UNITED STATES
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 2002 fiscal year ended December 28, 2002 Commission File No. 2-55860
For the fiscal year ended December 31, 1995
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 6052160523
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (708)area code: (630) 990-6600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
State the aggregate market value of the voting and nonvoting stock held by non-
affiliatesnon-affiliates of the Registrant. The Registrant'sThis
Company's shares are only issued only to and may be held only by, its dealer-stockholders, and thedealer-stockholders. All shares held by a dealer-stockholder are subject to repurchasethese stockholders can be
repurchased by the Registrant upon
termination ofCompany when the dealer-stockholder's membership agreement of a dealer-stockholder.terminates. Thus, there is no market for the Registrant's
these shares. The repurchase price for each share of Class A stock, the only voting stock issued by the
Registrant,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 23, 1996,17, 2003, the aggregate value of the Class A stockStock, Class B Stock
and Class C Stock held by non-
affiliatesnon-affiliates (dealer-stockholders) calculated on the basis of suchthis repurchase price was $3,893,000.
$275,876,900.
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. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X
No
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable
date (applicable only to corporation Registrants). Outstanding shares as of February 23,
1996:17, 2003:
Class A (voting) Stock, $1,000 par value 3,8933,594 shares
Class B (nonvoting) Stock, $1,000 par value 3,0321,928 shares
Class C (nonvoting) Stock, $ 100 par value 1,770,3462,684,269 shares
PART I
Item 1. Business
The terms "Ace," "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, by meansas the result of a
corporate merger, it succeeded tobecame the businesssuccessor 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 the Company had been conducted by the Illinois
corporation. The Company's principalAce. Our main executive offices are
located at 2200 Kensington Court, Oak Brook, Illinois 60521. Its60523. Our main telephone number is (708)(630) 990-6600. The Company functionsOur Internet
site address is http://www.acehardware.com. We make available free of charge our annual report on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K as soon as reasonably practicable after we file with or furnish such
documents to the Securities and Exchange Commission.
We operate primarily as a wholesaler of hardware and related products, and manufactureswe also manufacture paint products. Sales of theWe
mainly sell our products distributed by it are presently made primarily to individuals,
partnerships or corporations who are engaged in business as retailhardware dealers of hardware or related items and who have entered into Membership Agreements with us. These Membership Agreements
allow the Company entitling themhardware dealers to purchase merchandise and services from us and, in most cases, to license one or more of our
trademarks. (See the Company and to use the Company's
marks as provided therein.
The Company operatesheading "Business", subheading "Membership Agreements").
We operate on a cooperative basis and distributesdistribute patronage dividends to itsour eligible member dealers each year in
proportion toon the amount
basis of their annual purchasesquantity or value of merchandise
from it.patronage business that we do with them. (See the heading "Business", subheading "Distribution
of Patronage Dividends."Dividends")
At.
As of the end of our 2002 fiscal year on December 31, 199528, 2002, there were 5,007 retail business outlets
with respect to which such4,909 stores having Membership Agreements had been entered
into. Those
with us. The States havingwith the largest concentration of member
outletsmembers are California (approximately 10%), Texas and Illinois
(approximately 6% each), Florida (approximately 8%5%) and Michigan and Georgia (approximately 4% each). The States where
we shipped the largest percentages of merchandise in fiscal year 2002 were California (approximately 13%), Texas (approximatelyIllinois
(approximately 7%), Florida (approximately 6%), Texas, Michigan and Georgia (approximately 4% each). States into whichApproximately
4.0% of our merchandise sales were shipped
the largest percentages of the merchandise sold by the Company in
1995 are California (approximately 11%), Illinois (approximately
8%), Florida and Texas (approximately 6% each), Michigan
(approximately 5%) and Georgia (approximately 4%). Approximately 3%
of the Company's sales are made to outlets located outside of the
United States or its territories.
Information as to the number of the Company's member outlets
during each of the past three calendar years is set forth in the
following table:
1995 1994 1993
Member outlets at beginning of period 4,940 4,921 4,986
New member outlets 285 198 158
Member outlets terminated 218 179 223
Member outlets at end of period 5,007 4,940 4,921
Dealers having one or more member outlets at end of period 4,055 4,054 4,045
The Company services its dealers by purchasing merchandise in
quantity lots, primarily from manufacturers, by warehousing
substantial quantities of said merchandise and by selling the same
in smaller lots to the dealers. Most of the products that the
Company distributes to its dealers from its regional warehouses are
sold at a 10% markup. In 1995 warehouse sales accounted for 62% of
total sales and bulletin sales accounted for 3% of total sales with
the balance of 35% representing direct shipment, including lumber
and building material sales. The proportions in which the
Company's total warehouse sales were divided among the various
classes of merchandise sold by it during each of the past three
calendar years are as follows:
Class of Merchandise 1995 1994 1993
Paint, cleaning and related supplies 19% 19% 19%
Plumbing and heating supplies 16% 16% 15%
Hand and power tools 14% 14% 14%
General hardware 13% 13% 12%
Electrical supplies 13% 12% 12%
Garden, rural equipment and related supplies 13% 11% 12%
Sundry 7% 9% 9%
Housewares and appliances 5% 6% 7%
The Company sponsors two major conventions annually (one in the
Spring and one in the Autumn) at various locations. Dealers and
vendors are invited to attend, and dealers generally place orders
for delivery during the period prior to the next convention. During
the convention regular merchandise, new merchandise and seasonal
merchandise for the coming season are displayed to attending
dealers. Lawn and garden supplies, building materials and exterior
paints are seasonal merchandise in many parts of the country, as
are certain sundries such as holiday decorations.
Warehouse sales involve the purchase of merchandise from the
Company that is maintained in inventory by the Company at its
warehouses. Direct shipment sales involve the purchase of
merchandise from the Company with shipment directly from the
vendors. Bulletin sales involve the purchase of merchandise from
the Company pursuant to special bulletin offers by the Company.
Direct shipment sales are orders placed by dealers directly with
vendors, using special purchase orders. Such vendors bill the
Company for such orders, which are shipped directly to dealers. The
Company, in turn, bills the ordering dealers at a markup. The
markup on this category of sales varies with invoice amounts in
accordance with the following schedule and is exclusive of sales
under the LTL Plus program discussed below.
Invoice Amount Handling Charge (Markup)
$ 0 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%
Bulletin sales are made based upon notification from dealers of
their participation in special bulletins offered by the Company.
Generally, the Company will give notice to all members of its
intention to purchase certain products for bulletin shipment and
then purchases only so many of such products as the members order.
When the bulletin shipment arrives at the Company, it is not
warehoused, but is broken up into appropriate quantities and
delivered to members who placed orders. A 6% markup is generally
applied to this category of sales.
An additional markup of 3% applies to various categories of
sales of merchandise exported to certain dealers locatedlocations outside of the United States and its territories in fiscal 2002.
The number of member locations that we had during each of our past three fiscal years is summarized in the following
table:
200220012000
Member outlets at beginning of period 4,976 5,011 5,082
New member outlets 181 220 208
Member outlets terminated 248 255 279
Member outlets at end of period 4,909 4,976 5,011
==== ==== ====
Dealers having one or more member outlets at end of period 3,673 3,778 3,858
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 2002, warehouse sales were 72% of our merchandise sales and bulletin sales were 4% of our
merchandise sales with the balance of 24% being direct shipment sales.
The following is a breakdown of our total warehouse sales for merchandise purchases among various general classes of
merchandise for each of the past three fiscal years:
Class of Merchandise200220012000
Paint, cleaning and related supplies 22% 21% 20%
Plumbing and heating supplies 15% 15% 15%
Hand and power tools 13% 14% 14%
Garden, rural equipment and related supplies 15% 14% 14%
Electrical supplies 11% 12% 12%
General hardware 11% 11% 12%
Sundry 7% 8% 7%
Housewares and appliances 6% 5% 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 AmountAdder (Handling Charge)
$1,00.00 to $999.99 2.00%
$1,000.00 to $1,999.99 1.75%
$2,000.00 to $ 2,999.99 1.50%
$3,000.00 to $ 3,999.99 1.25%
$4,000.00 to $ 4,999.99 1.00%
$5,000.00 to $ 5,999.99 ..75%
$6,000.00 to $ 6,999.99 ..50%
$7,000.00 to $ 7,999.99 ..25%
$8,000.00 and over.00%
We make bulletin sales based upon notices from dealers that they wish to participate in one of our special bulletin offers.
Generally, we notify dealers of our intention to purchase certain products for bulletin shipment. We then purchase these
products in the quantities that the dealers order. When the bulletin shipment arrives, we do not place it into warehouse
inventory. Rather, we break it up into smaller quantities and deliver it to the dealers who ordered it. We generally apply a 6%
adder ("handling charge") to this category of sales.
We typically apply an additional adder of 3% to merchandise that is exported outside of the United States, its territories
and possessions. Ace dealers located outside of the United States, and its territories and possessions who are not subject to the
additional 3% markupadder are assessed a flat 2% markupadder on all direct shipment sales. The Company maintainsWe maintain inventories to meet only normal
resupply orders. Resupply orders are orders from members for merchandise tohelp keep our inventories at normal levels. Generally, suchUsually these resupply orders are filled within
one weekday of receipt. Bulletin orders (which are in
the nature ofsomewhat similar to resupply orders) mayorders, but can be for future delivery. The
Company doesWe do not backlog
normal resupply orders and accordingly,therefore, no significant backlog exists at any point in time.
The Company also has established special sales programs for
lumber and building materials products and for products assigned
from time to time to an "extreme competitive price sales"
classification and for products purchased from specified vendors
for delivery to certain of the Company's dealers on a direct
shipment basis (LTL Plus Program). Under its lumber and building
materials ("LBM") program, the Company imposes no handling charge,
markup or national advertising assessment on direct shipment orders
for such products. The LBM program also enables the Company's
dealers to purchase these products at net invoice prices which pass
on to them important cost savings resulting from the Company's
closely monitored lumber and building materials purchasing
procedures. Additionally, the LBM program offers dealers the
opportunity to order less-than-truckload quantities of many lumber
and building materials products at economical prices under the LTL
warehouse redistribution procedure which the Company has
established with certain major vendors.
The
Our Store Traffic Opportunity Program ("STOP") established by
the Company is a program under which certain stockkeeping units ofwhere we offer our dealers specific products assignedthat we
assign to an "extreme competitivea "competitive price sales" classificationclassification. These products are offered for sale to its dealers for deliverydelivered from designated Company retail support centers. Sales under this
program are madeour warehouses with or without the
addition of freight charges and with such handling charge or markupan adder (if any) of not more thanup to 5% as
shall be specified for each item. The Company's officers have
, determined on an item by item basis. Management has the
authority to add items to, and to withdraw items from the STOP program, from time to time and to establish reasonable minimum or multiple item purchase
requirements for the items offered under thethis program. No allocations orWe do not make any patronage dividend distributions of patronage dividends are
made with respect to salesfor purchases under the STOP program. Purchases under
the
We do, however, consider STOP program are, however, deemedpurchases to be either warehouse purchases or bulletin purchases, as the case may be, for purposes of calculatingapplicable, in
determining the forms of patronage dividend distributions. (See the heading "Business," subheading
under this Item 1 entitled "Forms of Patronage
Dividend Distributions.")
The
Our LTL Plus Program established by the Company is a program
under whichallows dealers to purchase full or partial truckloads of products are purchased by
the Company's dealers from specifiedspecific vendors for delivery to such
dealers on a direct
shipment basis.delivery. No markup, handling chargeadder or national advertising assessment is imposed by the Company on sales
under the LTL Plus Program, and the maximum amount of patronage
dividends allocated or distributedapplies to the Company's dealers with
respect to their purchases of products in the LTL Plus category is
.5% of such sales.these purchases. (See the heading "Business,"
subheading under this Item 1 entitled "Patronage Dividend Determinations and Allocations.")
The Company, in
In addition to conducting semi-annual andhosting conventions as well as other conventionsshows and product exhibits for itsour dealers, we also provides
them with numerous provide many
special services. We offer these services (on a voluntary basis and at a
cost to cover its related expenses), such asestablished charges. These services include inventory control systems, as well as
price and bin ticketing, and an electronic ordering
system. In order for them to have on hand current pricing and other
information concerning the merchandise obtainable from the Company,
the Company further provides to each of itsticketing. We also provide dealers eitherwith a
catalogue checklist service orso that they can have current information about the
merchandise that we offer. We also provide a microfiche film service (whichever
the dealer selects), for eitherchoice of which services the dealer must
pay a monthly charge. The Company also provides on a full-
participation basis videotapes and related materials forongoing educational and training programs for which dealers must pay an
established monthly charge.dealers. (See the
heading "Business," subheading under this Item 1
entitled "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. Loss Prevention
Services, Inc., another wholly owned subsidiary, offers security training and other loss prevention services to dealers.
On February 13, 2003, we sold all of the issued and outstanding shares of Ace Hardware Canada Limited ("Ace
Canada"), our wholly owned subsidiary, to Sodisco-Howden Group Inc. Ace Canada generated less than one percent (1%) of
our consolidated revenues during fiscal year 2002.
We operate our Company-owned retail hardware stores through our wholly owned subsidiary Ace Corporate Stores, Inc.
For further information about these stores, please see the heading "Properties."
We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights, Illinois. These
factories are the main source of the paint products that we offer for sale. We operate our paint manufacturing business as a
separate 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 businesses, hardware wholesaling and paint manufacturing, are 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 Ace 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 Company has anactual 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. However, the future is difficult to forecast, especially related to revenues, costs, margins
and profits which are influenced by many factors. Some of these factors are discussed below.
The effects of future growth in the hardware and hardlines-related industries are uncertain. By "hardlines-related
industries" we mean home center, do-it-yourself, rental and commercial/industrial categories. The future condition of the
economy is also uncertain, when viewed domestically, internationally or in specific geographical regions. Some other
uncertainties that could affect our plans include possible future changes in merchandise and inventory prices, and the effect of
increasingly intense competition. There could be potential shifts in market demand for some products. Lawsuits and laws,
especially laws dealing with franchising, licensing, importing, exporting and environmental matters could affect our future
business. We cannot predict whether these uncertainties might give rise to future costs or liabilities or have some other effect
on our future ability to achieve our plans.
Through our ongoing strategic planning process and haswe have focused its strategicour plans around four cornerstonessegments for future growth and
success in thisour competitive industry. TheThese four cornerstonessegments are: Retail Success (store operations), Wholesale Success
(distribution), International growth and new member growth. Dealer retailRetail success for our dealers is a primary objective sincebecause, in
our opinion, it drives both their retail performance and our wholesale growth of the Company. The Company
has accelerated itsgrowth. We have therefore increased our efforts in assisting member dealersto assist
members in "retail success initiatives"initiatives," which are designed to document and improve their retail performance and competitiveness. The These
retail success initiatives include retail goals which each dealer shouldthat we urge dealers to strive for within their storestores and localin locally competitive environment, but
markets. These goals do not, dictate
materialhowever, impose major restrictions or requirements on member dealers. Minimummembers. Our minimum requirements for
the acceptance of a member dealer by the Companynew members are outlined only in the current Membership Agreement and Supplement and in the Member
Operational Requirements that apply under the Ace Hardware Membershipthat Agreement. The Operational Requirements do require that, within one year, from the Company's acceptance of the Agreement,
the member dealermust make Ace theirus the primary source of supply and terminate any previous participation in the program of any other
major hardware wholesaler. There are currently no specificgeneral requirements as(apart from special voluntary programs) where
members have to percentagemake particular percentages of purchases required through Acefrom us or have to achieve minimum retail performance which must be achieved (i.e.levels,
such as sales dollars per square foot). Thisfoot.
Our current strategic plan, referred initiative, Vision 21, focuses on becoming a world class organization through encouraging dealers
to as "The New Ageadopt certain merchandising, marketing and operational practices that are supported by some of Ace" is
an extension of previous strategic efforts under Ace 2000 and is
not in conflict with these efforts.
Through its wholly-owned subsidiary, Ace Insurance Agency, Inc.,
the Company makes available our most successful dealers
to its dealers a Group Dealer Insurance
Program under which they can purchase a package of insurance
coverages, including "all risk" property insurance and business
interruption, crime, liability and workers' compensation coverages,
as well as medical insurance coverage for their employees. AHC
Realty Corporation, another wholly-owned subsidiary of the Company,
provides the services of a broker to those dealers who desire to
sell or seek a new location for a presently owned store or to
acquire an additional store. Loss Prevention Services, Inc.,
another wholly-owned subsidiary provides security training and
services for all dealers desiring security assistance. In addition,
the Company offers to its dealers retail computer systems
consisting of computer equipment, maintenance service and certain
software programs and services. These are marketed by the Company
under its registered service mark "PACE".
The Company manufactures paint and related products at
facilities owned by it in Matteson and Chicago Heights, Illinois.
These facilities now constitute the primary source of such products
offered for sale by the Company to its dealers. The Company's paint
manufacturing business is operated as a separate Division of the
Company for accounting purposes. All raw materials used by the
Company to manufacture paint are purchased from outside sources.
The Company has had adequate sources of raw materials, and no
shortages of any materials which would materially impact operations
are currently anticipated. The manufacturing of paint is seasonal
to the extent that greater paint sales are found in the months of
April through September. Historically, compliance with federal,
state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment have not
had any material impact.
The Company's business, either in hardware wholesaling or paint
manufacturing activities is not dependent on any major suppliersimprove Ace's and the Company feelsdealers' 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 any seasonal fluctuations do not have a
significant impact upon operations. For further discussiontake duplication and costs out of dealers' operations, achieving consistent implementation of programs more
rapidly and improving the Company's business, see "Management's Discussiondealers' financial performance and Analysis of
Financial Conditiontheir ability to pursue new stores and Results of Operations", in Item 7 hereof.
The Company makes available some services to members whichstore expansions. As
retailers become Vision 21 retailers they are related to the operation of their retail business. These services
(such as advertising, store supplies and training programs) are
provided in orderafforded various benefits to assist members and/orthem to utilize the
centralized buying power of the Company. Members are rebilled in
order to reimburse the Company for related expenses paid on their
behalf. The special charges and assessments described below are
similar in nature and are intended only to reimburse the Company
for related expenses.
succeed at retail.
Special Charges and Assessments
The Company sponsors
We sponsor a national advertising program. To pay for this program, for which
itswe assess dealers are currently assessed an amount equal to 1.25%1.50% of their
purchases (exclusive of(except purchases of lumber, LTL, LTL Plus products, building materialsmaterial products and PACEcertain hardware and software computer
systems), with the current minimum annual assessment for each
dealer location being established at $1,560.00 (or such greater
amount as would be required to maintain such minimum assessment at
1.25%yearly assessments of $2,223.00 (effective January 1, 2003, $2,535.00 or 1.50% of the annual
purchase volume of required purchases required in order for a retail outletstore to avoid imposition of the low volume account service charge) for 1996 ($1,300.00 for 1995), subject to: 1) acharge, if
greater). The maximum annualyearly assessment is $6,800.00 (based on purchases) for each dealer location for which a membership
agreement has been entered into with the Company of $5,000.00 for
1996 ($4,750.00 for 1995); 2) a maximum total annual assessment for
any one dealer determined by multiplying the number of such
dealer's retail outlets supplied by the Company which serve the
general public by $5,000.00 with certainstore location. We grant exemptions
from orthese assessments and make various adjustments to them for stores located outside the continental United States, for new
stores during their start up year and for stores operating under an agreement that does not permit them to use "Ace" or "Ace
Hardware". We intend to also impose a flat charge of $100.00 on a per event basis to pay for national sales promotions
including, but not limited to, the Memorial Day sale and the day after Thanksgiving sale. The amount of our national
advertising assessment for dealer
outlets located outside of the contiguous 48 states of the United
States and the District of Columbia, based on the evaluation by the
Company's management of the amount and nature of the television
broadcasts received in the dealer's area. The percentage of bi-
weekly purchases tocan be assessed for the Company's national
advertising program and the amount of the maximum annual assessment
for such program are both subject to being changed from time to time by action of theour Board of DirectorsDirectors. We can also impose assessments at a flat
monthly rate or based on a percentage of the Company. The
Company also has the authority, effective January 1, 1993 to impose
asales for regional advertising assessment (for select geographic regions) not to exceed 2% of a dealer's annual purchases withpurchases.
Regional advertising assessments are subject to the same minimum and maximum assessments imposed byamounts as the National Advertising national advertising
assessment.
A
Through December 31, 2002, every two weeks, we billed the member store for a special low volume account service
charge of $75 if annual purchases from us were less than $50,000. We billed the member store for a special low volume
account service charge of $60 per bi-weekly billing statement period if purchases from us during such period were less than
$5,700. Effective January 1, 2003, we will bill the member store for a special low volume account service charge of $30.00$100 per bi-
weekly
bi-weekly billing statement period is imposed on all stores whoseif purchases (exclusive of lumber and LTL purchases)from us during such period are less than $4,800.00, or, effective January 1, 1996 a
$50.00 per bi-weekly billing statement on all stores whose annual
purchases are less than $50,000.00. Any such $6,500. The low volume service
charges imposed on a
store during a specified year will be automatically refundedthat we bill to the store in a specific year are automatically refunded if itsthat store's total purchases (exclusive of lumber and LTL purchases)
exceed $124,800.00 for 1996 ($104,000.00 for 1995)increase to over
$169,000 during the year. All stores are exemptedA new store is excused from such specialthis low volume account service charge during the first 12 months from the date that they
it is a member. There are affiliated as Ace dealers.
Exceptionssome exceptions to theour low volume account service chargecharges that are as follows:described below:
1. when a dealer has purchased $124,800.00 for 1996
($104,000.00 for 1995)Stores which purchase $169,000 of merchandise (exclusive of carload
lumber purchases)from us during the applicable year the dealer
will beare given a credit on the next bi-weekly billing
statement for any low volume charges which have been added
towe billed that store earlier in the year. We then stop billing that store for low
volume account during suchservice charges for the rest of the year, and the low volume charge
shall no longer be added on any of such dealer's bi-weekly
billing statements during the remainder of such period even if theits current purchases shown on thea billing statement are less than $4,800.00; and
$6,500.
2. theWe do not bill low volume account service chargecharges every two weeks if a store's sales volume with us the year before
was at our minimum ($169,000), but we will bill these charges in a lump sum to a store's last statement of the year if that
store does not reach our applicable minimum by that time.
3. We will not be billed
on a bi-weekly basis to those accounts whose previous
year's sales volume exceeded the low volume purchases
minimum ($124,800.00 for 1996; $104,000.00 for 1995) for
the previous year, but the full annualbill low volume account service chargecharges to members that have signed and are in compliance with a
Vision 21 Retailer and Retail Support Commitment ("Vision 21 Agreement"), but we will be billed on the last billing statementbill low volume account service
charges, if applicable, to members who are not in compliance with their Vision 21 Agreements.
Low volume service charges are not included in a retailer's purchases of the year to those accounts if the minimum purchases to
avoid imposition of the charge have not been metmerchandise that qualify for the
current year.patronage
dividends. An Ace store that falls below our minimum purchase levels maycan also be subject to termination.
A
We add a late payment service charge is added on any past due balance owing by a dealer to the Companythat we are owed for purchases of merchandise, and services, or for the purchase price of the capitala stock of the
Company subscribed
subscription. The current rate for by the dealer. The late payment service charge currently in effect is an amount equal to .77% per bi-weekly statement period, except in Texas
where the charge is .384% and Georgia where the charge is .692%. AWe consider a past due balance is createdto exist whenever we do
not receive payment of the amountsamount shown as due on any sucha billing statement
is not received by the Company within 10 days followingafter the date of that statement. We can
change the statement. The percentage for determining the amountrate of theour late payment service charge may be changed from time to time bytime.
We assess members operating under a standard Membership Agreement a mandatory monthly fee for Core Retail
Services in the Company.
Subscriptions to a retail training program consistingamount of video
tapes and related course materials (the "S.T.A.R. Program") are
mandatory$168 per month for all single stores or parent stores and $37 per month for all branch stores located
in the United StatesStates. Core Retail Services consist of the following elements:
1. ACENET. This service is our primary communications vehicle with our members. It is an electronic network that
allows defective goods claims processing, product search online or through a CD-ROM catalog, electronic communications,
employee testing and U.S.
Territories. The initial monthly assessment imposedtraining courses, review and payment of retailer statements and numerous other applications.
2. Material Safety Data Sheet Subscription Service. This service provides members with access 24 hours per day and 7
days per week to information on such stores
for such subscriptionsthe chemical ingredients of certain products that we sell.
3. Ace Training Network. This service is $16.00 for 1996 ($14.50 for 1995) for
eachone of our retail training programs. Each single store or parent store is
credited with 16 points per month and $11.00 for 1996 ($10.00 for
1995) for each branch store.store is credited with 11 points per month. A single store or parent store is an
initial retail outlet for which a dealer owns,
one that has purchased or has subscribed for one (1)a share of our Class A stock and forty (40) shares of Class
C stock of the Company.voting stock. A branch store is an additional retail
outletone whose membership
involves only shares (or a subscription for which a dealer owns, or has subscribed for, fifty (50)
sharesshares) of our nonvoting Class C stock of the Company.Stock. (See Article XXV, Section 2 of our By-
laws). A store may use its points at any time to buy one of the By-Laws, set forthtraining programs that we offer. If a store does not have enough
points for the program that it wants, it can use the points that it has and be billed for the difference. Multiple stores and
member groups can pool their points together to purchase our training programs.
4. NRHA E-Tools. These include unlimited use of certain Internet-based services offered by the National Retail
Hardware Association (NRHA), including their Advanced Course in Appendix A). BranchHardware Retailing, the Forte International
Communications Survey and their Employee Compensation Study.
5. Retail Pricing. This includes access to our national price shopping and ad data collected from non-Ace stores, may, upon
request, be granted an exemption fromour
suggested retail prices, our customized retail pricing strategy services and catalog updates to our suggested retail prices.
Members operating under a Contractor agreement are assessed a mandatory monthly fee of $53 for ACENET and the monthly subscription fee.
Subscriptions to a
Material Safety Data Sheet information
serviceSubscription Service; however, there are also mandatory for all stores located inno members operating under a Contractor agreement as
of the United
States. The initialdate of this annual assessment imposed on such stores for
such subscriptions is $32.00 for 1996 ($30.00 for 1995) for each
single store or parent store and $16.00 for 1996 ($15.00 for 1995)
for each branch store.
report.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by the
Companymembers and by its member-dealersourselves in connection with the promotion,
advertising and marketing of products and services sold by the
Company. The Company holdsthat we sell. We have had the following Trademarktrademark and Service Mark
Registrationsservice mark
registrations issued by the U.S. Patent and Trademark Office for the marks used by it:
Registration
Description of Mark Type of Mark Number Expiration Date
our marks:
Registration
Description of MarkType of MarkNumberExpiration Date
"ACE HARDWARE" with winged
emblem design Service Mark 840,176 December 5, 2007
"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
"WEATHER SHEDDER" Trademark 1,053,816 December 7, 1996
"THE HELPFUL HARDWARE MAN" Service Mark 1,055,741 January 4, 1997
"ACE IS THE PLACE WITH THE
HELPFUL HARDWARE MAN" Service Mark 1,055,743 January 4, 1997
"BRIGHT & EASY" Trademark 1,058,117 February 8, 1997
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000
"HARDWARE UNIVERSITY"
with Design Service Mark 1,180,539 December 1, 2001
"SUPER STRIKER" Trademark 1,182,330 December 15, 2001
"PACE" with design Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with
winged emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in
slanted bar 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
Registration
Description of Mark Type of Mark Number Expiration Date
"ACE BEST BUYS" in
circle design Service Mark 1,560,250 October 10, 2009
"ACENET" Service Mark 1,574,019 December 26, 1999
"ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2000
"LUB-E" Trademark 1,615,386 October 2, 2000
"ACE FIVE STAR" in stylized
lettering design Trademark 1,627,887 December 18, 2000
"ACE THREE STAR" in stylized
lettering design Trademark 1,631,237 January 15, 2001
"ACE PRO" Trademark 1,632,078 January 22, 2001
"ASK ACE" Service Mark 1,653,263 August 6, 2001
Christmas Elves Design Trademark 1,669,306 December 24, 2001
"ACE 2000" Service Mark 1,682,467 April 7, 2002
"ACE" in stylized
lettering design Trademark 1,683,538 April 21, 2002
"HARMONY" in stylized
lettering design Trademark 1,700,526 July 14, 2002
"SEVEN STAR SATISFACTION
GUARANTEED QUALITY ACE
PAINTS" with design Service Mark 1,705,321 August 4, 2002
"THE OAKBROOK COLLECTION"
in stylized lettering
design Trademark 1,707,986 August 18, 2002
"ACE HARDWARE BROWN BAG
BONANZA" with design Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003
"THE OAKBROOK COLLECTION"
in stylized lettering
design Trademark 1,783,335 July 20, 2003
"STORE 2000 THE STORE OF
THE FUTURE" Service Mark 1,811,032 December 14, 2003
"ENVIRO-CHOICE" 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
Currently, the Company has applications pending before the U.S.
Patent and Trademark Office for Registration of "GREAT FINISHES" for
paints, paint-like coatings, primers, lacquers, stains and varnishes,
"WOOD ROYAL" for paint, exterior stains and wood cleaners, "ROYAL TOUCH"
for paints, primers, stains, lacquers and varnishes, "ROYAL SHIELD" for
paints, primers, stains, lacquers and varnishes and "SEAL TECH" for
acrylic waterproof coatings for porous surfaces. In addition, the
Company also has service mark applications pending for898,070 September 8, 2010
"THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2010)
"ACE HOME
CENTER," "HELPFUL HARDWARE FOLKS," and Repeating "A"HARDWARE" with winged
emblem design Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in stylized
lettering design withTrademark 1,426,137 January 27, 2007
"ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering design Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND
GARDEN CENTER" in stylized
lettering design Service Mark 1,487,216 May 3, 2008
"ACE NEW EXPERIENCE" in
stylized lettering design Trademark 1,554,322 September 5, 2009
"ACE SEVEN STAR" in stylized
lettering design Trademark 1,556,389 September 19, 2009
"ACE BEST BUYS" in circle design Service Mark 1,560,250 October 10, 2009
"ACENET" Service Mark 1,574,019 December 26, 2009
"ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2010
"LUB-E" Trademark 1,615,386 October 2, 2010
"ASK ACE" Service Mark 1,653,263 August 6, 2010
"ACE" in stylized lettering design Trademark 1,683,538 April 21, 2012
"ACE HARDWARE BROWN BAG
BONANZA" with design Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003
"CELEBRATIONS" Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005
"The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE"
in stylized lettering design Service Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006
"SEALTECH" Trademark 2,007,132 October 8, 2006
"GREAT FINISHES" Trademark 2,019,696 November 26, 2006
"WOODROYAL" Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD" Trademark 2,070,848 June 10, 2007
"ROYAL TOUCH" Trademark 2,070,849 June 10, 2007
"QUALITY SHIELD" Trademark 2,102,305 September 30, 2007
"QUALITY TOUCH" Trademark 2,102,306 September 30, 2007
"STAINHALT" Trademark 2,122,418 December 16, 2007
"ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008
"NHS NATIONAL
HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008
"THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008
"ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009
"ACE ROYAL" Trademark 2,237,981 April 13, 2009
"HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009
"THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009
"ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009
"ILLUMINATIONS" Trademark 2,353,666 May 30, 2010
"ACE YOUR NEIGHBORHOOD
SOLUTIONS PLACE" Service Mark 2,386,359 September 12, 2010
"ACE" with accent design Service Mark 2,378,123 August 15, 2010
"ACE SOLUTIONS PLACE" Service Mark 2,394,181 October 10, 2010
"ACE" with halo design Service Mark 2,558,478 April 19, 2012
"ACE HOMEPLACE" Trademark 2,621,873 September 17, 2012
As of the date of this filing, we also have the following applications for new registrations pending in the U.S. Patent and
Trademark Office:
MarkType of goods/services
"Store-It-Right"hardware products, namely, hooks,
brackets, knobs, hangers and extensions
for support or hanging
"COLOR YOUR LIFE" indoor and outdoor paint, coatings and
varnishes
"CONTRACTOR CENTERS OF AMERICA"
and design retail store services.
services in the field of hardware
and related goods
"NATIONAL SUPPLY NETWORK" wholesale store services; namely providing
wholesale industrial supplies and equipment
to commercial and industrial customers
"NSN" in circle design wholesale store services; namely providing
wholesale industrial supplies and equipment to
�� commercial and industrial customers
"SIMPLY MAGIC" interior, exterior house paints and primers
"COLOR YOUR LIFE" written and graphic advertisements and
promotional materials of paper and signage
"YOUR NEIGHBORHOOD ACE HARDWARE
THE HELPFUL PLACE" retail hardware store services
"THE HELPFUL PLACE" retail hardware store services
Competition
The competitive
Competitive conditions in the wholesale and retail hardware industry can
be characterized as intensiveare intense and increasing due to the fact that
independent increasing. Independent hardware
retailers are required tomust remain competitive with discount stores and chain stores, such as Wal-Mart,WalMart, Home Depot, Menard's, Sears, and
Lowe's, and with other mass merchandisers. The gradual shift of
retail operationsRetail hardware stores have been slowly shifting their locations to high rent
shopping center locations and thecenters. There has also been a trend toward longer store hours have also intensified pressureshours. There is intense pressure on hardware retailers to
obtain low cost wholesale supply sources. The CompanyIn several markets in the United States, we also compete directly competes in
several U.S. markets with Cotter & Company, Servistarother dealer-
owned wholesalers such as TruServ Corporation, Hardware Wholesalers, Inc., Our Own Hardware Company,Do it Best Corporation and United Hardware Distributing Co., all
Employees
As of which companies are also dealer-
owned wholesalers.
Employees
The Company employs 3,917December 28, 2002, we have 5,268 full-time employees, of which 1,1941,555 are salaried employees. Collective bargaining agreementsExcluding our
Canadian operations and Company-owned retail locations, we have 4,824 full-time employees to support our domestic and
international retailers. We also have, as of the end of the 2002 fiscal year, union contracts covering one (1) truck drivers'
bargaining unit and fourtwo (2) warehouse bargaining units are
currently in effect at certain of the Company's distribution
warehouses. The Company'sunits. We consider our employee relations with both union and non-
union non-union
employees are considered to be good, and the Company has
experiencedwe have had no significant employee-related work stoppagestrikes in the past five years. AllIn general, our employees are covered either by either
negotiated or non-
negotiated employeenonnegotiated benefit plans whichthat include hospitalization, death benefits and, with few exceptions, retirement
benefits.
Limitations on Ownership of Stock
All
Our members own all of the issued andour outstanding shares of capital stock of the
Company are owned by its dealers. Onlystock. Membership in Ace is limited to approved retail and other
dealers in
hardware and related products havingwho have Membership Agreements with us. These are the Company areonly ones eligible to own or
purchase shares of any class of the Company'sour stock.
No dealer regardless of the number of member business outlets
owned or controlled by the dealer, shall be entitledis allowed to own more than 1 share of our Class A Stock, which is the only class of voting stock, which can be issued by the Company.no matter how many store locations that
dealer owns or controls. This ensures that each stockholder-dealer will havestockholder in our cooperative has equal voting power. We treat an equal voice in the management of the
Company. An
unincorporated personmember or a partnership shall be deemed to bemember as being controlled by another person, partnership or corporationsomeone else if 50% or more of the assets or profit
shares thereinof that member are owned by (i) by such
otheranother person, partnership or corporationcorporation; or (ii) by the owner or
ownersowner(s) of 50% or more of the
assets or profit shares of another unincorporated business firm or (iii) by the owner or ownersowner(s) of at least 50% or
more of the capital stock of an incorporated business firm. Aa
corporation. We treat a member that is a corporation shall be deemed to beas 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 ifcorporation; or (ii) the owner(s) of at least 50% or more of the capital stock of said
corporation is owned (i) by such person, partnership or corporation or
(ii) by the owner or owners of 50% or more of the capital
stock of another incorporated business firmcorporation; or (iii) by the owner or ownersowner(s) of at least 50% or more of the assets or profit shares of ananother unincorporated
business firm.
business.
Distribution of Patronage Dividends
The Company operates
We operate on a cooperative basis with respect tofor patronage purchases of merchandise from us that are made from it by those of its dealers who have
become "members"members of the Company as described below and in the
Company's By-laws. In addition, the Company operatesAce. We also operate on a cooperative basis with respect to all dealers who have subscribed for shares of our stock but
who have not as yet actually become "members" by reason of the fact that the
payments made by them on account of the purchase price of their sharesbecause they have not yet reached an amount equal to thefully paid for their $1,000 purchase pricepar value shares of 1
share of our
Class A Voting Stock. All membervoting stock. The dealers falling intoin either of the foregoing classificationsthese two categories are entitled to receive patronage dividends once a year on
an equitable basis.
We made patronage dividend distributions once each year fromat the Companyfollowing percentages of our sales in proportion to the amount of their annual purchases of merchandise from
it.
The patronage dividends distributed on wholesale warehouse, bulletin and direct
shipment sales made by the Companycategories and on the total sales of products manufactured by theour Paint Division represented the
following percentages of each of said categories of sales during each
of the past three calendarfiscal years:
1995 1994 1993
Warehouse Sales 4.42965% 4.64117% 4.94434%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 6.8725% 8.2205% 7.9389%
In addition to the dividends described above, patronage dividends
are calculated separately and distributed on sales of lumber products,
building material and millwork products and less-than-truckload (LTL)
sales of lumber and building material products. Patronage dividends
equal to .3560%, .4073% and .1763% of the total sales of these
products (calculated separately by each of these three sales
categories) were distributed to the Company's dealers who purchased
those products in 1995, 1994 and 1993, respectively.
200220012000
Warehouse Sales 4.56348% 4.27330% 4.43564%
Bulletin Sales 2.0% 2.0% 2.0%
Direct Shipment Sales 1.0% 1.0% 1.0%
Paint Sales 10.1109% 8.9371% 8.1131%
Under theour LTL Plus Program, we also calculate patronage dividends are also calculated separately on sales of full or partial truckloads of
products purchased by eligible dealers from specifiedcertain vendors (see discussion of LTL Plus Program set
forth above in this Item 1). The maximum amount of patronage dividends
allocable to LTL Plus sales is .5% of such sales.under the heading
"Business.") The LTL Plus Program patronage dividend was .5%0.5% of suchthese sales for 1995, 1994fiscal year 2002, 2001 and 1993.
2000.
Sales of merchandise under our Contractor and Industrial Distributor Programs are made on a nonpatronage basis.
Patronage Dividend Determinations and Allocations
The amounts distributed by the Companythat we distribute as patronage dividends consist of itsour gross profits on patronage business donethat we do with
dealers who qualify for patronage dividend distributions, after deducting from said gross
profitsless a proportionate share of the Company'sour expenses for administration and
operations. SuchOur gross profits consist of the difference between our selling price for the merchandise that these dealers buy
from us and our purchase price at which merchandisefor that merchandise. The total patronage dividend paid to members is sold to such
dealers andbased on net earnings
calculated in accordance with accounting principles generally accepted in the costUnited States of such merchandise to the Company. AllAmerica after reducing or
increasing net earnings for non-member income or losses. Our computation of patronage dividends excludes all of our income
and expenses associated withfrom activities that are not directly related to patronage transactions aretransactions. The excluded items primarily consist of
profits or losses generated from non-shareholder international dealers and non-shareholder retail accounts served through
National Hardlines Supply, Inc. and our industrial distributor and contractor programs, profits or losses realized from Ace
Insurance Agency, Inc., New Age Insurance Limited, Ace Hardware Canada Limited, company-owned retail locations and our
share of the computationprofits or losses realized from our minority-owned investments including Builder Marts of patronage
dividends. Generally these include profits on business done with
dealers who do not qualify for patronage dividend distributionsAmerica, Inc. and joint
ventures. Additionally, any income (loss) realized by the Companyor loss that we realize from the disposition of property and equipment (except that,is excluded from
patronage dividends. The amount we distribute as patronage dividends also excludes profits or losses generated from our non-
shareholder programs. (See the heading "Business" and the subheading "Non-Shareholders Programs".)
Patronage dividends are usually paid to members within 90 days after the extent that depreciation
on such assets has been deductedclose of Ace's fiscal year; however, the Internal
Revenue Code (the "Code") permits distribution of patronage dividends as an expense duringlate as the time that
the Company has been operating on a cooperative basis and is
recaptured in connection with such a disposition, the income derived
from such recapture would be included in computing patronage
dividends).
The By-laws15th day of the Companyninth month after the
close of Ace's fiscal year, and Ace may elect to distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.
Our By-laws provide that, by virtue of a dealerdealers being a "member""members" of the CompanyAce (that is, by virtueowning shares of his ownership
of 1 share ofour Class A Voting Stock)voting
stock), he will be deemed to have
consentedthey consent to include in histheir 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 dealer's taxable year in which they are received by
him all patronage dividends distributed to him by the Company in
connection with his purchases of merchandise from the Company. A
dealer receives them. Dealers
who hashave not yet fully paid an amount which at least equals the $1,000 purchase price for their shares of the 1 share ofour Class A Voting Stock subscribed for
by him willvoting stock are also be required to include
all patronage dividends distributedwe distribute to him by the Companythem in histheir gross income for federal
income tax purposes in the year in which they are received by him.
This is required by virtue of a provision in theas explained above. Under our Stock Subscription
Agreement, executed by him under which hedealers must expressly consentsconsent to take all suchthese patronage dividendsdividend distributions into histheir gross income for such purposes.incomes.
The amount of the patronage dividends which dealers must be includedinclude in a
dealer'stheir gross incomeincomes includes both the cash portion
of patronage dividends and any portion of such patronage dividends received by himthat we apply against any indebtedness the dealer owes to us in cash or applied against indebtedness
owing by him to the Company in
accordance with Section 7 of Article XXIV of the Company's By-laws and theour By-laws. It also includes any portion or portions thereof
which he receivesof patronage dividends that they
receive in shares of our Class C Nonvoting Stock of the Company
or innonvoting stock, other property and patronage refund certificates. PatronageAce 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 the Company'sour 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 2002
patronage dividend rate for the LTL Plus Program. However, the maximum amountProgram is 0.5% of patronage dividends
allocable toour LTL Plus Program sales is an amount no greater than .5%
of such sales, the maximum amount ofsales. The 2002 patronage dividends allocable todividend rates for direct
shipment sales exclusive of LTL Plus Program sales is an amount
equal to 1% of such sales and the maximum amount of patronage
dividends allocable to bulletin sales is an amount equal to 2% of that
category of sales. All remaining patronage dividends resulting from
sales made under these programs are allocated by1.0% and 2.0%, respectively, while the Company tocurrent 2002 warehouse sales. The Company feels that this allocation procedure
provides a practical and understandable method for the distribution of
these patronage dividends in a fair and equitable manner.
Sales of lumber and building materials products are not included as
part of warehouse sales, bulletin sales or direct shipment sales for patronage dividend purposes.rate is
4.56%.
Patronage dividends are calculated separately and distributed to the Company's dealers with respect to
their purchases within each of four sales categories involving these
types of products. These four categories are (a) lumber products
(other than less-than-truckload sales); (b) building materials
products (other than less-than-truckload sales); (c) millwork products
and (d) less-than-truckload ("LTL") sales of lumber and building
material products. Patronage dividends are also calculated separately
and distributed to the Company's dealers for full and partial truckloads of products purchased under the LTL Plus
Program. (See the heading "Business", discussion of the LTL Plus Program set forth above in this Item 1 and
under the subheading "Forms of Patronage Dividend Distributions,"
subparagraphs 2(a)-(b) below).
Distributions" below.)
Any manufacturing profit realized on intracompany sales of the
products manufactured by the Company'sour Paint Division is allocated among and
distributed as patronage dividends to those membereligible dealers
who are eligible to receive patronage dividends from the Company in proportion to their respective annual dollar purchases of paint and
related products manufactured by said Division.from that division. The earnings realized
by the Companywe realize on wholesale sales of suchthe Paint Division's products made by it to its
member our eligible
dealers are currently distributed as patronage dividends to all of its
dealers who are eligible to receive patronage dividends from itthem as part of the patronage dividends which they receive each
year with
respect toin the basic patronage dividend categories established forof warehouse sales, bulletin sales and direct shipment sales. The 2002 paint
patronage dividend rate is 10.11%. Under Section 8 of Article XXIV of the Company'sour By-laws, if the Paint Division's manufacturing
operations for any year result in a net loss rather thaninstead of a profit to the Paint Division, suchthis loss would be netted against the
earnings we realized by the Company from itsour other activities during the year, with the resultso that the earnings available from such
other activities for distribution as patronage
dividends for such yearfrom these other activities would be correspondingly reduced.
reduced for the year. Therefore, if a loss were to result from Paint Division
activities, it would result in a reduced patronage dividend to all members, irrespective of their paint purchases.
We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products through Builder
Marts of America, Inc. ("BMA") and are eligible participants under our Contractor Center standards. This is not a patronage
dividend plan, but rather an allocation of the increase in our stock investment in BMA. Under the plan, we calculate an annual
estimate of the amount by which our stock in BMA has increased or decreased in value from our initial investment, net of
certain expenses. We allocate this estimate to eligible members annually based on their qualifying purchases of LBM products.
A member's pool allocation only becomes vested and can only be redeemed upon the termination of the member's Ace
membership which results in the sale or redemption of Ace stock held for that location, Ace's termination of the LBM
Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first. Negative pool balances are not charged to
members. The 2002 incentive pool rate under this plan is 0.57% of qualifying purchases.
Forms of Patronage Dividend Distributions
Patronage
We make patronage dividend distributions will be made to theour eligible and
qualified member dealers of the Company in cash, shares of the
Company'sour Class C stockStock and patronage
refund certificates in
accordance with the followingaccording to a specific plan whichthat has been adopted by the
Company'sour Board of Directors with respect to purchases of merchandise
made by such dealers from the Company on or after January 1, 1995, and
which will continue toDirectors. This plan can be in effect until such time as the Board of
Directors, in the exercise of their authority and discretion based
upon business conditions changed
from time to time by the Board as they deem fit depending on business conditions and Ace's needs.
This plan is summarized below for the requirementspurchases that our eligible dealers make from us for the year 2000 and subsequent
years.
1. For each of the
Company, shall determine that such plan should be altered or amended:
1. With respect to each store owned or controlled by eacha dealer's eligible and qualifying dealer, such dealer shall receive astores, we initially calculate the minimum cash patronage dividend distribution determined as
follows:
(a) an amount equal to 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to suchthe dealer in connection withbased
on the purchases made for suchthe eligible store;
(b) an amount equal to 25% of the portion of the total patronage dividends allocated for distribution each year
to such dealer for suchthat store which exceedsexceed $5,000 but doesdo not
exceed $7,500;
(c) an amount equal to 30% of the portion of the total patronage dividends allocated for distribution each year
to such dealer for suchthat store which exceedsexceed $7,500 but doesdo not
exceed $10,000;
(d) an amount equal to 35% of the portion of the total patronage dividends allocated for distribution each year
to such dealer for suchthat store which exceedsexceed $10,000 but doesdo not
exceed $12,500;
(e) an amount equal to 40% of the portion of the total patronage dividends allocated for distribution each year
to such dealer for suchthat store which exceeds $12,500;exceed $12,500.
2. TheWe distribute the portion of the total annual distribution allocated to
any such dealer for each store owned or controlled by such
dealerpatronage dividends in excess of the amount to be distributed to such
dealer for such store in cash shall be distributed each yearor property amounts above in the form of
shares of our Class C Non-voting Stock of Ace
Hardware Corporationnonvoting stock (par value $100 per share), valued at
the par value thereof, until the total par value of all shares of all classes of our
capital stock ofthat a dealer holds for the corporation held by such
dealer with respect to sucheligible store equals the greater of:
(a) $20,000; or
(b) athe sum equal to the total of purchases in the following categories of
purchasesthat a dealer made by such dealer for suchthe eligible store during the most recent
�� calendar year;year:
(i) 15% of the volume of warehouse (including STOP and
excluding Ace manufactured paint and related
products) and bulletin purchases, plus
(ii) 15% of the volume of Ace manufactured paint and related products purchases, plus
(iii)
(ii) 3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured paint and related
products), plus
(iv) 4%
(iii) 15% of the volume of lumber, building materialwarehouse and millwork (excluding LTL)bulletin purchases (including Stop and excluding Ace manufactured
paint and related products), plus
(v)
(iv) 4% of the volume of LTL Plus purchases;
provided,purchases.
Please note, however, that nowe do not issue fractional shares of Class C Non-
voting Stock shall be issued to any dealer and thatStock. We take any amount whichthat would have otherwise been distributable asresult
in a fractional share of such stock shall instead be distributed
to such dealerand distribute it in cash.cash or patronage refund certificates instead.
3. The portion of thea dealer's total patronage dividends allocated each
year to any such dealer for each store owned or controlled by
such dealerof the dealer's eligible stores which exceeds the sum ofof:
(a) the cash amount to be
distributed to such dealer for such store in cash pursuant todetermined under Paragraph 1.,1 above and
(b) anythe amount to be distributed to
him in the form of shares of Class C Non-voting Stock of Ace
Hardware Corporation (par value $100 per share) pursuant todetermined under Paragraph 2.,2 above shall beis distributed to suchthe dealer in cash; provided, however, that in no event shall thecash up to
certain limits. The total amount distributed under this plan to any suchthat a dealer for any
such storereceives in cash for an eligible store cannot exceed 45% of thethat
store's total patronage dividends allocated for such store for such year, and to the extent that any distribution to be made to any such dealer
for any store pursuant to this Paragraph 3., would otherwise
cause theyear. If a store's total cash distribution to such dealer for such
store towould exceed this 45% of the total patronage dividends
allocated for such store for such year,limit,
then the distribution to
beover that amount is made under this Paragraph 3., shall instead be made in the form of a non-negotiable patronage refund certificate having
such a maturity date and bearing interest at such an annual
rate as shall be determined by the
certificate. Our Board of Directors priordetermines the maturity dates and interest rates of these patronage refund
certificates before they are issued. These certificates include provisions that give us a first lien on the amount of
any indebtedness that a dealer owes us. The certificates also contain language subordinating them to all the issuance thereof.
Patronage dividend distributions will be made to the eligible
rights and qualified member dealersclaims of the Company in cash, shares of the
Company's Class C stockour secured creditors, general creditors and our bank creditors. Historically, these patronage
refund certificates in
accordance with the following plan which was adopted by the Company's
Board of Directors with respect to purchases of merchandise made by
such dealershave matured within five years from the Company on or after January 1, 1993, through and
including December 31, 1994.
1. With respect to each store owned or controlled by each
eligible and qualifying dealer, such dealer shall receive a
minimum cash distribution determined as follows:
(a) an amount equal to 20% of the first $5,000 of the total
patronage dividends allocated for distribution each year
to such dealer in connection with the purchases made for
such store;
(b) an amount equal to 25% of the portion of the total
patronage dividends allocated for distribution each year
to such dealer for such store which exceeds $5,000 but
does not exceed $7,500;
(c) an amount equal to 30% of the portion of the total
patronage dividends allocated for distribution each year
to such dealer for such store which exceeds $7,500 but
does not exceed $10,000;
(d) an amount equal to 35% of the portion of the total
patronage dividends allocated for distribution each year
to such dealer for such store which exceeds $10,000 but
does not exceed $12,500;
(e) an amount equal to 40% of the portion of the total
patronage dividends allocated for distribution each year
to such dealer for such store which exceeds $12,500;
2. The portion of the total annual distribution allocated to
any such dealer for each store owned or controlled by such
dealer in excess of the amount to be distributed to such
dealer for such store in cash shall be distributed to him
each year in the form of shares of Class C Non-voting Stock
of Ace Hardware Corporation (par value $100 per share),
valued at the par value thereof, until the total par value of
all shares of all classes of capital stock of the corporation
held by such dealer with respect to such store equals the
greater of:
(a) $20,000; or
(b) a sum equal to the total of the following categories of
purchases made by such dealer for such store during the
most recent calendar year;
(i) 13% of the volume of warehouse (including STOP and
excluding Ace manufactured paint and related
products) and bulletin purchases, plus
(ii) 10% of the volume of Ace manufactured paint and
related products purchases, plus
(iii) 3% of the volume of drop-shipment or direct
purchases (excluding Ace manufactured paint and
related products), plus
(iv) 4% of the volume of lumber, building material and
millwork (excluding LTL) purchases, plus
(v) 4% of the volume of LTL Plus purchases;
provided, however, that no fractional shares of Class
C Non-voting Stock shall bedate we issued to any dealer and
that any amount which would have otherwise been
distributable as a fractional share of such stock
shall instead be distributed to such dealer in cash.
3. The portion of the total patronage dividends allocated each
year to any such dealer for each store owned or controlled by
such dealer which exceeds the sum of (a) the amount to be
distributed to such dealer for such store in cash pursuant to
Paragraph 1., above and (b) any amount to be distributed to
him in the form of shares of Class C Non-voting Stock of Ace
Hardware Corporation (par value $100 per share) pursuant to
Paragraph 2., above shall be distributed to such dealer in
cash; provided, however, that in no event shall the total
amount distributed under this plan to any such dealer for any
such store in cash exceed 49.9% of the total patronage
dividends allocated for such store for such year, and to the
extent that any distribution to be made to any such dealer
for any store pursuant to this Paragraph 3., would otherwise
cause the total cash distribution to such dealer for such
store to exceed 49.9% of the total patronage dividends
allocated for such store for such year, the distribution to
be made under this Paragraph 3., shall instead be made in the
form of a non-negotiable patronage refund certificate having
such a maturity date and bearing interest at such an annual
rate as shall be determined by the Board of Directors prior
to the issuance thereof.
With certain modifications, the above Plans are applied
separately in determining the form in which patronage dividends
accrued with respect to sales of lumber and building materials
products are distributed. In this connection the combined patronage
dividends allocated annually to a store from (a) sales of lumber
products (other than LTL sales), (b) sales of building materials
(other than LTL sales) (c) sales of millwork products, and (d) LTL
sales to the store are used in determining the minimum cash
distribution percentages to be applied under Paragraph 1 of the above
Plans. A store's patronage dividends from any other sales category
with respect to which patronage dividends are distributed by the
Company are not taken into account in determining either the minimum
portion or any additional portion of the store's patronage dividends
derived from its purchases of lumber and building materials products
which is to be distributed in cash. Also, Paragraphs 2 and 3 of the
above Plans are applied separately to patronage dividends on lumber
and building materials sales and the requirements of Paragraph 2 of
the Plans shall not be deemed to have been complied with in the cases
of (a) purchases of lumber products (other than LTL purchases), (b)
purchases of building materials products (other than LTL purchases) or
(c) purchases of millwork products until the store's holdings of Class
C Non-voting Stock of the Company resulting from patronage dividends
on the Company's sales to it within the particular one of those two
sales categories for which a patronage dividend distribution is to be
made equal 4% of the volume of the store's purchases within such
category during the most recent calendar year. However, no such
special Class C Stock requirement applies to patronage dividends
accrued on LTL purchases.
Notwithstanding the provisions of the above-described Plans,
however, underthem.
Article XXIV, Section 7 of Article XXIV ofour By-laws requires the Company's By-laws thecash portion of any patronage dividends which would otherwise be
distributable in cash with respect to a retail dealer outlet which is
a member of the Company will instead be applied against any
indebtedness owing by the dealer to the Company to the extent of such
indebtedness in any casea member owes us where the membership for such outlethis store is cancelled or terminated prior tobefore the distribution of such patronage
dividends except that an amount equal to
dividends. Despite this, however, 20% of the dealer'sa terminated store's total annual patronage dividends for such outlet will be paid in cash if we
receive a timely request for the paymentthis form of such amount in cash is submitted to
the Company by the dealer.payment.
Because of the requirement of the U. S. Internal Revenue Code that the Companywe withhold 30% of the annual patronage dividends
distributed to membereligible dealers of the Company whose places of business are located in foreign countries or Puerto Rico, (exceptthe 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, and2) certain dealers incorporated in Guam,
American Samoa, the Northern Mariana Islands or the U.S. Virgin Islands,Islands. These exceptions apply if less than 25% of its the
stock of these dealers is owned by foreign persons, and at least 65% of the
Corporation'stheir gross income for the last three years has been
effectively
sufficiently connected with the conduct of a trade or business in such
possessionone of these locations or in the United States),States and 3) dealers located in
countries maintaining tax treaties with the cashUnited States that provide for reduced rates of withholding.
We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend distributions.
For example, to help members buy standardized exterior signs identifying their stores, our Board of Directors has authorized a
loan program. Under this program, a dealer may apply to borrow between $100 to $25,000 per location from us for this
purpose. If a dealer obtains a loan under this program, the dealer may either repay it in twelve payments billed on the regular
bi-weekly billing statement, or the dealer may apply the non-cash portion of the annual patronage dividends of such dealers shall in no event be less than
30%.
It is anticipated that(for up to the terms of anynext
three annual patronage refund
certificates issued pursuant to Paragraph 3.dividend distributions) toward payment of the foregoing Plans
would include provisions giving the Company a first lien thereon for
the amount of any indebtedness owing to it at any time by the owner of
any such certificate and provisions subordinating the certificates to
all the rights and claims of secured, general and bank creditors
against the Company. It is further anticipated that all such patronage
refund certificates will have maturity dates which will be no later
than five years from the dates of issuance thereof.
In order to aid the Company's dealers in acquiring and installing
standardized exterior signs identifying the retail stores operated by
them as member outlets supplied by the Company, theloan.
Our Board of Directors of the Company has also authorized a loan program under which ato help qualified dealers pay for costs of converting their
stores from another hardware distributor's program to our program. Under this loan program, these dealers can borrow up to
$95,000 per store. If the dealer may
borrow from the Company within a range of $100 to $20,000 per location
the funds required for such purpose. A dealer who obtains a loan under this program, may either repaywe will apply the loan in twelve substantially equal
payments billed on such dealer's regular by-weekly billing statement,
or may execute a direction to have thenon-cash portion of the dealer's annual
patronage dividends which would otherwise be distributed under the
above plan in a form other than cash from no more than(for up to the next three annual distributions of such dividends applied towardpatronage dividend distributions) towards payment of the principal and interest on the loan. In order to aid the Company's dealers in acquiring and installing
PACE and PAINTMAKER computer systems purchased from the Company,Unless
extended by the Board of Directors, this loan program will remain in effect until June 1, 2003 or until 100 loans are made,
whichever occurs first.
Our Board of the CompanyDirectors has also authorized finance programs under
which the Company will finance, forto help qualified dealers (but not tobuy certain computer systems from
us with patronage dividends. The amount financed cannot exceed 80% of the cost of any system) in the case of asystem. For PAINTMAKER
computer, within the range of $1,000
computers, members have applied to $15,000borrow between $4,000 to $25,000 per location repayable over a period of three (3) years, and in the case of a PACE computer,
within the range of $5,000 to $50,000 per location repayable over a
period of five (5) years for such purpose. Dealers who obtain
financing from the Company for
years.
Under these purposes direct the Company,
during the financing term,programs, members have directed us to first apply the patronage refund certificate portion of their patronage
dividend distributions toward the principalbalance owed on financed items and interest due on such loans, thenext to apply patronage dividends which would
otherwise be payable in the form of patronage refund certificates for
each year, and then to apply the patronage dividends which would
otherwise be payable for the same year in the form of the Company'sour Class C stock.
The aforementionedStock. These signage, and computer financing and store
conversion programs may be revised or discontinued by theour 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 patronage distributions of the non-cash portion of the annual patronage rebate on
the respective store during that period.
Federal Income Tax Treatment of Patronage Dividends
Both the shares of Class C Non-voting Stocknonvoting stock and the patronage refund certificates used by the Companythat we use to pay patronage dividends
that accrue to its eligible and qualifying dealers constitute
are "qualified written notices of allocation" within the meaning of that
term as used in Sections 1381 through 1388 of the U.S. Internal Revenue
Code. Ace 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 which specifically provide fordeal with the income tax treatment of cooperatives and
their patrons and which have been in effect since 1963. The dollar amount stated dollar amounts of suchon a qualified written noticesnotice of allocation and fair
market value of other qualified property must be taken into the gross income of each of the recipients thereof forperson to whom the taxable years in which they are received,
not withstanding the fact that statednotice is issued, even
though this dollar amountsamount may not actually be receivedpaid to the person in such taxable years.the same year that it is taxed.
In order for the Companyus to receive a deduction from itsour gross income for federal income tax purposes for the amount of any
patronage dividends paid by itthat we pay to a patron (that is, to one of itsour eligible and qualifying dealers) in the form of qualified
written notices of allocation it is necessary that the Companyor other qualified property, we have to pay (or apply against any indebtedness owing tothat the Company by such patron
owes us in accordance with Section 7 of Article XXIV of the Company'sour By-laws) not less than 20% of theeach patron's total patronage dividends distributable to such patron
dividend distribution in cash and that 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 they are received by him. It ishe
receives them. The Internal Revenue Code also required under the Coderequires that any patronage dividend distributions deducted by the Companythat we deduct on its our
federal income tax return with respect
tofor business done by itwe do with patrons during the year for which such
deduction is taken must be madepaid to the Company'sthose patrons within 8eight and one-half months after
the end of suchthat taxable year.
Dealers who have become
By becoming one of our "members" of the Company by owning 1 share of Class A Voting Stock arevoting stock, a patron is deemed under the U.S.
Internal Revenue Code to have consented to take anythe written notices of allocation distributed to themand other qualified property that we
distribute into theirthe patron's gross income by theirincome. Such consent is deemed because of 1) the act of obtaining or retaining membership
in Ace, and 2) because our By-laws provide that the Companymembership constitutes this consent, and by having received from the
Company awe give written notification of the
that By-law provision providing that
membership in the Company constitutes such consent. In accordance withprovision. Under another provision inof the Internal Revenue Code, nonmember dealers who have subscribed for shares of the Company's our
stock willare also be deemed to have consented by virtueto 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 theirthe Subscription Agreements, to take any written notices of
allocation distributed to them into their gross income.
A dealer receivingAgreement for
our stock.
If a patron receives a patronage refund certificate as part of the
dealer'sa patron's patronage dividends in accordance with the last clause of
Paragraph 3 of the patronage dividend distribution plans previously
described under(see the subheading "Forms of
Patronage Dividend Distributions" in this Item 1,), the patron may be deemed to have received interest incomeincome. This interest would arise in
the form of an original issue discount to the extent of any
excess ofthat the face amount of the certificate overexceeds the present value of the
stated principal and interest payments that we have to be made bypay the Companypatron under the terms of the certificate. SuchThis interest income
would be taxable to the dealer ratablya patron's "ratably" over the term of the certificate under Section 7872(b) (2) of the U. S.U.S. Internal
Revenue Code. The presentPresent value for this purpose is to be determined by using a discount rate equal to the applicable Federal rate in
effect as of the day of issuance of the certificate, compounded semi-annually.
The Company will betwice a year.
We are required to backup withhold for federal income tax on the total patronage dividend distribution which is madewe make to a payee
anyone who has not furnished hisus with a correct taxpayer identification number to the Company or as to
whom the Company has notice of the fact that the number furnished to
it is incorrect. A cooperative organization maynumber. We can also be required to backup withhold
federal taxes on the cash portion of each patronage dividend distribution made to a payeesomeone who becomes a member of the cooperative if the payee fails to certify to the cooperativeus that he is
not subject to backup withholding. It is the opinion of counsel for the Company that this
provision isThis backup withholding obligation based on a failure to certify may not be applicable, to any patronage dividend distribution to
a payee
however, unless 50% or more of the total distribution is made in cash. Since we distribute all of the Company'sour patronage dividends for a
given year are
distributed at the same time and the Company's currently effectivesince our current patronage dividend plan (see the heading "Business", subheading "Forms of
Patronage Dividend Distributions") does not permit any store which is a member of
the Companystore to receive more than 45% of its patronage dividends
for the year in the form of cash, it is said counsel's further opinionwe believe that such a certification failure wouldlike this should not ordinarily have noany effect on the CompanyAce or any of its
dealers.
Patronage dividends distributed by a cooperative organizationthat we distribute to
its patrons who are located in foreign countries or certain U. S.
U.S. possessions have been held to constitute fixed or determinable annual
or periodic income on which such patrons are required to pay a tax of
30% of the amount received in accordance with the provisions of
Sections 871(a)(1)(A) and 881(a) (1) of the Internal Revenue Code, as
do patronage dividends distributed to patrons which(including those who are incorporated in Puerto Rico or who reside in Puerto Rico but have not become
citizens of the United States. With respectStates) have been held to itsbe "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 who are subject to suchthis 30% tax, the Company is also obligated towe must withhold it from their patronage
dividends and pay it over to the U.S. Internal Revenue Service an amount equal to the tax.Service. The foregoing provisions
doabove 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 such possessionthat location or in the United States. A reduced rate of withholding may apply to dealers located in
countries maintaining tax treaties with the United States.
The 20% minimum portion of the patronage dividends tothat must be paid in cash to a patron with respect to whom the Company is neither required
to withhold 30% of his total patronage dividend distribution nor
permitted to apply such minimum portion against indebtedness owing to
it by himpatrons other than those discussed
above may not be insufficientenough, depending upon the patron's income tax bracket, of
each individual patron, to provide funds for the full paymentpay all of the patron's federal income tax for which such patron will be liable ason
his annual patronage dividend distributions. In our management's opinion, the payment of a resultminimum of the receipt20% of the total
patronage dividends distributed to him during
the year, including cash, patronage refund certificates and/or Class C
Non-voting Stock.
In the opinion of the Company's management, payment in cash of not
less than 20% of the total patronage dividends distributable each year
to the Company's eligible and qualifying dealers will not have a material adverse effectaffect on theour operations of the Company or itson our ability to obtain adequate
sufficient working capital for the normal requirements of itsour business.
Membership Agreement
In addition to signing a Subscription Agreement for the purchase
of shares of the Company's stock, each retail dealerAgreements
Persons who appliesapply to become an Ace dealer (excluding the firms which are "International
Retail Merchants" as discussed below under the subheading
"International Retail Merchants" in this Item 1)member must sign the
Company'sa Subscription Agreement to purchase our stock. They must also
sign our customary Membership Agreement. AAgreement and Supplement and submit a payment of $400 must
accompany the$1,500 ($2,500 for conversions or new
investor ground-ups) with their signed Membership Agreement to defray the Company'sand Supplement. We use this fee toward our estimated costs
of processing the membership application. If the
application is accepted, copies of both the Membership Agreement and
the Stock Subscription Agreement, signed on behalf of the Company to
evidence its acceptance, are forwarded to the dealer. No royalties are
payable at any time by a dealer for an outlet which the Company
accepts for affiliation into its dealer network. Membershipapplications. A membership may generally be terminated upon various notice periods and for
various reasons (including voluntary termination by either party) as prescribed. The details of these reasons and notice periods are
contained in the membership agreement,Membership Agreement. These reasons for termination and notice periods apply except to the extent thatwhere special laws or
regulations applicable to specificin certain locations may limit the Company'sour right to terminate memberships, or may prescribe greater periods ofrequire longer notice under particular circumstances.
International Retail Merchants and Non-Member Accountsperiods.
Non-Shareholder Programs
In 1989, the Company'sour Board of Directors first authorized the Companyus to affiliate International Retail Merchants,non-shareholder international dealers who operate retail
businesses outside the United States, its territories and possessions. International Retail Merchants do notThese international dealers sign the Company's Regularagreements that differ
from our regular Membership Agreement, butAgreement. They may depending on the circumstances, be granted a license to use certain of the Company'sour trademarks and service marks. Theymarks,
but they do not sign stock subscription agreements or become shareholders, of the Company, nor do they receive distributionpatronage 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 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 member enter into a Limited Liability Company Agreement, with the retailer acting as the managing
member, and form a limited liability company ("LLC") to operate the joint venture stores. In each joint venture, we own 50%
or less of the LLC's units. Currently, Ace has an ownership interest in seven joint ventures. In the future, we may explore
other joint venture opportunities with our members; however, we consider each situation unique and we evaluate each
opportunity on its own merits.
In our sole discretion, we may offer a member a mutually agreeable termination arrangement. In some situations, a
member who terminates on this basis may be offered the opportunity to purchase products from us (including Ace private
label products) for a period of up to 5 years after the termination of membership. The former member is not required to make
any such purchases from us, but must maintain favorable credit status in order to do so.
In 1999, we entered into an agreement with Builder Marts of America (BMA), to combine our lumber and building
materials division (the "LBM division") with BMA, a non-cooperative buying group for lumber and building materials in the
United States. Under this agreement, we contributed certain business assets (primarily vendor rebate receivables, fixed assets
and inventories) in exchange for a non-controlling (28%) interest in the combined entity. The investment in the combined
entity is accounted for under the equity method of accounting. As a result of December 31, 1995, 1994this transaction, we have established an LBM
Retailer Incentive Pool Plan for our members who purchase LBM products through BMA. This program is not a patronage
dividend plan but rather a process for allocating the increase in the value of our investment in BMA to those qualifying
dealers who purchase LBM products through BMA. (See the heading "Business", subheading "Patronage Dividend
Determinations and 1993
International Retail Merchant volumeAllocations".)
In 2001, we developed a non-shareholder industrial distributor program. These industrial distributors can purchase
selected types of products from us for resale under an Industrial Distributor Agreement or Distributor Franchise Agreement.
They are not members of our cooperative by reason of their participation in the industrial distributor program, and therefore
do not own stock or receive patronage dividends in connection with that program. These programs are made available to
cooperative members, however, members will not receive patronage dividends for purchases of products under these
programs.
Sales to international non-shareholder dealers accounted for approximately 3%1.9 % of the Company'sour merchandise sales in 2002,
approximately 2.0% of our merchandise sales in 2001 and approximately 2.2% of our merchandise sales in 2000. Sales to
domestic non-shareholder locations accounted for less than 1.0 % of our total sales in each such year. In 1995, the Company's
Board2002, less than 2.0% of Directors authorized the Company to affiliate non-member
retail accounts, which are not entitled to membershipour total sales in the
cooperative,
2001 and which therefore will neither own stockless than 3.0% of our total sales in the
Company, nor receive patronage dividends.2000. (See Appendix A, Article XXV, Sections 3
and 4section 2 of theour By-laws regarding
International Retail Merchants and non-
membernon-member accounts.)
In connection with the sales of the shares of Ace Canada to Sodisco-Howden Group Inc. on February 13, 2003, we
signed a License Agreement granting Ace Canada the right to operate, and license others to operate, retail hardware stores
under our trademarks and service marks. These retail hardware dealers are not shareholders and do not receive patronage
dividends from us.
Item 2. Properties
The Company's
Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60521.60523. Information with respect to the
Company's principal about our main
properties follows:
Square Feet Owned Lease
of Facility or Expiration
Location (Landappears below:
Square Feet Owned Lease
of Facility or Expiration
Location(Land in Acres)LeasedDate
General Offices:
Oak Brook, Illinois (1) 206,030 Owned
Oak Brook, Illinois 85,786 Leased Date
General Offices:
Oak Brook, Illinois 206,030 Leased September 30, 2009
Oak Brook, Illinois (1) 70,508 Owned
Markham, Ontario, Canada (2) 15,372 Leased February 28, 2006
Distribution Warehouses:
Lincoln, Nebraska 346,000 Leased December 31, 2006
Arlington, Texas 313,000 Leased July 31, 1997
Perrysburg, Ohio 396,000 Leased November 1, 2004
Tampa, Florida 391,760 Owned
Harmans, Maryland 277,000 Owned
Yakima, Washington 502,400 Owned
Maumelle, Arkansas 585,500 Owned
LaCrosse, Wisconsin 363,000 Owned
Bloomfield, Connecticut 449,820 Owned
Huntersville, North Carolina 354,000 Owned
Rocklin, California 470,000 Owned
Gainesville, Georgia 478,000 Owned
Prescott Valley, Arizona 633,000 Owned
Princeton, Illinois 1,080,000 Owned
Carol Stream, Illinois (3) 250,000 Leased September 30, 1999
Chicago, Illinois (4) 18,168 Leased May 31, 1997
Brantford, Ontario, Canada (5) 354,000 Leased March 31, 2006
Baltimore, Maryland (6) 158,485 Leased March 31, 1998
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased January 31, 1998
Paint Manufacturing Facilities:
Matteson, Illinois 356,000 Owned
Chicago Heights, Illinois 194,000 Owned
Other Property:
Aurora, Illinois 72 acres Owned
Square Feet Owned Lease
of Facility or Expiration
Location (Land in Acres) Leased Date
LaCrosse, Wisconsin (7) 3 acres Owned
Colorado Springs, Colorado (8) 42 acres Owned
Yorkville, Illinois (9) 12,500 Leased July 31, 2005
(1) Includes 35,254 square feet leased to tenant until September 30, 1996.
The subject2009
Downers Grove, Illinois 23,962 Leased June 30, 2004
Markham, Ontario, Canada (2) 15,372 Leased November 30, 2002
Distribution Warehouses:
Lincoln, Nebraska 345,440 Leased December 31, 2006
Arlington, Texas 313,091 Leased July 31, 2003
Perrysburg, Ohio 393,720 Leased December 31, 2004
Tampa, Florida 391,755 Owned
Yakima, Washington 507,030 Owned
Maumelle, Arkansas 597,253 Owned
LaCrosse, Wisconsin 591,964 Owned
Rocklin, California 478,468 Leased September 30, 2004
Rocklin, California 75,000 Leased July 31, 2003
Rocklin, California (3) 82 acres Leased January 15, 2023
Gainesville, Georgia 481,013 Owned
Prescott Valley, Arizona 631,485 Owned
Princeton, Illinois 1,094,756 Owned
Summit, Illinois (4) 37,236 Leased February 28, 2017
Baltimore, Maryland (4) 19,600 Leased December 31, 2008
Colorado Springs, Colorado 494,219 Owned
Wilton, New York 800,525 Leased September 1, 2007
Loxley, Alabama 798,698 Leased May 27, 2009
Brantford, Ontario, Canada (5) 354,000 Leased March 31, 2006
Prince George County, Virginia 798,786 Owned
Fort Worth, Texas (4) 10,915 Leased December 31, 2005
Cuyahoga Heights, Ohio (4) 21,320 Leased April 30, 2017
Print Shop Facility:
Downers Grove, Illinois 41,000 Leased April 30, 2004
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 adjacent to the Company's general offices.was leased by Ace for its corporate office until purchased in June, 2002.
(2) This facility isproperty was leased by the Company's wholly owned subsidiary, Ace Hardware Canada Limited.Limited for its corporate office.
(3) This facility wasAce has entered into a ground lease for 82 acres of land containing a 619,688 square foot warehouse/office building,
including 75,000 square feet of building space leased by the Company in October, 1994,Ace. Ace intends to exercise an option to purchase this property by
September, 2003, and to develop this property for use as a bulk merchandise redistribution center.distribution warehouse.
(4) This facility wasproperty is leased by the Company in June, 1994 for use as a freight consolidation center.
(5) This facility is leased byOur subsidiary, 3070070 Nova Scotia Company, leases this property for a distribution warehouse.
In addition to the Company's wholly ownedabove, we or our subsidiary, Ace Hardware Canada, Limited.
(6) This facility was leased by the Company in February, 1995 for
use as a redistribution center.
(7) This land is adjacentCorporate Stores, Inc., lease 26 retail hardware stores ranging from
7,000 to the Company's LaCrosse, Wisconsin
warehouse.
(8) This property was purchased by the Company in March, 1995. A
distribution warehouse containing approximately 493,00025,000 square feet is currently under constructionin size located in the following states: Colorado, Georgia, Illinois, New Jersey, Oregon,
Washington and expected to be in
operation during the second quarter of 1996.
(9) This facility is a retail hardware store leased by the
Company's wholly owned subsidiary, A.H.C. Store Development Corp.
The CompanyWisconsin.
We also leaseslease a fleet of transportationtrucks and equipment for the primarymain purpose of delivering merchandise from the Company'sour warehouses to its our
dealers.
Item 3. Legal Proceedings
There
In the normal course of our business, we are no material a party to various legal proceedings. We do not expect that any currently
pending legal proceedings which eitherwill, individually or in the aggregate, involve claims for damages that
exceed 10%have a material adverse effect on our business, results of the current assets of the Company and its subsidiaries
on a consolidated basis.
Item
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 theour stock of the Company and there is no expectation that any marketone will develop. The Company isWe are organized as a
Delaware corporation and operatesoperate as a cooperative corporation, and its stock is owned exclusively
byonly retailers of hardware and relatedsimilar merchandise who
are our members ofown our stock.
The table below shows the
Company.
The number of holdersstockholders of record that we had as of February 23, 199617, 2003:
Title of each classClassNumber of stock of the Company is as follows:
Title of Class Number of Record Holders
Class A stock, $1,000 par value 3,887
Class B stock, $1,000 par value 3,024
Class C stock, $100 par value 4,775
Dividends, other than patronage dividends are prohibited by theRecord Holders
Class A Stock, $1,000 par value 3,594
Class B Stock, $1,000 par value 1,928
Class C Stock, $100 par value 4,726
Our Company's Articles of Incorporation and By-laws. SeeBy-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:
For the Years Ended December 31,
1995 1994 1993 1992 1991
(000's omitted)
Net sales $2,436,012 $2,326,115 $2,017,763 $1,870,625 $1,704,203
Cost of sales 2,252,125 2,152,835 1,866,768 1,722,493 1,569,871
Gross profit 183,887 173,280 150,995 148,132 134,332
Total expenses 120,145 108,758 93,903 87,365 75,175
Net earnings $63,742 $64,522 $57,092 $60,767 $59,157
Patronage dividends (Notes A, B, 5 and 8) $64,716 $64,520 $59,023 $63,207 $57,729
December 28, December 29, December 30, January 1, January 2,
2002 2001 2000 2000 1999
(000's omitted)
Net sales $3,029,097 $2,923,882 $2,924,187 $3,154,057 $3,094,837
Cost of sales 2,742,201 2,641,840 2,649,211 2,885,371 2,854,879
Gross profit 286,896 282,042 274,976 268,686 239,958
Total expenses and other income, net 193,937 197,882 193,861 175,537 151,163
Income from continuing operations 92,959 84,160 81,115 93,149 88,795
Loss from discontinued operations, net (10,868) (11,091) (723) (587) (835)
Net earnings $ 82,091 $ 73,069 $ 80,392 $ 92,562 $ 87,960
======== ======== ======== ======== ========
Patronage dividends (Notes A, B and C) $95,580 $ 85,109 $ 86,537 $ 95,260 $ 88,022
========= ======== ======== ======== ========
Balance Sheet Data:
Year Ended December 31,
1995 1994 1993 1992 1991
(000's omitted)
Total assets $759,133 $723,610 $666,022 $593,399 $539,753
Working capital 134,354 146,170 135,224 105,641 107,408
Long-term debt 57,795 64,287 71,286 51,696 38,737
Patronage refund certificates payable,
long-term 54,741 63,666 56,270 55,389 58,559
Member dealers' equity 217,245 199,827 186,028 175,681 164,411
December 28, December 29, December 30, January 1, January 2,
2002 2001 2000 2000 1999
(000's omitted)
Total assets $1,143,352 $1,168,791 $1,123,810 $1,081,484 $1,047,580
Working capital 226,267 230,314 181,724 178,369 192,744
Long-term debt 163,075 170,387 105,891 111,895 115,421
Patronage refund certificates payable,
long-term 83,820 77,401 68,385 55,257 43,465
Member dealers' equity 280,022 281,702 285,278 271,564 262,330
(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. For the five
years ended December 31, 1995, patronagePatronage dividends were payable as follows:
1995 1994 1993 1992 1991
(000's omitted)
In cash $23,522 $27,302 $25,766 $27,538 $26,864
In patronage refund
certificates payable 5,032 9,920 12,728 14,598 15,176
In Class C Stock 27,506 21,766 19,064 20,301 14,841
In patronage financing
deductions 8,656 5,532 1,465 770 848
Total patronage dividends $64,716 $64,520 $59,023 $63,207 $57,729
listed in the table
below.
(C) Numbered notes referRefer to Notes toNote 6 of the Consolidated Financial Statements beginning on page F-8.
(5) & (8) refers to Notes (5) and (8) of the Financial Statements
included on page F-10, F-12 and F-13 of this Form 10-K.
December 28, December 29, December 30, January 1, January 2,
2002 2001 2000 2000 1999
(000's omitted)
In cash $38,687 $ 34,229 $ 34,764 $ 38,173 $34,826
In patronage refund certificates payable 20,651 18,739 18,029 12,249 15,720
In Class C Stock 26,053 23,284 24,267 21,648 26,170
In other property - - - 10,190 -
In patronage financing deductions 10,189 8,857 9,477 13,000 11,306
Total patronage dividends $ 95,580 $85,109 $86,537 $ 95,260 $88,022
======== ======= ======= ======= ========
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
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operations 2002 Compared to 2001
Consolidated sales increased 3.6%. Domestic merchandise sales increased 3.7% while International sales were flat with
2001. During 2002, sales to our domestic members increased 5.6%. The increase in domestic sales was primarily due to
higher sales to our existing retailer base, lower retailer cancellations and sales to newly affiliated retailers. This increase was
partially offset by a decrease in sales to non-coop members.
Gross profit increased $4.9 million; however decreased as a percent of total sales from 9.65% in 2001 to 9.47% in 2002.
The increase primarily resulted from higher handling charges due to a shift in sales mix towards handled sales, lower retailer
product returns and freight costs and increased paint margin due to lower raw material costs partially offset by inventory
adjustments.
Distribution operations expenses decreased $5.0 million from 2001 and decreased as a percent of total sales from 2.03%
in 2001 to 1.79% in 2002 primarily due to improved productivity, continued cost controls, lower fixed costs as a result of the
east coast distribution center reconfiguration and additional volume from logistics operations.
Selling, general and administrative expenses increased $3.5 million due to increased investments in technology partially
offset by lease savings due to the purchase of the corporate office location.
Retail success and development expenses increased $613,000 from 2001 primarily due to increased advertising and
marketing expenses offset by the continuation of cost control measures put in place in 2001. These expenses consist primarily
of field personnel and related costs, marketing, advertising, and training programs for Ace retailers and expenses of company-
owned retail operations. Ace continues to make investments in retail initiatives under its Vision 21 strategy to support Ace
Retailers.
Interest expense decreased $1.5 million due to lower interest rates and lower average borrowing levels under the
revolving credit facility. The decline in interest rates is primarily the result of a declining interest rate environment and the
decline in LIBOR, the basis on which our interest rate is determined. The lower average borrowing levels primarily resulted
from an increase in earnings, improved receivable collections and a reduction of inventory levels.
Other income decreased $2.4 million primarily due to a decline in retailer past due and low volume charges and lower
interest income. Additionally, 2001 included non-recurring gains on the sale of two distribution facilities offset by a write-
down of a minority-owned investment.
Income taxes decreased $3.9 million due to the taxes incurred on the sale of two retail support centers in 2001 and
increased tax benefits from non-patronage activities in 2002.
In 2002, the Company entered into an agreement to sell Ace Hardware Canada Limited, a wholly-owned subsidiary for
cash proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13, 2003, at which time the sale proceeds were received and used to repay outstanding indebtedness. The Company
recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002 and a loss from operations
of Ace Hardware Canada Limited of US $5.4 million in 2002 and US $11.1 million in 2001. The decrease in the loss from the
discontinued operation is primarily due to costs associated with the closure of the Calgary distribution center in 2001.
Operations 2001 Compared to 2000
Consolidated sales were flat with 2000. Domestic merchandise sales increased 0.7% primarily due to conversions of new
stores to the Ace program. Sales to our existing retailer base were flat due to the soft economy and inventory reductions at
retail. International sales decreased by 18.6% primarily due to a sale of Ace affiliated stores.
Gross profit increased $7.1 million and increased slightly as a percent of total sales from 9.40% in 2000 to 9.65% in
2001. The increase was primarily due to higher vendor rebates, paint manufacturing margin and margin from company-owned
retail locations partially offset by lower cash discounts from reduced merchandise purchases.
Distribution operations expenses increased $3.0 million over 2000 and increased as a percent of total sales from 1.93% in
2000 to 2.03% in 2001. Increased utilities and distribution expenses associated with the new Loxley, Alabama distribution
facility which was open for a full year in 2001 and the start-up of the Prince George, Virginia distribution facility drove the
higher expenses. Higher logistics income partially offset the increased expenses.
Selling, general and administrative expenses decreased $1.1 million primarily due to decreased expenses related to non-
patronage activities and continued cost control measures.
Retail success and development costs decreased $4.8 million due to continued cost control measures. Expenses in this
category are directly related to retail support of the Ace retailer. These expenses consist primarily of field personnel and
related costs, marketing, advertising and training programs for Ace retailers and expense of company-owned retail operations.
The Company continues to make investments in retail initiatives under our Vision 21 strategy to support Ace retailers.
Interest expense increased $1.4 million due to higher average borrowing levels during the year partially offset by lower
interest rates. The decline in interest rates is primarily the result of a declining interest rate environment and the decline in
LIBOR, the basis on which our interest rate is determined. The higher borrowing levels resulted from the completion of the
Loxley, Alabama and Prince George, Virginia distribution centers, the expansion of the LaCrosse, Wisconsin facility and
increased retailer dating programs.
Other income decreased $2.2 million primarily due to an increase in the write-down of a minority-owned investment of
$1.7 million and decreased interest income due to declining interest rates offset by a $3.6 million nonrecurring gain on
pension plan termination in 2000, the gain recognized on the sale of two distribution facilities and higher income realized on
non-controlling investments in affiliates.
Income taxes increased $3.3 million primarily due to deferred taxes recorded on the sale/exchange of two distribution
centers.
The loss on discontinued operation increased $10.4 million primarily due to a decline in sales volume as a result of the
loss of a significant customer and costs incurred related to the closure of the Calgary distribution center.
Liquidity and Capital Resources
The Company's
Ace's ability to generate cash adequate to meet its needs ("liquidity") results from internally generated funds, short-term
lines of credit and long-term financings (see Notes 3financing.
Cash flow generated from operations provides a significant source of liquidity. For the year-ended December 28, 2002,
cash provided by operations increased to $140.5 million compared to $62.2 million for 2001. The increase was primarily due
to an increase in net earnings, improved receivable collections, and 4a reduction of inventory.
Cash used in investing activities for the year-ended December 28, 2002 was $39.6 million compared to $55.8 million in
2001. The decrease was primarily due to decreased expenditures for the financial
statements).
The Company's longdistribution network as 2001 included expenditures
for the construction of the Prince George, Virginia distribution center. Net capital expenditures of $30.2 million in 2002 were
financed out of current and accumulated internally generated funds and short-term liquidity is dependent on retail
growth as described under the "Company's Business." Nothingborrowings.
Cash used in the
Company's plans as discussed under the "Company's Business" has led or
is expected to lead to any material change in pricing, margins or
product focus or is expected to materially impact the results or
operations or liquidity of the Company. The Company's long-term
strategic plan is only for a renewed focus on supporting retail growth.
Retail growth provides equity growthfinancing activities for the Company. Recognizingyear-ended December 28, 2002 was $101.4 million compared to $8.1 million in
2001 due to payments of short-term borrowings and 2001 proceeds of $70.0 million obtained from the need for equity growth in order to properly capitalize the Company, the
patronage stock formula for years beginning in 1995 was changed. See
"Formsissuance of Patronage Dividend Distributions." Additionally, to help
ensure adequate accessibility to cash, the Company established a
revolving credit facility in 1994. The Company believes that these
changes and the retail growth of the membership will provide adequate
liquidity for the long-term.
The CompanySenior
Notes.
Ace has an established, unsecured revolving credit facility with a group of banks. During 1995, the Company increased itsAce has unsecured lines of credit to $185.0of
$185.0 million of which $172.0$136.1 million was available at December 31, 1995. Any borrowings28, 2002. Borrowings under these lines of credit would
bear
interest at the prime rate or less.a spread over LIBOR based upon quarterly debt to EBITDA ratios. Long-term financings arefinancing is arranged as determined
necessary to meet the Company'sAce's capital or other requirements, with principal amount, timing and form dependent on prevailing debt
markets and general economic conditions. The Company's
credit facilities provide that certain ratios be maintained with the
only material covenant related to fixed charge coverage. The Company is
in compliance with all debt covenants.
Capital expenditures for new and improved facilities were $31.3,
$28.3$30.2 million, $51.4 million, and $16.3$44.6 million in 1995, 1994 2002, 2001
and 1993,2000, respectively. During
1995, the Company financed the $31.3 million of capitalCapital expenditures out
of current and accumulated internally generated funds and short-term
borrowings. 1996 capital expendituresfor 2003 are anticipated to be approximately $49.0$63.0 million primarily for a new
distribution facility,
and improvements to existing facilities.facilities and technology investments.
As a cooperative, the CompanyAce distributes substantially all of its patronage sourcesourced earnings to its members in the form of
patronage dividends, which are deductible for income tax purposes (see headings
"Patronage Dividend Determinations And Allocations" and "Federal Tax
Treatment of Patronage Dividends"). Prior to 1994, patronage dividends
were distributed on the basis of taxable income. Accordingly, patronage
dividends can exceed net income or be less than net income due to the
timing of certain items for income tax purposes. The Board of Directors
does have the authority to determine reasonable reserves for the purpose
of ensuring the welfare of the Company, but it has been the practice of
the Company to distribute substantially all patronage sourced earnings
in the form of patronage dividends. Non-patronage sourced earnings
(including international earnings) have been minimal in all years
presented except for capital gains related to the sale and leaseback of
a distribution center in 1991 which resulted in nonpatronage sourced
income not available for distribution as patronage dividends.
No adverse trends in revenue or net income have occurred since the
end of the Company's last reported financial period. The Company
Ace expects that existing and new internally generated funds, along with established lines of credit and long-term financings,
financing, will continue to be sufficient in the foreseeable future to finance the Company'sits working capital requirements and patronage
dividend and capital expenditure programs.
Operations-1995 Compared
The table below presents contractual obligations and commercial commitments by year of expiration:
Less than 1-3 4-5 After 5
Contractual ObligationsTotal1 YearYearsYearsYears
(000's omitted)
Short-term borrowings $48,900 $48,900 $ - $- $-
Long-term debt 168,722 5,647 18,336 35,739 109,000
Patronage refund certificates 97,016 13,196 27,326 35,843 20,651
Operating leases 94,772 19,522 29,422 18,385 27,443
Total Contractual Cash Obligations $409,410 $87,265 $75,084 $89,967 $157,094
======= ====== ====== ====== =======
Total Amounts Less than 1-3 4-5 Over 5
Other Commercial CommitmentsCommitted1 YearYearsYearsYears
(000's omitted)
Standby letters of credit $13,848 $13,848 $ - $ - $-
Guarantees 11,018 6,905 3,396717 - -
Total Commercial Commitments $24,866 $20,753 $3,396 $717 $-
====== ====== ====== ===== =====
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to 1994
Netmake estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements. On an ongoing basis, Ace evaluates its estimates and judgments based on
historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates, and our estimates would vary under different assumptions or conditions. Management believes
these estimates and assumptions are reasonable.
Ace annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial
reporting and disclosures provide accurate and comprehensive information relative to the current economic and business
environment. Ace's significant accounting policies are described in the accompanying Notes to Consolidated Financial
Statements. The following represents those critical accounting policies which involve a relatively higher degree of judgment,
estimates, and complexity and where materially different amounts could be reported under different conditions or using
different assumptions.
Valuation of Inventories
When necessary, Ace provides allowances to adjust the carrying value of inventories to the lower of cost or market,
including costs to sell or dispose of surplus or damaged/obsolete inventory, and for estimated shrinkage. Estimates for the
future demand for Ace's products are key factors used by management in assessing the net realizable value of the
inventories. While management believes that the estimates used are appropriate, an unanticipated decline in sales increased 4.7%at retail
outlets or a significant decline in 1995demand for products in selected product categories, could result in valuation
adjustments.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects management's estimate of the future amount of receivables that will not be
collected. Management records allowances for doubtful accounts based on judgements made considering a number of
factors, including historical collection statistics, current dealer credit information, the aging of receivables, the current
economic environment and the offsetting amounts due to increases in existing dealer
volume, new store developmentmembers for stock, notes, interest and increased store conversions. 1995 net
sales weredeclared and unpaid
dividends. While Ace believes it has appropriately considered known or expected outcomes, its dealers' ability to pay
their obligations, including those to Ace, could be adversely affected by slowdeclining sales of hardware at retail resulting
from such factors as contraction in the economy or competitive conditions in the wholesale and economic growth, moderate
seasonal sales primarilyretail hardware
industry including increased competition from discount stores, chain stores and other mass merchandisers.
Impact of New Accounting Standards
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The statement retains the previously existing accounting requirements related to late spring weather,the recognition and lumber
price declines. International sales
measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of
long-lived assets to be disposed of by sale to include discontinued operations. It also decreasedexpands the previously existing
reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is
classified as held for sale. The Company applied this statement in 1995 due toaccounting and reporting the peso devaluation resulting in lower export sales to Mexico. Salesdisposal of basic hardware and paint merchandise (including warehouse, bulletin and
direct shipments) increased 4.3%. Lumber and building material sales
experienced slightly higher percentage increases in 1995 due to
accelerated sales efforts, but were affected by industrywide lumber
price declines. Net dealer outlets increased in 1995 due to targeted
sales efforts on new store development and conversions to the Ace
program and increased emphasis on dealer retail success.
Gross profit increased $10.6 million or 6.1% and increasedAce's Canadian
operations as a percent of salesdiscontinued operation.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires companies to 7.55% from 7.45% in 1994 due primarily to shifts
in the Company's sales mix towards the warehouse categories and higher
merchandise discounts and allowances. Growth in competitively priced
and promotional items within the overall sales mix moderated resulting
in a slight gross profit improvement as a percent of sales. However,
emphasis on upfront rebates through reduced handling charges and low
upfront pricing programs and discounts continued with total upfront
rebates increasing 9.5% in 1995.
Warehouse and distribution expenses increased $1.4 million or 4.7%
due to increased building and distribution costs to support the sales
growth. Warehouse productivity improvements and increased freight
consolidation revenue offset these increases resulting in total
warehouse and distribution expenses remaining comparable to 1994 levels
as a percent of sales.
Selling, general and administrative expenses increased by $6.5
million or 12.3% and as a percent of sales due to increased data
processing and personnel costs.
Retail success and development expenses increased by $4.1 million or
27.6% due to increased personnel costs for field retail support and new
business development. Decreased advertising income resulting from
industrywide paper price increases also contributed to the 1995 expense
increase. Increases in this category are directly related to retail
support of the Ace dealer as the Company continues to make retail
investments in our dealer base.
Paint Division sales increased 6.2% to $90.2 million due to strong
dealer support. As a separate division of the Company, the Paint
Division produced net manufacturing profits of $5.8 million in 1995 vs.
$6.7 million in 1994. The decreased net manufacturing profit is a result
of increased raw material prices andrecognize costs associated with openingexit or disposal activities when they are incurred rather than at
the date of commitment to an exit or disposal plan. Ace is required to adopt the provisions of SFAS No. 146 prospectively for
exit or disposal activities initiated after December 31, 2002 and does not expect the implementation of this standard to have a
second facility. Paint
material effect on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others". This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the only product manufactured by fair value of
the Company.
As discussed on page 8, patronage dividendsobligation undertaken. The initial recognition and measurement provisions of the Interpretation are calculated separately
for paint salesapplicable to
guarantees issued or modified after December 31, 2002 and decreased to 6.87% in 1995 from 8.22% in 1994.
Interest expense decreased $337,000 or 2.5% due to lower borrowing
levels resulting from improved inventory turnover. The use of both
short-term borrowings and long-term financing isare not expected to continue to
fund planned capital expenditures in 1996.
Other income increased $192,000have a material effect on the Company's
financial statements. The Company has applied the disclosure requirements of this interpretation, which were effective for
financial statements of interim or 5.2% due primarily to the growth
in dealer financing programs.
Operations-1994 Compared to 1993
Net sales increased 15.3% in 1994 primarily due to increases in
volume from existing dealers and increased International sales. Sales of
basic hardware and paint merchandise (including warehouse, bulletin, and
direct shipments) increased 13.5%. Increased advertising activity fueled
strong 1994 promotional increases, particularly in the warehouse sales
categories. Lumber and building material sales experienced higher
percentage increases in 1994 as sales efforts were accelerated. Net
dealer outlets increased in 1994 partially reversing previous year
declines. Targeted sales efforts on new store development and
conversions to the Ace program and increased emphasis on dealer retail
success resulted in positive 1994 dealer growth.
Gross profit increased $22.3 million or 14.8% vs. 1993 due primarily
to the strong sales results in the basic sales categories and strong
manufacturing profits. As a percent of sales, however, gross profit
declined due to continued growth of competitively priced and promotional
items within the overall sales mix. Upfront rebates through reduced
handling charges and low upfront pricing programs and discounts have
accelerated and reduced gross profit as a percent of sales.
Warehouse and distribution expenses decreased by $1.4 million or
4.4%, and as a percent of sales due to increased traffic revenues and
reduced building, and operating costs due to the replacement of a
facility in early 1993.
Selling, general and administrative expenses increased by $6.0
million or 12.8% and as a percent of sales due to increased building,
data processing and purchasing costs.
Retail success and development expenses increased by $6.9 million due
to reduced net advertising income, increased personnel costs for field
retail support and increased marketing costs. Increases within these
categories are directly related to retail support of Ace dealers.
Paint Division sales increased 24% to $84.9 million due to strong
dealer support and growing recognition of Ace Paint as a quality private
label brand. Paint is the only product manufactured by the Company.
Manufacturing margins are characteristically higher than distribution
margins due to the inherent risks and capital invested in the
manufacturing process. As a separate division of the Company, the Paint
Division produced net manufacturing profits of $6.7 million in 1994 vs.
$5.1 million in 1993. Price increases did not occur in 1994 or
contribute to the sales or income increase. Rather, a drop in raw
material prices and the increase in production volume which improved
absorption of fixed overhead costs were the major factors leading to
increased manufacturing profits.
Interest expense increased $3.1 million in 1994 due to increased
borrowing levels to fund the sales growth and increased interest rates.
The use of both short-term borrowings and long-term financing is
expected to continue to fund planned capital expenditures (see liquidity
and capital resources and Notes 3 and 4 to the financial statements).
Other income increased $807,000 or 27.7% in 1994 due to increased
interest income related to dealer financing programs and 1993 losses on
asset disposals at a replaced facility which did not re-occur in 1994.
annual periods ending after December 15, 2002.
Inflation and Changes in Prices
The Company's
Ace'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 CompanyAce, Ace 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
Ace is subject to certain market risks, including foreign currency and interest rates. Ace uses a variety of practices to
manage these market risks, including, when considered appropriate, derivative financial instruments. Ace uses derivative
financial instruments only for risk management and does not use them for trading or speculative purposes. Ace is exposed to
potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign
currencies. Ace'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 28, 2002, all long-term debt was issued at fixed rates.
The table below presents principal amounts and related weighted average interest rates by year of maturity for Ace's
investments and debt obligations:
20032004200520062007ThereafterTotal
�� (000's omitted)
Assets:
Short-term investment-
fixed rate $ - $1,019 $,251 $ 630 $6,712 $11,735 $20,347
Fixed interest rate -% 5.75% 2.65% 5.73% 5.73% 6.05% 5.75%
Liabilities:
Short-term borrowings-
variable rate $ 48,900 - - - - - $48,900
Average variable interest rate 1.94% - - - - - 1.94%
Long-term debt-fixed rate $5,647 $5,454 $12,882 $17,882 $17,857 $109,000 $168,722
Average fixed interest rate 7.16% 7.18% 7.18% 7.18% 7.21% 7.24% 7.16%
Ace is exposed to credit risk on certain assets, primarily accounts receivable. Ace provides credit to customers in the
ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising Ace's customer base. Ace currently believes its
allowance for doubtful accounts is sufficient to cover customer credit risks.
Ace's various currency exposures often offset each other, providing a natural hedge against currency risk. Ace 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. Ace did not have any outstanding foreign exchange
forward contracts at December 28, 2002 or December 29, 2001. Settlement of foreign sales and purchases are generally
denominated in U.S. currency resulting in limited foreign currency transaction exposure.
Item 8. Financial Statements and Supplementary Data
Financial statements covered by the report of the Company's independent certified public accountants are listed on Page
F-1.
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Company
The
Our directors and the executive officers of the Company are:
Position(s) Currently Held
NameAgeand Business Experience Jennifer(for the past 5 years)
Jimmy Alexander 45 Vice President, Human Resources effective October 1, 2001;
General Merchandise Manager effective July 16, 1999; Merchandise
Manager effective November 1, 1997.
Michael J. Altendorf 45 Vice President, Information Technology effective January, 2001;
Director of Retail Technology effective January, 1999; Manager of
Administrative Services effective April, 1996.
Richard F. Baalmann, Jr. 43 Director since June, 1999; term expires 2005; President of Homart,
Inc., Centralia, Illinois since May, 1988.
William J. Bauman 54 Vice President, Retail Support-West effective October, 1998;
Western Divisional Director of Retail Support effective October, 1994.
Eric R. Bibens II 46 Director since June, 1997; term expires 2003; President of Bibens
Home Center, Inc., Springfield, Vermont since 1983.
Michael C. AndersonBodzewski 53 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 42 Vice President, Merchandising effective October, 2000; Vice
President - Finance effective October 1999; Vice President -
Controller effective September, 1997; Controller effective January,
1994.
J. Thomas Glenn 44 Director since June, 1996; term expires 2005; President of Ace
Hardware of Chattanooga, Chattanooga, Tennessee since January,
1990.
Ray A. Griffith 49 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 53 Director since June, 1998; term expires 2004; President of Garden
Acres Ace Hardware, Longmont, Colorado since January, 1991.
D. William Hagan 45 Director since June, 6, 1994;1997; term expires 1997;2003; President of Davis Lumber
andHagan
Ace Hardware, Inc., Davis, California.
Michael C. Bodzewski 46 Vice President-Merchandising effective
June, 1990; General Merchandise Manager
effective April, 1988.
Lawrence R. Bowman 49 DirectorOrange Park, Florida since February, 4, 1991; term
expires 1998; Vice President of
Owenhouse Hardware Co., Inc., Bozeman,
Montana.1980.
David F. Hodnik 4855 President and Chief Executive Officer effective January, 1, 1996;
President and Chief Operating Officer effective January 1, 1995; Executive Vice
President and Chief Operating Officer
effective January, 1994; Executive Vice
President and Treasurer effective
January, 1991;1995.
Paul M. Ingevaldson 57 Senior Vice President - International and TreasurerTechnology effective January, 1988;
September, 1997; Vice President-Finance and Management
Information Systems and Treasurer
effective September, 1986; Vice
President-Finance and Treasurer
effective December, 1982.
Paul M. Ingevaldson 50 Vice President-CorporatePresident - Corporate Strategy and International
Business effective September, 1992; Vice President-Retail
Support Services effective August, 1989;
Vice President-Western Region effective
September 1, 1988; Vice
President-Distribution effective
September, 1986; Vice
President-Management Information Systems
effective October, 1985; Director1992.
Howard J. Jung 55 Chairman of Data Processing effective October, 1982.
Mark Jeronimus 47the Board and Director since June, 3, 1991;1998; term expires 1997; President of Duluth
Hardware, Inc., Duluth, Minnesota.
Howard J. Jung 48 Director since June 1, 1987; term
expires 1996;
2003; Vice President of Ace Hardware & Home Center,Stores, Inc., Raleigh, North Carolina.
Carolina since June, 1997.
Rita D. Kahle 3946 Executive Vice President-FinancePresident effective October, 2000; Senior Vice President
- - Wholesale effective September, 1997; Vice President - Finance
effective January, 1994; Vice President-Controller
effective January, 1992; Controller
effective July, 1988.
John E. Kingrey 52 Director since May 17, 1992; term
expires 1996; President of WK&K
Corp., Wimberley, Texas.
Position(s) Held
Name Age and Business Experience1994.
Richard E. Laskowski 54 Chairman of the Board since
February 18, 1992 andA. Karp 51 Director since June, 1, 1987;2000; term expires 1998; Pres-
ident of Ace2003; President, Cole Hardware, Home Center of
Round Lake, Inc., Round Lake, Illinois.
David W. League 56
San Francisco, California since June, 1979.
Ronald J. Knutson 39 Vice President-General Counsel and
Secretary effective June, 1990; General
Counsel and SecretaryPresident, Controller effective January 1990; General Counsel1, 2003; Controller
effective January 1989.
William A. Loftus1, 2000; Assistant Controller effective May 15, 1996.
David F. Myer 57 Senior Vice President-Retail OperationsPresident, Retail Support and MarketingLogistics effective October, 1994;
Senior
2000; Vice President-Marketing and
AdvertisingPresident - Retail Support effective September, 1992;
Senior1997; Vice
President since
January 1, 1991; Vice President-Retail
Support Operations effective August,
1989; Vice President-Eastern Region
effective September 1, 1988; Vice
President-Sales effective October, 1983;
National Sales Manager effective
October, 1976.
David F. Myer 50 Vice President-Retail- Retail Support and New Business effective October, 1994;1994.
Kenneth L. Nichols �� 54 Vice President-Retail SupportPresident, Retail Operations effective August, 1992;October, 2000; Vice President-Distribution
President - Retail Operations West effective July, 1989.
Fred J. Neer 56October, 1999; Vice President-Human Resources
President - New Business effective April, 1989;October, 1998; Director - Retail
Operations, Eastern Division effective October, 1994.
Daniel C. Prochaska 45 Vice President, Retail Support-East effective November, 1998;
National Director of Human ResourcesDistribution effective April, 1986.
Ray W. Osborne 59March, 1996.
Jeffrey M. Schulein 61 Director since June, 6, 1988;2002; term expires 1997;2005; Chief Executive Officer
of Crown Hardware, Inc., Huntington Beach, California since
November, 2000; President of Cook & Sons
Ace Hardware Company, Inc., Albertville,
Alabama.
Roger E. Peterson 58from October, 1975 to October, 2000.
Richard W. Stine 57 Director since June, 5, 1995; Chief
Executive Officer (CEO) effective
January 1, 1995; President and Chief
Executive Officer (CEO) effective
December, 1989; President effective
August, 1986; Executive1999; term expires 2005; Vice President effective March, 1985; Vice
President-Operations effective December,
1982.
Donald L. Schuman 57 Vice President-Information Systems
effective June, 1990; Director-
Information Systems effective
January, 1987.
Jon R. Weiss 60of Stine,
Inc., Sulphur, Louisiana since September, 1976.
David S. Ziegler 47 Director since June, 4, 1990;2001; term expires 1996; President of John W. Weiss
Hardware Company, Glenview, Illinois.
Don S. Williams 54 Director since June 6, 1988; term
expires 1997; President of Williams
Lumber, Inc., Rhinebeck, New York.
James R. Williams 48 Director since June 5, 1989; term
expires 1998;2004; Vice President of Williams
AceZ
Hardware Inc., Wichita, Kansas.
TheCompany, Elgin, Illinois since February, 1979.
Our By-laws of the Company provide that itsour Board of Directors
shall be comprised of such number of persons, not less thanhave between 9 and not
greater than 12 as shall be fixed from time to time by the Board of
Directors.directors. A minimum of 9 of the directors shallmust be dealer
directors. A maximum of two of the directors may be non-dealer directors. Non-dealer directors but
non-dealer directors may notcannot exceed 25% of the total
number of directors in office at any one time. A person shallNon-dealer directors may (but do not have to) be eligible for
election or appointment as a non-dealer director without regard to
whether or not such person isshareholders of ours who are
in the owner of a retail business
organization which is a stockholder of Ace Hardware Corporation, or an
executive officer, general partner or general manager of such a retail
business organization. Thehardware business. Our By-laws also provide for three classes of directors who are to be elected for staggered 3-year terms.
The
terms, except that one director who would not otherwise be eligible for reelection in 2001 was elected at the 2001 annual
meeting of stockholders for a two year term under Article IV, Sections 1 through 3 of our By-laws. On January 23, 2001, the
Board of Directors passed a resolution reducing the number of directors from eleven to ten effective with the 2001 Annual
Stockholders meeting on June 4, 2001.
Our By-laws also provide that no person is eligible toone can serve as a dealer director unless suchthat person is either thean owner, of a retail business
organization holding stock in the Company or an executive officer,
general partner or general manager of such a retail business organization.organization that is a shareholder of ours. Regional dealer directors are
elected from geographic regions of the United States established by the Board.States. The Board under Article IV, Section 1 of our By-laws, determines these
regions. If the Board determinesfinds that all regions have representation by regional dealer directors and the maximum number of directors would not thereby be
exceeded,represent all regions, then dealer directors at large may also be elected.
In accordance withelected, so
long as the applicablemaximum 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 2003 annual stockholders meeting to
be held on June 2, 2003 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 establishedrequired by the By-
laws,our By-laws, the following directors have been selected as nominees for reelection as
dealer directors at the 2003 annual stockholders meeting to be held on Junemeeting:
NomineeAgeClassRegionTerm
Eric R. Bibens II 46 First 1 3 1996, as directors of the classes, from the regions, and for terms as
indicated below:
Nominee Class Region Term
John E. Kingrey Third 6years
D. William Hagan 45 First 3 years
Jon R. Weiss Third 4 3 years
Mr. Howard Jung is not eligible for reelection as a director
commencing in 1996.
Richard A. Karp 51 First At large 3 years
The person named below has been selected as thea nominee for election to the Board for the first time at the 19962003 annual
meeting as a dealer director of the class, from the region and for the term indicated.
indicated:
NomineeAgeClassRegionTerm
James T. Glenn 36 Third 2
Lori J. Terpstra 37 First At large 3 years
Reference should be made to
Non-dealer directors and dealer directors at large are not elected from particular geographic regions.
Article IV of theour By-laws forhas information concerningabout the qualifications required for membership on the Board of Directors, the terms
of directors, the limitations on the total period of time for whichthat a director may hold office, the procedure established for the designation of Nominating Committees
Committee to select certain persons ascandidates and nominees for election to the Board of Directors and the procedure for filling vacancies on
the Board for
the remaining portion ofif one occurs during an unexpired terms.term.
None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years with respect tofor any director of the
Registrant,our
directors, nominees for directorships or for any nominee for membership on the Board of Directors of
the Registrant or anyour executive or staff officer of the Registrant.
officers.
Item 11. Executive Compensation
The following
Below is information is set forth with respect toabout the cash compensation that we paid by the Company to each of theour five highest paid executive officers of the Company whose cash compensation exceeded
$100,000,earning over
$100,000 for their services rendered by them in all capacities to the
Companyus and itsour subsidiaries during the fiscal year ended December 31,
1995years 2002, 2001 and the two previous fiscal years:
2000:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
(2)
Name Other (4)
and Annual (3) All Other
Principal (1) Compen- Long-Term Compen-
Position Year Salary ($) Bonus ($) sation ($) Payouts ($) sation ($)
David F. Hodnik 1995 $450,000 - $17,021 $105,870 $ 97,624
President and Chief 1994 350,000 61,250 17,561 15,583 77,782
Executive Officer 1993 328,000 50,840 14,794 15,500 75,210
(CEO effective 1/1/96)
Roger E. Peterson 1995 333,333 - 6,087 - 105,487
Chief Executive 1994 800,000 125,000 12,907 - 147,159
Officer (through 5/31/95) 1993 670,000 100,000 19,001 - 139,598
William A. Loftus 1995 275,000 42,350 6,298 80,204 59,153
Senior Vice President-
Retail Operations 1994 260,000 45,500 10,163 12,000 61,308
and Marketing 1993 250,000 37,500 32,881 12,000 61,560
Paul M. Ingevaldson 1995 247,000 33,100 7,215 71,221 49,466
Vice President- 1994 232,000 41,760 7,190 10,583 59,111
Corporate Strategy and 1993 222,000 31,080 23,195 10,700 53,457
International Business
Michael C. Bodzewski 1995 192,500 36,800 9,555 48,158 36,523
Vice President-Merchandising 1994 165,000 28,900 7,946 6,926 37,739
1993 147,000 18,750 6,797 - 34,403
Rita D. Kahle 1995 195,000 32,175 9,012 44,807 35,573
Vice President-Finance 1994 160,000 29,600 7,874 6,104 36,670
1993 133,000 19,950 7,762 - 32,680
Long-Term
Annual CompensationCompensation
Name &nbs p; (3)
and (2) All Other
Principal (1) Long-Term Compen-
PositionYearSalary ($)Bonus ($)Payouts ($)sation ($)
David F. Hodnik 2002 $665,000 $79,800 $505,593 $117,032
President and Chief 2001 649,000 103,840 531,474 102,627
Executive Officer 2000 630,000 56,700 533,829 116,587
Rita D. Kahle 2002 $327,000 $165,080 $95,392 $52,570
Executive Vice President 2001 313,000 121,280 99,843 43,985
2000 298,000 103,704 85,921 51,302
Paul M. Ingevaldson 2002 $305,000 $128,100 $94,434 $48,098
Senior Vice President, 2001 305,000 72,800 100,779 39,953
International and Technology 2000 295,000 85,550 89,479 51,495
Ray A. Griffith 2002 $295,000 $143,100 $73,736 $44,432
Executive Vice President 2001 275,000 97,300 72,180 34,961
Retail 2000 250,000 76,250 39,563 33,026
David F. Myer 2002 $290,000 $130,500 $83,681 $45,340
Senior Vice President, 2001 278,000 102,980 86,382 38,007
Retail Support and Logistics 2000 263,000 80,215 73,967 42,843
(1) The Officer Incentive Compensation Plan covers each of the executive officers (exceptofficers. Mr. Hodnik).Hodnik participates only in the retail sales
component of the Officer 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. For 1994, and after, theThe
maximum short-term incentive award for each executive officer is 20%35% to 45% of their respective salary.salary in 2000, 2001
and 2002. The short-term bonus award becomes payable to each participant as early as practicable at or after the end of
the fiscal year.
(2) The Company provides automobiles to certain of its executive
officers. The Company requires them to maintain records with respect
to any business automobile use. Such officers pay, both directly and
by reimbursement to the Company, personal automobile expenses.
Country club memberships granted prior to 1994 to some officers have
been eliminated, except for the President. The compensation table set
forth above includes the value of these items and such value for any
officer did not exceed the lesser of $25,000 or 10% of the
compensation reported for each in said table.
(3) Includes the long-term incentive award under the Long-Term Incentive Compensation Deferral Option Plan effective in
1995. In 1994 and
thereafter, theThe 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-
termlong-term performance and
shareholder return in a cooperative environment. One third of the total long-term incentive award is subject to a one year
vesting provision. Total awards paid in 1995 were $105,870,
$80,204, $71,221, $48,158 and $44,807 for Messrs. Hodnik, Loftus,
Ingevaldson, Bodzewski and Ms. Kahle, respectively.
Effective January 1, 1995, executive officers may elect to defer a portion (20% to 100%, in 20% increments) of the
annual award granted. Participants' compensation deferrals are credited with a specified rate of interest to provide a
means to accumulate supplemental retirement benefits. Deferred benefits are payable over a period of 5 to 20 years.
Annual elections are required for the upcoming deferral year by December of the preceding year. OfTotal long-term
incentives for the total 1995
awards, amounts deferredthree year period ended in 2002, to be awarded in 2003, were $84,696, $64,163, $71,221, $32,105$465,467, $84,269, $104,189, $77,378
and $44,807$124,774 for Messrs. Hodnik, Loftus, Ingevaldson, BodzewskiGriffith, Myer and Ms. Kahle, respectively.
(4)
(3) Includes contributions to the Company's Profit Sharing401-k Savings and Retirement Plan which
has been in existence since January 1, 1953, and contributions to the Company's
Retirement Benefits Replacement Plan. All active employees are eligible to participate in the Company's profit sharing plan401-k Savings
and Retirement Plan after one year90 days 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 1995,2002, the Company contributed 10.1%a maximum of 9.9% of each participant's
eligible compensation to the Plan.401-k Savings and Retirement Plan (8.9% profit sharing and 1% Company 401-k match).
During the year 1995, $15,1502002, $19,800 was expensedcontributed to the Company's 401-k Savings and Retirement Plan by the Company
pursuant to the Plan for each of Messrs. Hodnik, Loftus, Ingevaldson, BodzewskiGriffith, 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 Sharing401-k
Savings and Retirement Plan may be reduced by reason of the limitations on contributions and benefits imposed by any
current or future provisions of the U.S. Internal Revenue Code or other federal legislation. During the year 1995,2002,
amounts expensed by the Company
pursuantcontributed to the Company's Retirement Benefits Replacement Plan were $82,474$97,232 for Mr. Hodnik, $44,003$28,298 for
Mr. Ingevaldson, $24,632 for Mr. Loftus, $34,316Griffith, $25,540 for Mr. Ingevaldson, $21,373 for Mr. BodzewskiMyer and $20,423$32,770 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 termlong-term incentive award into the variable annuity insurance policy in their name or may elect to defer
this portion under the Deferral Option Plan. In December 1995, the Company settled a portion of its pension
liability to retirees and vested terminated participants through lump
sum payments and the purchase of single premium annuity contracts.
Pension benefits were frozen to active participants and the plan was
closed to new entrants effective January 1, 1996.
(5)
(4) As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue stock awards of any
kind.
Messrs. Hodnik Loftus, and Ingevaldson are employed under contracts, each dated October, 1994commencing January 1, 2003 for respective terms
of two years, through December 31, 2004. Ms. Kahle and Mr. Myer are employed under contracts, each commencing January
1, 2002 for respective terms of two years, terminatingthrough December 31, 1996.2003. Mr. Bodzewski and Ms. Kahle areGriffith is employed under contracts dated March 24, 1994 and December 15, 1995a contract
commencing September 1, 2002 for a term of two year termyears, terminating March 24, 1996 and DecemberAugust 31, 1997,
respectively.2004. The contracts provide for annual
compensation effective January 1, 19962003 of $500,000, $290,000, $257,000, $200,000$692,000, $318,000, $347,000, $305,000 and $218,000,$322,000, respectively, or such
increased amount, if any, as shall be approved by the Board of Directors. If an executive's employment is terminated without
cause, each contract provides for continuing salary payments for the balance of the current contract term, with the minimum
period for these payments being 6 months (12 months in the case of Mr. Hodnik).
The Company also maintainsmaintained a Pension Plan which has been in existence
sincewas 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 arewere eligible to participate in this Plan on the first January 1
that they arewere working for the Company. Those active employees covered by a collective bargaining agreement regarding
retirement benefits which were the subject of good faith bargaining arewere not eligible if such agreement doesdid not include them
in the plan. The Plan providesprovided benefits at retirement at or after age 65 determined under a formula which takestook 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 iswas 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. In December 1995, the Company settled a portion of its
pension liability to retirees and vested terminated participants
through lump sum payments and the purchase of single premium annuity
contracts. The plan was closed to new entrants on December 31, 1995
and pension benefits were frozen to active participants on January 1,
1996.
Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing Plan offset) arewere as
follows:
Years of Service
Remuneration 10 15 20 25 30 or more
$150,000 30,000 45,000 60,000 75,000 90,000
$100,000 20,000 30,000 40,000 50,000 60,000
$250,000 10,000 15,000 20,000 25,000
Years of Service
Remuneration1015202530 or more
$200,000 $40,000 $60,000 $80,000 $100,000 $120,000
$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 are were
attained after 30 years of service and attainment of age 65. The compensation covered by the Pension Plan consistsconsisted of base
compensation (exclusive of bonuses and non-recurring salary or wage payments) and shall not to exceed $150,000$200,000 of such total
remuneration paid to a participant during any plan year. Remuneration and yearly benefits under the Plan arewere limited, and
subject to adjustment, under Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The amount of covered
compensation under the Pension Plan, therefore is $150,000was $200,000 for each Executive Officer named in the Compensation table. The present
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 arewere as follows: David F. Hodnik-23 years; William A.
Loftus-19Hodnik - 27 years; Paul M. Ingevaldson-16Ingevaldson - 20 years; Michael C. Bodzewski-18Ray
A. Griffith - 6 years; David F. Myer - 18 years and Rita D. Kahle-9Kahle - 14 years.
Compensation Committee Report
The Compensation Committee reviewsis responsible for approving the executive compensation programs, plans and benefits providedguidelines for all senior executives. The corporation's Executive
Compensation philosophy is one that supports
Corporate and Company Officers, and administering the Company's fundamentalExecutive Incentive Plans. Our decisions are based on
our understanding of Ace's business strategies.and its long-term strategies, as well as our knowledge of the capabilities and performance
of the Company and of the executives. We stress long termlong-term measured results, focus on teamwork,team work, accepting prudent risks
and are strongly committed to fulfilling dealer/retailer and consumer needs.
Our
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 team members; while others bring experiences from outside Ace.
We believe the compensation program reflectsfor our executives should be competitive with other high performing retail 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 policysimple
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 based pay. Our competitorsconsidered 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 Human Resources include publicly owned
for profitretail
success; balancing the many relationships within and outside the Ace family; and leading and coordinating with others,
programs which impact Company and retailer performance.
Under the Officer 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 corporations, privately owned for profit retail
enterprises, and other national cooperatives. Each of these comparative
groupings has quite a different compensation practice/philosophy. An
annual review is performed of executive cash compensation at competitor
enterprises. Our orientation is to be cognizant of their respective
practices and pay levels, but to give greater emphasis to that which
supports the needs of our dealer network.
The Compensation Committee changed the compensation mix in 1994 to
one which stresses the provision of more significant performance based
incentives, particularly long term. Annual and long term incentive
opportunities have increased, with substantive changes in long term
performance criteria. Individual, isolated criteria to achieve results
have been eliminated due to their emphasis on short-term decisions.
Long-term performance is evaluated heavily on a measurement of total
shareholder return including both year-end patronage dividends and
upfront dividends through low-upfront pricing programs and discounts.
This criteria maximizes total return to our membership.
As it relatessales growth compared to the President/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'sPresident and CEO's total compensation package. The President and CEO's compensation
includes a competitive base salary, and a significant long-term incentive award only
(no short-term award) so as to maintain theour commitment to long-term company
performance and shareholder return.
return and a retail sales award.
Compensation of Directors
Effective January 1, 1996, and January 1, 1995,2002, each member of the Board of Directors receives(other than the Chairman of the Board) received a
monthly fee of $2,750 and $2,650,
respectively,$3,083 for their services. Effective asservices, which was increased to $3,208 per month effective January 1, 2003. Each member of
the Board of Directors (other than the Chairman of the foregoing dates,Board) also receives $1,500 per Board of Directors meeting attended.
In addition, each Board of Director Committee Chairperson receives $1,000 per meeting chaired. Mr. LaskowskiJung is paid a totalan annual
fee of $120,000 and $110,000 per
year, respectively,$155,000 in his capacity as Chairman of the Board. In 1994, the previous Deferred Director Fee Plan was amended,
restated and retitled the
The Company has adopted a Directors' Deferral Option Plan. Like the Officers' Long TermLong-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 $200.00
$300 per diem compensation for special committee meetings and nominating committee regional trips attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
With the exception of Mr. Laskowski, no
No shares of the Company'sour stock wereare held by any of its officers. No person ownsour officers except for the shares held by Mr. Jung. He is a director, but his
position as Chairman of record orthe Board is known by the Company to own beneficiallyalso 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 theour outstanding voting securitiesstock, whether in their own names, or on
behalf of the Company.someone else.
The following table sets forthbelow shows the shares of our Class B Stock and Class C Stock of the Companythat is held beneficially, directly(directly or indirectly,indirectly), by each director (and nominee) owning such shares, individually itemized,
and by all our directors,
officers and nominees for directorships as of February 17, 2003:
Class B Stock OwnedClass C Stock Owned
Number Percent Number Percent
of Sharesof Classof Sharesof Class
Richard F. Baalmann, Jr. 4 ..207 3,919 ..146
Eric R. Bibens II - - - - 1,353 ..050
J. Thomas Glenn 4 ..207 11,672 ..435
Daniel L. Gust - - - - 661 ..025
D. William Hagan 4 ..207 4,148 ..155
Howard J. Jung - - - - 815 ..030
Richard A. Karp - - - - 5,425 ..202
Jeffrey M. Schulein - - - - 10,211 ..380
Richard W. Stine 4 ..207 11,109 ..414
Lori J. Terpstra - - - - 811 .030
David S. Ziegler - - 10,044 .374
All above directors and officer as a group as16 .828 60,168 2.241
====== ====== ======= ======
We are not aware of February 23, 1996:
Class B Stock Owned Class C Stock Owned
Number Percent Number Percent
of Shares of Class of Shares of Class
Jennifer C. Anderson 4 .132 2,436 .138
Lawrence R. Bowman 4 .132 1,431 .081
Mark Jeronimus 0 .000 730 .041
Howard J. Jung 0 .000 3,578 .202
John E. Kingrey 4 .132 680 .038
Richard E. Laskowski 4 .132 11,608 .656
Ray W. Osborne 4 .132 856 .048
Jon R. Weiss 4 .132 2,469 .139
Don S. Williams 0 .000 3,713 .210
James R. Williams 4 .132 772 .044
James T. Glenn 4 .132 6,527 .369
All above directors and officers as a group 32 1.056 34,800 1.966
There are no known contractual arrangements nor any pledge ofcontracts or securities of the Company whichpledges that may at a subsequent date result in a change in control of the Company.
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 security holder who is knownshareholder whom we know to be the Registrant to ownowner of record or beneficially
more than five percent of any class of the Registrant'sour voting securities or any member of thetheir immediate family of any of the foregoing persons,families had during the last
fiscal year
2002 or is currently proposedexpected to have any materialsignificant interest (whether direct or indirect,indirect) in any transaction in which the amount involved
exceedsover $60,000 and to which the Registrant was or is to be a party,with
us, except that eachthose of theour directors who are also Ace Hardware dealers purchased merchandise and services from the Registrantus and
participated in our programs for their stores, including but not limited to our lending programs, in the ordinary course of business on behalf of the
retail hardware businesses in which they have ownership interests.
business. None of such personsthese directors received benefits not shared by other hardware retailers
supplied by the Registrant.
No director has had any business relationship which is required to be
disclosed pursuant to Item 404(b) of Regulation S-K of the Securities
and Exchange Commission, during the Registrant's last fiscal year. Mr.
Peterson, who was elected as an outside Director effective June 5, 1995
and retired as CEO of the Company effective May 31, 1995 is subject to
an agreement through May 31, 2000 providing for non competition within
the industry, participation in designated Company functions and total
renumeration of $150,000 per year over the 5 year term.
No director, director nominee, executive officer, any member of the
immediate family of any of the foregoing, or any corporation or
organization of which any of the foregoing is an executive officer,
partner, or, directly or indirectly, the beneficial owner of ten percent
or more of any class of equity securities, or any trust or other estate
in which any of the foregoing has a substantial beneficial interest or
as to which such person serves as a trustee or in a similar capacity,
has been indebted to the Registrant or its subsidiaries at any time
since the beginning of the Registrant's last fiscal year in an amount in
excess of $60,000, except for indebtedness incurredspecial terms in connection with purchasesthese transactions (including, but not limited to
our lending programs) or any benefits that were not available to the other cooperative members that we supply.
Item 14. Controls and Procedures
Our Chief Executive Officer and Principal Financial Officer have concluded, based on their evaluation within 90 days of merchandise
the filing date of this report, that our disclosure controls and services made from procedures are effective for gathering, analyzing and disclosing
the Registrantinformation we are required to disclose in our reports filed under the ordinary courseSecurities Exchange Act of business by 1934. There have been
no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to
the retail hardware businesses in whichdate of the directors have ownership interest.
previously mentioned evaluation.
PART IV
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying index (page F-1) to the consolidated financial statements are
filed as part of this annual report.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits listed on the accompanying index to exhibits (pages E-1 through E-6) are filed as part of this annual
report.
(b) Reports on Form 8-K
None.
A Form 8-K was filed on October 23, 2002 reporting under Item 5: A letter of intent entered into by Ace Hardware
Corporation to sell all issued and outstanding shares of its wholly-owned subsidiary Ace Hardware Canada, Limited.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACE HARDWARE CORPORATION
By RICHARD E. LASKOWSKI
Richard E. Laskowski HOWARD J. JUNG
Howard J. Jung
Chairman of the Board and Director
DATED: March 11, 1996
24, 2003
Pursuant to the requirementrequirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
RICHARD E. LASKOWSKI
HOWARD J. JUNG Chairman of the Board March 11, 1996
Richard E. Laskowski24, 2003
Howard J. Jung and Director
DAVID F. HODNIK President and March 11, 199624, 2003
David F. Hodnik and Chief Executive Officer
RITA D. KAHLE Executive Vice President-FinancePresident March 11, 199624, 2003
Rita D. Kahle (Principal Financial Officer)
RONALD J. KNUTSON Vice President, Controller March 24, 2003
Ronald J. Knutson
Richard F. Baalmann, Jr., Eric R. Bibens II, Directors
J. Thomas Glenn, Daniel L. Gust, D. William
Hagan, Richard A. Karp, Jeffrey M. Schulein,
Richard W. Stine, and Accounting Officer)
Jennifer C. Anderson, Lawrence R. Bowman, Directors
Mark Jeronimus, Howard J. Jung,
John E. Kingrey, Ray W. Osborne,
Roger E. Peterson, Jon R. Weiss,
DonDavid S. Williams, and James R. Williams, Jr.
*ByZiegler
*By DAVID F. HODNIK March 24, 2003
David F. Hodnik
*By RITA D. KAHLE March 24, 2003
Rita D. Kahle
*Attorneys-in-fact
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
I, David F. Hodnik, *Bycertify that:
1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003 By DAVID F. HODNIK
David F. Hodnik
President and Chief Executive Officer
CERTIFICATION OF EXECUTIVE VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
I, Rita D. Kahle, certify that:
1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003 By RITA D. KAHLE
Rita D. Kahle
Executive Vice President
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibits
EnclosedDescription
10-P Copy of Lease dated June 19, 2002 for the Registrant's distribution center in Rocklin,
California.
10-a-20 Copy of Fourth Amendment to Ace Hardware Corporation Restated Officer Incentive
Plan adopted December 11, 2002 and effective January 1, 2003.
10-a-21 Copy of current standard form of National Supply Network Distributor Franchise
Agreement.
10-a-22 Copy of Ground Lease dated January 13, 2003 for lease of 82 acres of real estate in
Placer County, California.
10-a-23 Copy of Lease dated February 7, 2002 for the Registrant's freight consolidation center
in Cuyahoga Heights, Ohio.
10-a-24 Copy of Option Agreement and Joint Escrow Instructions dated January 13, 2003 for
purchase of 82 acres of real estate in Placer County, California.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
24 Powers of Attorney.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibits
Incorporated
by ReferenceDescription
3-A Copy of Restated Certificate of Incorporation of the Registrant, as amended through June 3,
1996, filed as Exhibit 3-A to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
incorporated herein by reference.
3-B Copy of By-laws of the Registrant as amended through January 26, 2002 filed as Exhibit
3-B to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) filed
on or about March 22, 2002 andincorporated herein by reference.
4-A Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as Exhibit
4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on or about March 15, 1985 and incorporated herein by reference.
4-B Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to
Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on or about March 29, 1988 and incorporated herein by reference.
4-C Specimen copy of Class A Stock certificate as revised in 1987 filed as Exhibit 4-C to
Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on or about March 29, 1988 and incorporated herein by reference.
4-D Specimen copy of Class C Stock certificate filed as Exhibit 4-I to the Registrant's Form S-1
Registration Statement (Registration No. 2-82460) on or about March 16, 1983 and
incorporated herein by reference.
4-E Copy of current standard form of Subscription for Capital Stock Agreement to be used for
dealers to subscribe for shares of the Registrant's stock in conjunction with new membership
agreements submitted to the Registrant filed as Exhibit 4-E to the Registrant's Form S-2
Registration Statement (Registration No. 333-84792) filed on or about March 22, 2002 and
incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with respect to purchases of
merchandise made from the Registrant for the year 2000 and subsequent years adopted by the
Board of Directors of the Registrant on December 6, 2000 and filed as Exhibit 4-F to
Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
4-G Copy of LBMRetailer Incentive Pool Plan adopted on December 8, 1999 by the Board of
Directors of the Registrant filed as Exhibit 4-G to Post-Effective Amendment No. 5 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about
March 15, 2000 and incorporated herein by reference.
10-A Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated and
Adopted December 7, 1993, consolidated and refiled with First, Second, Third and Fourth
Amendments as Exhibit 10-A to the Registrant's Form S-2 Registration Statement (Registration
No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-B Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and Restated as
of January 1, 1997 (for years 1995-2001), consolidated and refiled with First and Second
Amendments as Exhibit 10-B to the Registrant's Form S-2 Registration Statement (Registration
No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-C Copy of First Amendment to Ace Hardware Corporation Deferred Compensation Plan adopted
on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment No. 3 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-D Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans)
adopted on December 6, 2000 filed as Exhibit 10-D to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-E Copy of Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999
consolidated and refiled with First, Second and Third Amendments as Exhibit 10-E to the
Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about March
22, 2002 and incorporated herein by reference .
10-F Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
Agreement dated as of August 23, 1996 as amended by the First Modification of Amended
and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The
Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective Amendment
No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial Corp. dated December 17, 1997
establishing a $10,000,000 discretionary leasing facility for the purchase of land and
construction of retail hardware stores filed as Exhibit 10-G to Post-Effective Amendment No. 3
to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about
March 18, 1998 and incorporated herein by reference.
10-H Copy of form of Executive Officer Employment Agreement effective January 1, 1996 filed as
Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) filed on or about March 11, 1996 Rita D. Kahle
*Attorneys-in-fact
Item 14(a)and incorporated
herein by reference.
10-I Copy of Note Purchase and Private Shelf Agreement with The Prudential
Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A
Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit
10-A-q to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or
about March 23, 1992 and incorporated herein by reference.
10-J Copy of current standard form of Ace Hardware Corporation International
Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-K Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P
to Pre-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about April 26, 1995 and incorporated herein by reference.
10-L Copy of Supplement to Ace Hardware Membership Agreement effective April 1, 2000, filed as
Exhibit 10-L to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by
reference.
10-M Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued
September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000 Private Shelf Facility,
pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance
Company of America dated as of September 22, 1993 filed as Exhibit 10-R to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No.
33-46449) on or about March 23, 1994 and incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop facility of Registrant in Downers Grove,
Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-O Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook,
Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449) on or about March 22, 1993 and
incorporated herein by reference.
10-P No exhibit incorporated by reference. See Index to Exhibits, Exhibits Enclosed for the
applicable materials.
10-Q Copy of Ace Hardware Corporation Deferred Compensation Plan effective January 1, 1994
filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-R Copy of current standard form of Ace Hardware Corporation License Agreement for
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 Ace Hardware Corporation Long-Term Compensation Deferral Option Plan effective
January 1, 1995 consolidated and refiled with First, Second and Third Amendments as Exhibit
10-V to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or
about March 22, 2002 and incorporated herein by reference.
10-W Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R
Corporation for retail hardware store premises located in Yorkville, Illinois filed as Exhibit
10-a-11 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.
10-X Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace
Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada filed as Exhibit
10-a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.
10-Y Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware
Canada Limited for general office space in Markham, Ontario, Canada filed as Exhibit 10-a-13 to
Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.
10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on
August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment No. 4 to the Registrant's
Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein by reference.
10-a-1 Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July
19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and
incorporated herein by reference.
10-a-2 Copy of current standard form of International Retail Merchant Agreements filed as Exhibit
10-a-2 to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
10-a-3 Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in
Wilton, New York filed as Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
12, 1997 and incorporated herein by reference.
10-a-4 Copy of 6.47% Series A Senior Notes in the aggregate principal amount of $30,000,000 issued
August 23, 1996 with a maturity date of June 22, 2008 and $70,000,000 Private Shelf Facility,
pursuant to Amended and Restated Note Purchase and Private Shelf Agreement with the
Prudential Insurance Company dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 12, 1997 and incorporated herein by reference.
10-a-5 Copy of First Amendment to Ace Hardware Corporation Directors' Deferral Option Plan
(effective January 1, 2001) adopted December 5, 2001 and effective January 1, 2002 filed as
Exhibit 10-a-5 to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792)
on or about March 22, 2002 and incorporated herein by reference.
10-a-6 Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility in Loxley,
Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and
incorporated herein by reference.
10-a-7 Copy of current standard form of Industrial Distributor Agreement filed as Exhibit 10-a-7 to the
Registrant's Form S-2 Registration Statement(Registration No. 333-84792)filed on or about
March 22, 2002 and incorporated herein by reference.
10-a-8 Copy of First Amendment to Ace Hardware Corporation Long-Term Incentive Compensation
Deferral Option Plan (effective January 1, 2000) adopted December 5, 2001 and effective
January 1, 2002 filed as Exhibit 10-a-8 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792)on or about March 22, 2002 and incorporated herein by reference.
10-a-9 Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center in
Baltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-10 Copy of Amendment dated April 24, 2001 to Note Purchase and Private Shelf Agreement dated
as of September 27, 1991, and Restated Note Purchase and Private Shelf Agreement dated as
of August 23, 1996 with The Prudential Insurance Company of America filed as Exhibit 10-a-10
to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about
March 22, 2002 and incorporated herein by reference.
10-a-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.
10-a-16 Copy of Lease dated June 30, 2000 for the Registrant's supplemental warehouse space in
Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-17 Copy of Lease dated January 16, 2002 for the Registrant's freight consolidation center in
Summit, Illinois filed as Exhibit 10-a-17 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-18 Copy of Amendment dated September 10, 2001 to Note Purchase and Private Shelf Agreement
dated as of September 27, 1991, and Restated Note Purchase and Private Shelf Agreement
dated as of August 23, 1996 with The Prudential Insurance Company of America filed as
Exhibit 10-a-18 to the Registrant's Form S-2 Registration Statement (Registration No.
333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-19 Copy of Note Purchase Agreement dated April 15, 2001 for the issuance and sale of up to
$100,000,000 of Senior Notes, under which $70,000,00 of 7.27% Senior 2001-A Notes with a
maturity date of April 30, 2013 have been sold to various purchasers filed as Exhibit 10-a-19 to
the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about
March 22, 2002 and incorporated herein by reference.
Upon request of the Commission, we agree to furnish copies of any agreements regarding indebtedness that does not
exceed ten percent of our total assets and the assets of our subsidiaries on a consolidated basis.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which
have not Registered Securities Pursuant to Section 12 of the Act.
As of the date of the Report mentioned above, proxy soliciting materials for our 2003 annual meeting have not been sent
to our shareholders. Copies of proxy soliciting materials will be sent to our shareholders and furnished to the Securities and
Exchange Commission at a later date.
Index to Consolidated Financial Statements and Financial Statement Schedules
Page(s)
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 199528, 2002 and 1994 F-3December 29, 2001
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the three
years in the three-year period
ended December 31, 1995 F-528, 2002
Consolidated Statements of Member Dealers' Equity for each of the three years in the
three-year period ended December 31, 1995 F-628, 2002
Consolidated Statements of Cash Flows for each of the three
years in the three-year
period ended December 31, 1995 F-728, 2002
Notes to Consolidated Financial Statements F-8
All schedules have been omitted because the required information is not present or is not present in amounts sufficient to
require submission of the schedule or the required information is included in the consolidated financial statements or the notes
thereto.
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 31, 199528, 2002 and 1994December 29, 2001, 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 31, 1995.28, 2002. 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 auditing standards. 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 31, 199528, 2002 and 1994,December 29, 2001, and the results of its
their operations and itstheir cash flows for each of the years in the three-year period ended December 31, 199528, 2002 in conformity
with accounting principles generally accepted accounting
principles.in the United States of America.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 31, 1996
ACE HARDWARE CORPORATION
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
(000's omitted)
Current assets:
Cash and cash equivalents $ 12,853 $ 4,868
Receivables:
Dealers 248,572 228,525
Other 39,916 32,377
288,488 260,902
Less allowance for doubtful receivables (1,410) (1,350)
Net receivables 287,078 259,552
Inventories (Note 2) 254,451 270,391
Other current assets 9,324 7,189
Total current assets 563,706 542,000
Property and equipment (Note 9):
Land 16,063 14,219
Buildings and improvements 145,359 135,252
Warehouse equipment 51,396 48,947
Office equipment 61,568 54,056
Manufacturing equipment 12,697 12,165
Transportation equipment 14,763 14,557
Leasehold improvements 13,498 10,928
Construction in progress 12,449 7,561
327,793 297,685
Less accumulated depreciation and amortization (136,289) (120,577)
Net property and equipment 191,504 177,108
Other assets 3,923 4,502
$759,133 $723,610
See accompanying notes to financial statements.
ACE HARDWARE CORPORATION
BALANCE SHEETS
December 31, 1995 and 1994
LIABILITIES AND MEMBER DEALERS' EQUITY
1995 1994
(000's omitted)
Current Liabilities:
Current installments of long-term debt (Note 4) $ 7,378 $ 7,369
Short-term borrowings (Note 3) 13,000 30,000
Accounts payable 337,414 291,185
Patronage dividends payable in cash (Note 5) 23,522 27,302
Patronage refund certificates payable (Note 5) 12,641 1,315
Accrued expenses 35,397 38,659
Total current liabilities 429,352 395,830
Long-term debt (Note 4) 57,795 64,287
Patronage refund certificates payable (Note 5) 54,741 63,666
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value 3,905 3,924
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 177,817 164,666
Class C Stock of $100 par value, issuable to
dealers for patronage dividends 27,506 21,766
Additional stock subscribed, net 515 555
Retained earnings 4,650 5,624
Contributed capital 3,295 3,295
224,187 206,329
Less: Treasury stock, at cost (6,942) (6,502)
Total member dealers' equity 217,245 199,827
Commitments (Notes 6 and 9)
$759,133 $723,610
See accompanying notes to financial statements.
ACE HARDWARE CORPORATION
STATEMENTS OF EARNINGS
Years Ended December 31,
1995 1994 1993
(000's omitted)
Net sales $2,436,012 $2,326,115 $2,017,763
Cost of sales 2,252,125 2,152,835 1,866,768
Gross profit 183,887 173,280 150,995
Operating expenses:
Warehouse and distribution 31,476 30,056 31,432
Selling, general and administrative 59,157 52,662 46,706
Retail success and development 18,889 14,798 7,891
Total operating expenses 109,522 97,516 86,029
Operating income 74,365 75,764 64,966
Interest expense (Note 11) (13,137) (13,474) (10,355)
Other income, net 3,908 3,716 2,909
Income taxes (Note 7) (1,394) (1,484) (428)
Net earnings $ 63,742 $ 64,522 $ 57,092
Retained earnings at beginning of year $ 5,624 $ 5,622 $ 7,553
Net earnings 63,742 64,522 57,092
Patronage dividends (Notes 5 and 8) (64,716) (64,520) (59,023)
Retained earnings at end of year $ 4,650 $ 5,624 $ 5,622
See accompanying notes to financial statements.
ACE HARDWARE CORPORATION
STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 31, 1995
(000's omitted)
Class C Stock
Issuable to
Dealers for Additional
Class A Class B Class C Patronage Stock
Stock Stock Stock Dividends Subscribed*
Balance at December 31, 1992 $4,060 $6,499 $139,014 $20,301 $ 797
Net earnings - - - - -
Net payments on subscriptions - - - - 1,049
Stock issued 157 - 21,377 (20,301) (1,233)
Stock repurchased - - - - -
Stock retired (271) - (7,236) - -
Stock issuable as patronage dividends - - - 19,064 -
Patronage dividends payable - - - - -
Balance at December 31, 1993 $3,946 $6,499 $153,155 $19,064 $ 613
Net earnings - - - - -
Net payments on subscriptions - - - - 1,394
Patronage financing deductions - - - (1,086) -
Stock issued 218 - 19,212 (17,978) (1,452)
Stock repurchased - - - - -
Stock retired (240) - (7,701) - -
Stock issuable as patronage dividends - - - 21,766 -
Patronage dividends payable - - - - -
Balance at December 31, 1994 $3,924 $6,499 $164,666 $21,766 $ 555
Net earnings - - - - -
Net payments on subscriptions - - - - 1,580
Patronage financing deductions - - - (15) -
Stock issued 237 - 23,149 (21,751) (1,620)
Stock repurchased - - - - -
Stock retired (256) - (9,998) - -
Stock issuable as patronage dividends - - - 27,506 -
Patronage dividends payable - - - - -
Balance at December 31, 1995 $3,905 $6,499 $177,817 $27,506 $ 515
(Table Continued27, 2003
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 28, 2002 and December 29, 2001
ASSETS
December 28, December 29,
2002 2001
(000's omitted)
Current assets:
Cash and cash equivalents $ 21,605 $ 22,147
Short-term investments 20,347 17,158
Receivables:
Trade 287,422 303,367
Other 58,224 63,435
345,646 366,802
Less allowance for doubtful receivables (3,194) (2,304)
Net receivables 342,452 364,498
Inventories (Note 3) 399,133 404,302
Prepaid expenses and other current assets 18,182 16,244
Assets of discontinued operation held for sale (Note 2) 10,274 18,082
Total current assets 811,993 842,431
Property and equipment:
Land 17,152 15,466
Buildings and improvements 239,364 232,015
Warehouse equipment 100,683 97,892
Office equipment 115,442 106,811
Manufacturing equipment 16,285 15,197
Transportation equipment 16,328 15,871
Leasehold improvements 17,285 16,048
522,539 499,300
Less accumulated depreciation and amortization (238,507) (213,955)
Net property and equipment 284,032 285,345
Other assets 47,327 41,015
$1,143,352 $1,168,791
======== ========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 28, 2002 and December 29, 2001
LIABILITIES AND MEMBER DEALERS' EQUITY
December 28, December 29,
2002 2001
(000's omitted)
Current liabilities:
Current installments of long-term debt (Note 5) $ 5,647 $ 7,151
Short-term borrowings (Note 4) 48,900 72,600
Accounts payable 385,750 406,471
Patronage dividends payable in cash (Note 6) 38,687 34,229
Patronage refund certificates payable (Note 6) 13,196 9,084
Accrued expenses 86,747 78,843
Liabilities from discontinued operation held for sale (Note 2) 6,799 3,739
Total current liabilities 585,726 612,117
Long-term debt (Note 5) 163,075 170,387
Patronage refund certificates payable (Note 6) 83,820 77,401
Other long-term liabilities 30,709 27,184
Total liabilities 863,330 887,089
Member dealers' equity (Notes 6 and 9):
Class A Stock of $1,000 par value 3,617 3,693
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 269,612 260,224
Class C Stock of $100 par value, issuable to dealers for
patronage dividends 26,053 23,284
Additional stock subscribed, net 243 303
Retained deficit (31,080) (17,591)
Contributed capital 13,485 13,485
Accumulated other comprehensive income 703 587
289,132 290,484
Less: Treasury stock, at cost (9,110) (8,782)
Total member dealers' equity 280,022 281,702
Commitments (Notes 7 and 11)
$1,143,352 $1,168,791
========= ========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
December 28, December 29, December 30,
2002 2001 2000
(000's omitted)
Net sales $3,029,097 $2,923,882 $2,924,187
Cost of sales 2,742,201 2,641,840 2,649,211
Gross profit 286,896 282,042 274,976
Operating expenses:
Distribution operations 54,346 59,333 56,318
Selling, general and administrative 60,637 57,160 58,277
Retail success and development 67,893 67,280 72,069
Total operating expenses 182,876 183,773 186,664
Interest expense (Note 12) (21,583) (23,100) (21,670)
Other income, net 10,055 12,409 14,600
Income taxes (Note 8) 467 (3,418) (127)
Income from continuing operations 92,959 84,160 81,115
Discontinued operation:
Loss from discontinued operation (5,421) (11,091) (723)
Loss on following page)
*Additionaldisposal of discontinued operation (5,447) - --- - ---
Net earnings $ 82,091 $ 73,069 $ 80,392
============ ============ ==========
Retained earnings (deficit) at beginning of year $ (17,591) $ (5,551) $ 594
Net earnings 82,091 73,069 80,392
Patronage dividends (Note 6) (95,580) (85,109) (86,537)
Retained deficit at end of year $ (31,080) $ (17,591) $ (5,551)
============= ============ ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
December 28, December 29, December 30,
2002 2001 2000
(000's omitted)
Net earnings $ 82,091 $ 73,069 $ 80,392
Foreign Currency Translation, net 1,826 (1,206) (911)
Unrealized gains on securities 116 129 458
Comprehensive income $ 84,033 $ 71,992 $ 79,939
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 28, 2002 (000's omitted)
Class C Stock
Issuable to Accumulated
Dealers for Additional Retained Other Com-
Class A Class B Class C Patronage Stock Earnings Contributed prehensive Treasury
StockStockStockDividendsSubscribed*(deficit)CapitalIncome/(loss)StockTotal
Balance at January 1, 2000 $3,856 $6,499 $241,226 $21,648$498 $594 $13,485$ - $(8,134) $279,672
Net earnings - - - - - 80,392 - - - 80,392
Net payments on subscriptions - - - - - - 1,830 - - - - - - 1,830
Patronage financing deductions - - - (158) - - - - - (158)
Stock issued 234 - 23,391 (21,490) (1,977) - - - - 158
Stock repurchased - - - - - - - - (14,804) (14,804)
Stock retired (307) - (14,137) - - - - - 14,444 -
Patronage dividends issuable - - - 24,267 - - - - - 24,267
Patronage dividends payable - - - - - (86,537) - - - (86,537)
Accumulated other comprehensive
income (loss) - - - - - - - 458 - 458
Balance at December 30, 2000 3,783 6,499 250,480 24,267 351 (5,551) 13,485 458 (8,494) 285,278
Net earnings - - - - - 73,069 - - - 73,069
Net payments on subscriptions - - - - 1,479 - - - - 1,479
Patronage financing deductions - - - (1,324) - - - - - (1,324)
Stock issued 170 - 24,202 (22,943) (1,527) - - - - (98)
Stock repurchased - - - - - - - - (15,006) (15,006)
Stock retired (260) - (14,458) - - - - - 14,718 -
Patronage dividends issuable - - - 23,284 - - - - - 23,284
Patronage dividends payable - - - - - (85,109) - - - (85,109)
Accumulated other comprehensive
income (loss) - - - - - - - 129 - 129
Balance at December 29, 2001 3,693 6,499 260,224 23,284 303 (17,591) 13,485 587 (8,782) 281,702
Net earnings - - - - - 82,091 - - - 82,091
Net payments on subscriptions - - - - 1,322 - - - - 1,322
Patronage financing deductions - - - - - - - - - -
Stock issued 171 - 24,495 (23,284) (1,382) - - - - -
Stock repurchased - - - - - - - - (15,682) (15,682)
Stock retired (247) - (15,107) - - - - - 15,354 -
Patronage dividends issuable - - - 26,053 - - - - - 26,053
Patronage dividends payable - - - - - (95,580) - - - (95,580)
Accumulated other comprehensive
income (loss) - - - - - - - 116 - 116
Balance at December 28, 2002 $3,617 $6,499 $269,612 $26,053 $243 $(31,080) $13,485 $703 $(9,110)$280,022
*Additional stock subscribed is comprised of the following amounts at December 31, 1993, 199430, 2000, December 29, 2001 and 1995:
Retained Contributed Treasury
Earnings Capital Stock Total
Balance at December 31, 1992 $ 7,553 $ 3,295 $(5,838) $175,681
Net earnings 57,092 - - 57,092
Net payments on subscriptions - - - 1,049
Stock issued - - - -
Stock repurchased - - (7,835) (7,835)
Stock retired - - 7,507 -
Stock issuable as patronage dividends - - - 19,064
Patronage dividends payable (59,023) - - (59,023)
Balance at December 31, 1993 $ 5,622 $ 3,295 $(6,166) $186,028
Net earnings 64,522 - - 64,522
Net payments on subscriptions - - - 1,394
Patronage financing deductions - - - (1,086)
Stock issued - - - -
Stock repurchased - - (8,277) (8,277)
Stock retired - - 7,941 -
Stock issuable as patronage dividends - - - 21,766
Patronage dividends payable (64,520) - - (64,520)
Balance at December 31, 1994 $ 5,624 $ 3,295 $(6,502) $199,827
Net earnings 63,742 - - 63,742
Net payments on subscriptions - - - 1,580
Patronage financing deductions - - - (15)
Stock issued - - - 15
Stock repurchased - - (10,694) (10,694)
Stock retired - - 10,254 -
Stock issuable as patronage dividends - - - 27,506
Patronage dividends payable (64,716) - - (64,716)
Balance at December 31, 1995 $ 4,650 $ 3,295 $(6,942) $217,245
*Additional stock subscribed is comprised of the following amounts at December 31, 1993, 1994 and 1995:
1993 1994 1995December 28, 2002:
200020012002
Class A Stock $ 22341 $ 29194 $ 33240
Class B Stock - - -
Class C Stock 1,952 2,180 2,332
2,175 2,471 2,664
975 977 874
1016 1071 914
Less unpaid portion 1,562 1,916 2,149portion 665 768 671
$ 613351 $ 555303 $ 515243
===== ===== =====
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(000's omitted)
Operating Activities: 1995 1994 1993
Net Earnings $63,742 $64,522 $57,092
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 16,837 16,963 16,166
Loss on sale of property and equipment 3 175 460
Increase in accounts receivable, net (27,526) (46,950) (18,878)
Decrease (Increase) in inventories 15,940 (6,815) (50,099)
Decrease (Increase) in
other current assets (2,135) 153 (70)
Increase in accounts payable and
accrued expenses 42,967 63,437 57,898
Net Cash Provided by Operating
Activities 109,828 91,485 62,569
Investing Activities:
Purchase of property and equipment (31,263) (28,285) (16,350)
Proceeds from sale of property and equipment 27 187 238
Decrease (Increase) in other assets 579 7,711 (2,092)
Net Cash Used in Investing Activities (30,657) (20,387) (18,204)
Financing Activities:
Payments of short-term borrowings (17,000) (8,500) (17,500)
Proceeds from notes payable - - 30,000
Principal payments on long-term debt (6,483) (10,337) (1,092)
Payment of cash portion of patronage dividend (27,302) (25,766) (27,538)
Payments of patronage refund certificates
and patronage financing deductions (11,287) (18,886) (19,451)
Proceeds from sale of common stock 1,580 1,394 1,049
Repurchase of common stock (10,694) (8,277) (7,835)
Net Cash Used in
Financing Activities (71,186) (70,372) (42,367)
Increase in Cash and Cash Equivalents 7,985 726 1,998
Cash and Cash Equivalents at beginning of year 4,868 4,142 2,144
Cash and Cash Equivalents at end of year $12,853 $ 4,868 $ 4,142
See accompanying notes to financial statements.
statements
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 28, December 29, December 30,
2002 2001 2000
(000's omitted)
Operating Activities:
Income from continuing operations $ 92,959 $ 84,160 $ 81,115
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 31,659 28,295 30,930
Gain on sale of property and equipment,
net of deferred taxes of $1,681 - (3,264) -
Decrease (increase) in accounts receivable, net 22,046 (1,812) (3,778)
Decrease (increase) in inventories 5,169 (24,852) (26,540)
Increase in prepaid expenses and
other current assets (2,090) (1,724) (1,519)
Decrease in accounts payable and accrued expenses (12,817) (20,899) (5,032)
Increase in other long-term liabilities 3,525 2,261 2,523
Net Cash Provided by Operating Activities 140,451 62,165 77,699
Investing Activities:
Purchase of short-term investments (3,189) (4,386) (12,772)
Purchase of property and equipment (30,194) (51,430) (44,649)
Proceeds from sale of property and equipment - - 9,664
Increase in other assets (6,196)(23) (10,831)
Net Cash Used in Investing Activities (39,579)(55,839) (58,588)
Financing Activities:
Proceeds (payments) of short-term borrowings (23,700) (8,900) 33,501
Proceeds from issuance of long-term debt - 70,000 - -
Payments on long-term debt (8,816) (5,174) (3,001)
Payment of cash portion of patronage dividend (34,229) (34,764) (38,173)
Payments of patronage refund certificates and
patronage financing deductions (20,309) (15,713) (9,956)
Proceeds from sale of common stock 1,322 1,479 1,830
Repurchase of common stock (15,682)(15,006) (14,804)
Net Cash Used in Financing Activities (101,414)(8,078)(30,603)
Decrease in Cash and Cash Equivalents (542) (1,752) (11,492)
Cash and Cash Equivalents at Beginning of Year 22,147 23,899 35,391
Cash and Cash Equivalents at End of Year $ 21,605 $ 22,147 $ 23,899
============= ============ ============
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
The Company
Ace Hardware Corporation (the Company) operates as a wholesaler of hardware and related products, primarily in the United States, and manufactures manufactures
paint products. As a dealer-owned cooperative, the Company distributes substantially all of its its patronage sourced earnings in
the form of patronage dividends to member dealers based on their volume ofmerchandise 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
available 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 theCompany's 50%
or less owned affiliates over which the Company has the ability to exercise significant influence.
(d) Receivables
Receivables from dealers include amounts due from the sale of merchandise and special equipment used in theoperation
of dealers' businesses. Other receivables are principally amounts due from suppliers for promotional andadvertising
allowances.
(d)
(e) Revenue Recognition
The Company's policy is to recognize revenues from product sales when earned, following the guidance in SEC Staff
Accounting Bulletin ("SAB") No. 101. Specifically, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. Revenue is not
recognized until title and risk of loss have transferred to the customer, which is upon delivery of products. Provisionsfor
returns are made for at the time the related sales are recorded, and are reflected as a reduction of sales.
(f) Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined primarily using the last-in,first-out method on substantially
all inventories.
(e)
method.
(g) 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 orrenewals are
capitalized.
Depreciation expense is computed on both straight-line and acceleratedmethods based on estimated useful lives as
follows:
Useful Life Principal
YearsDepreciation 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 leases.
(f) lease.
(h) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance
sheet date while revenues and expenses are translated at the average monthly exchange rates prevailing during the year. The
Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these
foreign hedges are included in the basis of the underlying hedged investment. Foreign currency translation adjustments, net of
gains on foreign exchange contracts, are reflected in the accompanying Consolidated Statements of Comprehensive Income
for 2002, 2001 and 2000. The Company did not have any outstanding foreign exchange forward contracts at December 28,
2002 or December 29, 2001.
(i) Financial Instruments
The carrying value of assets and liabilities that meet the definition of a financial instrument included in the accompanying
Consolidated Balance Sheets approximate fair value.
( j) Retirement Plans
The Company has retirement plans covering substantially all non-union employees. Costs with respect to the
noncontributory pension plans are determined actuarially and consist of current costs and amounts to amortize prior service
costs and unrecognized gains and losses. The Company contribution under the profit sharing plan is determined annually by
the Board of Directors.
(g) Directors and charged to expense in the period it is earned by employees.
(k) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. (h) With respect to the Company's discontinued operation, actual losses could differ
from those estimates and will be reflected as adjustments in future financial statements when probable and estimable.
(l) Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Amounts incurred for shipping and
handling are included in cost of sales.
(m) Fiscal Year
The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2002, 2001 and 2000 ended on
December 28, 2002, December 29, 2001 and December 30, 2000, respectively.
(n) Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to comparable
classifications followed in 1995.
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
2002. During 2002, the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within distribution operations expenses and reclassified
certain amounts within selling, general and administrative expenses to distribution operations expenses. These
reclassifications had no effect on previously reported income.
(2) Discontinued Operations
In August of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144") which supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed O f". While SFAS 144 retains many of the fundamental recognition and measurement provisions of
SFAS 121, it changes the criteria required to be met to classify an asset as held for sale. SFAS 144 also supercedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", and
among other things, broadens reporting for discontinued operations to include a component of an entity, rather than just a
segment of a business. The Company adopted SFAS 144 in 2002, and applied its provisions in reporting discontinued
operations in 2002.
In 2002, the Company entered into an agreement to sell AceHardware Canada Limited, a wholly-owned subsidiary for
cash proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13, 2003, at which time the sale proceeds were received and used to repay outstanding indebtedness.
The Company recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002. Losses
from operations of AceHardware Canada Limited were US $5.4 million in 2002, US $11.1 million in 2001 and US $723,000 in 2000.
The Company has classified the assets and liabilities of AceHardware Canada Limited as held for sale in the accompanying
consolidated financial statements, and reclassified the financial statement and related notes for all periods presented to display
the operating results of this business as discontinued operations. For business segment reporting purposes, Ace Hardware
Canada Limited results were previously included in the "Wholesale" segment.
Net sales from the discontinued operation for the years 2002, 2001 and 2000 were US $24.6 million, US $27.9 million
and US $75.3 million, respectively. Total assets of the discontinued operation for the years 2002 and 2001 were US $10.3
million and US $18.1 million, respectively. Total liabilities of the discontinued operation for the 2002 and 2001 were US $6.8
million and US $3.7 million, respectively.
(3) Inventories
Inventories consist primarily of merchandise inventories. Substantially all of the Company's inventory is 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 $66,319,000$57,295,000 and $65,052,000$57,809,000 at December 31, 199528, 2002 and 1994,December 29, 2001, respectively. Indirect costs,
consisting primarily of warehousing costs, are absorbed as inventory costs rather than period costs.
(3)
(4) Short-Term Borrowings
Short-term borrowings were utilized during 1995 and 1994. The maximum
amount outstanding at any month-end during the period was $95,000,000 in
1995 and $115,500,000 in 1994. The interest rate effective as of December
31, 1995 and 1994 was 6.13% and 6.5%, respectively. Short term borrowings
outstanding as of December 31, 1995 and 1994 were $13,000,000 and
$30,000,000 respectively.
At December 31, 199528, 2002 the Company has available a revolving credit facility with a group of banks providing for $100
$175.0
million in committed lines of credit and also has available $85$10.0 million in uncommitted lines. The facility requires the
Company to comply with various financial covenants for which the Company was in compliance at December 28, 2002 and
December 29, 2001. The facility expires on May 2, 2005. The maximum amount outstanding at any month-end during the
period was $104.4 million in 2002 and $128.0 million in 2001. The monthly weighted average borrowing levels during 2002
and 2001 were $57.3 million and $77.9 million, respectively. The interest rate under the revolving credit facility is based
upon a spread over LIBOR based upon quarterly debt to EBITDA ratios. The weighted average interest rate effective as of
December 28, 2002 and December 29, 2001 was 1.94% and 2.58%, respectively. Short- term borrowings outstanding as of
December 28, 2002 and December 29, 2001 were $48.9 million and $72.6 million, respectively. The aggregate unused line
of credit available at December 31, 199528, 2002 and 1994December 29, 2001 was $172,000,000$136.1 million and $120,000,000,$112.4 million, respectively. At
December 31, 199528, 2002 the Company had no compensating balance requirements.
(4)
(5) Long-Term Debt
Long-term debt is comprised of the following:
December 31,
1995 1994
(000's omitted)
Industrial Development Revenue Bond -
$125,000 payable quarterly through December 1, 1996
December 28, December 29,
2002 2001
(000's omitted)
Notes Payable:
$20,000,000 due in quarterly installments of $540,500
with
interest at 65% of the prime rate $ 500 $ 1,000
Notes Payable:
$20,000,000 due in quarterly installments of $540,500
commencing July 1, 1994 with interest payable quarterly
beginning January 1, 1992 at a fixed rate of 8.74% 16,757 18,919
$20,000,000 due in quarterly installments of $952,400
commencing January 1, 1995 with interest payable
quarterly beginning October 1, 1992 at a fixed
rate of 6.89% 16,190 20,000
$30,000,000 due in semi-annual installments of
$2,000,000 commencing June 22, 2001 with interest
payable quarterly beginning December 22, 1993
at a fixed rate of 6.47% 30,000 30,000
Liability under capitalized leases (see Note 9) 816 726
Installment notes with maturities through 1999 with
various interest rates 910 1,011
65,173 71,656
Less current installments 7,378 7,369
$57,795 $64,287
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
Prime interest ratespayable quarterly at a fixed rate of 8.74% and a
maturity date of July 1, 2003 $ 1,622 $ 3,784
$30,000,000 due in effect ranged from 8.5% to 9.0%semi-annual installments of $2,000,000
with interest payable quarterly at a fixed rate of 6.47% and a
maturity date of June 22, 2008 22,000 26,000
$20,000,000 due in 1995quarterly installments of $714,300
commencing September 15, 2004 with interest payable quarterly
at a fixed rate of 7.49% and from 6.0% to 8.5%a maturity date of June 15, 2011 20,000 20,000
$30,000,000 due in 1994.annual installments of $6,000,000
commencing March 25, 2005 with interest payable quarterly
at a fixed rate of 7.55% and a maturity date of March 25, 2009 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% and a maturity date of February 8, 2010 25,000 25,000
$70,000,000 due in annual installments of $14,000,000
commencing April 30, 2009 with interest payable semi-annually
at a fixed rate of 7.27% and a maturity date of April 30, 2013 70,000 70,000
Installment notes with maturities through 2006 at a fixed rate of 6.00% 100 2,754
168,722 177,538
Less current installments (5,647) (7,151)
$ 163,075 $ 170,387
=========== ===========
The debt covenants on the notes payable are substantially consistent with the revolving credit facility. Aggregate
maturities of long-term debt are $7,378,000, $6,460,000,
$6,222,000 $6,052,000$5,647,000, $5,454,000, $12,882,000, $17,882,000 and $3,115,000$17,857,000 in 19962003 through 2000, respectively.
The fair value of the Company's debt based upon discounting future
cash flows does not materially vary from the carrying value of such debt
as of December 31, 19952007,
respectively, and 1994.
(5) $109,000,000 thereafter.
(6) 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, varyingranging from 20% on the total dividends under $5,000 and
increasing by 5% on total dividends for each subsequent $2,500 earned to a maximum of 40% on total dividends exceeding $12,500. All amounts
$12,500. Amounts exceeding the cash portionsportion will be distributed in the form of Class C $100 par value stock, to a maximum
based upon the current year purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional
cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A
portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied
toward payment of principal and interest on any balances outstanding for approved exterior signage and
computer equipment financing.patronage financing programs.
The patronage dividend composition for 1995, 19942002, 2001 and 19932000 follows:
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
Portion Certificates Stock Deductions Dividend
(000's omitted)
1995 $23,522 $5,032 $27,506 $8,656 $64,716
1994 27,302 9,920 21,766 5,532 64,520
1993 25,766 12,728 19,064 1,465 59,023
Subordinated Class Patronage Total
Cash Refund C Financing Patronage
PortionCertificatesStockDeductionsDividends
(000's omitted)
2002 $38,687 $20,651 $26,053 $10,189 $95,580
2001 34,229 18,739 23,284 8,857 85,109
2000 34,764 18,029 24,267 9,477 86,537
Patronage dividends are allocated on a calendarfiscal year basis with issuance in the following year.
The patronage refund certificates outstanding or issuable at December 31, 199528, 2002 are payable as follows:
&nb sp; Interest
January 1, AmountRate
(000's omitted)
1996 $12,641 7.0%
1997 14,303 6.25
1998 13,981 6.0
1999 11,902 6.0
2000 9,523 7.0
2001 5,032 6.0
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
(6)
2003 $13,196 6.00%
2004 15,094 6.00%
2005 12,232 6.25%
2006 17,331 6.50%
2007 18,512 6.00%
2008 20,651 6.00%
(7) Retirement Plans
The Company has two defined benefit pension plans covering substantially all non-union employees.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. 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 planplans 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 31, 199528, 2002 plan assets in the Employees' Retirement Income Plan and
Trust were held primarily in equities, mutual funds anda group annuity contracts.contract.
Pension incomeexpense for the years 1995, 19942002, 2001 and 19932000 included the following components:
1995 1994 1993
(000's omitted)
Service cost-benefits earned during the
period $ 355 $ 323 $ 292
Interest cost on projected benefit obligation 845 805 752
Actual return on plan assets (2,288) (121) (1,104)
Net amortization and deferral 1,257 (1,073) (169)
Net periodic pension expense (income) $ 169 $ (66) $ (229)
In December 1995 the plan settled a portion of the liability to
retirees and vested terminated participants through lump sum payments and
the purchase of single premium annuity contracts. In addition to the net
periodic pension expense in 1995, the Company recognized a net loss of
$1,380,100 related to this settlement.
The following table sets forth the funded status of the plans and
amounts recognized in the Company's Balance Sheet at December 31, 1995
and 1994 (December 31, 1995 and September 30, 1994 measurement dates):
1995 1994
(000's omitted)
Accumulated benefit obligation, including vested
benefits of $7,383,000 and $10,919,000 $ 7,613 $11,384
Plan assets at fair value $ 9,932 $13,654
Projected benefit obligation for service rendered
to date 8,832 12,364
Plan assets in excess of projected benefit obligation $ 1,100 $ 1,290
Unrecognized net gain from past experience
different from that assumed and effects of changes
in assumptions 1,775 3,361
Remaining unrecognized net asset being amortized
over participants average remaining service period (1,672) (1,983)
Prepaid pension cost included in other assets $ 1,203 $ 2,668
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
December 28, December 29, December 30,
2002 2001 2000
(000's omitted)
Service cost - benefits earned during the
period $ 43 $ 41 $ 52
Interest cost on projected benefit obligation 121 116 112
Expected return on plan assets (131) (123) (115)
Net amortization and deferral - - - - (31)
Gain on curtailment - - (58) - -
Net periodic pension expense (income) $ 33 $ (24) $ 18
=========== =========== ===========
The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated
Balance Sheets at December 28, 2002 and December 29, 2001:
December 28, December 29,
20022001
(000's omitted)
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,714 $ 1,656
Service cost 43 41
Interest cost 121 116
Actuarial losses 123 91
Curtailment and settlements - (141)
Benefits paid (67) (49)
Benefit obligation at end of year 1,9341,714
Change in plan assets:
Fair value of plan assets at beginning of year 1,645 1,560
Actual return on plan assets 108 91
Employer contribution 64 43
Benefits paid (67) (49)
Fair value of plan assets at end of year 1,7501,645
Funded status (184) (69)
Unrecognized transition asset 5 6
Unamortized prior service cost (3) (4)
Unrecognized net actuarial losses 22478
Prepaid pension asset $ 42 $ 11
============ ===========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0%
6.75% in 19952002 and 1994.7.25% in 2001. The related expected long-term rate of return was 8.0% in 19952002 and 1994.2001. The rate of
increase in future compensation was projected using actuarial salary tables plus 1.0% in 19952002 and 1994.
The Company2001.
Ace also participates in several multi-employer plans covering union employees. Amounts charged to expense and
contributed to the plans totaled approximately $275,000, $282,000$304,000, $212,000 and $275,000,$222,000 in 1995, 19942002, 2001 and 1993,2000, respectively.
The Company's profit sharing plan contribution for the years ended
1995, 19942002, 2001 and 19932000 was approximately $9,902,000, $9,381,000 $17,040,000, $14,253,000
and $8,690,000,$14,586,000, respectively.
(7)
(8) 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 1995, 19942002, 2001 and 19932000 provisions (benefit) for federal income taxes were $939,000,
$924,000
$(756,000), $3,037,000 and $141,000,$(162,000), respectively, and for state income taxes were $455,000,
$560,000$289,000, $381,000 and $287,000, $289,000,
respectively.
The Company made tax payments of $1,685,000, $1,428,000$374,000, $807,000 and $357,000$1,095,000 during 1995, 19942002, 2001 and 1993,2000, respectively.
(8)
(9) Member Dealers' Equity
The Company's classes of stock are described below:
Number of Shares
at December 31,
1995 1994
Class A Stock, voting, redeemable at par value-
Authorized 10,000 10,000
Issued and outstanding 3,905 3,924
Class B Stock, nonvoting, redeemable at not less than
twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 3,028 3,248
Treasury stock 3,471 3,251
Class C Stock, nonvoting, redeemable at not less
than par value-
Authorized 2,000,000 2,000,000
Issued and outstanding 1,778,173 1,646,656
Issuable as patronage dividends 275,059 217,658
Additional Stock Subscribed:
Class A Stock 332 291
Class B Stock - -
Class C Stock 23,320 21,800
December 28, December 29,
20022001
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,617 3,693
Class B Stock, nonvoting, redeemable at not less than
twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 1,944 2,108
Treasury stock 4,555 4,391
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,696,122 2,602,243
Issuable as patronage dividends 260,526 232,839
Additional Stock Subscribed:
Class A Stock 40 94
Class B Stock - -
Class C Stock 8,740 9,770
At December 31, 199528, 2002 and 1994December 29, 2001, there were no common shares reserved for options, warrants,
conversions or other rights; nor were any options granted or exercised during 2002, 2001 or 2000. Upon voluntary or
involuntary liquidation or bankruptcy, Class B and Class C shareholders would first receive amounts to repurchase the two years then ended.
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)shares
at prices previously set by the Company's Board of Directors from the net assets of the Company. If the available net assets
are not sufficient, each outstanding share of Class B and Class C stock will share in the distribution of the Company's net
assets in proportion to its purchase or redemption price to the total available for payment.
Member dealers may subscribe for the Company's stock in various prescribed combinations. Only one share of Class A
Stock may be owned by a dealer with respect to the first member retail outlet controlled by such dealer. Only four shares of
Class B Stock may be owned by a dealer with respect to each retail outlet controlled by such dealer, but only if such outlet
was a member of the Company on or before February 20, 1974. An appropriate number of shares of Class C Stock must be
included in any subscription by a dealer in an amount to provide that such dealer has a par value of all shares subscribed for
equal to $5,000 for each retail outlet. Unregistered shares of Class C Stock are also issued to dealers in connection with
patronage dividends. No dividends can be declared on any shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail outlet, all shares of stock of the Company
held by the dealer owning or controlling such outlet, must be sold back to the Company, unless a transfer of such shares is
made to another party accepted by the Company as a member dealer with respect to the same outlet.
A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C
shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Class CAdditional stock issuable as patronage dividends are
issued in the following year and are not issued in excess of amounts
authorized. Additional Stock Subscribed
subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion.
All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at
twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price
over par is allocated equally between contributed capital and retained earnings.
Transactions
Treasury stock transactions during 1993, 19942000, 2001 and 1995 affecting treasury shares follow:
Shares Held in Treasury
Class A Class B Class C
Balance at December 31, 1992 - 2,919 -
Stock issued - - -
Stock repurchased 271 164 72,359
Stock retired (271) - (72,359)
Balance at December 31, 1993 - 3,083 -
Stock issued - - -
Stock repurchased 240 168 77,013
Stock retired (240) - (77,013)
Balance at December 31, 1994 - 3,251 -
Stock issued - - -
Stock repurchased 256 220 99,975
Stock retired (256) - (99,975)
Balance at December 31, 1995 - 3,471 -
ACE HARDWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS-(Continued)
(9) Commitments
Leased property under capital leases is included as "Property and
Equipment" in the balance sheets as follows:
December 31,
1995 1994
(000's omitted)
Buildings and improvements $3,422 $3,422
Data processing equipment 1,441 723
Less: Accumulated depreciation and amortization (4,106) (3,609)
$ 757 $ 536
The Company rents buildings and warehouse, office and certain other
equipment under capital and operating leases. At December 31, 1995 annual
minimum rental commitments under leases that have initial or remaining
noncancelable terms in excess of one year are as follows:
Year Ending
December 31, Capital Operating
(000's omitted)
1996 $515 $13,383
1997 257 12,269
1998 77 10,116
1999 - 8,555
2000 - 7,744
Thereafter - 33,304
Total minimum lease payments $849 $85,371
Less amount representing interest 33
Present value of total minimum lease payments $816
2002 are summarized below:
Shares Held in Treasury
Class AClass BClass C
Balance at January 1, 2000 - - 4,067 - -
Stock issued - - - - - -
Stock repurchased 307 180 141,365
Stock retired (307) - - (141,365)
Balance at December 30, 2000 - - �� 4,247 - -
Stock issued - - - - - -
Stock repurchased 260 144 144,584
Stock retired (260) - - (144,584)
Balance at December 29, 2001 - - 4,391 - -
Stock issued - - - - - -
Stock repurchased 247 164 151,070
Stock retired (247) - - (151,070)
Balance at December 28, 2002 - - 4,555 - -
====== ====== =======
(10) Segments
The Company is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint
products. The Company's customers consist principally of its member dealers. No single customer or commonly-controlled
group of customers accounted for more than 10% of the Company's consolidated sales during 2002, 2001, or 2000.
The Company identifies segments based on management responsibility and the nature of the business activities of each
component of the Company. The Company measures segment earnings as operating earnings including an allocation for
interest expense and income taxes. The net sales from external customers included in the Other category are primarily
generated from company-owned retail locations. Information regarding the identified segments and the related reconciliation
to consolidated information are as follows:
December 28, 2002
(000's omitted)
Elimination of
Paint Intersegment
WholesaleManufacturingOtherActivitiesConsolidated
Net sales from external customers $2,961,217 $ 18,977 $48,903 $ - $3,029,097
Intersegment sales 24,211 119,110 - (143,321) -
Interest expense 21,583 1,127 817 (1,944) 21,583
Depreciation and amortization 28,079 1,751 1,829 - 31,659
Segment profit (loss)
from continuing operations 84,534 13,414 (4,756) (233) 92,959
Identifiable segment assets 1,032,473 60,661 69,809 (19,591) 1,143,352
Expenditures for long-lived assets 26,399 1,954 1,841 - 30,194
December 29, 2001
(000's omitted)
Elimination of
Paint Intersegment
WholesaleManufacturingOtherActivitiesConsolidated
Net sales from external customers $2,852,240 $ 18,668 $ 52,974 $ - $2,923,882
Intersegment sales 27,881 110,621 - - (138,502) - -
Interest expense 23,100 1,094 1,459 (2,553) 23,100
Depreciation and amortization 24,594 1,768 1,933 - - 28,295
Segment profit (loss)
from continuing operations 74,595 11,255 (1,330) (360) 84,160
Identifiable segment assets 1,053,139 62,205 71,961 (18,514) 1,168,791
Expenditures for long-lived assets 47,165 1,673 2,592 - - 51,430
December 30, 2000
(000's omitted)
Elimination of
Paint Intersegment
WholesaleManufacturingOtherActivitiesConsolidated
Net sales from external customers $2,858,988 $ 20,852 $44,347 $ - $2,924,187
Intersegment sales 28,641 100,780 - (129,421) -
Interest expense 21,670 1,209 1,278 (2,487) 21,670
Depreciation and amortization 27,833 1,694 1,403 - 30,930
Segment profit (loss)
from continuing operations 74,263 9,739 (2,452) (435) 81,115
Identifiable segment assets 1,013,093 68,130 61,812 (19,225) 1,123,810
Expenditures for long-lived assets 39,807 937 3,905 - 44,649
Net sales and long-lived assets by geographic region based upon customer location for 2002, 2001 and 2000 were as follows:
December 28, 2002December 29, 2001December 30, 2000
(000's omitted)
Net sales:
United States $2,930,255 $2,825,302 $2,803,116
Foreign countries 98,84298,580121,071
Total $3,029,097 $2,923,882 $2,924,187
======== ======== ========
Long-lived assets, net:
United States $284,032 $,285,345 $,258,802
Foreign countries - - -
Total $ 284,032 $ 285,345 $ 258,802
========= ========= ========
(11) Commitments
The Company primarily rents buildings, warehouse and office space and certain other equipment under operating
leases. At December 28, 2002 annual minimum rentalcommitments under leases that have initial or remaining noncancelable
terms in excess of one year are as follows:
December 28,
Year Ending, 2002
(000's omitted)
2003 $ 19,522
2004 16,650
2005 12,772
2006 10,416
2007 7,969
Thereafter 27,443
Total minimum lease payments $ 94,772
===========
All leases expirein or prior to 2010.2017. Under certain leases, the Company pays real estate taxes, insurance and maintenance
expenses in addition to rental expense. Management expects that in the normal course of business, leases that expire will be
renewed or replaced by other leases. Rent expense was approximately $25,024,000, $21,814,000$46,436,000, $49,336,000 and $21,444,000$45,514,000 in 1995, 19942002,
2001 and 1993,2000, respectively. Rent expense includes $4,724,000, $4,382,000$9,276,000, $9,793,000 and $4,282,000$9,977,000 in contingent rentals paid in 1995, 1994
2002, 2001 and 1993,2000, respectively, primarily for transportation equipment mileage.
(10) Media Expense
(12) Other Information
The Company expenses mediaadvertising costs the first time the advertising takes place. Gross mediaadvertising expense, prior to income offsets
reimbursements from dealers and suppliers, amounting to $59,167,000, $52,185,000$100,781,000, $94,553,000 and $48,293,000 were$93,340,000 was charged to
operations in 1995, 19942002, 2001 and 1993,2000, respectively. (11) Interest Expense
Capitalized interest totaled $497,000, $213,000Cost reimbursements from dealers and $29,000 in 1995, 1994suppliers amounted to $96,261,000,
$92,376,000 and 1993,$93,535,000 for 2002, 2001 and 2000, respectively.
Interest paid was $13,574,000, $13,518,000$20,084,000, $20,574,000 and $10,670,000$20,256,000 in 1995, 19942002, 2001 and 1993,2000, respectively, net of capitalized
interest of $289,000 and $715,000 in 2001 and 2000, respectively.
INDEX TO EXHIBITS
Exhibits
Enclosed Description
21 Subsidiaries
Other income, net consists primarily of interest income, past due and low volume retailer charges, gains on the sales of
property and equipment, and earnings, losses or adjustments of minority-owned investments as follows:
200220012000
Interest income $ 5,000 $ 6,389 $ 7,190
Past due and low volume retailer charges 4,413 5,318 4,620
Gains on the sales of property and equipment, net - 4,945 418
Earnings of minority-owned investments 1,462 1,048 764
Adjustment of minority-owned investment - - (5,000) (3,300)
Gain on pension plan termination - - 3,599
Other (820)(291)1,309
Total $ 10,055 $ 12,409 $ 14,600
======= ======= =======
In the normal course of business, the Company enters into commercial commitments including standby letters of credit
and guarantees that could become contractual obligations. Letters of credit are issued generally to insurance agencies and
financial institutions in direct support of the Registrant
24 Powers of Attorney
Exhibits
Incorporated
by Reference Description
2 Not Applicable
3-A Restated Certificate of Incorporation of the Registrant dated
September 18, 1974 filed as Exhibit 3-A to the Registrant's Form S-
1 Registration Statement (Registration No. 2-55860) on March 30,
1976Company's corporate and incorporated herein by reference.
3-B By-laws of the Registrant as amended through September 19, 1995
included as Appendix A to the Prospectus constituting a part of the
Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement filed on or about March 15, 1996
(Registration No. 33-58191)retailer insurance programs and incorporated herein by reference.
3-C Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 19, 1976 filed as Exhibit
3-D to Amendment No. 1 to the Registrant's Form S-1 Registration
Statement (Registration No. 2-55860) on June 10, 1976 and
incorporated herein by reference.
3-D Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated May 21, 1979 filed as Exhibit
3-F to Amendment No. 1 to the Registrant's Form S-1 Registration
Statement (Registration No. 2-63880) on May 23, 1979 and
incorporated herein by reference.
3-E Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 7, 1982 filed as Exhibit
3-G to the Registrant's Form S-1 Registration Statement
(Registration No. 2-82460) on March 16, 1983 and incorporated
herein by reference.
3-F Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 5, 1987 filed as Exhibit
3-F to the Registrant's Form S-1 Registration Statement
(Registration No. 33-4299) on March 29, 1988 and incorporated by
reference.
3-G Certificate of Amendment to the restated Certificate of
Incorporation of the Registrant dated June 16, 1989 filed as
Exhibit 4-G to Post Effective Amendment No. 1 to the Registrant's
S-2 Registration Statement filed on or about March 20, 1990 and
incorporated 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
Exhibits
Incorporated
by Reference
Statement (Registration No. 33-4299) on March 29, 1988 and
incorporated herein by reference.
4-D Specimen copy of Class C stock certificate filed as Exhibit 4-I to
the Registrant's Form S-1 Registration Statement (Registration No.
2-82460) on March 16, 1983 and incorporated herein by reference.
4-E Copy of current standard form of Subscription for Capital Stock
Agreement to be used for dealers to subscribe for shares of the
Registrant's stock in conjunction with new membership agreements
submitted to the Registrant filed as Exhibit 4-L to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant on or
after January 1, 1995 adopted by the Board of Directors of the
Registrant on July 26, 1994 filed as Exhibit 4-M to the
Registrant's Form S-2 Registration Statement on or about March 15,
1996 (Registration No. 33-58191) and incorporated herein by
reference.
4-G Copy of plan for the distribution of patronage dividends with
respect to purchases of merchandise made from the Registrant on or
after January 1, 1993 through December 31, 1994, adopted by the
Board of Directors of the Registrant on December 8, 1992, filed as
Exhibit 4-N to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 15, 1996 and incorporated herein by reference.
9 No Exhibit
10-A Copy of Retirement Benefits Replacement Plan of the Registrant,
restated as of January 1, 1989, filed as Exhibit 10-A to Post-
Effective Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on or about March 23, 1994
and incorporated herein by reference.
10-B Copy of resolutions amending the 1990 Incentive Compensation Plans
for Executives and establishing the Executive Supplemental Benefit
Plans of the Registrant adopted by its Board of Directors on
December 11, 1990 and filed as Exhibit 10-G to Post Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-27790) on March 20, 1991 and incorporated
herein by reference.
10-C Copy of amendment to the Executive Supplemental Benefits Plan of
the Registrant adopted by its Board of Directors on July 30, 1991
filed as Exhibit 10-E to the Registrant's Form S-2 Registration
Statement (Registration No. 33-46449) on March 23, 1992 and
incorporated herein by reference.
10-D Copy of amendment to the Executive Supplemental Benefits Plan of
the Registrant adopted by its Board of Directors on December 9,
1991 filed as Exhibit 10-F to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 23,
1992 and incorporated herein by reference.
10-E Copy of the "Ace Hardware Corporation Officer's (sic) Incentive
Compensation Plan" as amended and restated effective January 1,
1994, filed as Exhibit 10-G 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.
Exhibits
Incorporated
by Reference
10-F Copy of Employment Agreement dated October 4, 1994 between Ace
Hardware Corporation and Paul M. Ingevaldson filed as Exhibit 10-F
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-G Copy of Employment Agreement dated October 4, 1994 between Ace
Hardware Corporation and David F. Hodnik filed as Exhibit 10-G 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-H Copy of Employment Agreement dated October 12, 1994 between Ace
Hardware Corporation and William A. Loftus filed as Exhibit 10-H 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-I Copy of Employment Agreement effective January 1, 1993 between Ace
Hardware Corporation and Roger E. Peterson filed as Exhibit 10-K to
Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-J Copy of Employment Agreement effective January 1, 1993 between Ace
Hardware Corporation and Paul Ingevaldson filed as Exhibit 10-I to
Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-K Copy of Employment Agreement effective January 1, 1993 between Ace
Hardware Corporation and David F. Hodnik filed as Exhibit 10-J to
Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-L Copy of Employment Agreement effective January 1, 1993 between Ace
Hardware Corporation and William A. Loftus filed as Exhibit 10-L to
Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or about
March 22, 1993 and incorporated herein by reference.
10-M Copy of Loan Agreement with Anne Arundel County, Maryland dated
December 1, 1981 securing 15-year floating rate industrial
development revenue bonds in the principal sum of $9,000,000 held
by The Northern Trust Company, Chicago, Illinois, for itself and
other participating lenders filed as Exhibit 10-A-k to Post-
Effective Amendment No. 3 to the Registrant's Form S-1 Registration
Statement (Registration No. 2-63880) on March 9, 1982 and
incorporated herein by reference.
10-N 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
(Regis-tration No. 33-46449) on March 23, 1992 and incorporated
herein by reference.
10-O Copy of Standard Form of Ace Hardware International Retail Merchant
Agreement adopted in 1990, filed as Exhibit 10-A-q to Post
Effective Amendment No. 2 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-27790) on March 20, 1991 and
incorporated herein by reference.
Exhibits
Incorporated
by Reference
10-P 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 on or about April 26,
1995 and incorporated herein by reference.
10-Q Copy of 6.89% Senior Series B notes in the aggregate principal sum
of $20,000,000 issued July 29, 1992 with a maturity date of January
1, 2000 pursuant to Note Purchase and Private Shelf Agreement with
the Prudential Insurance Company of America dated September 27,
1991 and filed as Exhibit 10-A-r to Post Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on March 22, 1993 and incorporated herein by reference.
10-R Copy of 6.47% Senior Series A notes in the aggregate principal
amount of $30,000,000 issued September 22, 1993 with a maturity
date of June 22, 2008, and $20,000,000 Private Shelf Facility,
pursuant to Note Purchase and Private Shelf Agreement with the
Prudential Insurance Company of America dated as of September 22,
1993, filed as Exhibit 10-R to Post-Effective Amendment No. 2 to
the Registrant's Form S-2 Registration Statement (Registration No.
33-46449) on or about March 23, 1994 and incorporated herein by
reference.
10-S Assignment and Assumption dated October 22, 1992 of Lease dated
August 31, 1992 with MTI Vacations, Inc. filed as Exhibit 10-A-s to
Post Effective Amendment No. 1 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on March 22,
1993 and incorporated herein by reference.
10-T Copy of Amendment to the Executive Supplemental Benefit Plans of
the Registrant adopted by its Board of Directors on March 17, 1992
and filed as Exhibit 10-A-t to the Registrant's Form S-2
Registration Statement (Registration No.33-46449) on March 22, 1993
and incorporated herein by reference.
10-U 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
Registrant's Form S-2 Registration Statement (Registration No. 33-
46449) on March 22, 1993 and incorporated herein by reference.
10-V Copy of Fourth Amendment to Executive Supplemental Benefit Plans
effective January 1, 1994 filed as Exhibit 10-V to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-W Copy of Ace Hardware Corporation Deferred Director Fee Plan as
amended on June 8, 1993, filed as Exhibit 10-W to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-X 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 Registrants Form S-2 Registration Statement
(Registration No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-Y Copy of Lease dated September 22, 1994 for bulk merchandise
redistribution center of the Registrant in Carol Stream, Illinois
filed as Exhibit 10-Y to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 23, 1995
and incorporated herein by reference.
Exhibits
Incorporated
by Reference
10-Z 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-a-1 Copy of Long-Term Incentive Compensation Deferral Option Plan of
the Registrant effective January 1, 1995 adopted by its Board of
Directors on December 6, 1994 filed as Exhibit 10-a-1 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 23, 1995 and incorporated herein by
reference.
10-a-2 Copy of Directors' Deferral Option Plan of the Registrant
effective January 1, 1995 adopted by its Board of Directors on
December 6, 1994 filed as Exhibit 10-a-2 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-a-3 Copy of Employment Agreement dated March 22, 1994 between Ace
Hardware Corporation and Fred J. Neer filed as Exhibit 10-a-3 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-a-4 Copy of Employment Agreement dated March 22, 1994 between Ace
Hardware Corporation and Donald L. Schuman filed as Exhibit 10-
a-4 to the Registrant's Form S-2 Registration Statement on
(Registration No. 33-58191) or about March 23, 1995 and
incorporated herein by reference.
10-a-5 Copy of Employment Agreement dated December 13, 1993 between Ace
Hardware Corporation and David W. League filed as Exhibit 10-a-5
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-a-6 Copy of Employment Agreement dated December 15, 1993 between Ace
Hardware Corporation and David F. Myer filed as Exhibit 10-a-6
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-a-7 Copy of Employment Agreement dated March 24, 1994 between Ace
Hardware Corporation and Michael C. Bodzewski filed as Exhibit
10-a-7 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-a-8 Copy of Employment Agreement dated December 15, 1993 between Ace
Hardware Corporation and Rita D. Kahle filed as Exhibit 10-a-8
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-a-9 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-a-10 Copy of Ace Hardware Corporation Officer Incentive Plan for
Fiscal Year 1994 filed as Exhibit 10-a-10 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on
or about March 23, 1995 and incorporated herein by reference.
Exhibits
Incorporated
by Reference
10-a-11 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 15, 1996 and incorporated herein by reference.
10-a-12 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 15, 1996 and incorporated herein by reference.
10-a-13 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 15, 1996 and incorporated herein by reference.
10-a-14 Copy of Lease dated February 9, 1995 between Leroy M. Merritt
and the Registrant for its Baltimore, Maryland redistribution
center filed as Exhibit 10-a-14 to Post-Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1996 and
incorporated herein by reference.
10-a-15 Copy of First Amendment to the Ace Hardware Corporation Long-
Term Incentive Compensation Deferral Option Plan effective
December 5, 1995 filed as Exhibit 10-a-15 to Post-Effective
Amendment No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 15, 1996
and incorporated herein by reference.
10-a-16 Copy of First Amendment to the Ace Hardware Corporation
Directors' Deferral Option Plan effective December 5, 1995 filed
as Exhibit 10-a-16 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1996 and incorporated herein by
reference.
10-a-17 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 15, 1996
and incorporated herein by reference.
10-a-18 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 15, 1996 and incorporated herein by reference.
11 No Exhibit.
12 No Exhibit.
13 No Exhibit.
16 Not Applicable.
18 No Exhibit.
Exhibits
Incorporated
by Reference
21 No Exhibit.
22 Not Applicable.
23 Independent Auditors' Consent, dated March 8, 1996, filed as
Exhibit 23(a) to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) filed
on or about March 15, 1996 and incorporated herein by reference.
27 Financial Data Schedule filed as Exhibit 27 to Post-Effective
Amendment No. 1 to the Registrant's Form S-2 Registration
Statement (Registration 33-58191) filed on or about March 15,
1996 and incorporated herein by reference.
28 Not Applicable.
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.retailer lending
programs. As of December 28, 2002 and December 29, 2001, the dateCompany had outstanding letters of the foregoing Report, no annual report for the
Registrant'scredit with expiration
terms less than 1 year endedof $13,848,000 and $13,160,000, respectively. The Company enters into both limited and full
guarantees primarily to financial institutions in direct support of retailer lending programs. Outstanding guarantees were
$11,018,000 and $14,711,000 at December 31, 1995, nor any proxy soliciting
materials for the Registrant's 1996 annual meeting have been sent to
security holders. Copies28, 2002 and December 29, 2001, respectively. Aggregate expirations of such Annual Report
guarantees are $6,905,000 in 2003, $3,396,000 in 2004 through 2006, and proxy soliciting
materials will subsequently be sent to security holders and furnished to
the Securities and Exchange Commission.
$717,000 in 2007 through 2008.