Ace plan unveiled

In a Dec. 14 letter to Ace Hardware’s 3,100 owner-members, Ace CEO Ray Griffith said the co-op’s $152 million accounting error led to an overpayment of patronage dividends from 2002 to 2006. The patronage dividend is a profit-sharing plan that is based, in part, on a store owner’s purchases. The letter also stated that Ace has gained the support of its lenders, who will help Ace restore the equity to the $320-million level.

Griffith said the company expects to spend about $10 million to right the ship and that profits for 2007 should be $85 million.

To make up the shortfall, Ace dealers will, in essence, need to pay the money back to the company over a multi-year period. This will be done through variance allocation accounts based on each store’s proportion ate share of warehouse dividend pool purchases between 2002 and 2006, the period under review.

Each retailer’s patronage dividend for 2007 and beyond will be distributed 20 percent in cash and 80 percent in Class C stock—the latter portion being first applied against the variance account. New shares will be issued after the dealer’s portion of the overstatement is paid back.

“Shareholders received excess patronage payouts, and now we must make this unfortunate correction,” Griffith said in the letter. “We sincerely apologize for this event, but believe this to be the most prudent way to recoup this overpayment and restore the equity position of your company.”

Many stores will be able to satisfy their variance accounts with distributions for 2007 and 2008, with complete restoration for all but a few stores estimated to take place with distributions for 2009, Griffith further explained.

Opinions from dealers who spoke with Home Channel News vary from for giving to frustrated.

Linda Roark, owner of Pete’s Ace Hardware in Castro Valley, Calif., said that establishing variance allocation accounts based on a store’s proportionate share of warehouse purchases is a fair method of resolving the problem.

“I am grateful that the Ace board of directors and the Ace officers took action and resolved this issue so quickly once it came to light,” she said.

Randy Bever, owner of Bever’s Ace Hardware in Gentry, Ark., also believes the variance allocation accounts are an equitable way of spreading repayment of the shortfall across the dealer base. At the same time, he believes management should provide more details on “previous bonuses paid based on erroneous books or on the actual amounts, percentages or timeframes of the payback.”

Cris Henkle of Henkle’s Ace Hardware in Webb City, Mo, called Ace’s plan the “best solution for a worst case scenario.” He does worry, however, that the Ace name may lose credibility with lenders, store owners and the industry in general.

“It may seem to the public like this is an internal problem that can be addressed and managed with time,” Henkle said. “[But] we on a local level are now forced to go to our bank and explain why our pro formas—that were produced by Ace—are now incorrect because we will not receive the patronage dividends as projected, and we actually now have a new debt that we owe Ace.”

Ace was expected to make further announcements about the shortfall in January. Griffith also said the board of directors will distribute an executive summary of an independent investigation report when it becomes available, most likely early this year.

Ace’s activity has generated criticism and concern in online chat rooms. A group called the Concerned Ace Owners Forum: ( has accumulated more than 400 registered owner-members.

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