We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then
warehouse large quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products
that we distribute to our members from our warehouses are sold at a price that we establish ("dealer
cost"), to which a 10% adder ("handling charge") is generally added. In fiscal year 2001, warehouse sales
were 72% of our total sales and bulletin sales were 3% of our total sales with the balance of 25% being
direct shipment sales.
The following is a breakdown of our total warehouse sales among various general classes of merchandise
for each of the past three fiscal years:
Class of Merchandise
2001 2000 1999
Paint, cleaning and related
supplies
21% 20% 20%
Plumbing and heating
supplies
15% 15% 15%
Hand and power tools
14% 14% 14%
Garden, rural equipment and related supplies
14% 14% 13%
Electrical supplies
12% 12% 13%
General
hardware
11% 12% 12%
Sundry
8% 7% 7%
Housewares and
appliances
5% 6% 6%
We sponsor two major hardware conventions each year at various locations. We invite dealers and
vendors to attend, and dealers generally place orders that are delivered before the next convention.
During the convention, there are exhibits of regular merchandise, new merchandise and seasonal
merchandise. Lawn and garden supplies and exterior paints are seasonal merchandise in many parts of
the country. Some types of goods such as holiday decorations are also seasonal.
Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment
sales involve sales where the merchandise is shipped directly to dealers by vendors. Bulletin sales
involve our special bulletin offers where we order specific merchandise after dealers sign up to buy particular
quantities of it.
Dealers place direct shipment orders with our vendors using special purchase orders. The vendors
then bill us for these orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers
with an adder ("handling charge") that varies according to the following schedule:
Invoice Amount
Adder (Handling Charge)
$ 0.00 to $
999.99
2.00%
$1,000.00 to
$1,999.99
1.75%
$2,000.00 to
$2,999.99
1.50%
$3,000.00 to
$3,999.99
1.25%
$4,000.00 to
$4,999.99
1.00%
$5,000.00 to
$5,999.99
.75%
$6,000.00 to
$6,999.99
.50%
$7,000.00 to
$7,999.99
.25%
$8,000.00 and
over
.00%
We make bulletin sales based upon notices from dealers that they wish to participate in one of our
special bulletin offers. Generally, we notify dealers of our intention to purchase certain products for
bulletin shipment. We then purchase these products in the quantities that the dealers order. When the
bulletin shipment arrives, we do not place it into warehouse inventory. Rather, we break it up into smaller
quantities and deliver it to the dealers who ordered it. We generally apply a 6% adder ("handling charge")
to this category of sales.
We typically apply an additional adder of 3% to merchandise that is exported outside of the United
States, its territories and possessions. Ace dealers located outside of the United States, its territories and
possessions who are not subject to the additional 3% adder are assessed a flat 2% adder on all direct shipment
sales. We maintain inventories to meet only normal resupply orders. Resupply orders help keep our
inventories at normal levels. Usually these resupply orders are filled within one day of receipt. Bulletin
orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog normal
resupply orders and therefore, no significant backlog exists at any point in time.
Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific
products that we assign to a "competitive price sales" classification. These products are delivered from our
warehouses with or without the addition of freight charges and with an adder (if any) of up to 5%, determined
on an item by item basis. Management has the authority to add and withdraw items from the STOP
program, and to establish reasonable minimum or multiple item purchase requirements for this program.
We do not make any patronage dividend distributions for purchases under the STOP program. We do,
however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable,
in determining the forms of patronage dividend distributions. (See the heading "Business," subheading
"Forms of Patronage Dividend Distributions.")
Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific
vendors for direct shipment delivery. No adder or national advertising assessment applies to these
purchases. (See heading "Business," subheading "Patronage Dividend Determinations and Allocations.")
In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also
provide many special services. We offer these services at established charges. These services include
inventory control systems, as well as price and bin ticketing. We also provide dealers with a checklist
service so that they can have current information about the merchandise that we offer. We also provide a
choice of ongoing educational and training programs for dealers. (See the heading "Business," subheading
"Special Charges and Assessments.")
Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program
so that dealers can purchase different types of insurance coverage. This program offers "all risk" property
insurance and business interruption, crime, liability and workers' compensation insurance, in addition to
medical insurance for store employees. AHC Realty Corporation, another wholly owned subsidiary, offers
broker services to dealers who want to buy or sell stores. Loss Prevention Services, Inc., another wholly
owned subsidiary, offers security training and other loss prevention services to dealers.
Our wholly owned subsidiary, Ace Hardware Canada, Limited, operates as a wholesaler of hardware
and related merchandise in Canada. It has two distribution facilities located in Calgary, Alberta
and Brantford, Ontario. In November 2001, the Company announced the closure of the Calgary
facility. Ace Hardware Canada, Limited generated less than one percent (1%) of our consolidated
revenue during fiscal year 2001.
We operate our Company-owned retail hardware stores through our wholly owned subsidiary Ace
Corporate Stores, Inc. For further information about these stores, please see the heading "Properties."
We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights,
Illinois. These factories are the main source of the paint products that we offer for sale. We operate our
paint manufacturing business as a separate Division of our Company for accounting purposes. We purchase
all our raw materials for paint manufacturing from outside sources. We have had adequate sources of raw
materials in the past, and we do not currently expect any shortages of raw materials that would have a major
impact on our paint operations. Paint manufacturing is seasonal in the sense that greater paint sales occur
from April through September. Historically, our need to comply with environmental laws and regulations
has not had a major effect on our ability to conduct our paint manufacturing operations.
Our business, both hardware wholesaling and paint manufacturing, is not dependent on any major suppliers
and we feel that seasonal fluctuations do not have a major effect on our operations. For more discussion of our
business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."
We also offer services to members that relate to the operation of their retail businesses. We provide
these services (such as advertising, merchandising and training programs) to assist our members and in
some cases, to maximize our centralized buying power.
Strategic Planning
We have a strategic planning process that results in goals, objectives and programs that we want to
develop in the future for our Company and our members. Because strategic plans deal with the future,
this discussion of them contains "forward looking statements," which are based on our current expectations.
The actual results of our efforts can differ greatly from the results that we might desire. We believe
that we have the facilities, the employees and the resources for ongoing success as we implement our
plans and programs, but the future is difficult to forecast, especially areas such as revenues, costs, margins
and profits which are influenced by many factors. Some of these factors are discussed below.
The effects of future growth in the hardware and hardlines-related industries are uncertain. By "hardlines-related
industries" we mean home center, do-it-yourself, rental and commercial/industrial categories. The future
condition of the economy is also uncertain, when viewed domestically, internationally or in specific geographical
regions. Some other uncertainties that could affect our plans include possible future changes in merchandise
and inventory prices, and the effect of increasingly intense competition. There could be potential shifts in market
demand for some products. Lawsuits and laws, especially laws dealing with franchising, licensing, importing,
exporting and environmental matters could affect our future business. We cannot predict whether these uncertainties
might cause future costs or liabilities or have some other effect on our future ability to achieve our plans.
Through our ongoing strategic planning process we have focused our plans around four segments for
future growth and success in our competitive industry. These four segments are: Retail Success (store operations),
Wholesale Success (distribution), International growth and new member growth. Retail success for our
dealers is a primary objective because, in our opinion, it drives both their retail performance and our wholesale
growth. We have therefore increased our efforts to assist members in "retail success initiatives," which are
designed to improve their retail performance and competitiveness. These retail success initiatives include retail
goals that we urge dealers to strive for within their stores and in locally competitive markets. These goals do
not, however, impose major restrictions or requirements on members. Our minimum requirements for the
acceptance of new members are outlined in the current Membership Agreement and Supplement and in the
Member Operational Requirements that apply under that Agreement. The Operational Requirements do
require that, within one year, the member must make us the primary source of supply and terminate any
previous participation in the program of any other major hardware wholesaler. There are currently no general
requirements (apart from special voluntary programs) where members have to make particular percentages of
purchases from us or have to achieve minimum retail performance levels, such as sales dollars per square foot.
Our current strategic initiative, Vision 21, focuses on becoming a world class organization through encouraging
dealers to adopt certain merchandising, marketing and operational practices that are supported by some of our
most successful dealers to improve the Company's and the dealers' overall competitiveness and efficiency. The
cornerstones to Vision 21 are to improve retailer's sales and profits, streamline our processes, bring wholesale
and retail together as one Ace team and provide ultimate customer satisfaction. Vision 21 goals include minimizing
disparities between retail and wholesale, developing dealer-friendly procedures that take duplication
and costs out of dealers' operations, achieving consistent implementation of programs more rapidly and
improving the dealers' financial performance and their ability to pursue new stores and store expansions. As
retailers become Vision 21 retailers they are afforded various benefits to assist them to succeed at retail.
Special Charges and Assessments
We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to
1.50% of their purchases (except purchases of LTL Plus products and certain hardware and software computer
systems), with minimum and maximum yearly assessments of $2,223.00 and $6,800.00, respectively, (based on
purchases) for each store location. We grant exemptions from these assessments and make various adjustments
to them for stores located outside the continental United States and for new stores during their start up year,
and for stores operating under an agreement that does not permit them to use "Ace" or "Ace Hardware". For
the year 2002, we will also impose a flat charge of $100.00 on May 1, 2002 and November 1, 2002 per store location
to pay for national sales promotions for Memorial Day and the day after Thanksgiving. The amount of our
national advertising assessment can be changed from time to time by our Board of Directors. We can also impose
assessments at a flat monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of
a dealer's annual purchases. Regional advertising assessments are subject to the same minimum and maximum
amounts as the National Advertising assessment.
Every two weeks, we bill the member store for a special low volume account service charge of $75 if
annual purchases from us are less than $50,000. We will bill the member store for a special low volume
account service charge of $60 per bi-weekly billing statement period if purchases from us during such
period are less than $5,700.00. The low volume service charges that we bill to the store in a specific year
are automatically refunded if that store's total purchases increase to over $148,200 during the year. The
store is excused from this low volume account service charge during the first 12 months that it is a
member. There are some exceptions to our low volume account service charges that are described below:
1. Stores which purchase $148,200 of merchandise from us during the year, are given a credit on
the next billing statement for any low volume charges which we billed that store earlier in the
year. We then stop billing that store for low volume account service charges for the rest of the
year, even if its current purchases on a billing statement are less than $5,700; and
2. We do not bill low volume account service charges every two weeks if a store's sales volume with us
the year before was at our minimum ($148,200), but we will bill these charges in a lump sum to a
store's last statement of the year if that store does not reach our applicable minimum by that time.
An Ace store that falls below our minimum purchase levels can also be subject to termination.
We add a late payment service charge on any past due balance that we are owed for merchandise,
services, or for a stock subscription. The current rate for the late payment service charge is .77% per
bi-weekly statement period, except in Texas where the charge is .384% and Georgia where the charge is
.692%. We consider a past due balance to exist whenever we do not receive payment of the amount shown
as due on a billing statement within 10 days after the date of that statement. We can change the rate of
our late payment service charge from time to time.
Effective August, 2001, we assess members operating under a standard Membership Agreement a
mandatory monthly fee for Core Retail Services in the amount of $197 per month for all single stores or
parent stores and $67 per month for all branch stores located in the United States. Core Retail Services
consist of the following elements:
1. ACENET. This service is our primary communications vehicle with our members. It is an
electronic network that allows defective goods claims processing, product search online or
through a CD-ROM catalog, electronic communications, employee testing and training courses,
review and payment of retailer statements and numerous other applications.
2. Material Safety Data Sheet Subscription Service. This service provides members with access
24 hours per day and 7 days per week to information on the chemical ingredients of certain
products that we sell.
3. Ace Training Network. This service is one of our retail training programs. Each single store or
parent store is credited with 16 points per month and each branch store is credited with 11 points
per month. A single store or parent store is one that has purchased or subscribed for a share of
our Class A voting stock. A branch store is one whose membership involves only shares (or a
subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-laws).
A
store may use its points at any time to buy one of the training programs that we offer. If a
store does
not have enough points for the program that it
wants, it can use the points that it has and
be
billed the difference. Multiple stores and member groups can pool their points together
to purchase our training programs.
4. NRHA E-Tools. These include unlimited use of certain Internet-based services offered by
the National Retail Hardware Association (NRHA), including their Advanced Course in
Hardware Retailing, the Forte International Communications Survey and their Employee
Compensation Study.
5. Retail Pricing. This includes access to our national price shopping and ad data collected from
non-Ace stores, our suggested retail prices, our customized retail pricing strategy services and
catalog updates to our suggested retail prices.
Members operating under a Contractor agreement are assessed a mandatory monthly fee of $53 for
ACENET and the Material Safety Data Sheet Subsciption Service.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the
promotion, advertising and marketing of products and services that we sell. We have had the following
Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for our marks:
Registration
Description of Mark
Type of Mark Number
Expiration Date
"ACE HARDWARE" with winged
emblem
design
Service Mark 840,176 December 5, 2007
"ACE HARDWARE" with winged
emblem
design
Trademark 898,070
September 8, 2010
"THE PAINTIN' PLACE"
Service Mark 1,138,654 August 12, 2010
"PACE" with
design
Service Mark 1,208,887 September 14, 2002
"ACE HARDWARE" with winged
emblem
design
Trademark 1,277,581 May 15, 2004
"ACE HARDWARE" in stylized
lettering
design
Trademark 1,426,137 January 27,
2007
"ACE" in stylized lettering design Service Mark
1,464,025 November 3, 2007
"ACE HARDWARE" in stylized
lettering
design
Service Mark 1,486,528 April 26, 2008
"ACE HARDWARE AND
GARDEN CENTER" in stylized
lettering
design
Service Mark 1,487,216 May 3, 2008
"ACE NEW EXPERIENCE" in
stylized lettering design
Trademark 1,554,322 September 5,
2009
"ACE SEVEN STAR" in stylized
lettering
design
Trademark 1,556,389 September
19, 2009
"ACE BEST BUYS" in circle design Service Mark
1,560,250 October 10, 2009
"ACENET"
Service Mark 1,574,019 December 26, 2009
"ACE IS THE PLACE"
Service Mark 1,602,715 June 19, 2010
"LUB-E"
Trademark 1,615,386 October 2,
2010
"ASK ACE"
Service Mark 1,653,263 August 6, 2010
"ACE 2000"
Service Mark 1,682,467 April 7, 2002
"ACE" in stylized lettering design Trademark
1,683,538 April 12, 2002
"THE OAKBROOK COLLECTION"
in stylized lettering design
Trademark 1,707,986 August 18,
2002
"ACE HARDWARE BROWN BAG
BONANZA" with
design
Service Mark 1,761,277 April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT"
design
Service Mark 1,764,803 April 13, 2003
"CELEBRATIONS"
Service Mark 1,918,785 September 12, 2005
Repetitive Stylized "A" design Service Mark
1,926,798 October 10, 2005
"The NEW AGE OF ACE" design
Service Mark 1,937,008 November 21, 2005
"ACE RENTAL PLACE"
in stylized lettering design Service
Mark 1,943,140 December 19, 2005
"HELPFUL HARDWARE FOLKS"
Service Mark 1,970,828 April 30, 2006
"ACE HOME CENTER"
Service Mark 1,982,130 June 25, 2006
"SEALTECH"
Trademark 2,007,132 October 8,
2006
"GREAT FINISHES"
Trademark 2,019,696 November 26,
2006
"WOODROYAL"
Trademark 2,065,927 May 27, 2007
"ROYAL SHIELD"
Trademark 2,070,848 June 10,
2007
"ROYAL TOUCH"
Trademark 2,070,849 June 10,
2007
"QUALITY SHIELD"
Trademark 2,102,305 September
30, 2007
"QUALITY TOUCH"
Trademark 2,102,306 September
30, 2007
"STAINHALT"
Trademark 2,122,418 December 16,
2007
"ACE CONTRACTOR CENTER"
Service Mark 2,158,681 May 19, 2008
"NHS NATIONAL
HARDLINES SUPPLY"
Service Mark 2,171,775 July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY"
Service Mark 2,186,394 September 1, 2008
"THE OAKBROOK COLLECTION"
Trademark 2,187,586 September 8,
2008
"ACE GARDEN PLACE"
Service Mark 2,227,729 March 2, 2009
"ACE ROYAL"
Trademark 2,237,981 April 13,
2009
"HELPFUL HARDWARE CLUB"
Service Mark 2,239,400 April 13, 2009
"THE FOLKS IN THE RED VEST"
Service Mark 2,261,946 July 20, 2009
"ACE CONTRACTOR PRO"
Trademark 2,273,483 August 31,
2009
"ILLUMINATIONS"
Trademark 2,353,666 May 30, 2010
"ACE YOUR NEIGHBROHOOD
SOLUTIONS PLACE"
Service Mark 2,386,359 September 12, 2010
"ACE" with accent
design Service
Mark 2,378,123 August 15, 2010
"ACE SOLUTIONS PLACE"
Service Mark 2,394,181 October 10, 2010
As of the date of this filing, we also have the following applications for new registrations pending in
the U.S. Patent and Trademark Office:
Mark
Type of goods/services
"STORE-IT-RIGHT"
hardware products, namely, hooks
brackets, knobs, hangers and
extensions for support or hanging
"ACE HOMEPLACE"
magazines
"ACE" with halo
design
retail hardware store services
"COLOR YOUR LIFE"
indoor and outdoor paint, coatings and
varnishes
"CONTRACTOR CENTERS OF AMERICA"
and
design
retail store services in the field of
hardware and related goods
"NATIONAL SUPPLY NETWORK"
wholesale store services; namely
providing wholesale industrial supplies
and equipment to commercial and
industrial customers
Competition
Competitive conditions in the wholesale and retail hardware industry are intense and increasing.
Independent hardware retailers must remain competitive with discount stores and chain stores, such as
WalMart, Home Depot, Menard's, Sears, and Lowe's, and with other mass merchandisers. Retail hardware
stores have been slowly shifting their locations to high rent shopping centers. There has also been a
trend toward longer store hours. There is intense pressure on hardware retailers to obtain low cost wholesale
supply sources. In several markets in the United States, we also compete directly with other
dealer-owned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware
Distributing Co.
Employees
We have 5,229 full-time employees, of which 1,590 are salaried employees. Excluding our Canadian
operations and Company-owned retail locations, we have 4,828 full-time employees to support our
domestic and international retailers. We also have, as of the end of the 2001 fiscal year, union contracts
covering one (1) truck drivers' bargaining unit and two (2) warehouse bargaining units. We consider our
employee relations with both union and non-union employees to be good, and we have had no strikes in
the past five years. In general, our employees are covered by either negotiated or nonnegotiated benefit
plans that include hospitalization, death benefits and, with few exceptions, retirement benefits.
Limitations on Ownership of Stock
Our members own all of our outstanding shares of capital stock. Membership in our Company is
limited to approved dealers in hardware and related products who have Membership Agreements with
us. These are the only ones eligible to own or purchase shares of any class of our stock.
No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store
locations that dealer owns or controls. This ensures that each stockholder in our cooperative has equal
voting power. We treat an unincorporated member or a partnership member as being controlled by
someone else if 50% or more of the assets or profit shares of that member are owned by (i) another
person, partnership or corporation; or (ii) the owner(s) of 50% or more of the assets or profit shares of
another unincorporated business firm or (iii) the owner(s) of at least 50% of the capital stock of a corporation.
We treat a member that is a corporation as being controlled by someone else if at least 50% of the
capital stock of that member is owned by (i) another person, partnership or corporation; or (ii) the
owner(s) of at least 50% of the capital stock of another corporation; or (iii) the owner(s) of at least 50%
of the assets or profit shares of another unincorporated business.
Distribution of Patronage Dividends
We operate on a cooperative basis for patronage purchases of merchandise from us that are made by
dealers who have become members of our Company. We also operate on a cooperative basis with dealers
who have subscribed for shares of our stock but who have not yet actually become "members" because they
have not yet fully paid for their $1,000 par value shares of our Class A voting stock. The dealers in either
of these two categories are entitled to receive patronage dividends once a year on an equitable basis.
We made patronage dividend distributions at the following percentages of our sales in the warehouse,
bulletin and direct shipment categories and on the total sales of products manufactured by our Paint
Division during the past three fiscal years:
2001 2000 1999
Warehouse
Sales 4.27330%
4.43564% 4.98172%
Bulletin
Sales
2.0% 2.0% 2.0%
Direct Shipment Sales 1.0%
1.0% 1.0%
Paint
Sales
8.9371% 8.1131% 7.8827%
Under our LTL Plus Program, we also calculate patronage dividends separately on sales of full or
partial truckloads of products purchased by eligible dealers from certain vendors (see discussion of LTL
Plus Program under the heading "Business.") The LTL Plus Program patronage dividend was .5% of
these sales for fiscal year 2001, 2000 and 1999.
Sales of merchandise under our Contractor and Industrial Distributor Programs are made on a
nonpatronage basis.
Patronage Dividend Determinations and Allocations
The amounts that we distribute as patronage dividends consist of our gross profits on patronage business
that we do with dealers who qualify for patronage dividend distributions, less a proportionate share
of our expenses for administration and operations. Our gross profits consist of the difference between our
selling price for the merchandise that these dealers buy from us and our purchase price for that merchandise.
Our computation of patronage dividends excludes all of our income and expenses from activities that
are not directly related to patronage transactions. The excluded items primarily consist of profits on business
that we do with dealers or other customers who do not qualify for patronage dividend distributions
and any income or loss that we realize from the disposition of property and equipment.
Our By-laws provide that, by virtue of dealers being "members" of our Company (that is, by owning
shares of our Class A voting stock), they consent to include in their gross income for federal income tax
purposes all patronage dividends that we distribute to them. These distributions must be included in gross
income for the taxable year in which the dealer receives them. Dealers who have not yet fully paid the $1,000
purchase price for their shares of our Class A voting stock are also required to include all patronage dividends
we distribute to them in their gross income as explained above. Under our Stock Subscription Agreement,
dealers must expressly consent to take these patronage dividend distributions into their gross incomes.
The amount of the patronage dividends which dealers must include in their gross incomes includes
both the cash portion of patronage dividends and any portion of patronage dividends that we apply against
any indebtedness the dealer owes to us in accordance with Section 7 of Article XXIV of our By-laws. It
also includes any portion of patronage dividends that they receive in shares of our Class C nonvoting
stock, other property and patronage refund certificates. The Company also has the authority to issue a
portion of the patronage dividend in the form of other property.
Under our present program, patronage dividends on each of our three basic categories of sales (warehouse
sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends
under our LTL Plus Program. Dividend percentage calculations are made with reference to the net earnings
derived from each of the respective categories. The 2001 patronage dividend rate for the LTL Plus
Program is .5% of our LTL Plus sales. The 2001 patronage dividend rates for direct shipment and bulletin
sales are 1.0% and 2.0%, respectively, while the current 2001 patronage warehouse dividend rate is 4.27%.
Patronage dividends are calculated separately for full and partial truckloads of products purchased
under the LTL Plus Program. (See the heading "Business", discussion of LTL Plus Program and the
subheading "Forms of Patronage Dividend Distributions" below.)
Any manufacturing profit realized on intracompany sales of products manufactured by our Paint
Division is allocated and distributed as patronage dividends to eligible dealers in proportion to their respective
annual dollar purchases of paint and related products from that division. The earnings we realize on wholesale
sales of the Paint Division's products to our eligible dealers are currently distributed as patronage
dividends to them as part of the patronage dividends which they receive each year in the basic patronage
dividend categories of warehouse sales, bulletin sales and direct shipment sales. The 2001 paint dividend rate
is 8.94%. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's manufacturing operations
for any year result in a net loss instead of a profit to the Paint Division, this loss would be netted
against the earnings we realized from our other activities during the year, so that the earnings available for
distribution as patronage dividends from these other activities would be reduced for the year.
We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products
through Builder Marts of America, Inc. ("BMA"), and are eligible participants under our Contractor
Center standards. This is not a patronage dividend plan, but rather an allocation of the increase in our stock
investment in BMA. Under the plan, we calculate an annual estimate of the amount by which our stock in
BMA has increased or decreased in value from our initial investment, net of certain expenses. We allocate
this estimate to eligible members annually based on their qualifying purchases of LBM products.
A member's pool allocation only becomes vested and can only be redeemed upon the termination of the
member's Ace membership which results in the sale or redemption of Ace stock held for that location,
Ace's termination of the LBM Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first.
Negative pool balances are not charged to members. The 2001 incentive pool rate under this plan is .40%
of qualifying purchases.
Forms of Patronage Dividend Distributions
We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock
and patronage refund certificates according to a specific plan that has been adopted by our Board of
Directors. This plan can be changed from time to time by the Board as they deem fit depending on business
conditions and our Company's needs.
This plan is summarized below for the purchases that our eligible dealers make from us for the year
2001 and subsequent years.
1. For each of a dealer's eligible stores, we initially calculate the minimum cash patronage dividend
distribution as follows:
(a) 20% of the first $5,000 of the total patronage dividends allocated for distribution each year
to the
dealer based on the purchases made for the eligible store;
(b) 25% of the portion of the total patronage dividends allocated for that store which exceed
$5,000 but do not exceed $7,500;
(c) 30% of the portion of the total patronage dividends allocated for that store which exceed
$7,500 but do not exceed $10,000;
(d) 35% of the portion of the total patronage dividends allocated for that store which exceed
$10,000 but do not exceed $12,500;
(e) 40% of the portion of the total patronage dividends allocated for that store which exceed
$12,500.
2. We distribute the portion of patronage dividends in excess of the cash or property amounts above
in the form of shares of our Class C nonvoting stock (par value $100 per share) until the total par
value of all shares of all classes of our capital stock that a
dealer holds for the eligible store equals the
greater of:
(a) $20,000; or
(b) the sum of purchases in the following categories that a
dealer made for the eligible store during
the most recent calendar year:
(i) 15% of the volume of Ace manufactured paint and related products purchases, plus
(ii) 3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured
paint and related products), plus
(iii) 15% of the volume of warehouse and bulletin purchases (including STOP and excluding
Ace manufactured paint and related products), plus
(iv) 4% of the volume of LTL Plus purchases.
Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount
that would result in a fractional share of stock and distribute it in cash or patronage refund certificates
instead.
3. The portion of a
dealer's total patronage dividends for each of the
dealer's eligible stores which exceeds the
sum of:
(a) the cash amount determined under Paragraph 1 above and
(b) the amount of Class C Stock determined under Paragraph 2 above is distributed to the
dealer in cash
up to certain limits. The total amount that a
dealer receives in cash for an eligible store cannot exceed
45% of that store's total patronage dividends for the year. If a store's total cash distribution
would exceed this 45% limit, then the distribution over that amount is made instead in the form
of a non-negotiable patronage refund certificate. Our Board of Directors determines the maturity
dates and interest rates of these patronage refund certificates before they are issued. These
certificates include provisions that give us a first lien on the amount of any indebtedness that
a
dealer owes us. The certificates also contain language subordinating them to all the rights and
claims of our secured creditors, general creditors and our bank creditors. Historically, these
patronage refund certificates have matured within five years from the date we issued them.
Article XXIV, Section 7 of our By-laws requires the cash portion of any patronage dividends to be
applied against any indebtedness a member owes us where the membership for his store is terminated
before the distribution of patronage dividends. Despite this, however, 20% of a terminated store's total
annual patronage dividends will be paid in cash if we receive a timely request for this form of payment.
Because of the requirement of the U. S. Internal Revenue Code that we withhold 30% of the annual
patronage dividends distributed to eligible dealers whose places of business are located in foreign countries
or Puerto Rico, the cash portion of patronage dividends to these dealers is a minimum of 30%. There
are exceptions to this 30% cash payment in the case of 1) unincorporated Puerto Rico dealers owned by
individuals who are U.S. citizens, 2) certain dealers incorporated in Guam, American Samoa, the
Northern Mariana Islands or the U.S. Virgin Islands. These exceptions apply if less than 25% of the stock
of these dealers is owned by foreign persons, and at least 65% of their gross income for the last three years
has been sufficiently connected with a trade or business in one of these locations or in the United States,
and 3) dealers located in countries maintaining tax treaties with the United States that provide for
reduced rates of withholding.
We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend
distributions. For example, to help members buy standardized exterior signs identifying their stores,
our Board of Directors has authorized a loan program. Under this program, a dealer may apply to borrow
between $100 to $25,000 per location from us for this purpose. If a
dealer obtains a loan under this program,
the dealer may either repay it in twelve payments billed on the regular bi-weekly billing statement, or the
dealer may
apply the non-cash portion of the annual patronage dividends (for up to the next three annual patronage
dividend distributions) toward payment of the loan.
Our Board of Directors has also authorized a loan program to help qualified dealers pay for costs of
converting their stores from another hardware distributor's program to our program. Under this loan
program, these dealers can borrow up to $95,000 per store. If the
dealer obtains a loan under this program, we will
apply the non-cash portion of the
dealer's annual patronage dividends (for up to the next three annual patronage
dividend distributions) towards payment of the loan. Unless extended by the Board of Directors, this loan
program will remain in effect until June 1, 2002 or until 100 loans are made, whichever occurs first.
Our Board of Directors has also authorized finance programs to help qualified dealers buy certain
computer systems from us and to finance capital improvements with patronage dividends. The amount
financed cannot exceed 80% of the cost of any system. For PAINTMAKER computers, members have
applied to borrow between $4,000 to $15,000 per location repayable over a period of three (3) years.
Under these programs, members have directed us to first apply the patronage refund certificate
portion of their patronage dividend distributions toward the balance owed on financed items and next to
apply patronage dividends which would otherwise be payable for the same year in the form of our Class C
Stock. These signage, computer financing and store conversion programs may be revised or discontinued
by our Board at any time.
Members also have the ability to apply for a Capital Stock loan which is designed to provide them with
access to their future patronage dividends to assist them in opening new retail stores or to assist in significant
store expansions. These loans are repaid at the end of seven (7) years from rebate distributions of the
non-cash portion of the annual rebate on the respective store during that period.
Federal Income Tax Treatment of Patronage Dividends
Both the shares of Class C nonvoting stock and the patronage refund certificates that we use to pay
patronage dividends are "qualified written notices of allocation" within the meaning of Sections 1381
through 1388 of the U.S. Internal Revenue Code. The Company may pay a portion of its dividend in the
form of other qualified property pursuant to Section 1382 of the U.S. Internal Revenue Code. These
Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and their
patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation
and fair market value of other qualified property must be taken into the gross income of the person
to whom the notice is issued, even though this dollar amount may not actually be paid to the person in
the same year that it is taxed.
In order for us to receive a deduction from our gross income for federal income tax purposes for the
amount of any patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying
dealers) in the form of qualified written notices of allocation or other qualified property, we have to pay
(or apply against any indebtedness that the patron owes us in accordance with Section 7 of Article XXIV
of our By-laws) not less than 20% of each patron's total patronage dividend distribution in cash and the
patron also has to consent to having the written notices of allocation at their stated dollar amounts, and
other qualified property at the fair market value, included in his gross income for the taxable year in which
he receives them. The Internal Revenue Code also requires that any patronage dividend distributions that
we deduct on our federal income tax return for business we do with patrons must be paid to those patrons
within eight and one-half months after the end of that taxable year.
By becoming one of our "members" by owning 1 share of Class A voting stock, a
patron is deemed
under the U.S. Internal Revenue Code to have consented to take the written notices of allocation and
other qualified property that we distribute into the
patron's gross income. Such consent is deemed because
of 1) the act of obtaining or retaining membership in our Company, and 2) because our By-laws provide
that the membership constitutes this consent, and we give written notification of that By-law provision.
Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of
our stock are also deemed to have consented to take the dollar amounts of their written notices of allocation
and other qualified property into their gross incomes. This occurs because of the consent provisions
included in the Subscription Agreement for our stock.
A patron receives a patronage refund certificate as part of a
patron's patronage dividends (see the subheading
"Forms of Patronage Dividend Distributions"), the
patron may be deemed to have received interest income.
This interest would arise in the form of an original issue discount to the extent that the face amount of
the certificate exceeds the present value of the stated principal and interest payments that we have to pay
the patron under the terms of the certificate. This interest income would be taxable to a
patron's "ratably" over the
term of the certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. Present value for
this purpose is determined by using a discount rate equal to the applicable Federal rate in effect as of the
day of issuance of the certificate, compounded twice a year.
We are required to backup withhold for federal income tax on the total patronage dividend distribution
we make to anyone who has not furnished us with a correct taxpayer identification number. We can
also be required to backup withhold federal taxes on the cash portion of each patronage dividend distribution
made to someone who fails to certify to us that he is not subject to backup withholding. This
backup withholding obligation based on a failure to certify may not be applicable, however, unless 50%
or more of the total distribution is made in cash. Since we distribute all of our patronage dividends for a
given year at the same time and since our current patronage dividend plan (see the heading "Business",
subheading "Forms of Patronage Dividend Distributions") does not permit any member store to receive
more than 45% of its patronage dividends for the year in cash, we believe that a certification failure like
this should not ordinarily have any effect on our Company or any of its dealers.
Patronage dividends that we distribute to patrons who are located in foreign countries or certain
U.S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but
have not become citizens of the United States) have been held to be "fixed or determinable annual or
periodic income." Patrons who receive this type of income are currently required to pay a tax of 30% of
the amount received under Sections 871(a)(1)(A) and 881(a)(1) of the Internal Revenue Code. When
dealers are subject to this 30% tax, we must withhold it from their patronage dividends and pay it over to
the U.S. Internal Revenue Service. The above does not apply to a corporation organized in Guam,
American Samoa, the Northern Mariana Islands or the U. S. Virgin Islands if less than 25% of its stock is
owned by foreign persons and at least 65% of its gross income for the last three years has been effectively
connected with the conduct of a trade or business in that location or in the United States. A reduced rate
of withholding may apply to dealers located in countries maintaining tax treaties with the United States.
The 20% minimum portion of the patronage dividends that must be paid in cash to patrons other than
those discussed above may not be enough, depending upon the patron's income tax bracket, to pay all of
the patron's federal income tax on his annual patronage dividend distributions. In our management's
opinion, the payment of a minimum of 20% of total patronage dividends in cash each year will not have
a material adverse affect on our operations or on our ability to obtain sufficient working capital for the
normal requirements of our business.
Membership Agreements
Persons
who apply to become an Ace member, must sign a Subscription Agreement to purchase our
stock. They must also sign our customary Membership Agreement and Supplement and submit
a payment of $1,500 ($2,500 for conversions or new investor ground-ups) with your signed
Membership Agreement and Supplement. We use this fee toward our estimated costs of processing
the membership applications. If a
person submits a membership application and we accept it, we sign your
Stock Subscription Agreement and your Membership Agreement and Supplement and send them
back to you for your records. Your membership may generally be terminated upon various notice
periods and for various reasons (including voluntary termination by either of us). The details of these
reasons and notice periods are in the Membership Agreement. These reasons for termination and
notice periods apply except where special laws or regulations in certain locations limit our right to
terminate memberships, or require longer notice periods.
Non-Shareholder Programs
In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers
who operate retail businesses outside the United States, its territories and possessions. These international
dealers sign agreements that differ from our regular Membership Agreement. They may be granted
a license to use certain of our trademarks and service marks, but they do not sign stock subscription agreements
or become shareholders, nor do they receive patronage dividends.
In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other
than international dealers. These accounts, which are generally served through our wholly-owned
subsidiary National Hardlines Supply, Inc. ("NHS"), are not granted an ongoing license to use our trademarks
and service marks. They can purchase selected types of products from us for resale. They are not
members of our cooperative, and therefore do not own our stock or receive patronage dividends.
In 1996, we established a license program for international non-shareholder dealers. These international
licensees typically receive the exclusive right to use our trademarks and service marks, as well as
exclusive rights to distribute the merchandise they purchase from us in their home countries.
International licensees pay us a negotiated license fee and ongoing royalties on their retail sales in
exchange for these rights, and for our ongoing training and support.
In 1996, we also began operations through our subsidiary Ace Hardware Canada, Limited ("Ace
Canada"). Ace Canada's customers are non-shareholders who do not receive patronage dividends from us.
Only customers signed under the Ace Canada Franchise Agreement are licensed to use our trademarks
and service marks.
In 1998, the Company began developing joint ventures with certain dealers as a way of increasing the
Ace presence in key markets without the need for Ace to use solely its own resources to open company
stores. For each joint venture, the Company and the dealer enter into a Limited Liability Company
Agreement, with the dealer acting as the managing member, and form a limited liability company ("LLC")
to operate the joint venture stores. In each joint venture, the Company owns 50% or less of the LLC's
units. Currently, the Company has an ownership interest in six joint ventures. In the future, we may
explore other joint venture opportunities with our members; however, we consider each situation unique
and we evaluate each opportunity on its own merits.
In our sole discretion, we may offer a member a mutually agreeable termination arrangement.
In some situations, a member who terminates on this basis may be offered the opportunity to
purchase products from us (including Ace private label products) for a period of up to 5 years after the
termination of membership. The former member is not required to make any such purchases from us,
but must maintain favorable credit status in order to do so.
In 2001, we developed a non-shareholder industrial distributor program and contractor program.
These retailers can purchase selected types of products from us for resale. They are not members of our
cooperative, and therefore do not own stock or receive patronage dividends. These programs are made
available to cooperative members, however, members will not receive patronage dividends for purchases
of products under these programs.
Sales to international non-shareholder dealers accounted for approximately 4.4% of our total sales in
2001, approximately 6.7% of our total sales in 2000 and approximately 6.5% of our total sales in 1999.
Sales to domestic non-shareholder locations accounted for less than 2.0% of our total sales in 2001, less
than 2.5% of our total sales in 2000 and less than 1.5% of our total sales in 1999. (See Appendix A, Article
XXV, section 2 of our By-laws regarding International Retail Merchants and non-member accounts.)
Item 2. Properties
Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information
about our main properties appears below:
Square Feet
Owned Lease
of Facility
or Expiration
Location
(Land in Acres) Leased
Date
General Offices:
Oak Brook,
Illinois
291,816 Leased September 30, 2009
Downers Grove,
Illinois
23,962 Leased June 30, 2004
Markham, Ontario,
Canada(1)
15,372 Leased February 28, 2006
Distribution Warehouses:
Lincoln,
Nebraska
345,440 Leased December 31, 2006
Arlington,
Texas
313,091 Leased July 31, 2003
Perrysburg,
Ohio
393,720 Leased December 31, 2004
Tampa,
Florida
391,755 Owned
Yakima,
Washington
507,030 Owned
Maumelle,
Arkansas
597,253 Owned
LaCrosse,
Wisconsin
591,964 Owned
Rocklin, California
(4)
478,468 Owned
Rocklin,
California
75,000 Leased July 31, 2003
Gainesville,
Georgia
481,013 Owned
Prescott Valley,
Arizona
631,485 Owned
Princeton,
Illinois
1,094,756 Owned
Chicago, Illinois
(2)
18,168 Leased May 31, 2002
Summit, Illinois
(2)
37,236 Leased February 28, 2017
Baltimore, Maryland
(2)
19,600 Leased December 31, 2008
Colorado Springs,
Colorado
494,219 Owned
Wilton, New
York
800,525 Leased September 1, 2007
Loxley,
Alabama
798,698 Leased May 27, 2009
Brantford, Ontario, Canada (3)
354,000 Leased March 31, 2006
Calgary, Alberta, Canada (3)
240,000 Leased June 30, 2002
Prince George County, Virginia
798,786 Owned
Fort Worth, Texas
(2)
10,915 Leased December 31, 2005
Print Shop Facility:
Downers Grove,
Illinois
41,000 Leased April 30, 2003
Paint Manufacturing Facilities:
Matteson,
Illinois
371,411 Owned
Chicago Heights,
Illinois
194,000 Owned
(1) This property is leased by our subsidiary Ace Hardware Canada Limited for its corporate office.
(2) This property is leased for use as a freight consolidation center.
(3) Our subsidiary, Ace Hardware Canada Limited, leases this property for a distribution warehouse.
Ace Hardware Canada Limited has exercised an option to terminate the lease for the Calgary Warehouse
effective April 30, 2002.
(4) The Company has entered into an agreement to sell this property and plans to acquire vacant land and
construct a larger replacement warehouse.
In addition to the above, we or our subsidiary, Ace Corporate Stores, Inc., lease 26 retail hardware
stores ranging from 13,000 to 25,000 square feet in size located in the following states: Colorado, Georgia,
Illinois, New Jersey, Oregon, Washington and Wisconsin.
We also lease a fleet of trucks and equipment for the main purpose of delivering merchandise from
our warehouses to our dealers.
Item 3. Legal Proceedings
In the normal course of our business, we are a party to various legal proceedings. We do not expect
that any currently pending proceedings will, individually or in the aggregate, have a material adverse
effect on our business, results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The Company
provides credit to customers in the ordinary course of business and performs ongoing credit evaluations.
Concentrations of credit risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.
The Company's various currency exposures often offset each other, providing a natural hedge against
currency risk. The Company has utilized foreign exchange forward contracts to hedge non-U.S. equity
investments. Gains and losses on these foreign currency hedges are included in the basis of the underlying
hedged investment. Accumulated other comprehensive loss at December 29, 2001 and December
30,
2000 includes gains of approximately $2.0 million related to previously settled foreign currency
contracts. The Company did not have any outstanding foreign exchange forward contracts at December
29, 2001. Settlement of foreign sales and purchases are generally denominated in U.S. currency resulting
in limited foreign currency transaction exposure.
Item 8. Financial Statements and Supplementary Data
Financial statements covered by the report of the Company's independent certified public accountants
are listed on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
INDEX TO EXHIBITS
Exhibits
Enclosed
Description
21
21 Subsidiaries of the Registrant.
23
23 Consent of KPMG LLP.
24
24 Powers of Attorney.
Exhibits
Incorporated
by Reference
Description
3-A
Copy of Restated Certificate of Incorporation of the Registrant, as amended
through June 3, 1996, filed as Exhibit 3-A to Post-Effective Amendment No. 6 to
the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 22, 2001 and incorporated herein by reference.
3-B
Copy of By-laws of the Registrant as amended through January 26, 2002 included
as Appendix A to the Prospectus constituting a part of the Registrant's Form S-2
Registration Statement filed on or about March 22, 2002 and incorporated herein
by reference.
4-A
Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as
Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1
Registration Statement (Registration No. 2-82460) on or about March 15, 1985 and
incorporated herein by reference.
4-B
Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit
4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-4299) on or about March 29, 1988 and incorporated
herein by reference.
4-C
Specimen copy of Class A Stock certificate as revised in 1987 filed as Exhibit 4-C
to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration
Statement (Registration No. 33-4299) on or about March 29, 1988 and incorporated
herein by reference.
4-D
Specimen copy of Class C Stock certificate filed as Exhibit 4-I to the Registrant's
Form S-1 Registration Statement (Registration No. 2-82460) on or about March 16,
1983 and incorporated herein by reference.
4-E
Copy of current standard form of Subscription for Capital Stock Agreement to be
used for dealers to subscribe for shares of the Registrant's stock in conjunction with
new membership agreements submitted to the Registrant filed as Exhibit 4-E to
the Registrant's Form S-2 Registration Statement filed on or about March 22, 2002
and incorporated herein by reference.
4-F
Copy of plan for the distribution of patronage dividends with respect to purchases
of merchandise made from the Registrant for the year 2000 and subsequent years
adopted by the Board of Directors of the Registrant on December 6, 2000 and filed
as Exhibit 4-F to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
4-G
Copy of LBM Retailer Incentive Pool Plan adopted on December 8, 1999 by the
Board of Directors of the Registrant filed as Exhibit 4-G to Post-Effective
Amendment No. 5 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) filed on or about March 15, 2000 and incorporated
herein by reference.
10-A
Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated
and Adopted December 7, 1993, consolidated and refiled with First, Second, Third and
Fourth Amendments filed as Exhibit 10-A to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
10-B
Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and
Restated as of January 1, 1997 (for years 1995-2001), consolidated and refiled with First
and Second Amendments filed as Exhibit 10-B to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
10-C
Copy of First Amendment to Ace Hardware Corporation Deferred Compensation
Plan adopted on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment
No. 3 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-D
Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit
Plans) adopted on December 6, 2000 filed as Exhibit 10-D to Post-Effective
Amendment No. 6 to the Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
10-E
Copy of Ace Hardware Corporation Restated Officer Incentive Plan effective
January 1, 1999 consolidated and refiled with First, Second and Third Amendments
filed as Exhibit 10-E to the Registrant's Form S-2 Registration Statement on or about
March 22, 2002 and incorporated herein by reference.
10-F
Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
Agreement dated as of August 23, 1996 as amended by the First Modification of Amended
and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The
Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective
Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-G
Copy of Participation Agreement with PNC Commercial Corp. dated December 17,
1997 establishing a $10,000,000 discretionary leasing facility for the purchase of land
and construction of retail hardware stores filed as Exhibit 10-G to Post-Effective
Amendment No. 3 to the Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 18, 1998 and incorporated herein by reference.
10-H
Copy of form of Executive Officer Employment Agreement effective January 1,
1996 filed as Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) filed on or about
March 11, 1996 and incorporated herein by reference.
10-I
Copy of Note Purchase and Private Shelf Agreement with The Prudential
Insurance Company of America dated September 27, 1991 securing 8.74% Senior
Series A Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003
filed as Exhibit 10-A-q to the Registrant's Form S-2 Registration Statement (Registration
No. 33-46449) on or about March 23, 1992 and incorporated herein by reference.
Exhibits
Incorporated
by Reference
Description
10-J
Copy of current standard form of Ace Hardware Corporation International
Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 6 to
the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on
or about March 22, 2001 and incorporated herein by reference.
10-K
Copy of current standard form of Ace Hardware Membership Agreement filed as
Exhibit 10-P to Pre-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about April 26, 1995 and
incorporated herein by reference.
10-L
Copy of Supplement to Ace Hardware Membership Agreement effective April 1,
2000, filed as Exhibit 10-L to Post-Effective Amendment No. 6 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-M
Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000
issued September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000
Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with
the Prudential Insurance Company of America dated as of September 22, 1993
filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449) on or about March 23,
1994 and incorporated herein by reference.
10-N
Copy of Lease dated March 24, 1997 for print shop facility of Registrant in
Downers Grove, Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3
to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
on or about March 18, 1998 and incorporated herein by reference.
10-O
Copy of Lease dated September 30, 1992 for general offices of the Registrant in
Oak Brook, Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1
to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449)
on or about March 22, 1993 and incorporated herein by reference.
10-P
Copy of Deed of Lease with Arundel II L.L.C. dated as of January 30, 1998 for the
Registrant's redistribution center in Odenton, Maryland filed as Exhibit 10-P to
Post-Effective Amendment No. 4 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 1999 and incorporated
herein by reference.
10-Q
Copy of Ace Hardware Corporation Deferred Compensation Plan effective
January 1, 1994 filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or
about March 23, 1994 and incorporated herein by reference.
10-R
Copy of current standard form of Ace Hardware Corporation License Agreement
for international licensees filed as Exhibit 10-R to Post-Effective Amendment No.
6 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
on or about March 22, 2001 and incorporated herein by reference.
10-S
Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant
in Chicago, Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated
herein by reference.
Exhibits
Incorporated
by Reference
Description
10-T
Copy of Long-Term Incentive Compensation Deferral Option Plan of the
Registrant effective January 1, 2000 filed as Exhibit 10-a-13 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
15, 2000 and incorporated herein by reference.
10-U
Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective
January 1, 2001 filed as Exhibit 10-U to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 22, 2001 and incorporated herein by reference.
10-V
Copy of Ace Hardware Corporation Long-Term Compensation Deferral Option
Plan effective January 1, 1995 consolidated and refiled with First, Second and
Third Amendments filed as Exhibit 10-V to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
10-W
Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and
Tri-R Corporation for retail hardware store premises located in Yorkville, Illinois
filed as Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
11, 1996 and incorporated herein by reference.
10-X
Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc.
and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario,
Canada filed as Exhibit 10-a-12 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-Y
Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and
Ace Hardware Canada Limited for general office space in Markham, Ontario,
Canada filed as Exhibit 10-a-13 to Post-Effective Amendment No. 1 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 11, 1996 and incorporated herein by reference.
10-Z
Copy of Executive Healthcare Plan adopted by the Board of Directors of the
Registrant on August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment
No. 4 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein by reference.
10-a-1
Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement
effective July 19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1
to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
on or about March 11, 1996 and incorporated herein by reference.
10-a-2
Copy of current standard form of International Retail Merchant Agreements filed
as Exhibit 10-a-2 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
10-a-3
Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's
project facility in Wilton, New York filed as Exhibit 10-a-13 to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 12, 1997 and incorporated herein
by reference.
Exhibits
Incorporated
by Reference
Description
10-a-4
Copy of 6.47% Series A Senior Notes in the aggregate principal amount of
$30,000,000 issued August 23, 1996 with a maturity date of June 22, 2008 and
$70,000,000 Private Shelf Facility, pursuant to Amended and Restated Note
Purchase and Private Shelf Agreement with the Prudential Insurance Company
dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective Amendment No.
2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191)
on or about March 12, 1997 and incorporated herein by reference.
10-a-5
Copy of First Amendment to Ace Hardware Corporation Directors' Deferral
Option Plan (effective January 1, 2001) adopted December 5, 2001 and effective
January 1, 2002 filed as Exhibit 10-a-5 to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
10-a-6
Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility
in Loxley, Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 15, 2000 and incorporated herein by reference.
10-a-7
Copy of current standard form of Industrial Distributor Agreement filed as
Exhibit 10-a-7 to the Registrant's Form S-2 Registration Statement filed on or
about March 22, 2002 and incorporated herein by reference.
10-a-8
Copy of First Amendment to Ace Hardware Corporation Long-Term Incentive
Compensation Deferral Option Plan (effective January 1, 2000) adopted
December 5, 2001 and effective January 1, 2002 filed as Exhibit 10-a-8 to the
Registrant's Form S-2 Registration Statement on or about March 22, 2002 and
incorporated herein by reference.
10-a-9
Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center
in Baltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
10-a-10
Copy of Amendment dated April 24, 2001 to Note Purchase and Private Shelf
Agreement dated as of September 27, 1991, and Restated Note Purchase and Private
Shelf Agreement dated as of August 23, 1996 with The Prudential Insurance
Company of America filed as Exhibit 10-a-10 to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
10-a-11
Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000
filed as Exhibit 10-a-11 to Post-Effective Amendment No. 6 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-a-12
Copy of Lease effective November 27, 2000 for freight consolidation center of the
Registrant in Fort Worth, Texas filed as Exhibit 10-a-12 to Post-Effective
Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein
by reference.
10-a-13
Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional
general office space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois filed as
Exhibit 10-a-13 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 22, 2001
and incorporated herein by reference.
Exhibits
Incorporated
by Reference
Description
10-a-14
Copy of current standard form of Limited Liability Company Agreement for retail
joint ventures filed as Exhibit 10-a-14 to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 22, 2001 and incorporated herein by reference.
10-a-15
Copy of Amendment dated September 25, 2000 to Restated Note Purchase and
Private Shelf Agreement dated as of August 23, 1996 with The Prudential
Insurance Company of America filed as Exhibit 10-a-15 to Post-Effective
Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein
by reference.
10-a-16
Copy of Lease dated June 30, 2000 for the Registrant's supplemental warehouse
space in Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2
Registration Statement on or about March 22, 2002 and incorporated herein by
reference.
10-a-17
Copy of Lease dated January 16, 2002 for the Registrant's freight consolidation
center in Summit, Illinois filed as Exhibit 10-a-17 to the Registrant's Form S-2
Registration Statement on or about March 22, 2002 and incorporated herein by
reference.
10-a-18
Copy of Amendment dated September 10, 2001 to Note Purchase and Private
Shelf Agreement dated as of September 27, 1991, and Restated Note Purchase and
Private Shelf Agreement dated as of August 23, 1996 with The Prudential
Insurance Company of America filed as Exhibit 10-a-18 to the Registrant's Form S-
2 Registration Statement on or about March 22, 2002 and incorporated herein by
reference.
10-a-19
Copy of Note Purchase Agreement dated April 15, 2001 for the issuance and sale
of up to $100,000,000 of Senior Notes, under which $70,000,00 of 7.27% Senior
2001-A Notes with a maturity date of April 30, 2013 have been sold to various
purchasers filed as Exhibit 10-a-19 to the Registrant's Form S-2 Registration
Statement on or about March 22, 2002 and incorporated herein by reference.
Upon request of the Commission, we agree to furnish copies of any agreements regarding indebtedness
that does not exceed ten percent of our total assets and the assets of our subsidiaries on a consolidated basis.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of
the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act.
As of the date of the Report mentioned above, proxy soliciting materials for our 2002 annual meeting
have not been sent to our shareholders. Copies of proxy soliciting materials will be sent to our shareholders
and furnished to the Securities and Exchange Commission at a later date.
Item 14(a). Index to Consolidated Financial Statements and Financial Statement Schedules
Page
Independent Auditors' Report
F-2
Consolidated Balance Sheets at December 29, 2001 and December 30, 2000
F-3
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the years in the three-year period
ended December 29, 2001
F-5
Consolidated Statements of Member Dealers' Equity for each of the years in the
three-year period ended December 29, 2001
F-6
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 29, 2001
F-7
Notes to Consolidated Financial Statements
F-8
All schedules have been omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or the required information is included in the
consolidated financial statements or the notes thereto.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 29, 2001 and December 30, 2000
ASSETS
December 29, December 30,
2001
2000
(000's omitted)
Current assets:
Cash and cash equivalents
$ 25,213 $
24,644
Short-term
Investments
17,158 12,772
Receivables:
Trade
308,390 316,339
Other
63,064
59,090
371,454 375,429
Less allowances for doubtful receivables
(2,419) (2,458)
Net
receivables
369,035 372,971
Inventories (Note 2)
412,568 395,565
Prepaid expenses and other current assets
16,295
15,105
Total current assets
840,269
821,057
Property and equipment (Note 10):
Land
15,466 16,791
Buildings and
improvements
232,015 211,024
Warehouse
equipment
100,676 90,250
Office
equipment
111,175 99,560
Manufacturing
equipment
15,197 14,590
Transportaion
equipment
16,345 16,888
Leasehold
improvements
17,575 17,445
Construction in
progress
- -
2,054
508,449 468,602
Less accumulated depreciation and
amortization (220,942)
(206,712)
Net
property and
equipment
287,507 261,890
Other assets
41,015
40,863
$ 1,168,791 $ 1,123,810
============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 29, 2001 and December 30, 2000
LIABILITIES AND MEMBER DEALERS' EQUITY
December 29, December 30,
2001
2000
(000's omitted)
Current liabilities:
Current installment of long-term debt (Note
4)
$ 7,179
$ 6,904
Short-term borrowings (Note
3)
72,600 81,500
Accounts payable
409,789 448,766
Patronage dividends payable in cash (Note
5)
34,229 34,764
Patronage refund certificates payable (Note
5)
9,084 4,795
Accrued expenses
81,062 63,224
Total current liabilities
613,943 639,953
Long-term debt (Note
4)
170,387 105,891
Patronage refund certificates payable (Note
5)
77,401 68,385
Other long-term liabilities
27,184 24,923
Total liabilities
888,915 839,152
Member dealers' equity (Notes 5 and 8):
Class A Stock of $1,000 par value
3,693 3,783
Class B Stock of $1,000 par value
6,499 6,499
Class C Stock of $100 par value
260,224 250,480
Class C Stock of $100 par value, issuable to dealers
for patronage
dividends
23,284 24,267
Additional stock subscribed, net
303
351
Retained deficit
(17,591) (5,551)
Contributed capital
13,485 13,485
Accumulated other comprehensive loss
(1,239)
(162)
288,658 293,152
Less: Treasury stock, at cost
(8,782) (8,494)
Total member dealers' equity
279,876 284,658
Commitments (Notes 6 and 10)
$ 1,168,791 $ 1,123,810
============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year
Ended
December 29, December 30, January 1,
2001
2000
2000
(000's omitted)
Net sales
$ 2,894,369 $ 2,945,151 $3,181,802
Cost of sales
2,617,069 2,665,614
2,908,138
Gross profit
277,300 279,537
273,664
Operating expenses:
Warehouse and distribution
34,915
32,496 28,122
Selling, general and administrative
86,277
87,368 87,763
Retail success and development
68,523 71,558
57,149
Total operating expenses
189,715 191,422
173,034
Operating income
87,585
88,115 100,630
Interest expense (Note 12)
(23,156) (21,803) (16,651)
Other income,
net
12,058
14,207 10,416
Income taxes (Note 7)
(3,418) (127)
(1,833)
Net earnings
$ 73,069 $ 80,392
$ 92,562
============ ============ ===========
Retained earnings (deficit) at beginning of year
$ (5,551) $
594 $ 3,292
Net
earnings
73,069
80,392 92,562
Patronage dividends (Note
5)
(85,109) (86,537)
(95,260)
Retained earnings (deficit) at end of year
$ (17,591)
$ (5,551) $ 594
============ ============ ===========
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
Year
Ended
December 29, December 30, January 1,
2001
2000
2000
(000's omitted)
Net earnings
$ 73,069 $ 80,392
$ 92,562
Unrealized gains on
securities
129
458 -
Foreign currency translation,
net
(1,206) (911)
1,109
Comprehensive income
$ 71,992 $ 79,939
$ 93,671
============ ============ ===========
See
accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
Three Years Ended December 29, 2001 (000's Omitted)
Class C Stock
Issuable to Accumulated
Dealers for Additional Retained Other
Class A Class B Class C Patronage Stock Earnings Contributed Comprehensive Treasury
Stock Stock Stock Dividends Subscribed* (deficit) Capital Income/(loss) Stock Total
Balance at January 2, 1999 $3,846 $6,499 $226,571 $26,170 $ 471 $3,292 $3,295 $(818) $(7,814) $261,512
Net earnings - - - - - 92,562 - - - 92,562
Net payments on subscriptions - - - - 1,531 - - - - 1,531
Patronage financing deductions - - - (847) - - - - - (847)
Stock issued 238 - 26,616 (25,323) (1,504) - - - - 27
Stock repurchased - - - - - - - - (12,509) (12,509)
Stock retired (228) - (11,961) - - - - - 12,189 -
Patronage dividends issuable - - - 21,648 - - 10,190 - - 31,838
Patronage dividends payable - - - - - (95,260) - - - (95,260)
Accumulated other comprehensive income (loss) - - - - - - - 1,109 - 1,109
Balance at January 1, 2000 3,856 6,499 241,226 21,648 498 594 13,485 291 (8,134) 279,963
Net earnings - - - - - 80,392 - - - 80,392
Net payments on subscriptions - - - - 1,830 - - - - 1,830
Patronage financing deductions - - - (158) - - - - - (158)
Stock issued 234 - 23,391 (21,490) (1,977) - - - - 158
Stock repurchased - - - - - - - - (14,804) (14,804)
Stock retired (307) - (14,137) - - - - - 14,444 -
Patronage dividends issuable - - - 24,267 - - - - - 24,267
Patronage dividends payable - - - - - (86,537) - - - (86,537)
Accumulated other comprehensive income (loss) - - - - - - - (453) - (453)
Balance at December 30, 2000 3,783 6,499 250,480 24,267 351 (5,551) 13,485 (162) (8,494) 284,658
Net earnings - - - - - 73,069 - - - 73,069
Net payments on subscriptions - - - - 1,479 - - - - 1,479
Patronage financing deductions - - - (1,324) - - - - - (1,324)
Stock issued 170 - 24,202 (22,943) (1,527) - - - - (98)
Stock repurchased - - - - - - - - (15,006) (15,006)
Stock retired (260) - (14,458) - - - - - 14,718 -
Patronage dividends issuable - - - 23,284 - - - - - 23,284
Patronage dividends payable - - - - - (85,109) - - - (85,109)
Accumulated other comprehensive income (loss) - - - - - - - (1,077) - (1,077)
Balance at December 29, 2001 $3,693 $6,499 $260,224 $23,284 $ 303 $(17,591) $13,485 $(1,239) $(8,782) $279,876
======= ======= ========= ======== ======= ========= ======== ======== ========= =========
*Additional stock subscribed is comprised of the following amounts at January 1, 2000, December 30, 2000 and December 29, 2001:
1999 2000
2001
Class A Stock
$ 118 $ 41 $
94
Class B Stock
- -
- - -
Class C Stock 1,452
975 977
1,570 1,016 1,071
Less unpaid portion 1,072
665 768
$ 498 $ 351 $ 303
====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 29, December 30, January 1,
2001 2000 2000
(000's Omitted)
Operating Activities:
Net Earnings $ 73,069 $ 80,392 $ 92,562
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 29,221 32,273 23,396
Gain on sale of property and equipment, net of
deferred taxes of $1,681 (3,264) - -
Decrease (increase) in accounts receivable, net 3,936 (2,092) 26,095
Increase in inventories (17,003) (22,475) (38,685)
Decrease (increase) in prepaid expenses
and other current assets (1,334) (1,764) 1,805
Decrease in accounts payable and accrued expenses (21,139) (7,497) (1,101)
Increase in other long-term liabilities 2,261 2,523 3,718
Net Cash Provided by Operating Activities 65,747 81,360 107,790
Investing Activities:
Purchase of short-term investments (4,386) (12,314) -
Purchase of property and equipment (51,430) (44,649) (43,074)
Proceeds from sale of property and equipment - 9,664 349
Increase in other assets (1,229) (12,200) (21,160)
Net Cash Used in Investing Activities (57,045) (59,499) (63,885)
Financing Activities:
Proceeds (payments) of short-term borrowings (8,900) 31,631 24,869
Proceeds from issuance of long-term debt 70,000 - -
Payments on long-term debt (5,229) (3,167) (6,892)
Payment of cash portion of patronage dividend (34,764) (38,173) (34,826)
Payments of patronage refund certificates and
patronage financing deductions (15,713) (9,956) (34,557)
Proceeds from sale of common stock 1,479 1,830 1,531
Repurchase of common stock (15,006) (14,804) (12,509)
Net Cash Used in Financing Activities (8,133) (32,639) (62,384)
Increase (decrease) in Cash and Cash Equivalents 569 (10,778) (18,479)
Cash and Cash Equivalents at beginning of year 24,644 35,422 53,901
Cash and Cash Equivalents at end of year $ 25,213 $ 24,644 $ 35,422 ============ =========== ==========
See accompanying notes to consolidated financial statements.
Leasehold improvements are generally amortized on a straight-line basis over the term of the respective
lease.
(g) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated at the rate of exchange in
effect at the balance sheet date while revenues and expenses are translated at the average monthly exchange
rates prevailing during the year. The Company has utilized foreign exchange forward contracts to
hedge non-U.S. equity investments. Gains and losses on these foreign hedges are included in the basis of
the underlying hedged investment. Accumulated other comprehensive loss at December 29, 2001 and
December 30, 2000 includes gains of $2.0 million related to previously settled foreign currency contracts.
Foreign currency translation adjustments, net of gains on foreign exchange contracts, are reflected in the
accompanying Consolidated Statements of Comprehensive Income for 2001, 2000 and 1999. The
Company did not have any outstanding foreign exchange forward contracts at December 29, 2001 or
December 30, 2000.
(h)
Financial Instruments
The carrying value of assets and liabilities that meet the definition of a financial instrument included
in the accompanying Consolidated Balance Sheets approximates fair value.
(i)
Retirement Plans
The Company has retirement plans covering substantially all non-union employees. Costs with
respect to the noncontributory pension plans are determined actuarially and consist of current costs and
amounts to amortize prior service costs and unrecognized gains and losses. The Company contribution
under the profit sharing plan is determined annually by the Board of Directors.
(j)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(k)
Fiscal Year
The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2001, 2000
and 1999 ended on December 29, 2001, December 30, 2000 and January 1, 2000, respectively.
(l)
Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to
comparable classifications followed in 2001.
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially all of the Company's domestic
inventories are valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the
LIFO value of inventory was approximately $57,809,000 and $62,502,000 at December 29, 2001 and
December 30, 2000, respectively. Indirect costs, consisting primarily of warehousing costs, are absorbed
as inventory costs rather than period costs.
(3) Short-Term Borrowings
Short-term borrowings were utilized during 2001 and 2000. The maximum amount outstanding at any
month-end during the period was $128.0 million in 2001 and $147.0 million in 2000. The weighted
average interest rate effective as of December 29, 2001 and December 30, 2000 was 2.58% and 7.18%,
respectively. Short-term borrowings outstanding as of December 29, 2001 and December 30, 2000 were
$72.6 and $81.5 million, respectively. At December 29, 2001 the Company has available a revolving credit
facility with a group of banks providing for $175.0 million in committed lines and also has available $10.0
million in uncommitted lines. The aggregate unused line of credit available at December 29, 2001 and
December 30, 2000 was $112.4 million and $108.5 million, respectively. At December 29, 2001 the
Company had no compensating balance requirements.