-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GCoD3RpqyuwTLFirj0O0PoGMZn/grkmdOxA5gX+divPV9m/j48hYVrOcQUTVn+PF c3Ix94UJYJxmb7BbtN6NOA== 0000002024-94-000010.txt : 19940324 0000002024-94-000010.hdr.sgml : 19940324 ACCESSION NUMBER: 0000002024-94-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE HARDWARE CORP CENTRAL INDEX KEY: 0000002024 STANDARD INDUSTRIAL CLASSIFICATION: 5070 IRS NUMBER: 360700810 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 002-55860 FILM NUMBER: 94517327 BUSINESS ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7089906600 10-K 1 ANNUAL REPORT 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 fiscal year ended December 31, 1993 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 60521 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including Area Code: (708) 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 non-affiliates of the Registrant. The Registrant's shares are issued only to, and may be held only by, its dealer-stockholders, and the shares held by a dealer-stockholder are subject to repurchase by the Registrant upon termination of the membership agreement of a dealer-stockholder. Thus, there is no market for the Registrant's shares. The repurchase price for each share of Class A stock, the only voting stock issued by the Registrant, is equal to the par value of $1,000 per share. As of February 28, 1994, the aggregate value of the Class A stock held by non-affiliates (dealer-stockholders) calculated on the basis of such repurchase price was $3,933,000. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate 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 28, 1994: Class A (voting) Stock, $1,000 par value 3,933 shares Class B (nonvoting) Stock, $1,000 par value 3,400 shares Class C (nonvoting) Stock, $ 100 par value 1,523,707 shares PART I Item 1. Business Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, by means of a corporate merger, it succeeded to the business of Ace Hardware Corporation, an Illinois corporation organized in 1928. Until 1973, the business now being engaged in by the Company had been conducted by the Illinois corporation. The Company's principal executive offices are located at 2200 Kensington Court, Oak Brook, Illinois 60521. Its telephone number is (708) 990-6600. The Company functions as a wholesaler of hardware and related products, and manufactures paint products. Sales of the products distributed by it are presently made primarily to individuals, partnerships or corporations who are engaged in business as retail dealers of hardware or related items and who have entered into Membership Agreements with the Company entitling them to purchase merchandise and services from the Company and to use the Company's marks as provided therein. The Company operates on a cooperative basis and distributes patronage dividends to its eligible member dealers each year in proportion to the amount of their annual purchases of merchandise from it. (See the subheading "Distribution of Patronage Dividends".) At December 31, 1993 there were 4,921 retail business outlets with respect to which such Membership Agreements had been entered into. Those States having the largest concentration of member outlets are California (approximately 10%), Illinois and Texas (approximately 7% each), Florida (approximately 5%), and Michigan and Georgia (approximately 4% each). States into which were shipped the largest percentages of the merchandise sold by the Company in 1993 are California (approximately 12%), Illinois (approximately 9%), Florida and Texas (approximately 6% each) and Michigan and Georgia (approximately 4% each). Less than 3% of the Company's sales are made to outlets located outside of the United States or its territories. Information as to the number of the Company's member outlets during each of the past three calendar years is set forth in the following table: 1993 1992 1991 Member outlets at beginning of period 4,986 5,111 5,206 New member outlets 158 183 253 Member outlets terminated 223 308 348 Member outlets at end of period 4,921 4,986 5,111 Dealers having one or more member outlets at end of period 4,045 4,134 4,266 The Company services its dealers by purchasing merchandise in quantity lots, primarily from manufacturers, by warehousing substantial quantities of said merchandise and by selling the same in smaller lots to the dealers. Most of the products that the Company distributes to its dealers from its regional warehouses are sold at a 10% markup. In 1993 warehouse sales accounted for 61.7% of total sales and bulletin sales accounted for 3.4% of total sales with the balance of 34.9% representing direct shipment, including lumber and building material sales. 1 The proportions in which the Company's total warehouse sales were divided among the various classes of merchandise sold by it during each of the past three calendar years are as follows: Class of Merchandise 1993 1992 1991 Paint, cleaning and related supplies 19% 18% 18% Hand and power tools 14% 15% 14% Electrical supplies 12% 13% 12% Plumbing and heating supplies 15% 15% 16% General hardware 12% 12% 12% Housewares and appliances 7% 7% 8% Garden, rural equipment and related supplies 12% 11% 11% Sundry 9% 9% 9% The Company sponsors two major conventions annually (one in the Spring and one in the Autumn) at various locations. Dealers and vendors are invited to attend, and dealers generally place substantial orders for delivery during the period prior to the next convention. During the convention regular merchandise, new merchandise and seasonal merchandise for the coming season are displayed to attending dealers. Lawn and garden supplies, building materials and exterior paints are seasonal merchandise in many parts of the country, as are certain sundries such as holiday decorations. Warehouse sales involve the purchase of merchandise from the Company that is maintained in inventory by the Company at its warehouses. Direct shipment sales involve the purchase of merchandise from the Company with shipment directly from the vendors. Bulletin sales involve the purchase of merchandise from the Company pursuant to special bulletin offers by the Company. Direct shipment sales are orders placed by dealers directly with vendors, using special purchase orders. Such vendors bill the Company for such orders, which are shipped directly to dealers. The Company, in turn, bills the ordering dealers at a markup. The markup on this category of sales varies with invoice amounts in accordance with the following schedule and is exclusive of sales under the LTL Plus program discussed below. Invoice Amount Handling Charge (Markup) $ 0.00 to $ 999.99 2.00% or $1.00 whichever is greater $1,000.00 to $1,999.99 1.75% $2,000.00 to $2,999.00 1.50% $3,000.00 to $3,999.00 1.25% $4,000.00 to $4,999.00 1.00% $5,000.00 to $5,999.00 .75% $6,000.00 to $6,999.00 .50% $7,000.00 to $7,999.00 .25% $8,000.00 and over .00% Bulletin sales are made based upon notification from dealers of their participation in special bulletins offered by the Company. Generally, the Company will give notice to all members of its intention to purchase certain products for bulletin shipment and then purchases only so many of such products as the members order. When the bulletin shipment arrives at the Company, it is not warehoused, but is broken up into appropriate quantities and delivered to members who placed orders. A 6% markup is generally applied to this category of sales. An additional markup of 3% is applied on the various categories of sales of merchandise exported to certain dealers located outside of the United States and its territories and possessions. 2 The Company maintains inventories to meet only normal resupply orders. Resupply orders are orders from members for merchandise to keep inventories at normal levels. Generally, such orders are filled within one week of receipt. Bulletin orders (which are in the nature of resupply orders) may be for future delivery. The Company does not backlog normal resupply orders and, accordingly, no significant backlog exists at any point in time. The Company also has established special sales programs for lumber and building materials products and for products assigned from time to time to an "extreme competitive price sales" classification and for products purchased from specified vendors for delivery to certain of the Company's dealers on a direct shipment basis ("LTL Plus"). Under its lumber and building materials ("LBM") program, the Company imposes no handling charge, markup or national advertising assessment on direct shipment orders for such products. The LBM program also enables the Company's dealers to purchase these products at net invoice prices which pass on to them important cost savings resulting from the Company's closely monitored lumber and building materials purchasing procedures. Additionally, the LBM program offers dealers the opportunity to order less than truckload quantities of many lumber and building materials products at economical prices under the LTL warehouse redistribution procedure which the Company has established with certain major vendors. The Store Traffic Opportunity Program ("STOP") established by the Company is a program under which certain stockkeeping units of specific products assigned to an "extreme competitive price sales" classification are offered for sale to its dealers for delivery from designated Company retail support centers. Sales under this program are made without the addition of freight charges and with such handling charge or markup (if any) of not more than 5% as shall be specified for each item. The Company's officers have authority to add items to, and to withdraw items from, the STOP program from time to time and to establish reasonable minimum or multiple item purchase requirements for the items offered under the program. No allocations or distributions of patronage dividends are made with respect to sales under the STOP program. Purchases under the STOP program are, however, deemed to be warehouse purchases or bulletin purchases, as the case may be, for purposes of calculating the forms of patronage dividend distributions. (See the subheading under this Item 1 entitled "Forms of Patronage Dividend Distributions.) The LTL Plus Program, established by the Company effective as of September, 1990 is a program under which full or partial truckloads of products are purchased by the Company's dealers from specific vendors for delivery to such dealers on a direct shipment basis. No markup, handling charge or national advertising assessment is imposed by the Company on sales under the LTL Plus Program, and the maximum amount of patronage dividends allocated or distributed to the Company's dealers with respect to their purchases of products in the LTL Plus category is .5% of such sales. (See the subheading under this Item 1 entitled "Patronage Dividend Determinations and Allocations.") The Company, in addition to conducting semi-annual and other conventions and product exhibits for its dealers, also provides them with numerous special services (on a voluntary basis and at a cost to cover its related expenses), such as inventory control systems, price and bin ticketing, and an electronic ordering system. In order for them to have on hand current pricing and other information concerning the merchandise obtainable from the Company, the Company further provides to each of its dealers either a catalogue checklist service or a microfiche film service (whichever the dealer selects), for either of which services the dealer must pay a monthly charge. The Company also provides on a full-participation basis videotapes and related materials for educational and training programs for which dealers must pay an established monthly charge. (See the subheading under this Item 1 entitled "Special Charges and Assessments.") Through its wholly-owned subsidiary, Ace Insurance Agency, Inc., the Company makes available to its dealers a Group Dealer Insurance Program under which they can purchase a package of insurance coverages, including "all risk" property insurance and business interruption, crime, liability and workers' compensation coverages, as well as medical expense coverage for their employees. AHC Realty Corporation, another wholly-owned 3 subsidiary of the Company, provides the services of a broker to those dealers who desire to sell or seek a new location for a presently owned store or to acquire an additional store. In addition, the Company offers to its dealers retail computer systems consisting of computer equipment, maintenance service and certain software programs and services. These are marketed by the Company under its registered service mark "PACE". The Company manufactures paint and related products at a facility owned by it in Matteson, Illinois. This facility now constitutes the primary source of such products offered for sale by the Company to its dealers. It is operated as a separate Division of the Company for accounting purposes. All raw materials used by the Company to manufacture paint are purchased from outside sources. The Company has had adequate sources of raw materials, and no shortages of any materials which would materially impact operations are currently anticipated. The manufacturing of paint is seasonal to the extent that greater paint sales are found in the months of April through September. Historically, compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not had any material impact. The Company's business, either in hardware wholesaling or paint manufacturing activities is not dependent on any major suppliers and the Company feels that any seasonal fluctuations do not have a significant impact upon operations. For further discussion of Company's business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations", in Item 7 hereof. Special Charges and Assessments The Company sponsors a national advertising program for which its dealers are currently assessed an amount equal to 1.25% of their purchases (exclusive of lumber, building materials, purchases of PACE computer systems (hardware and software), less than truckload lumber and building material program purchases and LTL Plus Program purchases as described here in above in this Item 1) from the Company during each bi-weekly period, with the current minimum annual assessment being $975.00 and with the maximum annual assessment being $4,750 for each business location of any one dealer which has become a member of the Company. The total annual amount of advertising assessments payable by any one dealer is also subject to a further maximum limit which is determined by multiplying the number of such dealer's member retail store outlets serving the general public by $4,750. In the case of a dealer whose place of business is located outside the contiguous States of the United States, the Company's management has authority to determine the extent, if any, to which such dealer shall be required to pay the annual national advertising assessment based upon its evaluation of the amount and nature of the television broadcasts received in the dealer's area. The percentage of bi-weekly purchases to be assessed for the Company's national advertising program and the amount of the maximum annual assessment for such program are both subject to being changed from time to time by action of the Board of Directors of the Company. The Company also has the authority, effective January 1, 1993 to impose a regional advertising assessment (for select geographic regions) not to exceed 2% of annual purchases with the same minimum and maximum assessments imposed by the National Advertising assessment. Each dealer must pay a low volume service charge if the dealer's purchases during the calendar year are less than the minimum purchase levels described below. Minimum purchase levels and the amount of the low volume service charge are subject to change from time to time by the Company's Board of Directors. Presently, the low volume service charge is $30.00 and applies beginning one (1) year after the granting of the membership, if the dealer's purchases from the Company (exclusive of carload lumber purchases) are less than $4,000.00 per bi-weekly billing period. If the dealer's purchases from the Company reach $104,000 during the calendar year, then the dealer receives credit on its next bi-weekly billing statement for all low volume service charges imposed on that account earlier in the same calendar year, and the account is not subject to any further low volume service charges for the rest of the calendar year. The low volume service charge is not billed on a bi-monthly basis to those accounts whose previous year's sales volume exceeded the minimum purchases level for the previous year, but the full annual low volume 4 service charge will be billed at year end to those accounts if the minimum purchase level to avoid imposition of the charge has not been met for the current year. For the calendar year in which the first anniversary of the store's membership occurs, the $104,000 purchase requirement is pro-rated from the first billing statement after that anniversary through December 31, if less than a full calendar year. An Ace store that falls below minimum purchase levels is also subject to termination. A late payment service charge is added on any past due balance owing by a dealer to the Company for purchases of merchandise and services or for the purchase price of the capital stock of the Company subscribed for by the dealer. The late payment service charge currently in effect is an amount equal to .77% per bi-weekly statement period, except in Texas where the charge is .384% and Georgia where the charge is .692%. A past due balance is created whenever payment of the amounts shown as due on any such statement is not received by the Company within 10 days following the date of the statement. The percentage for determining the amount of the late payment service charge may be changed from time to time by the Company. Subscriptions to a retail training program consisting of video tapes and related course materials (the "S.T.A.R. Program") are mandatory for all stores located in the United States and U.S. Territories. The initial monthly assessment imposed on such stores for such subscriptions is $14.50 for each single store or parent store and $10.00 for each branch store. A single store or parent store is an initial retail outlet for which a dealer owns, or has subscribed for, one (1) share of Class A stock and forty (40) shares of Class C stock of the Company. A branch store is an additional retail outlet for which a dealer owns, or has subscribed for, fifty (50) shares of Class C stock of the Company. (See Article XXV, Section 2 of the By-laws.) Branch stores may, upon request, be granted an exemption from the monthly subscription fee. Trademark and Service Mark Registrations The names "ACE HARDWARE" and "ACE" are used extensively by the Company and by its member-dealers in connection with the promotion, advertising and marketing of products distributed by the Company. The Company also uses the names "Bright & Easy" and "Weather Shedder" for promotion of the sale of certain paints and paint primers, the name "Super Striker" for promotion of the sale of a packaged assortment containing fishing rods and lures (other than big game trolling lures) and the name "LUB-E" for the promotion of the sale of lubricant. In addition, the Company uses several service marks as an aid in the establishment and operation of stores owned and operated by its member-dealers and uses the service mark "Hardware University" for certain seminars and workshops conducted for its dealers and the service mark "PACE" for in-store computer systems which it markets for use by them in their store operations. The Company holds the following Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for the marks used by it for the above-described purposes:
Registration Description of Mark Type of Mark Number Expiration Date Name "ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007 Name "ACE Hardware" and winged emblem containing same Service Mark 840,176 December 5, 2007 "ACE Hardware-- The More Store" Service Mark 1,003,523 January 28, 1995 "ACE Is The Place With The Helpful Hardware Man" Service Mark 1,055,743 January 4, 1997 5 "The Helpful Hardware Man" Service Mark 1,055,741 January 4, 1997 "Ace Is the Place" Service Mark 1,602,715 June 19, 2000 "LUB-E" Trademark 1,615,386 October 2, 2000 "Ace Five Star" Trademark 1,627,887 December 18, 2000 "The Paintin' Place" Service Mark 1,138,654 August 12, 2000 "Hardware University" with design Service Mark 1,180,539 December 1, 2001 Name "PACE" with design Service Mark 1,208,887 September 14, 2002 Name "ACE Hardware" and winged emblem containing same Trademark 898,070 September 8, 2000 Name "ACE Hardware" and winged emblem containing same Trademark 1,277,581 May 15, 2004 "Super Striker" Trademark 1,182,330 December 15, 2001 "Bright & Easy" Trademark 1,058,117 February 8, 1997 "Weather Shedder" Trademark 1,053,816 December 7, 1996 Name "ACE Hardware" in slanted bar design Trademark 1,426,137 January 27, 2007 Name "ACE Hardware" in stylized lettering design Service Mark 1,486,528 April 26, 2008 Name "ACE Hardware and Garden Center" Service Mark 1,487,216 May 3, 2008 Name "ACE New Experience" in stylized lettering design Trademark 1,554,322 September 5, 2009 Name "ACE Seven Star" in stylized lettering design Trademark 1,556,389 September 19, 2009 Name "FLO-SOFT" Trademark 1,532,900 April 14, 2009 Name "ACE Best Buys" in circle design Service Mark 1,560,250 October 10, 2009 Name "PACER" Trademark 1,570,820 December 12, 1999 Name "ACENET" Service Mark 1,574,019 December 26, 1999 "ASK ACE" Service Mark 1,653,263 August 6, 2001 Name "ACE Three Star" in stylized lettering design Trademark 1,631,237 January 15, 2001 Name "ACE Pro" in stylized lettering design Trademark 1,632,078 January 22, 2001 Christmas Elves design Trademark 1,669,306 December 24, 2001 "ACE 2000" Service Mark 1,682,467 April 7, 2002 Name "ACE" in stylized lettering design Trademark 1,683,538 April 21, 2002 Name "HARMONY" in stylized lettering design Trademark 1,700,526 July 14, 2002 Seven Star Satisfaction Guaranteed Quality Ace Paints Design Service Mark 1,705,321 August 4, 2002 Name "THE OAK BROOK COLLECTION" in stylized lettering design Trademark 1,707,986 August 18, 2002 Name "THE OAK BROOK COLLECTION" in stylized lettering design Trademark 1,783,335 July 20, 2003 Name "ACE HARDWARE BROWN BAG BONANZA" with design Service Mark 1,761,277 April 13, 2003 Name "STORE 2000 THE STORE OF THE FUTURE" Trademark 1,811,032 December 14, 2003 Name "ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003 "ACE HARDWARE COMMITTED TO A QUALITY ENVIRONMENT" Service Mark 1,764,803 April 13, 2003
6 Currently the Company has a pending application before the U.S. Patent and Trademark Office for registration of "ACE RENTAL PLACE" in stylized lettering design for use in connection with the rental of equipment, merchandise and supplies. Competition The competitive conditions in the wholesale hardware industry can be characterized as intensive due to the fact that independent retailers are required to remain competitive with discount stores and chain stores such as Wal-Mart, Home Depot and Sears and with other mass merchandisers. The gradual shift of retail operations to high rent shopping center locations and the trend toward longer store hours have also intensified pressures to obtain low cost wholesale supply sources. The Company directly competes in several U.S. markets with Cotter & Company, Servistar Corporation, Hardware Wholesalers, Inc., Our Own Hardware Company, and United Hardware Distributing Co., all of which companies are also dealer-owned wholesalers. Of the aforementioned companies, only Cotter & Company, headquartered in Chicago, Illinois, has a larger sales volume than the Company. Employees The Company employs 3,405 full-time employees, of which 981 are salaried employees. Collective bargaining agreements covering one truck drivers' bargaining unit and four warehouse bargaining units are currently in effect at certain of the Company's distribution warehouses. The Company's employee relations with both union and non-union employees are considered to be good, and the Company has experienced only one employee-related work stoppage in the past five years. All employees are covered either by negotiated or non-negotiated employee benefit plans which include hospitalization, death benefits and, with few exceptions, retirement benefits. Limitations on Ownership of Stock All of the issued and outstanding shares of capital stock of the Company are owned by its dealers. Only approved retail and other dealers in hardware and related products having Membership Agreements with the Company are eligible to own or purchase shares of any class of the Company's stock. No dealer, regardless of the number of member business outlets owned or controlled by him, shall be entitled to own more than 1 share of Class A Stock, which is the only class of voting stock which can be issued by the Company. This ensures that each stockholder-dealer will have an equal voice in the management of the Company. An unincorporated person or partnership shall be deemed to be controlled by another person, partnership or corporation if 50% or more of the assets or profit shares therein are owned (i) by such other person, partnership or corporation or (ii) by the owner or owners of 50% or more of the assets or profit shares of another unincorporated business firm or (iii) by the owner or owners of 50% or more of the capital stock of an incorporated business firm. A corporation shall be deemed to be controlled by another person, partnership or corporation if 50% or more of the capital stock of said corporation is owned (i) by such person, partnership or corporation or (ii) by the owner or owners of 50% or more of the capital stock of another incorporated business firm or (iii) by the owner or owners of 50% or more of the assets or profit shares of an unincorporated business firm. Distribution of Patronage Dividends The Company operates on a cooperative basis with respect to purchases of merchandise made from it by those of its dealers who have become "members" of the Company as described below and in the Company's By-laws. In addition, the Company operates on a cooperative basis with respect to all dealers who have subscribed for shares but who have not as yet become "members" by reason of the fact that the payments made by them on account of the purchase price of their shares have not yet reached an amount equal to the $1,000 purchase price of 1 share of Class A Voting Stock. All member dealers falling into either of the foregoing classifications are entitled to receive patronage dividend distributions once each year from the Company in proportion to the amount of their annual purchases of merchandise from it. 7 The patronage dividends distributed on wholesale warehouse, bulletin and direct shipment sales made by the Company and on total sales of products manufactured by the Paint Division represented the following percentages of each of said categories of sales during each of the past three calendar years: 1993 1992 1991 Warehouse Sales 4.94434% 5.26838% 4.99516% Bulletin Sales 2.0% 2.0% 2.0% Direct Shipment Sales 1.0% 1.0% 1.0% Paint Sales 7.9389% 8.9440% 8.6463% In addition to the dividends described above, patronage dividends are calculated separately and distributed on sales of lumber products, building material products and less-than-truckload (LTL) sales of lumber and building material products. Patronage dividends equal to .1763%, .1260% and .2098% of the total sales of these products (calculated separately by each of these three sales categories) were distributed to the Company's dealers who purchased those products in 1993, 1992 and 1991, respectively. Under the LTL Plus Program, patronage dividends are also calculated separately on sales of full or partial truckloads of products purchased by eligible dealers from specified vendors (see discussion of LTL Plus Program set forth above in this Item 1). The maximum amount of patronage dividends allocable to LTL Plus sales is .5% of such sales. The LTL Plus Program dividend was .5% of such sales for 1993, 1992 and 1991. Patronage Dividend Determinations and Allocations The amounts distributed by the Company as patronage dividends consist of its gross profits on business done with dealers who qualify for patronage dividend distributions after deducting from said gross profits a proportionate share of the Company's expenses for administration and operations. Such gross profits consist of the difference between the price at which merchandise is sold to such dealers and the cost of such merchandise to the Company. All income and expenses associated with activities not directly related to patronage transactions are excluded from the computation of patronage dividends. Generally these include profits on business done with dealers who do not qualify for patronage dividend distributions and any income (loss) realized by the Company from the disposition of property and equipment (except that, to the extent that depreciation on such assets has been deducted as an expense during the time that the Company has been operating on a cooperative basis and is recaptured in connection with such a disposition, the income derived from such recapture would be included in computing patronage dividends). The By-laws of the Company provide that, by virtue of a dealer being a "member" of the Company (that is, by virtue of his ownership of 1 share of Class A Voting Stock), he will be deemed to have consented to include in his gross income for federal income tax purposes for the dealer's taxable year in which they are received by him all patronage dividends distributed to him by the Company in connection with his purchases of merchandise from the Company. A dealer who has not yet paid an amount which at least equals the $1,000 purchase price of the 1 share of Class A Voting Stock subscribed for by him will also be required to include all patronage dividends distributed to him by the Company in his gross income for federal income tax purposes in the year in which they are received by him. This is required by virtue of a provision in the Subscription Agreement executed by him under which he expressly consents to take all such patronage dividends into his gross income for such purposes. The amount of the patronage dividends which must be included in a dealer's gross income includes both the portion of such patronage dividends received by him in cash or applied against indebtedness owing by him to the Company in accordance with Section 7 of Article XXIV of the Company's By-laws and the portion or portions thereof which he receives in shares of Class C Nonvoting Stock of the Company or in patronage refund certificates. 8 Patronage dividends on each of the Company's three basic categories of sales (warehouse sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends under the LTL Plus Program. However, the maximum amount of patronage dividends allocable to LTL Plus Program sales is an amount no greater than .5% of such sales, the maximum amount of patronage dividends allocable to direct shipment sales exclusive of LTL Plus Program sales is an amount equal to 1% of such sales and the maximum amount of patronage dividends allocable to bulletin sales is an amount equal to 2% of that category of sales. All remaining patronage dividends resulting from sales made under these programs are allocated by the Company to warehouse sales. The Company feels that this allocation procedure provides a practical and understandable method for the distribution of these patronage dividends in a fair and equitable manner. Sales of lumber and building materials products are not included as part of warehouse sales, bulletin sales, or direct shipment sales for patronage dividend purposes. Patronage dividends are calculated separately and distributed to the Company's dealers with respect to their purchases within each of three sales categories involving these types of products. These three categories are (a) lumber products (other than less-than-truckload sales); (b) building materials products (other than less-than-truckload sales); and (c) less-than-truckload ("LTL") sales of lumber and building material products. Patronage dividends are also calculated separately and distributed to the Company's dealers for full and partial truckloads of products purchased under the LTL Plus Program. (See the discussion of the LTL Plus Program set forth above in this Item 1 and under the subheading "Forms of Patronage Dividend Distributions," subparagraphs 2(a)-(b) below). Any manufacturing profit realized on intracompany sales of the products manufactured by the Company's Paint Division is allocated among and distributed as patronage dividends to those member dealers who are eligible to receive patronage dividends from the Company in proportion to their respective annual dollar purchases of paint and related products manufactured by said Division. The earnings realized by the Company on wholesale sales of such products made by it to its member dealers are distributed as patronage dividends to all of its dealers who are eligible to receive patronage dividends from it as part of the patronage dividends which they receive each year with respect to the basic patronage dividend categories established for warehouse sales, bulletin sales, and direct shipment sales. Under Section 8 of Article XXIV of the Company's By-laws, if the Paint Division's manufacturing operations for any year result in a net loss, rather than a profit, to the Paint Division, such loss would be netted against the earnings realized by the Company from its other activities during the year, with the result that the earnings available from such other activities for distribution as patronage dividends for such year would be correspondingly reduced. Forms of Patronage Dividend Distributions Patronage dividend distributions will be made to the eligible and qualified member dealers of the Company in cash, shares of the Company's Class C stock and patronage refund certificates in accordance with the following plan which has been adopted by the Company's Board of Directors with respect to purchases of merchandise made by such dealers from the Company on or after January 1, 1993, and which will continue to be in effect until such time as the Board of Directors, in the exercise of their authority and discretion based upon business conditions from time to time and the requirements of the Company, shall determine that such plan should be altered or amended: 1. With respect to each store owned or controlled by each eligible and qualifying dealer, such dealer shall receive a minimum cash distribution determined as follows: (a) an amount equal to 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to such dealer in connection with the purchases made for such store; (b) an amount equal to 25% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $5,000 but does not exceed $7,500; 9 (c) an amount equal to 30% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $7,500 but does not exceed $10,000; (d) an amount equal to 35% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $10,000 but does not exceed $12,500; (e) an amount equal to 40% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $12,500. 2. The portion of the total annual distribution allocated to any such dealer for each store owned or controlled by such dealer in excess of the amount to be distributed to such dealer for such store in cash shall be distributed to him each year in the form of shares of Class C Non-voting Stock of Ace Hardware Corporation (par value $100 per share), valued at the par value thereof, until the total par value of all shares of all classes of capital stock of the corporation held by such dealer with respect to such store equals the greater of: (a) $20,000; or (b) a sum equal to the total of the following categories of purchases made by such dealer for such store during the most recent calendar year: (i) 10% 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) 13% of the volume of warehouse (including STOP and excluding Ace manufactured paint and related products) and bulletin purchases, plus (iv) 4% of the volume of lumber and building material (excluding LTL) purchases, plus (v) 4% of the volume of LTL Plus purchases; provided, however, that no fractional shares of Class C Non-voting Stock shall be issued to any dealer and that any amount which would have otherwise been distributable as a fractional share of such stock shall instead be distributed to such dealer in cash. 3. The portion of the total patronage dividends allocated each year to any such dealer for each store owned or controlled by such dealer which exceeds the sum of (a) the amount to be distributed to such dealer for such store in cash pursuant to Paragraph 1. above and (b) any amount to be distributed to him in the form of shares of Class C Non-voting Stock of Ace Hardware Corporation (par value $100 per share) pursuant to Paragraph 2. above shall be distributed to such dealer in cash; provided, however, that in no event shall the total amount distributed under this plan to any such dealer for any such store in cash exceed 49.9% of the total patronage dividends allocated for such store for such year, and to the extent that any distribution to be made to any such dealer for any store pursuant to this Paragraph 3. would otherwise cause the total cash distribution to such dealer for such store to exceed 49.9% of the total patronage dividends allocated for such store for such year, the distribution to be made under this Paragraph 3. shall instead be made in the form of a non-negotiable patronage refund certificate having such a maturity date and bearing interest at such an annual rate as shall be determined by the Board of Directors prior to the issuance thereof. With certain modifications, the above Plan is applied separately in determining the form in which patronage dividends accrued with respect to sales of lumber and building materials products are distributed. In this connection the combined patronage dividends allocated annually to a store from (a) sales of lumber products (other than LTL sales) to the store, (b) sales of building materials (other than LTL sales) to the store, and (c) LTL sales to the store are used in determining the minimum cash distribution percentages to be applied under Paragraph 1 of the above Plan. A store's patronage dividends from any other sales category with 10 respect to which patronage dividends are distributed by the Company are not taken into account in determining either the minimum portion or any additional portion of the store's patronage dividends derived from its purchases of lumber and building materials products which is to be distributed in cash. Also, Paragraphs 2 and 3 of the above Plan are applied separately to patronage dividends on lumber and building materials sales and the requirements of Paragraph 2 of the Plan shall not be deemed to have been complied with in the cases of (a) purchases of lumber products (other than LTL purchases) or (b) purchases of building materials products (other than LTL purchases) until the store's holdings of Class C Non-voting Stock of the Company resulting from patronage dividends on the Company's sales to it within the particular one of those two sales categories for which a patronage dividend distribution is to be made equal 4% of the volume of the store's purchases within such category during the most recent calendar year. However, no such special Class C Stock requirement applies to patronage dividends accrued on LTL purchases. Notwithstanding the provisions of the above-described Plan, however, under Section 7 of Article XXIV of the Company's By-laws the portion of any patronage dividends which would otherwise be distributable in cash with respect to a retail dealer outlet which is a member of the Company will instead be applied against any indebtedness owing by the dealer to the Company to the extent of such indebtedness in any case where the membership for such outlet is cancelled or terminated prior to the distribution of such patronage dividends except that an amount equal to 20% of the dealer's total annual patronage dividends for such outlet will be paid in cash if a timely request for the payment of such amount in cash is submitted to the Company by the dealer. Because of the requirement of the U. S. Internal Revenue Code that the Company withhold 30% of the annual patronage dividends distributed to member dealers of the Company whose places of business are located in foreign countries or Puerto Rico (except in the case of unincorporated Puerto Rico dealers owned by individuals who are U.S. citizens and certain dealers incorporated 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 the Corporation's gross income for the last three years has been effectively connected with the conduct of a trade or business in such possession or in the United States), the cash portion of the annual patronage dividends of such dealers shall in no event be less than 30%. It is anticipated that the terms of any patronage refund certificates issued pursuant to Paragraph 3. of the foregoing Plan would include provisions giving the Company a first lien thereon for the amount of any indebtedness owing to it at any time by the owner of any such certificate and provisions subordinating the certificates to all the rights and claims of secured, general and bank creditors against the Company. It is further anticipated that all such patronage refund certificates will have maturity dates which will be no later than five years from the dates of issuance thereof. In order to aid the Company's dealers in acquiring and installing standardized exterior signs identifying the retail stores operated by them as member outlets supplied by the Company, the Board of Directors of the Company has authorized a program under which a dealer may borrow from the Company within a range of $100 to $20,000 the funds required for such purpose. A dealer who obtains a loan under this program may either repay the loan in twelve substantially equal payments billed on such dealer's regular by-weekly billing statement, or may execute a direction to have the portion of the dealer's annual patronage dividends which would otherwise be distributed under the above plan in a form other than cash from no more than the next three annual distributions of such dividends applied toward payment of the principal and interest on the loan. In order to aid the Company's dealers in acquiring and installing PACE and PAINTMAKER computer systems purchased from the Company, the Board of Directors of the Company has also authorized programs under which the Company will finance qualified dealers in the case of a PAINTMAKER computer, within the range of $1,000 to $15,000 repayable over a period of three (3) years, and in the case of a PACE computer, within the range of 11 $5,000 to $50,000 repayable over a period of five (5) years for such purpose. Dealers who obtain financing from the Company for these purposes direct the Company, during the financing term, to first apply toward the principal and interest due on such loans, the patronage dividends which would otherwise be payable in the form of patronage refund certificates for each year, and then to apply the patronage dividends which would otherwise be payable for the same year in the form of the Company's Class C stock. The aforementioned signage and computer financing programs may be revised or discontinued by the Board at any time. Federal Income Tax Treatment of Patronage Dividends Both the shares of Class C Non-voting Stock and the patronage refund certificates used by the Company to pay patronage dividends that accrue to its eligible and qualifying dealers constitute "qualified written notices of allocation" within the meaning of that term as used in Sections 1381 through 1388 of the U.S. Internal Revenue Code, which specifically provide for the income tax treatment of cooperatives and their patrons and which have been in effect since 1963. The stated dollar amounts of such qualified written notices of allocation must be taken into the gross income of each of the recipients thereof for the taxable years in which they are received, not withstanding the fact that stated dollar amounts may not be received in such taxable years. In order for the Company to receive a deduction from its gross income for federal income tax purposes for the amount of any patronage dividends paid by it to a patron (that is, to one of its eligible and qualifying dealers) in the form of qualified written notices of allocation, it is necessary that the Company pay (or apply against indebtedness owing to the Company by such patron in accordance with Section 7 of Article XXIV of the Company's By-laws) not less than 20% of the total patronage dividends distributable to such patron in cash and that the patron consent to having the written notices of allocation, at their stated dollar amounts, included in his gross income for the taxable year in which they are received by him. It is also required under the Code that any patronage dividend distributions deducted by the Company on its federal income tax return with respect to business done by it with patrons during the year for which such deduction is taken must be made to the Company's patrons within 8 1/2 months after the end of such year. Dealers who have become "members" of the Company by owning 1 share of Class A Voting Stock are deemed under the U.S. Internal Revenue Code to have consented to take any written notices of allocation distributed to them into their gross income by their act of obtaining or retaining membership in the Company and by having received from the Company a written notification of the By-law provision providing that membership in the Company constitutes such consent. In accordance with another provision in the Internal Revenue Code, nonmember dealers who have subscribed for shares of the Company's stock will also be deemed to have consented, by virtue of the consent provisions included in their Subscription Agreements, to take any written notices of allocation distributed to them into their gross income. A dealer receiving a patronage refund certificate as part of the dealer's patronage dividends in accordance with the last clause of Paragraph 3 of the patronage dividend distribution plan previously described under the subheading "Forms of Patronage Dividend Distributions" in this Item 1, may be deemed to have received interest income in the form of an original issue discount to the extent of any excess of the face amount of the certificate over the present value of the stated principal and interest payments to be made by the Company under the terms of the certificate. Such income would be taxable to the dealer ratably over the term of the certificate under Section 7872(b) (2) of the U. S. Internal Revenue Code. The present value for this purpose is to be determined by using a discount rate equal to the applicable Federal rate in effect as of the day of issuance of the certificate, compounded semi-annually. 12 The Company will be required to withhold for federal income tax on the patronage dividend distribution which is made to a payee who has not furnished his taxpayer identification number to the Company or as to whom the Company has notice of the fact that the number furnished to it is incorrect. A cooperative organization may also be required to withhold on the cash portion of each patronage dividend distribution made to a payee who becomes a member of the cooperative if the payee fails to certify to the cooperative that he is not subject to backup withholding. It is the opinion of counsel for the Company that this provision is not applicable to any patronage dividend distribution to a payee unless 50% or more of the total distribution is made in cash. Since all of the Company's patronage dividends for a given year are distributed at the same time and the Company's currently effective patronage dividend plan does not permit any store which is a member of the Company to receive more than 49.9% of its patronage dividends for the year in the form of cash, it is said counsel's further opinion that such a certification failure would ordinarily have no effect on the Company or any of its dealers. Patronage dividends distributed by a cooperative organization to its patrons who are located in foreign countries or certain U. S. possessions have been held to constitute fixed or determinable annual or periodic income on which such patrons are required to pay a tax of 30% of the amount received in accordance with the provisions of Sections 871(a)(1)(A) and 881(a) (1) of the Internal Revenue Code, as do patronage dividends distributed to patrons which are incorporated in Puerto Rico or who reside in Puerto Rico but have not become citizens of the United States. With respect to its dealers who are subject to such 30% tax, the Company is also obligated to withhold from their patronage dividends and pay over to the U. S. Internal Revenue Service an amount equal to the tax. The foregoing provisions do not apply to a corporation organized in Guam, American Samoa, the Northern Mariana Islands, or the U. S. Virgin Islands if less than 25% of its stock is owned by foreign persons and at least 65% of its gross income for the last three years has been effectively connected with the conduct of a trade or business in such possession or in the United States. The 20% minimum portion of the patronage dividends to be paid in cash to a patron with respect to whom the Company is neither required to withhold 30% of his total patronage dividend distribution nor permitted to apply such minimum portion against indebtedness owing to it by him may be insufficient depending upon the income tax bracket of each individual patron, to provide funds for the full payment of the federal income tax for which such patron will be liable as a result of the receipt of the total patronage dividends distributed to him during the year, including cash, patronage refund certificates and/or Class C Non-voting Stock. In the opinion of the Company's management, payment in cash of not less than 20% of the total patronage dividends distributable each year to the Company's eligible and qualifying dealers will not have a material adverse effect on the operations of the Company or its ability to obtain adequate working capital for the normal requirements of its business. Membership Agreement In addition to signing a Subscription Agreement for the purchase of shares of the Company's stock, each retail dealer who applies to become an Ace dealer (excluding the firms which are "International Retail Merchants" as discussed below under the subheading "International Retail Merchants" in this Item 1) must sign the Company's customary Membership Agreement. A payment of $400 must accompany the signed Membership Agreement to defray the Company's estimated costs of processing the membership application. If the application is accepted, copies of both the Membership Agreement and the Stock Subscription Agreement, signed on behalf of the Company to evidence its acceptance, are forwarded to the dealer. No royalties are payable at any time by a dealer for an outlet which the Company accepts for affiliation into its dealer network. Membership may be terminated upon various notice periods and for various reasons (including voluntary termination by either party) as prescribed in the membership agreement, except to the extent that special laws or regulations applicable to specific locations may limit the Company's right to terminate memberships, or may prescribe greater periods of notice under particular circumstances. 13 International Retail Merchants In 1989, the Company's Board of Directors authorized the Company to affiliate International Retail Merchants, who operate retail businesses outside the United States, its territories and possessions. International Retail Merchants sign an International Retail Merchants Agreement in lieu of the Company's Regular Membership Agreement, and are generally granted a license to use certain of the Company's service marks. They do not, however, sign Stock Subscription Agreements or become shareholders of the Company by reason of their International Retail Merchants Agreements, nor do they receive distributions of patronage dividends. As of December 31, 1993, 1992 and 1991 International Retail Merchant volume with the Company accounts for less than 3% of the Company's total sales in each such year. Item 2. Properties The Company's general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60521. Information with respect to the Company's principal properties follows:
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 (1) 70,508 Owned Distribution Warehouses: Lincoln, Nebraska 346,000 Leased October 31, 1996 Arlington, Texas 313,000 Leased July 31, 1996 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 350,000 Owned LaCrosse, Wisconsin 363,000 Owned Bloomfield, Connecticut(2) 449,820 Owned Huntersville, North Carolina 354,000 Owned Rocklin, California 470,000 Owned Gainesville, Georgia 478,000 Owned Prescott Valley, Arizona 633,000 Owned Princeton, Illinois 1,080,000 Owned Print Shop Facility: Downers Grove, Illinois 41,000 Leased January 31, 1995 Paint Manufacturing Facility: Matteson, Illinois 356,000 Owned Other Property (Land): Aurora, Illinois 72 acres Owned LaCrosse, Wisconsin(3) 3 acres Owned
(1) Includes 35,254 square feet leased to tenant until July 31, 1996. The subject property is adjacent to the Company's general offices. (2) Includes an 80,820 sq. ft. warehouse expansion project, scheduled for completion later in 1994. (3) This land is adjacent to the Company's LaCrosse, Wisconsin warehouse. The Company also leases a fleet of transportation equipment for the primary purpose of delivering merchandise from the Company's warehouses to its dealers. 14 Item 3. Legal Proceedings There are no material pending legal proceedings which either individually or in the aggregate involve claims for damages that exceed 10% of the current assets of the Company and its subsidiaries on a consolidated basis. Item 4. Submission To A Vote Of Security Holders None. PART II Item 5. Market For The Registrant's Common Equity And Related Stockhoder Matters There is no existing market for the stock of the Company and there is no expectation that any market will develop. The Company is organized and operates as a cooperative corporation, and its stock is owned exclusively by retailers of hardware and related merchandise who are members of the Company. The number of holders of record as of February 28, 1994 of each class of stock of the Company is as follows: Title of Class Number of Record Holders Class A stock, $1,000 par value 3,933 Class B stock, $1,000 par value 850 Class C stock, $100 par value 4,756 Dividends, other than patronage dividends are prohibited by the Company's Articles of Incorporation and By-laws. See the discussion of patronage dividends under Item 1. Business. 15 Item 6. Selected Financial Data SELECTED FINANCIAL DATA (Not Covered by Auditors' Report) Income Statement Data: Year Ended December 31,
1993 1992 1991 1990 1989 (000's omitted) Net sales $ 2,017,763 $ 1,870,625 $ 1,704,203 $ 1,625,029 $ 1,546,450 Cost of sales 1,867,326 1,723,017 1,569,871 1,497,147 1,426,322 Gross profit 150,437 147,608 134,332 127,882 120,128 Total expenses 93,345 86,841 75,175 67,470 69,557 Earnings before patronage dividends 57,092 60,767 59,157 60,412 50,571 Patronage dividends (Note A, B, 5 and 8) 59,023 63,207 57,729 57,519 53,128 Net earnings $ (1,931) $ (2,440) $ 1,428 $ 2,893 $ (2,557)
Balance Sheet Data: Year Ended December 31,
1993 1992 1991 1990 1989 (000's omitted) Total assets $ 667,488 $ 594,676 $ 540,953 $ 479,202 $ 496,834 Working capital 133,287 103,952 105,899 92,376 76,683 Long-term debt 71,286 51,696 38,737 22,521 28,622 Patronage refund certificates payable, long-term 56,270 55,389 58,559 52,134 45,669 Member dealers' equity 186,028 175,681 164,411 154,563 139,545
(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 all patronage sourced earnings in the form of patronage dividends. Earnings before patronage dividends and patronage dividends will normally be the same, except for differences caused by the timing of the recognition of certain items for income tax purposes. (B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the amount distributable to each of the member dealers is known. For the five years ended December 31, 1993, patronage dividends were payable as follows:
1993 1992 1991 1990 1989 (000's omitted) In cash $25,766 $27,538 $26,864 $26,462 $24,359 In patronage refund certificates payable 12,728 14,598 15,176 13,597 12,310 In Class C Stock 19,064 20,301 14,841 16,322 15,328 In patronage finanacing deductions 1,465 770 848 1,138 1,131 Total patronage dividends $59,023 $63,207 $57,729 $57,519 $53,128
(C) Numbered notes refer to Notes to Financial Statements, beginning on page F-8. 16 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 financings (see Notes 3 and 4 to the financial statements). These sources have been sufficient to finance the Company's seasonal and other working capital requirements and its capital expenditure programs. The Company had unused unsecured lines of credit of $69.0 million at December 31, 1993. Any borrowings under these lines of credit would bear interest at the prime rate or less. Long-term financings are 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 $16.3, $34.6 and $37.9 million in 1993, 1992 and 1991, respectively. During 1993, the Company financed the $16.3 million of capital expenditures out of current and accumulated internally generated funds, and short-term and long-term borrowings. 1994 capital expenditures are anticipated to be approximately $30.9 million primarily for improvements to existing facilities. 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 (see headings "Patronage Dividend Determinations And Allocations" and "Federal Tax Treatment of Patronage Dividends"). The 1991 capital gain from the sale and leaseback of the Los Angeles, California facility constitutes nonpatronage-sourced income and is not available for distribution as patronage dividends. The Company expects that existing and new internally generated funds, along with established lines of credit and long-term financings, will continue to be sufficient to finance the Company's patronage dividend and capital expenditure programs. Operations--1993 Compared to 1992 Net sales increased 7.9% in 1993 primarily due to increases in volume from existing dealers. Sales of basic hardware and paint merchandise (including warehouse, bulletin, and direct shipments) increased 6.8%. Lumber and building material sales experienced a higher percentage increase in 1993. Net dealer outlets decreased as set forth on page 1 as a result of increased sales and marketing efforts with existing dealers and increased competition. Gross profit increased $2,829,000 or 1.9% vs. 1992 due primarily to higher net merchandise discounts and allowances. Gross profit decreased as a percent of sales, however, due to reduced handling charges on competitively priced items and shifts in the Company's sales mix. Warehouse and distribution expenses decreased by $641,000 or 2.0% due to decreased building rental and facility costs and increased levels of warehousing costs absorbed into cost of sales, partially offset by increased personnel and equipment costs and traffic freight subsidies. Selling, general, and administration expenses increased by $5,927,000 or 12.2% due to higher personnel costs and marketing expenses partially offset by higher advertising and retail support income. 17 Interest expense increased $1,418,000 in 1993 despite lower interest rates due to increased long-term debt resulting from the financing of planned capital expenditures and increased inventory levels. The use of both short-term borrowings and long-term financing is expected to continue to fund planned capital expenditures (see liquidity and capital resources and Notes 3 and 4 to the financial statements). Operations--1992 Compared to 1991 Net sales increased 9.8% in 1992 primarily due to increases in volume from existing dealers. Sales of basic hardware and paint merchandise (including warehouse, bulletin, and direct shipments) increased 6.9%. Lumber and building material sales experienced a higher percentage increase in 1992. Total paint sales increased 12.3%. Net dealer outlets decreased as set forth on page 1 as a result of increased sales and marketing efforts with existing dealers and increased competition. Gross profit increased $13,276,000 or 9.9% vs. 1991 but is comparable as a percentage of sales primarily due to higher net merchandise discounts and allowances and a lower LIFO provision partially offset by reduced handling charges as a percent of sales caused by a shift in the sales mix. Warehouse and distribution expenses increased by $3,310,000 or 11.4% due to higher personnel costs related to volume increases, increased building rental costs and higher 1992 start-up and closing costs incurred in conjunction with the replacement of a facility. Selling, general, and administration expenses increased by $4,013,000 or 9.0% due to higher personnel costs and marketing expenses partially offset by higher advertising income. Interest expense increased $1,370,000 in 1992 despite lower interest rates due to increased long and short-term debt resulting from the financing of planned capital expenditures and increased inventory levels. The use of both short-term borrowings and long-term financing is expected to continue to fund planned capital expenditures (see liquidity and capital resources and Notes 3 and 4 to the financial statements). Other income, net decreased $2,973,000 in 1992 due primarily to the 1991 gain on the sale of the Los Angeles facility (see Note 11 to the 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 8. Financial Statements And Supplementary Data Financial statements and financial statement schedules covered by the report of the Company's certified public accountants are listed on Page F-1. Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosures None. 18 PART III Item 10. Directors And Executive Officers Of The Company The directors and the executive officers of the Company are: Position(s) Held Name Age and Business Experience Lawrence R. Bowman 47 Director since February 4, 1991; term expires 1995; Vice President of Owenhouse Hardware Co., Inc., Bozeman, Montana David F. Hodnik 46 Executive Vice President and Chief Operating Officer since January, 1994; Executive Vice President and Treasurer since January, 1991; Senior Vice President and Treasurer since January, 1988; Vice President--Finance and Management Information Systems and Treasurer since September, 1986; Vice President--Finance and Treasurer from December, 1982. Paul M. Ingevaldson 48 Vice President--Corporate Strategy and International Business since September, 1992; Vice President--Retail Support Services since August, 1989; Vice President--Western Region since September 1, 1988; Vice President-- Distribution since September, 1986; Vice President--Management Information Systems from October, 1985; Director of Data Processing from October, 1982. Mark Jeronimus 45 Director since June 3, 1991; term expires 1994; President of Duluth Hardware, Inc., Duluth, Minnesota. Howard J. Jung 46 Director since June 1, 1987; term expires 1996; Vice President of Ace Hardware & Home Center, Inc., Raleigh, North Carolina. Rita D. Kahle 37 Vice President--Finance since January, 1994; Vice President--Controller since January, 1992; Controller from July, 1988. John E. Kingrey 50 Director since May 17, 1992; term expires 1996; President of WK&K Corp., Wimberley, Texas. Richard E. Laskowski 52 Chairman of the Board since February 18, 1992 and Director since June 1, 1987; term expires 1995; President of Ace Hardware Home Center of Round Lake, Inc., Round Lake, Illinois. William A. Loftus 55 Senior Vice President--Marketing and Advertising since September, 1992; Senior Vice President since January 1, 1991; Vice President--Retail Support Operations since August, 1989; Vice President--Eastern Region since September 1, 1988; Vice President--Sales since October, 1983; National Sales Manager from October, 1976. Fred J. Neer 54 Vice President--Human Resources since April, 1989; Director of Human Resources from April, 1986. 19 Ray W. Osborne 57 Director since June 6, 1988; term expires 1994; President of Cook & Sons Ace Hardware Company, Inc., Albertville, Alabama. Roger E. Peterson 56 President and Chief Executive Officer (CEO) since December, 1989; President since August, 1986; Executive Vice President from March, 1985; Vice President--Operations from December, 1982. Jon R. Weiss 58 Director since June 4, 1990; term expires 1996; President of John W. Weiss Hardware Company, Glenview, Illinois. Don S. Williams 52 Director since June 6, 1988; term expires 1994; President of Williams Lumber, Inc., Rhinebeck, New York. James R. Williams 46 Director since June 5, 1989; term expires 1995; Vice-President of Williams Ace Hardware, Inc., Wichita, Kansas. Gary R. Meyer whose term was to have expired in 1994, resigned from the Board of Directors for personal reasons in November, 1993 and no successor has yet been elected for the balance of his term. The By-laws of the Company provide that its Board of Directors shall be comprised of such number of persons, not less than 9, as shall be fixed from time to time by the Board of Directors. The By-laws also provide for three classes of directors who are to be elected for staggered 3-year terms. The By-laws provide that, except for one position on the Board which may, at the discretion of the directors, be filled by the President of the Company, no person is eligible to serve as a director unless such person is either the owner of a retail business organization holding stock in the Company or an executive officer, general partner or general manager of such a retail business organization. Such directors are referred to as "dealer directors", and are elected from geographic regions of the United States established by the Board. In accordance with the applicable procedure established by the By-laws, the following directors have been selected as nominees for reelection at the annual stockholders meeting to be held on June 6, 1994, as directors of the classes, from the regions, and for terms as indicated below: Nominee Class Region Term Don S. Williams First 1 3 years Ray W. Osborne First 3 3 years Mark Jeronimus First 9 3 years The person named below has been selected as the nominee for election to the Board for the first time at the 1994 annual meeting as director of the class, from the region, and for the term indicated. Nominee Age Class Region Term Jennifer Anderson 43 First 8 3 years Reference should be made to Article IV of the By-laws for information concerning the qualifications required for membership on the Board of Directors, the terms of directors, the limitations on the total period of 20 time for which a director may hold office, the procedure established for the designation of Nominating Committees to select certain persons as nominees for election to the Board of Directors, and the procedure for filling vacancies on the Board for the remaining portion of unexpired terms. None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years with respect to any director of the Registrant, any nominee for membership on the Board of Directors of the Registrant or any executive or staff officer of the Registrant. Item 11. Executive Compensation The following information is set forth with respect to the cash compensation paid by the Company to each of the five highest paid executive officers of the Company whose cash compensation exceeded $100,000, for services rendered by them in all capacities to the Company and its subsidiaries during the fiscal year ended December 31, 1993 and the two previous fiscal years: SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation
(2) Name Other (4) and Annual (3) All Other Principal (1) Compen- Long-Term Compen- Position Year Salary ($) Bonus ($) sation ($) Payouts ($) sation ($) Roger E. Peterson 1993 $670,000 $100,000 $19,001 $ -- $139,598 President and Chief 1992 635,000 -- 17,174 -- 115,758 Executive Officer (CEO) 1991 600,000 -- -- -- -- David F. Hodnik 1993 328,000 50,840 14,794 15,500 75,210 Executive Vice President 1992 312,000 49,920 13,929 -- 66,943 and Chief Operating Officer 1991 295,000 48,675 -- -- -- William A. Loftus 1993 250,000 37,500 32,881 12,000 61,560 Senior Vice President- 1992 240,000 24,000 16,447 -- 51,918 Marketing & Advertising 1991 230,000 36,800 -- -- -- Paul M. Ingevaldson 1993 222,000 31,080 23,915 10,700 53,457 Vice President- 1992 212,000 30,740 9,584 -- 46,522 Corporate Strategy and 1991 201,000 32,160 -- -- -- International Business Fred J. Neer 1993 157,000 17,490 5,760 7,500 37,361 Vice President- 1992 148,000 18,531 6,459 -- 33,222 Human Resources 1991 141,000 16,243 -- -- --
(1) The Incentive Compensation Plan covers each of the executive officers (except Mr. Peterson). The bonus amounts awarded to participants in the Plan are determined in accordance with individual performance and achievement of corporate goals. For 1991 to 1993, the maximum incentive award for each of Messrs. Hodnik, Loftus and Ingevaldson was 18% of their respective annual salaries and for other executive officers was 15% of their annual salary for the short-term incentive awards. The short-term bonus award becomes payable to each participant as early as practicable after the end of the fiscal year. The 1993 bonus amount for Mr. Peterson was a one time incentive award as described in the Compensation Committee Report. For 1994, the maximum short-term incentive award for each executive officer is 20% of their respective salary. 21 (2) The Company provides automobiles and prior to 1993 provided club memberships 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 and personal charges at clubs. 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 him in said table. (3) Includes the long-term incentive award under the Incentive Compensation Plan paid in 1993. The long-term executive award is based on corporate performance over a three year time frame. The maximum long-term incentive award for Messrs. Hodnik, Loftus, Ingevaldson, and Neer and other executive officers is 8.7% of their respective average 3 year annual salaries. The long term incentive award is determined and becomes payable to each participant as early as practicable each year if the participant is still employed by the Company on the preceding 31st of December. (4) Includes compensation for the Executive Supplemental Benefit Plan (ESBP), contributions to the Company's Profit Sharing Plan which has been in existence since January 1,1953, and contributions to the Company's Retirement Benefits Replacement Plan. The Board of Directors adopted the Executive Supplemental Benefit Plan (ESBP) in 1991. ESBP provides supplemental life insurance through a universal life insurance policy, supplemental long-term disability and supplemental retirement benefits to the executive officers. Under the supplemental retirement benefits portion of ESBP a formula equal to .02 of 1% of the total corporate annual Patronage Dividend times the number of executive officers participating determines the total annual supplemental retirement benefits under ESBP. This total sum for all executive officers allocated to the supplemental retirement benefits portion of ESBP cannot exceed $200,000 in any year. The sum is allocated, by tier, to the executive officers and placed in the cash value portion of each participant's variable annuity insurance policy as soon as practicable in each subsequent year. During the year 1993, total contributions were $14,365 for Messrs. Peterson, Hodnik and Ingevaldson and $11,485 for Mr. Neer. All active employees are eligible to participate in the Company's profit sharing plan after one year of service but 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 1993, the Company contributed 10.9% of each participant's eligible compensation to the Plan. During the year 1993, $25,707 was expensed by the Company pursuant to the Plan for Messrs. Peterson, Hodnik, Loftus and Ingevaldson and $21,896 for Mr. Neer. The Company has also established a Retirement Benefits Replacement Plan covering Messrs. Peterson, Hodnik, Loftus and Ingevaldson. Effective January 1, 1994, the plan will cover 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 1993, amounts expensed by the Company pursuant to the Plan were $94,253 for Mr. Peterson, $31,517 for Mr. Hodnik, $17,413 for Mr. Loftus, and $9,792 for Mr. Ingevaldson. (5) As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue stock awards of any kind. Messrs. Peterson, Hodnik, Loftus and Ingevaldson are employed under contracts, each dated October, 1992 for respective terms of two years, terminating December 31, 1994. The contracts provide for annual compensation 22 effective January 1, 1994 of $800,000, $350,000, $260,000, and $232,000, respectively or such increased amount, if any, as shall be approved by the Board of Directors. 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 but those active employees covered by a collective bargaining agreement regarding which retirement benefits 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 his employment and his 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 him by the Company under the Profit Sharing Plan. Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing Plan offset) are as follows: Years of Service Remuneration 10 15 20 25 30 or more $200,000 $40,000 $60,000 $80,000 $90,000 $112,221 150,000 30,000 45,000 60,000 75,000 90,000 100,000 20,000 30,000 40,000 50,000 60,000 50,000 10,000 15,000 20,000 25,000 30,000 The amounts shown above represent straight life annuity amounts. Maximum benefits from the Pension Plan are 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 $235,840 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 present credited years of service under the Pension Plan for the currently employed executive officers named in the compensation table are as follows: Roger E. Peterson--17 years; David F. Hodnik--21 years; William A. Loftus--17 years; Paul M. Ingevaldson--14 years; Fred J. Neer--7 years. Compensation Committee Report The corporation's Executive Compensation philosophy is one that supports the Company's fundamental business strategies. Like our dealers, we stress long term measured results, focus on teamwork, accepting prudent risks, and are strongly committed to fulfilling dealer/consumer needs. Our compensation program reflects a policy of competitive performance based pay. Our competitors for Human Resources include publicly owned for profit retail corporations, privately owned for profit retail enterprises, and other national cooperatives. Each of these comparative groupings has quite a different compensation practice/philosophy. Therefore, our orientation is to be cognizant of their respective practices and pay levels, but to give greater emphasis to that which supports the needs of our dealer network. The Compensation Committee is in the process of changing the compensation mix to one which stresses the provision of more significant performance based incentives, particularly long term. 1993 salary increases for executive officers averaged 5.3% per eligible executive. Annual and long term incentive opportunities for 1993 were maintained at previous levels while both programs were increased beginning in 1994. The Committee has agreed, in principle to more substantive changes to the existing long term incentive plan. This involves selecting appropriate long term performance criteria; possibly stretching the performance period 23 to a time frame greater than its current three year time frame, or obligating plan eligible participants to a minimum of three to five years service from date of performance award. We expect to complete these plan redesign changes in early 1994. As it relates to the President/CEO compensation, the Committee in the past has relied on providing the President/CEO with a base salary without either annual or long term incentives. The Committee's primary rationale for this was to allow the President/CEO to make objective recommendations pertaining to incentive eligible officers without the incumbrance of a personal stake associated with the same performance criteria. This too is under review and likely to change, so as to ensure the long term commitment of the President/CEO position to the longer term interest of our dealer network. The Committee also concluded that the corporation's performance results for 1993 were of such a significant milestone that a special one time incentive award to the President/CEO of $100,000 was granted. This was warranted based upon total sales exceeding $2 billion and distribution of a total patronage dividend of $59 million. Both represented excellent results for the company. The Compensation Committee approved a 19.4% salary increase for the President/CEO to take effect January 1, 1994. This was based upon comparison of CEO cash compensation at competitor enterprises and a desire to maintain Mr. Peterson's salary at a level consistent with his long-term contribution to the success of Ace and its over 4,900 retailers. The Committee also reviews the executive benefits provided to either the CEO and other senior executives. Country club memberships previously granted to some officers have been eliminated, except for the President/CEO and Chief Operating Officer. Compensation of Directors Effective January 1, 1993, and January 1, 1994, each member of the Board of Directors receives a fee of $2,300 and $2,500 per month, respectively, for their services. Effective as of the foregoing dates, Mr. Laskowski is paid a total annual fee of $80,000 and $100,000 per year, respectively, in his capacity as Chairman of the Board. Under a Deferred Director Fee Plan adopted by the Board, each director may elect to defer payment of 10% to 100% of his monthly director's fee, in 10% increments, until whichever of the following dates shall be selected by him at the time he makes such deferral election: (a) the first day of the month coinciding with or next following his 70th birthday or (b) the first day of the month coinciding with or next following such director's final day of service as a director, or (c) the first day of the month coinciding with or next following such director's 75th birthday, or (d) the first day of the month coinciding with or next following the date designated, which date must be after the date of the deferred election. Each member of the Board is also reimbursed for the amount of the travel and lodging expenses incurred by him in attending meetings of the Board and of the Committees of the Board. The expenses incurred by them in attending the semi-annual conventions and exhibits which the Company sponsors are also paid by the Company. Each member of the Board is also paid $200.00 per diem compensation for special committee meetings and nominating committee regional trips which he attends. Item 12. Security Ownership Of Certain Beneficial Owners And Management With the exception of Mr. Laskowski, no shares of the Company's stock were held by any of its officers. No person owns of record or is known by the Company to own beneficially more than five percent of the outstanding voting securities of the Company. The following table sets forth the shares of Class B Stock and Class C Stock of the Company held beneficially, directly or indirectly, by each director owning such shares, individually itemized, and by all officers and directors as a group, as of February 28, 1994: 24
Class B Stock Owned Class C Stock Owned Number Percent Number Percent of Shares of Class of Shares of Class Lawrence R. Bowman 4 0.118% 1,176 0.077% Mark Jeronimus -- -- 730 0.048 Howard J. Jung -- -- 3,261 0.214 John E. Kingrey 4 0.118 680 0.045 Richard E. Laskowski 4 0.118 10,213 0.670 Ray W. Osborne 4 0.118 705 0.046 Jon R. Weiss 4 0.118 2,037 0.134 Don S. Williams -- -- 2,529 0.166 James R. Williams 4 0.118 671 0.044 All above directors and officers as a group 24 0.708% 22,002 1.444%
There are no known contractual arrangements nor any pledge of securities of the Company which may at a subsequent date result in a change in control of the Company. Item 13. Certain Relationships And Related Transactions No director, director nominee, executive officer, security holder who is known to the Registrant to own of record or beneficially more than five percent of any class of the Registrant's voting securities, or any member of the immediate family of any of the foregoing persons, had during the last fiscal year or is currently proposed to have any material interest, direct or indirect, in any transaction in which the amount involved exceeds $60,000.00 and to which the Registrant was or is to be a party, except that each of the directors and director nominees, purchased merchandise and services from the Registrant in the ordinary course of business on behalf of the retail hardware businesses in which they have ownership interests. None of such persons received benefits not shared by other hardware retailers supplied by the Registrant. No director or director nominee has had any business relationship which is required to be disclosed pursuant to Item 404(b) of Regulation S-K of the Securities and Exchange Commission, during the Registrant's last fiscal year nor is any such relationship proposed during the Registrant's current fiscal year. No director, director nominee, executive officer, any member of the immediate family of any of the foregoing, or any corporation or organization of which any of the foregoing is an executive officer, partner, or, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities, or any trust or other estate in which any of the foregoing has a substantial beneficial interest or as to which such person serves as a trustee or in a similar capacity, has been indebted to the Registrant or its subsidiaries at any time since the beginning of the Registrant's last fiscal year in an amount in excess of $60,000.00, except for indebtedness incurred in connection with purchases of merchandise and services made from the Registrant in the ordinary course of business by the retail hardware businesses in which the directors and director nominees have ownership interest. 25 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 financial statements are filed as part of this annual report. 2. Financial Statement Schedules The financial statement schedules listed in the accompanying index (page F-1) to the financial statements are filed as part of this annual report. 3. Exhibits The exhibits listed on the accompanying index to exhibits (pages E-1 through E-5) are filed as part of this annual report. (b) Reports on Form 8-K None. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACE HARDWARE CORPORATION By RICHARD E. LASKOWSKI Richard E. Laskowski Chairman of the Board and Director DATED: March 23, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date RICHARD E. LASKOWSKI Chairman of the Board March 23,1994 Richard E. Laskowski and Director ROGER E. PETERSON President and Chief March 23, 1994 Roger E. Peterson Executive Officer DAVID F. HODNIK Executive Vice President March 23, 1994 David F. Hodnik and Chief Operating Officer RITA D. KAHLE Vice President-Finance March 23, 1994 Rita D. Kahle (Principal Financial Officer) Lawrence R. Bowman, Mark Jeronimus, Directors Howard J. Jung, John E. Kingrey, Ray W. Osborne, Don S. Williams, Jon R. Weiss and James R. Williams *By DAVID F. HODNIK David F. Hodnik *By RITA D. KAHLE March 23, 1994 Rita D. Kahle *Attorneys-in-fact 27 Item 14(a). Index To Financial Statements And Financial Statement Schedules Page(s) Independent Auditors' Report F-2 Balance Sheets at December 31, 1993 and 1992 F-3 Statements of Earnings for each of the three years in the period ended December 31, 1993 F-5 Statements of Member Dealers' Equity for each of the three years in the period ended December 31, 1993 F-6 Statements of Cash Flows for each of the three years in the period ended December 31, 1993 F-7 Notes to Financial Statements F-8 Financial Statement Schedules for each of the three years in the period ended December 31, 1993: V--Property, plant and equipment F-16 VI--Accumulated depreciation and amortization of property, plant and equipment F-17 VIII--Valuation and qualifying accounts -- Allowance for doubtful accounts F-18 All other 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 financial statements or the notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Ace Hardware Corporation: We have audited the balance sheets of Ace Hardware Corporation as of December 31, 1993 and 1992, and the related statements of earnings, member dealers' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 financial statements referred to above present fairly, in all material respects, the financial position of Ace Hardware Corporation at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK Chicago, Illinois January 31, 1994 F-2 ACE HARDWARE CORPORATION BALANCE SHEEET December 31, 1993 and 1992 ASSETS
1993 1992 (000's omitted) Current assets: Cash $ 4,142 $ 2,144 Receivables: Dealers 183,493 170,137 Others 29,831 24,287 213,324 194,424 Less Allowance for doubtful receivables (720) (700) Net receivables 212,604 193,724 Inventories (Note 2) 263,576 213,477 Prepaid expenses and other current assets 6,869 6,517 Total current assets 487,191 415,862 Property and equipment (Notes 4 and 9): Land 13,673 13,673 Buildings and improvements 131,794 128,838 Warehouse equipment 47,146 48,840 Office equipment 48,842 42,171 Manufacturing equipment 12,012 11,783 Transportation equipment 12,508 11,414 Leasehold improvements 6,553 6,495 Construction in progress 2,319 120 274,847 263,334 Less accumulated depreciation and amortization (108,710) (96,689) Net property and equipment 166,137 166,645 Other assets 14,160 12,169 $ 667,488 $ 594,676 See accompanying notes to financial statements.
F-3 ACE HARDWARE CORPORATION BALANCE SHEETS December 31, 1993 and 1992 LIABILITIES AND MEMBER DEALERS' EQUITY
1993 1992 (000's omitted) Current Liabilities: Current installments of long-term debt (Note 4) $ 10,707 $ 1,389 Short-term borrowings (Note 3) 38,500 56,000 Accounts payable 234,190 181,105 Patronage dividends payable in cash (Note 5) 25,766 27,538 Patronage refund certificates payable (Note 5) 11,059 17,198 Accrued expenses 33,682 28,680 Total current liabilities 353,904 311,910 Long-term debt (Note 4) 71,286 51,696 Patronage refund certificates payable (Note 5) 56,270 55,389 Member dealers' equity (Notes 5 and 8): Class A Stock of $1,000 par value 3,946 4,060 Class B Stock of $1,000 par value 6,499 6,499 Class C Stock of $100 par value 153,155 139,014 Class C Stock of $100 par value, issuable to dealers for patronage dividends 19,064 20,301 Additional stock subscribed, net 613 797 Retained earnings 5,622 7,553 Contributed capital 3,295 3,295 192,194 181,519 Less: Treasury stock, at cost (6,166) (5,838) Total member dealers' equity 186,028 175,681 Commitments (Notes 6 and 9) -- -- $ 667,488 $ 594,676 See accompanying notes to financial statements.
F-4 ACE HARDWARE CORPORATION STATEMENTS OF EARNINGS Year Ended December 31,
1993 1992 1991 (000's omitted) Net sales $ 2,017,763 $ 1,870,625 $ 1,704,203 Cost of sales 1,867,326 1,723,017 1,569,871 Gross Profit 150,437 147,608 134,332 Operating expenses: Warehouse and distribution 31,650 32,291 28,981 Selling, general and administration 54,378 48,451 44,438 Total operating expenses 86,028 80,742 73,419 Operating income 64,409 66,866 60,913 Interest expense (Note 11) (9,798) (8,380) (7,010) Other income, net (Note 11) 2,481 2,281 5,254 Earnings before patronage dividends 57,092 60,767 59,157 Patronage dividends 59,023 63,207 57,729 Net earnings $ (1,931) $ (2,440) $ 1,428 See accompanying notes to financial statements.
F-5 ACE HARDWARE CORPORATION STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended December 31, 1993 (000's omitted)
Class C Stock Issuable to Dealers for Additional Class A Class B Class C Patronage Stock Stock Stock Stock Dividends Subscribed* Balance at December 31, 1990 $ 4,244 $ 6,499 $ 119,496 $ 16,322 $ 1,308 Earnings before patronage dividends -- -- -- -- -- Net payments on subscriptions -- -- -- -- 1,526 Stock issued 287 -- 17,800 (16,322) (1,765) Stock repurchased -- -- -- -- -- Stock retired (366) -- (7,213) -- -- Stock issuable as patronage dividends -- -- -- 14,841 -- Patronage dividends payable -- -- -- -- -- Balance at December 31, 1991 $ 4,165 $ 6,499 $ 130,083 $ 14,841 $ 1,069 Earnings before patronage dividends -- -- -- -- -- Net payments on subscriptions -- -- -- -- 1,302 Stock issued 224 -- 16,191 (14,841) (1,574) Stock repurchased -- -- -- -- -- Stock retired (329) -- (7,260) -- -- Stock issuable as patronage dividends -- -- -- 20,301 -- Patronage dividends payable -- -- -- -- -- Balance at December 31, 1992 $ 4,060 $ 6,499 $ 139,014 $ 20,301 $ 797 Earnings before patronage dividends -- -- -- -- -- Net payments on subscriptions -- -- -- -- 1,049 Stock issued 157 -- 21,377 (20,301) (1,233) Stock repurchased -- -- -- -- -- Stock retired (271) -- (7,236) -- -- Stock issuable as patronage dividends -- -- -- 19,064 -- Patronage dividends payable -- -- -- -- -- Balance at December 31, 1993 $ 3,946 $ 6,499 $ 153,155 $ 19,064 $ 613 * Additional stock subscribed is comprised of the following amounts at December 31, 1991, 1992 and 1993:
1991 1992 1993 Class A Stock . . . . . . . . . $ 219 $ 185 $ 223 Class B Stock . . . . . . . . . -- -- -- Class C Stock . . . . . . . . . 2,876 2,184 1,952 3,095 2,369 2,175 Less unpaid portion . . . . . . 2,026 1,572 1,562 $1,069 $ 797 $ 613
Retained Contributed Treasury Earnings Capital Stock Total Balance at December 31, 1990 $ 8,565 $ 3,295 $ (5,166) $ 154,563 Earnings before patronage dividends 59,157 -- -- 59,157 Net payments on subscriptions -- -- -- 1,526 Stock issued -- -- -- -- Stock repurchased -- -- (7,947) (7,947) Stock retired -- -- 7,579 -- Stock issuable as patronage dividends -- -- -- 14,841 Patronage dividends payable (57,729) -- -- (57,729) Balance at December 31, 1991 $ 9,993 $ 3,295 $ (5,534) $ 164,411 Earnings before patronage dividends 60,767 -- -- 60,767 Net payments on subscriptions -- -- -- 1,302 Stock issued -- -- -- -- Stock repurchased -- -- (7,893) (7,893) Stock retired -- -- 7,589 -- Stock issuable as patronage dividends -- -- -- 20,301 Patronage dividends payable (63,207) -- -- (63,207) Balance at December 31, 1992 $ 7,553 $ 3,295 $ (5,838) $ 175,681 Earnings before patronage dividends 57,092 -- -- 57,092 Net payments on subscriptions -- -- -- 1,049 Stock issued -- -- -- -- Stock repurchased -- -- (7,835) (7,835) Stock retired -- -- 7,507 -- Stock issuable as patronage dividends -- -- -- 19,064 Patronage dividends payable (59,023) -- -- (59,023) Balance at December 31, 1993 $ 5,622 $ 3,295 $ (6,166) $ 186,028 See accompanying notes to financial statements.
F-6 ACE HARDWARE CORPORATION STATEMENTS OF CASH FLOWS Year Ended December 31,
(000's omitted) Operating Activities: 1993 1992 1991 Earnings before patronage dividends $ 57,092 $ 60,767 $ 59,157 Patronage dividends (59,023) (63,207) (57,729) Net Earnings (1,931) (2,440) 1,428 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 16,156 14,817 13,086 Loss (Gain) on sale of property and equipment 460 507 (3,880) Changes in operating assets and liabilities: Increase in accounts receivable, net (18,880) (32,783) (9,002) Increase in inventories (50,099) (2,091) (34,571) Increase in prepaids and other current assets (352) (632) (235) Increase (Decrease) in accounts payable and accrued expenses 58,087 (2,237) 1,202 Net Cash Provided by (Used for) Operating Activities 3,441 (24,859) (31,972) Investing Activities: Purchase of property, plant and equipment (16,346) (34,582) (37,851) Proceeds from sale of property and equipment 238 83 10,878 Increase in other assets (1,991) (3,831) (1,202) Net Cash Used in Investing Activities (18,099) (38,330) (28,175) Financing Activities: (Payments of) Proceeds from short-term borrowings (17,500) 34,000 21,000 Proceeds from Notes Payable 30,000 20,000 27,000 Principal payments on long-term debt and patronage refund certificates (19,078) (24,582) (12,875) Patronage dividends payable in cash 25,766 27,538 26,864 Patronage refund certificates 12,728 14,598 15,176 Class C stock issuable to dealers for patronage dividends 19,064 20,301 14,841 Proceeds from sale of common stock 1,049 1,302 1,526 Repurchase of common stock (7,835) (7,893) (7,947) Payment of cash portion of patronage dividend (27,538) (26,864) (26,462) Net Cash Provided by Financing Activities 16,656 58,400 59,123 Increase (Decrease) in Cash and Cash Equivalents 1,998 (4,789) (1,024) Cash and Cash Equivalents at beginning of year 2,144 6,933 7,957 Cash and Cash Equivalents at end of year $ 4,142 $ 2,144 $ 6,933 See accompanying notes to financial statements.
F-7 ACE HARDWARE CORPORATION NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (a) The Company and Its Business 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 earnings in the form of patronage dividends to its member dealers based on their volume of merchandise purchases. (b) Cash Equivalents The Company considers all highly liquid investments with an original maturity of one month or less when purchased to be cash equivalents. (c) Receivables Receivables from dealers include amounts due from the sale of merchandise and special equipment used in the operations of dealers' businesses. Other receivables are principally amounts due from suppliers for promotional and advertising allowances. (d) Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined using the last-in, first-out method on substantially all inventories. (e) 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 generally are 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 Sum of years Office equipment 3-10 Various Manufacturing equipment 3-20 Straight line Transportation equipment 3-7 Straight line Leasehold improvements are generally amortized on a straight-line basis over the term of the respective leases. (f) 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. F-8 (2) Inventories Inventories consist primarily of merchandise inventories. Substantially all of the Company's inventory is valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the LIFO value of inventory was approximately $63,615,000 and $60,806,000 at December 31, 1993 and 1992, respectively. Indirect costs, consisting primarily of warehousing costs, are absorbed as inventory costs rather than period costs. (3) Short-Term Borrowings Short-term borrowings were utilized during 1993 and 1992. The maximum amount outstanding at any month-end during the period was $91,000,000 in 1993 and $69,000,000 in 1992. The weighted average interest rate was 3.56%, 4.1%, and 6.28% for the years ended December 31, 1993, 1992 and 1991, respectively. Short term borrowings outstanding as of December 31, 1993, 1992 and 1991 were $38,500,000, $56,000,000 and $22,000,000, respectively. The aggregate unused line of credit available at December 31, 1993, 1992 and 1991 was $69,000,000, $41,500,000 and $54,500,000, respectively. The aggregate compensating balances (not legally restricted) at December 31, 1993, 1992 and 1991 were $600,000, $850,000 and $664,000, respectively. (4) Long-Term Debt Long-term debt is comprised of the following: December 31,
1993 1992 (000's omitted) Industrial Development Revenue and Variable Rate Bonds: $125,000 payable quarterly through December 1, 1996 with interest at 65% of the prime rate $ 1,500 $ 2,000 $8,250,000 due on February 1, 1994 with interest payable monthly beginning September 1, 1988 at variable rates ranging from 1.95% to 4.95% 8,250 8,250 Notes Payable: $20,000,000 due in quarterly installments of $540,500, commencing July 1, 1994 with interest payable quarterly beginning January 1, 1992 at a fixed rate of 8.74% 20,000 20,000 $20,000,000 due in quarterly installments of $952,400, commencing January 1, 1995 with interest payable quarterly beginning October 1, 1992 at a fixed rate of 6.89% 20,000 20,000 $30,000,000 due in semi-annual installments of $2,000,000, commencing June 22, 2001 with interest payable quarterly beginning December 22, 1993 at a fixed rate of 6.47% 30,000 -- Liability under capitalized leases (see Note 9) 1,197 1,632 Installment notes with maturities through 1997 with various interest rates 1,046 1,203 81,993 53,085 Less current installments 10,707 1,389 $ 71,286 $ 51,696
F-9 Prime interest rates in effect were 6.0% in 1993 and ranged from 6.0% to 6.5% in 1992. Aggregate maturities of long-term debt are $10,707,000, $7,283,000, $6,965,000, $6,034,000 and $5,972,000 in 1994 through 1998, respectively. Under the most restrictive covenants of the loan agreements the Company must not permit its working capital to be less than $33,000,000 and maintain current assets of at least 110% of current liabilities. The fair value of the Company's debt based upon discounting of future cash flows did not materially vary from the carrying value of such debt as of December 31, 1993. (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. For the years ended December 31, 1993 and 1992, 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. For the year ended December 31, 1991, the amount of patronage dividends to be remitted in cash depended upon the level of dividends earned by each member outlet, varying from 20% on the total dividends under $2,000 and increasing by 5% on total dividends for each subsequent $1,000 earned to a maximum of 40% on total dividends exceeding $5,000. All amounts exceeding the cash portions, as defined above, will be distributed in the form of Class C $100 par value stock, to a maximum based upon the current year's purchase volume or $20,000 ($10,000 in 1991), whichever is greater, and thereafter in a combination of additional cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied toward payment of principal and interest on any balances outstanding for approved exterior signage and in 1994 toward the payment of principal and interest on any outstanding computer equipments financing. The patronage dividend composition for 1993, 1992 and 1991 follows:
Subordinated Class Patronage Total Cash Refund C Financing Patronage Portion Certificates Stock Deductions Dividends (000's omitted) 1993 $25,766 $12,728 $19,064 $1,465 $59,023 1992 27,538 14,598 20,301 770 63,207 1991 26,864 15,176 14,841 848 57,729
Patronage dividends are allocated on a calandar year basis with issuance in the following year. The patronage refund certificates outstanding at December 31, 1993 are payable as follows:
Interest January 1, Amount Rate (000's omitted) 1994 $ 1,120 7.5 % 1995 11,292 7.0 1996 13,041 7.0 1997 14,764 6.25 1998 14,384 6.0 1999 12,728 6.0
F-10 On January 1, 1993 the Company prepaid a portion of the patronage refund certificates payable on January 1, 1994. The remaining patronage refund certificates payable on January 1, 1994 and a portion of the patronage refund certificates payable on January 1, 1995 will be paid in January 1994 and accordingly, are classified as current liabilities in the accompanying December 31, 1993 balance sheet. (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 December 31, 1993, plan assets were held primarily in group annuity and guaranteed interest contracts, equities and mutual funds. Pension income for the years 1993, 1992 and 1991 included the following components:
1993 1992 1991 (000's omitted) Service cost - benefits earned during the period $ 292 $ 338 $ 372 Interest cost on projected benefit obligation 752 722 602 Actual return on plan assets (1,104) (975) (1,120) Net amortization and deferral (169) (313) (233) Net periodic pension income $ (229) $ (228) $ (379)
The following table sets forth the funded status of the plans and amounts recognized in the Company's Balance Sheet at December 31, 1993 and 1992 (September 30th measurement date):
1993 1992 (000's omitted) Accumulated benefit obligation, including vested benefits of $8,500,000 and $8,009,000 $ 9,515 $ 9,251 Plan assets at fair value $ 14,023 $ 13,364 Projected benefit obligation for service rendered to date 10,897 10,451 Plan assets in excess of projected benefit obligation $ 3,126 $ 2,913 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 1,544 1,611 Remaining unrecognized net asset being amortized over participants average remaining service period (2,148) (2,318) Prepaid pension cost included in other assets $ 2,522 $ 2,206
F-11 The weighted average discount rate and rate of increase in future compensation used in determining the actuarial present value of the projected benefit obligation was 7.5% and 6.0%, respectively, in 1993 and 1992. The related expected long-term rate of return was 8.5% in 1993 and 9% in 1992. The Company also participates in several multi-employer plans covering union employees. Amounts charged to expense and contributed to the plans totaled approximately $275,000, $426,000, and $485,000 in 1993, 1992 and 1991, respectively. The Company's profit sharing plan contribution for the years ended 1993, 1992, and 1991 was approximately $8,690,000, $7,374,000 and $6,824,000, respectively. The Company has no significant post-retirement benefit liabilities as defined under Financial Accounting Standard No. 106. (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. Accordingly, provisions for income taxes have been historically insignificant and are generally comprised primarily of state income taxes. The 1993 and 1992 provisions for federal income taxes were $177,000 and $299,000, respectively, and state income taxes were $267,000 and $126,000, repectively. As described in Note 11, the Company completed a sale and leaseback of its Los Angeles, California distribution facility in 1991. The 1991 tax provision totals $1,158,000 for federal income taxes and $236,000 for state income taxes. The Company made tax payments of $357,000, $728,000, and $5,017,000 during 1993, 1992 and 1991, respectively. (8) Member Dealers' Equity The Company's founders for many years contemplated that the ownership of the Company would eventually be with the Company's member dealers. Prior to November 30, 1976, dealers deposited monies to the Ace Dealer's Perpetuation Fund for the purpose of accumulating funds for the purchase of stock when such ownership became available. The Company registered its stock with the Securities and Exchange Commission on October 1, 1976 and existing dealers who subscribed for stock applied their deposits toward payment of such shares. The small number of dealers who did not subscribe for shares had their respective deposits refunded during 1977. F-12 The Company's classes of stock are described below: Number of Shares at December 31,
1993 1992 Class A Stock, Voting, redeemable at par value -- Authorized 10,000 10,000 Issued and outstanding 3,946 4,060 Class B Stock, nonvoting, redeemable at not less than twice par value -- Authorized 6,500 6,500 Issued 6,499 6,499 Outstanding 3,416 3,580 Treasury stock 3,083 2,919 Class C Stock, nonvoting, redeemable at not less than par value -- Authorized 2,000,000 2,000,000 Issued and outstanding 1,531,549 1,390,137 Issuable as patronage dividends 190,635 203,013 Additional Stock Subscribed: Class A Stock 223 185 Class B Stock -- -- Class C Stock 19,520 21,840
At December 31, 1993 and 1992 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. F-13 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 1992 and 1993 affecting treasury shares follow: Shares Held in Treasury
Class A Class B Class C Balance at December 31, 1991 -- 2,767 -- Stock issued -- -- -- Stock repurchased 329 152 72,600 Stock retired (329) -- (72,600) Balance at December 31, 1992 -- 2,919 -- Stock issued -- -- -- Stock repurchased 271 164 72,359 Stock retired (271) -- (72,359) Balance at December 31, 1993 -- 3,083 --
(9) Commitments Leased property under capital leases included under "Property and Equipment" in the balance sheets as follows:
December 31, (000's omitted) 1993 1992 Buildings and improvements $ 3,422 $ 3,422 Data processing equipment 723 723 Less: Accumulated depreciation and amortization (3,291) (2,973) $ 854 $ 1,172
F-14 The Company rents buildings and warehouse, office and certain other equipment under operating and capital leases. At December 31, 1993 annual minimum rental commitments under leases that have initial or remaining noncancelable terms in excess of one year were as follows: Year Ending Capital Operating December 31, Leases Leases (000's omitted) 1994 $ 518 $ 8,917 1995 510 6,548 1996 271 4,982 1997 -- 3,689 1998 -- 3,110 Thereafter -- 26,191 Total minimum lease payments $1,299 $53,437 Less amount representing interest 102 Present value of total minimum lease payments $1,197 All leases expire prior to 2009. 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 $21,444,000, $21,073,000 and $17,753,000 in 1993, 1992 and 1991, respectively. Rent expense includes $4,282,000, $3,706,000 and $3,289,000 in contingent rentals paid in 1993, 1992 and 1991, respectively, primarily for transportation equipment mileage. (10) Supplementary Income Statement Information Gross media expense, prior to income offsets from dealers and suppliers, amounting to $48,293,000, $47,813,000 and $46,167,000 were charged to operations in 1993, 1992, and 1991, respectively. (11) Interest Expense and Other Income, Net Capitalized interest totaled $29,000, $836,000 and $417,000 in 1993, 1992 and 1991, respectively. Interest paid was $10,670,000, $9,149,000 and $6,409,000 in 1993, 1992 and 1991, respectively. In November 1991, the Company completed a sale and leaseback of its Los Angeles, California facility resulting in a gain of $2.5 million, net of $1.4 million in federal and state income taxes. The facility was leased back for a term which expired on October 31, 1992. The gain on the sale and leaseback is included in other income for the year ended December 31, 1991. The capital gain from the sale constitutes nonpatronage-sourced income and is not available for distribution as patronage dividends. F-15 Schedule V ACE HARDWARE CORPORATION PROPERTY, PLANT AND EQUIPMENT (000's omitted)
Balance at Balance Beginning Additions Retirements Other at End Description of Period at Cost or Sales Changes of Period Year ended December 31, 1991: Land $ 14,915 $ 586 $ 3,328 $ -- $ 12,173 Buildings and improvements 84,814 12,157 5,548 4,535 95,958 Warehouse equipment 42,619 5,688 875 -- 47,432 Office equipment 33,074 6,488 1,327 3 38,238 Manufacturing equipment 11,992 507 -- 41 12,540 Transportation equipment 9,219 599 177 -- 9,641 Leasehold improvements 5,243 8 36 205 5,420 Construction in progress 4,784 11,818 -- (4,784) 11,818 $206,660 $ 37,851 $ 11,291 $ -- $ 233,220 Year Ended December 31, 1992: Land $ 12,173 $ 1,500 $ -- $ -- 13,673 Buildings and improvements 95,958 21,387 191 11,684 128,838 Warehouse equipment 47,432 3,406 1,998 -- 48,840 Office equipment 38,238 4,899 1,100 134 42,171 Manufacturing equipment 12,540 216 973 -- 11,783 Transportation equipment 9,641 1,950 177 -- 11,414 Leasehold improvements 5,420 1,104 29 -- 6,495 Construction in progress 11,818 120 -- (11,818) 120 $233,220 $ 34,582 $ 4,468 $ -- $ 263,334 Year ended December 31, 1993: Land $ 13,673 $ -- $ -- $ -- $ 13,673 Buildings and improvements 128,838 3,474 519 1 131,794 Warehouse equipment 48,840 1,180 2,874 -- 47,146 Office equipment 42,171 7,394 723 -- 48,842 Manufacturing equipment 11,783 229 -- -- 12,012 Transportation equipment 11,414 1,393 299 -- 12,508 Leasehold improvements 6,495 356 417 119 6,553 Construction in progress 120 2,320 1 (120) 2,319 $263,334 $ 16,346 $ 4,833 $ -- $ 274,847
F-16 Schedule VI ACE HARDWARE CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (000's omitted)
Balance at Balance Beginning Additions Retirements Other at End Description of Period at Cost or Sales Changes of Period Year ended December 31, 1991: Buildings and improvements $ 14,640 $ 2,408 $ 2,055 $ -- $ 14,993 Warehouse equipment 28,904 3,732 848 -- 31,788 Office equipment 20,499 4,476 1,293 -- 23,682 Manufacturing equipment 5,246 931 -- -- 6,177 Transportation equipment 4,520 1,031 60 -- 5,491 Leasehold improvements 3,146 508 35 -- 3,619 $ 76,955 $13,086 $ 4,291 $ -- $ 85,750 Year Ended December 31, 1992: Buildings and improvements $ 14,993 $ 2,949 $ 41 $ -- $ 17,901 Warehouse equipment 31,788 3,781 1,918 -- 33,651 Office equipment 23,682 5,365 1,066 -- 27,981 Manufacturing equipment 6,177 941 718 -- 6,400 Transportation equipment 5,491 1,182 107 -- 6,566 Leasehold improvements 3,619 599 28 -- 4,190 $ 85,750 $14,817 $ 3,878 $ -- $ 96,689 Year ended December 31, 1993: Buildings and improvements $ 17,901 $ 3,507 $ 175 $ -- $ 21,233 Warehouse equipment 33,651 3,533 2,682 -- 34,502 Office equipment 27,981 6,117 665 -- 33,433 Manufacturing equipment 6,400 915 -- -- 7,315 Transportation equipment 6,566 1,379 255 -- 7,690 Leasehold improvements 4,190 705 358 -- 4,537 $ 96,689 $16,156 $ 4,135 $ -- $ 108,710
F-17 Schedule VIII ACE HARDWARE CORPORATION VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL ACCOUNTS (000's omitted)
Provision Collections Uncollectible Balance at for Losses on Receivables Accounts Balance Beginning Charged to Previously Written at End Description of Period Income Written Off Off Of Period 1991 $650 676 26 (692) $660 1992 $660 1,387 20 (1,367) $700 1993 $700 1,412 46 (1,438) $720
F-18 INDEX TO EXHIBITS Exhibits Enclosed Description 21 Subsidiaries of the Registrant. 24 Powers of Attorney. Exhibits Incorporated by Reference 2 Not Applicable 3-A Restated Certificate of Incorporation of the Registrant dated September 18, 1974 filed as Exhibit 3-A to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on March 30, 1976 and incorporated herein by reference. 3-B By-laws of the Registrant as amended on January 24, 1994 included as Appendix A to the Prospectus constituting a part of Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) filed on or about March 23, 1994 and incorporated herein by reference. 3-C Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 19, 1976 filed as Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on June 10, 1976 and incorporated herein by reference. 3-D Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 21, 1979 filed as Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on May 23, 1979 and incorporated herein by reference. 3-E Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 7, 1982 filed as Exhibit 3-G to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 3-F Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 5, 1987 filed as Exhibit 3-F to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated by reference. 3-G Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 16, 1989 filed as Exhibit 4-G to Post Effective Amendment No. 1 to the Registrant's S-2 Registration Statement filed on or about March 20, 1990 and incorporated by reference. 4-A Specimen copy of Class B stock certificate as revised as of November, 1984, filed as Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 15, 1985 and incorporated herein by reference. 4-B Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated herein by reference. E-1 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 or after January 1, 1993, adopted by the Board of Directors of the Registrant on December 8, 1992, filed as Exhibit 4-M 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. 9 No Exhibit 10-A Copy of Retirement Benefits Replacement Plan of the Registrant, restated as of January 1, 1989, filed as Exhibit 10-A to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-B Copy of resolutions establishing 1990 Incentive Compensation Plan for Executives and amending the 1989 Incentive Compensation Plans for Executives of the Registrant adopted by its Board of Directors on January 30, 1991 and filed as Exhibit 10-F to Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-C Copy of resolutions amending the 1990 Incentive Compensation Plans for Executives and establishing the Executive Supplemental Benefit Plans of the Registrant adopted by its Board of Directors on December 11, 1990 and filed as Exhibit 10-G to Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-D Copy of amendment to the Executive Supplemental Benefits Plan of the Registrant adopted by its Board of Directors on July 30, 1991 filed as Exhibit 10-E to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-E Copy of amendment to the Executive Supplemental Benefits Plan of the Registrant adopted by its Board of Directors on December 9, 1991 filed as Exhibit 10-F to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. E-2 10-F Copy of amendment to the 1990 Incentive Compensation Plan for Executives of the Registrant, filed as Exhibit 10-H to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-G Copy of the "Ace Hardware Corportation Officer's (sic) Incentive Compensation Plan" as amended and restated effective January 1, 1994, filed as Exhibit 10-G to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-H Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and Paul Ingevaldson filed as Exhibit 10-I to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-I Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and David F. Hodnik filed as Exhibit 10-J to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-J Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and Roger E. Peterson filed as Exhibit 10-K to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-K Copy of Employment Agreement effective January 1, 1993 between Ace Hardware Corporation and William A. Loftus filed as Exhibit 10-L to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 22, 1993 and incorporated herein by reference. 10-L Copy of Loan Agreement with Anne Arundel County, Maryland dated December 1, 1981 securing 15-year floating rate industrial development revenue bonds in the principal sum of $9 million held by The Northern Trust Company, Chicago, Illinois, for itself and other participating lenders filed as Exhibit 10-A-k to Post-Effective Amendment No. 3 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on March 9, 1982 and incorporated herein by reference. 10-M Copy of Loan Agreement with Pulaski County, Arkansas dated July 1, 1988 securing a variable rate demand Industrial Development Revenue Refunding Bond with a maturity date of February 1, 1994 in the principal sum of $8,250,000.00 filed as Exhibit 10-V to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) filed on March 28, 1989 and incorporated herein by reference. E-3 10-N Copy of Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A Notes in the principal sum of $20,000,000.00 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-O Copy of Standard Form of Ace Hardware International Retail Merchant Agreement adopted in 1990, filed as Exhibit 10-A-q to Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-P Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P to Post-Effective Amendment No. 2 to the Registrant's form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-Q Copy of 6.89% Senior Series B notes in the aggregate principal sum of $20,000,000 issued July 29, 1992 with a maturity date of January 1, 2000 pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated September 27, 1991 and filed as Exhibit 10-A-r to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement on March 22, 1993 and incorporated herein by reference. 10-R Copy of 6.47% Senior Series A notes in the aggregate principal amount of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008, and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993, filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-S Assignment and Assumption dated October 22, 1992 of Lease dated August 31, 1992 with MTI Vacations, Inc. filed as Exhibit 10-A-s to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-T Copy of Amendment to the Executive Supplemental Benefit Plans of the Registrant adopted by its Board of Directors on March 17, 1992 and filed as Exhibit 10-A-t to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-U Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook, Illinois filed as Exhibit 10-A-u to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. E-4 10-V Copy of Fourth Amendment to Executive Supplemental Benefit Plans effective January 1, 1994 filed as Exhibit 10-V to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-W Copy of Ace Hardware Corporation Deferred Director Fee Plan as amended on June 8, 1993, filed as Exhibit 10-W to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-X Copy of Ace Hardware Corporation Deferred Compensation Plan January, 1994, filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the Registrants Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 11 No Exhibit. 12 No Exhibit. 13 No Exhibit. 16 Not Applicable. 18 No Exhibit. 22 Not Applicable. 23 Auditors' Consent, dated March 23, 1994, filed as Exhibit 24(a) to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) filed on or about March 23, 1994 and incorporated herein by reference. 27 No Exhibit. 28 Not Applicable. Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act. As of the date of the foregoing Report, no annual report for the Registrant's year ended December 31, 1993, nor any proxy soliciting materials for the Registrant's 1994 annual meeting have been sent to security holders. Copies of such Annual Report and proxy soliciting materials will subsequently be sent to security holders and furnished to the Securities and Exchange Commission. E-5 EX-21 2 EXHIBIT LISTING EXISTING SUBSIDIARIES Exhibit 21 ACE HARDWARE CORPORATION LIST OF SUBSIDIARIES (as of March 23, 1994) NAME UNDER STATE OF WHICH SUBSIDIARY SUBSIDIARY INCORPORATION DOES BUSINESS Ace Insurance Agency, Inc. Illinois Ace Insurance Agency, Inc. AHC Realty Illinois AHC Realty Corporation EX-24 3 POWER OF ATTORNEY EXHIBIT Exhibit 24 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 RITA D. KAHLE, 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 23rd day of March, 1994. LAWRENCE R. BOWMAN Lawrence R. Bowman MARK JERONIMUS RAY W. OSBORNE Mark Jeronimus Ray W. Osborne HOWARD J. JUNG JON R. WEISS Howard J. Jung Jon R. Weiss JOHN E. KINGREY DON S. WILLIAMS John E. Kingrey Don S. Williams RICHARD E. LASKOWSKI JAMES R. WILLIAMS Richard E. Laskowski James R. Williams, Jr. -----END PRIVACY-ENHANCED MESSAGE-----