UNITED STATES
DELAWARE
36-0700810
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
2200 Kensington Court, Oak Brook, IL
60523
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code:
(630) 990-6600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
State the aggregate market value of the voting and nonvoting stock held by non-affiliates of the Registrant. This
Company's shares are only issued to and held by, its dealer-stockholders. All shares held by these stockholders can be
repurchased by the Company when the dealer-stockholder's membership agreement terminates. Thus, there is no market for
these shares. The repurchase price for each share of Class A Stock is equal to the par value of $1,000 per share. The
repurchase of Class B Stock is equal to twice the par value or $2,000 per share. The repurchase price for each share of Class
C Stock is equal to the par value of $100. As of February 17, 2003, the aggregate value of the Class A Stock, Class B Stock
and Class C Stock held by non-affiliates (dealer-stockholders) calculated on the basis of this repurchase price was
$275,876,900.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
required
to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated
in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes X
No
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest
practicable
date (applicable only to corporation Registrants). Outstanding shares as of February 17, 2003:
Class A (voting) Stock,
$1,000 par value
3,594 shares
Class B (nonvoting) Stock,
$1,000 par value
1,928 shares
Class C (nonvoting)
Stock,
$ 100 par value
2,684,269 shares
PART I
Item 1. Business
The terms "Ace," "cooperative," "we," "us," "our" and similar words refer to Ace Hardware Corporation. The terms
"member," "retailer," "dealer," "you," "your" and similar words refer to someone who purchases our stock.
Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, as the result of a
corporate merger, it became the successor of Ace Hardware Corporation, an Illinois corporation that was organized in 1928.
Until 1973, the Illinois corporation conducted the business now being engaged in by Ace. Our main executive offices are
located at 2200 Kensington Court, Oak Brook, Illinois 60523. Our main telephone number is (630) 990-6600. Our Internet
site address is http://www.acehardware.com. We make available free of charge our annual report on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K as soon as reasonably practicable after we file with or furnish such
documents to the Securities and Exchange Commission.
We operate primarily as a wholesaler of hardware and related products, and we also manufacture paint products. We
mainly sell our products to hardware dealers who have Membership Agreements with us. These Membership Agreements
allow the hardware dealers to purchase merchandise and services from us and, in most cases, to license one or more of our
trademarks. (See the heading "Business
"
, subheading "Membership Agreements").
We operate on a cooperative basis and distribute patronage dividends to our eligible member dealers each year on the
basis of quantity or value of patronage business that we do with them. (See the heading "Business
"
, subheading "Distribution
of Patronage Dividends").
As of the end of our 2002 fiscal year on December 28, 2002, there were 4,909 stores having
Membership Agreements
with us. The States with the largest concentration of members are California (approximately 10%), Texas
and Illinois
(approximately 6% each), Florida (approximately 5%) and Michigan and Georgia (approximately 4% each). The
States where
we shipped the largest percentages of merchandise in fiscal year 2002 were California (approximately 13%),
Illinois
(approximately 7%), Florida (approximately 6%), Texas, Michigan and Georgia (approximately 4% each).
Approximately
4.0% of our merchandise sales were made to locations outside of the United States and its territories in
fiscal 2002.
The number of member locations that we had during each of our past three fiscal years is
summarized in the following
table:
2002
2001 2000
Member outlets at beginning of period
4,976 5,011
5,082
New member outlets
181 220
208
Member outlets terminated
248 255
279
Member outlets at end of period
4,909 4,976
5,011
====
==== ====
Dealers having one or more member outlets at end of period
3,673 3,778
3,858
We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then warehouse large
quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products that we distribute to our
members
from our warehouses are sold at a price that we establish ("dealer cost"), to which a 10% adder ("handling
charge") is
generally added. In fiscal year 2002, warehouse sales were 72% of our merchandise sales and bulletin sales were
4% of our
merchandise sales with the balance of 24% being direct shipment sales.
The following is a breakdown of our total warehouse sales for merchandise purchases among various general classes of
merchandise for each of the past three fiscal years:
Class of Merchandise
2002 2001
2000
Paint, cleaning and related supplies
22% 21%
20%
Plumbing and heating supplies
15% 15%
15%
Hand and power tools
13% 14%
14%
Garden, rural equipment and related
supplies
15% 14%
14%
Electrical supplies
11% 12%
12%
General hardware
11% 11%
12%
Sundry
7%
8%
7%
Housewares and appliances
6% 5%
6%
We sponsor two major hardware conventions each year at various locations. We invite dealers and vendors to attend, and
dealers generally place orders that are delivered before the next convention. During the convention, there are exhibits of
regular merchandise, new merchandise and seasonal merchandise. Lawn and garden supplies and exterior paints are seasonal
merchandise in many parts of the country. Some types of goods such as holiday decorations are also seasonal.
Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment sales involve sales
where the merchandise is shipped directly to dealers by vendors. Bulletin sales involve our special bulletin offers where we
order specific merchandise after dealers sign up to buy particular quantities of it.
Dealers place direct shipment orders with our vendors using special purchase orders. The vendors then bill us for
these
orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers with an adder ("handling charge")
that
varies according to the following schedule:
Invoice Amount
Adder (Handling Charge)
$
1,00.00
to $ 999.99
2.00%
$1,000.00 to
$1,999.99
1.75%
$2,000.00 to
$ 2,999.99
1.50%
$3,000.00 to
$ 3,999.99
1.25%
$4,000.00 to
$ 4,999.99
1.00%
$5,000.00 to
$ 5,999.99
..75%
$6,000.00 to
$ 6,999.99
..50%
$7,000.00 to
$ 7,999.99
..25%
$8,000.00 and over
.00%
We make bulletin sales based upon notices from dealers that they wish to participate in one of our special bulletin offers.
Generally, we notify dealers of our intention to purchase certain products for bulletin shipment. We then purchase these
products in the quantities that the dealers order. When the bulletin shipment arrives, we do not place it into warehouse
inventory. Rather, we break it up into smaller quantities and deliver it to the dealers who ordered it. We generally apply a 6%
adder ("handling charge") to this category of sales.
We typically apply an additional adder of 3% to merchandise that is exported outside of the United States, its territories
and possessions. Ace dealers located outside of the United States, 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. Loss Prevention
Services, Inc., another wholly owned subsidiary, offers security training and other loss prevention services to dealers.
On February 13, 2003, we sold all of the issued and outstanding shares of Ace Hardware Canada Limited ("Ace
Canada"), our wholly owned subsidiary, to Sodisco-Howden Group Inc.
Ace Canada generated less than one percent (1%) of
our consolidated revenues during fiscal year 2002.
We operate our Company-owned retail hardware stores through our wholly owned subsidiary Ace Corporate Stores, Inc.
For further information about these stores, please see the heading "Properties."
We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights, Illinois. These
factories are the main source of the paint products that we offer for sale. We operate our paint manufacturing business as a
separate division of our Company for accounting purposes. We purchase all our raw materials for paint manufacturing from
outside sources. We have had adequate sources of raw materials in the past, and we do not currently expect any shortages
of
raw materials that would have a major impact on our paint operations. Paint manufacturing is seasonal in the sense that
greater paint sales occur from April through September. Historically, our need to comply with
environmental laws and
regulations has not had a major effect on our ability to conduct our paint manufacturing operations.
Our businesses, hardware wholesaling and paint manufacturing, are not dependent on any major suppliers and we feel
that seasonal fluctuations do not have a major effect on our operations. For more discussion of our business, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
We also offer services to members that relate to the operation of their retail businesses. We provide these services (such
as advertising, merchandising and training programs) to assist our members and in some cases, to maximize our centralized
buying power.
Strategic Planning
We have a strategic planning process that results in goals, objectives and programs that we want to develop in the future
for Ace and our members. Because strategic plans deal with the future, this discussion of them contains "forward looking
statements," which are based on our current expectations. The 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. However, the future is difficult to forecast, especially related to revenues, costs, margins
and profits which are influenced by many factors. Some of these factors are discussed below.
The effects of future growth in the hardware and hardlines-related industries are uncertain. By "hardlines-related
industries" we mean home center, do-it-yourself, rental and commercial/industrial categories. The future condition of the
economy is also uncertain, when viewed domestically, internationally or in specific geographical regions. Some other
uncertainties that could affect our plans include possible future changes in merchandise and inventory prices, and the effect of
increasingly intense competition. There could be potential shifts in market demand for some products. Lawsuits and laws,
especially laws dealing with franchising, licensing, importing, exporting and environmental matters could affect our future
business. We cannot predict whether these uncertainties might give rise to future costs or liabilities or have some other effect
on our future ability to achieve our plans.
Through our ongoing strategic planning process 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 Ace'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, building material products and certain hardware and software computer
systems), with minimum yearly assessments of $2,223.00 (effective January 1, 2003, $2,535.00 or 1.50% of the annual
purchase volume of required purchases in order for a store to avoid imposition of the low volume account service charge, if
greater). The maximum yearly assessment is $6,800.00 (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, for new
stores during their start up year and for stores operating under an agreement that does not permit them to use "Ace" or "Ace
Hardware". We intend to also impose a flat charge of $100.00 on a per event basis to pay for national sales promotions
including, but not limited to, the Memorial Day sale and the day after Thanksgiving sale. The amount of our national
advertising assessment 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.
Through December 31, 2002, every two weeks, we billed the member store for a special low volume account service
charge of $75 if annual purchases from us were less than $50,000. We billed the member store for a special low volume
account service charge of $60 per bi-weekly billing statement period if purchases from us during such period were less than
$5,700. Effective January 1, 2003, we will bill the member store for a special low volume account service charge of $100 per
bi-weekly billing statement period if purchases from us during such period are less than $6,500. 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
$169,000 during the year. A new 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 $169,000 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
$6,500.
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 ($169,000), but we will bill these charges in a lump sum to a store's last statement of the year if that
store does not reach our applicable minimum by that time.
3. We will not bill low volume account service charges to members that have signed and are in compliance with a
Vision 21 Retailer and Retail Support Commitment ("Vision 21 Agreement"), but we will bill low volume account service
charges, if applicable, to members who are not in compliance with their Vision 21 Agreements.
Low volume service charges are not included in a retailer's purchases of merchandise that qualify for patronage
dividends. 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.
We assess members operating under a standard Membership Agreement a mandatory monthly fee for Core Retail
Services in the amount of $168 per month for all single stores or parent stores and $37 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 for the difference. Multiple stores and
member groups can pool their points together to purchase our training programs.
4. NRHA E-Tools. These include unlimited use of certain Internet-based services offered by the National Retail
Hardware Association (NRHA), including their Advanced Course in 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 Subscription Service; however, there are no members operating under a Contractor agreement as
of the date of this annual report.
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)
"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" in stylized lettering design
Trademark
1,683,538 April 21, 2012
"ACE HARDWARE BROWN BAG
BONANZA" with design
Service Mark 1,761,277
April 13, 2003
"ACE HARDWARE
COMMITTED TO A QUALITY
ENVIRONMENT" design
Service Mark 1,764,803
April 13, 2003
"CELEBRATIONS"
Service Mark 1,918,785
September 12, 2005
Repetitive Stylized "A" design
Service Mark 1,926,798
October 10, 2005
"The NEW AGE OF ACE" design
Service Mark 1,937,008
November 21, 2005
"ACE RENTAL PLACE"
in stylized lettering design
Service Mark 1,943,140
December 19, 2005
"HELPFUL HARDWARE FOLKS"
Service Mark 1,970,828
April 30, 2006
"ACE HOME CENTER"
Service Mark 1,982,130
June 25, 2006
"SEALTECH"
Trademark
2,007,132 October 8, 2006
"GREAT FINISHES"
Trademark
2,019,696 November 26, 2006
"WOODROYAL"
Trademark
2,065,927 May 27, 2007
"ROYAL SHIELD"
Trademark
2,070,848 June 10, 2007
"ROYAL TOUCH"
Trademark
2,070,849 June 10, 2007
"QUALITY SHIELD"
Trademark
2,102,305 September 30, 2007
"QUALITY TOUCH"
Trademark
2,102,306 September 30, 2007
"STAINHALT"
Trademark
2,122,418 December 16, 2007
"ACE CONTRACTOR CENTER"
Service Mark 2,158,681
May 19, 2008
"NHS NATIONAL
HARDLINES SUPPLY"
Service Mark 2,171,775
July 7, 2008
"ACE COMMERCIAL &
INDUSTRIAL SUPPLY"
Service Mark 2,186,394
September 1, 2008
"THE OAKBROOK COLLECTION"
Trademark
2,187,586 September 8, 2008
"ACE GARDEN PLACE"
Service Mark 2,227,729
March 2, 2009
"ACE ROYAL"
Trademark
2,237,981 April 13, 2009
"HELPFUL HARDWARE CLUB" Service Mark
2,239,400
April 13, 2009
"THE FOLKS IN THE RED VEST"
Service Mark 2,261,946
July 20, 2009
"ACE CONTRACTOR PRO"
Trademark 2,273,483
August 31, 2009
"ILLUMINATIONS"
Trademark 2,353,666
May 30, 2010
"ACE YOUR NEIGHBORHOOD
SOLUTIONS PLACE"
Service Mark 2,386,359
September 12, 2010
"ACE" with accent design
Service Mark 2,378,123
August 15, 2010
"ACE SOLUTIONS PLACE"
Service Mark 2,394,181 October 10, 2010
"ACE" with halo design
Service Mark 2,558,478 April 19, 2012
"ACE HOMEPLACE"
Trademark 2,621,873
September 17, 2012
As of the date of this filing, we also have the following applications for new registrations pending in the U.S. Patent and
Trademark Office:
Mark
Type of goods/services
"Store-It-Right"
hardware products, namely, hooks,
brackets, knobs, hangers and extensions
for support or hanging
"COLOR YOUR LIFE"
indoor and outdoor paint, coatings and
varnishes
"CONTRACTOR CENTERS OF AMERICA"
and design
retail store services in the field of hardware
and related goods
"NATIONAL SUPPLY NETWORK"
wholesale store services; namely providing
wholesale industrial supplies and equipment
to commercial and industrial customers
"NSN" in circle design
wholesale store services; namely providing
wholesale industrial supplies and equipment to
commercial and industrial customers
"SIMPLY MAGIC"
interior, exterior house paints and primers
"COLOR YOUR LIFE"
written and graphic advertisements and
promotional materials of paper and signage
"YOUR NEIGHBORHOOD ACE HARDWARE
THE HELPFUL PLACE"
retail hardware store services
"THE HELPFUL PLACE"
retail hardware store services
Competition
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
As of December 28, 2002, we have 5,268 full-time employees, of which 1,555 are salaried employees. Excluding our
Canadian operations and Company-owned retail locations, we have 4,824 full-time employees to support our domestic and
international retailers. We also have, as of the end of the 2002 fiscal year, union contracts covering one (1) truck drivers'
bargaining unit and 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 Ace 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 Ace. 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:
2002 2001
2000
Warehouse Sales
4.56348% 4.27330% 4.43564%
Bulletin Sales
2.0% 2.0%
2.0%
Direct Shipment Sales
1.0% 1.0%
1.0%
Paint Sales
10.1109% 8.9371%
8.1131%
Under 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 0.5% of these sales for fiscal year 2002, 2001 and 2000.
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. The total patronage dividend paid to members is based on net earnings
calculated in accordance with accounting principles generally accepted in the United States of America after reducing or
increasing net earnings for non-member income or losses. 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 or losses generated from non-shareholder international dealers and non-shareholder retail accounts served through
National Hardlines Supply, Inc. and our industrial distributor and contractor programs, profits or losses realized from Ace
Insurance Agency, Inc., New Age Insurance Limited, Ace Hardware Canada Limited, company-owned retail locations and our
share of the profits or losses realized from our minority-owned investments including Builder Marts of America, Inc. and joint
ventures. Additionally, any income or loss that we realize from the disposition of property and equipment is excluded from
patronage dividends.
The amount we distribute as patronage dividends also excludes profits or losses generated from our
non-
shareholder programs. (See the heading "Business" and the subheading "Non-Shareholders Programs".)
Patronage dividends are usually paid to members within 90 days after the close of Ace's fiscal year; however, the Internal
Revenue Code (the "Code") permits distribution of patronage dividends as late as the
15th day of the ninth month after the
close of Ace's fiscal year, and Ace may elect to distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.
Our By-laws provide that, by virtue of dealers being "members" of Ace (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. Ace 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 2002
patronage dividend rate for the LTL Plus Program is 0.5% of our LTL Plus sales. The 2002 patronage dividend rates for direct
shipment and bulletin sales are 1.0% and 2.0%, respectively, while the current 2002 warehouse patronage dividend rate is
4.56%.
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 2002 paint
patronage dividend rate is 10.11%. 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. Therefore, if a loss were to result from Paint Division
activities, it would result in a reduced patronage dividend to all members, irrespective of their paint purchases.
We have established a LBM Retailer Incentive Pool Plan for our members who purchase
LBM products through Builder
Marts of America, Inc. ("BMA") and are eligible participants under our Contractor Center standards. This is not a patronage
dividend plan, but rather an allocation of the increase in our stock investment in BMA. Under the plan, we
calculate an annual
estimate of the amount by which our stock in BMA has increased or decreased in value from our initial investment, net of
certain expenses. We allocate this estimate to eligible members annually based on their qualifying purchases of
LBM products.
A member's pool allocation only becomes vested and can only be redeemed upon the termination of the member's Ace
membership which results in the sale or redemption of Ace stock held for that location, Ace's termination of the LBM
Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first. Negative pool balances are not charged to
members. The 2002 incentive pool rate under this plan is 0.57% of qualifying purchases.
Forms of Patronage Dividend Distributions
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 Ace's needs.
This plan is summarized below for the purchases that our eligible dealers make from us for the year 2000 and subsequent
years.
1. For each of 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, 2003 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 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 $25,000 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 patronage distributions of the non-cash portion of the annual patronage rebate on
the respective store during that period.
Federal Income Tax Treatment of Patronage Dividends
Both the shares of Class C 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. Ace may pay a portion of its dividend in the form of other qualified property pursuant to Section 1382 of the U.S.
Internal Revenue Code. These Sections of the Internal Revenue Code 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 Ace, 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.
If 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 Ace 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 their signed Membership Agreement and Supplement. We use this fee toward our estimated costs
of processing the membership applications. A membership may generally be terminated upon various
notice periods and for
various reasons (including voluntary termination by either party). The details of these reasons and notice periods are
contained 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 1998, the Company began developing joint ventures with certain dealers as a way of increasing the Ace presence in
key markets without the need for Ace to use solely its own resources to open company stores. For each joint venture, the
Company and the member enter into a Limited Liability Company Agreement, with the retailer acting as the managing
member, and form a limited liability company ("LLC") to operate the joint venture stores. In each joint venture, we own 50%
or less of the LLC's units. Currently, Ace has an ownership interest in seven joint ventures. In the future, we may explore
other joint venture opportunities with our members; however, we consider each situation unique and we evaluate each
opportunity on its own merits.
In our sole discretion, we may offer a member a mutually agreeable termination arrangement. In some situations, a
member who terminates on this basis may be offered the opportunity to purchase products from us (including Ace private
label products) for a period of up to 5 years after the termination of membership. The former member is not required to make
any such purchases from us, but must maintain favorable credit status in order to do so.
In 1999, we entered into an agreement with Builder Marts of America (BMA), to combine our lumber and building
materials division (the "LBM division") with BMA, a non-cooperative buying group for lumber and building materials in the
United States. Under this agreement, we contributed certain business assets (primarily vendor rebate receivables, fixed assets
and inventories) in exchange for a non-controlling (28%) interest in the combined entity. The investment in the combined
entity is accounted for under the equity method of accounting. As a result of this transaction, we have established an LBM
Retailer Incentive Pool Plan for our members who purchase LBM products through BMA. This program is not a patronage
dividend plan but rather a process for allocating the increase in the value of our investment in BMA to those qualifying
dealers who purchase LBM products through BMA. (See the heading "Business", subheading "Patronage Dividend
Determinations and Allocations".)
In 2001, we developed a non-shareholder industrial distributor program. These industrial distributors can purchase
selected types of products from us for resale under an Industrial Distributor Agreement or Distributor Franchise Agreement.
They are not members of our cooperative by reason of their participation in the industrial distributor program, and therefore
do not own stock or receive patronage dividends in connection with that program. These programs are made available to
cooperative members, however, members will not receive patronage dividends for purchases of products under these
programs.
Sales to international non-shareholder dealers accounted for approximately
1.9 % of our merchandise sales in 2002,
approximately 2.0% of our merchandise sales in 2001 and approximately 2.2% of our merchandise sales in 2000. Sales to
domestic non-shareholder locations accounted for less than
1.0 % of our total sales in 2002, less than 2.0% of our total sales in
2001 and less than 3.0% of our total sales in 2000. (See Appendix A, Article XXV, section 2 of our By-laws regarding
International Retail Merchants and non-member accounts.)
In connection with the sales of the shares of Ace Canada to Sodisco-Howden Group Inc. on February 13,
2003, we
signed a License Agreement granting Ace Canada the right to operate, and license others to operate, retail hardware stores
under our trademarks and service marks. These retail hardware dealers are not shareholders and do not receive patronage
dividends from us.
Item 2. Properties
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 (1)
206,030
Owned
Oak Brook, Illinois
85,786
Leased September 30, 2009
Downers Grove, Illinois
23,962
Leased June 30, 2004
Markham, Ontario, Canada (2)
15,372
Leased November 30, 2002
Distribution Warehouses:
Lincoln, Nebraska
345,440
Leased December 31, 2006
Arlington, Texas
313,091
Leased July 31, 2003
Perrysburg, Ohio
393,720
Leased December 31, 2004
Tampa, Florida
391,755
Owned
Yakima, Washington
507,030
Owned
Maumelle, Arkansas
597,253
Owned
LaCrosse, Wisconsin
591,964
Owned
Rocklin, California
478,468
Leased September 30, 2004
Rocklin, California
75,000
Leased July 31, 2003
Rocklin, California (3)
82 acres
Leased January 15, 2023
Gainesville, Georgia
481,013
Owned
Prescott Valley, Arizona
631,485
Owned
Princeton, Illinois
1,094,756
Owned
Summit, Illinois (4)
37,236
Leased February 28, 2017
Baltimore, Maryland (4)
19,600
Leased December 31, 2008
Colorado Springs, Colorado
494,219
Owned
Wilton, New York
800,525
Leased September 1, 2007
Loxley, Alabama
798,698
Leased May 27, 2009
Brantford, Ontario, Canada (5)
354,000
Leased March 31, 2006
Prince George County, Virginia
798,786
Owned
Fort Worth, Texas (4)
10,915
Leased December 31, 2005
Cuyahoga Heights, Ohio (4)
21,320
Leased April 30, 2017
Print Shop Facility:
Downers Grove, Illinois
41,000
Leased April 30, 2004
Paint Manufacturing Facilities:
Matteson, Illinois
371,411
Owned
Chicago Heights, Illinois
194,000
Owned
Other Property:
Aurora, Illinois
72 acres
Owned
(1) This property was leased by Ace for its corporate office until purchased in June, 2002.
(2) This property was leased by Ace Hardware Canada Limited for its corporate office.
(3) Ace has entered into a ground lease for 82 acres of land containing a 619,688 square foot warehouse/office building,
including 75,000 square feet of building space leased by Ace. Ace intends to exercise an option to purchase this property
by
September, 2003, and to develop this property for use as a distribution warehouse.
(4) This property is leased for use as a freight consolidation center.
(5) Our subsidiary, 3070070 Nova Scotia Company, leases this property for a distribution warehouse.
In addition to the above, we or our subsidiary, Ace Corporate Stores, Inc., lease 26 retail hardware stores ranging from
7,000 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.
PART II
Item 5. Market for The Registrant's Common Equity and Related Stockholder Matters
There is no existing market for our stock and there is no expectation that one will develop. We are organized as a
Delaware corporation and operate as a cooperative corporation, and only retailers of hardware and similar merchandise who
are our members own our stock.
The table below shows the number of stockholders of record that we had as of February 17, 2003:
Title of Class
Number of Record Holders
Class A Stock, $1,000 par value
3,594
Class B Stock, $1,000 par value
1,928
Class C Stock, $100 par value
4,726
Our Company's Articles of Incorporation and By-laws prohibit us from declaring dividends (other than patronage
dividends). (Please see the discussion of patronage dividends under Item 1. Business.)
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
Income Statement Data:
December 28, December 29,
December 30, January 1,
January 2,
2002 2001 2000 2000
1999
(000's omitted)
Net sales
$3,029,097 $2,923,882
$2,924,187 $3,154,057 $3,094,837
Cost of sales
2,742,201 2,641,840 2,649,211 2,885,371 2,854,879
Gross profit
286,896
282,042 274,976 268,686 239,958
Total expenses and other income, net
193,937 197,882 193,861 175,537 151,163
Income from continuing operations
92,959 84,160 81,115 93,149 88,795
Loss from discontinued operations, net
(10,868) (11,091) (723) (587) (835)
Net earnings
$ 82,091 $
73,069
$ 80,392
$ 92,562 $
87,960
========
========
======== ========
========
Patronage dividends (Notes A, B and C)
$ 95,580
$ 85,109 $
86,537 $
95,260 $
88,022
=========
========
======== ========
========
Balance Sheet Data:
December 28, December 29,
December 30, January 1,
January 2,
2002 2001 2000 2000
1999
(000's omitted)
Total assets
$1,143,352 $1,168,791 $1,123,810 $1,081,484
$1,047,580
Working capital
226,267 230,314 181,724 178,369
192,744
Long-term debt
163,075 170,387 105,891
111,895 115,421
Patronage refund certificates payable,
long-term
83,820 77,401 68,385 55,257
43,465
Member dealers' equity
280,022 281,702 285,278
271,564 262,330
(A) The Company operates as a cooperative organization, and pays patronage dividends to member dealers on earnings
derived from business done with such dealers. It is the practice of the Company to distribute substantially all patronage
sourced earnings in the form of patronage dividends.
(B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the
amount distributable to each of the member dealers is known. Patronage dividends were payable as listed in the table
below.
(C) Refer to Note 6 of the Consolidated Financial Statements beginning on page F-12 of this Form 10-K.
December 28, December 29,
December 30, January 1,
January 2,
2002 2001 2000 2000
1999
(000's omitted)
In cash
$ 38,687 $
34,229 $
34,764 $
38,173
$ 34,826
In patronage refund certificates payable
20,651
18,739 18,029 12,249
15,720
In Class C Stock
26,053 23,284 24,267 21,648 26,170
In other property
-
-
-
10,190 -
In patronage financing deductions
10,189
8,857
9,477 13,000 11,306
Total patronage dividends $
95,580 $
85,109 $
86,537
$ 95,260
$ 88,022
========
=======
=======
======= ========
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operations 2002 Compared to 2001
Consolidated sales increased 3.6%. Domestic merchandise sales increased 3.7% while International sales were flat with
2001. During 2002, sales to our domestic members increased 5.6%. The increase in domestic sales was primarily due to
higher sales to our existing retailer base, lower retailer cancellations and sales to newly affiliated retailers. This increase was
partially offset by a decrease in sales to non-coop members.
Gross profit increased $4.9 million; however decreased as a percent of total sales from 9.65% in 2001 to 9.47% in 2002.
The increase primarily resulted from higher handling charges due to a shift in sales mix towards handled sales, lower retailer
product returns and freight costs and increased paint margin due to lower raw material costs partially offset by inventory
adjustments.
Distribution operations expenses decreased $5.0 million from 2001 and decreased as a percent of total sales from 2.03%
in 2001 to 1.79% in 2002 primarily due to improved productivity, continued cost controls, lower fixed costs as a result of the
east coast distribution center reconfiguration and additional volume from logistics operations.
Selling, general and administrative expenses increased $3.5 million due to increased investments in technology partially
offset by lease savings due to the purchase of the corporate office location.
Retail success and development expenses increased $613,000 from 2001 primarily due to increased advertising and
marketing expenses offset by the continuation of cost control measures put in place in 2001. These expenses consist primarily
of field personnel and related costs, marketing, advertising, and training programs for Ace retailers and expenses of
company-
owned retail operations. Ace continues to make investments in retail initiatives under its Vision 21 strategy to support Ace
Retailers.
Interest expense decreased $1.5 million due to lower interest rates and lower average borrowing levels under the
revolving credit facility. The decline in interest rates is primarily the result of a declining interest rate environment and the
decline in LIBOR, the basis on which our interest rate is determined. The lower average borrowing levels primarily resulted
from an increase in earnings, improved receivable collections and a reduction of inventory levels.
Other income decreased $2.4 million primarily due to a decline in retailer past due and low volume charges and lower
interest income. Additionally, 2001 included non-recurring gains on the sale of two distribution facilities offset by a
write-
down of a minority-owned investment.
Income taxes decreased $3.9 million due to the taxes incurred on the sale of two retail support centers in 2001 and
increased tax benefits from non-patronage activities in 2002.
In 2002, the Company entered into an agreement to sell Ace
Hardware Canada Limited, a wholly-owned subsidiary for
cash proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13,
2003, at which time the sale proceeds were received and used to repay outstanding indebtedness. The
Company
recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002 and a loss from operations
of Ace Hardware Canada Limited of US $5.4 million in 2002 and US $11.1 million in 2001. The decrease in the loss from the
discontinued operation is primarily due to costs associated with the closure of the Calgary distribution center in 2001.
Operations 2001 Compared to 2000
Consolidated sales were flat with 2000. Domestic merchandise sales increased 0.7% primarily due to conversions of new
stores to the Ace program. Sales to our existing retailer base were flat due to the soft economy and inventory reductions at
retail. International sales decreased by 18.6% primarily due to a sale of Ace affiliated stores.
Gross profit increased $7.1 million and increased slightly as a percent of total sales from 9.40% in 2000 to 9.65% in
2001. The increase was primarily due to higher vendor rebates, paint manufacturing margin and margin from company-owned
retail locations partially offset by lower cash discounts from reduced merchandise purchases.
Distribution operations expenses increased $3.0 million over 2000 and increased as a percent of total sales from 1.93% in
2000 to 2.03% in 2001. Increased utilities and distribution expenses associated with the new Loxley, Alabama distribution
facility which was open for a full year in 2001 and the start-up of the Prince George, Virginia distribution facility drove the
higher expenses. Higher logistics income partially offset the increased expenses.
Selling, general and administrative expenses decreased $1.1 million primarily due to decreased expenses related to
non-
patronage activities and continued cost control measures.
Retail success and development costs decreased $4.8 million due to continued cost control measures. Expenses in this
category are directly related to retail support of the Ace retailer. These expenses consist primarily of field personnel and
related costs, marketing, advertising and training programs for Ace retailers and expense of company-owned retail operations.
The Company continues to make investments in retail initiatives under our Vision 21 strategy to support Ace retailers.
Interest expense increased $1.4 million due to higher average borrowing levels during the year partially offset by lower
interest rates. The decline in interest rates is primarily the result of a declining interest rate environment and the decline in
LIBOR, the basis on which our interest rate is determined. The higher borrowing levels resulted from the completion of the
Loxley, Alabama and Prince George, Virginia distribution centers, the expansion of the LaCrosse, Wisconsin facility and
increased retailer dating programs.
Other income decreased $2.2 million primarily due to an increase in the write-down of a minority-owned investment of
$1.7 million and decreased interest income due to declining interest rates offset by a $3.6 million nonrecurring gain on
pension plan termination in 2000, the gain recognized on the sale of two distribution facilities and higher income realized on
non-controlling investments in affiliates.
Income taxes increased $3.3 million primarily due to deferred taxes recorded on the sale/exchange of two distribution
centers.
The loss on discontinued operation increased $10.4 million primarily due to a decline in sales volume as a result of the
loss of a significant customer and costs incurred related to the closure of the Calgary distribution center.
Liquidity and Capital Resources
Ace's ability to generate cash adequate to meet its needs ("liquidity") results from internally generated funds, short-term
lines of credit and long-term financing.
Cash flow generated from operations provides a significant source of liquidity. For the year-ended December 28, 2002,
cash provided by operations increased to $140.5 million compared to $62.2 million for 2001. The increase was primarily due
to an increase in net earnings, improved receivable collections, and a reduction of inventory.
Cash used in investing activities for the year-ended December 28, 2002 was $39.6 million compared to $55.8 million in
2001. The decrease was primarily due to decreased expenditures for the distribution network as 2001 included expenditures
for the construction of the Prince George, Virginia distribution center. Net capital expenditures of $30.2 million in 2002 were
financed out of current and accumulated internally generated funds and short-term borrowings.
Cash used in financing activities for the year-ended December 28, 2002 was $101.4 million compared to $8.1 million in
2001 due to payments of short-term borrowings and 2001 proceeds of $70.0 million obtained from the issuance of Senior
Notes.
Ace has an established, unsecured revolving credit facility with a group of banks. Ace has unsecured lines of credit of
$185.0 million of which $136.1 million was available at December 28, 2002. Borrowings under these lines of credit bear
interest at a spread over LIBOR based upon quarterly debt to EBITDA ratios. Long-term financing is arranged as determined
necessary to meet Ace'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 $30.2 million, $51.4 million, and $44.6 million in 2002, 2001
and 2000, respectively. Capital expenditures for 2003 are anticipated to be approximately $63.0 million primarily for a new
distribution facility, improvements to existing facilities and technology investments.
As a cooperative, Ace distributes substantially all of its patronage sourced earnings to its members in the form of
patronage dividends, which are deductible for income tax purposes.
Ace expects that existing and new internally generated funds, along with established lines of credit and long-term
financing, will continue to be sufficient in the foreseeable future to finance its working capital requirements and patronage
dividend and capital expenditure programs.
The table below presents contractual obligations and commercial commitments by year of expiration:
Less than 1-3
4-5
After 5
Contractual Obligations
Total
1 Year
Years Years
Years
(000's omitted)
Short-term
borrowings
$48,900 $48,900 $
- $
-
$ -
Long-term
debt
168,722
5,647 18,336 35,739
109,000
Patronage refund
certificates
97,016
13,196 27,326
35,843
20,651
Operating
leases
94,772
19,522 29,422
18,385 27,443
Total Contractual Cash
Obligations
$409,410
$87,265 $75,084 $89,967
$157,094
=======
====== ======
====== =======
Total Amounts
Less than
1-3
4-5
Over 5
Other Commercial Commitments
Committed
1 Year
Years Years
Years
(000's omitted)
Standby letters of credit
$13,848
$13,848 $
-
$ -
$ -
Guarantees
11,018
6,905 3,396
717
- -
Total Commercial
Commitments
$24,866
$20,753
$3,396 $ 717
$ -
======
======
======
===== =====
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements. On an ongoing basis, Ace evaluates its estimates and judgments based on
historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates, and our estimates would vary under different assumptions or conditions. Management believes
these estimates and assumptions are reasonable.
Ace annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial
reporting and disclosures provide accurate and comprehensive information relative to the current economic and business
environment. Ace's significant accounting policies are described in the accompanying Notes to Consolidated Financial
Statements. The following represents those critical accounting policies which involve a relatively higher degree of judgment,
estimates, and complexity and where materially different amounts could be reported under different conditions or using
different assumptions.
Valuation of Inventories
When necessary, Ace provides allowances to adjust the carrying value of inventories to the lower of cost or market,
including costs to sell or dispose of surplus or damaged/obsolete inventory, and for estimated shrinkage. Estimates for the
future demand for Ace's products are key factors used by management in assessing the net realizable value of the
inventories. While management believes that the estimates used are appropriate, an unanticipated decline in sales at retail
outlets or a significant decline in demand for products in selected product categories, could result in valuation
adjustments.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects management's estimate of the future amount of receivables that will not be
collected. Management records allowances for doubtful accounts based on judgements made considering a number of
factors, including historical collection statistics, current dealer credit information, the aging of receivables, the current
economic environment and the offsetting amounts due to members for stock, notes, interest and declared and unpaid
dividends. While Ace believes it has appropriately considered known or expected outcomes, its dealers' ability to pay
their obligations, including those to Ace, could be adversely affected by declining sales of hardware at retail resulting
from such factors as contraction in the economy or competitive conditions in the wholesale and retail
hardware
industry including increased competition from discount stores, chain stores and other mass
merchandisers.
Impact of New Accounting Standards
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The statement retains the previously existing accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of
long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is
classified as held for sale. The Company applied this statement in accounting and reporting the disposal of Ace's Canadian
operations as a discontinued operation.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at
the date of commitment to an exit or disposal plan. Ace is required to adopt the provisions of SFAS No. 146 prospectively
for
exit or disposal activities initiated after December 31, 2002 and does not expect the implementation of this standard to have a
material effect on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others". This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of
the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's
financial statements. The Company has applied the disclosure requirements of this interpretation, which were effective for
financial statements of interim or annual periods ending after December 15, 2002.
Inflation and Changes in Prices
Ace's business is not generally governed by contracts that establish prices substantially in advance of the receipt of goods
or services. As vendors increase their prices for merchandise supplied to Ace, Ace increases the price to its dealers in an equal
amount plus the normal handling charge on such
amounts. In the past, these increases have provided adequate gross profit to
offset the impact of inflation on operating expenses.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Ace is subject to certain market risks, including foreign currency and interest rates. Ace uses a variety of practices to
manage these market risks, including, when considered appropriate, derivative financial instruments. Ace uses derivative
financial instruments only for risk management and does not use them for trading or speculative purposes. Ace is exposed to
potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign
currencies. Ace's primary exposure is to changes in exchange rates for the U.S. dollar versus the Canadian dollar.
Interest rate risk is managed through a combination of fixed rate debt and variable rate short-term borrowings with
varying maturities. At December 28, 2002, all long-term debt was issued at fixed rates.
The table below presents principal amounts and related weighted average interest rates by year of maturity for Ace's
investments and debt obligations:
2003 2004 2005 2006 2007 Thereafter Total
(000's omitted)
Assets:
Short-term investment-
fixed rate $ - $ 1,019 $, 251 $ 630 $ 6,712 $11,735 $20,347
Fixed interest rate -% 5.75% 2.65% 5.73% 5.73% 6.05% 5.75%
Liabilities:
Short-term borrowings-
variable rate $ 48,900 - - - - - $48,900
Average variable interest rate 1.94% - - - - - 1.94%
Long-term debt-fixed rate $ 5,647 $ 5,454 $12,882 $17,882 $17,857 $109,000 $168,722
Average fixed interest rate 7.16% 7.18% 7.18% 7.18% 7.21% 7.24% 7.16%
Ace is exposed to credit risk on certain assets, primarily accounts receivable. Ace provides credit to customers in the
ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising Ace's customer base. Ace currently believes its
allowance for doubtful accounts is sufficient to cover customer credit risks.
Ace's various currency exposures often offset each other, providing a natural hedge against currency risk. Ace has
utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these foreign currency
hedges are included in the basis of the underlying hedged investment. Ace did not have any outstanding foreign exchange
forward contracts at December 28, 2002 or December 29, 2001. Settlement of foreign sales and purchases are generally
denominated in U.S. currency resulting in limited foreign currency transaction exposure.
Item 8. Financial Statements and Supplementary Data
Financial statements covered by the report of the Company's independent certified public accountants are listed on Page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Company
Our directors and executive officers are:
Position(s) Currently Held
Name
Age
and Business Experience (for the past 5 years)
Jimmy Alexander
45
Vice President, Human Resources effective October 1, 2001;
General Merchandise Manager effective July 16, 1999; Merchandise
Manager effective November 1, 1997.
Michael J. Altendorf
45
Vice President, Information Technology effective January, 2001;
Director of Retail Technology effective January, 1999; Manager of
Administrative Services effective April, 1996.
Richard F. Baalmann, Jr.
43
Director since June, 1999; term expires 2005; President of Homart,
Inc., Centralia, Illinois since May, 1988.
William J.
Bauman
54 Vice
President, Retail Support-West effective October, 1998;
Western Divisional Director of Retail Support effective October, 1994.
Eric R. Bibens II
46 Director since June, 1997; term expires 2003; President of Bibens
Home Center, Inc., Springfield, Vermont since 1983.
Michael C. Bodzewski
53
Vice President, Marketing, Advertising, Retail Development and
Company Stores effective October, 2000; Vice President -
Marketing, Advertising and Retail Operations East effective
October, 1999; Vice President - Sales and Marketing effective
October, 1998; Vice President - Merchandising effective June,
1990.
Lori L. Bossmann
42
Vice President, Merchandising effective October, 2000; Vice
President - Finance effective October 1999; Vice President -
Controller effective September, 1997; Controller effective January,
1994.
J. Thomas Glenn
44 Director since June, 1996; term expires 2005; President of Ace
Hardware of Chattanooga, Chattanooga, Tennessee since January,
1990.
Ray A. Griffith
49 Executive Vice President, Retail effective October, 2000; Vice
President - Merchandising effective October, 1998; Vice President
Retail Development and Marketing effective September, 1997;
Director - Retail Operations, Western Division effective September,
1994.
Daniel L. Gust
53 Director since June, 1998; term expires 2004; President of Garden
Acres Ace Hardware, Longmont, Colorado since January, 1991.
D. William Hagan
45 Director since June, 1997; term expires 2003; President of Hagan
Ace Hardware, Orange Park, Florida since February, 1980.
David F. Hodnik
55 President and Chief Executive Officer effective January, 1996;
President
and Chief Operating Officer effective January 1, 1995.
Paul M. Ingevaldson
57 Senior Vice President - International and Technology effective
September, 1997; Vice President - Corporate Strategy and International
Business effective September, 1992.
Howard J. Jung
55
Chairman of the Board and Director since June, 1998; term expires
2003; Vice President of Ace Hardware Stores, Inc., Raleigh, North
Carolina since June, 1997.
Rita D. Kahle
46
Executive Vice President effective October, 2000; Senior Vice President
- - Wholesale effective September, 1997; Vice President - Finance
effective January, 1994.
Richard A. Karp
51
Director since June, 2000; term expires 2003; President, Cole Hardware,
San Francisco, California since June, 1979.
Ronald J. Knutson
39 Vice President, Controller effective January 1, 2003;
Controller
effective January 1, 2000; Assistant Controller effective May 15, 1996.
David F. Myer
57 Senior Vice President, Retail Support and Logistics effective October,
2000; Vice President - Retail Support effective September, 1997; Vice
President - Retail Support and New Business effective October, 1994.
Kenneth L. Nichols
54
Vice President, Retail Operations effective October, 2000; Vice
President - Retail Operations West effective October, 1999; Vice
President - New Business effective October, 1998; Director - Retail
Operations, Eastern Division effective October, 1994.
Daniel C. Prochaska
45 Vice
President, Retail Support-East effective November, 1998;
National Director of Distribution effective March, 1996.
Jeffrey M. Schulein
61 Director since June, 2002; term expires 2005; Chief Executive Officer
of Crown Hardware, Inc., Huntington Beach, California since
November, 2000; President from October, 1975 to October, 2000.
Richard W. Stine
57 Director since June, 1999; term expires 2005; Vice President of Stine,
Inc., Sulphur, Louisiana since September, 1976.
David S. Ziegler
47 Director since June, 2001; term expires 2004; Vice President of Z
Hardware Company, Elgin, Illinois since February, 1979.
Our By-laws provide that our Board shall have between 9 and 12 directors. A minimum of 9 directors must be dealer
directors. A maximum of two directors may be non-dealer directors. Non-dealer directors cannot exceed 25% of the total
number of directors in office at any one time. Non-dealer directors may (but do not have to) be shareholders of ours who are
in the retail hardware business. Our By-laws provide for three classes of directors who are to be elected for staggered 3-year
terms, except that one director who would not otherwise be eligible for reelection in 2001 was elected at the 2001 annual
meeting of stockholders for a two year term under Article IV, Sections 1 through 3 of our By-laws. On January 23, 2001, the
Board of Directors passed a resolution reducing the number of directors from eleven to ten effective with the 2001 Annual
Stockholders meeting on June 4, 2001.
Our By-laws also provide that no one can serve as a dealer director unless that person is an owner, executive officer,
general partner or general manager of a retail business organization that is a shareholder of ours. Regional dealer directors are
elected from geographic regions of the United States. The Board under Article IV, Section 1 of our By-laws, determines these
regions. If the Board finds that regional dealer directors represent all regions, then dealer directors at large may be elected, so
long as the maximum number of directors allowed under our By-laws is not exceeded.
A geographic breakdown of our current regions for the election of directors at our 2003 annual stockholders meeting to
be held on June 2, 2003 appears below:
Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania,
New Jersey;
Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina,
District of Columbia, Ohio;
Region 3 - Alabama, Mississippi, Georgia, Florida;
Region 4 - Indiana, Illinois, Michigan, Wisconsin;
Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota,
Utah, Wyoming;
Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona;
Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska
Under the procedure required by our By-laws, the following directors have been selected as nominees for reelection as
dealer directors at the 2003 annual stockholders meeting:
Nominee
Age
Class
Region
Term
Eric R. Bibens II
46 First
1 3 years
D. William Hagan
45 First
3 3 years
Richard A. Karp
51 First
At large 3 years
The person named below has been selected as a nominee for election to the Board for the first time at the 2003 annual
meeting as a dealer director of the class, from the region and for the term indicated:
Nominee
Age
Class
Region
Term
Lori J. Terpstra
37 First
At large 3 years
Non-dealer directors and dealer directors at large are not elected from particular geographic regions.
Article IV of our By-laws has information about the qualifications for membership on the Board of Directors, the terms
of directors, the limitations on the total period of time that a director may hold office, the procedure for the Nominating
Committee to select candidates and nominees for election to the Board of Directors and the procedure for filling vacancies on
the Board if one occurs during an unexpired term.
None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years for any of our
directors, nominees for directorships or for any of our executive or staff officers.
Item 11. Executive Compensation
Below is information about the cash compensation that we paid to our five highest paid executive officers earning over
$100,000 for their services in all capacities to us and our subsidiaries during fiscal years 2002, 2001 and 2000:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation
Name &nbs
p;
(3)
and
(2)
All Other
Principal
(1)
Long-Term
Compen-
Position
Year
Salary ($)
Bonus ($)
Payouts ($)
sation ($)
David F. Hodnik
2002
$665,000
$79,800
$505,593
$117,032
President and Chief
2001
649,000
103,840
531,474
102,627
Executive Officer
2000
630,000
56,700
533,829
116,587
Rita D. Kahle
2002
$327,000
$165,080
$95,392
$52,570
Executive Vice President
2001
313,000
121,280
99,843
43,985
2000
298,000
103,704
85,921
51,302
Paul M. Ingevaldson
2002
$305,000
$128,100
$94,434
$48,098
Senior Vice President,
2001
305,000
72,800
100,779
39,953
International and Technology
2000
295,000
85,550
89,479
51,495
Ray A. Griffith
2002
$295,000
$143,100
$73,736
$44,432
Executive Vice President
2001
275,000
97,300
72,180
34,961
Retail
2000
250,000
76,250
39,563
33,026
David F. Myer
2002
$290,000
$130,500
$83,681
$45,340
Senior Vice President,
2001
278,000
102,980
86,382
38,007
Retail Support and Logistics
2000
263,000
80,215
73,967
42,843
(1) The Officer Incentive Plan covers each of the executive officers. Mr. Hodnik participates only in the retail sales
component of the Officer Incentive Plan. The bonus amounts awarded to participants in the Plan are determined in
accordance with achievement of individual performance based objectives and achievement of corporate goals. The
maximum short-term incentive award for each executive officer is 35% to 45% of their respective salary in 2000, 2001
and 2002. The short-term bonus award becomes payable to each participant as early as practicable at or after the end of
the fiscal year.
(2) Includes the long-term incentive award under the Long-Term Incentive Compensation Deferral Option Plan effective in
1995. The long-term Officer incentive plan is based upon corporate performance over a three year period with emphasis
on total shareholder return through maximizing both year-end patronage dividends and upfront dividends (throughout
the year) through pricing programs and discounts. This plan maintains the commitment to long-term performance and
shareholder return in a cooperative environment. One third of the total long-term incentive award is subject to a one year
vesting provision.
Effective January 1, 1995, executive officers may elect to defer a portion (20% to 100%, in 20% increments) of the
annual award granted. Participants' compensation deferrals are credited with a specified rate of interest to provide a
means to accumulate supplemental retirement benefits. Deferred benefits are payable over a period of 5 to 20 years.
Annual elections are required for the upcoming deferral year by December of the preceding year. Total long-term
incentives for the three year period ended in 2002, to be awarded in 2003, were $465,467, $84,269, $104,189, $77,378
and $124,774 for Messrs. Hodnik, Ingevaldson, Griffith, Myer and Ms. Kahle, respectively.
(3) Includes contributions to the Company's 401-k Savings and Retirement Plan and contributions to the
Company's
Retirement Benefits Replacement Plan. All active employees are eligible to participate in the Company's 401-k Savings
and Retirement Plan after 90 days of service. Those active employees covered by a collective bargaining agreement
regarding retirement benefits, which were the subject of good faith bargaining, are not eligible if such agreement does
not include them in the plan. For the year 2002, the Company contributed a maximum of 9.9% of each participant's
eligible compensation to the 401-k Savings and Retirement Plan (8.9% profit sharing and 1% Company 401-k match).
During the year 2002, $19,800 was contributed to the Company's 401-k Savings and Retirement Plan by the Company
pursuant to the Plan for each of Messrs. Hodnik, Ingevaldson, Griffith, Myer and Ms. Kahle.
The Company has also established a Retirement Benefits Replacement Plan covering all executive officers of the
Company. This is an unfunded Plan under which the participants therein are eligible to receive retirement benefits equal
to the amounts by which the benefits they would otherwise have been entitled to receive under the Company's 401-k
Savings and Retirement Plan may be reduced by reason of the limitations on contributions and benefits imposed by any
current or future provisions of the U.S. Internal Revenue Code or other federal legislation. During the year 2002,
amounts contributed to the
Company's Retirement Benefits Replacement Plan were $97,232 for Mr. Hodnik,
$28,298 for
Mr. Ingevaldson, $24,632 for Mr.
Griffith, $25,540 for Mr. Myer and $32,770 for Ms. Kahle.
The Company also funds the base premium for a supplemental universal life insurance policy for each officer but does
not contribute to supplemental retirement benefits through this vehicle. Participants may elect to deposit a portion (up to
one-third) of the long-term incentive award into the variable annuity insurance policy in their name or may elect to defer
this portion under the Deferral Option Plan.
(4) As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue stock awards of any
kind.
Messrs. Hodnik and Ingevaldson are employed under contracts, each commencing January 1, 2003 for respective terms
of two years, through December 31, 2004. Ms. Kahle and Mr. Myer are employed under contracts, each commencing January
1, 2002 for respective terms of two years, through December 31, 2003. Mr. Griffith is employed under a contract
commencing September 1, 2002 for a term of two years, terminating August 31, 2004. The contracts provide for annual
compensation effective January 1, 2003 of $692,000, $318,000, $347,000, $305,000 and $322,000, respectively, or such
increased amount, if any, as shall be approved by the Board of Directors. If an executive's employment is terminated without
cause, each contract provides for continuing salary payments for the balance of the current contract term, with the minimum
period for these payments being 6 months (12 months in the case of Mr.
Hodnik).
The Company also maintained a Pension Plan which was established December 31, 1970. The Plan was closed to new
entrants on December 31, 1995. Pension Plan benefit accruals were frozen as of February 29, 2000. The Company terminated
the Pension Plan effective April 30, 2000. All active employees were eligible to participate in this Plan on the first January 1
that they were working for the Company. Those active employees covered by a collective bargaining agreement regarding
retirement benefits which were the subject of good faith bargaining were not eligible if such agreement did not include them
in the plan. The Plan provided benefits at retirement at or after age 65 determined under a formula which took into account
60% of a participant's average base pay (including overtime) during the
5 highest consecutive calendar years of employment
and years of service prior to age 65, and under which an offset was applied for the straight life annuity equivalent of the
vested portion of the participant in the amount of benefits provided for them by the Company under the Profit Sharing Plan.
Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing Plan offset)
were as
follows:
Years of Service
Remuneration
10
15
20
25
30 or more
$200,000
$40,000 $60,000
$80,000 $100,000
$120,000
$170,000
34,000 51,000
68,000 85,000
102,000
$150,000
30,000 45,000
60,000 75,000
90,000
$100,000
20,000 30,000
40,000 50,000
60,000
$ 50,000
10,000 15,000
20,000 25,000
30,000
The amounts shown above represent straight life annuity amounts. Maximum benefits from the Pension Plan were
attained after 30 years of service and attainment of age 65. The compensation covered by the Pension Plan consisted of base
compensation (exclusive of bonuses and non-recurring salary or wage payments) not to exceed $200,000 of such total
remuneration paid to a participant during any plan year. Remuneration and yearly benefits under the Plan were limited, and
subject to adjustment, under Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The amount of covered
compensation under the Pension Plan, therefore was $200,000 for each Executive Officer named in the Compensation table.
Upon termination of the plan, the credited years of service under the Pension Plan for the currently employed executive
officers named in the compensation table were as follows: David F. Hodnik - 27 years; Paul M. Ingevaldson - 20 years; Ray
A. Griffith - 6 years; David F. Myer - 18 years and Rita D. Kahle - 14 years.
Compensation Committee Report
The Compensation Committee is responsible for approving the compensation programs, plans and guidelines for all
Corporate and Company Officers, and administering the Company's Executive Incentive Plans. Our decisions are based on
our understanding of Ace's business and its long-term strategies, as well as our knowledge of the capabilities and performance
of the Company and of the executives. We stress long-term measured results, focus on team work, accepting prudent risks
and are strongly committed to fulfilling retailer and consumer needs.
We believe that our retailers (shareholders) are best served by running the Company with a long-term perspective while
striving to deliver consistently good year-end results. Therefore, the Company's Executive Compensation Program and
Officer Incentive Plan has been designed to attract, retain and reward superior talent that will produce positive results and
enhance Ace's position in the highly competitive hardware and home improvement marketplace. The Company is led by
exceptional leaders, many of them long-term Ace team members; while others bring experiences from outside Ace.
We believe the compensation for our executives should be competitive with other high performing retail companies in
order to motivate and retain the talent needed to produce superior results. In that regard, our Committee conducts an overall
review of compensation programs and philosophies bi-annually. We review information supplied by an independent
Compensation consultant and other marketplace data to determine the competitiveness of Ace's total compensation package.
The Committee believes that special leadership competencies and sensitivities are required to balance the unique
relationship between and among the Company, its employees, retailers and vendors. Therefore, we go beyond a simple
evaluation of competitive salary information and Company financial results in making compensation decisions.
Our Committee annually establishes an executive's base salary, based on evaluation of the executive's level of
responsibility and individual performance considered in light of competitive pay practices. We gage Executive performance in
developing and executing corporate strategies; leading and developing people; initiating and leading change; passion for retail
success; balancing the many relationships within and outside the Ace family; and leading and coordinating with others,
programs which impact Company and retailer performance.
Under the Officer Incentive Plan each officer is assigned an incentive target percent at the beginning of the year (the
greater the Officer's responsibility, the higher the target percent is of base salary). This plan has individual, team and retail
sales components. This concept is used to reflect the accomplishments of each Officer's functional organization results,
overall Company wholesale performance and retail sales growth compared to the competition.
Consistent with our focus on long-term objectives, our long-term incentive plan is based on total corporate world-wide
performance. A three-year performance cycle is established each year with Officers receiving an award if minimum
pre-
determined (by the Compensation Committee) performance goals are achieved at the end of each annual cycle. As a pay for
performance plan, the long-term incentive plan is intended to motivate and reward executives by directly linking the amount
of any award to specific long-term corporate financial goals and total team performance. There is a direct shared relationship
between what a retail owner receives in patronage rebate and what the Officer group receives as an award pool.
The President and CEO participates in the base salary, Retail Sales Incentive and Long-Term Incentive Plan
compensation programs described in this report consistent with our compensation philosophy. At risk compensation
represents a major portion of the President and CEO's total compensation package. The President and CEO's compensation
includes a competitive base salary, a significant long-term incentive award to maintain our commitment to long-term company
performance and shareholder return and a retail sales award.
Compensation of Directors
Effective January 1, 2002, each member of the Board of Directors (other than the Chairman of the Board) received a
monthly fee of $3,083 for their services, which was increased to $3,208 per month effective January 1, 2003. Each member of
the Board of Directors (other than the Chairman of the Board) also receives $1,500 per Board of Directors meeting attended.
In addition, each Board of Director Committee Chairperson receives $1,000 per meeting chaired. Mr. Jung is paid an annual
fee of $155,000 in his capacity as Chairman of the Board.
The Company has adopted a Directors' Deferral Option Plan. Like the Officers' Long-Term Incentive Compensation
Deferral Option Plan, under this Directors' Plan, directors may elect to defer a portion (5% to 100%, in 5% increments) of
their annual director's fee. Deferred benefits are payable over a period of 5 to 20 years, as elected. Annual elections are
required for the upcoming deferral year by December 15 of the preceding year.
Each member of the Board is also reimbursed for the amount of travel and lodging expenses incurred in attending
meetings of the Board and of the Committees of the Board. The expenses incurred by them in attending the semi-annual
conventions and exhibits which the Company sponsors are also paid by the Company. Each member of the Board is also paid
$300 per diem compensation for special committee meetings and nominating committee regional trips attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No shares of our stock are held by any of our officers except for the shares held by Mr. Jung. He is a director, but his
position as Chairman of the Board is also an executive officer position under Article VIII Section 1 of our By-laws. We are
not aware of anyone who holds more than five percent of our outstanding voting stock, whether in their own names, or on
behalf of someone else.
The table below shows the shares of our Class B and Class C Stock that is held (directly or indirectly), by our directors,
officers and nominees for directorships as of February 17, 2003:
Class B Stock Owned
Class C Stock Owned
Number Percent
Number Percent
of Shares of Class
of Shares
of Class
Richard F. Baalmann, Jr.
4
..207
3,919
..146
Eric R. Bibens II
- -
- -
1,353
..050
J. Thomas Glenn
4
..207
11,672
..435
Daniel L. Gust
- -
- -
661
..025
D. William Hagan
4
..207
4,148
..155
Howard J. Jung
- -
- -
815
..030
Richard A. Karp
- -
- -
5,425
..202
Jeffrey M. Schulein
- -
- -
10,211
..380
Richard W. Stine
4
..207
11,109
..414
Lori J. Terpstra
- -
- -
811
.030
David S. Ziegler
-
-
10,044
.374
All above directors and officer as a group
16
.828
60,168 2.241
======
======
======= ======
We are not aware of any contracts or securities pledges that may result in a change in control of our Company at a later
date.
Item 13. Certain Relationships and Related Transactions
The term "owner" as used in this section pertains to owners of our shares. It includes both those who are named as
owners of shares on our corporate books and records, as well as those who are not named as owners of record, but for whose
benefit someone else is holding the shares. No director, executive officer or shareholder whom we know to be the owner of
more than five percent of any class of our voting securities or any member of their immediate families had during fiscal year
2002 or is currently expected to have any significant interest (whether direct or indirect) in any transaction over $60,000 with
us, except that those of our directors who are also Ace Hardware dealers purchased merchandise and services from us and
participated in our programs for their stores, including but not limited to our lending programs, in the ordinary course of
business. None of these directors received special terms in connection with these transactions (including, but not limited to
our lending programs) or any benefits that were not available to the other cooperative members that we supply.
Item 14. Controls and Procedures
Our Chief Executive Officer and Principal Financial Officer have concluded, based on their evaluation within 90 days of
the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing
the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been
no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying index (page F-1) to the
consolidated financial statements are
filed as part of this annual report.
2.
Financial Statement Schedules
None.
3.
Exhibits
The exhibits listed on the accompanying index to exhibits (pages E-1 through E-6) are filed as part of this annual
report.
(b) Reports on Form 8-K
A Form 8-K was filed on October 23, 2002 reporting under Item 5: A letter of intent entered into by Ace
Hardware
Corporation to sell all issued and outstanding shares of its wholly-owned subsidiary Ace Hardware Canada, Limited.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has caused this
Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ACE HARDWARE CORPORATION
By HOWARD
J. JUNG
Howard J. Jung
Chairman of the Board and Director
DATED: March 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
HOWARD
J. JUNG
Chairman of the Board
March 24, 2003
Howard J. Jung
and Director
DAVID
F. HODNIK
President
March 24, 2003
David F. Hodnik
and Chief Executive Officer
RITA
D. KAHLE
Executive Vice President
March 24, 2003
Rita D. Kahle
(Principal Financial Officer)
RONALD
J. KNUTSON
Vice President, Controller
March 24, 2003
Ronald J. Knutson
Richard F. Baalmann, Jr., Eric R. Bibens II,
Directors
J. Thomas Glenn, Daniel L. Gust, D. William
Hagan, Richard A. Karp, Jeffrey M. Schulein,
Richard W. Stine, and David S. Ziegler
*By DAVID
F. HODNIK
March 24, 2003
David F. Hodnik
*By RITA
D. KAHLE
March 24, 2003
Rita D. Kahle
*Attorneys-in-fact
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
I, David F. Hodnik, certify that:
1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003
By
DAVID F.
HODNIK
David F. Hodnik
President and Chief Executive Officer
CERTIFICATION OF EXECUTIVE VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
I, Rita D. Kahle, certify that:
1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003
By
RITA D.
KAHLE
Rita D. Kahle
Executive Vice President
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibits
Enclosed
Description
10-P Copy of Lease dated June 19, 2002 for the Registrant's distribution center in Rocklin,
California.
10-a-20 Copy of Fourth Amendment to Ace Hardware Corporation Restated Officer Incentive
Plan adopted December 11, 2002 and effective January 1, 2003.
10-a-21 Copy of current standard form of National Supply Network Distributor Franchise
Agreement.
10-a-22 Copy of Ground Lease dated January 13, 2003 for lease of 82 acres of real estate in
Placer County, California.
10-a-23 Copy of Lease dated February 7, 2002 for the Registrant's freight consolidation center
in Cuyahoga Heights, Ohio.
10-a-24 Copy of Option Agreement and Joint Escrow Instructions dated January 13, 2003 for
purchase of 82 acres of real estate in Placer County, California.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
24 Powers of Attorney.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibits
Incorporated
by 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 filed as Exhibit
3-B to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) filed
on or about March 22, 2002 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 (Registration No. 333-84792) filed on or about March 22, 2002 and
incorporated herein by reference.
4-F Copy of plan for the distribution of patronage dividends with respect to purchases of
merchandise made from the Registrant for the year 2000 and subsequent years adopted by the
Board of Directors of the Registrant on December 6, 2000 and filed as Exhibit 4-F to
Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
4-G Copy of 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 as Exhibit 10-A to the Registrant's Form S-2 Registration Statement (Registration
No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-B Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and Restated as
of January 1, 1997 (for years 1995-2001), consolidated and refiled with First and Second
Amendments as Exhibit 10-B to the Registrant's Form S-2 Registration Statement (Registration
No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-C Copy of First Amendment to Ace Hardware Corporation Deferred Compensation Plan adopted
on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment No. 3 to the Registrant's
Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-D Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans)
adopted on December 6, 2000 filed as Exhibit 10-D to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-E Copy of Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999
consolidated and refiled with First, Second and Third Amendments as Exhibit 10-E to the
Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about March
22, 2002 and incorporated herein by reference .
10-F Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
Agreement dated as of August 23, 1996 as amended by the First Modification of Amended
and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The
Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective Amendment
No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
about March 18, 1998 and incorporated herein by reference.
10-G Copy of Participation Agreement with PNC Commercial Corp. dated December 17, 1997
establishing a $10,000,000 discretionary leasing facility for the purchase of land and
construction of retail hardware stores filed as Exhibit 10-G to Post-Effective Amendment No. 3
to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about
March 18, 1998 and incorporated herein by reference.
10-H Copy of form of Executive Officer Employment Agreement effective January 1, 1996 filed as
Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) filed on or about March 11, 1996 and incorporated
herein by reference.
10-I Copy of Note Purchase and Private Shelf Agreement with The Prudential
Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A
Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit
10-A-q to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or
about March 23, 1992 and incorporated herein by reference.
10-J Copy of current standard form of Ace Hardware Corporation International
Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-K Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P
to Pre-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about April 26, 1995 and incorporated herein by reference.
10-L Copy of Supplement to Ace Hardware Membership Agreement effective April 1, 2000, filed as
Exhibit 10-L to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by
reference.
10-M Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued
September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000 Private Shelf Facility,
pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance
Company of America dated as of September 22, 1993 filed as Exhibit 10-R to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No.
33-46449) on or about March 23, 1994 and incorporated herein by reference.
10-N Copy of Lease dated March 24, 1997 for print shop facility of Registrant in Downers Grove,
Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and
incorporated herein by reference.
10-O Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook,
Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-46449) on or about March 22, 1993 and
incorporated herein by reference.
10-P No exhibit incorporated by reference. See Index to Exhibits, Exhibits Enclosed for the
applicable materials.
10-Q Copy of Ace Hardware Corporation Deferred Compensation Plan effective January 1, 1994
filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the Registrant's Form S-2
Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and
incorporated herein by reference.
10-R Copy of current standard form of Ace Hardware Corporation License Agreement for
international licensees filed as Exhibit 10-R to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-S Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant in Chicago,
Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration Statement (Registration
No. 33-58191) on or about March 23, 1995 and incorporated herein by reference.
10-T Copy of Long-Term Incentive Compensation Deferral Option Plan of the Registrant effective
January 1, 2000 filed as Exhibit 10-a-13 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference.
10-U Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective January 1, 2001
filed as Exhibit 10-U to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
incorporated herein by reference.
10-V Copy of Ace Hardware Corporation Long-Term Compensation Deferral Option Plan effective
January 1, 1995 consolidated and refiled with First, Second and Third Amendments as Exhibit
10-V to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or
about March 22, 2002 and incorporated herein by reference.
10-W Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R
Corporation for retail hardware store premises located in Yorkville, Illinois filed as Exhibit
10-a-11 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.
10-X Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace
Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada filed as Exhibit
10-a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.
10-Y Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware
Canada Limited for general office space in Markham, Ontario, Canada filed as Exhibit 10-a-13 to
Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.
10-Z Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on
August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment No. 4 to the Registrant's
Form S-2 Registration Statement (Registration No.
33-58191) on or about March 15, 1999 and incorporated herein by reference.
10-a-1 Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July
19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and
incorporated herein by reference.
10-a-2 Copy of current standard form of International Retail Merchant Agreements filed as Exhibit
10-a-2 to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
10-a-3 Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in
Wilton, New York filed as Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
12, 1997 and incorporated herein by reference.
10-a-4 Copy of 6.47% Series A Senior Notes in the aggregate principal amount of $30,000,000 issued
August 23, 1996 with a maturity date of June 22, 2008 and $70,000,000 Private Shelf Facility,
pursuant to Amended and Restated Note Purchase and Private Shelf Agreement with the
Prudential Insurance Company dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective
Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No.
33-58191) on or about March 12, 1997 and incorporated herein by reference.
10-a-5 Copy of First Amendment to Ace Hardware Corporation Directors' Deferral Option Plan
(effective January 1, 2001) adopted December 5, 2001 and effective January 1, 2002 filed as
Exhibit 10-a-5 to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792)
on or about March 22, 2002 and incorporated herein by reference.
10-a-6 Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility in Loxley,
Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and
incorporated herein by reference.
10-a-7 Copy of current standard form of Industrial Distributor Agreement filed as Exhibit 10-a-7 to the
Registrant's Form S-2 Registration Statement (Registration No. 333-84792) filed on or about
March 22, 2002 and incorporated herein by reference.
10-a-8 Copy of First Amendment to Ace Hardware Corporation Long-Term Incentive Compensation
Deferral Option Plan (effective January 1, 2000) adopted December 5, 2001 and effective
January 1, 2002 filed as Exhibit 10-a-8 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-9 Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center in
Baltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-10 Copy of Amendment dated April 24, 2001 to Note Purchase and Private Shelf Agreement dated
as of September 27, 1991, and Restated Note Purchase and Private Shelf Agreement dated as
of August 23, 1996 with The Prudential Insurance Company of America filed as Exhibit 10-a-10
to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about
March 22, 2002 and incorporated herein by reference.
10-a-11 Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000 filed as
Exhibit 10-a-11 to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration
Statement (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by
reference.
10-a-12 Copy of Lease effective November 27, 2000 for freight consolidation center of the Registrant
in Fort Worth, Texas filed as Exhibit 10-a-12 to Post-Effective Amendment No. 6 to the
Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
22, 2001 and incorporated herein by reference.
10-a-13 Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional general office
space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois filed as Exhibit 10-a-13 to
Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
(Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.
10-a-14 Copy of current standard form of Limited Liability Company Agreement for retail joint
ventures filed as Exhibit 10-a-14 to Post-Effective Amendment No. 6 to the Registrant's Form
S-2 Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
incorporated herein by reference.
10-a-15 Copy of Amendment dated September 25, 2000 to Restated Note Purchase and Private Shelf
Agreement dated as of August 23, 1996 with The Prudential Insurance Company of America
filed as Exhibit 10-a-15 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
incorporated herein by reference.
10-a-16 Copy of Lease dated June 30, 2000 for the Registrant's supplemental warehouse space in
Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-17 Copy of Lease dated January 16, 2002 for the Registrant's freight consolidation center in
Summit, Illinois filed as Exhibit 10-a-17 to the Registrant's Form S-2 Registration Statement
(Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-18 Copy of Amendment dated September 10, 2001 to Note Purchase and Private Shelf Agreement
dated as of September 27, 1991, and Restated Note Purchase and Private Shelf Agreement
dated as of August 23, 1996 with The Prudential Insurance Company of America filed as
Exhibit 10-a-18 to the Registrant's Form S-2 Registration Statement (Registration No.
333-84792) on or about March 22, 2002 and incorporated herein by reference.
10-a-19 Copy of Note Purchase Agreement dated April 15, 2001 for the issuance and sale of up to
$100,000,000 of Senior Notes, under which $70,000,00 of 7.27% Senior 2001-A Notes with a
maturity date of April 30, 2013 have been sold to various purchasers filed as Exhibit 10-a-19 to
the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about
March 22, 2002 and incorporated herein by reference.
Upon request of the Commission, we agree to furnish copies of any
agreements regarding indebtedness that does not
exceed ten percent of our total assets and the assets of our subsidiaries on a
consolidated basis.
Supplemental Information to be
Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants
which
have not Registered Securities Pursuant to Section 12 of the Act.
As of the date of the Report
mentioned above, proxy soliciting materials for our 2003 annual meeting have not
been sent
to our shareholders. Copies of proxy soliciting materials will be sent to our
shareholders and furnished to the Securities and
Exchange Commission at a later date.
Index to Consolidated Financial Statements and Financial Statement Schedules
Independent Auditors' Report
Consolidated Balance Sheets at December 28, 2002 and December 29, 2001
Consolidated Statements of Earnings and Consolidated Statements of
Comprehensive Income for each of the years in the three-year period
ended December 28, 2002
Consolidated Statements of Member Dealers' Equity for each of the years in the
three-year period ended December 28, 2002
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 28, 2002
Notes to Consolidated Financial Statements
All schedules have been omitted because the required information is not present or is not present in amounts sufficient to
require submission of the schedule or the required information is included in the consolidated financial statements or the notes
thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace Hardware Corporation and subsidiaries as of
December 28, 2002 and December 29, 2001, and the related consolidated statements of earnings, comprehensive income,
member dealers' equity and cash flows for each of the years in the three-year period ended December 28, 2002. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Ace Hardware Corporation and subsidiaries as of December 28, 2002 and December 29, 2001, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 28, 2002 in conformity
with accounting principles generally accepted in the United States of America.
Chicago, IllinoisKPMG LLP
Buildings and improvements 10-40 Straight line
Warehouse equipment 5-10 Accelerated
Office equipment 3-10 Various
Manufacturing equipment 3-20 Straight line
Transportation equipment 3-7 Straight line
Leasehold improvements are generally amortized on a straight-line basis over the term of the respective lease.
(h) Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance
sheet date while revenues and expenses are translated at the average monthly exchange rates prevailing during the
year. The
Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and
losses on these
foreign hedges are included in the basis of the underlying hedged investment. Foreign currency
translation adjustments, net of
gains on foreign exchange contracts, are reflected in the accompanying Consolidated
Statements of Comprehensive Income
for 2002, 2001 and 2000. The Company did not have any outstanding foreign exchange forward contracts at December 28,
2002 or December 29, 2001.
(
i)
Financial Instruments
The carrying value of assets and liabilities that meet the definition of a financial instrument included in the
accompanying
Consolidated Balance Sheets approximate fair value.
( j)
Retirement Plans
The Company has retirement plans covering substantially all non-union employees. Costs with respect to the
noncontributory pension plans are determined actuarially and consist of current costs and amounts to amortize prior
service
costs and unrecognized gains and losses. The Company contribution under the profit sharing plan is
determined annually by
the Board of Directors and charged to expense in the period it is earned by employees.
(k)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted 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. With respect to the Company's discontinued
operation, actual losses could differ
from those estimates and will be reflected as adjustments in future financial
statements when probable and estimable.
(l)
Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Amounts incurred for
shipping and
handling are included in cost of sales.
(m)
Fiscal Year
The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2002, 2001 and 2000 ended on
December 28, 2002, December 29, 2001 and December 30, 2000, respectively.
(n)
Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to comparable
classifications followed in 2002. During 2002, the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within distribution operations expenses and
reclassified
certain amounts within selling, general and administrative expenses to distribution operations expenses.
These
reclassifications had no effect on previously reported income.
(2)
Discontinued Operations
In August of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144") which supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed O f
"
. While SFAS 144 retains many of the fundamental recognition and measurement provisions of
SFAS 121, it changes the criteria required to be met to classify an asset as held for sale. SFAS 144 also supercedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", and
among other things, broadens reporting for discontinued operations to include a component of an entity, rather than just a
segment of a business. The Company adopted SFAS 144 in 2002, and applied its provisions in reporting discontinued
operations in 2002.
In 2002, the Company entered into an agreement to sell Ace
Hardware Canada Limited, a wholly-owned subsidiary for
cash
proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13, 2003, at which time the sale proceeds were received and used to repay outstanding indebtedness.
The Company recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002. Losses
from operations of Ace
Hardware Canada Limited were US $5.4 million in 2002, US $11.1 million in 2001 and US $723,000 in 2000.
The Company has classified the assets and liabilities of Ace
Hardware Canada Limited as held for sale in the accompanying
consolidated financial statements, and reclassified the financial statement and related notes for all periods presented to display
the operating results of this business as discontinued operations.
For business segment reporting purposes, Ace Hardware
Canada Limited results were previously included in the "Wholesale" segment.
Net sales from the discontinued operation for the years 2002, 2001 and 2000 were US $24.6 million, US $27.9 million
and US $75.3 million, respectively. Total assets of the discontinued operation for the years 2002 and 2001 were US $10.3
million and US $18.1 million, respectively. Total liabilities of the discontinued operation for the 2002 and 2001 were US $6.8
million and US $3.7 million, respectively.
(3) Inventories
Inventories consist primarily of merchandise inventories. Substantially all of the Company's 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 $57,295,000 and $57,809,000 at December 28, 2002 and December 29, 2001, respectively. Indirect costs,
consisting primarily of warehousing costs, are absorbed as inventory costs rather than period costs.
(4) Short-Term Borrowings
At December 28, 2002 the Company has available a revolving credit facility with a group of banks providing for $175.0
million in committed lines of credit and also has available $10.0 million in uncommitted lines. The facility requires the
Company to comply with various financial covenants for which the Company was in compliance at December 28, 2002 and
December 29, 2001. The facility expires on May 2, 2005. The maximum amount outstanding at any month-end during the
period was $104.4 million in 2002 and $128.0 million in 2001. The monthly weighted average borrowing levels during 2002
and 2001 were $57.3 million and $77.9 million, respectively. The interest rate under the revolving credit facility is based
upon a spread over LIBOR based upon quarterly debt to EBITDA ratios. The weighted average interest rate effective as of
December 28, 2002 and December 29, 2001 was 1.94% and 2.58%, respectively. Short-
term borrowings outstanding as of
December 28, 2002 and December 29, 2001 were $48.9 million and
$72.6 million, respectively. The aggregate unused line
of credit available at December 28, 2002 and December 29, 2001 was $136.1 million and $112.4 million, respectively. At
December 28, 2002 the Company had no compensating balance requirements.
(5)
Long-Term Debt
Long-term debt is comprised of the following:
December
28,
December 29,
2002
2001
(000's omitted)
Notes Payable:
$20,000,000 due in quarterly installments of $540,500
with interest payable quarterly at a fixed rate of 8.74% and a
maturity date of July 1, 2003
$
1,622
$
3,784
$30,000,000 due in semi-annual installments of $2,000,000
with interest payable quarterly at a fixed rate of 6.47% and a
maturity date of June 22, 2008
22,000
26,000
$20,000,000 due in quarterly installments of $714,300
commencing September 15, 2004 with interest payable quarterly
at a fixed rate of 7.49% and a maturity date of June 15, 2011
20,000
20,000
$30,000,000 due in annual installments of $6,000,000
commencing March 25, 2005 with interest payable quarterly
at a fixed rate of 7.55% and a maturity date of March 25, 2009
30,000
30,000
$25,000,000 due in annual installments of $5,000,000
commencing February 9, 2006 with interest payable quarterly
at a fixed rate of 6.61% and a maturity date of February 8, 2010
25,000
25,000
$70,000,000 due in annual installments of $14,000,000
commencing April 30, 2009 with interest payable semi-annually
at a fixed rate of 7.27% and a maturity date of April 30, 2013
70,000
70,000
Installment notes with maturities through 2006 at a fixed rate of 6.00%
100
2,754
168,722
177,538
Less current installments
(5,647)
(7,151)
$ 163,075
$
170,387
===========
===========
The debt covenants on the notes payable are substantially consistent with the revolving credit facility. Aggregate
maturities of long-term debt are $5,647,000, $5,454,000, $12,882,000, $17,882,000 and $17,857,000 in 2003 through 2007,
respectively, and $109,000,000 thereafter.
(6)
Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or will pay patronage dividends to member dealers on
the portion of earnings derived from business done with such dealers. Patronage dividends are allocated in proportion to the
volume of purchases by member dealers during the period. The amount of patronage dividends to be remitted in cash depends
upon the level of dividends earned by each member outlet, ranging 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. Amounts exceeding the cash portion will be distributed in the form of Class C $100 par value stock, to a maximum
based upon the current year purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional
cash and patronage refund
certificates having maturity dates and bearing interest as determined by the Board of Directors. A
portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied
toward payment of principal and interest on any balances outstanding for approved patronage financing programs.
The patronage dividend composition for 2002, 2001 and 2000 follows:
Subordinated
Class
Patronage
Total
Cash
Refund
C
Financing
Patronage
Portion
Certificates
Stock
Deductions
Dividends
(000's omitted)
2002
$38,687
$20,651
$26,053
$10,189
$95,580
2001
34,229
18,739
23,284
8,857
85,109
2000
34,764
18,029
24,267
9,477
86,537
Patronage dividends are allocated on a fiscal year basis with issuance in the following year.
The patronage refund certificates outstanding or issuable at December 28, 2002 are payable as follows:
&nb
sp;
Interest
January 1,
Amount
Rate
(000's omitted)
2003
$13,196
6.00%
2004
15,094
6.00%
2005
12,232
6.25%
2006
17,331
6.50%
2007
18,512
6.00%
2008
20,651
6.00%
(7)
Retirement Plans
The Company has two defined benefit pension plans covering substantially all non-union employees, the Employees'
Pension Plan and Trust and the Employees' Retirement Income Plan and Trust. The Company terminated the Employees'
Pension Plan and Trust effective April 30, 2000. Benefits in these plans are based on years of service, highest average
compensation (as defined) and the related profit sharing and primary social security benefit. Contributions to the plans are
based on the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that are currently
deductible for tax reporting purposes. As of December 28, 2002 plan assets in the Employees' Retirement Income Plan and
Trust were held in a group annuity contract.
Pension expense for 2002, 2001 and 2000 included the following components:
December
28,
December
29,
December 30,
2002
2001
2000
(000's omitted)
Service cost - benefits earned during the
period
$
43
$
41
$ 52
Interest cost on projected benefit
obligation
121
116
112
Expected return on plan
assets
(131)
(123)
(115)
Net amortization and
deferral
- -
- -
(31)
Gain on
curtailment
- -
(58)
- -
Net periodic pension expense
(income)
$
33
$
(24)
$ 18
===========
===========
===========
The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated
Balance Sheets at December 28, 2002 and December 29, 2001:
December 28,
December 29,
2002
2001
(000's omitted)
Change
in benefit obligation:
Benefit obligation at beginning of year
$ 1,714
$ 1,656
Service cost
43
41
Interest cost
121
116
Actuarial losses
123
91
Curtailment and settlements
-
(141)
Benefits paid
(67)
(49)
Benefit obligation at end of year
1,934
1,714
Change in plan assets:
Fair value of plan assets at beginning of year
1,645
1,560
Actual return on plan assets
108
91
Employer contribution
64
43
Benefits paid
(67)
(49)
Fair value of plan assets at end of year
1,750
1,645
Funded status
(184)
(69)
Unrecognized transition asset
5
6
Unamortized prior service cost
(3)
(4)
Unrecognized net actuarial losses
224
78
Prepaid pension asset
$ 42
$ 11
============
===========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was
6.75% in 2002 and 7.25% in 2001. The related expected long-term rate of return was 8.0% in 2002 and 2001. The rate of
increase in future compensation was projected using actuarial salary tables plus 1.0% in 2002 and 2001.
Ace also participates in several multi-employer plans covering union employees. Amounts charged to expense and
contributed to the plans totaled approximately $304,000, $212,000 and $222,000 in 2002, 2001 and 2000, respectively.
The Company's profit sharing plan contribution for 2002, 2001 and 2000 was approximately $17,040,000, $14,253,000
and $14,586,000, respectively.
(8) Income Taxes
As a cooperative, the Company distributes substantially all of its patronage sourced earnings to
its members in the form of patronage dividends. The 2002, 2001 and 2000 provisions (benefit) for federal income taxes were
$(756,000), $3,037,000 and $(162,000), respectively, and for state income taxes were $289,000, $381,000 and $289,000,
respectively.
The Company made tax payments of $374,000, $807,000 and $1,095,000 during 2002, 2001 and 2000, respectively.
(9) Member Dealers' Equity
The Company's classes of stock are described below:
December 28,
December 29,
2002
2001
Class A Stock, voting, redeemable at par value -
Authorized 10,000 10,000
Issued and outstanding 3,617 3,693
Class B Stock, nonvoting, redeemable at not less than
twice par value-
Authorized 6,500 6,500
Issued 6,499 6,499
Outstanding 1,944 2,108
Treasury stock 4,555 4,391
Class C Stock, nonvoting, redeemable at not less
than par value -
Authorized 4,000,000 4,000,000
Issued and outstanding 2,696,122 2,602,243
Issuable as patronage dividends 260,526 232,839
Additional Stock Subscribed:
Class A Stock 40 94
Class B Stock - -
Class C Stock 8,740 9,770
At December 28, 2002 and December 29, 2001, there were no common shares reserved for options,
warrants,
conversions or other rights; nor were any options granted or exercised during 2002, 2001 or 2000. Upon voluntary or
involuntary liquidation or bankruptcy, Class B and Class C shareholders would first receive amounts to repurchase the shares
at prices previously set by the Company's Board of Directors from the net assets of the Company. If the available net assets
are not sufficient, each outstanding share of Class B and Class C stock will share in the distribution of the Company's net
assets in proportion to its purchase or redemption price to the total available for payment.
Member dealers may subscribe for the Company's stock in various prescribed combinations. Only one share of Class A
Stock may be owned by a dealer with respect to the first member retail outlet controlled by such dealer. Only four shares of
Class B Stock may be owned by a dealer with respect to each retail outlet controlled by such dealer, but only if such outlet
was a member of the Company on or before February 20, 1974. An appropriate number of shares of Class C Stock must be
included in any subscription by a dealer in an amount to provide that such dealer has a par value of all shares subscribed for
equal to $5,000 for each retail outlet. Unregistered shares of Class C Stock are also issued to dealers in connection with
patronage dividends. No dividends can be declared on any shares of any class of the Company's Stock.
Upon termination of the Company's membership agreement with any retail outlet, all shares of stock of the Company
held by the dealer owning or controlling such outlet, must be sold back to the Company, unless a transfer of such shares is
made to another party accepted by the Company as a member dealer with respect to the same outlet.
A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C
shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Additional stock
subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion.
All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at
twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price
over par is allocated equally between contributed capital and retained earnings.
Treasury stock transactions during 2000, 2001 and 2002 are summarized below:
Shares Held in Treasury
Class A
Class B
Class C
Balance at January 1, 2000
- -
4,067
- -
Stock issued
- -
- -
- -
Stock repurchased
307
180
141,365
Stock retired
(307)
- -
(141,365)
Balance at December 30, 2000
- -
4,247
- -
Stock issued
- -
- -
- -
Stock repurchased
260
144
144,584
Stock retired
(260)
- -
(144,584)
Balance at December 29, 2001
- -
4,391
- -
Stock issued
- -
- -
- -
Stock repurchased
247
164
151,070
Stock retired
(247)
- -
(151,070)
Balance at December 28, 2002
- -
4,555
- -
======
======
=======
(10) Segments
The Company is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint
products. The Company's customers consist principally of its member dealers. No single customer or commonly-controlled
group of customers accounted for more than 10% of the Company's consolidated sales during 2002, 2001, or 2000.
The Company identifies segments based on management responsibility and the nature of the business activities of each
component of the Company. The Company measures segment earnings as operating earnings including an allocation for
interest expense and income taxes. The net sales from external customers included in the Other category are primarily
generated from company-owned retail locations. Information regarding the identified segments and the related reconciliation
to consolidated information are as follows:
December
28, 2002
(000's omitted)
Elimination of
Paint
Intersegment
Wholesale
Manufacturing
Other
Activities
Consolidated
Net sales from external customers
$2,961,217
$ 18,977
$ 48,903
$ -
$3,029,097
Intersegment sales
24,211
119,110
-
(143,321)
-
Interest expense
21,583
1,127
817
(1,944)
21,583
Depreciation and amortization
28,079
1,751
1,829
-
31,659
Segment profit (loss)
from continuing operations
84,534
13,414
(4,756)
(233)
92,959
Identifiable segment assets
1,032,473
60,661
69,809
(19,591)
1,143,352
Expenditures for long-lived assets
26,399
1,954
1,841
-
30,194
December 29, 2001
(000's omitted)
Elimination of
Paint
Intersegment
Wholesale
Manufacturing
Other
Activities
Consolidated
Net sales from external customers
$2,852,240
$ 18,668
$ 52,974
$ -
$2,923,882
Intersegment sales
27,881
110,621
- -
(138,502)
- -
Interest expense
23,100
1,094
1,459
(2,553)
23,100
Depreciation and amortization
24,594
1,768
1,933
- -
28,295
Segment profit (loss)
from continuing operations
74,595
11,255
(1,330)
(360)
84,160
Identifiable segment assets
1,053,139
62,205
71,961
(18,514)
1,168,791
Expenditures for long-lived assets
47,165
1,673
2,592
- -
51,430
December 30, 2000
(000's omitted)
Elimination of
Paint
Intersegment
Wholesale
Manufacturing
Other
Activities
Consolidated
Net sales from external customers
$2,858,988
$ 20,852
$ 44,347
$ -
$2,924,187
Intersegment sales
28,641
100,780
-
(129,421)
-
Interest expense
21,670
1,209
1,278
(2,487)
21,670
Depreciation and amortization
27,833
1,694
1,403
-
30,930
Segment profit (loss)
from continuing operations
74,263
9,739
(2,452)
(435)
81,115
Identifiable segment assets
1,013,093
68,130
61,812
(19,225)
1,123,810
Expenditures for long-lived assets
39,807
937
3,905
-
44,649
Net sales and long-lived assets by geographic region based upon customer location for 2002, 2001 and 2000 were as follows:
December 28, 2002
December 29, 2001
December 30, 2000
(000's omitted)
Net sales:
United States
$2,930,255
$2,825,302
$2,803,116
Foreign countries
98,842
98,580
121,071
Total
$3,029,097
$2,923,882
$2,924,187
========
========
========
Long-lived assets, net:
United States
$
284,032
$,
285,345
$,
258,802
Foreign countries
-
-
-
Total
$ 284,032
$
285,345
$ 258,802
=========
=========
========
(11) Commitments
The Company primarily rents buildings, warehouse and office space and certain
other equipment under operating
leases. At December 28, 2002 annual minimum rental
commitments under leases that have initial or remaining noncancelable
terms in excess of one year are as follows:
December 28,
Year Ending,
2002
(000's omitted)
2003
$ 19,522
2004
16,650
2005
12,772
2006
10,416
2007
7,969
Thereafter
27,443
Total minimum lease payments
$ 94,772
===========
All leases expire in
or prior to 2017. Under certain leases, the Company pays real estate taxes, insurance and maintenance
expenses in addition to rental expense. Management expects that in the normal course of business, leases that expire will be
renewed or replaced by other leases. Rent expense was approximately $46,436,000, $49,336,000 and $45,514,000 in 2002,
2001 and 2000, respectively. Rent expense includes $9,276,000, $9,793,000 and $9,977,000 in contingent rentals paid in
2002, 2001 and 2000, respectively, primarily for transportation equipment mileage.
(12) Other Information
The Company expenses advertising costs the first time the advertising takes place. Gross advertising expense, prior to
reimbursements from dealers and suppliers, amounting to $100,781,000, $94,553,000 and $93,340,000 was charged to
operations in 2002, 2001 and 2000, respectively. Cost reimbursements from dealers and suppliers amounted to $96,261,000,
$92,376,000 and $93,535,000 for 2002, 2001 and 2000, respectively.
Interest paid was $20,084,000, $20,574,000 and $20,256,000 in 2002, 2001 and 2000, respectively, net of capitalized
interest of $289,000 and $715,000 in 2001 and 2000, respectively.
Other income, net consists primarily of interest income, past due and low volume retailer charges, gains on the sales of
property and equipment, and earnings, losses or adjustments of minority-owned investments as follows:
2002
2001
2000
Interest income
$
5,000
$
6,389
$ 7,190
Past due and low volume retailer charges
4,413
5,318
4,620
Gains on the sales of property and equipment, net
-
4,945
418
Earnings of minority-owned investments
1,462
1,048
764
Adjustment of minority-owned investment
- -
(5,000)
(3,300)
Gain on pension plan termination
-
-
3,599
Other
(820)
(291)
1,309
Total
$
10,055 $
12,409 $
14,600
=======
======= =======
In the normal course of business, the Company enters into commercial commitments including standby letters of credit
and guarantees that could become contractual obligations. Letters of credit are issued generally to insurance agencies and
financial institutions in direct support of the Company's corporate and retailer insurance programs and retailer lending
programs. As of December 28, 2002 and December 29, 2001, the Company had outstanding letters of credit with expiration
terms less than 1 year of $13,848,000 and $13,160,000, respectively. The Company enters into both limited and full
guarantees primarily to financial institutions in direct support of retailer lending programs. Outstanding guarantees were
$11,018,000 and $14,711,000 at December 28, 2002 and December 29, 2001, respectively. Aggregate expirations of
guarantees are $6,905,000 in 2003, $3,396,000 in 2004 through 2006, and $717,000 in 2007 through 2008.