 and 2001. The short-term bonus award becomes payable to each participant as early
as practicable at or after the end of the fiscal year.
(2) Includes the long-term incentive award under the Long-Term Incentive Compensation Deferral
Option Plan effective in 1995. The long-term Officer incentive plan is based upon corporate performance
over a three year period with emphasis on total shareholder return through maximizing both
year-end patronage dividends and upfront dividends (throughout the year) through pricing programs
and discounts. This plan maintains the commitment to long-term performance and shareholder
return in a cooperative environment. One third of the total long-term incentive award is subject to a
one year vesting provision.
Effective January 1, 1995, executive officers may elect to defer a portion (20% to 100%, in 20% increments)
of the annual award granted. Participants' compensation deferrals are credited with a
specified rate of interest to provide a means to accumulate supplemental retirement benefits.
Deferred benefits are payable over a period of 5 to 20 years. Annual elections are required for the
upcoming deferral year by December of the preceding year. Total long-term incentives for the three
year period ended in 2001, to be awarded in 2002, were $505,594, $94,434, $86,396, $83,681 and
$95,392 for Messrs. Hodnik, Ingevaldson, Bodzewski, Myer and Ms. Kahle, respectively.
(3) Includes contributions to the Company's 401-k Savings and Retirement Plan and contributions to the
Company's Retirement Benefits Replacement Plan. All active employees are eligible to participate
in the Company's 401-k Savings and Retirement Plan after one year of service. Those active
employees covered by a collective bargaining agreement regarding retirement benefits, which were
the subject of good faith bargaining, are not eligible if such agreement does not include them in the
plan. For the year 2001, the Company contributed a maximum of 8.9% of each participant's eligible
compensation to the 401-k Savings and Retirement Plan (7.9% profit sharing and 1% Company 401-k
match). During the year 2001, $15,130 was contributed to the Company's 401-k Savings and
Retirement Plan by the Company pursuant to the Plan for each of Messrs. Hodnik, Ingevaldson,
Bodzewski, Myer and Ms. Kahle.
The Company has also established a Retirement Benefits Replacement Plan covering all executive
officers of the Company. This is an unfunded Plan under which the participants therein are eligible to
receive retirement benefits equal to the amounts by which the benefits they would otherwise have been
entitled to receive under the Company's 401-k Savings and Retirement Plan may be reduced by reason
of the limitations on contributions and benefits imposed by any current or future provisions of the U.S.
Internal Revenue Code or other federal legislation. During the year 2001, amounts contributed to the
Company's Retirement Benefits Replacement Plan were $63,102 for Mr. Hodnik, $16,283 for
Mr. Ingevaldson, $18,906 for Mr. Bodzewski, $18,251 for Mr. Myer and $23,739 for Ms. Kahle.
The Company also funds the base premium for a supplemental universal life insurance policy for each
officer but does not contribute to supplemental retirement benefits through this vehicle. Participants
may elect to deposit a portion (up to one-third) of the long-term incentive award into the variable annuity
insurance policy in their name or may elect to defer this portion under the Deferral Option Plan.
(4) As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue
stock awards of any kind.
Messrs. Hodnik and Ingevaldson are employed under contracts, each commencing January 1, 2001 for
respective terms of two years, through December 31, 2002. Ms. Kahle and Mr. Myer are employed under
contracts, each commencing January 1, 2002 for respective terms of two years, through December 31,
2003. Mr. Bodzewski is employed under a contract commencing April 1, 2002 for a term of two years,
terminating March 31, 2004. The contracts provide for annual compensation effective January 1, 2002 of
$665,000, $305,000, $327,000, $290,000 and $288,000, respectively, or such increased amount, if any, as
shall be approved by the Board of Directors. If an executive's employment is terminated without cause,
each contract provides for continuing salary payments for the balance of the current contract term, with
the minimum period for these payments being 6 months (12 months in the case of Mr. Hodnik).
The Company also maintained a Pension Plan which was established December 31, 1970. The Plan
was closed to new entrants on December 31, 1995. Pension Plan benefit accruals were frozen as of
February 29, 2000. The Company terminated the Pension Plan effective April 30, 2000. All active
employees were eligible to participate in this Plan on the first January 1 that they were working for the
Company. Those active employees covered by a collective bargaining agreement regarding retirement
benefits which were the subject of good faith bargaining were not eligible if such agreement did not
include them in the plan. The Plan provided benefits at retirement at or after age 65 determined under a
formula which took into account 60% of a participant's average base pay (including overtime) during the
5 highest consecutive calendar years of employment and years of service prior to age 65, and under which
an offset was applied for the straight life annuity equivalent of the vested portion of the participant in the
amount of benefits provided for them by the Company under the Profit Sharing Plan.
Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing
Plan offset) are as follows:
Years of Service
Remuneration 10 15 20 25 30 or more
$170,000 $34,000 $51,000 $68,000 $85,000 $102,000
$150,000 30,000 45,000 60,000 75,000 90,000
$100,000 20,000 30,000 40,000 50,000 60,000
$ 50,000 10,000 15,000 20,000 25,000 30,000
The amounts shown above represent straight life annuity amounts. Maximum benefits from the
Pension Plan were attained after 30 years of service and attainment of age 65. The compensation covered
by the Pension Plan consisted of base compensation (exclusive of bonuses and non-recurring salary or
wage payments) not to exceed $170,000 of such total remuneration paid to a participant during any plan
year. Remuneration and yearly benefits under the Plan were limited, and subject to adjustment, under
Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The amount of covered compensation
under the Pension Plan, therefore was $170,000 for each Executive Officer named in the Compensation
table. Upon termination of the plan, the credited years of service under the Pension Plan for the currently
employed executive officers named in the compensation table were as follows: David F. Hodnik - 27 years;
Paul M. Ingevaldson - 20 years; Michael C. Bodzewski - 22 years; David F. Myer - 18 years and Rita D.
Kahle - 14 years.
Compensation Committee Report
The Compensation Committee is responsible for approving the compensation programs, plans and
guidelines for all Corporate and Company Officers, and administering the Company's Executive Incentive
Plans. Our decisions are based on our understanding of Ace's business and its long-term strategies, as well
as our knowledge of the capabilities and performance of the Company and of the executives. We stress
long-term measured results, focus on team work, accepting prudent risks and are strongly committed to
fulfilling retailer and consumer needs.
We believe that our retailers (shareholders) are best served by managing the Company with a long-term
perspective while striving to deliver consistently good year-end results. Therefore, the Company's
Executive Compensation Program and Officer Incentive Plan has been designed to attract, retain and
reward superior talent that will produce positive results and enhance Ace's position in the highly competitive
hardware and home improvement marketplace. The Company is led by exceptional leaders, many of
them long-term Ace employees; while others bring experiences from outside of Ace.
We believe the compensation for our executives should be competitive with other high performing
companies in order to motivate and retain the talent needed to produce superior results. In that regard,
our Committee conducts an overall review of compensation programs and philosophies bi-annually. We
review information supplied by an independent Compensation consultant and other marketplace data to
determine the competitiveness of Ace's total compensation package.
The Committee believes that special leadership competencies and sensitivities are required to
balance the unique relationship between and among the Company, its employees, retailers, customers
and vendors. Therefore, we go beyond a simple evaluation of competitive salary information and
Company financial results in making compensation decisions.
Our Committee annually establishes an executive's base salary, based on evaluation of the executive's
level of responsibility and individual performance considered in light of competitive pay practices. We
gage Executive performance in developing and executing corporate strategies; leading and developing
people; initiating and leading change; passion for retail success; balancing the many relationships within
and outside the Ace family; and leading and coordinating with others, programs which impact the
Company and retailer performance.
Under the Annual Incentive Plan each officer is assigned an incentive target percent at the beginning
of the year (the greater the Officer's responsibility, the higher the target percent is of base salary). This
plan has individual, team and retail sales components. This concept is used to reflect the accomplishments
of each Officer's functional organization results, overall Company wholesale performance and retail sales
growth compared to the competition.
Consistent with our focus on long-term objectives, our long-term incentive plan is based on total
corporate world-wide performance. A three-year performance cycle is established each year with Officers
receiving an award if minimum pre-determined (by the Compensation Committee) performance goals
are achieved at the end of each annual cycle. As a pay for performance plan, the long-term incentive plan
is intended to motivate and reward executives by directly linking the amount of any award to specific long-term
corporate financial goals and total team performance. There is a direct shared relationship between
what a retail owner receives in patronage rebate and what the Officer group receives as an award pool.
The President and CEO participates in the base salary, Retail Sales Incentive and Long-Term
Incentive Plan compensation programs described in this report consistent with our compensation philosophy.
At risk compensation represents a major portion of the President and CEO's total compensation
package. The President and CEO's compensation includes a competitive base salary, a significant long-term
incentive award to maintain our commitment to long-term company performance and shareholder
return and a retail sales award.
Compensation of Directors
Effective January 1, 2001, each member of the Board of Directors (other than the Chairman of the
Board) receives a monthly fee of $2,917 for their services, which was increased to $3,083 per month effective
January 1, 2002. Each member of the Board of Directors (other than the Chairman of the Board) also
receives $1,500 per Board of Directors meeting attended. In addition, each Board of Director Committee
Chairperson receives $1,000 per meeting chaired. Mr. Jung is paid an annual fee of $153,000 in his
capacity as Chairman of the Board.
The Company has adopted a Directors' Deferral Option Plan. Like the Officers' Long-Term
Incentive Compensation Deferral Option Plan, under this Directors' Plan, directors may elect to defer a
portion (5% to 100%, in 5% increments) of their annual director's fee. Deferred benefits are payable over
a period of 5 to 20 years, as elected. Annual elections are required for the upcoming deferral year by
December 15 of the preceding year.
Each member of the Board is also reimbursed for the amount of travel and lodging expenses incurred
in attending meetings of the Board and of the Committees of the Board. The expenses incurred by them
in attending the semi-annual conventions and exhibits which the Company sponsors are also paid by the
Company. Each member of the Board is also paid $300 per diem compensation for special committee
meetings and nominating committee regional trips attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No shares of our stock are held by any of our officers except for the shares held by Mr. Jung. He is a
director, but his position as Chairman of the Board is also an executive officer position under Article VIII
Section 1 of our By-laws. We are not aware of anyone who holds more than five percent of our outstanding
voting stock, whether in their own names, or on behalf of someone else.
The table below shows the shares of our Class B and Class C Stock that is held (directly or indirectly),
by our directors, officers and nominees for directorships as of February 15, 2002:
Class B Stock Owned Class C Stock Owned
Number Percent Number Percent
of Shares of Class of Shares of Shares
Jennifer C. Anderson 4 .191 3,881 .150
Richard F. Baalmann, Jr. 4 .191 3,615 .140
Eric R. Bibens II - - - - 1,143 .044
J. Thomas Glenn 4 .191 10,699 .414
Daniel L. Gust - - - - 509 .020
D. William Hagan - - - - 1,637 .063
Howard J. Jung - - - - 620 .024
Richard A. Karp - - - - 4,816 .186
Richard W. Stine 4 .191 9,635 .373
David S. Ziegler - - - - 10,141 .392
Jeffrey M. Schulein - - - - 8,138 .315
All above directors and officers as a group 16 .764 54,834 2.121
========= ======== ========= =========
We are not aware of any contracts or securities pledges that may result in a change in control of our
Company at a later date.
Item 13. Certain Relationships and Related Transactions
The term "owner" as used in this section pertains to owners of our shares. It includes both those
who are named as owners of shares on our corporate books and records, as well as those who are not
named as owners of record, but for whose benefit someone else is holding the shares. No director,
executive officer or shareholder whom we know to be the owner of more than five percent of any class
of our voting securities or any member of their immediate families had during fiscal year 2001 or is
currently expected to have any significant interest (whether direct or indirect) in any transaction over
$60,000 with us, except that those of our directors who are also Ace Hardware dealers purchased
merchandise and services from us and participated in our programs for their stores, including but not
limited to our lending programs, in the ordinary course of business. None of these directors received
special terms in connection with these transactions (including, but not limited to our lending
programs) or any benefits that were not available to the other cooperative members that we supply.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying index (page F-1) to the consolidated
financial statements are filed as part of this annual report.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits listed on the accompanying index to exhibits (pages E-1 through E-6) are filed as
part of this annual report.
(b) Reports on Form 8-K
No Form 8-K was filed during the fourth quarter of fiscal 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has caused this Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ACE HARDWARE CORPORATION
By HOWARD J. JUNG
Howard J. Jung
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been
signed by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
HOWARD J. JUNG Chairman of the Board March 22, 2002
Howard J. Jung and Director
DAVID F. HODNIK President and Chief March 22, 2002
David F. Hodnik Executive Officer
RITA D. KAHLE Executive Vice President March 22, 2002
Rita D. Kahle (Principal Financial and
Accounting Officer)
Jennifer C. Anderson, Richard F.
Baalmann, Jr., Eric R. Bibens II, Directors
J. Thomas Glenn, Daniel L. Gust,
D. William Hagan, Richard A. Karp,
Richard W. Stine, and David S. Ziegler
*By: DAVID F. HODNIK March 22, 2002
David F. Hodnik
*By: RITA D. KAHLE March 22, 2002
Rita D. Kahle
*Attorneys-in-fact
INDEX TO EXHIBITS
Exhibits
Enclosed Description
21 21 Subsidiaries of the Registrant.
23 23 Consent of KPMG LLP.
24 24 Powers of Attorney.
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, 2002 included
as Appendix A to the Prospectus constituting a part of the Registrant's Form S-2
Registration Statement filed on or about March 22, 2002 and incorporated herein
by reference.
4-A Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as
Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1
Registration Statement (Registration No. 2-82460) on 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 (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 Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration
Statement (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 filed on or about March 22, 2002
and incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with respect to purchases
of merchandise made from the Registrant 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 No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
4-G Copy of LBM Retailer Incentive Pool Plan adopted on December 8, 1999 by the
Board of Directors of the Registrant filed as Exhibit 4-G to Post-Effective
Amendment No. 5 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) filed on or about March 15, 2000 and incorporated
herein by reference.
10-A Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated
and Adopted December 7, 1993, consolidated and refiled with First, Second, Third and
Fourth Amendments filed as Exhibit 10-A to the Registrant's Form S-2 Registration
Statement 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 Amendments filed as Exhibit 10-B to the Registrant's Form S-2 Registration
Statement 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) 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-E Copy of Ace Hardware Corporation Restated Officer Incentive Plan effective
January 1, 1999 consolidated and refiled with First, Second and Third Amendments
filed as Exhibit 10-E to the Registrant's Form S-2 Registration Statement on or about
March 22, 2002 and incorporated herein by reference.
10-F Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
Agreement dated as of August 23, 1996 as amended by the First Modification of Amended
and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The
Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective
Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial Corp. dated December 17,
1997 establishing a $10,000,000 discretionary leasing facility for the purchase of land
and construction of retail hardware stores filed as Exhibit 10-G to Post-Effective
Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-H Copy of form of Executive Officer Employment Agreement effective January 1,
1996 filed as Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) 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.
Exhibits
Incorporated
by Reference Description
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 Registrant'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 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 September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000
Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with
the Prudential Insurance Company of America dated as of September 22, 1993
filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449) on or about March 23,
1994 and incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop facility of 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-P Copy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998 for the
Registrant's redistribution center in Odenton, Maryland filed as Exhibit 10-P to
Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1999 and incorporated
herein by reference.
10-Q Copy of Ace Hardware Corporation Deferred Compensation Plan effective
January 1, 1994 filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or
about March 23, 1994 and incorporated herein by reference.
10-R Copy of current standard form of Ace Hardware Corporation License Agreement
for international 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.
Exhibits
Incorporated
by Reference Description
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 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 Amendments filed as Exhibit 10-V to the Registrant's Form S-2 Registration
Statement 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 Corporation for retail hardware store premises located in Yorkville, Illinois
filed as Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
11, 1996 and incorporated herein by reference.
10-X Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc.
and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario,
Canada filed as Exhibit 10-a-12 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-Y Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and
Ace Hardware Canada Limited for general office space in Markham, Ontario,
Canada filed as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the
Registrant on August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment
No. 4 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein by reference.
10-a-1 Copy of 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 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.
Exhibits
Incorporated
by Reference Description
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 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 on 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 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 Statement on or about March 22, 2002 and
incorporated herein by reference.
10-a-9 Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center
in Baltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration
Statement 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 on or about March 22, 2002 and incorporated herein by reference.
10-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 in 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 No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
Exhibits
Incorporated
by Reference Description
10-a-14 Copy of current standard form of Limited Liability Company Agreement for retail
joint ventures 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 in Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2
Registration Statement 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 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 Form S-
2 Registration Statement on or about March 22, 2002 and incorporated herein by
reference.
10-a-19 Copy 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 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 2002 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, 2001 and December 30, 2000 F-3
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-5
Consolidated Statements of Member Dealers' Equity for each of the years in the
three-year period ended December 29, 2001 F-6
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 29, 2001 F-7
Notes to Consolidated Financial Statements F-8
All schedules have been omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or the required information is included in the
consolidated financial statements or the notes thereto.
Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace Hardware Corporation and
subsidiaries as of December 29, 2001 and December 30, 2000 and the related consolidated statements of
earnings, comprehensive income, member dealers' equity and cash flows for each of the years in the
three-year period ended December 29, 2001. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Ace Hardware Corporation and subsidiaries as of December 29, 2001
and December 30, 2000, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 29, 2001 in conformity with accounting principles generally
accepted in the United States of America.
Chicago, Illinois
KPMG LLP
January 28, 2002
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 29, 2001 and December 30, 2000
ASSETS
December 29, December 30,
2001 2000
(000's omitted)
Current assets:
Cash and cash equivalents $ 25,213 $ 24,644
Short-term Investments 17,158 12,772
Receivables:
Trade 308,390 316,339
Other 63,064 59,090
371,454 375,429
Less allowances for doubtful receivables (2,419) (2,458)
Net receivables 369,035 372,971
Inventories (Note 2) 412,568 395,565
Prepaid expenses and other current assets 16,295 15,105
Total current assets 840,269 821,057
Property and equipment (Note 10):
Land 15,466 16,791
Buildings and improvements 232,015 211,024
Warehouse equipment 100,676 90,250
Office equipment 111,175 99,560
Manufacturing equipment 15,197 14,590
Transportaion equipment 16,345 16,888
Leasehold improvements 17,575 17,445
Construction in progress - - 2,054
508,449 468,602
Less accumulated depreciation and amortization (220,942) (206,712)
Net property and equipment 287,507 261,890
Other assets 41,015 40,863
$ 1,168,791 $ 1,123,810
============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 29, 2001 and December 30, 2000
LIABILITIES AND MEMBER DEALERS' EQUITY
December 29, December 30,
2001 2000
(000's omitted)
Current liabilities:
Current installment of long-term debt (Note 4) $ 7,179 $ 6,904
Short-term borrowings (Note 3) 72,600 81,500
Accounts payable 409,789 448,766
Patronage dividends payable in cash (Note 5) 34,229 34,764
Patronage refund certificates payable (Note 5) 9,084 4,795
Accrued expenses 81,062 63,224
Total current liabilities 613,943 639,953
Long-term debt (Note 4) 170,387 105,891
Patronage refund certificates payable (Note 5) 77,401 68,385
Other long-term liabilities 27,184 24,923
Total liabilities 888,915 839,152
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,693 3,783
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 260,224 250,480
Class C Stock of $100 par value, issuable to dealers
for patronage dividends 23,284 24,267
Additional stock subscribed, net 303 351
Retained deficit (17,591) (5,551)
Contributed capital 13,485 13,485
Accumulated other comprehensive loss (1,239) (162)
288,658 293,152
Less: Treasury stock, at cost (8,782) (8,494)
Total member dealers' equity 279,876 284,658
Commitments (Notes 6 and 10)
$ 1,168,791 $ 1,123,810
============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
December 29, December 30, January 1,
2001 2000 2000
(000's omitted)
Net sales $ 2,894,369 $ 2,945,151 $3,181,802
Cost of sales 2,617,069 2,665,614 2,908,138
Gross profit 277,300 279,537 �� 273,664
Operating expenses:
Warehouse and distribution 34,915 32,496 28,122
Selling, general and administrative 86,277 87,368 87,763
Retail success and development 68,523 71,558 57,149
Total operating expenses 189,715 191,422 173,034
Operating income 87,585 88,115 100,630
Interest expense (Note 12) (23,156) (21,803) (16,651)
Other income, net 12,058 14,207 10,416
Income taxes (Note 7) (3,418) (127) (1,833)
Net earnings $ 73,069 $ 80,392 $ 92,562
============ ============ ===========
Retained earnings (deficit) at beginning of year $ (5,551) $ 594 $ 3,292
Net earnings 73,069 80,392 92,562
Patronage dividends (Note 5) (85,109) (86,537) (95,260)
Retained earnings (deficit) at end of year $ (17,591) $ (5,551) $ 594
============ ============ ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
December 29, December 30, January 1,
2001 2000 2000
(000's omitted)
Net earnings $ 73,069 $ 80,392 $ 92,562
Unrealized gains on securities 129 458 -
Foreign currency translation, net (1,206) (911) 1,109
Comprehensive income $ 71,992 $ 79,939 $ 93,671
============ ============ ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended December 29, 2001 (000's Omitted)
Class C Stock Issuable to Accumulated Dealers for Additional Retained Other Class A Class B Class C Patronage Stock Earnings Contributed Comprehensive Treasury Stock Stock Stock Dividends Subscribed* (deficit) Capital Income/(loss) Stock Total Balance at January 2, 1999 $3,846 $6,499 $226,571 $26,170 $ 471 $3,292 $3,295 $(818) $(7,814) $261,512 Net earnings - - - - - 92,562 - - - 92,562 Net payments on subscriptions - - - - 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 - 1,109 Balance 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) - - - - - - - (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) - - - - - 14,718 - Patronage dividends issuable - - - 23,284 - - - - - 23,284 Patronage dividends payable - - - - - (85,109) - - - (85,109) Accumulated other comprehensive income (loss) - - - - - - - (1,077) - (1,077) Balance at December 29, 2001 $3,693 $6,499 $260,224 $23,284 $ 303 $(17,591) $13,485 $(1,239) $(8,782) $279,876 ======= ======= ========= ======== ======= ========= ======== ======== ========= ========= *Additional stock subscribed is comprised of the following amounts at January 1, 2000, December 30, 2000 and December 29, 2001:
1999 2000 2001
Class A Stock $ 118 $ 41 $ 94
Class B Stock - - - - -
Class C Stock 1,452 975 977
1,570 1,016 1,071
Less unpaid portion 1,072 665 768
$ 498 $ 351 $ 303
====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 29, December 30, January 1, 2001 2000 2000 (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 liabilities 2,261 2,523 3,718 Net Cash Provided by Operating Activities 65,747 81,360 107,790
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 year 24,644 35,422 53,901
Cash and Cash Equivalents at end of year $ 25,213 $ 24,644 $ 35,422 ============ =========== ==========
See accompanying notes to consolidated financial statements.
(a) The Company and Its Business
Ace Hardware Corporation (the Company) operates as a wholesaler of hardware and related
products, and manufactures paint products. As a dealer-owned cooperative, the Company distributes
substantially all of its patronage sourced earnings in the form of patronage dividends to member dealers
based on their volume of merchandise purchases.
(b) Cash Equivalents and Investments
The Company considers all highly liquid investments with an original maturity of three months or less
to be cash equivalents. Short-term investments consist primarily of corporate and government agency
bonds and are classified as held for sale.
(c) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and
subsidiaries. All significant intercompany transactions have been eliminated. The equity method of
accounting is used for the Company's 50% or less owned affiliates over which the Company has the ability
to exercise significant influence.
(d) Receivables
Receivables from dealers include amounts due from the sale of merchandise and special equipment
used in the operation of dealers' businesses. Other receivables are principally amounts due from suppliers
for promotional and advertising allowances. The Company recognizes revenue from product sales upon
shipment to customers.
(e) Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined primarily using
the last-in, first-out method.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to
earnings. Significant improvements or renewals are capitalized.
Depreciation expense is computed on both straight-line and accelerated methods based on estimated
useful lives as follows:
Useful Life Principal
Years Depreciation Method
Buildings and improvements 10-40 Straight Line
Warehouse equipment 5-10 Accelerated
Office equipment 3-10 Various
Manufacturing equipment 3-20 Straight Line
Transportation equipment 3-7 Straight Line
Leasehold improvements are generally amortized on a straight-line basis over the term of the respective
lease.
(g) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated at the rate of exchange in
effect at the balance sheet date while revenues and expenses are translated at the average monthly exchange
rates prevailing during the year. The Company has utilized foreign exchange forward contracts to
hedge non-U.S. equity investments. Gains and losses on these foreign 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 $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 2001, 2000 and 1999. The
Company did not have any outstanding foreign exchange forward contracts at December 29, 2001 or
December 30, 2000.
(h) Financial Instruments
The carrying value of assets and liabilities that meet the definition of a financial instrument included
in the accompanying Consolidated Balance Sheets approximates fair value.
(i) Retirement Plans
The Company has retirement plans covering substantially all non-union employees. Costs with
respect to the noncontributory pension plans are determined actuarially and consist of current costs and
amounts to amortize prior service costs and unrecognized gains and losses. The Company contribution
under the profit sharing plan is determined annually by the Board of Directors.
(j) Use of Estimates
The preparation of financial statements in conformity with 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.
(k) Fiscal Year
The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2001, 2000
and 1999 ended on December 29, 2001, December 30, 2000 and January 1, 2000, respectively.
(l) Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to
comparable classifications followed in 2001.
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially all of the Company's domestic
inventories are valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the
LIFO value of inventory was approximately $57,809,000 and $62,502,000 at December 29, 2001 and
December 30, 2000, respectively. Indirect costs, consisting primarily of warehousing costs, are absorbed
as inventory costs rather than period costs.
(3) Short-Term Borrowings
Short-term borrowings were utilized during 2001 and 2000. The maximum amount outstanding at any
month-end during the period was $128.0 million in 2001 and $147.0 million in 2000. The weighted
average 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, 2001 the Company has available a revolving credit
facility with a group of banks providing for $175.0 million in committed lines and also has available $10.0
million in uncommitted lines. The aggregate unused line of credit available at December 29, 2001 and
December 30, 2000 was $112.4 million and $108.5 million, respectively. At December 29, 2001 the
Company had no compensating balance requirements.
Long-term debt is comprised of the following:
December 29, December 30,
2001 2000
(000's Omitted)
Notes Payable:
$20,000,000 due in quarterly installments of $540,500
with interest payable quarterly at a fixed rate of 8.74% $ 3,784 $ 5,946
$30,000,000 due in semi-annual installments of $2,000,000
with interest payable quarterly at a fixed rate of 6.47% 26,000 30,000
$20,000,000 due in quarterly installments of $714,300
commencing September 15, 2004 with interest payable quarterly
at a fixed rate of 7.49% 20,000 20,000
$30,000,000 due in annual installments of $6,000,000
commencing March 25, 2005 with interest payable quarterly
at a fixed rate of 7.55% 30,000 30,000
$25,000,000 due in annual installments of $5,000,000
commencing February 9, 2006 with interest payable quarterly
at a fixed rate of 6.61% 25,000 25,000
$70,000,000 due in annual installments of $14,000,000
commencing April 30, 2009 with interest payable semi-annually
at a fixed rate of 7.27% 70,000 -
Other long term debt 28 83
Installment notes with maturities through 2005 with various
interest rates 2,754 1,766
177,566 112,795
Less current installments (7,179) (6,904)
$ 170,387 $ 105,891
=========== ===========
Aggregate maturities of long-term debt are $7,179,000, $6,412,000, $6,066,000, $13,195,000 and
$17,857,000 in 2002 through 2006, respectively, and $126,857,000 thereafter.
(5) Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or will pay patronage dividends
to member dealers on the portion of earnings derived from business done with such dealers. Patronage
dividends are allocated in proportion to the volume of purchases by member dealers during the period.
The amount of patronage dividends to be remitted in cash depends upon the level of dividends earned
by each member outlet, varying from 20% on the total dividends under $5,000 and increasing by 5%
on total dividends for each subsequent $2,500 earned to a maximum of 40% on total dividends
exceeding $12,500. In 1999, amounts exceeding the cash portion were distributed in the form of
options (i.e. other property) exercisable by the dealers at a future date to acquire shares of the
Company's ownership in a minority-owned investment. Amounts exceeding the cash portion will be
distributed in the form of Class C $100 par value stock, to a maximum based upon the current year
purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional cash
and patronage refund certificates having maturity dates and bearing interest as determined by the
Board of Directors. A portion of the dealer's annual patronage dividends distributed under the above
plan in a form other than cash can be applied toward payment of principal and interest on any balances
outstanding for approved patronage financing programs.
The patronage dividend composition for 2001, 2000 and 1999 follows:
Subordinated Class Patronage Total
Cash Refund C Other Financing Patronage
Portion Certificates Stock Property Deductions Dividends
(000's Omitted)
2001 $34,229 $18,739 $23,284 $ - $ 8,857 $ 85,109
2000 34,764 18,029 24,267 - 9,477 86,537
1999 38,173 12,249 21,648 10,190 13,000 95,260
Patronage dividends are allocated on a fiscal year basis with issuance in the following year.
The patronage refund certificates outstanding or issuable at December 29, 2001 are payable as follows:
Interest
January 1, Amount �� Rate
(000's omitted)
2002 $ 9,084 6.25%
2003 13,319 6.00
2004 15,297 6.00
2005 12,449 6.25
2006 17,597 6.50
2007 18,739 6.00
(6) Retirement Plans
The Company has two defined benefit pension plans covering substantially all non-union employees,
the Employees' Pension Plan and Trust and the Employees' Retirement Income Plan and Trust. The
Company terminated the Employees' Pension Plan and Trust effective April 30, 2000. In addition to the
net periodic pension expense, the Company recognized a gain of $3,131,000 (net of tax) in 2000 of which
the pre-tax portion is classified as other income, net in the accompanying consolidated financial statements.
Benefits in these plans are based on years of service, highest average compensation (as defined)
and the related profit sharing and primary social security benefit. Contributions to the plans are based on
the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that
are currently deductible for tax reporting purposes. As of December 29, 2001 plan assets in the
Employees' Retirement Income Plan and Trust were held primarily in equities, mutual funds and group
annuity contracts.
Pension expense for 2001, 2000 and 1999 included the following components:
December 29, December 30, January 1,
2001 2000 2000
(000's omitted)
Service cost - benefits earned during the
period $ 41 $ 52 $ 309
Interest cost on projected benefit obligation 116 112 399
Expected return on plan assets (123) (115) (733)
Net amortization and deferral - - (31) 125
Gain on curtailment (58) - - - -
Net periodic pension expense (income) $ (24) $ 18 $ 100
============ ============ ==========
The following table sets forth the funded status of the plans and amounts recognized in the Company's
Consolidated Balance Sheets at December 29, 2001 and December 30, 2000:
December 29, December 30,
2001 2000
(000's omitted)
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,656 $ 5,412
Service cost 41 52
Interest cost 116 112
Actuarial losses (gains) 91 (119)
Curtailment and settlements (141) -
Benefits paid (49) (3,801)
Benefit obligation at end of year 1,714 1,656
Change in plan assets:
Fair value of plan assets at beginning of year 1,560 10,293
Actual return on plan assets 91 29
Employer contribution (reversion) 43 (4,961)
Benefits paid (49) (3,801)
Fair value of plan assets at end of year 1,645 1,560
Funded status (69) (96)
Unrecognized transition asset 6 (65)
Unamortized prior service cost (4) (581)
Unrecognized net actuarial losses (gains) 78 688
Prepaid (accrued) pension cost $ 11 $ (54)
============ ============
The weighted average discount rate used in determining the actuarial present value of the projected
benefit obligation was 7.25% in 2001 and 7.50% in 2000. The related expected long-term rate of return
was 8.0% in 2001 and 2000. The rate of increase in future compensation was projected using actuarial
salary tables plus 1.0% in 2001 and 2000.
charged to expense and contributed to the plans totaled approximately $212,000, $222,000 and $233,000
in 2001, 2000 and 1999, respectively.
The Company's profit sharing plan contribution for 2001, 2000 and 1999 was approximately
$14,253,000, $14,586,000 and $15,071,000, respectively.
(7) Income Taxes
As a cooperative, the Company distributes substantially all of its patronage sourced earnings to
its members in the form of patronage dividends. The 2001, 2000 and 1999 provisions (benefit) for federal
income taxes were $3,037,000, $(162,000) and $1,000,000, respectively, and for state income taxes were
$381,000, $289,000 and $833,000, respectively. The current year increase in the effective tax rate was
primarily due to nonrecurring gains realized on the sale of property and equipment.
The Company made tax payments of $807,000, $1,095,000 and $2,755,000 during 2001, 2000 and
1999, respectively.
(8) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares at
December 29, December 30,
2001 2000
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,693 3,783
Class B Stock, nonvoting, redeemable at not less than
twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,108 2,252
Treasury stock 4,391 4,247
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,602,243 2,504,796
Issuable as patronage dividends 232,839 242,671
Additional Stock Subscribed:
Class A Stock 94 41
Class B Stock - -
Class C Stock 9,770 9,750
conversions or other rights; nor were any options granted or exercised during the two years then ended.
Member dealers may subscribe for the Company's stock in various prescribed combinations. Only one
share of Class A Stock may be owned by a dealer with respect to the first member retail outlet controlled by
such dealer. Only four shares of Class B Stock may be owned by a dealer with respect to each retail outlet
controlled by such dealer, but only if such outlet was a member of the Company on or before February 20,
1974. An appropriate number of shares of Class C Stock must be included in any subscription by a dealer
in an amount to provide that such dealer has a par value of all shares subscribed for equal to $5,000 for each
retail outlet. Unregistered shares of Class C Stock are also issued to dealers in connection with patronage
dividends. No dividends can be declared on any shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail outlet, all shares of stock
of the Company held by the dealer owning or controlling such outlet, must be sold back to the Company,
unless a transfer of such shares is made to another party accepted by the Company as a member dealer
with respect to the same outlet.
A Class A share is issued to a member dealer only when the share subscribed has been fully paid.
Class B and Class C shares are only issued when all such shares subscribed with respect to a retail outlet
have been fully paid. Additional stock subscribed in the accompanying statements represents the par
value of shares subscribed, reduced by the unpaid portion.
All shares of stock are currently issued and repurchased at par value, except for Class B Stock which
is repurchased at twice its par value, or $2,000 per share. Upon retirement of Class B shares held in
treasury, the excess of redemption price over par is allocated equally between contributed capital and
retained earnings.
Treasury stock transactions during 1999, 2000 and 2001 are summarized below:
Shares Held in Treasury
Class A Class B Class C
Balance at January 2, 1999 - 3,907 -
Stock issued - - -
Stock repurchased 228 160 119,614
Stock retired (228) - (119,614)
Balance at January 1, 2000 - 4,067 -
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 -
========= ========= =========
(9) Segments
The Company is principally engaged as a wholesaler of hardware and related products and is a manufacturer
of paint products. The Company identifies segments based on management responsibility and
the nature of the business activities of each component of the Company. The Company measures segment
earnings as operating earnings including an allocation for interest expense and income taxes. Information
regarding the identified segments and the related reconciliation to consolidated information are as
follows:
December 29, 2001
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net sales from external customers $2,822,727 $ 18,668 $52,974 - $2,894,369
Intersegment sales 27,881 110,621 - (138,502) -
Interest expense 23,156 1,094 1,459 (2,553) 23,156
Depreciation and amortization 25,520 1,768 1,933 - 29,221
Segment profit (loss) 63,504 11,255 (1,330) (360) 73,069
Identifiable segment assets 1,075,358 62,205 49,742 (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 $ 20,852 $44,347 - $2,945,151
Intersegment sales 28,641 100,780 - (129,421) -
Interest expense 21,803 1,209 1,278 (2,487) 21,803
Depreciation and amortization 29,176 1,694 1,403 - 32,273
Segment profit (loss) 73,540 9,739 (2,452) (435) 80,392
Identifiable segment assets 1,026,130 68,130 48,775 (19,225) 1,123,810
Expenditures for long-lived assets 39,807 937 3,905 - 44,649
January 1, 2000
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net sales from external customers $3,128,269 $ 27,268 $26,265 - $3,181,802
Intersegment sales 22,647 100,758 - (123,405) -
Interest expense 16,651 1,383 590 (1,973) 16,651
Depreciation and amortization 21,022 1,589 785 - 23,396
Segment profit (loss) 85,574 9,475 (1,819) (668) 92,562
Identifiable segment assets 975,618 78,057 40,235 (12,426) 1,081,484
Expenditures 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 2001, 2000 and
1999 were as follows:
December 29, 2001 December 30, 2000 January 1, 2000
(000's omitted)
Net sales:
United States $2,767,829 $2,748,740 $2,975,567
Foreign countries 126,540 196,411 206,235
Total $2,894,369 $2,945,151 $3,181,802
========== ========== ==========
Long-lived assets, net:
United States $ 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 Consolidated
Balance Sheets as follows:
December 29, December 30,
2001 2000
(000's omitted)
Data processing equipment $3,444 $3,598
Less: accumulated depreciation and amortization (3,345) (3,252)
$99 $346
============ ============
The Company primarily rents buildings and warehouse, office and certain other equipment under
operating leases. At December 29, 2001 annual minimum rental commitments under leases that have
initial or remaining noncancelable terms in excess of one year are as follows:
December 29,
Year Ending 2001
(000's omitted)
2002 $ 27,372
2003 20,905
2004 16,353
2005 13,481
2006 11,653
Thereafter 39,277
Total minimum lease payments $ 129,041
============
All leases expire 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, $45,514,000 and $39,149,000 in 2001, 2000 and 1999, respectively. Rent expense
includes $9,793,000, $9,977,000 and $7,352,000 in contingent rentals paid in 2001, 2000 and 1999,
respectively, primarily for transportation equipment mileage.
(11) Media Expense
The Company expenses media costs the first time the advertising takes place. Gross media expense,
prior to income offsets from dealers and suppliers, amounting to $76,898,000, $76,372,000 and
$79,639,000 was charged to operations in 2001, 2000 and 1999, respectively.
(12) Interest Expense
Interest paid was $20,574,000, $20,256,000 and $16,411,000 in 2001, 2000 and 1999, respectively, net
of capitalized interest of $289,000, $715,000 and $234,000 in 2001, 2000 and 1999, respectively.