SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the 2000 fiscal year ended December 30, 2000 Commission File No. 2-55860
Ace Hardware Corporation
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-0700810
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2200 Kensington Court, Oak Brook, IL 60523
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (630) 990-6600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
State the aggregate market value of the voting and nonvoting stock
held by nonaffiliates of the Registrant. This Company's shares are only
issued to and held by, its dealer-stockholders. All shares held by these
stockholders can be repurchased by the Company when the dealer-
stockholder's membership agreement terminates. Thus, there is no
market for these shares. The repurchase price for each share of Class
A Stock 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 16, 2001, the aggregate value of the Class A Stock
and Class C Stock held by non-affiliates (dealer-stockholders) calculated on
the basis of this repurchase price was $251,623,900.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.YesX No
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable
date (applicable only to corporation Registrants). Outstanding shares
as of February 16, 2001:
Class A (voting) Stock, $1,000 par value 3,757 shares
Class B (nonvoting) Stock, $1,000 par value 2,224 shares
Class C (nonvoting) Stock, $ 100 par value 2,478,669 shares
PART I
Item 1. Business
The terms "Ace," "Company," "cooperative," "we," "us," "our" and
similar words refer to Ace Hardware Corporation. The terms "member,"
"retailer," "dealer," "you," "your" and similar words refer to someone
who purchases our stock.
Ace Hardware Corporation was formally organized as a Delaware
corporation in 1964. In 1973, as the result of a corporate merger, it
became the successor of Ace Hardware Corporation, an Illinois
corporation that was organized in 1928. Until 1973, the Illinois
corporation conducted the business now being engaged in by our
Company. Our main executive offices are located at 2200 Kensington
Court, Oak Brook, Illinois 60523. Our main telephone number is (630)
990-6600.
We operate primarily as a wholesaler of hardware and related
products, and we also manufacture paint products. We mainly sell our
products to hardware dealers who have Membership Agreements with us.
These Membership Agreements allow the hardware dealers to purchase
merchandise and services from us and to license some of our marks,
such as "Ace" and "Ace Hardware." (See the heading "Business"
subheading "Membership Agreement").
We operate on a cooperative basis and distribute patronage
dividends to our eligible member dealers each year on the basis of
quantity or value of business that we do with them. (See the
subheading "Distribution of Patronage Dividends").
As of the end of our 2000 fiscal year on December 30, 2000, there
were 5,011 stores having Membership Agreements with us. The States
with the largest concentration of members are California (approximately
10%), Texas (approximately 6%), Florida and Illinois (approximately 5%
each), and Michigan and Georgia (approximately 4% each). The States
where we shipped the largest percentages of merchandise in fiscal
year 2000 are California (approximately 12%), Illinois (approximately
10%), Florida (approximately 6%), Texas, Michigan and Georgia
(approximately 4% each). Approximately 6.7% of our sales are made to
locations outside of the United States and its territories.
The number of member locations that we had during each of our past
three fiscal years is summarized in the following table:
2000 1999 1998
----- ----- -----
Member outlets at beginning of period 5,082 5,039 5,032
New member outlets 208 264 231
Member outlets terminated 279 221 224
----- ----- -----
Member outlets at end of period 5,011 5,082 5,039
===== ===== =====
Dealers having one or more member outlets
at end of period 3,858 3,932 3,963
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 2000,
warehouse sales were 70% of our total sales and bulletin sales were 3%
of our total sales with the balance of 27% 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 2000 1999 1998
-------------------- ---- ---- ----
Paint, cleaning and related supplies 20% 20% 20%
Plumbing and heating supplies 15% 15% 15%
Hand and power tools 14% 14% 14%
Garden, rural equipment and related supplies 14% 13% 13%
Electrical supplies 12% 13% 13%
General hardware 12% 12% 12%
Sundry 7% 7% 7%
Housewares and appliances 6% 6% 6%
We sponsor two major hardware conventions each year at various
locations. We invite dealers and vendors to attend, and dealers
generally place orders that are delivered before the next convention.
During the convention, there are exhibits of regular merchandise, new
merchandise and seasonal merchandise. Lawn and garden supplies and
exterior paints are seasonal merchandise in many parts of the country.
Some types of goods such as holiday decorations are also seasonal.
Warehouse sales involve the sale of merchandise that we inventory
at our warehouses. Direct shipment sales involve sales where the
merchandise is shipped directly to dealers by vendors. Bulletin sales
involve our special bulletin offers where we order specific
merchandise after dealers sign up to buy particular quantities of it.
Dealers place direct shipment orders with our vendors using special
purchase orders. The vendors then bill us for these orders, which are
shipped directly to dealers. We, in turn, bill the ordering dealers
with an adder ("handling charge") that varies according to the
following schedule:
Invoice Amount Adder (Handling Charge)
-------------- -----------------------
$ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $2,999.99 1.50%
$3,000.00 to $3,999.99 1.25%
$4,000.00 to $4,999.99 1.00%
$5,000.00 to $5,999.99 .75%
$6,000.00 to $6,999.99 .50%
$7,000.00 to $7,999.99 .25%
$8,000.00 and over .00%
We make bulletin sales based upon notices from dealers that they
wish to participate in one of 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. Ace Hardware Canada, Limited generated less than three
percent (3%) of our consolidated revenue during fiscal year 2000.
We operate our Company-owned retail hardware stores through our
wholly owned subsidiaries A.H.C. Store Development Corp. and Ace
Corporate Stores, Inc. For further information about these stores,
please see the heading "Properties."
We manufacture paint and similar coating products at our factories
in Matteson and Chicago Heights, Illinois. These factories are the
main source of the paint products that we offer for sale. We operate
our paint manufacturing business as a separate Division of our Company
for accounting purposes. We purchase all our raw materials for paint
manufacturing from outside sources. We have had adequate sources of
raw materials in the past, and we do not currently expect any
shortages of raw materials that would have a major impact on our paint
operations. Paint manufacturing is seasonal in the sense that greater
paint sales occur from April through September. Historically, our need
to comply with environmental laws and regulations has not had a major
effect on our ability to conduct our paint manufacturing operations.
Our business, both hardware wholesaling and paint manufacturing, is
not dependent on any major suppliers and we feel that 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 things like revenues,
costs, margins and profits which are influenced by many factors. Some
of these factors are discussed below.
The effects of future growth in the hardware and hardlines-related
industries, are uncertain. By "hardlines-related industries" we mean
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 cornerstones are: Retail Success
(store operations), Wholesale Success (distribution), International
growth and new member growth. Retail success for our dealers is a
primary objective because, in our opinion, it drives both their retail
performance and our wholesale growth. We have therefore increased our
efforts to assist members in "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 retail 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 1.365% of their purchases (except
purchases of LTL Plus and certain hardware and software computer
systems), with minimum and maximum yearly assessments of $1,916.46 and
$6,500.00, respectively, for each store location. Effective January 1,
2001, we will assess dealers an amount equal to 1.5% of their
purchases. The minimum assessment is $2,223.00, and the maximum
assessment is $6,800.00 for each store location. We grant exemptions
from these assessments and make various adjustments to them for stores
located outside the continental United States. These exemptions and
adjustments are based on our management's evaluation of the number and
types of television broadcasts that are received in these areas. The
amount of our national advertising assessment can be changed from time
to time by our Board of Directors. We can also impose assessments at a
flat monthly rate or based on a percentage of sales for regional
advertising not to exceed 2% of a dealer's annual purchases. Regional
advertising assessments are subject to the same minimum and maximum
amounts as the National Advertising assessment.
Every two weeks, we bill the member store for a special low volume
account service charge of $75 if annual purchases from us are less
than $50,000. Effective January 1, 2001, every two weeks, we will bill
the 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.If you purchase $148,200 of merchandise from us during the year,
we give you credit on your next billing statement for any low volume
charges which we billed to you earlier in the year. We then stop
billing you for low volume account service charges for the rest of the
year, even if your current purchases on a billing statement are less
than $5,700; and
2.We do not bill low volume account service charges every two weeks
if your store's sales volume with us the year before was at our
minimum ($148,200), but we will bill these charges in a lump sum to
your last statement of the year if you do not reach our applicable
minimum by that time.
An Ace store that falls below our minimum purchase levels can also
be subject to termination.
We add a late payment service charge on any past due balance that
you owe us for merchandise, services, or your stock subscription. The
current rate for the late payment service charge is .77% per biweekly
statement period, except in Texas where the charge is .384% and
Georgia where the charge is .692%. We consider a past due balance to
exist whenever we do not receive payment of the amount shown as due on
your billing statement within 10 days after the date of that
statement. We can change the rate of our late payment service charge
from time to time.
Our retail training program called the "Ace Training Network" is
required for all member stores in the United States and U.S.
Territories. Under the "Ace Training Network," we will bill a monthly
fee which we call a "monthly training assessment." This assessment is
$16 per month for each single store or parent store and $11 for each
branch store. A single store or parent store is one that has a share
of our Class A voting stock (or one that involves a stock subscription
for a share of our Class A Stock.) A branch store is one whose
membership involves only shares (or a subscription for shares) of our
nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws.)
Branch stores can request an exemption from the monthly training
assessment.
With the Ace Training Network, you have the option of choosing how
your monthly training assessment dollars will be spent. Under this
program, one point equals one dollar in your training account. We
credit you with another point for each dollar you pay for your monthly
training assessment. Thus, a single store or parent store can earn 16
points per month and a branch store can earn 11 points per month. You
may use your points at any time to buy one of the training programs
that we offer. If you do not have enough points for the program that
you want, you can use the points that you have and we will bill you
for the difference. Multiple stores and member groups can pool their
points together to purchase our training programs.
We also have a mandatory subscription service for Material Safety
Data Sheet information for all member stores located in the United
States. As of the date of this filing, the yearly assessment for these
subscriptions is $20 for each single store or parent store and $10 for
each branch store.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by members
and ourselves in the promotion, advertising and marketing of products
and services that we sell. We have had the following Trademark and
Service Mark Registrations issued by the U.S. Patent and Trademark
Office for our marks:
Registration
Description of Mark Type of Mark Number Expiration Date
-------------------------- ------------ ------------ ---------------
"ACE HARDWARE" with winged
emblem design Service Mark 840,176 December 5, 2007
"ACE HARDWARE" with winged
emblem design Trademark 898,070 September 8, 2000(1)
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000(2)
"HARDWARE UNIVERSITY"
with design Service Mark 1,180,539 December 1, 2001
"SUPER STRIKER" Trademark 1,182,330 December 15, 2001
"PACE" with design Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in stylized
lettering design Trademark 1,426,137 January 27, 2007
"ACE" in stylized lettering
design Service Mark 1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND
GARDEN CENTER" in stylized
lettering design Service Mark 1,487,216 May 3, 2008
"ACE NEW EXPERIENCE" in
stylized lettering design Trademark 1,554,322 September 5, 2009
"ACE SEVEN STAR" in stylized
lettering design Trademark 1,556,389 September 19, 2009
"ACE BEST BUYS" in circle
design Service Mark 1,560,250 October 10, 2009
"ACENET" Service Mark 1,574,019 December 26, 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, 2001
Christmas Elves design Trademark 1,669,306 December 24, 2001
"ACE 2000" Service Mark 1,682,467 April 7, 2002
"ACE" in stylized lettering
design Trademark 1,683,538 April 21, 2002
"THE OAKBROOK COLLECTION"
in stylized lettering
design Trademark 1,707,986 August 18, 2002
Registration
Description of Mark Type of Mark Number Expiration Date
----------------------- ------------ ------------ ---------------
"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
"STORE 2000 THE
STORE OF THE FUTURE" Service Mark 1,811,032 December 14, 2003
"ENVIROCHOICE" Trademark 1,811,392 December 14, 2003
"CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A"
design Service Mark 1,926,798 October 10, 2005
"The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE"
in stylized lettering
design Service Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREAT FINISHES" Trademark 2,019,696 November 26, 2006
"WOODROYAL" Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD" Trademark 2,070,848 June 10, 2007
"ROYAL TOUCH" Trademark 2,070,849 June 10, 2007
"QUALITY SHIELD" Trademark 2,102,305 September 30, 2007
"QUALITY TOUCH" Trademark 2,102,306 September 30, 2007
"STAINHALT" Trademark 2,122,418 December 16, 2007
"ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008
"NHS NATIONAL
HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008
"THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008
"ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009
"ACE ROYAL" Trademark 2,237,981 April 13, 2009
"HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009
"THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009
"ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009
"ILLUMINATIONS" Trademark 2,353,666 May 30, 2010
"YOUR NEIGHBROHOOD
SOLUTIONSPLACE" Service Mark 2,386,359 September 12, 2010
"ACE" with accent design Service Mark 2,378,123 August 15, 2010
"ACE SOLUTIONSPLACE" Service Mark 2,394,181 October 10, 2010
(1) Application for renewal of registration filed October 10, 2000.
(2) Application for renewal of registration filed August 4, 2000.
As of the date of this filing, we also have the following
applications for new registrations pending in the U.S. Patent and
Trademark Office:
Mark Type of goods/services
---- ----------------------
"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
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 5,513 full-time employees, of which 1,685 are salaried
employees. We also have, as of the end of the 2000 fiscal year, union
contracts covering one (1) truck drivers' bargaining unit and three
(3) warehouse bargaining unit(s). We consider our employee relations
with both union and non-union employees to be good, and we have had no
strikes in the past five years. In general, our employees are covered
by either negotiated or nonnegotiated benefit plans that include
hospitalization, death benefits and, with few exceptions, retirement
benefits.
Limitations on Ownership of Stock
Our members own all of our outstanding shares of capital stock.
Membership in our Company is limited to approved dealers in hardware
and related products who have Membership Agreements with us. These are
the only ones eligible to own or purchase shares of any class of our
stock.
No dealer is allowed to own more than 1 share of our Class A voting
stock, no matter how many store locations that dealer owns or
controls. This ensures that each stockholder in our cooperative has
equal voting power. We treat an unincorporated member or a partnership
member as being controlled by someone else if 50% or more of the
assets or profit shares of that member are owned by (i) another
person, partnership or corporation; or (ii) the owner(s) of 50% or
more of the assets or profit shares of another unincorporated business
firm or (iii) the owner(s) of at least 50% of the capital stock of a
corporation. We treat a member that is a corporation as being
controlled by someone else if at least 50% of the capital stock of
that member is owned by (i) another person, partnership or
corporation; or (ii) the owner(s) of at least 50% of the capital stock
of another corporation; or (iii) the owner(s) of at least 50% of the
assets or profit shares of another unincorporated business.
Distribution of Patronage Dividends
We operate on a cooperative basis for purchases of merchandise from
us that are made by dealers who have become members of our Company. We
also operate on a cooperative basis with dealers who have subscribed
for shares of our stock but who have not yet actually become "members"
because they have not yet fully paid for their $1,000 par value shares
of our Class A voting stock. The dealers in either of these two
categories are entitled to receive patronage dividends once a year on
an equitable basis.
We made patronage dividend distributions at the following
percentages of our sales in the warehouse, bulletin and direct
shipment categories and on the total sales of products manufactured by
our Paint Division during the past three fiscal years:
2000 1999 1998
---- ---- ----
Warehouse Sales 4.43564% 4.98172% 4.78251%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 8.1131% 7.8827% 9.1653%
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 2000, 1999
and 1998.
Patronage Dividend Determinations and Allocations
The amounts that we distribute as patronage dividends consist of
our gross profits on business that we do with dealers who qualify for
patronage dividend distributions, less a proportionate share of our
expenses for administration and operations. Our gross profits consist
of the difference between our selling price for the merchandise that
these dealers buy from us and our purchase price for that merchandise.
Our computation of patronage dividends excludes all of our income and
expenses from activities that are not directly related to patronage
transactions. The excluded items primarily consist of profits on
business that we do with dealers or other customers who do not qualify
for patronage dividend distributions and any income or loss that we
realize from the disposition of property and equipment. If a
disposition occurred, then the income we would derive from this type
of recapture would be included in computing patronage dividends.
Our By-laws provide that, by virtue of dealers being "members" of
our Company (that is, by owning shares of our Class A voting stock),
they consent to include in their gross income for federal income tax
purposes all patronage dividends that we distribute to them. These
distributions must be included in gross income for the taxable year in
which the dealer receives them. Dealers who have not yet fully paid
the $1,000 purchase price for their shares of our Class A voting stock
are also required to include all patronage dividends we distribute to
them in their gross income as explained above. Under our Stock
Subscription Agreement, dealers must expressly consent to take these
patronage dividend distributions into their gross incomes.
The amount of the patronage dividends which dealers must include in
their gross incomes includes both the cash portion of patronage
dividends and any portion of patronage dividends that we apply against
any indebtedness the dealer owes to us in accordance with Section 7 of
Article XXIV of our By-laws. It also includes any portion of patronage
dividends that they receive in shares of our Class C nonvoting stock,
other property and patronage refund certificates. The Company also has
the authority to issue a portion of the patronage dividend in the form
of other property.
Under our present program, patronage dividends on each of our three
basic categories of sales (warehouse sales, bulletin sales and direct
shipment sales) are allocated separately, as are patronage dividends
under our LTL Plus Program. Dividend percentage calculations are made
with reference to the net earnings derived from each of the respective
categories. The 2000 patronage dividend rate for the LTL Plus Program
is 0.5% of our LTL Plus sales. The 2000 patronage dividend rates for
direct shipment and bulletin sales are 1% and 2%, respectively, while
the current 2000 patronage warehouse dividend rate is 4.44%.
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. 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 Ace 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 2000 incentive pool rate under this
plan is 0.34% 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 2000 and subsequent years.
1.For each of your eligible stores, we initially calculate the
minimum cash patronage dividend distribution as follows:
(a) 20% of the first $5,000 of the total patronage dividends allocated
for distribution each year to you based on the purchases made
for the eligible store;
(b) 25% of the portion of the total patronage dividends allocated for
that store which exceed $5,000 but do not exceed $7,500;
(c) 30% of the portion of the total patronage dividends allocated for
that store which exceed $7,500 but do not exceed $10,000;
(d) 35% of the portion of the total patronage dividends allocated for
that store which exceed $10,000 but do not exceed $12,500;
(e) 40% of the portion of the total patronage dividends allocated for
that store which exceed $12,500.
2. We distribute the portion of patronage dividends in excess of the cash
or property amounts above in the form of shares of our Class C nonvoting
stock (par value $100 per share) until the total par value of all shares
of all classes of our capital stock that you hold for the eligible store
equals the greater of:
(a) $20,000; or
(b) the sum of purchases in the following categories that you made
for the eligible store during the most recent calendar year:
(i) 15% of the volume of Ace manufactured paint and related
products purchases, plus
(ii) 3% of the volume of drop-shipment or direct purchases
(excluding Ace manufactured paint and related products),
plus
(iii)15% of the volume of warehouse and bulletin purchases
(including STOP and excluding Ace manufactured paint
and related products), plus
(iv) 4% of the volume of LTL Plus purchases.
Please note, however, that we do not issue fractional shares of
Class C Stock. We take any amount that would result in a fractional
share of stock and distribute it in cash or patronage refund
certificates instead.
3. The portion of your total patronage dividends for each of your
eligible stores which exceeds the sum of:
(a) the cash amount determined under Paragraph 1 above and
(b) the amount of Class C Stock determined under Paragraph 2 above is
distributed to you in cash up to certain limits. The total amount
that you receive in cash for an eligible store cannot exceed 45%
of that store's total patronage dividends for the year. If a
store's total cash distribution would exceed this 45% limit, then
the distribution over that amount is made instead in the form of a
non-negotiable patronage refund certificate. Our Board of Directors
determines the maturity dates and interest rates of these patronage
refund certificates before they are issued. These certificates
include provisions that give us a first lien on the amount of any
indebtedness that you owe us. The certificates also contain
language subordinating them to all the rights and claims of our
secured creditors, general creditors and our bank creditors.
Historically, these patronage refund certificates have matured
within five years from the date we issued them.
Article XXIV, Section 7 of our By-laws requires the cash portion of
any patronage dividends to be applied against any indebtedness a
member owes us where the membership for his store is terminated before
the distribution of patronage dividends. Despite this, however, 20% of
a terminated store's total annual patronage dividends will be paid in
cash if we receive a timely request for this form of payment.
Because of the requirement of the U. S. Internal Revenue Code that
we withhold 30% of the annual patronage dividends distributed to
eligible dealers whose places of business are located in foreign
countries or Puerto Rico, the cash portion of patronage dividends to
these dealers is a minimum of 30%. There are exceptions to this 30%
cash payment in the case of 1) unincorporated Puerto Rico dealers
owned by individuals who are U.S. citizens, and 2) certain dealers
incorporated in Guam, American Samoa, the Northern Mariana Islands or
the U.S. Virgin Islands. These exceptions apply if less than 25% of
the stock of these dealers is owned by foreign persons, and at least
65% of their gross income for the last three years has been
sufficiently connected with a trade or business in one of these
locations or in the United States.
We also have certain loan programs that allow dealers to pay us
back with part of their patronage dividend distributions. For example,
to help members buy standardized exterior signs identifying their
stores, our Board of Directors has authorized a loan program. Under
this program, a dealer may apply to borrow between $100 to $20,000 per
location from us for this purpose. If you obtain a loan under this
program, you may either repay it in twelve payments billed on your
regular bi-weekly billing statement, or you may apply the non-cash
portion of your annual patronage dividends (for up to the next three
annual patronage dividend distributions) toward payment of your loan.
Our Board of Directors has also authorized finance programs to help
qualified dealers buy certain computer systems from us and to finance
capital improvements with patronage dividends. The amount financed
cannot exceed 80% of the cost of any system. For PAINTMAKER computers,
members have applied to borrow between $1,000 to $15,000 per location
repayable over a period of three (3) years.
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 retrofit programs may be revised or discontinued
by our Board at any time. Members also have the ability to apply for a
Capital Stock loan which is designed to provide them with access to
their future patronage dividends to assist them in opening new retail
stores or to assist in significant store expansions. These loans are
repaid 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 8 months after the end of that taxable year.
If you become one of our "members" by owning 1 share of Class A
voting stock, you are deemed under the U.S. Internal Revenue Code to
have consented to take the written notices of allocation and other
qualified property that we distribute to you into your gross income.
Your consent is deemed because of 1) your act of obtaining or
retaining membership in our Company, and 2) because our By-laws
provide that your membership constitutes this consent, and we give you
written notification of that By-law provision. Under another provision
of the Internal Revenue Code, dealers who have subscribed for shares
of our stock are also deemed to have consented to take the dollar
amounts of their written notices of allocation and other qualified
property into their gross incomes. This occurs because of the consent
provisions included in the Subscription Agreement for our stock.
If you receive a patronage refund certificate as part of your
patronage dividends (see the subheading "Forms of Patronage Dividend
Distributions"), you may be deemed to have received interest income.
This interest would arise in the form of an original issue discount to
the extent that the face amount of the certificate exceeds the present
value of the stated principal and interest payments that we have to
pay you under the terms of the certificate. This interest income would
be taxable to you "ratably" over the term of the certificate under
Section 7872(b) (2) of the U.S. Internal Revenue Code. Present value
for this purpose is determined by using a discount rate equal to the
applicable Federal rate in effect as of the day of issuance of the
certificate, compounded twice a year.
We are required to withhold for federal income tax on the total
patronage dividend distribution we make to anyone who has not
furnished us with a correct taxpayer identification number. We can
also be required to withhold federal taxes on the cash portion of each
patronage dividend distribution made to someone who fails to certify
to us that he is not subject to backup withholding. This withholding
obligation based on a failure to certify may not be applicable,
however, unless 50% or more of the total distribution is made in cash.
Since we distribute all of our patronage dividends for a given year at
the same time and since our current patronage dividend plan (see the
subheading "Forms of Patronage Dividend Distributions") does not
permit any member store to receive more than 45% of its patronage
dividends for the year in cash, we believe that a certification
failure like this should not ordinarily have any effect on our Company
or any of its dealers.
Patronage dividends that we distribute to patrons who are located
in foreign countries or certain U.S. possessions (including those who
are incorporated in Puerto Rico or who reside in Puerto Rico but
have not become citizens of the United States) have been held to
be "fixed or determinable annual or periodic income." Patrons who
receive this type of income are currently required to pay a tax
of 30% of the amount received under Sections 871(a)(1)(A) and 881(a)
(1) of the Internal Revenue Code. When dealers are subject to this
30% tax, we must withhold it from their patronage dividends and
pay it over to the U.S. Internal Revenue Service. The above does
not apply to a corporation organized in Guam, American Samoa, the
Northern Mariana Islands or the U. S. Virgin Islands if less than
25% of its stock is owned by foreign persons and at least 65% of its
gross income for the last three years has been effectively connected
with the conduct of a trade or business in that location or in the
United States.
The 20% minimum portion of the patronage dividends that must be
paid in cash to patrons other than those discussed above may not be
enough, depending upon the patron's income tax bracket, to pay all of
the patron's federal income tax on his annual patronage dividend
distributions. In our management's opinion, the payment of a minimum
of 20% of total patronage dividends in cash each year will not have a
material adverse affect on our operations or on our ability to obtain
sufficient working capital for the normal requirements of our
business.
Membership Agreement
If you apply to become an Ace member, you must sign a Subscription
Agreement to purchase our stock. You must also sign our customary
Membership Agreement and Supplement. You must submit a payment of
$1,500 ($2,500 for conversions or new investor ground-ups effective
January 1, 2001) with your signed Membership Agreement and Supplement.
We use this fee toward our estimated costs of processing your
membership application. If you submit a membership application and we
accept it, we sign your Membership Agreement, Supplement and Stock
Subscription Agreement and send them back to you for your records.
Your membership may generally be terminated upon various notice
periods and for various reasons (including voluntary termination by
either of us). The details of these reasons and notice periods are in
the Membership Agreement. These reasons for termination and notice
periods apply except where special laws or regulations in certain
locations limit our right to terminate memberships, or require longer
notice periods.
Non-Shareholder Programs
In 1989, our Board of Directors first authorized us to affiliate
non-shareholder international dealers who operate retail businesses
outside the United States, its territories and possessions. These
international dealers sign agreements that differ from our regular
Membership Agreement. They may be granted a license to use certain of
our trademarks and service marks, but they do not sign stock
subscription agreements or become shareholders, nor do they receive
patronage dividends.
In 1995, our Board of Directors first authorized us to affiliate
non-shareholder retail accounts other than international dealers.
These accounts, which are generally served through our 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. To date, the Company has entered
into five 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.
Sales to international non-shareholder dealers accounted for
approximately 6.7% of our total sales in 2000 and approximately 6.5%
in 1999 and 1998. Sales to domestic non-shareholder locations
accounted for less than 2.5% of our total sales in fiscal year 2000,
less than 1.5% of our total sales in 1999 and less than 1% in 1998.
(See Appendix A, Article XXV, Sections 3 and 4 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 206,030 Leased September 30, 2009
Oak Brook, Illinois 70,508 Leased September 30, 2009
Oak Brook, Illinois 15,278 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, 2002
Perrysburg, Ohio 393,720 Leased November 1, 2004
Tampa, Florida 391,755 Owned
Hanover, Maryland (2) 278,505 Owned
Yakima, Washington 507,030 Owned
Maumelle, Arkansas 597,253 Owned
LaCrosse, Wisconsin (6) 591,964 Owned
Huntersville, North Carolina (2) 354,336 Owned
Rocklin, California 478,468 Owned
Gainesville, Georgia 481,013 Owned
Prescott Valley, Arizona 631,485 Owned
Princeton, Illinois 1,094,756 Owned
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
-------- -------------- ------ ----------
Chicago, Illinois (3) 18,168 Leased May 31, 2002
Odenton, Maryland (3) 57,500 Leased June 26, 2003
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 (4) 354,000 Leased March 31, 2006
Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001
Prince George County, Virginia (5)155.4 acres See Note 5
Fort Worth, Texas (3) 10,915 Leased December 31, 2005
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 2002
Paint Manufacturing Facilities:
Matteson, Illinois 371,411 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
(1) This property is leased by our subsidiary Ace Hardware Canada,
Limited for its corporate office.
(2) This property is under contract to be sold to Citation Properties,
Inc. on May 1, 2001, and leased back by the Company for a five-year
term ending April 30, 2006, with an option to terminate the lease at
the end of the first nine months of the term. The Company recently
announced that it intends to close this facility.
(3) This property is leased for use as a freight consolidation center.
(4) Our subsidiary, Ace Hardware Canada, Limited leases this property for
a distribution warehouse.
(5) This property is owned by Panattoni/Woods Road-Richmond, LCC, which has
contracted with the Company to build a 778,000 square foot distribution
warehouse. The property and distribution warehouse will be purchased by
the Company upon completion, estimated to be on or before May 1, 2001.
(6) Includes a 220,710 square foot expansion estimated to be completed in
May, 2001.
In addition to the above, we or our subsidiaries, A.H.C. Store
Development Corp. and Ace Corporate Stores, Inc. lease other property
for retail hardware stores ranging from approximately 13,000 to
slightly less than 25,000 square feet in size. The numbers and
locations of these leased retail stores as of the date of this filing
are summarized in the table below:
Number of
State Retail Store Leases
----- -------------------
Colorado 1
Georgia 8
Illinois 6
New Jersey 2
Washington 9
Wisconsin 1
We also lease a fleet of trucks and equipment for the main purpose
of delivering merchandise from our warehouses to our dealers.
Item 3. Legal Proceedings
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 affect 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 16, 2001:
Title of Class Number of Record Holders
-------------- ------------------------
Class A Stock, $1,000 par value 3,757
Class B Stock, $1,000 par value 2,224
Class C Stock, $100 par value 4,835
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 30, January 1, January 2, December 31, December 31,
2000 2000 1999 1997 1996
------------ ---------- ---------- ------------ ------------
(000's omitted)
Net sales $ 2,945,151 $3,181,802 $3,120,380 $ 2,907,259 $ 2,742,451
Cost of sales 2,665,614 2,908,138 2,879,296 2,693,362 2,542,562
------------ ---------- ---------- ------------ ------------
Gross profit 279,537 273,664 241,084 213,897 199,889
Total expenses 199,145 181,102 153,124 137,510 127,582
------------ ---------- ---------- ------------ ------------
Net earnings $ 80,392 $ 92,562 $ 87,960 $ 76,387 $ 72,307
============ ========== ========== ============ ============
Patronage dividends
(Notes A, B and 5) $ 86,537 $ 95,260 $ 88,022 $ 76,153 $ 73,837
============ ========== ========== ============ ============
Balance Sheet Data:
December 30, January 1, January 2, December 31, December 31,
2000 2000 1999 1997 1996
------------ ---------- ---------- ------------ ------------
(000's omitted)
Total assets $ 1,122,173 $1,081,484 $1,047,580 $ 977,478 $ 916,375
Working capital 182,741 180,763 191,926 158,676 146,862
Long-term debt 105,891 111,895 115,421 96,815 71,837
Patronage refund
certificates payable,
long-term 68,385 55,257 43,465 49,044 49,639
Member dealers' equity 284,658 279,963 261,512 245,479 233,313
(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.
(5) Refers to Note (5) of the Consolidated Financial Statements beginning on
page F-10 of this Form 10-K.
December 30, January 1, January 2, December 31, December 31,
2000 2000 1999 1997 1996
------------ ---------- ---------- ------------ ------------
(000's omitted)
In cash $ 34,764 $ 38,173 $ 34,826 $ 29,943 $ 28,178
In patronage refund
certificates payable 18,029 12,249 15,720 13,726 9,500
In Class C Stock 24,267 21,648 26,170 22,366 26,474
In other property - 10,190 - - -
In patronage financing
deductions 9,477 13,000 11,306 10,118 9,685
------------ ---------- ---------- ------------ ------------
Total patronage dividends $ 86,537 $ 95,260 $ 88,022 $ 76,153 $ 73,837
============ ========== ========== ============ ============
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs
("liquidity") results from internally generated funds, short-term
lines of credit and long-term financing.
The Company has an established, unsecured revolving credit facility
with a group of banks. The Company has unsecured lines of credit of
$190.0 million of which $108.5 million was available at December 30,
2000. Any borrowings under these lines of credit would bear interest
at the prime rate or less. Long-term financing is arranged as
determined necessary to meet the Company's capital or other
requirements, with principal amount, timing and form dependent on
prevailing debt markets and general economic conditions.
Capital expenditures for new and improved facilities were $44.6,
$43.1 and $26.5 million in 2000, 1999 and 1998, respectively. During
2000, the Company financed the $44.6 million of capital expenditures
out of current and accumulated internally generated funds and short-
term borrowings. Capital expenditures for 2001 are anticipated to be
approximately $72.5 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 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
Division 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 $2.0
million, or 2.3% 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 $16.0 million
primarily due to operating 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.
Operations 1999 Compared to 1998
On June 30, 1999 the Company entered into a business combination
agreement with Builder Marts of America, Inc. (BMA) to combine the
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 increase of 2.0% was affected by the business
combination of the LBM Division with BMA. As a result of this transaction,
LBM Division sales were not reported within the Company's sales
results after August 2, 1999. Sales of basic hardware and paint
merchandise (including warehouse, bulletin and direct shipments) increased
7.8% in 1999 primarily due to increased existing retailer volume,
targeted efforts on new store development within our retailer
base and conversions to Ace membership. Excluding international,
domestic basic business sales were up 8.8%. Sales were negatively impacted
by a decline in international sales. Net dealer outlets increased in 1999
due to targeted sales efforts on new store development and conversions to
Ace membership and continued emphasis on retail success.
Gross profit increased $32.6 million or 13.5% and increased as a
percent of sales to 8.60% vs. 7.73% in 1998. This increase as a
percent of sales results partially from the loss of lower margin LBM
Division volume. Higher cash discounts and vendor rebates and increased
margin from import products and retail operations resulted in the
gross profit increase.
Warehouse and distribution expenses increased $918,000 and
increased as a percent of sales from .87% to .88%. Increased warehouse
and distribution costs required to support higher handled sales are
partially offset by increased logistics income. Higher logistics
income combined with improvements in productivity drove expenses as a
percent of basic business sales down to 1.00% in 1999 from 1.04% in
1998.
Selling, general and administrative expenses increased by $4.5
million or 5.4% and increased as a percent to sales due to increased
information technology costs to support our Year 2000 efforts.
Retail success and development expenses increased $24.2 million or
73.7% due to increased new business development costs, costs
associated with additional company-owned stores and costs to support
retail initiatives. Increases in this category are directly related to
retail support of the Ace retailer as the Company continues to make
retail investments in our dealer base.
Impact of New Accounting Standards
In June, 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS Nos. 137 and 138, requires companies to
record derivatives on the balance sheet as assets and liabilities,
measured at fair value. The accounting treatment of gains or losses
resulting from changes in the values of those derivatives is dependent
on the use of the derivative and whether it qualifies for hedge
accounting. The company is required to comply with SFAS No. 133, as
amended, in fiscal year 2001 and estimates its adoption will not have
a material effect on the consolidated financial statements.
In September, 2000, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 140, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 replaces SFAS No. 125 and revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral. The company is required to comply with SFAS No. 140 in
the second quarter of fiscal year 2001 and does not believe its
adoption will have a material effect on the consolidated financial
statements.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that
establish prices substantially in advance of the receipt of goods or
services. As vendors increase their prices for merchandise supplied to
the Company, the Company increases the price to its dealers in an
equal amount plus the normal handling charge on such amounts. In the
past, these increases have provided adequate gross profit to offset
the impact of inflation on operating expenses.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
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 30, 2000, all short-term and long-term debt was issued at
fixed rates.
The table below presents principal amounts and related weighted
average interest rates by year of maturity for the Company's
investments and debt obligations:
2001 2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(000's omitted)
Assets:
Short-term investment-
fixed rate $10,594 $ 2,987 $ 977 $ - $ 2,060 $ 6,748 $ 23,366
Fixed interest rate 5.52% 6.98% 5.75% - 7.44% 6.70% 6.23%
Liabilities:
Short-term borrowings-
variable rate $81,500 - - - - - $ 81,500
Average variable
interest rate 7.18% - - - - - 7.18%
Long-term debt-fixed
rate $ 6,904 $ 6,715 $ 5,975 $ 5,629 $12,857 $74,715 $112,795
Average fixed interest
rate 7.08% 7.07% 7.07% 7.10% 7.08% 7.09% 7.08%
The Company is exposed to credit risk on certain assets, primarily
accounts receivable. The Company provides credit to customers in the
ordinary course of business and performs ongoing credit evaluations.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.
The Company's various currency exposures often offset each other,
providing a natural hedge against currency risk. The Company has
utilized foreign exchange forward contracts to hedge non-U.S. equity
investments. Gains and losses on these foreign currency hedges are
included in the basis of the underlying hedged investment. During
1999, the Company settled all outstanding foreign currency contracts
that resulted in a gain of approximately $2.0 million reflected within
accumulated other comprehensive income at January 1, 2000. The Company
does not have any outstanding foreign exchange forward contracts at
December 30, 2000. Settlement of foreign sales and purchases are
generally denominated in U.S. currency resulting in limited foreign
currency transaction exposure.
Item 8. Financial Statements and Supplementary Data
Financial statements covered by the report of the Company's
independent certified public accountants are listed on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Company Our directors and
executive officers are:
Position(s) Currently Held
and Business Experience (for
Name Age the past 5 years)
---- --- ----------------------------
Jennifer C. Anderson 50 Director since June, 1994; term
expires 2003; President of Davis
Lumber and Ace Hardware, Inc.,
Davis, California since November,
1985.
Richard F. Baalmann, Jr. 41 Director since June, 1999; term
expires 2002; President of Homart,
Inc., Centralia, Illinois since
May, 1988.
Eric R. Bibens II 44 Director since June, 1997; term
expires 2003; President of Bibens
Home Center, Inc., Springfield,
Vermont since 1983.
Michael C. Bodzewski 51 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 40 Vice President, Merchandising
effective October, 2000; Vice
President - Finance effective
October 1999; Vice President -
Controller effective September,
1997; Controller effective
January, 1994.
Lawrence R. Bowman 54 Director since February, 1991;
term expires 2001; President of
Owenhouse Hardware Co., Inc.,
Bozeman, Montana since February,
1996 and Vice President of that
company from March, 1988 until
February, 1996.
James T. Glenn 41 Director since June, 1996; term
expires 2002; President of Ace
Hardware of Chattanooga,
Chattanooga, Tennessee since
January, 1990.
Ray A. Griffith 47 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 51 Director since June, 1998; term
expires 2001; President of Garden
Acres Ace Hardware, Longmont,
Colorado since January, 1991.
D. William Hagan 43 Director since June, 1997; term
expires 2003; President of Hagan
Ace Hardware, Orange Park, Florida
since February, 1980.
David F. Hodnik 53 President and Chief Executive
Officer effective January, 1996;
President and Chief Operating
Officer effective January 1, 1995.
Position(s) Currently Held
and Business Experience (for
Name Age the past 5 years)
---- --- ----------------------------
Paul M. Ingevaldson 55 Senior Vice President -
International and Technology
effective September, 1997; Vice
President - Corporate Strategy
and International Business
effective September, 1992.
Howard J. Jung 53 Chairman of the Board and Director
since June, 1998; term expires
2001; Vice President of Ace
Hardware Stores, Inc., Raleigh,
North Carolina since June, 1997.
Rita D. Kahle 44 Executive Vice President effective
October, 2000; Senior Vice
President - Wholesale effective
September, 1997; Vice President -
Finance effective January, 1994.
Richard A. Karp 49 Director since June, 2000;
President, Cole Hardware, San
Francisco, California since June,
1979.
David F. Myer 55 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.
Mario R. Nathusius 57 Director since June, 1998; term
expires 2001; President of Cemaco
S.A. Guatemala City, Guatemala
since March, 1978.
Fred J. Neer 61 Vice President - Human Resources
effective April, 1989.
Ken L. Nichols 52 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 55 Director since June, 1999; term
expires 2002; Vice President of
Stine, Inc., Sulphur, Louisiana
since September, 1976.
Our By-laws provide that our Board shall have between 9 and 12
directors. A minimum of 9 directors must be dealer directors. A
maximum of two directors may be non-dealer directors. Non-dealer
directors cannot exceed 25% of the total number of directors in office
at any one time. Non-dealer directors may (but do not have to be)
shareholders of ours who are in the retail hardware business. Our By-
laws provide for three classes of directors who are to be elected for
staggered 3-year terms, except that one director who would not
otherwise be eligible for reelection in 2001 may be 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 2001 annual stockholders meeting to be held on June
4, 2001 appears below:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut,
Rhode Island, New York, Pennsylvania, New Jersey;
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee,
North Carolina, South Carolina, District of Columbia, Ohio;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Indiana, Illinois, Michigan, Wisconsin;
Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana,
Nebraska, North Dakota, South Dakota, Utah, Wyoming;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona;
Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska
Under the procedure required by our By-laws, the following
directors have been selected as nominees for reelection as dealer
directors at the 2001 annual stockholders meeting:
Nominee Age Class Region Term
------- --- ----- ------ ----
Daniel L. Gust 51 Third 5 3 years
Howard J. Jung 53 First N/A* 2 years
*Non-dealer director
The person named below has been selected as a nominee for election
to the Board for the first time at the 2001 annual meeting as a dealer
director of the class, from the region and for the term indicated:
Nominee Age Class Region Term
------- --- ----- ------ ----
David S. Ziegler 45 Third At large 3 years
Non-dealer directors and dealer directors at large are not elected
from particular geographic regions.
Article IV of our By-laws has information about the qualifications
for membership on the Board of Directors, the terms of directors, the
limitations on the total period of time that a director may hold
office, the procedure for Nominating Committees to select candidates
and nominees for election to the Board of Directors and the procedure
for filling vacancies on the Board if one occurs during an unexpired
term.
None of the events described under Item 401(f) of Regulation S-K
occurred during the past 5 years for any of our directors, nominees
for directorships or for any of our executive or staff officers.
Item 11. Executive Compensation
Below is information about the cash compensation that we paid to
our five highest paid executive officers earning over $100,000 for
their services in all capacities to us and our subsidiaries during
fiscal years 2000, 1999 and 1998:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Name (3)
and (2) All Other
Principal (1) Long-Term Compen-
Position Year Salary($) Bonus($) Payouts($) sation($)
-------- ---- --------- -------- ---------- ---------
David F. Hodnik 2000 $630,000 $ 56,700 $533,829 $117,568
President and Chief 1999 600,000 - 478,104 187,730
Executive Officer 1998 600,000 - 230,268 151,997
Rita D. Kahle 2000 $298,000 $103,704 $ 85,921 $ 51,455
Executive Vice President 1999 285,000 128,685 77,826 64,536
1998 270,000 114,372 65,409 53,852
Paul M. Ingevaldson 2000 $295,000 $ 85,550 $ 89,479 $ 49,013
Senior Vice President, 1999 287,000 99,662 85,242 73,401
International and Technology 1998 279,000 85,430 76,590 64,702
Michael C. Bodzewski 2000 $270,500 $ 87,570 $ 79,437 $ 45,382
Vice President, Marketing, 1999 261,000 94,472 73,923 57,346
Advertising, Retail Development 1998 248,000 85,450 63,681 53,658
and Company Stores
David F. Myer 2000 $263,000 $ 80,215 $ 73,967 $ 42,994
Senior Vice President, 1999 245,000 92,453 69,180 53,849
Retail Support and Logistics 1998 230,000 72,726 60,474 44,381
(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 25% to 35% of their respective salary in 1998,
30% to 40% of their respective salary in 1999 and 35% to 45% of
their respective salary in 2000. 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 2000, to be
awarded in 2001, were $531,474, $100,779, $91,182, $86,382 and
$99,843 for Messrs. Hodnik, Ingevaldson, Bodzewski, Myer and Ms.
Kahle, respectively.
(3) Includes contributions to the Company's Profit Sharing Plus Plan
and contributions to the Company's Retirement Benefits Replacement
Plan. All active employees are eligible to participate in the
Company's profit sharing plan after one year of service. Those
active employees covered by a collective bargaining agreement
regarding retirement benefits, which were the subject of good faith
bargaining, are not eligible if such agreement does not include them
in the plan. For the year 2000, the Company contributed a maximum of
9.6% of each participant's eligible compensation to the Profit Sharing
Plus Plan (8.6% profit sharing and 1% Company 401-K match). During the
year 2000, $16,320 was contributed to the Company's Profit Sharing Plus
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 Profit Sharing Plan may be reduced by reason of the
limitations on contributions and benefits imposed by any current or
future provisions of the U.S. Internal Revenue Code or other
federal legislation. During the year 2000, amounts were contributed
to the Company's Retirement Benefit Replacement Plan $101,248 for
Mr. Hodnik, $32,693 for Mr. Ingevaldson, $29,062 for Mr. Bodzewski,
$26,674 for Mr. Myer and $35,135 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,
terminating December 31, 2002. Ms. Kahle and Mr. Myer are employed
under contracts, each commencing January 1, 2000 for respective terms
of two years, terminating December 31, 2001. Mr. Bodzewski is employed
under a contract commencing April 1, 2000 for a term of two years,
terminating March 31, 2002. The contracts provide for annual
compensation effective January 1, 2001 of $649,000, $305,000,
$313,000, $278,000 and $278,000, 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 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 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 it's long-term strategies, as well as our knowledge of the
capabilities and performance of the Company and of the executives. We
stress long-term measured results, focus on team work, accepting
prudent risks and are strongly committed to fulfilling
retailer/consumer needs.
We believe that our retailers (shareholders) are best served by
running 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 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 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's
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 an annual retail sales award.
Compensation of Directors
Effective January 1, 2001, and January 1, 2000, each member of the
Board of Directors (other than the Chairman of the Board) receives a
monthly fee of $2,917 and $2,833, respectively, for their services.
Effective January 1, 1998 each member of the Board of Directors (other
than the Chairman of the Board) receives $1,500 per Board of Directors
meeting attended. In addition, effective January 1, 1999, each Board
of Director Committee Chairperson received $750 per meeting chaired,
which was increased to $1,000 effective January 1, 2000. Mr. Jung is
paid a total annual fee of $150,000 effective June 1, 2000, and
$130,000 effective June 1, 1999 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 $200 per diem compensation for special committee
meetings and nominating committee regional trips attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No shares of our stock are held by any of our officers except for
the shares held by Mr. Jung. He is a director, but his position as
Chairman of the Board is also an executive officer position under
Article VIII Section 1 of our By-laws. We are not aware of anyone who
holds more than five percent of our outstanding voting stock, whether
in their own names, or on behalf of someone else.
The table below shows the shares of our Class B and Class C Stock
that is held (directly or indirectly), by our directors, officers and
nominees for directorships as of February 16, 2001:
Class B Stock Owned Class C Stock Owned
------------------- -------------------
Number Percent Number Percent
of Shares of Class of Shares of Class
--------- -------- --------- --------
Jennifer C. Anderson 4 .180 3,660 .148
Richard F. Baalmann, Jr. 4 .180 2,988 .121
Eric R. Bibens II - -- 1,071 .043
Lawrence R. Bowman 4 .180 2,732 .110
James T. Glenn 4 .180 9,310 .376
Daniel L. Gust - -- 926 .037
D. William Hagan - -- 1,629 .066
Howard J. Jung - -- 555 .022
Richard A. Karp - -- 4,360 .176
Mario R. Nathusius - -- 4,779 .193
Richard W. Stine 4 .180 8,289 .334
David S. Ziegler - -- 9,437 .381
--------- -------- --------- --------
All above directors and
officers as a group 20 .900 49,736 2.007
========= ======== ========= ========
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 2000 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 any special terms in connection including but not limited to
our lending programs, with these transactions or any benefits that
were not available to the other cooperative members that we supply.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a)1. Financial Statements
The financial statements listed in the accompanying index (page
F-1) to the consolidated financial statements are filed as part of
this annual report.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits listed on the accompanying index to exhibits (pages
E-1 through E-7) are filed as part of this annual report.
(b)Reports on Form 8-K
No Form 8-K was required to be filed during the fourth quarter of
fiscal 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ACE HARDWARE CORPORATION
By HOWARD J. JUNG
Howard J. Jung
Chairman of the Board and Director
DATED: March 22, 2001
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.
Signature Title Date
HOWARD J. JUNG Chairman of the Board March 22, 2001
Howard J. Jung and Director
DAVID F. HODNIK President and Chief March 22, 2001
David F. Hodnik Executive Officer
RITA D. KAHLE Executive Vice President March 22, 2001
Rita D. Kahle (Principal Financial and
Accounting Officer)
Jennifer C. Anderson, Richard F. Directors
Baalmann, Jr., Eric R. Bibens II,
Lawrence R. Bowman, James T. Glenn,
Daniel L. Gust, D. William Hagan,
Richard A. Karp, Mario R. Nathusius,
and Richard W. Stine
*By DAVID F. HODNIK March 22, 2001
David F. Hodnik
*By RITA D. KAHLE March 22, 2001
Rita D. Kahle
*Attorneys-in-fact
INDEX TO EXHIBITS
Exhibits
Enclosed Description
- -------- -----------
3-A Copy of Restated Certificate of Incorporation of the Registrant,
as amended, through June 3, 1996 filed as Exhibit 3-A the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 22, 2001.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
24 Powers of Attorney.
Exhibits
Incorporated
by Reference Description
- ------------ -----------
3-B Copy of By-laws of the Registrant as amended through
December 6, 2000 included as Appendix A to the
Prospectus constituting a part of the Post-Effective
Amendment No. 6 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) filed on or about
March 22, 2001 and incorporated herein by reference.
4-A Specimen copy of Class B Stock certificate as revised as
of November, 1984 filed as Exhibit 4-A to Post-Effective
Amendment No. 2 to the Registrant's Form S-1
Registration Statement (Registration No. 2-82460) on
March 15, 1985 and incorporated herein by reference.
4-B Specimen copy of Patronage Refund Certificate as revised
in 1988 filed as Exhibit 4-B to Post-Effective Amendment
No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-4299) on March 29, 1988
and incorporated herein by reference.
4-C Specimen copy of Class A Stock certificate as revised in
1987 filed as Exhibit 4-C to Post-Effective Amendment
No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-4299) on March 29, 1988
and incorporated herein by reference.
4-D Specimen copy of Class C Stock certificate filed as
Exhibit 4-I to the Registrant's Form S-1 Registration
Statement (Registration No. 2-82460) on March 16, 1983
and incorporated herein by reference.
4-E Copy of current standard form of Subscription for
Capital Stock Agreement to be used for dealers to
subscribe for shares of the Registrant's stock in
conjunction with new membership agreements submitted to
the Registrant filed as Exhibit 4-L to Post-Effective
Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or
about March 23, 1994 and incorporated herein by
reference.
4-F Copy of plan for the distribution of patronage dividends
with respect to purchases of merchandise made from the
Registrant 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.
Exhibits
Incorporated
by Reference Description
- ------------ -----------
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
filed as Exhibit 10-A to Post-Effective Amendment No. 3
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 18, 1998
and incorporated herein by reference.
10-B Copy of First Amendment to Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted
on August 19, 1997 filed as Exhibit 10-B to Post-
Effective Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by
reference.
10-C Copy of First Amendment to Ace Hardware Corporation
Deferred Compensation Plan adopted on August 19, 1997
filed as Exhibit 10-C to Post-Effective Amendment No. 3
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-D Copy of Restated PREP Plan (formerly known as Executive
Supplemental Benefit Plans) adopted 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 the Ace Hardware Corporation Restated Officer
Incentive Plan effective January 1, 1999 filed as
Exhibit 10-E to Post-Effective Amendment No. 4 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1999
and incorporated herein by reference.
10-F Copy of Second Modification of Amended and Restated Note
Purchase and Private Shelf Agreement dated as of August
23, 1996 as amended by the First Modification of Amended
and Restated Purchase and Private Shelf Agreement dated
as of April 2, 1997 with The Prudential Insurance Company
of America filed as Exhibit 10-F to Post-Effective
Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial
Corp. dated December 17, 1997 establishing a $10,000,000
discretionary leasing facility for the purchase of land
and construction of retail hardware stores filed as
Exhibit 10-G to Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 18, 1998
and incorporated herein by reference.
10-H Copy of Form of Executive Officer Employment Agreement
effective January 1, 1996 filed as Exhibit 10-a-17 to
Post-Effective Amendment No. 1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191)
on or about March 11, 1996 and incorporated herein by
reference.
Exhibits
Incorporated
by Reference Description
- ------------ -----------
10-I Copy of Note Purchase and Private Shelf Agreement with
The Prudential Insurance Company of America dated
September 27, 1991 securing 8.74% Senior Series A Notes
in the principal sum of $20,000,000 with a maturity date
of July 1, 2003 filed as Exhibit 10-A-q to the Registrant's
Form S-2 Registration Statement (Registration No. 33-46449)
on March 23, 1992 and incorporated herein by reference.
10-J Copy of current standard form of Ace Hardware
Corporation International Franchise Agreement filed as Exhibit
10-J to Post-Effective Amendment No. 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 March 23, 1994 and
incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop
facility of Registrant in Downers Grove, Illinois filed
as Exhibit 10-N to Post-Effective Amendment No. 3 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 18, 1998
and incorporated herein by reference.
10-O Copy of Lease dated September 30, 1992 for general
offices of the Registrant in Oak Brook, Illinois filed
as Exhibit 10-a-u to the Post-Effective Amendment No.1
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on March 22, 1993 and
incorporated herein by reference.
10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of
January 30, 1998 for the Registrant's redistribution
center in 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 March 23, 1994 and incorporated herein by reference.
Exhibits
Incorporated
by Reference Description
- ------------ -----------
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.
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 Agreement dated January 6, 1995 between Ace
Hardware Corporation and Roger E. Peterson filed as
Exhibit 10-a-9 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March
23, 1995 and incorporated herein by reference.
10-W Copy of Lease dated July 28, 1995 between A.H.C. Store
Development Corp. and Tri-R Corporation for retail
hardware store premises located in Yorkville, Illinois
filed as Exhibit 10-a-11 to Post-Effective Amendment No.
1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996
and incorporated herein by reference.
10-X Copy of Lease dated October 31, 1995 between Brant Trade
& Industrial Park, Inc. and Ace Hardware Canada Limited
for warehouse space in Brantford, Ontario, Canada filed
as Exhibit 10-a-12 to Post-Effective Amendment No. 1 to
the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996
and incorporated herein by reference.
10-Y Copy of Lease dated November 27, 1995 between 674573
Ontario Limited and Ace Hardware Canada Limited for
general office space in Markham, Ontario, Canada filed
as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to
the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996
and incorporated herein by reference.
10-Z Copy of Executive Healthcare Plan adopted by the Board
of Directors of the Registrant on August 25, 1998 filed
as Exhibit 10-Z to Post-Effective Amendment No. 4 to the
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1999
and incorporated herein by reference.
10-a-1 Copy of 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.
Exhibits
Incorporated
by Reference Description
- ------------ -----------
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.
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 Second Amendment to the Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted
on December 8, 1998 and effective January 1, 1999 filed
as Exhibit 10-a-6 to Post-Effective Amendment No. 4 to
the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1999
and incorporated herein by reference.
10-a-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 Agreement dated October 29, 1999 between
Registrant and William A. Loftus filed as Exhibit 10-a-
10 to Post-Effective Amendment No. 5 to Registrant's
Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 15, 2000 and incorporated
herein by reference.
10-a-8 Copy of Third Amendment to Restated Ace Hardware
Corporation Retirement Benefits Replacement Plan adopted
December 8, 1999 and effective January 1, 2000 filed as
Exhibit 10-a-11 to Post-Effective Amendment No. 5 to
Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 2000
and incorporated herein by reference.
10-a-9 Copy of First Amendment to Ace Hardware Corporation
Restated Officer Incentive Plan adopted on December 8,
1999 and effective January 1, 2000 filed as Exhibit 10-a-
12 to Post-Effective Amendment No. 5 to Registrant's
Form S-2 Registration Statement (Registration No. 33-
58191) on or about March 15, 2000 and incorporated
herein by reference.
10-a-10 Copy of Second Amendment to Ace Hardware Corporation
Restated Officer Incentive Plan adopted on December 6,
2000 and effective January 1, 2001 filed as Exhibit 10-a-
10 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-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.
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.
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, neither our annual
report for fiscal year 2000 nor any proxy soliciting materials for our
2001 annual meeting have been sent to our shareholders. Copies of that
annual report as well as our proxy soliciting materials will be sent
to our shareholders and furnished to the Securities and Exchange
Commission at a later date.
Item 14(a) Index to Consolidated Financial Statements and Financial
Statement Schedules
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 30, 2000
and January 1, 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 30, 2000 F-5
Consolidated Statements of Member Dealers' Equity for
each of the years in the three-year period ended
December 30, 2000 F-6
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 30, 2000 F-7
Notes to Consolidated Financial Statements F-8
All schedules have been omitted because the required information is
not present or is not present in amounts sufficient to require
submission of the schedule or the required information is included in
the consolidated financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace
Hardware Corporation and subsidiaries as of December 30, 2000 and
January 1, 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 30, 2000. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 30, 2000
and January 1, 2000, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
January 26, 2001
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 30, 2000 and January 1, 2000
ASSETS
December 30, January 1,
2000 2000
------------- ------------
(000's omitted)
Current assets:
Cash and cash equivalents $ 24,644 $ 35,422
Short-term investments 12,772 -
Receivables:
Trade 316,339 317,144
Other 59,090 56,360
------------- ------------
375,429 373,504
Less allowance for doubtful receivables (2,458) (2,625)
------------- ------------
Net receivables 372,971 370,879
Inventories (Note 2) 395,565 373,090
Prepaid expenses and other current assets 15,105 13,341
------------- ------------
Total current assets 821,057 792,732
------------- ------------
Property and equipment (Note 10):
Land 16,791 18,210
Buildings and improvements 211,024 188,795
Warehouse equipment 90,250 79,573
Office equipment 99,560 94,377
Manufacturing equipment 14,590 14,360
Transportation equipment 16,888 16,426
Leasehold improvements 17,445 17,400
Construction in progress 2,054 14,456
------------- ------------
468,602 443,597
Less accumulated depreciation and
amortization (206,712) (184,419)
------------- ------------
Net property and equipment 261,890 259,178
Other assets 39,226 29,574
------------- ------------
$ 1,122,173 $ 1,081,484
============= ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 30, 2000 and January 1, 2000
LIABILITIES AND MEMBER DEALERS' EQUITY
December 30, January 1,
2000 2000
------------- ------------
(000's omitted)
Current liabilities:
Current installments of long-term debt
(Note 4) $ 6,904 $ 4,067
Short-term borrowings (Note 3) 81,500 49,869
Accounts payable 448,766 449,497
Patronage dividends payable in cash (Note 5) 34,764 38,173
Patronage refund certificates payable (Note 5) 4,795 373
Accrued expenses 61,587 69,990
------------- ------------
Total current liabilities 638,316 611,969
Long-term debt (Note 4) 105,891 111,895
Patronage refund certificates payable (Note 5) 68,385 55,257
Other long-term liabilities 24,923 22,400
------------- ------------
Total liabilities 837,515 801,521
------------- ------------
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,783 3,856
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 250,480 241,226
Class C Stock of $100 par value, issuable
to dealers for patronage dividends 24,267 21,648
Additional stock subscribed, net 351 498
Retained earnings (deficit) (5,551) 594
Contributed capital 13,485 13,485
Accumulated other comprehensive income (loss) (162) 291
------------- ------------
293,152 288,097
Less: Treasury stock, at cost (8,494) (8,134)
------------- ------------
Total member dealers' equity 284,658 279,963
Commitments (Notes 6 and 10)
Total liabilities and member dealers' ------------- ------------
equity $ 1,122,173 $ 1,081,484
============= ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
---------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------- ------------ ------------
(000's omitted)
Net sales $ 2,945,151 $ 3,181,802 $ 3,120,380
Cost of sales 2,665,614 2,908,138 2,879,296
------------- ------------ ------------
Gross profit 279,537 273,664 241,084
------------- ------------ ------------
Operating expenses:
Warehouse and distribution 32,516 28,122 27,204
Selling, general and administrative 85,774 87,763 83,228
Retail success and development 73,132 57,149 32,907
------------- ------------ ------------
Total operating expenses 191,422 173,034 143,339
------------- ------------ ------------
Operating income 88,115 100,630 97,745
Interest expense (Note 12) (21,803) (16,651) (17,412)
Other income, net 14,207 10,416 9,363
Income taxes (Note 7) (127) (1,833) (1,736)
------------- ------------ ------------
Net earnings $ 80,392 $ 92,562 $ 87,960
============= ============ ============
Retained earnings at beginning of year $ 594 $ 3,292 $ 3,354
Net earnings 80,392 92,562 87,960
Patronage dividends (Note 5) (86,537) (95,260) (88,022)
------------- ------------ ------------
Retained earnings (deficit) at end of year $ (5,551) $ 594 $ 3,292
============= ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
---------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------- ------------ ------------
(000's omitted)
Net earnings $ 80,392 $ 92,562 $ 87,960
Unrealized gains on securities 458 - -
Foreign currency translation, net (911) 1,109 (483)
------------- ------------ ------------
Comprehensive income $ 79,939 $ 93,671 $ 87,477
============= ============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 30, 2000 (000's omitted)
Class C Accum-
Stock ulated
Issuable to Other Comp-
Dealers for Additional Retained rehensive
Class A Class B Class C Patronage Stock Earnings Contributed Income/ Treasury
Stock Stock Stock Dividends Subscribed* (deficit) Capital (loss) Stock Total
----- ----- ------ --------- ----------- --------- ------- -------- ----- ------
Balance at December 31, 1997 $3,874 $6,499 $213,609 $22,366 $ 383 $ 3,354 $ 3,295 $ (335) $(7,566) $245,479
Net earnings - - - - - 87,960 - - - 87,960
Net payments on subscriptions - - - - 1,463 - - - - 1,463
Patronage financing deductions - - - (485) - - - - - (485)
Stock issued 215 - 23,526 (21,881) (1,375) - - - - 485
Stock repurchased - - - - - - - - (11,055) (11,055)
Stock retired (243) - (10,564) - - - - - 10,807 -
Patronage dividends issuable - - - 26,170 - - - - - 26,170
Patronage dividends payable - - - - - (88,022) - - - (88,022)
Accumulated other
comprehensive income - - - - - - - (483) - (483)
----- ----- ------ --------- ----------- --------- ------- -------- ------- -------
Balance at January 2, 1999 3,846 6,499 226,571 26,170 471 3,292 3,295 (818) (7,814) 261,512
Net earnings - - - - - 92,562 - - - 92,562
Net payments on subscriptions - - - - 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 - - - - - - - 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 - - - - - - - (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
====== ====== ======== ========= =========== ========= ======= ======== ======== =======
*Additional stock subscribed is comprised of the following amounts at
January 2, 1999, January 1, 2000 and December 30, 2000:
1998 1999 2000
---- ---- ----
Class A Stock $ 60 $ 118 $ 41
Class B Stock - - -
Class C Stock 955 1,452 975
----- ----- -----
1,015 1,570 1,016
Less unpaid portion 544 1,072 665
----- ----- -----
$ 471 $ 498 $ 351
===== ===== =====
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------ ----------- -----------
(000's omitted)
Operating Activities:
Net earnings $ 80,392 $ 92,562 $ 87,960
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 32,273 23,396 21,536
Decrease (increase) in accounts receivable, net (11,569) 13,095 (44,481)
Decrease (increase) in inventories (22,475) (38,685) 4,104
Decrease (increase) in prepaid expenses and
other current assets (1,764) 1,805 (1,531)
Increase (decrease) in accounts payable and
accrued expenses (9,134) (1,101) 42,264
Increase in other long-term liabilities 2,523 3,718 3,960
------------- ------------ ------------
Net Cash Provided by Operating Activities 70,246 94,790 113,812
------------- ------------ ------------
Investing Activities:
Purchase of short-term investments (12,314) - -
Purchase of property and equipment (44,649) (43,074) (26,554)
Proceeds from sale of property and equipment 9,664 349 8,148
Increase in other assets (10,563) (21,160) (3,383)
------------- ------------ ------------
Net Cash Used in Investing Activities (57,862) (63,885) (21,789)
------------- ------------ ------------
Financing Activities:
Proceeds (payments) of short-term borrowings 31,631 24,869 (17,000)
Proceeds from notes payable - - 26,117
Payments on long-term debt (3,167) (6,892) (7,593)
Payment of cash portion of patronage dividend (38,173) (34,826) (29,943)
Payments of patronage refund certificates (479) (21,557) (14,282)
Proceeds from sale of common stock 1,830 1,531 1,463
Repurchase of common stock (14,804) (12,509) (11,055)
------------- ------------ ------------
Net Cash Used in Financing Activities (23,162) (49,384) (52,293)
------------- ------------ ------------
Increase (decrease) in Cash and Cash Equivalents (10,778) (18,479) 39,730
Cash and Cash Equivalents at beginning of year 35,422 53,901 14,171
------------- ------------ ------------
Cash and Cash Equivalents at end of year $ 24,644 $ 35,422 $ 53,901
============= ============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) The Company and Its Business
Ace Hardware Corporation (the Company) operates as a wholesaler of
hardware and related products, and manufactures paint products.
As a dealer-owned cooperative, the Company distributes substantially
all of its patronage sourced earnings in the form of patronage
dividends to member dealers based on their volume of merchandise purchases.
(b) Cash Equivalents 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. The Company
has other investments that are accounted for at cost.
(d) Receivables
Receivables from dealers include amounts due from the sale of
merchandise and special equipment used in the operation of dealers'
businesses. Other receivables are principally amounts due from
suppliers for promotional and advertising allowances. The Company
recognizes revenue from product sales upon 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 ex-
change 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. During 1999 the Company
settled all outstanding foreign currency contracts that resulted in
a gain of approximately $2.0 million reflected within accumulated
other comprehensive income at December 30, 2000 and January 1, 2000.
Foreign currency translation adjustments, net of gains on foreign
exchange contracts, are reflected in the accompanying Consolidated
Statement of Comprehensive Income for 2000, 1999 and 1998. The Company
does not have any outstanding foreign exchange forward contracts at
December 30, 2000 or January 1, 2000.
(h) Financial Instruments
The carrying value of assets and liabilities that meet the
definition of a financial instrument included in the accompanying
Consolidated Balance Sheets approximate fair value.
(i) Retirement Plans
The Company has retirement plans covering substantially all non-
union employees. Costs with respect to the noncontributory pension
plans are determined actuarially and consist of current costs and
amounts to amortize prior service costs and unrecognized gains and
losses. The Company contribution under the profit sharing plan is
determined annually by the Board of Directors.
(j) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(k) Fiscal Year
Effective January 1, 1998 the Company changed its fiscal year from
December 31st to the Saturday nearest December 31st. Accordingly,
2000, 1999 and 1998 ended on December 30, 2000, January 1, 2000 and
January 2, 1999, respectively.
(l) Reclassifications
Certain financial statement reclassifications have been made to prior
year amounts to conform to comparable classifications followed in
2000.
(2) Inventories
Inventories consist primarily of merchandise inventories.
Substantially all of the Company's domestic inventories are valued on
the last-in, first-out (LIFO) method; the excess of replacement cost
over the LIFO value of inventory was approximately $62,502,000 and
$61,483,000 at December 30, 2000 and January 1, 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 2000 and 1999. The
maximum amount outstanding at any month-end during the period was
$147.0 million in 2000 and $108.0 million in 1999. The weighted
average interest rate effective as of December 30, 2000 and January 1,
2000 was 7.18% and 6.84%, respectively. Short-term borrowings
outstanding as of December 30, 2000 and January 1, 2000 were $81.5 and
$49.9 million, respectively. At December 30, 2000 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 $15.0
million in uncommitted lines. The aggregate unused line of credit
available at December 30, 2000 and January 1, 2000 was $108.5 million
and $160.1 million, respectively. At December 30, 2000 the Company had
no compensating balance requirements.
(4) Long-Term Debt
Long-term debt is comprised of the following:
December 30, January 1,
2000 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% $ 5,946 $ 8,108
$20,000,000 due in quarterly installments of
$952,400 with interest payable quarterly at a
fixed rate of 6.89% - 952
$30,000,000 due in semi-annual installments of
$2,000,000 commencing June 22, 2001 with interest
payable quarterly at a fixed rate of 6.47% 30,000 30,000
$20,000,000 due in quarterly installments of
$714,300 commencing September 15, 2004 with interest
payable quarterly at a fixed rate of 7.49% 20,000 20,000
$30,000,000 due in annual installments of
$6,000,000 commencing March 25, 2005 with interest
payable quarterly at a fixed rate of 7.55% 30,000 30,000
$25,000,000 due in annual installments of
$5,000,000 commencing February 9, 2006 with interest
payable quarterly at a fixed rate of 6.61% 25,000 25,000
Liability under capitalized leases (see Note 10) 83 510
Installment notes with maturities through 2004
with various interest rates 1,766 1,392
----------- ----------
112,795 115,962
Less current installments (6,904) (4,067)
----------- ----------
$ 105,891 $ 111,895
=========== ==========
Aggregate maturities of long-term debt are $6,904,000, $6,715,000,
$5,975,000, $5,629,000 and $12,857,000 in 2001 through 2005,
respectively, and $74,715,000 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 2000, 1999 and 1998 follows:
Subordinated Class Patronage Total
Cash Refund C Other Financing Patronage
Portion Certificates Stock Property Deductions Dividends
------- ------------ ----- -------- ---------- ---------
(000's omitted)
2000 $34,764 $18,029 $24,267 $ - $ 9,477 $86,537
1999 38,173 12,249 21,648 10,190 13,000 95,260
1998 34,826 15,720 26,170 - 11,306 88,022
Patronage dividends are allocated on a fiscal year basis with
issuance in the following year.
The patronage refund certificates outstanding or issuable at
December 30, 2000 are payable as follows:
Interest
January 1, Amount Rate
---------- ------ --------
(000's omitted)
2001 $ 4,795 6.00%
2002 9,142 6.25
2003 13,370 6.00
2004 15,348 6.00
2005 12,496 6.25
2006 18,029 6.50
(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 30, 2000 plan assets in the Employees' Retirement Income Plan
and Trust were held primarily in equities, mutual funds and group
annuity contracts.
Pension expense for 2000, 1999 and 1998 included the following
components:
December 30, January 1, January 2,
2000 2000 1999
------------ ---------- ----------
(000's omitted)
Service cost - benefits earned
during the period $ 52 $ 309 $ 293
Interest cost on projected
benefit obligation 112 399 428
Expected return on plan assets (115) (733) (710)
Net amortization and deferral (31) 125 87
------------ ---------- ----------
Net periodic pension expense $ 18 $ 100 $ 98
============ ========== ==========
The following table sets forth the funded status of the plans and
amounts recognized in the Company's Consolidated Balance Sheets at
December 30, 2000 and January 1, 2000:
December 30, January 1,
2000 2000
------------ ----------
(000's omitted)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,412 $ 5,341
Service cost 52 309
Interest cost 112 399
Actuarial gains (119) (213)
Benefits paid (3,801) (424)
------------ ----------
Benefit obligation at end of year 1,656 5,412
------------ ----------
Change in plan assets:
Fair value of plan assets at beginning
of year 10,293 9,448
Actual return on plan assets 29 1,198
Employer contribution (reversion) (4,961) 71
Benefits paid (3,801) (424)
------------ ----------
Fair value of plan assets at end of year 1,560 10,293
------------ ----------
Funded status (96) 4,881
Unrecognized transition asset (65) (78)
Unamortized prior service cost (581) (583)
Unrecognized net actuarial losses (gains) 688 (3,634)
------------ ----------
Prepaid (accrued) pension cost $ (54) $ 586
============ ==========
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.50%
in 2000 and 7.75% in 1999. The related expected long-term rate of
return was 8.0% in 2000 and 1999. The rate of increase in future
compensation was projected using actuarial salary tables plus 1.0% in
2000 and 1999.
The Company also participates in several multi-employer plans
covering union employees. Amounts charged to expense and contributed
to the plans totaled approximately $222,000, $233,000 and $216,000 in
2000, 1999 and 1998, respectively.
The Company's profit sharing plan contribution for 2000, 1999 and
1998 was approximately $14,586,000, $15,071,000 and $13,746,000,
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 2000, 1999 and 1998 provisions (benefit) for federal
income taxes were $(162,000), $1,000,000 and $1,105,000, respectively,
and for state income taxes were $289,000, $833,000 and $631,000,
respectively.
The tax benefit for the current period results from a combination
of losses in nonpatronage areas and from the offset of available tax
credits against federal income tax liability. All available tax
credits have been utilized. There are no available tax credits to
carry forward into future periods.
The Company made tax payments of $1,095,000, $2,755,000 and
$1,374,000 during 2000, 1999 and 1998, respectively.
(8) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares at
-------------------
December 30, January 1,
2000 2000
------------ ----------
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,783 3,856
Class B Stock, nonvoting, redeemable at not less than
twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 2,252 2,432
Treasury stock 4,247 4,067
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,504,796 2,412,255
Issuable as patronage dividends 242,671 216,480
Additional Stock Subscribed:
Class A Stock 41 118
Class B Stock - -
Class C Stock 9,750 14,520
At December 30, 2000 and January 1, 2000 there were no common
shares reserved for options, warrants, conversions or other
rights; nor were any options granted or exercised during the two
years then ended.
Member dealers may subscribe for the Company's stock in various
prescribed combinations. Only one share of Class A Stock may be owned
by a dealer with respect to the first member retail outlet controlled
by such dealer. Only four shares of Class B Stock may be owned by a
dealer with respect to each retail outlet controlled by such dealer,
but only if such outlet was a member of the Company on or before
February 20, 1974. An appropriate number of shares of Class C Stock
must be included in any subscription by a dealer in an amount to
provide that such dealer has a par value of all shares subscribed for
equal to $5,000 for each retail outlet. Unregistered shares of Class C
Stock are also issued to dealers in connection with patronage
dividends. No dividends can be declared on any shares of any class of
the Company's Stock.
Upon termination of the Company's membership agreement with any
retail outlet, all shares of stock of the Company held by the dealer
owning or controlling such outlet, must be sold back to the Company,
unless a transfer of such shares is made to another party accepted by
the Company as a member dealer with respect to the same outlet.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A Class A share is issued to a member dealer only when the share
subscribed has been fully paid. Class B and Class C shares are only
issued when all such shares subscribed with respect to a retail outlet
have been fully paid. Additional stock subscribed in the accompanying
statements represents the par value of shares subscribed, reduced by
the unpaid portion.
All shares of stock are currently issued and repurchased at par
value, except for Class B Stock which is repurchased at twice its par
value, or $2,000 per share. Upon retirement of Class B shares held in
treasury, the excess of redemption price over par is allocated equally
between contributed capital and retained earnings.
Treasury stock transactions during 1998, 1999 and 2000 are
summarized below:
Shares Held in Treasury
-----------------------
Class A Class B Class C
----------- ----------- -----------
Balance at December 31, 1997 - 3,783 -
Stock issued - - -
Stock repurchased 243 124 105,639
Stock retired (243) - (105,639)
----------- ----------- -----------
Balance at January 2, 1999 - 3,907 -
Stock issued - - -
Stock repurchased 228 160 119,614
Stock retired (228) - (119,614)
----------- ----------- -----------
Balance at January 1, 2000 - 4,067 -
Stock issued - - -
Stock repurchased 307 180 141,365
Stock retired (307) - (141,365)
----------- ----------- -----------
Balance at December 30, 2000 - 4,247 -
=========== =========== ===========
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(9) Segments
The Company is principally engaged as a wholesaler of hardware and
related products and 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 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 1,024,493 68,130 48,775 (19,225) 1,122,173
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
January 2, 1999
---------------
(000's omitted)
Elimination of
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
Net sales from external customers $3,086,913 $ 20,798 $12,669 - $3,120,380
Intersegment sales 13,701 93,536 - (107,237) -
Interest expense 17,412 1,464 244 (1,708) 17,412
Depreciation and amortization 19,808 1,392 336 - 21,536
Segment profit (loss) 78,442 10,364 (382) (464) 87,960
Identifiable segment assets 963,354 54,215 39,030 (9,019) 1,047,580
Expenditures for long-lived assets 21,849 937 3,768 - 26,554
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Net sales and long-lived assets by geographic region based upon
customer location for 2000, 1999 and 1998 were as follows:
December 30, 2000 January 1, 2000 January 2, 1999
----------------- --------------- ---------------
(000's omitted)
Net sales:
United States $2,748,740 $2,975,567 $2,903,906
Foreign countries 196,411 206,235 216,474
----------------- --------------- ---------------
Total $2,945,151 $3,181,802 $3,120,380
================= =============== ===============
Long-lived assets, net:
United States $ 258,802 $ 254,747 $ 234,543
Foreign countries 3,088 4,431 5,306
----------------- --------------- ---------------
Total $ 261,890 $ 259,178 $ 239,849
================= =============== ===============
(10) Commitments
Leased property under capital leases is included as "Property and
Equipment" in the Consolidated Balance Sheets as follows:
December 30, January 1,
2000 2000
------------ ----------
(000's omitted)
Data processing equipment $3,598 $3,598
Less: accumulated depreciation and amortization (3,252) (2,711)
------------ ----------
$ 346 $ 887
============ ==========
The Company rents buildings and warehouse, office and certain other
equipment under capital and operating leases. At December 30, 2000
annual minimum rental commitments under leases that have initial or
remaining noncancelable terms in excess of one year are as follows:
Year Ending, Capital Operating
- ------------ ------- ---------
(000's omitted)
2001 $ 93 $ 22,646
2002 - 17,811
2003 - 13,304
2004 - 11,153
2005 - 9,070
Thereafter - 26,183
------- ---------
Total minimum lease payments 93 $100,167
Less amount representing interest (10) =========
-------
Present value of total minimum lease payments $ 83
=======
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
All leases expire prior to 2014. Under certain leases, the Company
pays real estate taxes, insurance and maintenance expenses in addition
to rental expense. Management expects that in the normal course of
business, leases that expire will be renewed or replaced by other
leases. Rent expense was approximately $45,514,000, $39,149,000 and
$37,023,000 in 2000, 1999 and 1998, respectively. Rent expense
includes $9,977,000, $7,352,000 and $6,004,000 in contingent rentals
paid in 2000, 1999 and 1998, 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 $76,372,000, $79,639,000 and $70,254,000 was
charged to operations in 2000, 1999 and 1998, respectively.
(12) Interest Expense
Interest paid was $20,256,000, $16,411,000 and $16,553,000 in 2000,
1999 and 1998, respectively, net of capitalized interest of $715,000
and $234,000 in 2000 and 1999.