Item 1. Business
Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, by means of a corporate merger, it succeeded to the business of Ace Hardware Corporation, an Illinois corporation organized in 1928. Until 1973, the business now being engaged in by the Company had been conducted by the Illinois corporation. The Company's principal executive offices are located at 2200 Kensington Court, Oak Brook, Illinois 60521. Its telephone number is (630) 990-6600. The Company functions as a wholesaler of hardware and related products, and manufactures paint products. Sales of the products distributed by it are presently made primarily to individuals, partnerships or corporations who are engaged in business as retail dealers of hardware or related items and who have entered into Membership Agreements with the Company entitling them to purchase merchandise and services from the Company and to use the Company's marks as provided therein. The Company operates on a cooperative basis and distributes patronage dividends to its eligible member dealers each year in proportion to the amount of their annual purchases of merchandise from it. (See the subheading "Distribution of Patronage Dividends.") At December 31, 1996 there were 5,067 retail business outlets with respect to which such Membership Agreements had been entered into. Those States having the largest concentration of member outlets are California (approximately 10%), Illinois and Texas (approximately 6% each), Florida (approximately 5%) and Michigan and Georgia (approximately 4% each). States into which were shipped the largest percentages of the merchandise sold by the Company in 1996 are California (approximately 11%), Illinois (approximately 7%), Florida and Texas (approximately 6% each), Michigan (approximately 5%) and Georgia (approximately 4%). Approximately 4% of the Company's sales are made to outlets located outside of the United States or its territories. Information as to the number of the Company's member outlets during each of the past three calendar years is set forth in the following table:
1996 1995 1994 ---- ---- ---- Member outlets at beginning of period 5,007 4,940 4,921 New member outlets 272 285 198 Member outlets terminated 212 218 179 ----- ----- ----- Member outlets at end of period 5,067 5,007 4,940 ===== ===== ===== Dealers having one or more member outlets at end of period 4,084 4,055 4,054
The Company services its dealers by purchasing merchandise in quantity lots, primarily from manufacturers, by warehousing substantial quantities of said merchandise and by selling the same in smaller lots to the dealers. Most of the products that the Company distributes to its dealers from its regional warehouses are sold at a dealer price established by the Company ("dealer cost"), to which a 10% adder ("handling charge") is generally added. In 1996 warehouse sales accounted for 61% of total sales and bulletin sales accounted for 2% of total sales with the balance of 37% representing direct shipment sales, including lumber and building materials. The proportions in which the Company's total warehouse sales were divided among the various classes of merchandise sold by it during each of the past three calendar years are as follows:
Class of Merchandise 1996 1995 1994 -------------------- ---- ---- ---- Paint, cleaning and related supplies 20% 19% 19% Plumbing and heating supplies 16% 16% 16% Hand and power tools 14% 14% 14% Garden, rural equipment and related supplies 13% 13% 11% General hardware 12% 13% 13% Electrical supplies 12% 13% 12% Sundry 7% 7% 9% Housewares and appliances 6% 5% 6%
The Company sponsors two major conventions annually (one in the Spring and one in the Autumn) at various locations. Dealers and vendors are invited to attend, and dealers generally place orders for delivery during the period prior to the next convention. During the convention, regular merchandise, new merchandise and seasonal merchandise for the coming season are displayed to attending dealers. Lawn and garden supplies, building materials and exterior paints are seasonal merchandise in many parts of the country, as are certain sundries such as holiday decorations. Warehouse sales involve the purchase of merchandise from the Company that is maintained in inventory by the Company at its warehouses. Direct shipment sales involve the purchase of merchandise from the Company with shipment directly from the vendors. Bulletin sales involve the purchase of merchandise from the Company pursuant to special bulletin offers by the Company. Direct shipment sales are orders placed by dealers directly with vendors, using special purchase orders. Such vendors bill the Company for such orders, which are shipped directly to dealers. The Company, in turn, bills the ordering dealers with an adder ("handling charge") that varies in accordance with the following schedule and is exclusive of sales under the LTL Plus program discussed below.
Invoice Amount Adder (Handling Charge) -------------- ----------------------- $ 0 to $ 999.99 2.00% or $1.00 whichever is greater $1,000.00 to $1,999.99 1.75% $2,000.00 to $2,999.99 1.50% $3,000.00 to $3,999.99 1.25% $4,000.00 to $4,999.99 1.00% $5,000.00 to $5,999.99 .75% $6,000.00 to $6,999.99 .50% $7,000.00 to $7,999.99 .25% $8,000.00 and over .00%
Bulletin sales are made based upon notification from dealers of their participation in special bulletins offered by the Company. Generally, the Company will give notice to all members of its intention to purchase certain products for bulletin shipment and then purchases only so many of such products as the members order. When the bulletin shipment arrives at the Company, it is not warehoused, but is broken up into appropriate quantities and delivered to members who placed orders. A 6% adder ("handling charge") is generally applied to this category of sales. An additional adder of 3% applies to various categories of sales of merchandise exported to certain dealers located outside of the United States and its territories and possessions. Ace dealers located outside of the United States and its territories and possessions not subject to the additional 3% adder are assessed a flat 2% adder on all direct shipment sales. The Company maintains inventories to meet only normal resupply orders. Resupply orders are orders from members for merchandise to keep inventories at normal levels. Generally, such orders are filled within one week of receipt. Bulletin orders (which are in the nature of resupply orders) may be for future delivery. The Company does not backlog normal resupply orders and, accordingly, no significant backlog exists at any point in time. The Company also has established special sales programs for lumber and building materials products and for products assigned from time to time to an "extreme competitive price sales" classification and for products purchased from specified vendors for delivery to certain of the Company's dealers on a direct shipment basis (LTL Plus Program). Under its lumber and building materials ("LBM") program, the Company imposes no adder ("handling charge"), or national advertising assessment on direct shipment orders for such products. The LBM program enables the Company's dealers to realize important savings resulting from the Company's closely monitored lumber and building materials purchasing procedures. Additionally, the LBM program offers dealers the opportunity to order less-than-truckload quantities of many lumber and building materials products at economical prices under the LTL warehouse redistribution procedure which the Company has established with certain major vendors. The Store Traffic Opportunity Program ("STOP") established by the Company is a program under which certain stockkeeping units of specific products assigned to a "competitive price sales" classification are offered for sale to its dealers for delivery from designated Company retail support centers. Sales under this program are made without the addition of freight charges and with such adder ("handling charge"), if any, of not more than 5% as shall be specified for each item. The Company's officers have authority to add items to, and to withdraw items from, the STOP program from time to time and to establish reasonable minimum or multiple item purchase requirements for the items offered under the program. No allocations or distributions of patronage dividends are made with respect to sales under the STOP program. Purchases under the STOP program are, however, deemed to be warehouse purchases or bulletin purchases, as the case may be, for purposes of calculating the forms of patronage dividend distributions. (See the subheading under this Item 1 entitled "Forms of Patronage Dividend Distributions.") The LTL Plus Program established by the Company is a program under which full or partial truckloads of products are purchased by the Company's dealers from specified vendors for delivery to such dealers on a direct shipment basis. No adder ("handling charge") or national advertising assessment is imposed by the Company on sales under the LTL Plus Program, and the maximum amount of patronage dividends allocated or distributed to the Company's dealers with respect to their purchases of products in the LTL Plus category is .5% of such sales. (See the subheading under this Item 1 entitled "Patronage Dividend Determinations and Allocations.") The Company, in addition to conducting semi-annual and other conventions and product exhibits for its dealers, also provides them with numerous special services (on a voluntary basis and at an established cost), such as inventory control systems, as well as price and bin ticketing. In order for them to have on hand current pricing and other information concerning the merchandise obtainable from the Company, the Company further provides to each of its dealers either a catalogue checklist service or a microfiche film service (whichever the dealer selects), for either of which services the dealer must pay a monthly charge. The Company also provides on a full-participation basis videotapes and related materials for educational and training programs for which dealers must pay an established monthly charge. (See the subheading under this Item 1 entitled "Special Charges and Assessments.") The Company has an ongoing strategic planning process and has focused its strategic plans around four cornerstones for future growth and success in this competitive industry. The four cornerstones are: Retail Success (store operations), Wholesale Success (distribution), International growth and new member growth. Dealer retail success is a primary objective since it drives both retail performance and wholesale growth of the Company. The Company has accelerated its efforts in assisting member dealers in "retail success initiatives" designed to document and improve their retail performance and competitiveness. The retail success initiatives include retail goals which each dealer should strive for within their store and local competitive environment, but do not dictate material restrictions or requirements on member dealers. Minimum requirements for acceptance of a member dealer by the Company are outlined only in the Membership Agreement and in the Member Operational Requirements under the Ace Hardware Membership Agreement. The Operational Requirements do require that, within one year from the Company's acceptance of the Agreement, the member dealer make Ace their primary source of supply and terminate participation in the program of any other major hardware wholesaler. There are currently no generally applicable requirements as to percentage of purchases required through Ace or minimum retail performance which must be achieved (i.e. sales dollars per square foot). This strategic plan, referred to as "The New Age of Ace" is an extension of previous strategic efforts under Ace 2000 and is not in conflict with these efforts. As of the date hereof, the Company operates two company-owned stores through its wholly-owned subsidiary, AHC Store Development, Inc. Through its wholly-owned subsidiary, Ace Insurance Agency, Inc., the Company makes available to its dealers a Group Dealer Insurance Program under which they can purchase a package of insurance coverages, including "all risk" property insurance and business interruption, crime, liability and workers' compensation coverages, as well as medical insurance coverage for their employees. AHC Realty Corporation, another wholly-owned subsidiary of the Company, provides the services of a broker to those dealers who desire to sell or seek a new location for a presently owned store or to acquire an additional store. Loss Prevention Services, Inc., another wholly-owned subsidiary provides security training and services for all dealers desiring security assistance. In addition, the Company offers to its dealers retail computer systems consisting of computer equipment, maintenance service and certain software programs and services. These are marketed by the Company under its registered service mark "PACE". During 1996 the Company commenced operations through Ace Hardware Canada, Limited, a wholly-owned subsidiary, as a wholesaler of hardware and related merchandise through two distribution facilities located in Calgary, Alberta and Brantford, Ontario. Ace Hardware Canada, Limited generated less than two percent of the Company's consolidated revenue during 1996. The Company manufactures paint and related products at facilities owned by it in Matteson and Chicago Heights, Illinois. These facilities now constitute the primary source of such products offered for sale by the Company to its dealers. The Company's paint manufacturing business is operated as a separate Division of the Company for accounting purposes. All raw materials used by the Company to manufacture paint are purchased from outside sources. The Company has had adequate sources of raw materials, and no shortages of any materials which would materially impact operations are currently anticipated. The manufacturing of paint is seasonal to the extent that greater paint sales are found in the months of April through September. Historically, compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not had any material impact. The Company's business, either in hardware wholesaling or paint manufacturing activities is not dependent on any major suppliers and the Company feels that any seasonal fluctuations do not have a significant impact upon operations. For further discussion of the Company's business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations", in Item 7 hereof. The Company makes available some services to members which are related to the operation of their retail businesses. These services (such as advertising, store supplies and training programs) are provided in order to assist members and/or to utilize the centralized buying power of the Company. Members are rebilled in order to pay the Company the established charge for such services.
Special Charges and Assessments
The Company sponsors a national advertising program for which its dealers are assessed an amount equal to 1.25% (1.3% effective January 1, 1997) of their purchases (exclusive of purchases of lumber, LTL, LTL Plus, building materials products and PACE hardware and software computer systems), with the minimum annual assessment for each dealer location being established at $1,560.00 for the year ending December 31, 1996 and $1,622.40 effective January 1, 1997 (or such greater amount as would be required to maintain the foregoing minimum applicable assessments at 1.25% and 1.3%, respectively) subject to: 1) a maximum annual assessment for each dealer location for which a membership agreement has been entered into with the Company of $5,000.00 for 1996 ($5,500.00 for 1997); 2) a maximum total annual assessment for any one dealer determined by multiplying the number of such dealer's retail outlets supplied by the Company which serve the general public by $5,000.00 for 1996 and $5,500.00 for 1997 with certain exemptions from or adjustments to the national advertising assessment for dealer outlets located outside of the contiguous 48 states of the United States and the District of Columbia, based on the evaluation by the Company's management of the amount and nature of the television broadcasts received in the dealer's area. The percentage of bi-weekly purchases to be assessed for the Company's national advertising program and the amount of the maximum annual assessment for such program are both subject to being changed from time to time by action of the Board of Directors of the Company. The Company also has the authority, effective January 1, 1993 to impose a regional advertising assessment (for select geographic regions) not to exceed 2% of annual purchases with the same minimum and maximum assessments imposed by the National Advertising assessment. A special low volume account service charge of $50.00 per bi-weekly billing statement period is imposed on all stores whose annual purchases (exclusive of lumber and LTL purchases) are less than $50,000 and $30.00 per bi-weekly billing for annual purchases between $50,000 and $124,800. Any such charges imposed on a store during a specified year will be automatically refunded to the store if its total purchases (exclusive of lumber and LTL purchases) exceed $124,800.00 during the year. All stores are exempt from such special charge during the first 12 months from the date that they are affiliated as Ace dealers. Exceptions to the low volume account service charge are as follows:
1. when a dealer has purchased $124,800.00 of merchandise (exclusive of carload lumber purchases) during the applicable year, the dealer will be given credit on the next bi-weekly billing statement for any low volume charges which have been added to the account during such year and the low volume charge shall no longer be added on any of such dealer's bi- weekly billing statements during the remainder of such period even if the current purchases shown on the billing statement are less than $5,000.00; and
2. the low volume account service charge will not be billed on a bi-weekly basis to those accounts whose previous year's sales volume exceeded the low volume purchases minimum ($124,800.00) for the previous year, but the full annual low volume account service charge will be billed on the last billing statement of the year to those accounts if the minimum purchases to avoid imposition of the charge have not been met for the current year.
An Ace store that falls below minimum purchase levels may also be subject to termination. A late payment service charge is added on any past due balance owing by a dealer to the Company for purchases of merchandise and services or for the purchase price of the capital stock of the Company subscribed for by the dealer. The late payment service charge currently in effect is an amount equal to .77% per bi-weekly statement period, except in Texas where the charge is .384% and Georgia where the charge is .692%. A past due balance is created whenever payment of the amounts shown as due on any such statement is not received by the Company within 10 days following the date of the statement. The percentage for determining the amount of the late payment service charge may be changed from time to time by the Company. Subscriptions to a retail training program consisting of video tapes and related course materials (the "S.T.A.R. Program") are mandatory for all stores located in the United States and U.S. Territories. The initial monthly assessment imposed on such stores for such subscriptions is $16 for each single store or parent store and $11 for each branch store. A single store or parent store is an initial retail outlet for which a dealer owns, or has subscribed for, one (1) share of Class A stock and forty (40) shares of Class C stock of the Company. A branch store is an additional retail outlet for which a dealer owns, or has subscribed for, fifty (50) shares of Class C stock of the Company. (See Article XXV, Section 2 of the By-Laws, set forth in Appendix A). Branch stores may, upon request, be granted an exemption from the monthly subscription fee. Subscriptions to a Material Safety Data Sheet information service are also mandatory for all stores located in the United States. The initial annual assessment imposed on such stores for such subscriptions is $20 for each single store or parent store and $10 for each branch store.
Trademark and Service Mark Registrations
The names "ACE HARDWARE" and "ACE" are used extensively by the Company and by its member-dealers in connection with the promotion, advertising and marketing of products and services sold by the Company. The Company holds the following Trademark and Service Mark Registrations issued by the U.S. Patent and Trademark Office for the marks used by it: Registration Description of Mark Type of Mark Number Expiration Date ------------------- ------------ ------------ --------------- "ACE HARDWARE" with winged emblem design Service Mark 840,176 December 5, 2007 "ACE HARDWARE" with winged emblem design Trademark 898,070 September 8, 2000 "THE HELPFUL HARDWARE MAN" Service Mark 1,055,741 January 4, 1997* "ACE IS THE PLACE WITH THE HELPFUL HARDWARE MAN" Service Mark 1,055,743 January 4, 1997* "THE PAINTIN' PLACE" Service Mark 1,138,654 August 12, 2000 "HARDWARE UNIVERSITY" with Design Service Mark 1,180,539 December 1, 2001 "SUPER STRIKER" Trademark 1,182,330 December 15, 2001 "PACE" with design Service Mark 1,208,887 September 14, 2002 "ACE HARDWARE" with winged emblem design Trademark 1,277,581 May 15, 2004 "ACE HARDWARE" in stylized lettering design Trademark 1,426,137 January 27, 2007 "ACE" in stylized lettering design Service Mark 1,464,025 November 3, 2007 "ACE HARDWARE" in stylized lettering design Service Mark 1,486,528 April 26, 2008 "ACE HARDWARE AND GARDEN CENTER" in stylized lettering design Service Mark 1,487,216 May 3, 2008 "ACE NEW EXPERIENCE" in stylized lettering design Trademark 1,554,322 September 5, 2009 "ACE SEVEN STAR" in stylized lettering design Trademark 1,556,389 September 19, 2009 "ACE BEST BUYS" in circle design Service Mark 1,560,250 October 10, 2009 "ACENET" Service Mark 1,574,019 December 26, 1999 "ACE IS THE PLACE" Service Mark 1,602,715 June 19, 2000 "LUB-E" Trademark 1,615,386 October 2, 2000 "ACE PRO" Trademark 1,632,078 January 22, 2001 "ASK ACE" Service Mark 1,653,263 August 6, 2001 Christmas Elves Design Trademark 1,669,306 December 24, 2001 "ACE 2000" Service Mark 1,682,467 April 7, 2002 "ACE" in stylized lettering design Trademark 1,683,538 April 21, 2002 "HARMONY" in stylized lettering design Trademark 1,700,526 July 14, 2002 "SEVEN STAR SATISFACTION GUARANTEED QUALITY ACE PAINTS" with design Service Mark 1,705,321 August 4, 2002 "THE OAKBROOK COLLECTION" in stylized lettering design Trademark 1,707,986 August 18, 2002 "ACE HARDWARE BROWN BAG BONANZA" with design Service Mark 1,761,277 April 13, 2003 "ACE HARDWARE COMMITTED TO A QUALITY ENVIRONMENT" design Service Mark 1,764,803 April 13, 2003 "THE OAKBROOK COLLECTION" in stylized lettering design Trademark 1,783,335 July 20, 2003 "STORE 2000 THE STORE OF THE FUTURE" Service Mark 1,811,032 December 14, "ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003 "CELEBRATIONS" Service Mark 1,918,785 September 12, 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 "HELPFULHARDWAREFOLKS" Service Mark 1,970,828 April 30, 2006 "ACEHOMECENTER" Service Mark 1,982,130 June 25, 2006 "SEALTECH" Trademark 2,007,132 October 8, 2006 "GREATFINISHES" Trademark 2,019,696 November 26, 2006
*The Company has amendments pending before the U.S. Patent and Trademark office to change the word "MAN" to "FOLKS".
Currently, the Company has applications pending before the U.S. Patent and Trademark Office for Registration of "WOOD ROYAL" for paint, exterior stains and wood cleaners, "ROYAL SHIELD" for paints, primers, stains, lacquers and varnishes, "ROYAL TOUCH" for paints, primers, stains, lacquers and varnishes, "ACE ROYAL" for exterior and interior paint, "QUALITY SHIELD" for exterior and interior paints, primers, stains, lacquers and varnishes, "QUALITY TOUCH" for exterior and interior paints, primers, stains, lacquers and varnishes, "STAIN HALT" for paint primers and sealers, and "ACE DRY GUARD" for waterproofing paint. In addition, the Company also has service mark applications pending for "ACE COMMERCIAL & INDUSTRIAL SUPPLY" for retail store services in the field of hardware and related goods, "NHS NATIONAL HARDLINES SUPPLY" for hardware wholesaling and "HELPFUL HARDWARE CLUB" for club services, namely providing benefits to preferred customers.
Competition
The competitive conditions in the wholesale hardware industry can be characterized as intensive and increasing due to the fact that independent retailers are required to remain competitive with discount stores and chain stores, such as Wal-Mart, Home Depot, Menard's, Sears, and Lowe's, and with other mass merchandisers. The gradual shift of retail operations to high rent shopping center locations and the trend toward longer store hours have also intensified pressures to obtain low cost wholesale supply sources. The Company directly competes in several U.S. markets with Cotter & Company and Servistar Corporation (which announced the signing of a merger agreement in December, 1996), as well as with Hardware Wholesalers, Inc., Our Own Hardware Company, and United Hardware Distributing Co., all of which companies are also dealer-owned wholesalers.
Employees
The Company employs 4,352 full-time employees, of which 1,282 are salaried employees. Collective bargaining agreements covering one truck drivers' bargaining unit and four warehouse bargaining units are currently in effect at certain of the Company's distribution warehouses. The Company's employee relations with both union and non- union employees are considered to be good, and the Company has experienced no significant employee-related work stoppage in the past five years. All employees are covered either by negotiated or non- negotiated employee benefit plans which include hospitalization, death benefits and, with few exceptions, retirement benefits.
Limitations on Ownership of Stock
All of the issued and outstanding shares of capital stock of the Company are owned by its dealers. Only approved retail and other dealers in hardware and related products having Membership Agreements with the Company are eligible to own or purchase shares of any class of the Company's stock. No dealer, regardless of the number of member business outlets owned or controlled by the dealer, shall be entitled to own more than 1 share of Class A Stock, which is the only class of voting stock which can be issued by the Company. This ensures that each stockholder- dealer will have an equal voice in the management of the Company. An unincorporated person or partnership shall be deemed to be controlled by another person, partnership or corporation if 50% or more of the assets or profit shares therein are owned (i) by such other person, partnership or corporation or (ii) by the owner or owners of 50% or more of the assets or profit shares of another unincorporated business firm or (iii) by the owner or owners of 50% or more of the capital stock of an incorporated business firm. A corporation shall be deemed to be controlled by another person, partnership or corporation if 50% or more of the capital stock of said corporation is owned (i) by such person, partnership or corporation or (ii) by the owner or owners of 50% or more of the capital stock of another incorporated business firm or (iii) by the owner or owners of 50% or more of the assets or profit shares of an unincorporated business firm.
Distribution of Patronage Dividends
The Company operates on a cooperative basis with respect to purchases of merchandise made from it by those of its dealers who have become "members" of the Company as described below and in the Company's By-laws. In addition, the Company operates on a cooperative basis with respect to all dealers who have subscribed for shares but who have not as yet become "members" by reason of the fact that the payments made by them on account of the purchase price of their shares have not yet reached an amount equal to the $1,000 purchase price of 1 share of Class A Voting Stock. All member dealers falling into either of the foregoing classifications are entitled to receive patronage dividend distributions once each year from the Company in proportion to the amount of their annual purchases of merchandise from it. The patronage dividends distributed on wholesale warehouse, bulletin and direct shipment sales made by the Company and on total sales of products manufactured by the Paint Division represented the following percentages of each of said categories of sales during each of the past three calendar years:
1996 1995 1994 ---- ---- ---- Warehouse Sales 4.53912% 4.42965% 4.64117% Bulletin Sales 2.0% 2.0% 2.0% Direct Shipment Sales 1.0% 1.0% 1.0% Paint Sales 7.9773% 6.8725% 8.2205%
In addition to the dividends described above, patronage dividends are calculated separately and distributed on sales of lumber products, building material and millwork products and less-than-truckload (LTL) sales of lumber and building material products. Patronage dividends equal to .4328%, .3560%, and .4073% of the total sales of these products (calculated separately by each of these three sales categories) were distributed to the Company's dealers who purchased those products in 1996, 1995 and 1994, respectively. Under the LTL Plus Program, patronage dividends are also calculated separately on sales of full or partial truckloads of products purchased by eligible dealers from specified vendors (see discussion of LTL Plus Program set forth above in this Item 1). The maximum amount of patronage dividends allocable to LTL Plus sales is .5% of such sales. The LTL Plus Program dividend was .5% of such sales for 1996, 1995 and 1994.
Patronage Dividend Determinations and Allocations
The amounts distributed by the Company as patronage dividends consist of its gross profits on business done with dealers who qualify for patronage dividend distributions after deducting from said gross profits a proportionate share of the Company's expenses for administration and operations. Such gross profits consist of the difference between the price at which merchandise is sold to such dealers and the cost of such merchandise to the Company. All income and expenses associated with activities not directly related to patronage transactions are excluded from the computation of patronage dividends. Generally these include profits on business done with dealers who do not qualify for patronage dividend distributions and any income (loss) realized by the Company from the disposition of property and equipment (except that, to the extent that depreciation on such assets has been deducted as an expense during the time that the Company has been operating on a cooperative basis and is recaptured in connection with such a disposition, the income derived from such recapture would be included in computing patronage dividends). The By-laws of the Company provide that, by virtue of a dealer being a "member" of the Company (that is, by virtue of his ownership of 1 share of Class A Voting Stock), he will be deemed to have consented to include in his gross income for federal income tax purposes for the dealer's taxable year in which they are received by him all patronage dividends distributed to him by the Company in connection with his purchases of merchandise from the Company. A dealer who has not yet paid an amount which at least equals the $1,000 purchase price of the 1 share of Class A Voting Stock subscribed for by him will also be required to include all patronage dividends distributed to him by the Company in his gross income for federal income tax purposes in the year in which they are received by him. This is required by virtue of a provision in the Subscription Agreement executed by him under which he expressly consents to take all such patronage dividends into his gross income for such purposes. The amount of the patronage dividends which must be included in a dealer's gross income includes both the portion of such patronage dividends received by him in cash or applied against indebtedness owing by him to the Company in accordance with Section 7 of Article XXIV of the Company's By-laws and the portion or portions thereof which he receives in shares of Class C Non-voting Stock of the Company or in patronage refund certificates. Patronage dividends on each of the Company's three basic categories of sales (warehouse sales, bulletin sales and direct shipment sales) are allocated separately, as are patronage dividends under the LTL Plus Program. However, the maximum amount of patronage dividends allocable to LTL Plus Program sales is an amount no greater than .5% of such sales, the maximum amount of patronage dividends allocable to direct shipment sales exclusive of LTL Plus Program sales is an amount equal to 1% of such sales and the maximum amount of patronage dividends allocable to bulletin sales is an amount equal to 2% of that category of sales. All remaining patronage dividends resulting from sales made under these programs are allocated by the Company to warehouse sales. The Company feels that this allocation procedure provides a practical and understandable method for the distribution of these patronage dividends in a fair and equitable manner. Sales of lumber and building materials products are not included as part of warehouse sales, bulletin sales or direct shipment sales for patronage dividend purposes. Patronage dividends are calculated separately and distributed to the Company's dealers with respect to their purchases within each of four sales categories involving these types of products. These four categories are (a) lumber products (other than less-than-truckload sales); (b) building materials products (other than less-than-truckload sales); (c) millwork products and (d) less-than-truckload ("LTL") sales of lumber and building material products. Patronage dividends are also calculated separately and distributed to the Company's dealers for full and partial truckloads of products purchased under the LTL Plus Program. (See the discussion of the LTL Plus Program set forth above in this Item 1 and under the subheading "Forms of Patronage Dividend Distributions," subparagraphs 2(a)-(b) below). Any manufacturing profit realized on intracompany sales of the products manufactured by the Company's Paint Division is allocated among and distributed as patronage dividends to those member dealers who are eligible to receive patronage dividends from the Company in proportion to their respective annual dollar purchases of paint and related products manufactured by said Division. The earnings realized by the Company on wholesale sales of such products made by it to its member dealers are distributed as patronage dividends to all of its dealers who are eligible to receive patronage dividends from it as part of the patronage dividends which they receive each year with respect to the basic patronage dividend categories established for warehouse sales, bulletin sales, and direct shipment sales. Under Section 8 of Article XXIV of the Company's By-laws, if the Paint Division's manufacturing operations for any year result in a net loss, rather than a profit, to the Paint Division, such loss would be netted against the earnings realized by the Company from its other activities during the year, with the result that the earnings available from such other activities for distribution as patronage dividends for such year would be correspondingly reduced.
Forms of Patronage Dividend Distributions
Patronage dividend distributions will be made to the eligible and qualified member dealers of the Company in cash, shares of the Company's Class C stock and patronage refund certificates in accordance with the following plan which has been adopted by the Company's Board of Directors with respect to purchases of merchandise made by such dealers from the Company on or after January 1, 1995, and which will continue to be in effect until such time as the Board of Directors, in the exercise of their authority and discretion based upon business conditions from time to time and the requirements of the Company, shall determine that such plan should be altered or amended:
1. With respect to each store owned or controlled by each eligible and qualifying dealer, such dealer shall receive a minimum cash distribution determined as follows: (a) an amount equal to 20% of the first $5,000 of the total patronage dividends allocated for distribution each year to such dealer in connection with the purchases made for such store; (b) an amount equal to 25% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $5,000 but does not exceed $7,500; (c) an amount equal to 30% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $7,500 but does not exceed $10,000; (d) an amount equal to 35% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $10,000 but does not exceed $12,500; (e) an amount equal to 40% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $12,500; 2. The portion of the total annual distribution allocated to any such dealer for each store owned or controlled by such dealer in excess of the amount to be distributed to such dealer for such store in cash shall be distributed each year in the form of shares of Class C non-voting Stock of Ace Hardware Corporation (par value $100 per share), valued at the par value thereof, until the total par value of all shares of all classes of capital stock of the corporation held by such dealer with respect to such store equals the greater of:
(a) $20,000; or (b) a sum equal to the total of the following categories of purchases made by such dealer for such store during the most recent calendar year; (i) 15% of the volume of warehouse (including STOP and excluding Ace manufactured paint and related products) and bulletin purchases, plus (ii) 15% of the volume of Ace manufactured paint and related products purchases, plus (iii) 3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured paint and related products), plus (iv) 4% of the volume of lumber, building material and millwork (excluding LTL) purchases, plus (v) 4% of the volume of LTL Plus purchases;
provided, however, that no fractional shares of Class C non- voting Stock shall be issued to any dealer and that any amount which would have otherwise been distributable as a fractional share of such stock shall instead be distributed to such dealer in cash. 3. The portion of the total patronage dividends allocated each year to any such dealer for each store owned or controlled by such dealer which exceeds the sum of (a) the amount to be distributed to such dealer for such store in cash pursuant to Paragraph 1., above and (b) any amount to be distributed to him in the form of shares of Class C non- voting Stock of Ace Hardware Corporation (par value $100 per share) pursuant to Paragraph 2., above shall be distributed to such dealer in cash; provided, however, that in no event shall the total amount distributed under this plan to any such dealer for any such store in cash exceed 45% of the total patronage dividends allocated for such store for such year, and to the extent that any distribution to be made to any such dealer for any store pursuant to this Paragraph 3., would otherwise cause the total cash distribution to such dealer for such store to exceed 45% of the total patronage dividends allocated for such store for such year, the distribution to be made under this Paragraph 3., shall instead be made in the form of a non-negotiable patronage refund certificate having such a maturity date and bearing interest at such an annual rate as shall be determined by the Board of Directors prior to the issuance thereof.
With certain modifications, the above Plan is applied separately in determining the form in which patronage dividends accrued with respect to sales of lumber and building materials products are distributed. In this connection the combined patronage dividends allocated annually to a store from (a) sales of lumber products (other than LTL sales), (b) sales of building materials (other than LTL sales), (c) sales of millwork products, and (d) LTL sales to the store are used in determining the minimum cash distribution percentages to be applied under Paragraph 1 of the above Plan. A store's patronage dividends from any other sales category with respect to which patronage dividends are distributed by the Company are not taken into account in determining either the minimum portion or any additional portion of the store's patronage dividends derived from its purchases of lumber and building materials products which is to be distributed in cash. Also, Paragraphs 2 and 3 of the above Plan is applied separately to patronage dividends on lumber and building materials sales and the requirements of Paragraph 2 of the Plan shall not be deemed to have been complied with in the cases of (a) purchases of lumber products (other than LTL purchases), (b) purchases of building materials products (other than LTL purchases) or (c) purchases of millwork products until the store's holdings of Class C non-voting Stock of the Company resulting from patronage dividends on the Company's sales to it within the particular one of those two sales categories for which a patronage dividend distribution is to be made equal 4% of the volume of the store's purchases within such category during the most recent calendar year. However, no such special Class C Stock requirement applies to patronage dividends accrued on LTL purchases. Notwithstanding the provisions of the above-described Plan, however, under Section 7 of Article XXIV of the Company's By-laws the portion of any patronage dividends which would otherwise be distributable in cash with respect to a retail dealer outlet which is a member of the Company will instead be applied against any indebtedness owing by the dealer to the Company to the extent of such indebtedness in any case where the membership for such outlet is cancelled or terminated prior to the distribution of such patronage dividends except that an amount equal to 20% of the dealer's total annual patronage dividends for such outlet will be paid in cash if a timely request for the payment of such amount in cash is submitted to the Company by the dealer. Because of the requirement of the U. S. Internal Revenue Code that the Company withhold 30% of the annual patronage dividends distributed to member dealers of the Company whose places of business are located in foreign countries or Puerto Rico (except in the case of unincorporated Puerto Rico dealers owned by individuals who are U.S. citizens and certain dealers incorporated in Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands, if less than 25% of its stock is owned by foreign persons, and at least 65% of the Corporation's gross income for the last three years has been effectively connected with the conduct of a trade or business in such possession or in the United States), the cash portion of the annual patronage dividends of such dealers shall in no event be less than 30%. It is anticipated that the terms of any patronage refund certificates issued pursuant to Paragraph 3. of the foregoing Plan would include provisions giving the Company a first lien thereon for the amount of any indebtedness owing to it at any time by the owner of any such certificate and provisions subordinating the certificates to all the rights and claims of secured, general and bank creditors against the Company. It is further anticipated that all such patronage refund certificates will have maturity dates which will be no later than five years from the dates of issuance thereof. In order to aid the Company's dealers in acquiring and installing standardized exterior signs identifying the retail stores operated by them as member outlets supplied by the Company, the Board of Directors of the Company has authorized a program under which a dealer may borrow from the Company within a range of $100 to $20,000 per location the funds required for such purpose. A dealer who obtains a loan under this program may either repay the loan in twelve substantially equal payments billed on such dealer's regular by-weekly billing statement, or may execute a direction to have the portion of the dealer's annual patronage dividends which would otherwise be distributed under the above plan in a form other than cash from no more than the next three annual distributions of such dividends applied toward payment of the principal and interest on the loan. In order to aid the Company's dealers in acquiring and installing PACE and PAINTMAKER computer systems purchased from the Company and to finance capital improvements, the Board of Directors of the Company has also authorized programs under which the Company will finance, for qualified dealers, (but not to exceed 80% of the cost of any system) in the case of a PAINTMAKER computer, within the range of $1,000 to $15,000 per location repayable over a period of three (3) years, in the case of a PACE computer, within the range of $5,000 to $50,000 per location repayable over a period of five (5) years for such purpose and in the case of capital improvements, up to $2.00 per square foot of retail space repayable over a period of three (3) years for such purpose. Dealers who obtain financing from the Company for these purposes direct the Company, during the financing term, to first apply toward the principal and interest due on such loans, the patronage dividends which would otherwise be payable in the form of patronage refund certificates for each year, and then to apply the patronage dividends which would otherwise be payable for the same year in the form of the Company's Class C stock. The aforementioned signage, computer financing and store retrofit programs may be revised or discontinued by the Board at any time.
Federal Income Tax Treatment of Patronage Dividends (See Previous Heading "Opinions of Experts")
Both the shares of Class C non-voting Stock and the patronage refund certificates used by the Company to pay patronage dividends that accrue to its eligible and qualifying dealers constitute "qualified written notices of allocation" within the meaning of that term as used in Sections 1381 through 1388 of the U.S. Internal Revenue Code, which specifically provide for the income tax treatment of cooperatives and their patrons and which have been in effect since 1963. The stated dollar amounts of such qualified written notices of allocation must be taken into the gross income of each of the recipients thereof for the taxable years in which they are received, not withstanding the fact that stated dollar amounts may not be received in such taxable years. In order for the Company to receive a deduction from its gross income for federal income tax purposes for the amount of any patronage dividends paid by it to a patron (that is, to one of its eligible and qualifying dealers) in the form of qualified written notices of allocation, it is necessary that the Company pay (or apply against indebtedness owing to the Company by such patron in accordance with Section 7 of Article XXIV of the Company's By-laws) not less than 20% of the total patronage dividends distributable to such patron in cash and that the patron consent to having the written notices of allocation, at their stated dollar amounts, included in his gross income for the taxable year in which they are received by him. It is also required under the Code that any patronage dividend distributions deducted by the Company on its federal income tax return with respect to business done by it with patrons during the year for which such deduction is taken must be made to the Company's patrons within 8 months after the end of such year. Dealers who have become "members" of the Company by owning 1 share of Class A Voting Stock are deemed under the U.S. Internal Revenue Code to have consented to take any written notices of allocation distributed to them into their gross income by their act of obtaining or retaining membership in the Company and by having received from the Company a written notification of the By-law provision providing that membership in the Company constitutes such consent. In accordance with another provision in the Internal Revenue Code, nonmember dealers who have subscribed for shares of the Company's stock will also be deemed to have consented, by virtue of the consent provisions included in their Subscription Agreements, to take any written notices of allocation distributed to them into their gross income. A dealer receiving a patronage refund certificate as part of the dealer's patronage dividends in accordance with the last clause of Paragraph 3 of the patronage dividend distribution plan previously described under the heading "The Company's Business," subheading, "Forms of Patronage Dividend Distributions," may be deemed to have received interest income in the form of an original issue discount to the extent of any excess of the face amount of the certificate over the present value of the stated principal and interest payments to be made by the Company under the terms of the certificate. Such income would be taxable to the dealer ratably over the term of the certificate under Section 7872(b) (2) of the U.S. Internal Revenue Code. The present value for this purpose is to be determined by using a discount rate equal to the applicable Federal rate in effect as of the day of issuance of the certificate, compounded semi-annually. The Company will be required to withhold for federal income tax on the total patronage dividend distribution which is made to a payee who has not furnished his taxpayer identification number to the Company or as to whom the Company has notice of the fact that the number furnished to it is incorrect. A cooperative organization may also be required to withhold on the cash portion of each patronage dividend distribution made to a payee who becomes a member of the cooperative if the payee fails to certify to the cooperative that he is not subject to back-up withholding. It is the opinion of the council for the Company that this provision is not applicable to any patronage dividend distribution to a payee unless 50% or more of the total distribution is made in cash. Since all of the Company's patronage dividends for a given year are distributed at the same time and the Company's currently effective patronage dividend plan does not permit any store which is a member of the Company to receive more than 45% of its patronage dividends for the year in the form of cash, it is said counsel's further opinion that such a certification failure would ordinarily have no effect on the Company or any of its dealers. Patronage dividends distributed by a cooperative organization to its patrons who are located in foreign countries or certain U.S. possessions have been held to constitute fixed or determinable annual or periodic income on which such patrons are required to pay a tax of 30% of the amount received in accordance with the provisions of Sections 871(a)(1)(A) and 881(a)(1) of the Internal Revenue Code, as do patronage dividends distributed to patrons which are incorporated in Puerto Rico or who reside in Puerto Rico but have not become citizens of the United States. With respect to its dealers who are subject to such 30% tax, the Company is also obligated to withhold from their patronage dividends and pay over to the U.S. Internal Revenue Service an amount equal to the tax. The foregoing provisions do not apply to a corporation organized in Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands if less than 25% of its stock is owned by foreign persons and at least 65% of its gross income for the last three years has been effectively connected with the conduct of a trade or business in such possession or in the United States. The 20% minimum portion of the patronage dividends to be paid in cash to a patron with respect to whom the Company is neither required to withhold 30% of his total patronage dividend distribution nor permitted to apply such minimum portion against indebtedness owing to it by him may be insufficient, depending upon the income tax bracket of each individual patron, to provide funds for the full payment of the federal income tax for which such patron will be liable as a result of the receipt of the total patronage dividends distributed to him during the year, including cash, patronage refund certificates and/or Class C non-voting Stock. In the opinion of the Company's management, payment in cash of not less than 20% of the total patronage dividends distributable each year to the Company's eligible and qualifying dealers will not have a material adverse effect on the operations of the Company or its ability to obtain adequate working capital for the normal requirements of its business.
Membership Agreement
In addition to signing a Subscription Agreement for the purchase of shares of the Company's stock, each retail dealer who applies to become an Ace dealer (excluding firms which are discussed below under the subheading "International Retail Merchants") must sign the Company's customary Membership Agreement. A payment of $400 must accompany the signed Membership Agreement to defray the Company's estimated costs of processing the membership application. If the application is accepted, copies of both the Membership Agreement and the Stock Subscription Agreement, signed on behalf of the Company to evidence its acceptance, are forwarded to the dealer. No royalties are payable at any time by a dealer for an outlet which the Company accepts as a member-shareholder. Membership may be terminated upon various notice periods and for various reasons (including voluntary termination by either party) as prescribed in the Membership Agreement, except to the extent that special laws or regulations applicable to specific locations may limit the Company's right to terminate memberships, or may prescribe greater periods of notice under particular circumstances.
International Retail Merchants and Non-Member Accounts
In 1989, the Company's Board of Directors authorized the Company to affiliate International Retail Merchants, who operate retail businesses outside the United States, its territories and possessions. International Retail Merchants do not sign the Company's Regular Membership Agreement, but may, depending on the circumstances, be granted a license to use certain of the Company's trademarks and service marks. They do not sign stock subscription agreements or become shareholders of the Company, nor do they receive distribution of patronage dividends. As of December 31, 1996, 1995 and 1994, International Retail Merchant volume accounted for approximately 3% of the Company's total sales in each such year. In 1995, the Company's Board of Directors authorized the Company to affiliate non-member retail accounts, which are not entitled to membership in the cooperative, and which therefore will neither own stock in the Company, nor receive patronage dividends. (See Article XXV, Sections 3 and 4 of the By-laws regarding International Retail Merchants and non- member accounts.) In 1996, the Company commenced operations through Ace Canada Limited. Ace Canada merchants are not shareholders of the Company, nor do they receive distribution of patronage dividends.
Item 2.
Item 2. Properties
The Company's general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60521. Information with respect to the Company's principal properties follows: Square Feet Owned Lease of Facility or Expiration Location (Land in Acres) Leased Date -------- --------------- ------ ---------- General Offices: Oak Brook, Illinois 206,030 Leased September 30, 2009 Oak Brook, Illinois 70,508 Owned Markham, Ontario, Canada (1) 15,372 Leased February 28, 2006
Distribution Warehouses: Lincoln, Nebraska 346,000 Leased December 31, 2006 Arlington, Texas 313,000 Leased July 31, 2002 Perrysburg, Ohio 396,000 Leased November 1, 2004 Tampa, Florida 391,760 Owned Harmans, Maryland 277,000 Owned Yakima, Washington 502,400 Owned Maumelle, Arkansas 585,500 Owned LaCrosse, Wisconsin 363,000 Owned Bloomfield, Connecticut 449,820 Owned Huntersville, North Carolina 354,000 Owned Rocklin, California 470,000 Owned Gainesville, Georgia 478,000 Owned Prescott Valley, Arizona 633,000 Owned Princeton, Illinois 1,080,000 Owned Carol Stream, Illinois (2) 250,000 Leased September 30, 1999 Chicago, Illinois (3) 18,168 Leased May 31, 1998 Brantford,Ontario, Canada (4) 354,000 Leased March 31, 2006 Baltimore, Maryland (5) 158,485 Leased March 31, 1998 Colorado Springs, Colorado 493,000 Owned Wilton, New York (8) 130 acres Leased September 1, 2007 Calgary, Alberta, Canada (4) 240,000 Leased December 31, 2001
Print Shop Facility: Downers Grove, Illinois 41,000 Leased January 31, 1998
Paint Manufacturing Facilities: Matteson, Illinois 356,000 Owned Chicago Heights, Illinois 194,000 Owned
Other Property: Aurora, Illinois 72 acres Owned LaCrosse, Wisconsin (6) 3 acres Owned Yorkville, Illinois (7) 12,500 Leased July 31, 2005 Arlington Heights, Illinois (7) 22,095 Leased December 31, 2001 Pleasant Prairie, Wisconsin (7) 14,914 Leased February 28, 2006 -------
(1) This facility is leased by the Company's wholly owned subsidiary, Ace Hardware Canada, Limited for use as its corporate office. (2) This facility was leased by the Company in October, 1994, for use as a bulk merchandise redistribution center. (3) This facility was leased by the Company in June, 1994 for use as a freight consolidation center. (4) This facility is leased by the Company's wholly owned subsidiary, Ace Hardware Canada, Limited for use as a distribution warehouse. (5) This facility was leased by the Company in February, 1995 for use as a redistribution center. (6) This land is adjacent to the Company's LaCrosse, Wisconsin warehouse. (7) These facilities are retail hardware stores leased by the Company's wholly owned subsidiary, A.H.C. Store Development Corp. The Pleasant Prairie, Wisconsin property is being remodeled. Its lease term is 10 years from the time the remodeling is substantially completed, estimated to occur during the first quarter of 1997. (8) This property was purchased by the Company in October, 1996, then sold to and leased back from the County of Saratoga Industrial Development Agency. A distribution warehouse containing approximately 792,000 square feet is currently under construction and expected to be in operation during the third quarter of 1997.
The Company also leases a fleet of transportation equipment for the primary purpose of delivering merchandise from the Company's warehouses to its dealers.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings which either individually or in the aggregate involve claims for damages that exceed 10% of the current assets of the Company and its subsidiaries on a consolidated basis.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for The Registrant's Common Equity and Related Stockholder Matters
There is no existing market for the stock of the Company and there is no expectation that any market will develop. The Company is organized and operates as a cooperative corporation, and its stock is owned exclusively by retailers of hardware and related merchandise who are members of the Company. The number of holders of record as of February 14, 1997 of each class of stock of the Company is as follows:
Title of Class Number of Record Holders -------------- ------------------------ Class A stock, $1,000 par value 3,929 Class B stock, $1,000 par value 2,852 Class C stock, $100 par value 4,828
Dividends, other than patronage dividends are prohibited by the Company's Articles of Incorporation and By-laws. See the discussion of patronage dividends under Item 1. Business.
Item 6.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
Income Statement Data: For the Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (000's omitted) Net sales $2,742,451 $2,436,012 $2,326,115 $2,017,763 $1,870,625 Cost of sales 2,535,014 2,253,430 2,152,322 1,866,768 1,722,493 ---------- ---------- ---------- ---------- ---------- Gross profit 207,437 182,582 173,793 150,995 148,132 Total expenses 135,130 118,840 109,271 93,903 87,365 ---------- ---------- ---------- ---------- ---------- Net earnings $ 72,307 $ 63,742 $ 64,522 $ 57,092 $ 60,767 ========== ========== ========== ========== ========== Patronage dividends (Notes A, B, 5 and 8) $ 73,837 $ 64,716 $ 64,520 $ 59,023 $ 63,207 ========== ========== ========== ========== ==========
Balance Sheet Data: Year Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (000's omitted) Total assets $916,375 $759,133 $723,610 $666,022 $593,399 Working capital 148,468 139,805 150,514 138,652 108,794 Long-term debt 71,837 57,795 64,287 71,286 51,696 Patronage refund certificates payable, long-term 49,639 54,741 63,666 56,270 55,389 Member dealers' equity 233,363 217,245 199,827 186,028 175,681
(A) The Company operates as a cooperative organization, and pays patronage dividends to member dealers on earnings derived from business done with such dealers. It is the practice of the Company to distribute substantially all patronage sourced earnings in the form of patronage dividends. (B) The form in which patronage dividends are to be distributed can only be determined at the end of each year when the amount distributable to each of the member dealers is known. For the five years ended December 31, 1996, patronage dividends were payable as follows:
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (000's omitted) In cash $28,178 $23,522 $27,302 $25,766 $27,538 In patronage refund certificates payable 9,500 5,032 9,920 12,728 14,598 In Class C Stock 26,474 27,506 21,766 19,064 20,301 In patronage financing deductions 9,685 8,656 5,532 1,465 770 ------- ------- ------- ------- ------- Total patronage dividends $73,837 $64,716 $64,520 $59,023 $63,207 ======= ======= ======= ======= =======
(C) Numbered notes refer to Notes to Consolidated Financial Statements, beginning on page. (5) & (8) refers to Notes (5) and (8) of the Consolidated Financial Statements beginning on page of this Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its needs ("liquidity") results from internally generated funds, short-term lines of credit and long-term financings (see Notes 3 and 4 to the financial statements). The Company's long and short-term liquidity is dependent on retail growth as described under the "Company's Business." Nothing in the Company's plans as discussed under the "Company's Business" has led or is expected to lead to any material change in pricing, margins or product focus or is expected to materially impact the results or operations or liquidity of the Company. The Company's long-term strategic plan is only for a renewed focus on supporting retail growth. Retail growth provides equity growth for the Company. Recognizing the need for equity growth in order to properly capitalize the Company, the patronage stock formula for years beginning in 1995 was changed. See "Forms of Patronage Dividend Distributions." The Company believes that these changes and the retail growth of the membership will provide adequate liquidity for the long-term. The Company has an established unsecured revolving credit facility with a group of banks. The Company has unsecured lines of credit of $180.0 million of which $109.0 million was available at December 31, 1996. Any borrowings under these lines of credit would bear interest at the prime rate or less. Long-term financings are arranged as determined necessary to meet the Company's capital or other requirements, with principal amount, timing and form dependent on prevailing debt markets and general economic conditions. The Company's credit facilities provide that certain ratios be maintained with the only material covenant related to fixed charge coverage. The Company is in compliance with all debt covenants. Capital expenditures for new and improved facilities were $40.4, $31.3 and $28.3 million in 1996, 1995 and 1994, respectively. During 1996, the Company financed the $40.4 million of capital expenditures out of current and accumulated internally generated funds, short-term borrowings and long-term borrowings. 1997 capital expenditures are anticipated to be approximately $57.3 million primarily for a new distribution facility and improvements to existing facilities. As a cooperative, the Company distributes substantially all of its patronage source earnings to its members in the form of patronage dividends, which are deductible for income tax purposes (see headings "Patronage Dividend Determinations And Allocations" and "Federal Tax Treatment of Patronage Dividends"). Prior to 1994, patronage dividends were distributed on the basis of taxable income. Accord- ingly, patronage dividends can exceed net income or be less than net income due to the timing of certain items for income tax purposes. The Board of Directors does have the authority to determine reasonable reserves for the purpose of ensuring the welfare of the Company, but it has been the practice of the Company to distribute substantially all patronage sourced earnings in the form of patronage dividends. No adverse trends in revenue or net income have occurred since the end of the Company's last reported financial period. The Company expects that existing and new internally generated funds, along with established lines of credit and long-term financings, will continue to be sufficient to finance the Company's working capital requirements and patronage dividend and capital expenditure programs.
Operations-1996 Compared to 1995
Net sales increased 12.6% due to increases in existing retailer volume, targeted efforts on new store development and conversions, and the start-up of Canadian operations. 1996 domestic same store sales increased 9.8% due to retailer store upgrades and continued emphasis on retail success. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 11.6%. Lumber and building material sales experienced slightly higher percentage increases in 1996 due to accelerated sales efforts and industry-wide lumber price increases. Net dealer outlets increased in 1996 due to targeted sales efforts on new store development and conversions to the Ace program and continued emphasis on retail success. Gross profit increased $24.9 million or 13.6% and increased as a percent of sales to 7.56% vs 7.50% in 1995 due primarily to gross profit from Canadian operations. Domestic gross profit as a percent of sales is comparable to 1995 as higher merchandise discounts and allowances were completely offset by lower levels of dealer price increases in 1996. Emphasis on low upfront pricing continued with total upfront rebates increasing 16.9% in 1996. Warehouse and distribution expenses increased $6.6 million or 22.1% due to start-up costs for the opening of one domestic and two Canadian facilities in 1996. Excluding Canadian operations, warehouse and distribution expenses increased 13.5% and increased slightly as a percent of sales due to wage increases to support the sales growth and start-up costs for the new facility. Selling, general and administrative expenses increased by $8.4 million or 14% due to personnel costs for the start-up operations and increased data processing expenses. Excluding Canadian operations, selling, general and administrative expenses increased 8.3% and declined as a percent of sales due to reduced corporate administrative expenses resulting from 1996 re-engineering efforts. Retail success and development expenses increased $2.8 million or 15% due to increased new business development costs, increased retail training expenses and reduced retail systems income. Increases in this category are directly related to retail support of the Ace retailer as the Company continues to make retail investments in our dealer base. Paint Division sales increased 16.5% to $103.3 million. As a separate division of the Company, the Paint Division produced net manufacturing profits of $8.0 million in 1996 vs. $5.8 million in 1995. The increased net manufacturing profit results from the 16.5% sales increase and resulting gross margin and improved utilization of the Company's second facility partially offset by increased 1996 advertising expenses. Paint is the only product manufactured by the Company. As discussed on page 8, patronage dividends are calculated separately for paint sales and increased to 7.98% in 1996 vs 6.87% in 1995. Interest expense decreased $1.3 million or 9.8% due to lower inventory levels resulting from improved inventory turnover in 1996. Additional dealer dating programs and long-term debt to fund 1996 capital investments partially offset the interest expense decline.
Operations-1995 Compared to 1994
Net sales increased 4.7% in 1995 due to increases in existing dealer volume, new store development and increased store conversions. 1995 net sales were affected by slow retail and economic growth, moderate seasonal sales primarily related to late spring weather, and lumber price declines. International sales also decreased in 1995 due to the peso devaluation resulting in lower export sales to Mexico. Sales of basic hardware and paint merchandise (including warehouse, bulletin and direct shipments) increased 4.3%. Lumber and building material sales experienced slightly higher percentage increases in 1995 due to accelerated sales efforts, but were affected by industrywide lumber price declines. Net dealer outlets increased in 1995 due to targeted sales efforts on new store development and conversions to the Ace program and increased emphasis on dealer retail success. Gross profit increased $8.8 million or 5.1% and increased as a percent of sales to 7.50% from 7.47% in 1994 due primarily to shifts in the Company's sales mix towards the warehouse categories and higher merchandise discounts and allowances. Growth in competitively priced and promotional items within the overall sales mix moderated resulting in a slight gross profit improvement as a percent of sales. However, emphasis on upfront rebates through reduced handling charges and low upfront pricing programs and discounts continued with total upfront rebates increasing 9.5% in 1995. Warehouse and distribution expenses increased $975,000 or 3.4% due to increased building and distribution costs to support the sales growth. Warehouse productivity improvements and increased freight consolidation revenue offset these increases resulting in total warehouse and distribution expenses remaining comparable to 1994 levels as a percent of sales. Selling, general and administrative expenses increased by $5.6 million or 10.3% and as a percent of sales due to increased data processing and personnel costs. Retail success and development expenses increased by $3.6 million or 24.6% due to increased personnel costs for field retail support and new business development. Decreased advertising income resulting from industrywide paper price increases also contributed to the 1995 expense increase. Increases in this category are directly related to retail support of the Ace dealer as the Company continues to make retail investments in our dealer base. Paint Division sales increased 6.2% to $90.2 million due to strong dealer support. As a separate division of the Company, the Paint Division produced net manufacturing profits of $5.8 million in 1995 vs. $6.7 million in 1994. The decreased net manufacturing profit is a result of increased raw material prices and costs associated with opening a second facility. Paint is the only product manufactured by the Company. As discussed on page 8, patronage dividends are calculated separately for paint sales and decreased to 6.87% in 1995 from 8.22% in 1994. Interest expense decreased $337,000 or 2.5% due to lower borrowing levels resulting from improved inventory turnover. Other income increased $354,000 or 10.5% due primarily to the growth in dealer financing programs.
Inflation and Changes in Prices
The Company's business is not generally governed by contracts that establish prices substantially in advance of the receipt of goods or services. As vendors increase their prices for merchandise supplied to the Company, the Company increases the price to its dealers in an equal amount plus the normal handling charge on such amounts. In the past, these increases have provided adequate gross profit to offset the impact of inflation on operating expenses.
Item 8.
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.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
The directors and the executive officers of the Company are:
Position(s) Held Name Age and Business Experience ---- --- ----------------------- Jennifer C. Anderson 46 Director since June 6, 1994; term expires 1997; President of Davis Lumber and Ace Hardware, Inc., Davis, California. Michael C. Bodzewski 47 Vice President-Merchandising effective June, 1990; General Merchandise Manager effective April, 1988. Lawrence R. Bowman 50 Director since February 4, 1991; term expires 1998; Vice President of Owenhouse Hardware Co., Inc., Bozeman, Montana. James T. Glenn 37 Director since June 3, 1996; term expires 1999; President of Ace Hardware of Chatanooga, Chatanooga, Tennessee. David F. Hodnik 49 President and Chief Executive Officer effective January 1, 1996; President and Chief Operating Officer effective January 1, 1995; Executive Vice President and Chief Operating Officer effective January, 1994; Executive Vice President and Treasurer effective January, 1991; Senior Vice President and Treasurer effective January, 1988; Vice President-Finance and Management Information Systems and Treasurer effective September, 1986; Vice President-Finance and Treasurer effective December, 1982. Paul M. Ingevaldson 51 Vice President-Corporate Strategy and International Business effective September, 1992; Vice President-Retail Support Services effective August, 1989; Vice President-Western Region effective September 1, 1988; Vice President-Distribution effective September, 1986; Vice President-Management Information Systems effective October, 1985; Director of Data Processing effective October, 1982. Mark Jeronimus 48 Director since June 3, 1991; term expires 1997; President of Duluth Hardware, Inc., Duluth, Minnesota. Rita D. Kahle 40 Vice President-Finance effective January, 1994; Vice President-Controller effective January, 1992; Controller effective July, 1988. John E. Kingrey 53 Director since May 17, 1992; term expires 1999; President of WK&K Corp., Wimberley, Texas. Richard E. Laskowski 55 Chairman of the Board since February 18, 1992 and Director since June 1, 1987; term expires 1998; Pres- ident of Ace Hardware Home Center of Round Lake, Inc., Round Lake, Illinois. David W. League 57 Vice President-General Counsel and Secretary effective June, 1990; General Counsel and Secretary effective January, 1990; General Counsel effective January, 1989. William A. Loftus 58 Senior Vice President-Retail Operations and Marketing effective October, 1994; Senior Vice President-Marketing and Advertising effective September, 1992; Senior Vice President since January 1, 1991; Vice President-Retail Support Operations effective August, 1989; Vice President-Eastern Region effective September 1, 1988; Vice President-Sales effective October, 1983; National Sales Manager effective October, 1976. David F. Myer 51 Vice President-Retail Support and New Business effective October, 1994; Vice President-Retail Support effective August, 1992; Vice President-Distribution effective July, 1989. Fred J. Neer 57 Vice President-Human Resources effective April, 1989; Director of Human Resources effective April, 1986. Ray W. Osborne 60 Director since June 6, 1988; term expires 1997; President of Cook & Sons Ace Hardware Company, Inc., Albertville, Alabama. Roger E. Peterson 59 Director since June 5, 1995; Chief Executive Officer (CEO) effective January 1, 1995; President and Chief Executive Officer (CEO) effective December, 1989; President effective August, 1986; Executive Vice President effective March, 1985; Vice President-Operations effective December, 1982. Donald L. Schuman 58 Vice President-Information Systems effective June, 1990; Director-Information Systems effective January, 1987. Jon R. Weiss 61 Director since June 4, 1990; term expires 1999; President of John W. Weiss Hardware Company, Glenview, Illinois. Don S. Williams 55 Director since June 6, 1988; term expires 1997; President of Williams Lumber, Inc., Rhinebeck, New York. James R. Williams, Jr. 49 Director since June 5, 1989; term expires 1998; Vice President of Williams Ace Hardware, Inc., Wichita, Kansas.
The By-laws of the Company provide that its Board of Directors shall be comprised of such number of persons, not less than 9 and not greater than 12, as shall be fixed from time to time by the Board of Directors. A minimum of 9 of the directors shall be dealer directors. A maximum of two of the directors may be non-dealer directors, but non- dealer directors may not exceed 25% of the total number of directors in office at any one time. A person shall be eligible for election or appointment as a non-dealer director without regard to whether or not such person is the owner of a retail business organization which is a stockholder of Ace Hardware Corporation, or an executive officer, general partner or general manager of such a retail business organization. The By-laws also provide for three classes of directors who are to be elected for staggered 3-year terms. The By-laws provide that no person is eligible to serve as a dealer director unless such person is either the owner of a retail business organization holding stock in the Company or an executive officer, general partner or general manager of such a retail business organization. Regional dealer directors are elected from geographic regions of the United States established by the Board. If the Board determines that all regions have representation by regional dealer directors and the maximum number of directors would not thereby be exceeded, then dealer directors at large may also be elected. In accordance with the applicable procedure established by the By- laws, the following directors have been selected as nominees for reelection at the annual stockholders meeting to be held on June 2, 1997, as directors of the classes, from the regions, and for terms as indicated below:
Nominee Class Region Term - ------- ----- ------ ---- Jennifer C. Anderson 1 8 3 years Mark Jeronimus 1 9 3 years
Mr. Ray Osborne and Mr. Don Williams are not eligible for reelection as a director commencing in 1997. The person(s) named below have been selected as the nominee for election to the Board for the first time at the 1997 annual meeting as a dealer director of the class, and for the term indicated.
Nominee Age Class Region Term - ------- --- ----- ------ ---- Eric R. Bibens II 40 1 1 3 years D. William Hagan 39 1 3 3 years
Reference should be made to Article IV of the By-laws for information concerning the qualifications required for membership on the Board of Directors, the terms of directors, the limitations on the total period of time for which a director may hold office, the procedure established for the designation of Nominating Committees to select certain persons as nominees for election to the Board of Directors, and the procedure for filling vacancies on the Board for the remaining portion of unexpired terms. None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years with respect to any director of the Registrant, any nominee for membership on the Board of Directors of the Registrant or any executive or staff officer of the Registrant.
Item 11.
Item 11. Executive Compensation
The following information is set forth with respect to the cash compensation paid by the Company to each of the five highest paid executive officers of the Company whose cash compensation exceeded $100,000, for services rendered by them in all capacities to the Company and its subsidiaries during the fiscal year ended December 31, 1996 and the two previous fiscal years:
SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------- ------------ (2) Other (4) Name Annual (3) All Other and (1) Compen- Long-Term Compen Principal Salary Bonus sation Payouts sation Position Year ($) ($) ($) ($) ($) --------- ---- ------ ----- ------- --------- --------- David F. Hodnik 1996 $500,000 - $20,110 $173,223 $104,989 President and Chief 1995 450,000 - 17,021 105,870 97,624 Executive Officer 1994 350,000 61,250 17,561 15,583 77,782 (CEO effective 1/1/96)
William A. Loftus 1996 290,000 39,440 8,442 81,132 60,644 Senior Vice 1995 275,000 42,350 6,298 80,204 59,153 President-Retail 1994 260,000 45,500 10,163 12,000 61,308 Operations and Marketing
Paul M. Ingevaldson 1996 257,000 30,840 11,188 72,450 49,579 Vice President- 1995 247,000 33,100 7,215 71,221 49,466 Corporate Strategy and 1994 232,000 41,760 7,190 10,583 59,111 International Business
Michael C. Bodzewski 1996 217,250 28,990 7,312 52,107 36,384 Vice President- 1995 192,500 36,800 9,555 48,158 36,523 Merchandising 1994 165,000 28,900 7,946 6,926 37,739
Rita D. Kahle 1996 218,000 28,558 6,826 50,436 33,122 Vice President- 1995 195,000 32,175 9,012 44,807 35,573 Finance 1994 160,000 29,600 7,874 6,104 36,670
(1) The Incentive Compensation Plan covers each of the executive officers (except Mr. Hodnik). The bonus amounts awarded to participants in the Plan are determined in accordance with achievement of individual performance based objectives and achievement of corporate goals. The maximum short-term incentive award for each executive officer is 20% of their respective salary. The short-term bonus award becomes payable to each participant as early as practicable at or after the end of the fiscal year. (2) The Company provided automobiles to certain of its executive officers. The Company requires them to maintain records with respect to any business automobile use. Such officers pay, both directly and by reimbursement to the Company, personal automobile expenses. During 1996, Company provided automobiles were replaced with automobile allowances. Country club memberships granted prior to 1994 to some officers have been eliminated, except for the President. The compensation table set forth above includes the value of these items and such value for any officer did not exceed the lesser of $25,000 or 10% of the compensation reported for each in said table. (3) Includes the long-term incentive award under the Long-Term Incentive Compensation Deferral Option Plan effective in 1995. The long-term Officer incentive plan is based upon corporate performance over a three year period with emphasis on total shareholder return through maximizing both year-end patronage dividends and upfront dividends (throughout the year) through pricing programs and discounts. This plan maintains the commitment to long-term performance and shareholder return in a cooperative environment. One third of the total long-term incentive award is subject to a one year vesting provision. Total awards paid in 1996 were $173,223, $81,132, $72,450, $52,107 and $50,436 for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle, respectively. Effective January 1, 1995, executive officers may elect to defer a portion (20% to 100%, in 20% increments) of the annual award granted. Participants' compensation deferrals are credited with a specified rate of interest to provide a means to accumulate supplemental retirement benefits. Deferred benefits are payable over a period of 5 to 20 years. Annual elections are required for the upcoming deferral year by December of the preceding year. Of the total 1996 awards, amounts deferred were $115,482, $64,906, $72,450, $34,738 and $50,436 for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle, respectively. (4) Includes contributions to the Company's Profit Sharing Plan which has been in existence since January 1, 1953, and contributions to the Company's Retirement Benefits Replacement Plan. All active employees are eligible to participate in the Company's profit sharing plan after one year of service. Those active employees covered by a collective bargaining agreement regarding retirement benefits, which were the subject of good faith bargaining, are not eligible if such agreement does not include them in the plan. For the year 1996, the Company contributed 10.4% of each participant's eligible compensation to the Plan. During the year 1996, $15,600 was expensed by the Company pursuant to the Plan for Messrs. Hodnik, Loftus, Ingevaldson, Bodzewski and Ms. Kahle. The Company has also established a Retirement Benefits Replacement Plan covering all executive officers of the Company. This is an unfunded Plan under which the participants therein are eligible to receive retirement benefits equal to the amounts by which the benefits they would otherwise have been entitled to receive under the Company's Profit Sharing Plan may be reduced by reason of the limitations on contributions and benefits imposed by any current or future provisions of the U.S. Internal Revenue Code or other federal legislation. During the year 1996, amounts expensed by the Company pursuant to the Plan were $89,389 for Mr. Hodnik, $45,044 for Mr. Loftus, $33,979 for Mr. Ingevaldson, $20,784 for Mr. Bodzewski and $17,522 for Ms. Kahle. The Company also funds the base premium for a supplemental universal life insurance policy for each officer but does not contribute to supplemental retirement benefits through this vehicle. Participants may elect to deposit a portion (up to one- third) of the long term incentive award into the variable annuity insurance policy in their name or may elect to defer this portion under the Deferral Option Plan. (5) As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue stock awards of any kind.
Messrs. Hodnik, Loftus, and Ingevaldson are employed under contracts, each dated January 1, 1997 for respective terms of two years, terminating December 31, 1998. Mr. Bodzewski and Ms. Kahle are employed under contracts dated April 1, 1996 and January 1, 1996 for a two year term terminating March 31, 1998 and December 31, 1997, respectively. The contracts provide for annual compensation effective January 1, 1997 of $600,000, $305,000, $269,000, $223,000 and $240,000, respectively or such increased amount, if any, as shall be approved by the Board of Directors. The Company also maintains a Pension Plan which has been in existence since December 31, 1970. All active employees are eligible to participate in this Plan on the first January 1 that they are working for the Company. Those active employees covered by a collective bargaining agreement regarding retirement benefits, which were the subject of good faith bargaining are not eligible if such agreement does not include them in the plan. The Plan provides benefits at retirement at or after age 65 determined under a formula which takes into account 60% of a participant's average base pay (including overtime) during the 5 highest consecutive calendar years of employment and years of service prior to age 65, and under which an offset is applied for the straight life annuity equivalent of the vested portion of the participant in the amount of benefits provided for them by the Company under the Profit Sharing Plan. In December 1995, the Company settled a portion of its pension liability to retirees and vested terminated participants through lump sum payments and the purchase of single premium annuity contracts. The plan was closed to new entrants on December 31, 1995 and pension benefits were frozen to active participants on January 1, 1996.
Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing Plan offset) are as follows:
Years of Service Remuneration 10 15 20 25 30 or more - ------------ -- -- -- -- ---------- $150,000 $30,000 $45,000 $60,000 $75,000 $90,000 $100,000 20,000 30,000 40,000 50,000 60,000 $ 50,000 10,000 15,000 20,000 25,000 30,000
The amounts shown above represent straight life annuity amounts. Maximum benefits from the Pension Plan are attained after 30 years of service and attainment of age 65. The compensation covered by the Pension Plan consists of base compensation (exclusive of bonuses and non-recurring salary or wage payments) and shall not exceed $150,000 of such total remuneration paid to a participant during any plan year. Remuneration and yearly benefits under the Plan are limited, and subject to adjustment, under Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The amount of covered compensation under the Pension Plan, therefore is $150,000 for each Executive Officer named in the Compensation table. The present credited years of service under the Pension Plan for the currently employed executive officers named in the compensation table are as follows: David F. Hodnik-24 years; William A. Loftus-20 years; Paul M. Ingevaldson-17 years; Michael C. Bodzewski-19 years and Rita D. Kahle-10 years.
Compensation Committee Report
The Compensation Committee reviews and approves compensation and benefits provided to all senior executives. The corporation's Executive Compensation philosophy is one that supports the Company's fundamental business strategies. We stress long term measured results, focus on teamwork, accepting prudent risks, and are strongly committed to fulfilling dealer/consumer needs. Our compensation program reflects a policy of market place comparisons and corporate and individual performance based pay. Our competitors for talented people include publicly owned for profit retail corporations, privately owned for profit retail enterprises, and other national hardware/LBM cooperatives. Each of these comparative groupings has quite a different compensation practice/philosophy. An annual review is performed of executive cash compensation provided by competitors and by participating in various executive compensation surveys. Our orientation is to be cognizant of their respective practices and pay levels, but to give greater emphasis to that which supports our strategic business objectives and the needs of our dealer network. The Compensation Committee changed the compensation mix in 1994 to one which stresses the provision of more significant performance based incentives, particularly long term. Annual and long term incentive opportunities have increased, with substantive changes in long term performance criteria. Long-term performance is evaluated heavily on a measurement of total shareholder return including both year-end patronage dividends and upfront dividends through low-upfront pricing programs and discounts. This criteria maximizes total return to our membership. As it relates to the President/CEO compensation, the President's compensation includes a competitive base salary and a long-term incentive award to maintain the commitment to long-term Company performance and shareholder return.
Compensation of Directors
Effective January 1, 1997, and January 1, 1996, each member of the Board of Directors receives a monthly fee of $2,850 and $2,750, respectively, for their services. Effective as of the foregoing dates, Mr. Laskowski is paid a total annual fee of $135,000 and $120,000 per year, respectively, in his capacity as Chairman of the Board. In 1994, the previous Deferred Director Fee Plan was amended, restated and retitled the Directors' Deferral Option Plan. Like the Officers' Long Term Incentive Compensation Deferral Option Plan, under this Directors' Plan, directors may elect to defer a portion (5% to 100%, in 5% increments) of their annual director's fee. Deferred benefits are payable over a period of 5 to 20 years, as elected. Annual elections are required for the upcoming deferral year by December of the preceding year. Each member of the Board is also reimbursed for the amount of travel and lodging expenses incurred in attending meetings of the Board and of the Committees of the Board. The expenses incurred by them in attending the semi-annual conventions and exhibits which the Company sponsors are also paid by the Company. Each member of the Board is also paid $200.00 per diem compensation for special committee meetings and nominating committee regional trips attended.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
With the exception of Mr. Laskowski, no shares of the Company's stock were held by any of its officers. No person owns of record or is known by the Company to own beneficially more than five percent of the outstanding voting securities of the Company. The following table sets forth the shares of Class B Stock and Class C Stock of the Company held beneficially, directly or indirectly, by each director (and nominee) owning such shares, individually itemized, and by all officers and directors as a group, as of February 14, 1997:
Class B Stock Owned Class C Stock Owned
Number Percent Number Percent of Shares of Class of Shares of Class --------- -------- --------- -------- Jennifer C. Anderson 4 .140 2,968 .152 Eric R. Bibens II - - 437 .022 Lawrence R. Bowman 4 .140 1,718 .088 James T. Glenn 4 .140 6,246 .319 D. William Hagan - - 1,536 .079 Mark Jeronimus - - 730 .037 John E. Kingrey 4 .140 945 .048 Richard E. Laskowski 4 .140 12,403 .634 Ray W. Osborne 4 .140 1,048 .054 Jon R. Weiss 4 .140 2,660 .136 Don S. Williams - - 4,466 .228 James R. Williams, Jr. 4 .140 772 .039 ------- ------- ------- ------- All above directors and officers as a group 32 1.120 35,929 1.836 ======= ======= ======= =======
There are no known contractual arrangements nor any pledge of securities of the Company which may at a subsequent date result in a change in control of the Company.
Item 13.
Item 13. Certain Relationships and Related Transactions
No director, executive officer or security holder who is known to the Registrant to own of record or beneficially more than five percent of any class of the Registrant's voting securities, or any member of the immediate family of any of the foregoing persons, had during the last fiscal year or is currently proposed to have any material interest, direct or indirect, in any transaction in which the amount involved exceeds $60,000 and to which the Registrant was or is to be a party, except that each of the directors purchased merchandise and services from the Registrant in the ordinary course of business on behalf of the retail hardware businesses in which they have ownership interests. None of such persons received benefits not shared by other hardware retailers supplied by the Registrant. No director has had any business relationship which is required to be disclosed pursuant to Item 404(b) of Regulation S-K of the Securities and Exchange Commission, during the Registrant's last fiscal year. Mr. Peterson, who was elected as an outside Director effective June 5, 1995 and retired as CEO of the Company effective May 31, 1995 is subject to an agreement through May 31, 2000 providing for non-competition within the industry, participation in designated Company functions and total renumeration of $150,000 per year over the 5 year term. No director, director nominee, executive officer, any member of the immediate family of any of the foregoing, or any corporation or organization of which any of the foregoing is an executive officer, partner, or, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities, or any trust or other estate in which any of the foregoing has a substantial beneficial interest or as to which such person serves as a trustee or in a similar capacity, has been indebted to the Registrant or its subsidiaries at any time since the beginning of the Registrant's last fiscal year in an amount in excess of $60,000, except for indebtedness incurred in connection with purchases of merchandise and services made from the Registrant in the ordinary course of business by the retail hardware businesses in which the directors have ownership interest.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements The financial statements listed in the accompanying index (page) to the consolidated financial statements are filed as part of this annual report.
2. Financial Statement Schedules None.
3. Exhibits The exhibits listed on the accompanying index to exhibits (pages E-1 through E-6) are filed as part of this annual report.
(b) Reports on Form 8-K None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACE HARDWARE CORPORATION
By RICHARD E. LASKOWSKI Richard E. Laskowski Chairman of the Board and Director
DATED: March 12, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- RICHARD E. LASKOWSKI Chairman of the Board March 12, 1997 (Richard E. Laskowski) and Director
DAVID F. HODNIK President and March 12, 1997 (David F. Hodnik) Chief Executive Officer
RITA D. KAHLE Vice President-Finance March 12, 1997 (Rita D. Kahle) (Principal Financial and Accounting Officer)
Jennifer C. Anderson, Directors Lawrence R. Bowman, James T. Glenn, Mark Jeronimus, John E. Kingrey, Ray W. Osborne, Roger E. Peterson, Jon R. Weiss, Don S. Williams, and James R. Williams, Jr.
*By DAVID F. HODNIK David F. Hodnik
*By RITA D. KAHLE March 12, 1997 Rita D. Kahle
*Attorneys-in-fact
Item 14(a). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page ---- Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Earnings for each of the years in the three-year period ended December 31, 1996
Consolidated Statements of Member Dealers' Equity for each of the years in the three-year period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996
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 financial statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors Ace Hardware Corporation:
We have audited the accompanying consolidated balance sheets of Ace Hardware Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, member dealers' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ace Hardware Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois January 30, 1997
ACE HARDWARE CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
ASSETS
1996 1995 ---- ---- (000's omitted) Current assets: Cash and cash equivalents $ 12,657 $ 12,853 Receivables: Trade 305,742 248,572 Other 43,206 39,916 ---------- ---------- 348,948 288,488 Less allowance for doubtful receivables (1,700) (1,410) ---------- ---------- Net receivables 347,248 287,078
Inventories (Note 2) 327,145 254,451
Prepaid expenses and other current assets 11,880 9,324 ---------- ---------- Total current assets 698,930 563,706
Property and equipment (Note 9): Land 17,464 16,063 Buildings and improvements 162,100 145,359 Warehouse equipment 57,246 51,457 Office equipment 71,689 61,568 Manufacturing equipment 13,132 12,636 Transportation equipment 14,609 14,763 Leasehold improvements 15,654 13,498 Construction in progress 12,501 12,449 ---------- ---------- 364,395 327,793 Less accumulated depreciation and amortization (150,861) (136,289) ---------- ---------- Net property and equipment 213,534 191,504
Other assets 3,911 3,923 ---------- ---------- $ 916,375 $ 759,133 ========== ==========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
LIABILITIES AND MEMBER DEALERS' EQUITY
1996 1995 ---- ---- (000's omitted)
Current liabilities: Current installments of long-term debt (Note 4) $ 6,727 $ 7,378 Short-term borrowings (Note 3) 71,000 13,000 Accounts payable 394,070 338,577 Patronage dividends payable in cash (Note 5) 28,178 23,522 Patronage refund certificates payable (Note 5) 14,138 12,641 Accrued expenses 36,349 28,783 ---------- ---------- Total current liabilities 550,462 423,901
Long-term debt (Note 4) 71,837 57,795 Patronage refund certificates payable (Note 5) 49,639 54,741 Other long-term liabilities 11,074 5,451 ---------- ---------- Total liabilities 683,012 541,888 ---------- ----------
Member dealers' equity (Notes 5 and 8): Class A Stock of $1,000 par value 3,937 3,905 Class B Stock of $1,000 par value 6,499 6,499 Class C Stock of $100 par value 196,742 177,817 Class C Stock of $100 par value, issuable to dealers for patronage dividends 26,474 27,506 Additional stock subscribed, net 502 515 Retained earnings 3,120 4,650 Contributed capital 3,295 3,295 ----------- ----------- 240,569 224,187 Less: Treasury stock, at cost (7,206) (6,942) ----------- ----------- Total member dealers' equity 233,363 217,245
Commitments (Notes 6 and 9) ---------- ---------- $ 916,375 $ 759,133 ========== ==========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31, --------------------------------------- 1996 1995 1994 ---- ---- ---- (000's omitted)
Net sales $2,742,451 $2,436,012 $2,326,115 Cost of sales 2,535,014 2,253,430 2,152,322 ------------ ------------ ------------ Gross profit 207,437 182,582 173,793 ------------ ------------ ------------
Operating expenses: Warehouse and distribution 36,442 29,849 28,874 Selling, general and administrative 68,323 59,929 54,357 Retail success and development 21,198 18,439 14,798 ------------ ----------- ----------- Total operating expenses 125,963 108,217 98,029 ------------ ----------- ----------- Operating income 81,474 74,365 75,764
Interest expense (Note 11) (11,855) (13,137) (13,474) Other income, net 3,806 3,715 3,361 Income taxes (Note 7) (1,118) (1,201) (1,129) ------------ ------------ ------------ Net earnings $ 72,307 $ 63,742 $ 64,522 ============ ============ ============
Retained earnings at beginning of year $ 4,650 $ 5,624 $ 5,622 Net earnings 72,307 63,742 64,522 Patronage dividends (Notes 5 and 8) (73,837) (64,716) (64,520) ------------ ------------ ------------ Retained earnings at end of year $ 3,120 $ 4,650 $ 5,624 ============ ============ ============
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended December 31, 1996 (000's omitted)
Class C Stock Issuable to Dealers for Additional Class A Class B Class C Patronage Stock Stock Stock Stock Dividends Subscribed* ------- ------- -------- --------- ----------- Balance at December 31, 1993 $3,946 $6,499 $153,155 $19,064 $ 613 Net earnings - - - - - Net payments on subscriptions - - - - 1,394 Patronage financing deductions - - - (1,086) - Stock issued 218 - 19,212 (17,978) (1,452) Stock repurchased - - - - - Stock retired (240) - (7,701) - - Stock issuable as patronage dividends - - - 21,766 - Patronage dividends payable - - - - - ------- ------- -------- -------- -------- Balance at December 31, 1994 $3,924 $6,499 $164,666 $21,766 $ 555 Net earnings - - - - - Net payments on subscriptions - - - - 1,580 Patronage financing deductions - - - (15) - Stock issued 237 - 23,149 (21,751) (1,620) Stock repurchased - - - - - Stock retired (256) - (9,998) - - Stock issuable as patronage dividends - - - 27,506 - Patronage dividends payable - - - - - ------- ------- --------- -------- ------- Balance at December 31, 1995 $3,905 $6,499 $177,817 $27,506 $ 515 Net earnings - - - - - Net payments on subscriptions - - - - 1,603 Patronage financing deductions - - - (43) - Stock issued 268 - 28,854 (27,463) (1,616) Stock repurchased - - - - - Stock retired (236) - (9,929) - - Stock issuable as patronage dividends - - - 26,474 - Patronage dividends payable - - - - - ------- ------- --------- -------- ------- Balance at December 31, 1996 $3,937 $6,499 $196,742 $26,474 $ 502 ======= ======= ========= ======== =======
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY Three Years Ended December 31, 1996 (000's omitted)
Retained Contributed Treasury C Earnings Capital Stock Total -------- ----------- ---------- ----- Balance at December 31, 1993 $ 5,622 $3,295 $ (6,166) $186,028 Net earnings 64,522 - - 64,522 Net payments on subscriptions - - - 1,394 Patronage financing deductions - - - (1,086) Stock issued - - - - Stock repurchased - - (8,277) (8,277) Stock retired - - 7,941 - Stock issuable as patronage dividends - - - 21,766 Patronage dividends payable (64,520) - - (64,520) -------- ------ --------- --------- Balance at December 31, 1994 $ 5,624 $3,295 $ (6,502) $199,827 Net earnings 63,742 - - 63,742 Net payments on subscriptions - - - 1,580 Patronage financing deductions - - - (15) Stock issued - - - 15 Stock repurchased - - (10,694) (10,694) Stock retired - - 10,254 - Stock issuable as patronage dividends - - - 27,506 Patronage dividends payable (64,716) - - (64,716) -------- ------- --------- --------- Balance at December 31, 1995 $ 4,650 $3,295 $ (6,942) $217,245 Net earnings 72,307 - - 72,307 Net payments on subscriptions - - - 1,603 Patronage financing deductions - - - (43) Stock issued - - - 43 Stock repurchased - - (10,429) (10,429) Stock retired - - 10,165 - Stock issuable as patronage dividends - - - 26,474 Patronage dividends payable (73,837) - - (73,837) -------- ------- --------- --------- Balance at December 31, 1996 $ 3,120 $3,295 $ (7,206) $233,363 ======== ======= ========= =========
*Additional stock subscribed is comprised of the following amounts at December 31, 1994, 1995 and 1996:
1994 1995 1996 ---- ---- ---- Class A Stock $ 291 $ 332 $ 337 Class B Stock - - - Class C Stock 2,180 2,332 2,450 ------ ------ ------ 2,471 2,664 2,787 Less unpaid portion 1,916 2,149 2,285 ------ ------ ------ $ 555 $ 515 $ 502 ====== ====== ======
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------- 1996 1995 1994 ---- ---- ---- (000's omitted)
Operating Activities: Net Earnings $ 72,307 $ 63,742 $ 64,522 Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 17,517 16,837 16,963 Loss on sale of property and equipment 712 3 175 Increase in accounts receivable, net (60,170) (27,526) (46,950) Decrease (increase) in inventories (72,694) 15,940 (6,815) Decrease (increase) in prepaids and other current assets (2,556) (2,135) 153 Increase in accounts payable and accrued expenses 63,059 41,860 62,521 Increase in other long-term liabilities 5,623 1,107 916 ----------- ----------- ----------- Net Cash Provided by Operating Activities 23,798 109,828 91,485 ----------- ----------- ----------- Investing Activities: Purchase of property and equipment (40,379) (31,263) (28,285) Proceeds from sale of property and equipment 120 27 187 Decrease in other assets 12 579 7,711 ----------- ----------- ----------- Net Cash Used in Investing Activities (40,247) (30,657) (20,387) ----------- ----------- ----------- Financing Activities: Proceeds (payments) of short-term borrowings 58,000 (17,000) (8,500) Proceeds from notes payable 20,000 - - Payments on long-term debt (6,609) (6,483) (10,337) Payment of cash portion of patronage dividend (23,522) (27,302) (25,766) Payments of patronage refund certificates and patronage financing deductions (22,790) (11,287) (18,886) Proceeds from sale of common stock 1,603 1,580 1,394 Repurchase of common stock (10,429) (10,694) (8,277) ----------- ----------- ----------- Net Cash Provided by (Used in) Financing Activities 16,253 (71,186) (70,372) ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents (196) 7,985 726 Cash and Cash Equivalents at beginning of year 12,853 4,868 4,142 ----------- ----------- ----------- Cash and Cash Equivalents at end of year $ 12,657 $ 12,853 $ 4,868 =========== =========== ===========
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) The Company and Its Business
Ace Hardware Corporation (the Company) operates as a wholesaler of hardware and related products primarily in the United States, and manufactures paint products. As a dealer-owned cooperative, the Company distributes substantially all of its patronage sourced earnings in the form of patronage dividends to member dealers based on their volume of merchandise purchases. The accompanying consolidated financial statements include the accounts of the Company and subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated.
(b) Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
(c) Receivables
Receivables from dealers include amounts due from the sale of merchandise and special equipment used in the operation of dealers' businesses. Other receivables are principally amounts due from suppliers for promotional and advertising allowances.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the last-in, first-out method on substantially all inventories.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to earnings. Significant improvements or renewals are capitalized. Depreciation expense is computed on both straight-line and accelerated methods based on estimated useful lives as follows:
Useful Life Principal Years Depreciation Method ----------- ------------------- Buildings and improvements 10-40 Straight line Warehouse equipment 5-10 Accelerated Office equipment 3-10 Various Manufacturing equipment 3-20 Straight line Transportation equipment 3-7 Straight line
Leasehold improvements are generally amortized on a straight-line basis over the term of the respective lease.
(f) 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. Foreign currency translation adjustments were insignificant for 1996. The fair market value of the forward contracts approximates carrying cost at December 31, 1996.
(g) 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.
(h) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(i) Reclassifications
Certain financial statement reclassifications have been made to prior year amounts to conform to comparable classifications followed in 1996.
(2) Inventories
Inventories consist primarily of merchandise inventories. Substantially all of the Company's inventory is valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the LIFO value of inventory was approximately $69,867,000 and $66,319,000 at December 31, 1996 and 1995, respectively. Indirect costs, consisting primarily of warehousing costs, are absorbed as inventory costs rather than period costs.
(3) Short-Term Borrowings
Short-term borrowings were utilized during 1996 and 1995. The maximum amount outstanding at any month-end during the period was $97,500,000 in 1996 and $95,000,000 in 1995. The weighted average interest rate effective as of December 31, 1996 and 1995 was 7.13% and 6.13%, respectively. Short- term borrowings outstanding as of December 31, 1996 and 1995 were $71,000,000 and $13,000,000, respectively. At December 31, 1996 the Company has available a revolving credit facility with a group of banks providing for $75 million in committed lines and also has available $105 million in uncommitted lines. The aggregate unused line of credit available at December 31, 1996 and 1995 was $109 million and $172 million, respectively. At December 31, 1996 the Company had no compensating balance requirements.
(4) Long-Term Debt
Long-term debt is comprised of the following: December 31, ---------------------- 1996 1995 ---- ---- (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% $14,595 $16,757 $20,000,000 due in quarterly installments of $952,400 with interest payable quarterly at a fixed rate of 6.89% 12,381 16,190 $30,000,000 due in semi-annual installments of $2,000,000 commencing June 22, 2001 with interest payable quarterly at a fixed rate of 6.47% 30,000 30,000 $20,000,000 due in quarterly installments of $714,285 commencing September 15, 2004 with interest payable quarterly beginning December 15, 1996 at a fixed rate of 7.49% 20,000 - Industrial Development Revenue Bond - $125,000 payable quarterly through December 1, 1996 with interest at 65% of the prime rate - 500 Liability under capitalized leases (see Note 9) 664 816 Installment notes with maturities through 1999 with various interest rates 924 910 ------- ------- 78,564 65,173 Less current installments 6,727 7,378 ------- ------- $71,837 $57,795 ======= =======
Aggregate maturities of long-term debt are $6,727,000, $6,507,000, 6,161,000, $3,216,000 and $6,162,000 in 1997 through 2001, respectively, and $49,791,000 thereafter. The fair value of the Company's debt based upon discounting future cash flows does not materially vary from the carrying value of such debt as of December 31, 1996 and 1995.
(5) Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or will pay patronage dividends to member dealers on the portion of earnings derived from business done with such dealers. Patronage dividends are allocated in proportion to the volume of purchases by member dealers during the period. The amount of patronage dividends to be remitted in cash depends upon the level of dividends earned by each member outlet, varying from 20% on the total dividends under $5,000 and increasing by 5% on total dividends for each subsequent $2,500 earned to a maximum of 40% on total dividends exceeding $12,500. All amounts exceeding the cash portions will be distributed in the form of Class C $100 par value stock, to a maximum based upon the current year purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied toward payment of principal and interest on any balances outstanding for approved exterior signage, computer equipment and store retrofit financing. The patronage dividend composition for 1996, 1995 and 1994 follows:
Subordinated Class Patronage Total Cash Refund C Financing Patronage Portion Certificates Stock Deductions Dividend ------- ------------ ----- ---------- --------- (000's omitted)
1996 $28,178 $ 9,500 $26,474 $9,685 $73,837 1995 23,522 5,032 27,506 8,656 64,716 1994 27,302 9,920 21,766 5,532 64,520
Patronage dividends are allocated on a calendar year basis with issuance in the following year.
The patronage refund certificates outstanding or issuable at December 31, 1996 are payable as follows:
Interest January 1, Amount Rate ---------- ------ -------- (000's omitted)
1997 $14,138 6.25% 1998 13,782 6.0 1999 11,690 6.0 2000 9,518 7.0 2001 5,149 6.0 2002 9,500 6.25
(6) Retirement Plans
The Company has defined benefit pension plans covering substantially all non-union employees. Benefits are based on years of service, highest average compensation (as defined) and the related profit sharing and primary social security benefit. Contributions to the plan are based on the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that are currently deductible for tax reporting purposes. As of December 31, 1996 plan assets were held primarily in equities, mutual funds and group annuity contracts. Pension expense for the years 1996, 1995 and 1994 included the following components:
1996 1995 1994 ---- ---- ---- (000's omitted)
Service cost - benefits earned during the period $ 72 $ 355 $ 323 Interest cost on projected benefit obligation 486 845 805 Actual return on plan assets (786) (2,288) (121) Net amortization and deferral 292 1,257 (1,073) -------- ------- -------- Net periodic pension expense (income) $ 64 $ 169 $ (66) ======== ======= ========
In 1995 and 1996, the plan settled a portion of the liability to retirees and vested terminated participants through lump sum payments and the purchase of single premium annuity contracts. In addition to the net periodic pension expense, the Company recognized a net loss of $475,000 and $1,380,000 in 1996 and 1995, respectively, related to this settlement.
The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheet at December 31, 1996 and 1995 (December 31st measurement date): December 31, 1996 1995 ---- ---- (000's omitted)
Accumulated benefit obligation, including vested benefits of $6,185,000 and $7,383,000 $ 6,196 $ 7,613 ========= =========
Plan assets at fair value $ 7,965 $ 9,932 Projected benefit obligation for service rendered to date 6,487 8,832 --------- --------- Plan assets in excess of projected benefit obligation $ 1,478 $ 1,100
Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions 107 1,775 Remaining unrecognized net asset being amortized over participants average remaining service period (845) (1,672) --------- --------- Prepaid pension cost included in other assets $ 740 $ 1,203 ========= =========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% in 1996 and 7.0% in 1995. The related expected long-term rate of return was 8.0% in 1996 and 1995. The rate of increase in future compensation was projected using actuarial salary tables plus 1.0% in 1996 and 1995. The Company also participates in several multi-employer plans covering union employees. Amounts charged to expense and contributed to the plans totaled approximately $265,000, $275,000 and $282,000, in 1996, 1995 and 1994, respectively. The Company's profit sharing plan contribution for the years ended 1996, 1995 and 1994 was approximately $11,357,000, $9,902,000 and $9,381,000, respectively.
(7) Income Taxes
As a cooperative, the Company distributes substantially all of its patronage sourced earnings to its members in the form of patronage dividends. The 1996, 1995 and 1994 provisions for federal income taxes were $860,000, $939,000 and $924,000, respectively, and for state income taxes were $258,000, $262,000 and $205,000, respectively. The Company made tax payments of $1,524,000, $1,625,000 and $1,222,000 during 1996, 1995 and 1994, respectively.
(8) Member Dealers' Equity
The Company's classes of stock are described below: Number of Shares at December 31, -------------------- 1996 1995 ---- ---- Class A Stock, voting, redeemable at par value - Authorized 10,000 10,000 Issued and outstanding 3,937 3,905
Class B Stock, nonvoting, redeemable at not less than twice par value- Authorized 6,500 6,500 Issued 6,499 6,499 Outstanding 2,896 3,028 Treasury stock 3,603 3,471
Class C Stock, nonvoting, redeemable at not less than par value - Authorized 4,000,000 2,000,000 Issued and outstanding 1,967,420 1,778,173 Issuable as patronage dividends 264,740 275,059
Additional Stock Subscribed: Class A Stock 337 332 Class B Stock - - Class C Stock 24,500 23,320
At December 31, 1996 and 1995 there were no common shares reserved for options, warrants, conversions or other rights; nor were any options granted or exercised during the two years then ended. Member dealers may subscribe for the Company's stock in various prescribed combinations. Only one share of Class A Stock may be owned by a dealer with respect to the first member retail outlet controlled by such dealer. Only four shares of Class B Stock may be owned by a dealer with respect to each retail outlet controlled by such dealer, but only if such outlet was a member of the Company on or before February 20, 1974. An appropriate number of shares of Class C Stock must be included in any subscription by a dealer in an amount to provide that such dealer has a par value of all shares subscribed for equal to $5,000 for each retail outlet. Unregistered shares of Class C Stock are also issued to dealers in connection with patronage dividends. No dividends can be declared on any shares of any class of the Company's Stock. Upon termination of the Company's membership agreement with any retail outlet, all shares of stock of the Company, held by the dealer owning or controlling such outlet, must be sold back to the Company, unless a transfer of such shares is made to another party accepted by the Company as a member dealer with respect to the same outlet. A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Class C stock issuable as patronage dividends are issued in the following year and are not issued in excess of amounts authorized. Additional Stock Subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion. All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price over par is allocated equally between contributed capital and retained earnings. Transactions during 1994, 1995 and 1996 affecting treasury shares follow:
Shares Held in Treasury ------------------------ Class A Class B Class C ------- ------- ------- Balance at December 31, 1993 - 3,083 - Stock issued - - - Stock repurchased 240 168 77,013 Stock retired (240) - (77,013) -------- -------- ---------
Balance at December 31, 1994 - 3,251 - Stock issued - - - Stock repurchased 256 220 99,975 Stock retired (256) - (99,975) -------- -------- ---------
Balance at December 31, 1995 - 3,471 - Stock issued - - - Stock repurchased 236 132 99,290 Stock retired (236) - (99,290) -------- -------- --------- Balance at December 31, 1996 - 3,603 - ======== ======== ========
(9) Commitments
Leased property under capital leases is included as "Property and Equipment" in the consolidated balance sheets as follows:
December 31, ------------ 1996 1995 ---- ---- (000's omitted)
Buildings and improvements $3,422 $3,422 Data processing equipment 1,783 1,441 Less: Accumulated depreciation and amortization (4,678) (4,106) ------- ------- $ 527 $ 757 ======= =======
The Company rents buildings and warehouse, office and certain other equipment under capital and operating leases. At December 31, 1996 annual minimum rental commitments under leases that have initial or remaining noncancelable terms in excess of one year are as follows:
Year Ending December 31, Capital Operating - ------------- ------- --------- (000's omitted)
1997 $ 437 $16,185 1998 257 14,570 1999 - 11,915 2000 - 10,020 2001 - 8,811 Thereafter - 28,449 ------- ------- Total minimum lease payments 694 $89,950 Less amount representing interest 30 ======= ------- Present value of total minimum lease payments $ 664 =======
All leases expire prior to 2010. 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 $29,747,000, $25,024,000 and $21,814,000 in 1996, 1995 and 1994, respectively. Rent expense includes $5,503,000, $4,724,000 and $4,382,000 in contingent rentals paid in 1996, 1995 and 1994, respectively, primarily for transportation equipment mileage.
(10) Media Expense
The Company expenses media costs the first time the advertising takes place. Gross media expense, prior to income offsets from dealers and suppliers, amounting to $64,333,000, $58,765,000 and $52,185,000 was charged to operations in 1996, 1995 and 1994, respectively.
(11) Interest Expense
Capitalized interest totaled $523,000, $497,000 and $213,000 in 1996, 1995 and 1994, respectively. Interest paid was $12,452,000, $13,574,000 and $13,518,000 in 1996, 1995 and 1994, respectively.
INDEX TO EXHIBITS
Exhibits Enclosed Description - -------- ----------- 21 Subsidiaries of the Registrant 24 Powers of Attorney
Exhibits Incorporated by Reference Description - ------------ ----------- 2 Not Applicable 3-A Restated Certificate of Incorporation of the Registrant dated September 18, 1974 filed as Exhibit 3-A to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on March 30, 1976 and incorporated herein by reference. 3-B By-laws of the Registrant as amended through September 19, 1995 included as Appendix A to the Prospectus constituting a part of the Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement filed on or about March 12, 1997 (Registration No. 33-58191) and incorporated herein by reference. 3-C Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 19, 1976 filed as Exhibit 3-D to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-55860) on June 10, 1976 and incorporated herein by reference. 3-D Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated May 21, 1979 filed as Exhibit 3-F to Amendment No. 1 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on May 23, 1979 and incorporated herein by reference. 3-E Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 7, 1982 filed as Exhibit 3-G to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 3-F Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 5, 1987 filed as Exhibit 3-F to the Registrant's Form S-1 Registration Statement (Registration No. 33-4299) on March 29, 1988 and incorporated by reference. 3-G Certificate of Amendment to the restated Certificate of Incorporation of the Registrant dated June 16, 1989 filed as Exhibit 4-G to Post Effective Amendment No. 1 to the Registrant's S-2 Registration Statement filed on or about March 20, 1990 and incorporated by reference. 3-H Certificate of Amendment to the restated Certificate of Incorporation of the Registrant filed as Exhibit 4-H to Post- Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about March 12, 1997 and incorporated herein by reference. 4-A Specimen copy of Class B stock certificate as revised as of November, 1984, filed as Exhibit 4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 15, 1985 and incorporated herein by reference. 4-B Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33- 4299) on March 29, 1988 and incorporated herein by reference. 4-C Specimen copy of Class A stock certificate as revised in 1987 filed as Exhibit 4-C to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement (Registration No. 33- 4299) on March 29, 1988 and incorporated herein by reference. 4-D Specimen copy of Class C stock certificate filed as Exhibit 4-I to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 4-E Copy of current standard form of Subscription for Capital Stock Agreement to be used for dealers to subscribe for shares of the Registrant's stock in conjunction with new membership agreements submitted to the Registrant filed as Exhibit 4-L to Post- Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 4-F Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant on or after January 1, 1995 adopted by the Board of Directors of the Registrant on July 26, 1994 filed as Exhibit 4-M to the Registrant's Form S-2 Registration Statement on or about March 15, 1996 (Registration No. 33-58191) and incorporated herein by reference. 9 No Exhibit 10-A Copy of Retirement Benefits Replacement Plan of the Registrant, restated as of January 1, 1989, filed as Exhibit 10-A to Post- Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-B Copy of resolutions amending the 1990 Incentive Compensation Plans for Executives and establishing the Executive Supplemental Benefit Plans of the Registrant adopted by its Board of Directors on December 11, 1990 and filed as Exhibit 10-G to Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-C Copy of amendment to the Executive Supplemental Benefits Plan of the Registrant adopted by its Board of Directors on July 30, 1991 filed as Exhibit 10-E to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-D Copy of amendment to the Executive Supplemental Benefits Plan of the Registrant adopted by its Board of Directors on December 9, 1991 filed as Exhibit 10-F to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-E Copy of the "Ace Hardware Corporation Officer's (sic) Incentive Compensation Plan" as amended and restated effective January 1, 1994, filed as Exhibit 10-G to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-F Copy of Employment Agreement dated October 4, 1994 between Ace Hardware Corporation and Paul M. Ingevaldson filed as Exhibit 10- F to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-G Copy of Employment Agreement dated October 4, 1994 between Ace Hardware Corporation and David F. Hodnik filed as Exhibit 10-G to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-H Copy of Employment Agreement dated October 12, 1994 between Ace Hardware Corporation and William A. Loftus filed as Exhibit 10-H to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-I Copy of Employment Agreement dated March 22, 1994 between Ace Hardware Corporation and Fred J. Neer filed as Exhibit 10-a-3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-J Copy of Employment Agreement dated March 22, 1994 between Ace Hardware Corporation and Donald L. Schuman filed as Exhibit 10-a- 4 to the Registrant's Form S-2 Registration Statement on (Registration No. 33-58191) or about March 23, 1995 and incorporated herein by reference. 10-K Copy of Employment Agreement dated March 24, 1994 between Ace Hardware Corporation and Michael C. Bodzewski filed as Exhibit 10- a-7 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-L Copy of Form of Executive Officer Employment Agreement effective January 1, 1996 filed as Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1996 and incorporated herein by reference. 10-M Copy of Loan Agreement with Anne Arundel County, Maryland dated December 1, 1981 securing 15-year floating rate industrial development revenue bonds in the principal sum of $9,000,000 held by The Northern Trust Company, Chicago, Illinois, for itself and other participating lenders filed as Exhibit 10-A-k to Post- Effective Amendment No. 3 to the Registrant's Form S-1 Registration Statement (Registration No. 2-63880) on March 9, 1982 and incorporated herein by reference. 10-N Copy of Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit 10-A-q to the Registrant's Form S-2 Registration Statement (Regis- tration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-O Copy of Standard Form of Ace Hardware International Retail Merchant Agreement adopted in 1990, filed as Exhibit 10-A-q to Post Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-P Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P to Pre-Effective Amendment No. 2 to the Registrant's form S-2 Registration Statement (Registration No. 33-58191) on or about April 26, 1995 and incorporated herein by reference. 10-Q Copy of 6.89% Senior Series B notes in the aggregate principal sum of $20,000,000 issued July 29, 1992 with a maturity date of January 1, 2000 pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated September 27, 1991 and filed as Exhibit 10-A-r to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-R Copy of 6.47% Senior Series A notes in the aggregate principal amount of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008, and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993, filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-S Assignment and Assumption dated October 22, 1992 of Lease dated August 31, 1992 with MTI Vacations, Inc. filed as Exhibit 10-A-s to Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-T Copy of Amendment to the Executive Supplemental Benefit Plans of the Registrant adopted by its Board of Directors on March 17, 1992 and filed as Exhibit 10-A-t to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 22, 1993 and incorporated herein by reference. 10-U Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook, Illinois filed as Exhibit 10-A-u to the Registrant's Form S-2 Registration Statement (Registration No. 33- 46449) on March 22, 1993 and incorporated herein by reference. 10-V Copy of Fourth Amendment to Executive Supplemental Benefit Plans effective January 1, 1994 filed as Exhibit 10-V to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-W Copy of Ace Hardware Corporation Deferred Director Fee Plan as amended on June 8, 1993, filed as Exhibit 10-W to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-X Copy of Ace Hardware Corporation Deferred Compensation Plan effective January 1, 1994, filed as Exhibit 10-X to Post- Effective Amendment No. 2 to the Registrants Form S-2 Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and incorporated herein by reference. 10-Y Copy of Lease dated September 22, 1994 for bulk merchandise redistribution center of the Registrant in Carol Stream, Illinois filed as Exhibit 10-Y to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-Z Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant in Chicago, Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-a-1 Copy of Long-Term Incentive Compensation Deferral Option Plan of the Registrant effective January 1, 1995 adopted by its Board of Directors on December 6, 1994 filed as Exhibit 10-a-1 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) on or about March 23, 1995 and incorporated herein by reference. 10-a-2 Copy of Directors' Deferral Option Plan of the Registrant effective January 1, 1995 adopted by its Board of Directors on December 6, 1994 filed as Exhibit 10-a-2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-a-3 Copy of Agreement dated January 6, 1995 between Ace Hardware Corporation and Roger E. Peterson filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) on or about March 23, 1995 and incorporated herein by reference. 10-a-4 Copy of Ace Hardware Corporation Officer Incentive Plan for Fiscal Year 1994 filed as Exhibit 10-a-10 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 23, 1995 and incorporated herein by reference. 10-a-5 Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R Corporation for retail hardware store premises located in Yorkville, Illinois filed as Exhibit 10-a-11 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-6 Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada filed as Exhibit 10- a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S- 2 Registration Statement (Registration No. 33-58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-7 Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware Canada Limited for general office space in Markham, Ontario, Canada filed as Exhibit 10-a-13 to Post- Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-8 Copy of Lease dated February 9, 1995 between Leroy M. Merritt and the Registrant for its Baltimore, Maryland redistribution center filed as Exhibit 10-a-14 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-9 Copy of First Amendment to the Ace Hardware Corporation Long-Term Incentive Compensation Deferral Option Plan effective December 5, 1995 filed as Exhibit 10-a-15 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-10 Copy of First Amendment to the Ace Hardware Corporation Directors' Deferral Option Plan effective December 5, 1995 filed as Exhibit 10-a-16 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-11 Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July 19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 15, 1996 and incorporated herein by reference. 10-a-12 Copy of current standard form License Agreement for International Retail Merchants adopted in 1996 filed as Exhibit 10-a-12 to Post- Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 12, 1997 and incorporated herein by reference. 10-a-13 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-14 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 and 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. 11 No Exhibit. 12 No Exhibit. 13 No Exhibit. 16 Not Applicable. 18 No Exhibit. 22 Not Applicable. 23 Consent of KPMG Peat Marwick LLP, dated March 10, 1997, filed as Exhibit 23(a) to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33- 58191) filed on or about March 12, 1997 and incorporated herein by reference. 27 Financial Data Schedule filed as Exhibit 27 to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about March 12, 1997 and incorporated herein by reference. 28 Not Applicable.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which have not Registered Securities Pursuant to Section 12 of the Act.
As of the date of the foregoing Report, no annual report for the Registrant's year ended December 31, 1996, nor any proxy soliciting materials for the Registrant's 1997 annual meeting have been sent to security holders. Copies of such Annual Report and proxy soliciting materials will subsequently be sent to security holders and furnished to the Securities and Exchange Commission.