-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PccSuLqjIU1A6XqV1kexhVmFk8OFbQu9irjjpV9i5+KuaqDqdKGVykJVY0vuFByX MaKfPGtXxqyhODgf74XWkQ== 0000002024-00-000008.txt : 20000320 0000002024-00-000008.hdr.sgml : 20000320 ACCESSION NUMBER: 0000002024-00-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE HARDWARE CORP CENTRAL INDEX KEY: 0000002024 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] IRS NUMBER: 360700810 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-55860 FILM NUMBER: 572982 BUSINESS ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7089906600 MAIL ADDRESS: STREET 1: 1300 KENSINGTON RD CITY: OAKBROOK STATE: IL ZIP: 60521 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 1999 fiscal year ended January 1, 2000 Commission File No. 2-55860 Ace Hardware Corporation (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-0700810 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2200 Kensington Court, Oak Brook, IL 60523 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including Area Code: (630) 990-6600 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE State the aggregate market value of the voting stock held by nonaffiliates of the Registrant. This Company's shares are only issued to and held by, its dealer-stockholders. All shares held by these stockholders can be repurchased by the Company when the dealer-stockholder's membership agreement terminates. Thus, there is no market for these shares. The repurchase price for each share of Class A Stock, which is the only voting stock issued, is equal to the par value of $1,000 per share. As of February 16, 2000, the aggregate value of the Class A Stock held by non-affiliates (dealer-stockholders) calculated on the basis of this repurchase price was $3,832,000. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YesX No Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (applicable only to corporation Registrants). Outstanding shares as of February 16, 2000: Class A (voting) Stock, $1,000 par value 3,832 shares Class B (non-voting) Stock, $1,000 par value 2,408 shares Class C (non-voting) Stock, $1,100 par value 2,395,406 shares PART I Item 1. Business The terms "Ace," "Company," "cooperative," "we," "us," "our" and similar words refer to Ace Hardware Corporation. The terms "member," "retailer," "dealer," "you," "your" and similar words refer to someone who purchases our stock. Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, as the result of a corporate merger, it became the successor of Ace Hardware Corporation, an Illinois corporation that was organized in 1928. Until 1973, the Illinois corporation conducted the business now being engaged in by our Company. Our main executive offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Our main telephone number is (630) 990-6600. We operate primarily as a wholesaler of hardware and related products, and we also manufacture paint products. We mainly sell our products to hardware dealers who have Membership Agreements with us. These Membership Agreements allow the hardware dealers to purchase merchandise and services from us and to license some of our marks, such as "Ace" and "Ace Hardware." (See the heading "Business" subheading "Membership Agreement"). We operate on a cooperative basis and distribute patronage dividends to our eligible member dealers each year on the basis of quantity or value of business that we do with them. (See the subheading "Distribution of Patronage Dividends"). As of the end of our 1999 fiscal year on January 1, 2000, there were 5,082 stores having Membership Agreements with us. The States with the largest concentration of members are California (approximately 10%), Texas and Illinois (approximately 6% each), Florida (approximately 5%), and Michigan and Georgia (approximately 4% each). The States where we shipped the largest percentages of merchandise in fiscal year 1999 are California (approximately 11%), Illinois (approximately 8%), Florida (approximately 6%), Texas (approximately 5%), and Michigan and Georgia (approximately 4% each). Approximately 6.5% of our sales are made to locations outside of the United States and its territories. The number of member locations that we had during each of our past three fiscal years is summarized in the following table: 1999 1998 1997 ------ ------ ------ Member outlets at beginning of period 5,039 5,032 5,067 New member outlets 264 231 208 Member outlets terminated 221 224 243 ------ ------ ------ Member outlets at end of period 5,082 5,039 5,032 Dealers having one or more member ====== ====== ====== outlets at end of period 3,932 3,963 4,022 We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then warehouse large quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products that we distribute to our members from our warehouses are sold at a price that we establish ("dealer cost"), to which a 10% adder ("handling charge") is generally added. In fiscal year 1999, warehouse sales were 63% of our total sales and bulletin sales were 3% of our total sales with the balance of 34% being direct shipment sales, including lumber and building materials. The following is a breakdown of our total warehouse sales among various general classes of merchandise for each of the past three fiscal years: Class of Merchandise 1999 1998 1997 ------ ------ ------ Paint, cleaning and related supplies 20% 20% 21% Plumbing and heating supplies 15% 15% 15% Hand and power tools 14% 14% 14% Garden, rural equipment and related supplies 13% 13% 13% Electrical supplies 13% 13% 12% General hardware 12% 12% 12% Sundry 7% 7% 7% Housewares and appliances 6% 6% 6% We sponsor two major hardware conventions each year at various locations. We invite dealers and vendors to attend, and dealers generally place orders that are delivered before the next convention. During the convention, there are exhibits of regular merchandise, new merchandise and seasonal merchandise. Lawn and garden supplies, building materials and exterior paints are seasonal merchandise in many parts of the country. Some types of goods such as holiday decorations are also seasonal. Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment sales involve sales where the merchandise is shipped directly to dealers by vendors. Bulletin sales involve our special bulletin offers where we order specific merchandise after dealers sign up to buy particular quantities of it. Dealers place direct shipment orders with our vendors using special purchase orders. The vendors then bill us for these orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers with an adder ("handling charge") that varies according to the following schedule: Invoice Amount Adder (Handling Charge) -------------- ----------------------- $ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater $1,000.00 to $1,999.99 1.75% $2,000.00 to $2,999.99 1.50% $3,000.00 to $3,999.99 1.25% $4,000.00 to $4,999.99 1.00% $5,000.00 to $5,999.99 .75% $6,000.00 to $6,999.99 .50% $7,000.00 to $7,999.99 .25% $8,000.00 and over .00% We make bulletin sales based upon notices from dealers that they wish to participate in one of the special bulletins offers. Generally, we notify dealers of our intention to purchase certain products for bulletin shipment. We then purchase these products in the quantities that the dealers order. When the bulletin shipment arrives, we do not place it into warehouse inventory. Rather, we break it up into smaller quantities and deliver it to the dealers who ordered it. We generally apply a 6% adder ("handling charge") to this category of sales. We typically apply an additional adder of 3% to merchandise that is exported outside of the United States, its territories and possessions. Ace dealers located outside of the United States, its territories and possessions who are not subject to the additional 3% adder are assessed a flat 2% adder on all direct shipment sales. We maintain inventories to meet only normal resupply orders. Resupply orders help keep our inventories at normal levels. Usually these resupply orders are filled within one day of receipt. Bulletin orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog normal resupply orders and therefore, no significant backlog exists at any point in time. We have also created special sales programs for lumber and building materials products, for products that we periodically assign to an "extreme competitive price sales" classification, and for products from specified vendors for delivery to our dealers on a direct shipment basis (LTL Plus Program). Under our previous lumber and building materials ("LBM") program, we did not impose any adder or national advertising assessment on direct shipment orders for these products. Our LBM program enabled our dealers to realize important savings from our closely monitored lumber and building materials purchasing procedures. Also, our LBM program offered our dealers the opportunity to order less-than-truckload quantities of many lumber and building materials products at economical prices under the LTL warehouse redistribution procedure which we had with certain major vendors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a description of our LBM Division. Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific products that we assign to a "competitive price sales" classification. These products are delivered from our warehouses without the addition of freight charges and with an adder (if any) of up to 5%, determined on an item by item basis. Our officers have the authority to add and withdraw items from the STOP program, and to establish reasonable minimum or multiple item purchase requirements for this program. We do not make any patronage dividend distributions for purchases under the STOP program. We do, however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable, in determining the forms of patronage dividend distributions. (See the heading "Business" subheading, "Forms of Patronage Dividend Distributions.") Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific vendors for direct shipment delivery. No adder or national advertising assessment applies to these purchases. The current maximum amount of patronage dividends for products in the LTL Plus category is .5% of these sales. (See heading "Business," subheading "Patronage Dividend Determinations and Allocations.") In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also provide many special services. We offer these services at established charges. These services include inventory control systems, as well as price and bin ticketing. We also provide dealers with a checklist service so that they can have current information about the merchandise that we offer. We also provide a choice of ongoing educational and training programs for dealers. (See the heading "Business," subheading "Special Charges and Assessments.") Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program so that dealers can purchase different types of insurance coverage. This program offers "all risk" property insurance and business interruption, crime, liability and workers' compensation insurance, in addition to medical insurance for store employees. AHC Realty Corporation, another wholly owned subsidiary, offers broker services to dealers who want to buy or sell stores. Loss Prevention Services, Inc., another wholly owned subsidiary, offers security training and other loss prevention services to dealers. During 1996, our wholly owned subsidiary, Ace Hardware Canada, Limited, began operations as a wholesaler of hardware and related merchandise in Canada. It has two distribution facilities located in Calgary, Alberta and Brantford, Ontario. Ace Hardware Canada, Limited generated less than three percent (3%) of our consolidated revenue during fiscal year 1999. We operate our Company-owned retail hardware stores through our wholly owned subsidiaries A.H.C. Store Development Corp. and Ace Corporate Stores, Inc. For further information about these stores, please see the heading "Properties." We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights, Illinois. These factories are the main source of the paint products that we offer for sale. We operate our paint manufacturing business as a separate Division of our Company for accounting purposes. We purchase all our raw materials for paint manufacturing from outside sources. We have had adequate sources of raw materials in the past, and we do not currently expect any shortages of raw materials that would have a major impact on our paint operations. Paint manufacturing is seasonal in the sense that greater paint sales occur from April through September. Historically, our need to comply with environmental laws and regulations has not had a major effect on our ability to conduct our paint manufacturing operations. Our business, both hardware wholesaling and paint manufacturing, is not dependent on any major suppliers and we feel that any seasonal fluctuations do not have a major effect on our operations. For more discussion of our business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," which appears after the "Notes to Financial Statements." We also offer services to members that relate to the operation of their retail businesses. We provide these services (such as advertising, merchandising and training programs) to assist our members and in some cases, to maximize our centralized buying power. Strategic Planning We have a strategic planning process that results in goals, objectives and programs that we want to develop in the future for our Company and our members. Because strategic plans deal with the future, this discussion of them contains "forward looking statements," which are based on our current expectations. The actual results of our efforts can differ greatly from the results that we might desire. We believe that we have the facilities, the employees and the resources for ongoing success as we implement our plans and programs, but the future is difficult to forecast, especially things like revenues, costs, margins and profits which are influenced by many factors. Some of these factors are discussed below. The effects of future growth in the hardware and hardlines-related industries, are uncertain. By "hardlines-related industries" we mean lumber/building materials, home center, do-it-yourself, rental and commercial/industrial categories. The future condition of the economy is also uncertain, when viewed domestically, internationally or in specific geographical regions. Some other uncertainties that could affect our plans include possible future changes in merchandise and inventory prices, and the effect of increasingly intense competition. There could be potential shifts in market demand for some products. Future lawsuits and laws, especially laws dealing with franchising, licensing and environmental matters could affect our business. We cannot predict whether these uncertainties might cause future costs or liabilities or have some other effect on our future ability to achieve our plans. Through our ongoing strategic planning process we have focused our plans around four cornerstones for future growth and success in our competitive industry. These four cornerstones are: Retail Success (store operations), Wholesale Success (distribution), International growth and new member growth. Retail success for our dealers is a primary objective because, in our opinion, it drives both their retail performance and our wholesale growth. We have therefore increased our efforts to assist members in our "retail success initiatives," which are designed to improve their retail performance and competitiveness. These retail success initiatives include retail goals that we urge dealers to strive for within their stores and in locally competitive markets. These goals do not, however, impose major restrictions or requirements on members. Our minimum requirements for the acceptance of new members are outlined in the current Membership Agreement and in the Member Operational Requirements that apply under that Agreement. The Operational Requirements do require that, within one year the member must make us the primary source of supply and terminate any previous participation in the program of any other major hardware wholesaler. There are currently no general requirements (apart from special voluntary programs) where members have to make particular percentages of purchases from us or have to achieve minimum retail performance levels, such as sales dollars per square foot. Our latest strategic initiative, which we call Vision 21, focuses on encouraging dealers to adopt certain merchandising, marketing and operational practices that are supported by some of our most successful dealers to improve the Company's and the dealers' overall competitiveness and efficiency. Vision 21 goals include minimizing disparities between retail and wholesale, developing dealer-friendly procedures that take duplication and costs out of dealers' operations, achieving consistent implementation of programs more rapidly and improving the dealers' financial performance and their ability to pursue new stores and store expansions. Special Charges and Assessments We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to 1.365% of their purchases (except purchases of LTL Plus and certain computer systems), with minimum and maximum yearly assessments for each store location. Effective January 1, 2000, the minimum assessment is $1,916.46 and the maximum assessment is $6,500.00 for each store location. We grant exemptions from these assessments and make various adjustments to them for stores located outside the continental United States. These exemptions and adjustments are based on our management's evaluation of the number and types of television broadcasts that are received in these areas. The amount of our national advertising assessment can be changed from time to time by our Board of Directors. We can also impose assessments at a flat monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of a dealer's annual purchases. Regional advertising assessments are subject to the same minimum and maximum amounts as the National Advertising assessment. Every two weeks, we bill your member store for a special low volume account service charge of $75 if your annual purchases from us are less than $50,000. Effective January 1, 2000, every two weeks, we will bill your store for a special low volume account service charge of $60 if your annual purchases from us are between $50,000 and $140,400. The low volume service charges that we bill to your store in a specific year are automatically refunded if that store's total purchases increase to over $140,400 during the year. Your store is excused from this low volume account service charge during the first 12 months that it is a member. There are some exceptions to our low volume account service charges that are described below: 1. If you purchase $140,400 of merchandise from us during the year, we give you credit on your next billing statement for any low volume charges which we billed to you earlier in the year. We then stop billing you for low volume account service charges for the rest of the year, even if your current purchases on a billing statement are less than $5,400; and 2. We do not bill low volume account service charges every two weeks if your store's sales volume with us the year before was at our minimum ($140,400), but we will bill these charges in a lump sum to your last statement of the year if you do not reach our applicable minimum by that time. An Ace store that falls below our minimum purchase levels can also be subject to termination. We add a late payment service charge on any past due balance that you owe us for merchandise, services, or your stock subscription. The current rate for the late payment service charge is .77% per biweekly statement period, except in Texas where the charge is .384% and Georgia where the charge is .692%. We consider a past due balance to exist whenever we do not receive payment of the amount shown as due on your billing statement within 10 days after the date of that statement. We can change the rate of our late payment service charge from time to time. Our retail training program called the "Ace Training Network" is required for all member stores in the United States and U.S. Territories. Under the "Ace Training Network," we will bill you a monthly fee which we call a "monthly training assessment." This assessment is $16 per month for each single store or parent store and $11 for each branch store. A single store or parent store is one that has a share of our Class A voting stock (or one that involves a stock subscription for a share of our Class A Stock.) A branch store is one whose membership involves only shares (or a subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws.) Branch stores can request an exemption from the monthly training assessment. With the Ace Training Network, you have the option of choosing how your monthly training assessment dollars will be spent. Under this program, you are initially issued 200 points, and one point equals one dollar in your training account. We credit you with another point for each dollar you pay for your monthly training assessment. Thus, a single store or parent store can earn 16 points per month and a branch store can earn 11 points per month. You may use your points at any time to buy one of the training programs that we offer. If you do not have enough points for the program that you want, you can use the points that you have and we will bill you for the difference. Multiple stores and member groups can pool their points together to purchase our training programs. We also have a mandatory subscription service for Material Safety Data Sheet information for all member stores located in the United States. As of the date of this filing, the initial yearly assessment for these subscriptions is $20 for each single store or parent store and $10 for each branch store. Trademark and Service Mark Registrations The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the promotion, advertising and marketing of products and services that we sell. We have had the following Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for our marks: Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "ACE HARDWARE" with winged emblem design Service Mark 840,176 December 5, 2007 "ACE HARDWARE" with winged emblem design Trademark 898,070 September 8, 2000 "THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000 "HARDWARE UNIVERSITY" with design Service Mark 1,180,539 December 1, 2001 "SUPER STRIKER" Trademark 1,182,330 December 15, 2001 "PACE" with design Service Mark 1,208,887 September 14, 2002 "ACE HARDWARE" with winged emblem design Trademark 1,277,581 May 15, 2004 "ACE HARDWARE" in stylized lettering design Trademark 1,426,137 January 27, 2007 "ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007 "ACE HARDWARE" in stylized lettering design Service Mark 1,486,528 April 26, 2008 "ACE HARDWARE AND GARDEN CENTER" in stylized lettering design Service Mark 1,487,216 May 3, 2008 "ACE NEW EXPERIENCE" in stylized lettering design Trademark 1,554,322 September 5, 2009 "ACE SEVEN STAR" in stylized lettering design Trademark 1,556,389 September 19, 2009 "ACE BEST BUYS" in circle design Service Mark 1,560,250 October 10, 2009 "ACENET" Service Mark 1,574,019 December 26, 1999(1) "ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2000 "LUBE" Trademark 1,615,386 October 2, 2000 "ACE PRO" Trademark 1,632,078 January 22, 2001 Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "ASK ACE" Service Mark 1,653,263 August 6, 2001 Christmas Elves design Trademark 1,669,306 December 24, 2001 "ACE 2000" Service Mark 1,682,467 April 7, 2002 "ACE" in stylized lettering design Trademark 1,683,538 April 21, 2002 "HARMONY" in stylized lettering design Trademark 1,700,526 July 14, 2002 "SEVEN STAR SATISFACTION GUARANTEED QUALITY ACE PAINTS" with design Service Mark 1,705,321 August 4, 2002 "THE OAKBROOK COLLECTION" in stylized lettering design Trademark 1,707,986 August 18, 2002 "ACE HARDWARE BROWN BAG BONANZA" with design Service Mark 1,761,277 April 13, 2003 "ACE HARDWARE COMMITTED TO A QUALITY ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003 "THE OAKBROOK COLLECTION" in stylized lettering design Trademark 1,783,335 July 20, 2003 "STORE 2000 THE STORE OF THE FUTURE" Service Mark 1,811,032 December 14, 2003 "ENVIROCHOICE" Trademark 1,811,392 December 14, 2003 "CELEBRATIONS" Service Mark 1,918,785 September 12, 2005 Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005 "The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005 "ACE RENTAL PLACE" in stylized lettering design Service Mark 1,943,140 December 19, 2005 "HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006 "ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006 "SEALTECH" Trademark 2,007,132 October 8, 2006 "GREAT FINISHES" Trademark 2,019,696 November 26, 2006 "WOODROYAL" Trademark 2,065,927 May 27, 2007 "ROYAL SHIELD" Trademark 2,070,848 June 10, 2007 "ROYAL TOUCH" Trademark 2,070,849 June 10, 2007 "QUALITY SHIELD" Trademark 2,102,305 September 30, 2007 "QUALITY TOUCH" Trademark 2,102,306 September 30, 2007 "STAINHALT" Trademark 2,122,418 December 16, 2007 "ACE CONTRACTOR CENTER" Service Mark 2,158,681 May 19, 2008 "NHS NATIONAL HARDLINES SUPPLY" Service Mark 2,171,775 July 7, 2008 "ACE COMMERCIAL & INDUSTRIAL SUPPLY" Service Mark 2,186,394 September 1, 2008 "THE OAKBROOK COLLECTION" Trademark 2,187,586 September 8, 2008 "ACE GARDEN PLACE" Service Mark 2,227,729 March 2, 2009 "ACE ROYAL" Trademark 2,237,981 April 13, 2009 "HELPFUL HARDWARE CLUB" Service Mark 2,239,400 April 13, 2009 "THE FOLKS IN THE RED VEST" Service Mark 2,261,946 July 20, 2009 "ACE CONTRACTOR PRO" Trademark 2,273,483 August 31, 2009 (1) Application for renewal of registration filed January 28, 2000. As of the date of this filing, we also have the following applications for new registrations pending in the U.S. Patent and Trademark Office: Mark Type of goods/services ---- ---------------------- "ACE SOLUTIONS PLACE" retail store services in the field of hardware and related goods "YOUR NEIGHBORHOOD SOLUTIONS PLACE" retail store services in the field of hardware and related goods "ACE" with accent design retail store services in the field of hardware and related goods "ILLUMINATIONS" paint color chip display rack kits, consisting primarily of display racks, paint color charts, architect kits and decals for use in determining color schemes "STORE-IT-RIGHT" hardware products, namely, hooks, brackets, knobs, hangers and extensions for support or hanging Competition Competitive conditions in the wholesale hardware industry are intense and increasing. Independent hardware retailers must remain competitive with discount stores and chain stores, such as WalMart, Home Depot, Menard's, Sears, and Lowe's, and with other mass merchandisers. Retail hardware stores have been slowly shifting their locations to high rent shopping centers. There has also been a trend toward longer store hours. There is intense pressure on hardware retailers to obtain low cost wholesale supply sources. In several markets in the United States, we also compete directly with other dealer-owned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware Distributing Co. Employees We have 5,180 full-time employees, of which 1,610 are salaried employees. We also have union contracts covering one (1) truck drivers' bargaining unit and three (3) warehouse bargaining unit(s). We consider our employee relations with both union and non-union employees to be good, and we have had no strikes in the past five years. In general, our employees are covered by either negotiated or nonnegotiated benefit plans that include hospitalization, death benefits and, with few exceptions, retirement benefits. Limitations on Ownership of Stock Our members own all of our outstanding shares of capital stock. Membership in our Company is limited to approved dealers in hardware and related products who have Membership Agreements with us. These are the only ones eligible to own or purchase shares of any class of our stock. No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store locations that dealer owns or controls. This ensures that each stockholder in our cooperative has equal voting power no matter how many member store locations the stockholder owns or controls. We treat an unincorporated member or a partnership member as being controlled by someone else if 50% or more of the assets or profit shares of that member are owned by (i) another person, partnership or corporation; or (ii) the owner(s) of 50% or more of the assets or profit shares of another unincorporated business firm or (iii) the owner(s) of at least 50% of the capital stock of a corporation. We treat a member that is a corporation as being controlled by someone else if at least 50% of the capital stock of that member is owned by (i) another person, partnership or corporation; or (ii) the owner(s) of at least 50% of the capital stock of another corporation; or (iii) the owner(s) of at least 50% of the assets or profit shares of another unincorporated business. Distribution of Patronage Dividends We operate on a cooperative basis for purchases of merchandise from us that are made by dealers who have become members of our Company. We also operate on a cooperative basis with dealers who have subscribed for shares of our stock but who have not yet actually become "members" because they have not yet fully paid for their $1,000 par value shares of our Class A voting stock. The dealers in either of these two categories are entitled to receive patronage dividends once a year on an equitable basis. We made patronage dividend distributions at the following percentages of our sales in the warehouse, bulletin and direct shipment categories and on the total sales of products manufactured by our Paint Division during the past three fiscal years: 1999 1998 1997 ---- ---- ---- Warehouse Sales 4.98172% 4.78251% 4.32753% Bulletin Sales 2.0% 2.0% 2.0% Direct Shipment Sales 1.0% 1.0% 1.0% Paint Sales 7.8827% 9.1653% 10.3088% There are other patronage dividends that are calculated separately for distribution on sales of lumber products, building material and millwork products and less-than-truckload (LTL) sales of lumber and building material products. We distributed patronage dividends equal to .4595%, .4668% and .4593% of the total sales of these categories (calculated separately by category) to our members who purchased these products in fiscal years 1999, 1998 and 1997. The 1999 dividend pertains to the activity of the LBM Division through August 2, 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a description of our LBM Division. Under our LTL Plus Program, we also calculate patronage dividends separately on sales of full or partial truckloads of products purchased by eligible dealers from certain vendors (see discussion of LTL Plus Program under the heading "Business.") The amount of patronage dividends that we currently allocate to LTL Plus sales is .5% of these sales. The LTL Plus Program patronage dividend was .5% of these sales for fiscal year 1999, 1998 and 1997. Patronage Dividend Determinations and Allocations The amounts that we distribute as patronage dividends consist of our gross profits on business that we do with dealers who qualify for patronage dividend distributions, less a proportionate share of our expenses for administration and operations. Our gross profits consist of the difference between our selling price for the merchandise that these dealers buy from us and our purchase price for that merchandise. Our computation of patronage dividends excludes all of our income and expenses from activities that are not directly related to patronage transactions. The excluded items primarily consist of profits on business that we do with dealers or other customers who do not qualify for patronage dividend distributions and any income or loss that we realize from the disposition of property and equipment. If that occurred, then the income we would derive from this type of recapture would be included in computing patronage dividends. Our By-laws provide that, by virtue of dealers being "members" of our Company (that is, by owning shares of our Class A voting stock), they consent to include in their gross income for federal income tax purposes all patronage dividends that we distribute to them. These distributions must be included in gross income for the taxable year in which the dealer receives them. Dealers who have not yet fully paid the $1,000 purchase price for their shares of our Class A voting stock are also required to include all patronage dividends we distribute to them in their gross income as explained above. Under our Stock Subscription Agreement, dealers must expressly consent to take these patronage dividend distributions into their gross incomes. The amount of the patronage dividends which dealers must include in their gross incomes includes both the cash portion of patronage dividends and any portion of patronage dividends that we apply against any indebtedness the dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws. It also includes any portion of patronage dividends that they receive in shares of our Class C nonvoting stock, other property and patronage refund certificates. The Company also has the authority to issue a portion of the patronage dividend in the form of other property. Under our present program, patronage dividends on each of our three basic categories of sales (warehouse sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends under our LTL Plus Program. Dividend percentage calculations are made with reference to the net earnings derived from each of the respective categories. The 1999 patronage dividend rate for the LTL Plus Program is .5% of our LTL Plus sales. The 1999 dividend rates for direct shipment and bulletin sales are 1% and 2%, respectively, while the current 1999 warehouse dividend rate is 4.98%. We do not include sales of lumber and building materials products as part of warehouse sales, bulletin sales or direct shipment sales for patronage dividend purposes. Patronage dividends for lumber and building materials are calculated separately for purchases within each of four sales categories involving these types of products. These four categories are: (a) lumber products (other than less-than-truckload sales); (b) building materials products (other than less-than-truckload sales); (c) millwork products and (d) less-than-truckload ("LTL") sales of lumber and building materials products. Patronage dividends are also calculated separately for full and partial truckloads of products purchased under the LTL Plus Program. (See the heading "Business", discussion of LTL Plus Program and the subheading "Forms of Patronage Dividend Distributions", subparagraphs 2(a)-(b) below.) See "Management's Discussion and Analysis of Financial Conditions and Results of Operations," for a description of our LBM Division. Patronage dividends are also calculated separately for full and partial truckloads of products purchased under the LTL Plus Program. (See the heading "Business", discussion of LTL Plus Program and the subheading "Forms of Patronage Dividend Distributions", subparagraphs 2(a)-(b) below.) We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products through Builder Marts of America, Inc. ("BMA") and are participants in the Ace Contractor Center program. Under the plan, we calculate an annual estimate of the amount by which our stock in BMA has increased or deceased in value from our initial investment, net of certain expenses. We allocate this estimate to eligible members annually based on their qualifying purchases of LBM products. A member's pool allocation only becomes vested and can only be redeemed upon the termination of the member's Ace membership which results in the sale or redemption of Ace stock held for that location, Ace's termination of the LBM Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first. Negative pool balances are not charged to members. Any manufacturing profit realized on intracompany sales of products manufactured by our Paint Division is allocated and distributed as patronage dividends to eligible dealers in proportion to their respective annual dollar purchases of paint and related products from that division. The earnings we realize on wholesale sales of the Paint Division's products to our eligible dealers are currently distributed as patronage dividends to them as part of the patronage dividends which they receive each year in the basic patronage dividend categories of warehouse sales, bulletin sales and direct shipment sales. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's manufacturing operations for any year result in a net loss instead of a profit to the Paint Division, this loss would be netted against the earnings we realized from our other activities during the year, so that the earnings available for distribution as patronage dividends from these other activities would be reduced for the year. Forms of Patronage Dividend Distributions We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock and patronage refund certificates according to a specific plan that has been adopted by our Board of Directors. This plan can be changed from time to time by the Board as they deem fit depending on business conditions and our Company's needs. This plan is summarized below for the purchases that our eligible dealers make from us on or after January 1, 1999. 1. For each of your eligible stores, we initially calculate the minimum cash patronage dividend distribution as follows: (a) 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to you based on the purchases made for the eligible store; (b) 25% of the portion of the total patronage dividends allocated for that store which exceed $5,000 but do not exceed $7,500; (c) 30% of the portion of the total patronage dividends allocated for that store which exceed $7,500 but do not exceed $10,000; (d) 35% of the portion of the total patronage dividends allocated for that store which exceed $10,000 but do not exceed $12,500; (e) 40% of the portion of the total patronage dividends allocated for that store which exceed $12,500. 1A. The portion of the total annual distribution allocated to any such dealer for each store owned or controlled by such dealer in excess of the minimum cash distribution shall be distributed to him for the year 1999 payable in the year 2000 as follows: (a) To the extent there is an excess amount over a store's minimum cash distribution, each such eligible store shall receive stock options of OurHouse, Inc. (valued at $3.40 each) rounded to the nearest multiple of 50 but not to exceed 150 stock options. (b) Next, to the extent there is an excess over a store's minimum cash distribution and allocation under (a) above, each such eligible store shall receive its prorata share of 3,000,000 stock options less the number of stock options allocated under (a) above. Allocation to each eligible store shall be based on each store's total patronage dividend as a percentage of the Company's total patronage dividend rounded to nearest multiple of 50. (c) The eligible stores include change of ownership stores, but exclude canceled stores. 2. We distribute the portion of patronage dividends in excess of the cash or property amounts above in the form of shares of our Class C nonvoting stock (par value $100 per share) until the total par value of all shares of all classes of our capital stock that you hold for the eligible store equals the greater of: (a) $20,000; or (b) the sum of purchases in the following categories that you made for the eligible store during the most recent calendar year: (i) 15% of the volume of Ace manufactured paint and related products purchases, plus (ii) 3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured paint and related products), plus (iii)15% of the volume of warehouse and bulletin purchases (including STOP and excluding Ace manufactured paint and related products), plus (iv) 4% of the volume of LTL Plus purchases. Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount that would result in a fractional share of stock and distribute it in cash or patronage refund certificates instead. 3. The portion of your total patronage dividends for each of your eligible stores which exceeds the sum of: (a) the cash amount determined under Paragraph 1 above and (b) the amount to be distributed to you in property under Paragraph 1A above and (c) the amount of Class C Stock determined under Paragraph 2 above is distributed to you in cash up to certain limits. The total amount that you receive in cash for an eligible store cannot exceed 45% of that store's total patronage dividends for the year. If a store's total cash distribution would exceed this 45% limit, then the distribution over that amount is made instead in the form of a non-negotiable patronage refund certificate. Our Board of Directors determines the maturity dates and interest rates of these patronage refund certificates before they are issued. These certificates include provisions that give us a first lien on the amount of any indebtedness that you owe us. The certificates also contain language subordinating them to all the rights and claims of our secured creditors, general creditors and our bank creditors. Historically, these patronage refund certificates have matured within five years from the date we issued them. With some modifications, the plan described above is applied separately in determining patronage dividends on our sales of lumber and building materials. The combined patronage dividends allocated annually to a store from: - sales of lumber products (other than LTL sales), - sales of building materials (other than LTL sales), - sales of millwork product and - LTL sales to the store are used to calculate the minimum cash distribution percentages that we apply under Paragraph 1 above. A store's patronage dividends from any other sales category are not taken into account in determining either the minimum portion or any additional portion of the store's patronage dividends from its purchases of lumber and building materials products that are distributed in cash. Article XXIV, Section 7 of our By-laws requires the cash portion of any patronage dividends to be applied against any indebtedness a member owes us where the membership for his store is terminated before the distribution of patronage dividends. Despite this, however, 20% of a terminated store's total annual patronage dividends will be paid in cash if we receive a timely request for this form of payment. Because of the requirement of the U. S. Internal Revenue Code that we withhold 30% of the annual patronage dividends distributed to eligible dealers whose places of business are located in foreign countries or Puerto Rico, the cash portion of patronage dividends to these dealers is a minimum of 30%. There are exceptions to this 30% cash payment in the case of 1) unincorporated Puerto Rico dealers owned by individuals who are U.S. citizens, and 2) certain dealers incorporated in Guam, American Samoa, the Northern Mariana Islands or the U.S. Virgin Islands. These exceptions apply if less than 25% of the stock of these dealers is owned by foreign persons, and at least 65% of their gross income for the last three years has been sufficiently connected with a trade or business in one of these locations or in the United States. We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend distributions. For example, to help members buy standardized exterior signs identifying their stores, our Board of Directors has authorized a loan program. Under this program, a dealer may apply to borrow between $100 to $20,000 per location from us for this purpose. If you obtain a loan under this program, you may either repay it in twelve payments billed on your regular bi-weekly billing statement, or you may apply the non-cash portion of your annual patronage dividends (for up to the next three annual patronage dividend distributions) toward payment of your loan. Our Board of Directors has also authorized finance programs to help qualified dealers buy certain computer systems from us and to finance capital improvements with patronage dividends. The amount financed cannot exceed 80% of the cost of any system. For PAINTMAKER computers, members have applied to borrow between $1,000 to $15,000 per location repayable over a period of three (3) years. For PACE computers, members have applied to borrow between $5,000 to $50,000 per location repayable over a period of five (5) years. Under these programs, members have directed us to first apply the patronage refund certificate portion of their patronage dividend distributions toward the balance owed on these financed items and next to apply patronage dividends which would otherwise be payable for the same year in the form of our Class C Stock. These signage, computer financing and store retrofit programs may be revised or discontinued by our Board at any time. Members also have the ability to apply for a Capital Stock loan which is designed to provide them with access to their future patronage dividends to assist them in opening new retail stores or to assist in significant store expansions. These loans are repaid by the first seven rebate distributions of the non-cash portion of the annual rebate on the respective store. Federal Income Tax Treatment of Patronage Dividends Both the shares of Class C nonvoting stock and the patronage refund certificates that we use to pay patronage dividends are "qualified written notices of allocation" within the meaning of Sections 1381 through 1388 of the U.S. Internal Revenue Code. The Company may pay a portion of its dividend in the form of other qualified property pursuant to Section 1382 of the U.S. Internal Revenue Code. These Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and their patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation and fair market value of other qualified property must be taken into the gross income of the person to whom the notice is issued, even though this dollar amount may not actually be paid to the person in the same year that it is taxed. In order for us to receive a deduction from our gross income for federal income tax purposes for the amount of any patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying dealers) in the form of qualified written notices of allocation or other qualified property, we have to pay (or apply against any indebtedness that the patron owes us in accordance with Section 7 of Article XXIV of our By-laws) not less than 20% of each patron's total patronage dividend distribution in cash and the patron also has to consent to having the written notices of allocation at their stated dollar amounts, and other qualified property at the fair market value, included in his gross income for the taxable year in which he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that we deduct on our federal income tax return for business we do with patrons must be paid to those patrons within 8 months after the end of that taxable year. If you become one of our "members" by owning 1 share of Class A voting stock, you are deemed under the U.S. Internal Revenue Code to have consented to take the written notices of allocation and other qualified property that we distribute to you into your gross income. Your consent is deemed because of 1) your act of obtaining or retaining membership in our Company, and 2) because our By-laws provide that your membership constitutes this consent, and we give you written notification of that By-law provision. Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of our stock are also deemed to have consented to take the dollar amounts of their written notices of allocation and other qualified property into their gross incomes. This occurs because of the consent provisions included in the Subscription Agreement for our stock. If you receive a patronage refund certificate as part of your patronage dividends (see the subheading "Forms of Patronage Dividend Distributions"), you may be deemed to have received interest income. This interest would arise in the form of an original issue discount to the extent that the face amount of the certificate exceeds the present value of the stated principal and interest payments that we have to pay you under the terms of the certificate. This interest income would be taxable to you "ratably" over the term of the certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. Present value for this purpose is determined by using a discount rate equal to the applicable Federal rate in effect as of the day of issuance of the certificate, compounded twice a year. We are required to withhold for federal income tax on the total patronage dividend distribution we make to anyone who has not furnished us with a correct taxpayer identification number. We can also be required to withhold federal taxes on the cash portion of each patronage dividend distribution made to someone who fails to certify to us that he is not subject to backup withholding. This withholding obligation based on a failure to certify may not be applicable, however, unless 50% or more of the total distribution is made in cash. Since we distribute all of our patronage dividends for a given year at the same time and since our current patronage dividend plan (see the subheading "Forms of Patronage Dividend Distributions") does not permit any member store to receive more than 45% of its patronage dividends for the year in cash, we believe that a certification failure like this should not ordinarily have any effect on our Company or any of its dealers. Patronage dividends that we distribute to patrons who are located in foreign countries or certain U. S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but have not become citizens of the United States) have been held to be "fixed or determinable annual or periodic income." Patrons who receive this type of income are currently required to pay a tax of 30% of the amount received under Sections 871(a)(1)(A) and 881(a)(1) of the Internal Revenue Code. When dealers are subject to this 30% tax, we must withhold it from their patronage dividends and pay it over to the U.S. Internal Revenue Service. The above does not apply to a corporation organized in Guam, American Samoa, the Northern Mariana Islands or the U. S. Virgin Islands if less than 25% of its stock is owned by foreign persons and at least 65% of its gross income for the last three years has been effectively connected with the conduct of a trade or business in that location or in the United States. The 20% minimum portion of the patronage dividends that must be paid in cash to patrons other than those discussed above may not be enough, depending upon the patron's income tax bracket, to pay all of the patron's federal income tax on his annual patronage dividend distributions. In our management's opinion, the payment of a minimum of 20% of total patronage dividends in cash each year will not have a material adverse affect on our operations or on our ability to obtain sufficient working capital for the normal requirements of our business. Membership Agreement If you apply to become an Ace member, you must sign a Subscription Agreement to purchase our stock. You must also sign our customary Membership Agreement. You must submit a payment of $1,500 with your signed Membership Agreement. We use the $1,500 fee toward our estimated costs of processing your membership application. If you submit a membership application and we accept it, we sign both your Membership Agreement and Stock Subscription Agreement and send them back to you for your records. Your membership may generally be terminated upon various notice periods and for various reasons (including voluntary termination by either of us). The details of these reasons and notice periods are in the Membership Agreement. These reasons for termination and notice periods apply except where special laws or regulations in certain locations limit our right to terminate memberships, or require longer notice periods. Non-Shareholder Programs In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers who operate retail businesses outside the United States, its territories and possessions. These international dealers sign agreements that differ from our regular Membership Agreement. They may be granted a license to use certain of our trademarks and service marks, but they do not sign stock subscription agreements or become shareholders, nor do they receive patronage dividends. In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other than international dealers. These accounts, which are generally served through our subsidiary National Hardlines Supply, Inc. ("NHS"), are not granted an ongoing license to use our trademarks and service marks. They can purchase selected types of products from us for resale. They are not members of our cooperative, and therefore do not own our stock or receive patronage dividends. In 1996, we established a license program for international non-shareholder dealers. These international licensees typically receive the exclusive right to use our trademarks and service marks, as well as exclusive rights to distribute the merchandise they purchase from us in their home countries. International licensees pay us a negotiated license fee and ongoing royalties on their retail sales in exchange for these rights, and for our ongoing training and support. In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace Canada"). Ace Canada's customers are non-shareholders who do not receive patronage dividends from us. Only customers signed under the Ace Canada Franchise Agreement are licensed to use our trademarks and service marks. In 1998, we also established a domestic franchise program whose franchisees will not be shareholders of our cooperative, and will not therefore receive patronage dividends. These franchisees will pay us a franchise fee and ongoing royalties on their retail sales. In turn, they receive exclusive rights to a designated area, a license to use our trademarks and service marks, and various initial and ongoing training and support. In October, 1998, we entered into a joint venture with one of our dealers. The joint venture operates 11 leased stores in Massachusetts, New Hampshire and Rhode Island. In January, 1999, we entered into another joint venture with another Ace dealer. This joint venture operates 2 leased stores in southwest Florida. In January, 2000, we entered into a third joint venture with another Ace dealer. This joint venture plans to open 3 stores in Oregon over the next 2 years. In the future, we will explore other joint venture opportunities with our dealers; however, we consider each situation unique and we evaluate each opportunity on its own merits. As of the end of fiscal years 1999, 1998 and 1997 sales to international non-shareholder dealers accounted for approximately 6.5% of our total sales for fiscal year 1999, 1998 and 1997. As of the end of fiscal years 1999, 1998 and 1997, sales to domestic non-shareholder locations accounted for less than 1.5% of our total sales in 1999 and less than 1% in 1998 and 1997. (See Appendix A, Article XXV, Sections 3 and 4 of our By-laws regarding International Retail Merchants and non-member accounts.) Year 2000 The Company established a detailed plan to identify and track progress on the identification of systems, changing of non-compliant systems and testing of those systems for Year 2000 compliance. In addition, a plan was also implemented for all devices (time clocks, power systems, etc.) within the Company. The Company successfully completed its Year 2000 rollover without any mission-critical information technology or non-information technology system disruptions. The Company is not aware of any Year 2000 related problems with third-party vendors of mission-cricital information technology systems. However, it will continue to maintain contingency plans with respect to its third-party vendor relationships. Although the Year 2000 event has occurred, there can be no assurance that there will be no problems related to the Year 2000 for a period of time after January 1, 2000. The Company incurred internal staff costs as well as incremental consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the Year 2000. A significant portion of these costs represented the re-deployment of existing information technology resources. The Company has expended approximately $5.1 million through January 1, 2000 for Year 2000 compliance. To date, the Company's systems have experienced no material disruption related to Year 2000 compliance issues. Item 2. Properties Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information about our main properties appears below: Square Feet Owned Lease of Facility or Expiration Location (Land in Acres) Leased Date -------- --------------- ------ ---------- General Offices: Oak Brook, Illinois 206,030 Leased September 30, 2009 Oak Brook, Illinois 70,508 Owned Downers Grove, Illinois 23,962 Leased June 30, 2004 Markham, Ontario, Canada(1) 15,372 Leased February 28, 2006 Distribution Warehouses: Lincoln, Nebraska 346,000 Leased December 31, 2006 Arlington, Texas 313,000 Leased July 31, 2002 Perrysburg, Ohio 396,000 Leased November 1, 2004 Tampa, Florida 391,760 Owned Harmans, Maryland 277,000 Owned Yakima, Washington 502,400 Owned Maumelle, Arkansas 585,500 Owned LaCrosse, Wisconsin 363,000 Owned Huntersville, North Carolina 354,000 Owned Rocklin, California 470,000 Owned Gainesville, Georgia 478,000 Owned Prescott Valley, Arizona 633,000 Owned Princeton, Illinois 1,080,000 Owned Chicago, Illinois (2) 18,168 Leased May 31, 2001 Hanover, Maryland (2) 57,500 Leased June 26, 2003 Colorado Springs, Colorado 493,000 Owned Wilton, New York 795,000 Leased September 1, 2007 Loxley, Alabama (3) 103.6 acres Leased May 27, 2009 Brantford, Ontario, Canada (4) 434,000 Leased March 31, 2006 Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001 Print Shop Facility: Downers Grove, Illinois 41,000 Leased April 30, 2002 Paint Manufacturing Facilities: Matteson, Illinois 356,000 Owned Chicago Heights, Illinois 194,000 Owned Other Property: Aurora, Illinois 72 acres Owned LaCrosse, Wisconsin (5) 3 acres Owned (1) This property is leased by our subsidiary Ace Hardware Canada, Limited for its corporate office. (2) This property is leased for use as a freight consolidation center. (3) This property was purchased by the Company in May, 1999 then sold and leased back from the Industrial Development Board of the Town of Loxley. A distribution warehouse of approximately 800,000 square feet is under construction and expected to be in operation during the third quarter of 2000. (4) Our subsidiary, Ace Hardware Canada, Limited leases this property for a distribution warehouse. The Brantford property includes 80,000 square feet leased for a two-year period from January 1, 1998-December 31, 2000. (5) This land is adjacent to our LaCrosse, Wisconsin warehouse. In addition to the above, we or our subsidiaries, A.H.C. Store Development Corp. and Ace Corporate Stores, Inc. lease other property for retail hardware stores ranging from approximately 13,000 to 20,000 square feet in size. The numbers and locations of these leased retail stores as of the date of this filing are summarized in the table below: Number of State Retail Store Leases ----- ------------------- Colorado 1 Georgia 6 Illinois 6 New Jersey 1 Washington 8 Wisconsin 1 We also lease a fleet of trucks and equipment for the main purpose of delivering merchandise from our warehouses to our dealers. Item 3. Legal Proceedings There are no significant pending legal proceedings that either alone or together involve claims for damages for more than 10% of our current assets and our subsidiaries on a consolidated basis. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for The Registrant's Common Equity and Related Stockholder Matters There is no existing market for our stock and there is no expectation that one will develop. We are organized as a Delaware corporation and operate as a cooperative corporation, and only retailers of hardware and similar merchandise who are our members own our stock. The table below shows the number of stockholders of record that we had as of February 16, 2000: Title of Class Number of Record Holders -------------- ------------------------ Class A Stock, $1,000 par value 3,832 Class B Stock, $1,000 par value 2,408 Class C Stock, $100 par value 4,862 Our Company's Articles of Incorporation and By-laws prohibit us from declaring dividends (other than patronage dividends). (Please see the discussion of patronage dividends under Item 1. Business.) Item 6. Selected Financial Data SELECTED FINANCIAL DATA Income Statement Data: January 1, January 2, December 31, December 31, December 31, 2000 1999 1997 1996 1995 ---------- ---------- ------------ ------------ ------------ (000's omitted) Net sales $3,181,802 $3,120,380 $2,907,259 $2,742,451 $2,436,012 Cost of sales 2,892,287 2,863,156 2,677,537 2,528,767 2,247,354 ---------- ---------- ---------- ---------- ---------- Gross profit 289,515 257,224 229,722 213,684 188,658 Total expenses 196,953 169,264 153,335 141,377 124,916 ---------- ---------- ---------- ---------- ---------- Net earnings $ 92,562 $ 87,960 $ 76,387 $ 72,307 $ 63,742 ========== ========== ========== ========== ========== Patronage dividends (Notes A, B, 5 and 8) $ 95,260 $ 88,022 $ 76,153 $ 73,837 $ 64,716 ========== ========== ========== ========== ========== Balance Sheet Data: January 1, January 2, December 31, December 31, December 31, 2000 1999 1997 1996 1995 ---------- ---------- ------------ ------------ ------------ (000's omitted) Total assets $1,081,484 $1,047,580 $ 977,478 $ 916,375 $ 759,133 Working capital 180,763 191,926 158,676 146,862 139,805 Long-term debt 111,895 115,421 96,815 71,837 57,795 Patronage refund certificates payable, long-term 55,257 43,465 49,044 49,639 54,741 Member dealers' equity 279,963 261,512 245,479 233,313 217,245 (A) The Company operates as a cooperative organization, and pays patronage dividends to member dealers on earnings derived from business done with such dealers. It is the practice of the Company to distribute substantially all patronage sourced earnings in the form of patronage dividends. (B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the amount distributable to each of the member dealers is known. Patronage dividends were payable as follows: January 1, January 2, December 31, December 31, December 31, 2000 1999 1997 1996 1995 ---------- ---------- ------------ ------------ ------------ (000's omitted) In cash $ 38,173 $ 34,826 $ 29,943 $ 28,178 $ 23,522 In patronage refund certificates payable 12,249 15,720 13,726 9,500 5,032 In Class C Stock 21,648 26,170 22,366 26,474 27,506 In other property 10,190 -- -- -- -- In patronage financing deductions 13,000 11,306 10,118 9,685 8,656 ---------- ---------- ------------ ------------ ------------ Total patronage dividends $ 95,260 $ 88,022 $ 76,153 $ 73,837 $ 64,716 ========== ========== ============ ============ ============ (C) Numbered notes refer to Notes to Consolidated Financial Statements, beginning on page F-8. (5) & (8) refers to Notes (5) and (8) of the Consolidated Financial Statements beginning on page F-8 of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company's ability to generate cash adequate to meet its needs ("liquidity") results from internally generated funds, short-term lines of credit and long-term financing. The Company has an established, unsecured revolving credit facility with a group of banks. The Company has unsecured lines of credit of $210.0 million of which $160.1 million was available at January 1, 2000. Any borrowings under these lines of credit would bear interest at the prime rate or less. Long-term financing is arranged as determined necessary to meet the Company's capital or other requirements, with principal amount, timing and form dependent on prevailing debt markets and general economic conditions. Capital expenditures for new and improved facilities were $43.5, $21.0 and $42.9 million in 1999, 1998 and 1997, respectively. During 1999, the Company financed the $43.5 million of capital expenditures out of current and accumulated internally generated funds and short-term borrowings. Capital expenditures for 2000 are anticipated to be approximately $60.3 million primarily for a new distribution facility, improvements to existing facilities and technology investments. As a cooperative, the Company distributes substantially all of its patronage source earnings to its members in the form of patronage dividends, which are deductible for income tax purposes. The Company expects that existing and new internally generated funds, along with established lines of credit and long-term financing, will continue to be sufficient to finance the Company's working capital requirements and patronage dividend and capital expenditures programs. Operations 1999 Compared to 1998 On June 30, 1999 the Company entered into a business combination agreement with Builder Marts of America, Inc. (BMA) to combine the LBM Division of the Company with BMA. Under this agreement, the Company contributed defined business assets (primarily vendor rebate receivables, fixed assets and inventories) for a non-controlling interest in the combined entity. The investment in the combined entity is accounted for under the equity method of accounting. The accompanying consolidated financial statements include the financial results of the LBM Division through the closing date of August 2, 1999. The total sales increase of 2.0% was effected by the business combination of Ace LBM with BMA. As a result of this transaction, LBM sales are not reported within the Company's sales results after August 2, 1999. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 7.8% in 1999 primarily due to increased existing retailer volume, targeted efforts on new store development within our retailer base and conversions to the Ace program. Excluding international, domestic basic business sales are up 8.6%. Sales were negatively impacted by a decline in international sales. Net dealer outlets increased in 1999 due to targeted sales efforts on new store development and conversions to the Ace program and continued emphasis on retail success. Gross profit increased $32.3 million or 12.6% and increased as a percent of sales to 9.10% vs. 8.24% in 1998. This increase as a percent of sales results partially from the loss of lower margin LBM volume. Higher cash discounts and vendor rebates and increased margin from import products and retail operations resulted in the gross profit increase. Warehouse and distribution expenses increased $1.3 million and increased as a percent of sales from 1.25% to 1.26%. Increased warehouse and distribution costs required to support higher handled sales are partially offset by increased logistics income. Higher logistics income combined with improvements in productivity drove expenses as a percent of basic business sales down to 1.43% in 1999 from 1.49% in 1998. Selling, general and administrative expenses increased by $5.0 million or 5.9% and increased as a percent to sales due to increased information technology costs to support our Year 2000 efforts. Retail success and development expenses increased $24.2 million or 73.7% due to increased new business development costs, costs associated with additional company-owned stores and costs to support retail initiatives. Increases in this category are directly related to retail support of the Ace retailer as the Company continues to make retail investments in our dealer base. Operations 1998 Compared to 1997 Net sales increased 7.3% due to increases in existing retailer volume, targeted efforts on new store development and conversions and increased sales from company-owned retail locations. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 8.1% while lumber and building materials sales increased 4.2%. Lumber sales were negatively impacted by price deflation. Excluding Canada, international sales increased 22.2% primarily due to new international store development. Net dealer outlets increased in 1998 due to targeted sales efforts on new store development and conversions to the Ace program and continued emphasis on retail success. Gross profit increased $27.5 million or 12.0% and increased as a percent of sales to 8.24% vs. 7.90% in 1997. Domestic gross profit increased as a percent of sales due to increased handling charges from sales mix shifts, increased vendor rebates and lower warehouse costs absorbed into inventory. Gross profit from additional company-owned stores also contributed to the increase. Warehouse and distribution expenses decreased $384,000 and decreased as a percent of sales from 1.35% to 1.25%. The decrease was due to increased traffic and cross dock revenues and non-recurring start-up facility costs. Selling, general and administrative expenses increased $7.6 million or 9.7% and increased slightly as a percent to sales due to increased information technology costs to support our Year 2000 efforts and lower costs absorbed into inventory. Retail success and development expenses increased $7.3 million or 28.7% due to increased new business development costs and costs associated with additional company-owned stores. Increases in this category are directly related to retail support of the Ace retailer as the Company continues to make retail investments in our dealer base. Interest expense increased $2.5 million or 17.1% due to increased dealer dating programs and long-term debt issued during 1998 to fund the replacement of a facility. Impact of New Accounting Standards In June, 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting for derivative instruments and hedging activities. In June, 1999 the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No. 133 - An Amendment of FASB Statement 133." This statement delays the effective date for this standard until fiscal years beginning after June 15, 2000. The Company is required to comply with SFAS No. 133 and SFAS No. 137 in fiscal year 2001. The Company has not evaluated the impact of SFAS No. 133 or SFAS No. 137 on the consolidated financial statements. Inflation and Changes in Prices The Company's business is not generally governed by contracts that establish prices substantially in advance of the receipt of goods or services. As vendors increase their prices for merchandise supplied to the Company, the Company increases the price to its dealers in an equal amount plus the normal handling charge on such amounts. In the past, these increases have provided adequate gross profit to offset the impact of inflation on operating expenses. Item 7a. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to certain market risks, including foreign currency and interest rates. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposure is to changes in exchange rates for the U.S. dollar versus the Canadian dollar. Interest rate risk is managed through a combination of fixed rate debt and variable rate short-term borrowings with varying maturities. At January 1, 2000, all short-term and long-term debt was issued at fixed rates. The table below presents principal amounts and related weighted average interest rates by year of maturity for the Company's investments and debt obligations: 2000 2001 2002 2003 2004 Thereafter Total ------ ------ ------ ------ ------ ---------- ------- (000's omitted) Assets: Short-term investment- fixed rate $18,699 $ -- $ -- $ -- $ -- $ -- $ 18,699 Fixed interest rate 5.35% 5.35% Liabilities: Short-term borrowings- fixed rate $49,869 -- -- -- -- -- $ 49,869 Average fixed interest rate 6.84% 6.84% Long-term debt-fixed rate $ 4,067 $6,678 $6,467 $5,750 $5,429 $ 87,571 $111,895 Average fixed interest rate 8.17% 7.27% 7.27% 7.12% 6.74% 7.10% 7.13%
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks. The Company's various currency exposures often offset each other, providing a natural hedge against currency risk. The Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these foreign currency hedges are included in the basis of the underlying hedged investment. During 1999, the Company settled all outstanding foreign currency contracts that resulted in a gain of approximately $2.0 million reflected within accumulated other comprehensive income at January 1, 2000. The Company does not have any outstanding foreign exchange forward contracts at January 1, 2000. Settlement of foreign sales and purchases are generally denominated in U.S. currency resulting in limited foreign currency transaction exposure. Item 8. Financial Statements and Supplementary Data Financial statements covered by the report of the Company's independent certified public accountants are listed on Page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. PART III Item 10. Directors and Executive Officers of the Company Our directors and executive officers are: Position(s) Currently Held Name Age and Business Experience (for the past 5 years) ---- --- ---------------------------------------------- Jennifer C. Anderson 49 Director since June 6, 1994; term expires 2000; President of Davis Lumber and Ace Hardware, Inc., Davis, California since November, 1985. Richard F. Baalmann, Jr. 40 Director since June 7, 1999; term expires 2002; President of Homart, Inc., Centralia, Illinois since May, 1988. Eric R. Bibens II 43 Director since June 2, 1997; term expires 2000; President of Bibens Home Center, Inc., Springfield, Vermont since 1983. Michael C. Bodzewski 50 Vice President, Marketing, Advertising and Retail Operations East effective October, 1999; Vice President - Sales and Marketing effective October, 1998; Vice President - Merchandising effective June, 1990. Lori L. Bossmann 39 Vice President - Finance effective October 1999; Vice President-Controller effective September, 1997; Controller effective January, 1994. Lawrence R. Bowman 53 Director since February 4, 1991; term expires 2001; President of Owenhouse Hardware Co., Inc., Bozeman, Montana since February, 1996 and Vice President of that company from March, 1988 until February, 1996. James T. Glenn 40 Director since June 3, 1996; term expires 2002; President of Ace Hardware of Chattanooga, Chattanooga, Tennessee since January, 1990. Ray A. Griffith 46 Vice President, Merchandising effective October, 1998; Vice President - Retail Development and Marketing effective September, 1997; Director - Retail Operations, Western Division effective September, 1994; from July, 1993-April, 1994, President and Chief Executive Officer of Servistar/Coast to Coast Corporation. Daniel L. Gust 50 Director since June 1, 1998; term expires 2001; President of Garden Acres Ace Hardware, Longmont, Colorado since January, 1991. D. William Hagan 42 Director since June 2, 1997; term expires 2000; President of Hagan Ace Hardware, Orange Park, Florida since February, 1980. David F. Hodnik 52 President and Chief Executive Officer effective January 1, 1996; President and Chief Operating Officer effective January 1, 1995; Executive Vice President and Chief Operating Officer effective January, 1994. Position(s) Currently Held Name Age and Business Experience (for the past 5 years) ---- --- ---------------------------------------------- Paul M. Ingevaldson 54 Senior Vice President - International and Technology effective September, 1997; Vice President - Corporate Strategy and International Business effective September, 1992. Mark Jeronimus 51 Director since June 3, 1991; term expires 2000; President of Duluth Hardware, Inc., Duluth, Minnesota since February, 1984. Howard J. Jung 52 Chairman of the Board and Director since June, 1998; term expires 2001; Vice President of Ace Hardware Stores, Inc., Raleigh, North Carolina since June, 1997. Rita D. Kahle 43 Senior Vice President - Wholesale effective September, 1997; Vice President - Finance effective January, 1994. David W. League 60 Vice President-General Counsel and Secretary effective June, 1990. David F. Myer 54 Vice President-Retail Support effective September, 1997; Vice President - Retail Support and New Business effective October, 1994; Vice President - Retail Support effective August, 1992. Mario R. Nathusius 56 Director since June 1, 1998; term expires 2001; President of Cemaco S.A. Guatemala City, Guatemala since March, 1978. Fred J. Neer 60 Vice President - Human Resources effective April, 1989. Ken L. Nichols 51 Vice President, Retail Operations West effective October, 1999; Vice President, New Business effective October, 1998; Director, Retail Operations, Eastern Division effective October, 1994. Roger E. Peterson 62 Director since June 5, 1995; term expires 2001; Chief Executive Officer effective January 1, 1995 through May 31, 1995. Richard W. Stine 54 Director since June 7, 1999; term expires 2002; Vice President of Stine, Inc., Sulphur, Louisiana since September, 1976. Our By-laws provide that our Board shall have between 9 and 12 directors. A minimum of 9 directors must be dealer directors. A maximum of two directors may be non-dealer directors. Non-dealer directors cannot exceed 25% of the total number of directors in office at any one time. Non-dealer directors may (but do not have to be) shareholders of ours who are in the retail hardware business. Our By-laws provide for three classes of directors who are to be elected for staggered 3-year terms. Our By-laws also provide that no one can serve as a dealer director unless that person is an owner, executive officer, general partner or general manager of a retail business organization that is a shareholder of ours. Regional dealer directors are elected from geographic regions of the United States. The Board under Article IV, Section 1 of our By-laws, determines these regions. If the Board finds that regional dealer directors represent all regions, then dealer directors at large may be elected, so long as the maximum number of directors allowed under our By-laws is not exceeded. A geographic breakdown of our current regions for the election of directors at our 2000 annual stockholders meeting to be held on June 5, 2000 appears below: Region 1- Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, New Jersey; Region 2- Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina, District of Columbia, Ohio; Region 3- Alabama, Mississippi, Georgia, Florida; Region 4- Indiana, Illinois, Michigan, Wisconsin; Region 5- Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Utah, Wyoming; Region 6- Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona; Region 7- Hawaii, California, Nevada, Oregon, Washington, Alaska Under the procedure required by our By-laws, the following directors have been selected as nominees for reelection as dealer directors at the 2000 annual stockholders meeting: Nominee Age Class Region Term - ------- --- ----- ------ ---- Eric R. Bibens II 43 First 1 3 years D. William Hagan 42 First 3 3 years Jennifer C. Anderson 49 First 7 3 years Mark Jeronimus is not eligible for reelection as a director beginning in 2000. The person named below has been selected as a nominee for election to the Board for the first time at the 2000 annual meeting as a dealer director of the class, from the region and for the term indicated: Nominee Age Class Region Term - ------- --- ----- ------ ---- Richard A. Karp 48 First N/A* 3 years *Non-dealer directors and dealer directors at large are not elected from particular geographic regions. Article IV of our By-laws has information about the qualifications for membership on the Board of Directors, the terms of directors, the limitations on the total period of time that a director may hold office, the procedure for Nominating Committees to select candidates and nominees for election to the Board of Directors and the procedure for filling vacancies on the Board if one occurs during an unexpired term. None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years for any of our directors, nominees for directorships or for any of our executive or staff officers. Item 11. Executive Compensation Below is information about the cash compensation that we paid to our five highest paid executive officers earning over $100,000 for their services in all capacities to us and our subsidiaries during fiscal years 1999, 1998 and 1997: SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation ------------------- ------------ (2) Name Other (4) and Annual (3) All Other Principal (1) Compen- Long-Term Compen- Position Year Salary ($) Bonus ($) sation ($) Payouts ($) sation ($) -------- ---- ---------- --------- ---------- ----------- ----------- David F. Hodnik 1999 $600,000 - $16,723 $478,104 $170,450 President and Chief 1998 600,000 - 16,723 230,268 151,997 Executive Officer 1997 600,000 - 14,147 195,666 133,167 William A. Loftus 1999 $325,000 $149,453 $11,563 $96,315 $77,378 Executive Vice President- 1998 315,000 132,804 11,563 86,157 80,873 Retail 1997 308,300 53,628 12,853 83,241 71,778 Paul M. Ingevaldson 1999 $287,000 $99,662 $11,563 $85,242 $56,121 Senior Vice President- 1998 279,000 85,430 12,260 76,590 64,702 International and Technology 1997 272,300 49,453 11,738 74,259 46,922 Rita D. Kahle 1999 $285,000 $128,685 $11,563 $77,826 $47,256 Senior Vice President- 1998 270,000 114,372 11,563 65,409 53,852 Wholesale 1997 250,000 46,237 8,647 57,813 46,733 Michael C. Bodzewski 1999 $261,000 $94,472 $11,563 $73,923 $40,066 Vice President- 1998 248,000 85,450 11,563 63,681 53,658 Marketing, Advertising and 1997 235,750 45,420 9,988 57,990 34,785 Retail Operations East
(1) The Incentive Compensation Plan covers each of the executive officers (except Mr. Hodnik). The bonus amounts awarded to participants in the Plan are determined in accordance with achievement of individual performance based objectives and achievement of corporate goals. The maximum short-term incentive award for each executive officer is 20% of their respective salary in 1997, 25% to 35% of their respective salary in 1998 and 30% to 40% of their respective salary in 1999. The short-term bonus award becomes payable to each participant as early as practicable at or after the end of the fiscal year. (2) The Company provided automobiles to certain of its executive officers. The Company requires them to maintain records with respect to any business automobile use. Such officers pay, both directly and by reimbursement to the Company, personal automobile expenses. During 1997, Company provided automobiles were replaced with automobile allowances. Country club memberships granted prior to 1994 to some officers have been eliminated, except for the President. The compensation table set forth above includes the value of these items and such value, for any officer, did not exceed the lesser of $25,000 or 10% of the compensation reported for each in said table. (3) Includes the long-term incentive award under the Long-Term Incentive Compensation Deferral Option Plan effective in 1995. The long-term Officer incentive plan is based upon corporate performance over a three year period with emphasis on total shareholder return through maximizing both year-end patronage dividends and upfront dividends (throughout the year) through pricing programs and discounts. This plan maintains the commitment to long-term performance and shareholder return in a cooperative environment. One third of the total long-term incentive award is subject to a one year vesting provision. Total awards paid in 1999 were $478,104, $96,315, $85,242, $73,923 and $77,826 for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle, respectively. Effective January 1, 1995, executive officers may elect to defer a portion (20% to 100%, in 20% increments) of the annual award granted. Participants' compensation deferrals are credited with a specified rate of interest to provide a means to accumulate supplemental retirement benefits. Deferred benefits are payable over a period of 5 to 20 years. Annual elections are required for the upcoming deferral year by December of the preceding year. Of the total 1999 awards, amounts deferred were $249,120, $0, $89,479, $79,437 and $85,921 for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle, respectively. (4) Includes contributions to the Company's Profit Sharing Plan which has been in existence for the period of January 1, 1953 through December 31, 1996, the Company's Profit Sharing Plus Plan which has been in existence since January 1, 1997, and contributions to the Company's Retirement Benefits Replacement Plan. All active employees are eligible to participate in the Company's profit sharing plan after one year of service. Those active employees covered by a collective bargaining agreement regarding retirement benefits, which were the subject of good faith bargaining, are not eligible if such agreement does not include them in the plan. For the year 1999, the Company contributed a maximum of 10.8% of each participant's eligible compensation to the Profit Sharing Plus Plan (9.8% profit sharing and 1% Company 401-K match). During the year 1999, $17,280 was expensed by the Company pursuant to the Plan for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle. The Company has also established a Retirement Benefits Replacement Plan covering all executive officers of the Company. This is an unfunded Plan under which the participants therein are eligible to receive retirement benefits equal to the amounts by which the benefits they would otherwise have been entitled to receive under the Company's Profit Sharing Plan may be reduced by reason of the limitations on contributions and benefits imposed by any current or future provisions of the U.S. Internal Revenue Code or other federal legislation. During the year 1999, amounts expensed by the Company pursuant to the Plan were $170,450 for Mr. Hodnik, $77,378 for Mr. Loftus, $56,121 for Mr. Ingevaldson, $40,066 for Mr. Bodzewski and $47,256 for Ms. Kahle. The Company also funds the base premium for a supplemental universal life insurance policy for each officer but does not contribute to supplemental retirement benefits through this vehicle. Participants may elect to deposit a portion (up to one-third) of the long-term incentive award into the variable annuity insurance policy in their name or may elect to defer this portion under the Deferral Option Plan. (5) As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue stock awards of any kind. Messrs. Hodnik and Ingevaldson are employed under contracts, each commencing January 1, 1999 for respective terms of two years, terminating December 31, 2000. Mr. Bodzewski and Ms. Kahle are employed under contracts commencing April 1, 1998 and January 1, 2000 for a two year term terminating March 31, 2000 and December 31, 2001, respectively. The contracts provide for annual compensation effective January 1, 2000 of $630,000, $295,000, $268,000 and $298,000, respectively or such increased amount, if any, as shall be approved by the Board of Directors. Mr. Loftus retired from the Company on December 31, 1999. The Company also maintains a Pension Plan which has been in existence since December 31, 1970. All active employees are eligible to participate in this Plan on the first January 1 that they are working for the Company. Those active employees covered by a collective bargaining agreement regarding retirement benefits, which were the subject of good faith bargaining are not eligible if such agreement does not include them in the plan. The Plan provides benefits at retirement at or after age 65 determined under a formula which takes into account 60% of a participant's average base pay (including overtime) during the 5 highest consecutive calendar years of employment and years of service prior to age 65, and under which an offset is applied for the straight life annuity equivalent of the vested portion of the participant in the amount of benefits provided for them by the Company under the Profit Sharing Plan. The Plan was closed to new entrants on December 31, 1995. Pension Plan benefit accruals have been frozen as of February 29, 2000. It is the Company's intent to terminate the Pension Plan on or around April 30, 2000. Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing Plan offset) are as follows: Years of Service Remuneration 10 15 20 25 30 or more - ------------ -- -- -- -- ---------- $150,000 $30,000 $45,000 $60,000 $75,000 $90,000 $100,000 20,000 30,000 40,000 50,000 60,000 $250,000 10,000 15,000 20,000 25,000 30,000 The amounts shown above represent straight life annuity amounts. Maximum benefits from the Pension Plan are attained after 30 years of service and attainment of age 65. The compensation covered by the Pension Plan consists of base compensation (exclusive of bonuses and non-recurring salary or wage payments) and shall not exceed $160,000 of such total remuneration paid to a participant during any plan year. Remuneration and yearly benefits under the Plan are limited, and subject to adjustment, under Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The amount of covered compensation under the Pension Plan, therefore is $160,000 for each Executive Officer named in the Compensation table. The present credited years of service under the Pension Plan for the currently employed executive officers named in the compensation table are as follows: David F. Hodnik-27 years; Paul M. Ingevaldson-20 years; Michael C. Bodzewski-22 years and Rita D. Kahle-13 years. Compensation Committee Report The Compensation Committee is responsible for approving the compensation guidelines for all Corporate Officers, Senior management and administering the Company's Executive Incentive Plans. Our decisions are based on our understanding of Ace's business and it's long-term strategies, as well as our knowledge of the capabilities and performance of the Company and of the executives. We stress long-term measured results, focus on team work, accepting prudent risks and are strongly committed to fulfilling dealer/consumer needs. We believe that our dealers (shareholders) are best served by running the Company with a long-term prospective while striving to deliver consistently good year-end results. Therefore, the Company's Executive Compensation Program has been designed to attract, retain and reward superior talent that will produce positive results and enhance Ace's position in a highly competitive hardware and home improvement marketplace. The Company is led by exceptional managers, many of them long-term Ace people; while others bring experiences from outside Ace. We believe the compensation for our executives should be competitive with other high performing companies in order to motivate and retain the talent needed to produce superior results. In that regard, our Committee conducts an overall review of compensation programs and philosophies biannually. We review information supplied by an independent compensation consultant and other marketplace data to determine the competitiveness of Ace's total compensation package. The Committee believes that special management talents and sensitivities are required to balance the unique relationship between and among the Company, its employees, dealers and suppliers. Therefore, we go beyond a simple evaluation of competitive salary information and Company financial results in making compensation decisions. Our Committee annually establishes an executive's salary based on our evaluation of the executive's level of responsibility and individual performance considered in light of competitive pay practices. We gage individual performance in developing and executing corporate strategies; leading and developing people; initiating and managing change; balancing the many relationships within the Ace family; and, contributing to programs which impact the Company's performance. Under the Annual Incentive Plan each officer is assigned a target incentive at the beginning of the year (the greater the individual's responsibility, the higher the percentage of target incentive to salary). This plan has an individual, team performance and a retail sales component. This is used to reflect the results of the organization unit and for overall Company wholesale and retail performance. Consistent with our increased focus on long-term objectives, we developed our long-term incentive plan based on total corporate performance. A three year performance cycle is established each year with officers receiving an award which varies if minimum pre-determined performance goals are achieved at the end of the cycle. No payout occurs unless the Company achieves certain performance objectives. As a pay for performance plan, the long-term incentive plan is intended to motivate and reward executives by directly linking the amount of any award to specific long-term corporate financial goals and total team performance. The CEO and President participates in the base salary and retail sales annual and long-term incentive compensation program described in this report consistent with our compensation philosophy. At risk compensation represents a significant portion of the CEO and President's total compensation package. The President's compensation includes a competitive base salary and a long-term incentive award to maintain the commitment to long-term company performance and shareholder return. Compensation of Directors Effective January 1, 2000, and January 1, 1999, each member of the Board of Directors (other than the Chairman of the Board) receives a monthly fee of $2,833 and $2,667, respectively, for their services. Effective January 1, 1998 each member of the Board of Directors (other than the Chairman of the Board) receives $1,500 per Board of Directors meeting attended. In addition, effective January 1, 1999, each Board of Director Committee Chairperson received $750 per meeting chaired, which was increased to $1,000 effective January 1, 2000. Mr. Jung is paid a total annual fee of $130,000 effective June 1, 1999, and $110,000 effective June 1, 1998 in his capacity as Chairman of the Board. In 1994, the previous Deferred Director Fee Plan was amended, restated and retitled the Directors' Deferral Option Plan. Like the Officers' Long-Term Incentive Compensation Deferral Option Plan, under this Directors' Plan, directors may elect to defer a portion (5% to 100%, in 5% increments) of their annual director's fee. Deferred benefits are payable over a period of 5 to 20 years, as elected. Annual elections are required for the upcoming deferral year by December of the preceding year. Each member of the Board is also reimbursed for the amount of travel and lodging expenses incurred in attending meetings of the Board and of the Committees of the Board. The expenses incurred by them in attending the semi-annual conventions and exhibits which the Company sponsors are also paid by the Company. Each member of the Board is also paid $200 per diem compensation for special committee meetings and nominating committee regional trips attended. Item 12. Security Ownership of Certain Beneficial Owners and Management No shares of our stock are held by any of our officers except for the shares held by Mr. Jung. He is a director, but his position as Chairman of the Board is also an executive officer position under Article VIII Section 1 of our By-laws. We are not aware of anyone who holds more than five percent of our outstanding voting stock, whether in their own names, or on behalf of someone else. The table below shows the shares of our Class B and Class C Stock that is held (directly or indirectly), by our directors, officers and nominees for directorships as of February 16, 2000: Class B Stock Owned Class C Stock Owned ------------------- ------------------- Number Percent Number Percent of Shares of Class of Shares of Class --------- -------- --------- -------- Jennifer C. Anderson 4 .166 3,528 .147 Richard F. Baalmann, Jr. 4 .166 2,841 .119 Eric R. Bibens II - - 834 .035 Lawrence R. Bowman 4 .166 2,594 .108 James T. Glenn 4 .166 9,994 .417 Daniel L. Gust - - 530 .022 D. William Hagan - - 1,508 .063 Mark Jeronimus - - 820 .034 Howard J. Jung - - 555 .023 Richard A. Karp - - - - Mario R. Nathusius - - 4,779 .200 Richard W. Stine 4 .166 6,613 .276 --------- -------- --------- -------- All above directors and officers as a group 20 .830 34,596 1.444 ========= ======== ========= ======== We are not aware of any contracts or securities pledges that may result in a change in control of our Company at a later date. Item 13. Certain Relationships and Related Transactions The term "owner" as used in this section pertains to owners of our shares. It includes both those who are named as owners of shares on our corporate books and records, as well as those who are not named as owners of record, but for whose benefit someone else is holding the shares. No director, executive officer or shareholder whom we know to be the owner of more than five percent of any class of our voting securities or any member of their immediate families had during fiscal year 1999 or is currently expected to have any significant interest (whether direct or indirect) in any transaction over $60,000 with us, except that those of our directors who are also Ace Hardware dealers purchased merchandise and services from us and participated in our programs for their stores in the ordinary course of business. None of these directors received any special terms in connection with these transactions or any benefits that were not available to the other cooperative members that we supply. None of our directors has had any business relationship during fiscal year 1999 that we must disclose under Item 404(b) of Regulation S-K of the Securities and Exchange Commission, except Mr. Peterson. He retired as CEO of our Company effective May 31, 1995 and was first elected as an outside Director on June 5, 1995. He has an agreement with us that continues through May 31, 2000. This agreement provides for non-competition by Mr. Peterson within the industry and for his participation in certain Company functions. This agreement also provides for our payment to Mr. Peterson of $150,000 per year over its 5 year term. None of our executive officers has had any business relationship during fiscal year 1999 that we must disclose under Item 404(b) of Regulation S-K of the Securities and Exchange Commissions except Mr. Loftus. He retired as Executive Vice President-Retail effective December 31, 1999. He has an agreement with us that continues through December 31, 2000. This agreement provides for non-competition by Mr. Loftus within the industry and for consulting services and his participation in certain Company functions. This agreement also provides for our payment to Mr. Loftus of $96,000 during its one-year term. As used below, the term "directors, director nominees and executive officers" includes: - people in those categories as identified in Item 10 of this filing; - members of their immediate families; - any other company or organization where they serve as executive officers, or partners; - any other company or organization where they own at least ten percent of any class of equity securities; - any trust or estate in which they have a substantial interest as beneficiaries; and - any trust or estate where they serve as trustees or positions similar to trustees. None of our directors, director nominees and executive officers has been indebted to us or to our subsidiaries during fiscal year 1999 for more than $60,000, except for purchasing merchandise and services for their stores from us in the ordinary course of business and participating in our loan and financing programs on the same terms offered to our other cooperative members. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements The financial statements listed in the accompanying index (page F-1) to the consolidated financial statements are filed as part of this annual report. 2. Financial Statement Schedules None. 3. Exhibits The exhibits listed on the accompanying index to exhibits (pages E-1 through E-7) are filed as part of this annual report. (b) Reports on Form 8-K A Form 8-K was filed on April 30, 1999 containing Notice of Annual Meeting of Stockholders on June 7, 1999 and Proxy solicited by Board of Directors and related information. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACE HARDWARE CORPORATION By HOWARD J. JUNG ------------------------- Howard J. Jung Chairman of the Board and Director DATED: March 15, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date HOWARD J. JUNG Chairman of the Board March 15, 2000 ------------------------ Howard J. Jung and Director DAVID F. HODNIK President and Chief March 15, 2000 ------------------------ David F. Hodnik Executive Officer LORI L. BOSSMANN Vice President-Finance March 15, 2000 ------------------------ Lori L. Bossmann (Principal Financial and Accounting Officer) Jennifer C. Anderson, Richard F. Baalmann, Jr., Directors Eric R. Bibens II, Lawrence R. Bowman, James T. Glenn, Daniel L. Gust, D. William Hagan, Mark Jeronimus, Mario R. Nathusius, Roger E. Peterson and Richard W. Stine *By DAVID F. HODNIK ------------------------ David F. Hodnik *By LORI L. BOSSMANN ------------------------ Lori L. Bossmann March 15, 2000 *Attorneys-in-fact INDEX TO EXHIBITS Exhibits Enclosed Description -------- ----------- 21 Subsidiaries of the Registrant 24 Powers of Attorney Exhibits Incorporated by Reference Description - ------------ ----------- 2 No Exhibit. 3-A Copy of Restated Certificate of Incorporation of the Registrant dated September 18, 1974 filed as Exhibit 3-A to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on March 30, 1976 and incorporated herein by reference. 3-B Copy of By-laws of the Registrant as amended through January 25, 2000 included as Appendix A to the Prospectus constituting a part of the Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about March 15, 2000 and incorporated herein by reference. 3-C Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 19, 1976 filed as Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on June 10, 1976 and incorporated herein by reference. 3-D Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 21, 1979 filed as Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on May 23, 1979 and incorporated herein by reference. 3-E Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 7, 1982 filed as Exhibit 3-G to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 3-F Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 5, 1987 filed as Exhibit 3-F to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. 3-G Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 16, 1989 filed as Exhibit 4-G to Post-Effective Amendment No. 1 to the Registrant's S-2 Registration Statement (Registration No. 33-27790) on March 20, 1990 and incorporated herein by reference. 3-H Copy of Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 3, 1996 filed as Exhibit 4-H to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about March 12, 1997 and incorporated herein by reference. 4-A Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 15, 1985 and incorporated herein by reference. 4-B Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. 4-C Specimen copy of Class A Stock certificate as revised in 1987 filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. 4-D Specimen copy of Class C Stock certificate filed as Exhibit 4-I to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 4-E Copy of current standard form of Subscription for Capital Stock Agreement to be used for dealers to subscribe for shares of the Registrant's stock in conjunction with new membership agreements submitted to the Registrant filed as Exhibit 4-L to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 4-F Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant on and after January 1, 1999 adopted by the Board of Directors of the Registrant filed as Exhibit 4-F to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 4-G Copy of LBM Retailer Incentive Pool Plan adopted on December 8, 1999 by the Board of Directors of the Registrant filed as Exhibit 4-G to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about March 15, 2000 and incorporated herein by reference. 9 No Exhibit. 10-A Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated and Adopted December 7, 1993 filed as Exhibit 10-A to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-B Copy of First Amendment to Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted on August 19, 1997 filed as Exhibit 10-B to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-C Copy of First Amendment to Ace Hardware Corporation Deferred Compensation Plan adopted on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-D Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans) adopted August 19, 1997 filed as Exhibit 10-D to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-E Copy of the Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999 filed as Exhibit 10-E to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-F Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf Agreement dated as of August 23, 1996 as amended by the First Modification of Amended and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (RegistrationNo. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-G Copy of Participation Agreement with PNC Commercial Corp. dated December 17, 1997 establishing a $10,000,000 discretionary leasing facility for the purchase of land and construction of retail hardware stores filed as Exhibit 10-G to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-H Copy of Form of Executive Officer Employment Agreement effective January 1, 1996 filed as Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-I Copy of Note Purchase and Private Shelf Agreement with The Prudential Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit 10-A-q to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-J Copy of current standard form of Ace Hardware Corporation International Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-K Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P to Pre-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about April 26, 1995 and incorporated herein by reference. 10-L Copy of 6.89% Senior Series B notes in the aggregate principal sum of $20,000,000 issued July 29, 1992 with a maturity date of January 1, 2000 pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated September 27, 1991 filed as Exhibit 10-Q to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-M Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993 filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-N Copy of Lease dated March 24, 1997 for print shop facility of Registrant in Downers Grove, Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and incorporated herein by reference. 10-O Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook, Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-P Copy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998 for the Registrant's redistribution center in Hanover, Maryland filed as Exhibit 10-P to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-Q Copy of Ace Hardware Corporation Deferred Compensation Plan effective January 1, 1994 filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-R Copy of Lease dated September 22, 1994 for bulk merchandise redistribution center of Registrant in Carol Stream, Illinois filed as Exhibit 10-Y to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-S Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant in Chicago, Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-T Copy of Long-Term Incentive Compensation Deferral Option Plan of the Registrant effective January 1, 1995 adopted by its Board of Directors on December 6, 1994 filed as Exhibit 10-a-1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and Restated as of January 1, 1997 filed as Exhibit 10-U to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-V Copy of Agreement dated January 6, 1995 between Ace Hardware Corporation and Roger E. Peterson filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-W Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R Corporation for retail hardware store premises located in Yorkville, Illinois filed as Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-X Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada filed as Exhibit 10-a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-Y Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware Canada Limited for general office space in Markham, Ontario, Canada filed as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-a-1 Copy of First Amendment to the Ace Hardware Corporation Long-Term Incentive Compensation Deferral Option Plan effective December 5, 1995, filed as Exhibit 10-a-15 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-a-2 Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July 19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-a-3 Copy of current standard form License Agreement for International Retail Merchants adopted in 1996 filed as Exhibit 10-a-12 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-4 Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in Wilton, New York filed as Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-5 Copy of 6.47% Series A Senior Notes in the aggregate principal amount of $30,000,000 issued August 23, 1996 with a maturity date of June 22, 2008 and $70,000,000 Private Shelf Facility, pursuant to Amended and Restated Note Purchase and Private Shelf Agreement with the Prudential Insurance Company dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-6 Copy of Second Amendment to the Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted on December 8, 1998 and effective January 1, 1999 filed as Exhibit 10-a-6 to Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1999 and incorporated herein by reference. 10-a-7 Copy of Second Amendment to the Ace Hardware Corporation Long-Term Incentive Compensation Deferral Option Plan adopted and effective March 23, 1999 filed as Exhibit 10-a-7 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-8 Copy of First Amendment to Ace Hardware Corporation Directors' Deferral Option Plan adopted and effective March 23, 1999 filed as Exhibit 10-a-8 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-9 Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility in Loxley, Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-10 Copy of Agreement dated October 29, 1999 between Registrant and William A. Loftus filed as Exhibit 10-a-10 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-11 Copy of Third Amendment to Restated Ace Hardware Corporation Retirement Benefits Replacement Plan adopted December 8, 1999 and effective January 1, 2000 filed as Exhibit 10-a-11 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-12 Copy of First Amendment to Ace Hardware Corporation Restated Officer Incentive Plan adopted on December 8, 1999 and effective January 1, 2000 filed as Exhibit 10-a-12 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 10-a-13 Copy of Ace Hardware Corporation Long-Term Incentive Compensation Deferral Option Plan adopted December 8, 1999 and effective January 1, 2000 filed as Exhibit 10-a-13 to Post-Effective Amendment No. 5 to Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 11 No Exhibit. 12 No Exhibit. 13 No Exhibit. 16 No Exhibit. 18 No Exhibit. 22 No Exhibit. 23 Copy of Consent of KPMG LLP dated March 13, 2000 filed as Exhibit 23(a) to Post-Effective Amendment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 27 Copy of Financial Data Schedule filed as Exhibit 27 to Post-Effective Amend-ment No. 5 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference. 28 No Exhibit. 99 No Exhibit. Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act. As of the date of the Report mentioned above, neither our annual report for fiscal year 2000 nor any proxy soliciting materials for our 2000 annual meeting have been sent to our shareholders. Copies of that annual report as well as our proxy soliciting materials will be sent to our shareholders and furnished to the Securities and Exchange Commission at a later date. Item 14(a). Index to Consolidated Financial Statements and Financial Statement Schedules Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets at January 1, 2000 and January 2, 1999 F-3 Consolidated Statements of Earnings and Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended January 1, 2000 F-5 Consolidated Statements of Member Dealers' Equity for each of the years in the three-year period ended January 1, 2000 F-6 Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 1, 2000 F-7 Notes to Consolidated Financial Statements F-8 All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or the required information is included in the consolidated financial statements or the notes thereto. INDEPENDENT AUDITORS' REPORT The Board of Directors Ace Hardware Corporation: We have audited the accompanying consolidated balance sheets of Ace Hardware Corporation and subsidiaries as of January 1, 2000 and January 2, 1999 and the related consolidated statements of earnings, comprehensive income, member dealers' equity and cash flows for each of the years in the three-year period ended January 1, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ace Hardware Corporation and subsidiaries as of January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended January 1, 2000 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois January 26, 2000 ACE HARDWARE CORPORATION ---------- CONSOLIDATED BALANCE SHEETS January 1, 2000 and January 2, 1999 ASSETS January 1, January 2, 2000 1999 ---------- ---------- (000's omitted) Current assets: Cash and cash equivalents $ 35,422 $ 53,901 Receivables: Trade 319,722 345,182 Other 53,782 54,517 ----------- ----------- $ 373,504 $ 399,699 Less allowance for doubtful receivables (2,625) (2,725) ----------- ----------- Net receivables $ 370,879 $ 396,974 Inventories (Note 2) 373,090 334,405 Prepaid expenses and other current assets 13,341 15,146 ----------- ----------- Total current assets $ 792,732 $ 800,426 ----------- ----------- Property and equipment (Note 10): Land 18,210 16,952 Buildings and improvements 187,709 180,854 Warehouse equipment 79,573 70,315 Office equipment 82,373 74,567 Manufacturing equipment 15,446 13,817 Transportation equipment 16,426 16,076 Leasehold improvements 17,400 18,049 Construction in progress 14,456 -- ----------- ----------- $ 431,593 $ 390,630 Less accumulated depreciation and amortization (184,419) (163,176) ----------- ----------- Net property and equipment $ 247,174 $ 227,454 Other assets 41,578 19,700 ----------- ----------- $1,081,484 $1,047,580 =========== =========== See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION ---------- CONSOLIDATED BALANCE SHEETS January 1, 2000 and January 2, 1999 LIABILITIES AND MEMBER DEALERS' EQUITY January 1, January 2, 2000 1999 ----------- ----------- (000's omitted) Current liabilities: Current installments of long-term debt (Note 4) $ 4,067 $ 7,433 Short-term borrowings (Note 3) 49,869 25,000 Accounts payable 449,497 465,862 Patronage dividends payable in cash (Note 5) 38,173 34,826 Patronage refund certificates payable (Note 5) 373 20,655 Accrued expenses 69,990 54,724 ----------- ----------- Total current liabilities $ 611,969 $ 608,500 Long-term debt (Note 4) 111,895 115,421 Patronage refund certificates payable (Note 5) 55,257 43,465 Other long-term liabilities 22,400 18,682 ----------- ----------- Total liabilities $ 801,521 $ 786,068 ----------- ----------- Member dealers' equity (Notes 5 and 8): Class A Stock of $1,000 par value $ 3,856 $ 3,846 Class B Stock of $1,000 par value 6,499 6,499 Class C Stock of $100 par value 241,226 226,571 Class C Stock of $100 par value, issuable to dealers for patronage dividends 21,648 26,170 Additional stock subscribed, net 498 471 Retained earnings 594 3,292 Contributed capital 13,485 3,295 Accumulated other comprehensive income 291 (818) ----------- ----------- $ 288,097 $ 269,326 Less: Treasury stock, at cost (8,134) (7,814) ----------- ----------- Total member dealers' equity $ 279,963 $ 261,512 Commitments (Notes 6 and 10) ----------- ----------- $1,081,484 $1,047,580 =========== =========== See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION --------- CONSOLIDATED STATEMENTS OF EARNINGS Year Ended -------------------------------------------- January 1, January 2, December 31, 2000 1999 1997 ------------- ------------- ---------------- (000's omitted) Net sales $3,181,802 $3,120,380 $2,907,259 Cost of sales 2,892,287 2,863,156 2,677,537 ----------- ----------- ----------- Gross profit $ 289,515 $ 257,224 $ 229,722 ----------- ----------- ----------- Operating expenses: Warehouse and distribution 40,232 38,980 39,364 Selling, general and administrative 90,513 85,504 77,917 Retail success and development 57,149 32,907 25,573 ----------- ----------- ----------- Total operating expenses 187,894 157,391 142,854 ----------- ----------- ----------- Operating income 101,621 99,833 86,868 Interest expense (Note 12) (16,651) (17,350) (14,816) Other income, net 9,425 7,213 6,245 Income taxes (Note 7) (1,833) (1,736) (1,910) ----------- ----------- ----------- Net earnings $ 92,562 $ 87,960 $ 76,387 =========== =========== =========== Retained earnings at beginning of year $ 3,292 $ 3,354 $ 3,120 Net earnings 92,562 87,960 76,387 Patronage dividends (Notes 5 and 8) (95,260) (88,022) (76,153) ----------- ----------- ----------- Retained earnings at end of year $ 594 $ 3,292 $ 3,354 =========== =========== =========== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended ------------------------------------------- January 1, January 2, December 31, 2000 1999 1997 ------------------------------------------- (000's omitted) Net earnings $ 92,562 $ 87,960 $ 76,387 Foreign currency translation, net 1,109 (483) (285) ----------- ----------- ----------- Comprehensive income $ 93,671 $ 87,477 $ 76,102 =========== =========== =========== See accompanying notes to consolidated financial statements ACE HARDWARE CORPORATION ---------- CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended January 1, 2000 (000's omitted) Class C Stock Issuable to Accumulated Dealers for Additional Other Class A Class B Class C Patronage Stock Retained Contributed Comprehensive Treasury Stock Stock Stock Dividends Subscribed* Earnings Capital Income Stock Total ----- ----- ----- --------- ----------- -------- ------- ------ -------- ----- Balance at December 31, 1996 $3,937 $6,499 $196,742 $26,474 $ 502 $ 3,120 $ 3,295 $ (50) $(7,206) $233,313 Net earnings -- -- -- -- -- 76,387 -- -- -- 76,387 Net payments on subscriptions -- -- -- -- 2,906 -- -- -- -- 2,906 Patronage financing deductions -- -- -- (119) -- -- -- -- -- (119) Stock issued 236 -- 29,263 (26,355) (3,025) -- -- -- -- 119 Stock repurchased -- -- -- -- -- -- -- -- (13,055) (13,055) Stock retired (299) -- (12,396) -- -- -- -- -- 12,695 -- Patronage dividends issuable -- -- -- 22,366 -- -- -- -- -- 22,366 Patronage dividends payable -- -- -- -- -- (76,153) -- -- -- (76,153) Accumulated other comprehensive income -- -- -- -- -- -- -- (285) -- (285) ------- ------- -------- --------- ---------- --------- -------- ------ --------- --------- Balance at December 31, 1997 $3,874 $6,499 $213,609 $22,366 $ 383 $ 3,354 $ 3,295 $ (335) $(7,566) $245,479 Net earnings -- -- -- -- -- 87,960 -- -- -- 87,960 Net payments on subscriptions -- -- -- -- 1,463 -- -- -- -- 1,463 Patronage financing deductions -- -- -- (485) -- -- -- -- -- (485) Stock issued 215 -- 23,526 (21,881) (1,375) -- -- -- -- 485 Stock repurchased -- -- -- -- -- -- -- -- (11,055) (11,055) Stock retired (243) -- (10,564) -- -- -- -- -- 10,807 -- Patronage dividends issuable -- -- -- 26,170 -- -- -- -- -- 26,170 Patronage dividends payable -- -- -- -- -- (88,022) -- -- -- (88,022) Accumulated other comprehensive income -- -- -- -- -- -- -- (483) -- (483) ------- ------- --------- -------- ---------- --------- -------- ------ --------- --------- Balance at January 2, 1999 $3,846 $6,499 $226,571 $26,170 $ 471 $ 3,292 $ 3,295 $ (818) $(7,814) $261,512 Net earnings -- -- -- -- -- 92,562 -- -- -- 92,562 Net payments on subscriptions -- -- -- -- 711 -- -- -- -- 711 Patronage financing deductions -- -- -- (847) -- -- -- -- -- (847) Stock issued 238 -- 26,616 (25,323) (684) -- -- -- -- 847 Stock repurchased -- -- -- -- -- -- -- -- (12,509) (12,509) Stock retired (228) -- (11,961) -- -- -- -- -- 12,189 -- Patronage dividends issuable -- -- -- 21,648 -- -- 10,190 -- -- 31,838 Patronage dividends payable -- -- -- -- -- (95,260) -- -- -- (95,260) Accumulated other comprehensive income -- -- -- -- -- -- -- 1,109 -- 1,109 ------- ------- --------- -------- ------- --------- -------- ------ --------- --------- Balance at January 1, 2000 $3,856 $6,499 $241,226 $21,648 $ 498 $ 594 $13,485 $ 291 $ (8,134) $279,963 ======= ======= ========= ======== ======= ========= ======== ====== ========= ========= *Additional stock subscribed is comprised of the following amounts at December 31, 1997, January 2, 1999 and January 1, 2000:
1997 1998 1999 ------ ------ ------ Class A Stock $ 86 $ 60 $ 118 Class B Stock -- -- -- Class C Stock 1,085 955 1,452 ------ ------ ------ 1,171 1,015 1,570 Less unpaid portion 788 544 1,072 ------ ------ ------ $ 383 $ 471 $ 498 ====== ====== ====== See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION ---------- CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended -------------------------------------------- January 1, January 2, December 31, 2000 1999 1997 ---------- ---------- ------------ (000's omitted) Operating Activities: Net earnings $ 92,562 $ 87,960 $ 76,387 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 23,396 21,536 19,494 Loss on sale of property and equipment 28 425 285 Decrease (Increase) in accounts receivable, net 26,174 (32,061) (15,835) Decrease (Increase) in inventories (37,549) 2,689 (12,067) Decrease (Increase) in prepaid expenses and other current assets 1,805 (1,531) (1,735) Increase (Decrease) in accounts payable and accrued expenses (1,203) 42,082 46,000 Increase in other long-term liabilities 3,718 3,960 5,205 ----------- ----------- ------------- Net Cash Provided by Operating Activities 108,931 125,060 117,734 ----------- ----------- ------------ Investing Activities: Purchase of property and equipment (43,497) (21,036) (42,921) Proceeds from sale of property and equipment 349 8,148 149 Increase in other assets (21,878) (8,843) (6,946) ----------- ----------- ------------- Net Cash Used in Investing Activities (65,026) (21,731) (49,718) ----------- ----------- ------------- Financing Activities: Proceeds (payments) of short-term borrowings 24,869 (17,000) (29,000) Proceeds from notes payable -- 26,117 32,994 Payments on long-term debt (6,892) (7,593) (7,228) Payment of cash portion of patronage dividend (34,826) (29,943) (28,178) Payments of patronage refund certificates and patronage financing deductions (34,557) (25,588) (24,941) Proceeds from sale of common stock 1,531 1,463 2,906 Repurchase of common stock (12,509) (11,055) (13,055) ----------- ----------- ------------- Net Cash Used in Financing Activities (62,384) (63,599) (66,502) ----------- ----------- ------------- Increase (Decrease) in Cash and Cash Equivalents (18,479) 39,730 1,514 Cash and Cash Equivalents at beginning of year 53,901 14,171 12,657 ----------- ----------- ------------- Cash and Cash Equivalents at end of year $ 35,422 $ 53,901 $ 14,171 =========== =========== ============= See accompanying notes to consolidated financial statements. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (a) The Company and Its Business Ace Hardware Corporation (the Company) operates as a wholesaler of hardware and related products, and manufactures paint products. As a dealer-owned cooperative, the Company distributes substantially all of its patronage sourced earnings in the form of patronage dividends to member dealers based on their volume of merchandise purchases. (b) Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (c) Consolidations The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All significant intercompany transactions have been eliminated. The equity method of accounting is used for the Company's 50% or less owned affiliates over which the Company has the ability to exercise significant influence. The Company has other investments that are accounted for at cost. (d) Receivables Receivables from dealers include amounts due from the sale of merchandise and special equipment used in the operation of dealers' businesses. Other receivables are principally amounts due from suppliers for promotional and advertising allowances. The Company recognizes revenue from product sales upon the shipment to customers. (e) Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined primarily using the last-in, first-out method. (f) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to earnings. Significant improvements or renewals are capitalized. Depreciation expense is computed on both straight-line and accelerated methods based on estimated useful lives as follows: Useful Life Principal Years Depreciation Method ----------- ------------------- Buildings and improvements 10-40 Straight line Warehouse equipment 5-10 Accelerated Office equipment 3-10 Various Manufacturing equipment 3-20 Straight line Transportation equipment 3-7 Straight line Leasehold improvements are generally amortized on a straight-line basis over the term of the respective lease. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (g) Foreign Currency Translation Substantially all assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance sheet date while revenues and expenses are translated at the average monthly exchange rates prevailing during the year. The Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses in these foreign hedges are included in the basis of the underlying hedged investment. During 1999 the Company settled all outstanding foreign currency contracts that resulted in a gain of approximately $2.0 million reflected within accumulated other comprehensive income at January 1, 2000. Foreign currency translation adjustments, net of gains on foreign exchange contracts, are reflected in the accompanying Consolidated Statement of Comprehensive Income for 1999, 1998 and 1997. The Company does not have any outstanding foreign exchange forward contracts at January 1, 2000. (h) Financial Instruments The carrying value of assets and liabilities that meet the definition of a financial instrument included in the accompanying Consolidated Balance Sheets approximate fair value. (i) Retirement Plans The Company has retirement plans covering substantially all non-union employees. Costs with respect to the noncontributory pension plans are determined actuarially and consist of current costs and amounts to amortize prior service costs and unrecognized gains and losses. The Company contribution under the profit sharing plan is determined annually by the Board of Directors. (j) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) Fiscal Year Effective January 1, 1998 the Company changed its fiscal year from December 31st to the Saturday nearest December 31st. Accordingly, 1999 and 1998 ended on January 1, 2000 and January 2, 1999, respectively. (l) Reclassifications Certain financial statement reclassifications have been made to prior year amounts to conform to comparable classifications followed in 1999. (2) Inventories Inventories consist primarily of merchandise inventories. Substantially all of the Company's domestic inventories are valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the LIFO value of inventory was approximately $61,483,000 and $62,093,000 at January 1, 2000 and January 2, 1999, respectively. Indirect costs, consisting primarily of warehousing costs, are absorbed as inventory costs rather than period costs. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (3) Short-Term Borrowings Short-term borrowings were utilized during 1999 and 1998. The maximum amount outstanding at any month-end during the period was $108.0 million in 1999 and $67.0 million in 1998. The weighted average interest rate effective as of January 1, 2000 and January 2, 1999 was 6.84% and 5.03%, respectively. Short-term borrowings outstanding as of January 1, 2000 and January 2, 1999 were $49.9 and $25.0 million, respectively. At January 1, 2000 the Company has available a revolving credit facility with a group of banks providing for $125 million in committed lines and also has available $85 million in uncommitted lines. The aggregate unused line of credit available at January 1, 2000 and January 2, 1999 was $160.1 million and $185.0 million, respectively. At January 1, 2000 the Company had no compensating balance requirements. (4) Long-Term Debt Long-term debt is comprised of the following: January 1, January 2, 2000 1999 ---------- ---------- (000's omitted) Notes Payable: $20,000,000 due in quarterly installments of $540,500 with interest payable quarterly at a fixed rate of 8.74% $ 8,108 $ 10,270 $20,000,000 due in quarterly installments of $952,400 with interest payable quarterly at a fixed rate of 6.89% 952 4,762 $30,000,000 due in semi-annual installments of $2,000,000 commencing June 22, 2001 with interest payable quarterly at a fixed rate of 6.47% 30,000 30,000 $20,000,000 due in quarterly installments of $714,300 commencing September 15, 2004 with interest payable quarterly at a fixed rate of 7.49% 20,000 20,000 $30,000,000 due in annual installments of $6,000,000 commencing March 25, 2005 with interest payable quarterly at a fixed rate of 7.55% 30,000 30,000 $25,000,000 due in annual installments of $5,000,000 commencing February 9, 2006 with interest payable quarterly at a fixed rate of 6.61% 25,000 25,000 Liability under capitalized leases (see Note 10) 510 1,370 Installment notes with maturities through 2003 with various interest rates 1,392 1,452 ---------- ---------- 115,962 122,854 Less current installments 4,067 7,433 ---------- ---------- $ 111,895 $ 115,421 ========== ========== Aggregate maturities of long-term debt are $4,067,000, $6,678,000, $6,467,000, $5,750,000 and $5,429,000 in 2000 through 2004, respectively, and $87,571,000 thereafter. ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (5) Patronage Dividends and Refund Certificates Payable The Company operates as a cooperative organization and has paid or will pay patronage dividends to member dealers on the portion of earnings derived from business done with such dealers. Patronage dividends are allocated in proportion to the volume of purchases by member dealers during the period. The amount of patronage dividends to be remitted in cash depends upon the level of dividends earned by each member outlet, varying from 20% on the total dividends under $5,000 and increasing by 5% on total dividends for each subsequent $2,500 earned to a maximum of 40% on total dividends exceeding $12,500. In 1999, amounts exceeding the cash portion will be distributed in the form of options (i.e. other property) excercisable by the dealers at a future date to acquire shares of the Company's ownership in a minority-owned investment. Amounts exceeding the cash and option portions will be distributed in the form of Class C $100 par value stock, to a maximum based upon the current year purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied toward payment of principal and interest on any balances outstanding for approved patronage financing programs. The patronage dividend composition for 1999, 1998 and 1997 follows: Subordinated Class Patronage Total Cash Refund C Other Financing Patronage Portion Certificates Stock Property Deductions Dividend ------- ------------ ----- -------- ---------- -------- (000's omitted) 1999 $38,173 $12,249 $21,648 $10,190 $13,000 $95,260 1998 34,826 15,720 26,170 -- 11,306 88,022 1997 29,943 13,726 22,366 -- 10,118 76,153 Patronage dividends are allocated on a fiscal year basis with issuance in the following year. The patronage refund certificates outstanding or issuable at January 1, 2000 are payable as follows: Interest January 1, Amount Rate ---------- ------ -------- (000's omitted) 2000 $ 373 7.00% 2001 4,838 6.00 2002 9,202 6.25 2003 13,484 6.00 2004 15,484 6.00 2005 12,249 6.25 A portion of the patronage refund certificates payable on January 1, 2000 were prepaid in 1999. Patronage refund certificates due on January 1, 2001 are classified as non-current liabilities as the due date extends beyond fiscal year ending December 30, 2000. ACE HARDWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (6) Retirement Plans The Company has defined benefit pension plans covering substantially all non-union employees. Benefits are based on years of service, highest average compensation (as defined) and the related profit sharing and primary social security benefit. Contributions to the plan are based on the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that are currently deductible for tax reporting purposes. As of January 1, 2000 plan assets were held primarily in equities, mutual funds and group annuity contracts. Pension expense for the years included the following components: January 1, January 2, December 31, 2000 1999 1997 ----------- ----------- ----------- (000's omitted) Service cost - benefits earned during the period $ 309 $ 293 $ 358 Interest cost on projected benefit obligation 399 428 351 Expected return on plan assets (733) (710) (630) Net amortization and deferral 125 87 53 ----------- ----------- ----------- Net periodic pension expense $ 100 $ 98 $ 132 =========== =========== =========== The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at January 1, 2000 and January 2, 1999: January 1, January 2, 2000 1999 ----------- ----------- (000's omitted) Change in benefit obligation: Benefit obligation at beginning of year $ 5,341 $ 5,041 Service cost 309 293 Interest cost 399 428 Actuarial losses (gains) (213) 325 Benefits paid (424) (746) ----------- ----------- Benefit obligation at end of year 5,412 5,341 ----------- ----------- Change in plan assets: Fair value of plan assets at beginning of year 9,448 9,122 Actual return on plan assets 1,198 1,001 Employer contribution 71 71 Benefits paid (424) (746) ----------- ----------- Fair value of plan assets at end of year 10,293 9,448 ----------- ----------- Funded status 4,881 4,107 Unrecognized transition asset (78) (91) Unamortized prior service cost (583) (631) Unrecognized net actuarial gains (3,634) (2,776) ----------- ----------- Prepaid pension cost included in other assets $ 586 $ 609 =========== =========== ACE HARDWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.75% in 1999 and 7.0% in 1998. The related expected long-term rate of return was 8.0% in 1999 and 1998. The rate of increase in future compensation was projected using actuarial salary tables plus 1.0% in 1999 and 1998. The Company will terminate the Employees' Pension Plan and Trust effective April 30, 2000. The Company does not believe that the termination will have a material adverse effect upon the financial condition or results of operations of the Company. The Company also participates in several multi-employer plans covering union employees. Amounts charged to expense and contributed to the plans totaled approximately $233,000, $216,000 and $225,000 in 1999, 1998 and 1997, respectively. The Company's profit sharing plan contribution for the years ended 1999, 1998 and 1997 was approximately $15,071,000, $13,746,000 and $12,240,000, respectively. (7)Income Taxes As a cooperative, the Company distributes substantially all of its patronage sourced earnings to its members in the form of patronage dividends. The 1999, 1998 and 1997 provisions for federal income taxes were $1,000,000, $1,105,000 and $1,501,000, respectively, and for state income taxes were $833,000, $631,000 and $409,000, respectively. The Company made tax payments of $2,755,000, $1,374,000 and $2,807,000 during 1999, 1998 and 1997, respectively. (8)Member Dealers' Equity The Company's classes of stock are described below: Number of Shares at ------------------- January 1, January 2, 2000 1999 ------------ ------------ Class A Stock, voting, redeemable at par value - Authorized 10,000 10,000 Issued and outstanding 3,856 3,846 Class B Stock, nonvoting, redeemable at not less than twice par value- Authorized 6,500 6,500 Issued 6,499 6,499 Outstanding 2,432 2,592 Treasury stock 4,067 3,907 Class C Stock, nonvoting, redeemable at not less than par value - Authorized 4,000,000 4,000,000 Issued and outstanding 2,412,255 2,265,718 Issuable as patronage dividends 216,480 261,700 Additional stock subscribed: Class A Stock 118 60 Class B Stock -- -- Class C Stock 14,520 9,550 ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) At January 1, 2000 and January 2, 1999 there were no common shares reserved for options, warrants, conversions or other rights; nor were any options granted or exercised during the two years then ended. Member dealers may subscribe for the Company's stock in various prescribed combinations. Only one share of Class A Stock may be owned by a dealer with respect to the first member retail outlet controlled by such dealer. Only four shares of Class B Stock may be owned by a dealer with respect to each retail outlet controlled by such dealer, but only if such outlet was a member of the Company on or before February 20, 1974. An appropriate number of shares of Class C Stock must be included in any subscription by a dealer in an amount to provide that such dealer has a par value of all shares subscribed for equal to $5,000 for each retail outlet. Unregistered shares of Class C Stock are also issued to dealers in connection with patronage dividends. No dividends can be declared on any shares of any class of the Company's Stock. Upon termination of the Company's membership agreement with any retail outlet, all shares of stock of the Company, held by the dealer owning or controlling such outlet, must be sold back to the Company, unless a transfer of such shares is made to another party accepted by the Company as a member dealer with respect to the same outlet. A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Additional stock subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion. All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price over par is allocated equally between contributed capital and retained earnings. Transactions during 1997, 1998 and 1999 affecting treasury shares follow: Shares Held in Treasury ----------------------- Class A Class B Class C -------- -------- --------- Balance at December 31, 1996 -- 3,603 -- Stock issued -- -- -- Stock repurchased 299 180 123,964 Stock retired (299) -- (123,964) -------- -------- --------- Balance at December 31, 1997 -- 3,783 -- Stock issued -- -- -- Stock repurchased 243 124 105,639 Stock retired (243) -- (105,639) -------- -------- --------- Balance at January 2, 1999 -- 3,907 -- Stock issued -- -- -- Stock repurchased 228 160 119,614 Stock retired (228) -- (119,614) -------- -------- --------- Balance at January 1, 2000 -- 4,067 -- ======== ======== ========= ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (9)Segments The Company is principally engaged as a wholesaler of hardware and related products and manufacturer of paint products. The Company identifies segments based on management responsibility and the nature of the business activities of each component of the Company. The Company measures segment earnings as operating earnings including an allocation for interest expense and income taxes. Information regarding the identified segments and the related reconciliation to consolidated information are as follows: January 1, 2000 --------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- -------------- ------------ Net sales from external customers $3,128,269 $ 27,268 $26,265 -- $3,181,802 Intersegment sales 22,647 100,758 -- (123,405) -- Interest expense 16,651 1,383 590 (1,973) 16,651 Depreciation 21,022 1,589 785 -- 23,396 Segment earnings (loss) 85,574 9,475 (1,819) (668) 92,562 Identifiable segment assets 1,010,754 42,921 40,235 (12,426) 1,081,484 Expenditures for long-lived assets 35,446 2,846 5,201 -- 43,493
January 2, 1999 --------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- -------------- ------------ Net sales from external customers $3,086,913 $ 20,798 $12,669 -- $3,120,380 Intersegment sales 13,701 93,536 -- (107,237) -- Interest expense 17,350 1,464 244 (1,708) 17,350 Depreciation 19,808 1,392 336 -- 21,536 Segment earnings (loss) 78,442 10,364 (382) (464) 87,960 Identifiable segment assets 983,354 34,215 39,030 (9,019) 1,047,580 Expenditures for long-lived assets 16,331 937 3,768 -- 21,036
December 31, 1997 ----------------- (000's omitted) Elimination of Paint Intersegment Wholesale Manufacturing Other Activities Consolidated --------- ------------- ----- -------------- ------------ Net sales from external customers $2,882,457 $ 18,788 $ 6,014 -- $2,907,259 Intersegment sales 4,377 89,490 -- (93,867) -- Interest expense 14,816 1,005 88 (1,093) 14,816 Depreciation 17,977 1,371 146 -- 19,494 Segment earnings (loss) 64,844 11,306 432 (195) 76,387 Identifiable segment assets 928,401 28,957 24,206 (4,086) 977,478 Expenditures for long-lived assets 40,860 806 1,255 -- 42,921
ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Net sales and long-lived assets by geographic region based upon customer location for 1999, 1998 and 1997 were as follows: January 1, 2000 January 2, 1999 December 31, 1997 --------------- --------------- ----------------- (000's omitted) Net sales: United States $2,975,567 $2,903,906 $2,717,881 Foreign countries 206,235 216,474 189,378 --------------- --------------- ----------------- Total $3,181,802 $3,120,380 $2,907,259 =============== =============== ================= Long-lived assets, net: United States $ 242,743 $ 222,148 $ 230,036 Foreign countries 4,431 5,306 6,491 --------------- --------------- ----------------- Total $ 247,174 $ 227,454 $ 236,527 =============== =============== ================= (10)Commitments Leased property under capital leases is included as "Property and Equipment" in the Consolidated Balance Sheets as follows: January 1, January 2, 2000 1999 ---------- ---------- (000's omitted) Data processing equipment $3,598 $3,600 Less: accumulated depreciation and amortization (2,711) (1,905) ---------- ---------- $ 887 $1,695 ========== ========== The Company rents buildings and warehouse, office and certain other equipment under capital and operating leases. At January 1, 2000 annual minimum rental commitments under leases that have initial or remaining noncancelable terms in excess of one year are as follows: Year Ending, Capital Operating ------- --------- (000's omitted) 2000 $ 454 $17,313 2001 93 15,407 2002 -- 10,454 2003 -- 7,429 2004 -- 6,352 Thereafter -- 18,073 ------- --------- Total minimum lease payments 547 $75,028 ========= Less amount representing interest 37 ------- Present value of total minimum lease payments $ 510 ======= ACE HARDWARE CORPORATION ---------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) All leases expire prior to 2014. Under certain leases, the Company pays real estate taxes, insurance and maintenance expenses in addition to rental expense. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. Rent expense was approximately $39,149,000, $37,023,000 and $33,343,000 in 1999, 1998 and 1997, respectively. Rent expense includes $7,352,000, $6,004,000 and $5,956,000 in contingent rentals paid in 1999, 1998 and 1997, respectively, primarily for transportation equipment mileage. (11)Media Expense The Company expenses media costs the first time the advertising takes place. Gross media expense, prior to income offsets from dealers and suppliers, amounting to $79,639,000, $70,254,000 and $65,013,000 was charged to operations in 1999, 1998 and 1997, respectively. (12)Interest Expense Interest paid was $16,326,000, $16,553,000 and $15,281,000 in 1999, 1998 and 1997, respectively, net of capitalized interest of $234,000 and $1,022,000 in 1999 and 1997. EX-21 2 LIST OF SUBSIDIARIES ACE HARDWARE CORPORATION LIST OF SUBSIDIARIES STATE/COUNTRY NAME UNDER WHICH SUBSIDIARY OF INCORPORATION SUBSIDIARY DOES BUSINESS - ---------- ---------------- ------------------------ Ace Insurancy Agency, Inc. Illinois Ace Insurance Agency, Inc. AHC Realty Corporation Illinois AHC Realty Corporation Loss Prevention Services, Inc. Illinois Loss Prevention Services, Inc. A.H.C. Sore Development Corp. Illinois A.H.C. Store Development Corp. Ace Hardware Canada Limited Canada Ace Hardware Canada Limited National Hardlines Supply, Illinois National Hardlines Supply, Inc. Inc. Ace Hardware de Mexico, S.A. Mexico Ace Hardware de Mexico, de C.V. S.A. de C.V. Ace Hardware Foundation Illinois Ace Hardware Foundation New Age Insurance Ltd. Bermuda New Age Insurance Ltd. Ace Hardware International, Barbados Ace Hardware International Inc. Inc. Ace Corporate Stores, Inc. Illinois Ace Corporate Stores, Inc. EX-24 3 POWERS OF ATTORNEY ACE HARDWARE CORPORATION: POWER OF ATTORNEY -------------------------------------------- KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors of ACE HARDWARE CORPORATION, a Delaware corporation, hereby constitutes and appoints DAVID F. HODNIK and LORI L. BOSSMANN, and each of them, his true and lawful attorneys-in-fact and agents, each with full power to act without the other, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has set his or her hand and seal as of this 15th day of March, 2000. JENNIFER C. ANDERSON D. WILLIAM HAGAN Jennifer C. Anderson D. William Hagan RICHARD F. BAALMANN, JR. MARK JERONIMUS Richard F. Baalmann, Jr. Mark Jeronimus ERIC R. BIBENS II HOWARD J. JUNG Eric R. Bibens II Howard J. Jung LAWRENCE R. BOWMAN MARIO R. NATHUSIUS Lawrence R. Bowman Mario R. Nathusius JAMES T. GLENN ROGER E. PETERSON James T. Glenn Roger E. Peterson DANIEL L. GUST RICHARD W. STINE Daniel L. Gust Richard W. Stine -----END PRIVACY-ENHANCED MESSAGE-----