-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OlrgJduIxsmoIBbVbRi8i9e1zSB51qzlB/X5OvElCv68nl91ysLjXsJM9/9otNoV bSbH2FwShoq//dknbjxYMw== 0000002024-97-000006.txt : 19970313 0000002024-97-000006.hdr.sgml : 19970313 ACCESSION NUMBER: 0000002024-97-000006 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970312 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE HARDWARE CORP CENTRAL INDEX KEY: 0000002024 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] IRS NUMBER: 360700810 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-58191 FILM NUMBER: 97555177 BUSINESS ADDRESS: STREET 1: 2200 KENSINGTON COURT CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7089906600 MAIL ADDRESS: STREET 1: 1300 KENSINGTON RD CITY: OAKBROOK STATE: IL ZIP: 60521 POS AM 1 S-2 BODY Registration NO. 33-58191 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Post-Effective Amendment No. 2 To Form S-2 REGISTRATION STATEMENT Under the SECURITIES ACT OF 1933 Ace Hardware Corporation (Exact Name of Registrant as Specified in its Charter) Delaware (State of Incorporation) 36-0700810 (I.R.S. Employer Identification No.) 2200 Kensington Court Oak Brook, Illinois 60521 (630) 990-6600 (Address and telephone number of registrant's principal executive offices) David W. League Vice President, General Counsel Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 (630) 990-6600 (Name, address and telephone number of agent for service) Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Post-Effective Amendment to the Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. X If the registrant elects to deliver its latest annual report to security- holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. __ ACE HARDWARE CORPORATION Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K Between Items in Part I of Form S-2 and the Prospectus Item Number and Caption Heading in Prospectus 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges Factors To Be Considered; Summary 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Distribution Plan and Offering Terms 9. Description of Securities to be Registered Outside Front Cover Page; Description of Capital Stock 10. Interests of Named Experts and Counsel Opinions of Experts 11. Information with Respect to the Registrant The Company's Business; Properties; Index to Financial Statements; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Management. 12. Incorporation of Certain Information by Reference Documents Incorporated by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Indemnification Obligations of Company and S.E.C. Position on Securities Act Indemnification PROSPECTUS ACE HARDWARE CORPORATION 2200 Kensington Court Oak Brook, Illinois 60521 (630) 990-6600 1,558 Shares Class A (Voting) Stock, $1,000 par value 62,509 Shares Class C (Non-Voting) Stock, $100 par value Class A Stock is offered only in combination with Class C Stock to retailers of hardware and related or similar merchandise in connection with their initial business outlets that become members of the Company. Class C Stock is also offered separately to such retailers in connection with each additional business outlet that becomes a member of the Company. (See "Distribution Plan and Offering Terms" herein) There is no existing market for the Capital Stock offered hereunder, and there is no expectation that any market will develop. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Underwriting Price to Discounts and Proceeds to Public Commissions(5) Company --------- -------------- ------------ Class A Stock Per share(1)(2) $ 1,000 None $ 1,000 Total $ 1,558,000 None $ 1,558,000 Class C Stock Per Share(1)(3)(4)(6) $ 100 None $ 100 Total $62,509,000 None $62,509,000 (1) The shares are offered in a unit of $5,000 to each retail dealer, with 1 share of Class A Stock being included only in the unit offered to dealers having no retail business outlet that is already a member of the Company. (2) 1 share (with 40 shares of Class C Stock) to each retail dealer in connection with such dealer's first retail business outlet which becomes a member of the Company. (3) 40 shares (with 1 share of Class A Stock) to each retail dealer for such dealer's first member outlet. (4) 50 shares to each member dealer for each of such dealer's retail business outlets, over and above the first such outlet, which become a member of the Company. (5) There will be no underwriters. The subject stock will be offered for sale directly by the Company. Applicants for new memberships are charged $400 to defray estimated costs of processing their membership applications. Assuming the sale of all of the stock offered hereunder, and before deduction of approximately $28,000 estimated expenses in connection with this offering, the total proceeds will be as shown above. (6) All of the shares of Class C Stock included in this offering have been reserved for sale for cash but, unless the purchaser elects to prepay the purchase price, such price is to be paid in bi-weekly installments. However, the Company also intends to issue additional authorized shares of Class C Stock each year to its member dealers as a part of patronage dividends with respect to business done with dealers in 1996 and subsequent years. This offering is exempt from the registration provisions of the New York Franchise/Disclosure Statute. The Company's agent for service of process in connection with the offering pursuant to such exemption is C T Corporation, 1633 Broadway, New York, New York 10019. See back cover page regarding revocation rights of Florida purchasers. No state securities commission has passed upon the accuracy of this prospectus. REFERENCE IS MADE TO FACTORS TO BE CONSIDERED ON PAGE 2 OF THIS PROSPECTUS. This is a continuous offering terminating not later than April 30, 1998. The date of this Prospectus is _________, 1997 AVAILABLE INFORMATION The Company is subject to the informational requirements of Section 15(d) of the Securities Exchange Act of 1934. Accordingly, it files annual and quarterly reports and other information with the Securities and Exchange Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 5th Street, N.W., Judiciary Plaza, Washington, D. C. 20549, and copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D. C. 20549 at prescribed rates. The material can also be inspected and copied at the following Regional Offices of the Commission: 219 South Dearborn Street, Room 1204, Chicago, Illinois 60604; 26 Federal Plaza, Room 1028, New York, New York 10278; and 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036. REPORTS TO SECURITY HOLDERS Within a reasonable time following the end of each calendar year, the Company furnishes to its stockholders an annual report containing financial information that has been examined and reported upon, with an opinion expressed by, a certified public accounting firm. DOCUMENTS INCORPORATED BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1996 filed pursuant to Section 15(d) of the Exchange Act is incorporated herein by reference. The Company will provide without charge to each person to whom a Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the documents incorporated by reference in the Registration Statement (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that the Registration Statement incorporates). Requests for such copies should be directed to David League, Vice President, General Counsel and Secretary, Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60521, (630) 990-6600. FACTORS TO BE CONSIDERED Limitations on Value and Marketability of Stock Although Ace Hardware Corporation ("the Company") is obligated to pay patronage dividends to its stockholders in proportion to the respective purchases of merchandise made by them from the Company, the payment of dividends on shares of the Company's capital stock is prohibited and transfer of the shares is limited so that no trading market for them exists. The shares can be sold only to another retail hardware dealer whom the Company has approved as a member for the retail outlet for which the shares were purchased or to the Company which must repurchase the shares if said retail outlet closes down or if its Company membership is otherwise terminated. (See the heading "Description of Capital Stock".) However, no amounts to fund repurchase of shares by the Company are expressly set aside for such purpose and repurchases can be made only as permitted under the General Corporation Law of Delaware. (See the heading "Summary," subheading "Repurchase of Shares by Company".) Accordingly, except for the voting rights attached to the Class A Stock, the stock has value to a purchaser thereof only in the event of the liquidation of the Company or upon termination of the Company membership for the retail outlet for which the stock has been purchased. Income Tax Liability Incidental to Patronage Dividends A purchaser of shares will be required to report as gross income for federal income tax purposes the total amount of patronage dividends distributed by the Company to such purchaser, including shares of Class C Stock and patronage refund certificates distributed in the form of written notices of allocation at their stated dollar amounts. Patronage refund certificates are non-negotiable having a maturity date and bearing interest at an annual rate to be determined by the Board of Directors prior to issuance. Although a minimum of 20% of each recipient's total annual patronage dividends is required to be paid in cash in all cases except those in which the cash portion has been applied against indebtedness owed to the Company by a stockholder whose Company membership has terminated and who has not requested payment of such 20% minimum portion in cash, the cash portion may be insufficient, depending upon the income tax bracket of each recipient, to provide funds for the full payment of the federal income tax liability incurred by the recipient with respect to such patronage dividends. (See the heading "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends".) Sale of All Shares Offered Not Assured Since the shares offered hereby are available for purchase only by retailers of hardware and related merchandise with respect to particular retail outlets for which a Company membership is approved, it is not certain that all of the shares offered will be sold. Company's First Lien Rights on Shares The shares held by any purchaser, including any shares of Class C Stock distributed as patronage dividends, will be subject to a first lien in favor of the Company for the amount of any indebtedness payable to the Company by such holder. (See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights".) Any patronage refund certificates which are distributed as patronage dividends will also be subject to a similar first lien. (See the heading "The Company's Business", subheading "Forms of Patronage Dividend Distributions".) Full Payment Required for Issuance of Shares Unless a purchaser of shares chooses to prepay the purchase price of the shares, the purchase price is to be paid by charges added to the purchaser's bi-weekly billing statements from the Company for merchandise and services. A purchaser will receive a certificate for each class of stock included in his subscription for shares only upon the completion of payment of the purchase price for the share or shares of that class. (See the heading "Distribution Plan and Offering Terms".) By-law Provisions Constitute a Legal Contract with the Company It is provided in Article XXVI of the By-laws of the Company that said By-laws shall constitute a legal contract between the Company and its stockholders. A copy of the By-laws of the Company, as amended as of September 15, 1995, is attached to this Prospectus as Appendix A. Those By- law provisions having special significance with respect to the operations of the Company include Sections 5 through 12 of Article XVI which set forth limitations on the transfer of the Company's stock and the circumstances under which shares thereof will be repurchased by the Company;) Article XXIV entitled "Members" Patronage Dividends'; and Article XXV dealing with the membership rights and obligations of the Company's dealers. Documents Accompanying Prospectus The Company's most recent annual report to security holders and Company's current standard form of Membership Agreement accompany this Prospectus. (See the heading "The Company's Business," subheading "Membership Agreement.") SUMMARY The Company and Its Business The mailing address and telephone number of the Company's principal executive offices are: 2200 Kensington Court, Oak Brook, Illinois 60521, (630) 990-6600. The Company is a wholesaler of hardware and related products, and manufactures paint products. Sales of such products are made almost exclusively to retail hardware dealers having Membership Agreements with the Company entitling them to purchase merchandise and services from it and to use the Company's marks as provided in the Membership Agreement. (See the heading "The Company's Business," subheading "Membership Agreement.") Also see further description under "The Company's Business" for a discussion of member operational requirements and material requirements on purchases of the Company's securities. The number of retail business outlets for which Membership Agreements have been executed as of December 31, 1996 were 5,067. (See the heading "The Company's Business.") Basic Distinctions Between Classes of Stock The issued and outstanding shares of capital stock of the Company are divided into three classes. Class A Stock is the only class of stock having voting rights with respect to the election of directors and most other matters. Class B Stock had been offered to retail dealers with respect to each business outlet owned or controlled by them for which a membership was granted by the Company on or before February 20, 1974, but the offering of Class B Stock terminated on March 31, 1979 and no shares of such stock are being offered by this Prospectus. The Board of Directors has authority to redeem the whole or any part of the outstanding shares of Class B Stock, or the whole or any part of the outstanding shares of Class C Stock which have been issued to the Company's member dealers in partial payment of their patronage dividend distributions from the Company. In the event of the Company's liquidation, the outstanding shares of Class B Stock and Class C Stock have priority over the outstanding shares of Class A Stock in the distribution of the Company's net assets to the extent of an amount equal to the total amount which the Company would have been required to pay to purchase or redeem all of its outstanding shares of Class B Stock and Class C Stock. If the net assets of the Company exceed the total amount which the Company would have been required to pay for such purpose, such excess is to be distributed in equal portions to each holder of an outstanding share of Class A Stock up to an amount equal to the par value of the Class A Stock. Any net assets still remaining are to be distributed among the holders of all three classes of issued and outstanding stock of the Company. Each share of Class A Stock will participate in such distribution in the proportion which the par value of such share bears to the sum of the total par value of the outstanding shares of Class A Stock and the total amount which the Company would have been required to pay to purchase or redeem all of its outstanding shares of Class B Stock and Class C Stock. Each share of Class B Stock and Class C Stock will participate in such distribution in the proportion which the then applicable purchase or redemption prices thereof bear to the aforementioned sum. (See the heading "Description of Capital Stock", subheadings "Voting Rights","Liquidation Rights", and "Redemption Provisions.") By virtue of express prohibitions contained in the Company's Certificate of Incorporation and Bylaws, no dividends can be declared on any of the shares of any class of stock of the Company. (See the heading "Description of Capital Stock", subheading "Dividend Rights.") Basic Features of Offering The shares of the Company's stock being offered hereby are offered only to approved retail and other dealers in hardware and related products who submit applications for Ace Hardware Corporation memberships. The offering price for each share of Class A Stock is $1,000 and the offering price for each share of Class C Stock is $100. The offering enables dealers in hardware or similar merchandise to obtain membership in the Company. Membership entitles a dealer to use the Company's marks as provided in the Membership Agreement, to purchase merchandise from the Company under the various sales classes and programs described under the heading "The Company's Business," and also to receive patronage dividends based upon the dealer's purchases from the Company. A dealer who applies for an initial Company membership must subscribe for a combination of 1 share of Class A Stock plus 40 shares of Class C Stock. If a membership is applied for with respect to an additional outlet owned or controlled by the same dealer, the dealer must subscribe for 50 shares of Class C Stock for such outlet. Any application for a membership must be accompanied by a $400 payment constituting a handling charge to defray the estimated cost of processing such application. The shares subscribed for by a dealer are to be paid for by means of charges to be added to the bi-weekly billing statements of the Company for merchandise and services purchased from it by its dealers. The dealer shall also have the right at any time to make prepayments on account of the purchase price. For a detailed explanation of the offering reference is made to the information set forth under the heading "Distribution Plan and Offering Terms". Repurchase of Shares by Company Upon termination of the Ace Hardware Corporation membership for any retail business outlet, all of the shares with respect to such outlet held by the dealer must be sold back to the Company, unless the shares are to be transferred to another party whom the Company agrees to accept as a member dealer with regard to such outlet. In any repurchase of its shares, the Company must pay a price equal to the $1,000 par value for Class A Stock, a price which cannot be less than twice the $1,000 par value for Class B Stock, and a price which cannot be less than the $100 par value for Class C Stock. (See the heading "Description of Capital Stock", subheading "Other Restrictions and Rights", paragraph (g).) A portion of the repurchase price to be paid by the Company will be paid by means of an interest-bearing 4- year installment note if the dealer's membership with the Company terminates in either of two basic types of situations. Reference is made to the heading "Description of Capital Stock", subheading "Other Restrictions and Rights", paragraph (h), of this Prospectus and to Section 12 of Article XVI of the By-laws, set forth in Appendix A of this Prospectus, for further details concerning the situations in which part of such repurchase price will be paid by means of an installment note and the terms and conditions which will be applicable to such notes. As of December 31, 1996 the number of outstanding shares of the Company's stock is Class A stock - 3,937 shares, Class B stock - 2,896 shares and Class C stock - 1,967,420 shares. As of the completion of this offering, assuming that all Class A stock is sold, the number of outstanding shares of the CompanyOs stock will be Class A stock - 5,487 shares, Class B stock - 2,852 shares and Class C stock - 2,018,350 shares. Under the applicable provisions of the General Corporation Law of Delaware, however, the Company would be prohibited from repurchasing any of its shares at any time when its assets are less than the amount represented by the aggregate outstanding shares of its capital stock or would be reduced below said amount as a result of a repurchase of its shares. The number of shares of stock repurchased by the Company and the price per share paid by it during each of the past three calendar years were as follows:
Class of Stock A B C No.of Purchase No.of Purchase No.of Purchase Aggregate Shares Price Shares Price Shares Price Cost Year ended December 31, 1996 236 $1,000 132 $2,000 99,290 $100 $10,429,000 Year ended December 31, 1995 256 $1,000 220 $2,000 99,975 $100 $10,693,500 Year ended December 31, 1994 240 $1,000 168 $2,000 77,013 $100 $ 8,277,300
Patronage Dividends and Income Tax Treatment Thereof The Company operates on a cooperative basis with respect to purchases of merchandise made from it by its member dealers who are either the owners of shares of its capital stock or who are subscribers for shares which are being paid for by charges added to the Company's bi-weekly billing statements for merchandise purchased from it, and makes annual distributions of patronage dividends to such dealers in proportion to the amount of purchases made by each of them during the year. Reference is made to the table under the heading "The Company's Business," subheading "Distribution of Patronage Dividends" for information as to the percentages of sales of merchandise made by the Company during the years 1994 through 1996 which were distributed as patronage dividends. Under the Company's patronage dividend plan which is currently in effect, a portion of such patronage dividends (which can never be less than 20% nor more than 45% of the total annual patronage dividends distributed to each eligible and qualifying dealer) will be paid in cash, except that the portion of any patronage dividends which would otherwise have been paid in cash to a dealer whose membership with the Company has terminated will instead be applied against any indebtedness owing by such dealer to the Company to the extent of such indebtedness unless a timely request for the payment of the minimum 20% cash portion thereof is submitted to the Company by the dealer. The entire remaining portion will be paid in the form of shares of Class C Stock of the Company or non-negotiable patronage refund certificates, or in a combination of Class C shares and such patronage refund certificates. Those dealers whose volume of purchases entitles them to larger total annual patronage dividend distributions will receive larger percentages of their patronage dividends in cash. (See the heading "The Company's Business", subheadings "Distribution of Patronage Dividends", "Patronage Dividend Determinations and Allocations", and "Forms of Patronage Dividend Distributions.") The amount of patronage dividends allocated over the past five fiscal years is set forth in Note (C) to Selected Financial Data. The cash payments and the stated dollar amounts of shares of the Company's Class C Stock and of any patronage refund certificates which are distributed by the Company as a part of patronage dividends must all be taken into the gross income of each of the recipients thereof for federal income tax purposes in the taxable years in which they are received. (See the heading "The Company's Business", subheading "Federal Income Tax Treatment of Patronage Dividends.") In the case of member dealers whose places of business are located in foreign countries or Puerto Rico (except for unincorporated Puerto Rico dealers owned by individuals having U.S. citizenship) who are subject to the special 30% U.S. income tax imposed on nonresident alien individuals and foreign corporations (not including certain Guam, American Samoa, Northern Mariana Islands, or U.S. Virgin Islands corporations) receiving fixed or determinable annual income from sources within the United States, the minimum portion of the annual patronage dividends to be distributed in cash is 30%, and that amount will be withheld by the Company for payment of the U.S. income tax imposed on such dealers. (See the heading "The Company's Business", subheadings "Forms of Patronage Dividend Distributions", and "Federal Income Tax Treatment of Patronage Dividends.") USE OF PROCEEDS The proceeds to be received from the shares of stock of the Company offered hereby will be used by the Company primarily for general working capital purposes (including the purchase of merchandise to be resold by the Company to its member dealers and the maintenance of adequate inventories of such merchandise) and also for capital expenditures as required in order to serve the Company's retail business outlets. The Company has no current specific plan for the proceeds or a significant portion thereof. The Company has no plan if less than all shares offered are sold, as the principal reason for the offering is to enable the Company to accept new dealer outlets in accordance with the Company's By-laws. See the heading "The Company's Business," subheadings "Patronage Dividend Determinations and Allocations" and "Forms of Patronage Dividend Distributions", for a description of the method by which the Company will obtain most of the balance of its operating capital. (See the heading "Factors to be Considered," subheading "Sale of All Shares Offered Not Assured.") DISTRIBUTION PLAN AND OFFERING TERMS Offering Made Through Company Officers Sales of each class of stock offered by the Company are made by the officers of the Company to dealers whose applications for Ace memberships have been accepted by the Company. The Company also employs approximately 215 field sales personnel including retail consultants, management and retail development personnel whose duties include contact with retail dealer outlets and promotion of the Company's business and the dealer services offered by it. Among these field sales personnel are Market Development Managers, New Business Sales Managers, and Retail Sales Managers whose duties include initial contact with potential retail dealer outlets. The Company's field sales personnel, however, do not and are not empowered to accept new dealer outlets on behalf of the Company, not are they authorized to make sales of any shares of the stock offered by the Company. Also, no commission, bonus or other separate compensation is to be paid to any officer, field sales personnel, or other employee of the Company in connection with the sale of its stock. Limitation of Offering to Applicants for Ace Dealer Memberships The offering of the Company's stock being made by this Prospectus is limited to dealers in hardware or similar merchandise who submit membership applications to the Company with respect to designated retail outlets which are accepted by the Company. In connection with each such application with respect to any retail outlet owned or controlled by a dealer, there must be submitted to the Company: 1. A membership agreement executed by the applicant in the form submitted by the Company; 2. A check in the sum of $400 in payment of a processing charge which is imposed to defray the estimated cost of processing the application; and 3. An executed Subscription Agreement for the purchase of shares of the Company's stock. Offering Price and Terms of Payment Each retail dealer who applies for Ace membership privileges with respect to any retail business outlet must subscribe for shares of the Company's stock having a total purchase price of $5,000. In the case of a dealer who does not already have a Membership Agreement with the Company with respect to any retail outlet, the shares to be subscribed for on behalf of such dealer's first retail outlet will include 1 share of Class A Voting Stock at a price of $1,000 per share plus 40 shares of Class C Non-voting Stock at a price of $100 per share. The shares of stock to be subscribed for by a dealer on behalf of each additional retail outlet owned or controlled by the same dealer will consist entirely of 50 shares of Class C Non-voting Stock at a price of $100 per share. Unless the right of prepayment described below is exercised, the entire purchase price of all shares of stock of the Company subscribed for by a dealer for any retail business outlet owned or controlled by such dealer shall be paid by means of a stock subscription payment charge to be added to such outlet's bi-weekly billing statement from the Company in the amount of $40 or in an amount equal to 2% of the purchase price of the merchandise and services purchased by such outlet from the Company during each bi- weekly period (if such percentage amount is greater than $40). Such charge shall be continued until the full purchase price for all shares of the stock of the Company subscribed for with respect to such outlet has been paid. Upon the acceptance by the Company of the Membership Agreement and the Stock Subscription Agreement executed by a dealer for a prospective member outlet, such outlet will be entitled to participate in the patronage dividend distributions made by the Company even though the full purchase price for the shares of stock subscribed for has not yet been paid. Right of Prepayment All dealers subscribing for shares of any class of stock of the Company shall also have the right at any time to pay all or any portion of the then unpaid balance of the purchase price payable by them for the shares of any class of the stock of the Company subscribed for by them with respect to any member business outlet. However, no interest or other finance charge shall accrue upon or be added to the unpaid balance so long as all payments are made when the same are due in accordance with the terms described above. Time of Issuance of Stock Certificates Immediately upon the completion of the payment by a dealer of the full purchase price of $1,000 for the 1 share of Class A Voting Stock of the Company subscribed for by such dealer, a certificate for such share will be issued to him. In the case of a dealer whose subscription for shares includes 1 share of Class A Stock, all payments made by him under his Stock Subscription Agreement will be applied first toward the $1,000 purchase price for such Class A Stock. No dealer shall have any voting rights until such share of Class A Voting Stock has been issued to him. Certificates for the shares of Class C Stock of the Company subscribed for by a dealer with respect to any member business outlet owned or controlled by such dealer will be issued to him only upon the completion of the payment by him of the full purchase price of all of the Class C shares subscribed for by him with respect to such outlet. If any store or other business outlet with respect to which a dealer has subscribed for shares of stock of the Company ceases to be a member business outlet of the Company before such shares have been issued and paid for in full, the amount paid in by such dealer on account of the purchase price of such shares will thereupon be refunded to him. Termination of Membership Upon Transfer or Repurchase of Shares Unless the Company expressly consents at such time to the continuation of such membership, the Ace Hardware Membership Agreement for any store or other business outlet shall automatically be deemed to have terminated as of the time when any of the shares of capital stock of the Company owned for such outlet by a dealer (regardless of whether the shares were purchased by the dealer or were received by him as patronage dividends) are transferred by him to another eligible holder or are purchased from him by the Company. Federal Income Tax Status of Class A and Class C Shares (See the Heading "Opinions of Experts"). If the Ace Hardware Corporation membership for a particular business outlet owned by a dealer who has only one member outlet is terminated, or if the memberships for all of a dealer's business outlets having memberships with the Company are terminated, and the shares of the Company's stock owned by such dealer are then repurchased by the Company, such dealer's 1 share of Class A Stock would be included among the shares so repurchased. Since the Class A Stock can never be repurchased by the Company at a price other than the $1,000 par value, no taxable income would be realized by a dealer upon the Company's repurchase of his share of Class A Stock. Upon the purchase by the Company of shares of Class C Stock previously sold or distributed to a dealer, taxable income would be realized by such dealer under the present provisions of the U.S. Internal Revenue Code to the extent that the price to be paid by the Company for such shares is established by the Board of Directors at some time in the future at a figure in excess of the $100 par value offering price of the shares. Unless the dealer whose shares of Class C Stock are purchased by the Company still owns shares of the Company's stock in connection with one or more other outlets that are members of the Company, the taxable income realized by such dealer at the time of the Company's purchase of Class C shares from him would probably qualify for capital gain treatment. In the case of a dealer who continues to own shares of the Company's stock for one or more other member outlets after his shares with respect to a member outlet have been purchased or redeemed by the Company, the entire amount paid to such dealer for the shares purchased by the Company might be treated under applicable provisions of the Internal Revenue Code as a distribution essentially equivalent to a dividend which would be taxable to the dealer as ordinary income. In such case the income tax basis of the shares of the Company's stock still held by such dealer would be increased by an amount equal to the original basis of the shares purchased from him by the Company. The provisions of Section 483 of the U.S. Internal Revenue Code may be applicable to sales of the Company's stock to dealers who make payment for said shares in periodic installments extending more than 1 year after the date of the sale. In any such case, all payments which are due to be made by a dealer more than 6 months after the date of the sale may be deemed to include "unstated interest" which would be tax deductible by the dealer, but would also reduce the cost basis of his shares. "Unstated interest" constituting taxable income may be imputed under Section 483 of the U.S. Internal Revenue Code to a dealer whose Company membership is terminated and who receives a 4-year installment note (See the heading "Description of Capital Stock," subheading "Other Restrictions and Rights," subparagraph (h)) in partial payment of the repurchase price of his Company stock if the sum of the total payments to be made to the dealer by the Company with respect to such repurchase exceeds the sum of the present values of such payments and the present values of any interest payments due under the note. For this purpose, the present value of a payment is to be determined by using a discount rate equal to the applicable Federal rate in effect as of the date of the note, compounded semi-annually. DESCRIPTION OF CAPITAL STOCK Dividend Rights The Company's Certificate of Incorporation and By-laws prohibit the declaration of dividends on any of the shares of any class of stock of the Company. However, the Company may distribute shares of its Class C Stock as a part of the annual patronage dividends to be paid to its eligible and qualifying dealers. (See the heading "The Company's Business," subheading "Forms of Patronage Dividend Distributions," as well as Note 5 to Financial Statements, and Note (B) to "Selected Financial Data.") Voting Rights All rights to vote and all voting powers are vested solely in the Class A Stock, provided, however, that holders of shares of $1,000 par value Class B Stock and shares of $100 par value Class C Stock shall be entitled to vote separately as a class upon any proposed amendment to the Company's Certificate of Incorporation which would increase or decrease the number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the power, preferences or special rights of the shares of such class so as to affect them adversely. Each holder of any class of stock having the right to vote at any meeting of the stockholders of the Company shall be entitled to one vote for every share of such stock outstanding in the name of such holder on the books of the Company. Cumulative voting of shares with respect to the election of directors or otherwise is expressly prohibited. Liquidation Rights In the event of any liquidation or winding up of the affairs of the Company, whether voluntary or involuntary, the net assets of the Company shall be distributed among the holders of all classes of issued and outstanding stock of the Company. In such event, there shall first be distributed to the holders of outstanding shares of Class B Stock and Class C Stock amounts equal to the total amounts which the Company would have been required to pay to them to purchase or redeem all of their outstanding shares of such stock in accordance with the purchase or redemption prices for said shares as last determined by the Board of Directors, but if the net assets are insufficient to pay such amounts to the holders of said shares, each outstanding share of Class B Stock and each outstanding share of Class C Stock shall share in the distribution of the Company's net assets in the proportion which its purchase or redemption price bears to such total amount. (See the subheading "Redemption Provisions" below). If the net assets exceed said total amount, the excess is to be distributed in equal portions to each holder of an outstanding share of Class A Stock, but the amount so distributed to each holder of a share of Class A Stock cannot exceed such share's $1,000 par value. Any net assets still remaining are to be distributed among the holders of all classes of issued and outstanding shares of stock of the Company pursuant to the following procedure: (a) there shall first be determined the sum of the total $1,000 par value of all of the outstanding shares of Class A Stock and the total amount which the Company would have been required to pay to purchase or redeem all of its outstanding shares of Class B Stock and Class C Stock in accordance with the purchase or redemption price thereof last determined by the Board of Directors; (b) each outstanding share of Class A Stock shall share in said remaining net assets in the proportion which the $1,000 par value thereof bears to the sum determined in the foregoing manner; and (c) each outstanding share of Class B Stock and each outstanding share of Class C Stock shall share in said remaining net assets in the proportion which the purchase or redemption prices thereof last determined by the Board of Directors bear to said sum. Preemptive Rights No stockholder of the Company shall, by reason of his holding shares of any class of stock of the Company, have any preemptive or preferential right to purchase or to subscribe to any shares of any class of the Company, now or to be hereafter authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase any shares of any class, now or hereafter to be authorized. Redemption Provisions There are no redemption provisions applicable to any of the shares of Class A Stock or to any of the shares of Class C Stock other than shares of Class C Stock which have been issued to the Company's member dealers in partial payment of their annual patronage dividends. The Company may, at the option of its Board of Directors, redeem the whole or any part of the outstanding shares of its Class B Stock or the whole or any part of the outstanding shares of its Class C Stock which have been issued as patronage dividend distributions. Such redemptions may be made at any time or from time to time. The redemption price in each instance shall be determined by the Board of Directors, but the redemption price to be paid for Class C Stock shall in no event be less than the $100 par value of such stock and the redemption price to be paid for Class B Stock shall at all times be no less than twice the $1,000 par value of the Class B Stock and shall always be equal to twenty times the per share price last established by the Board of Directors with respect to purchases or redemptions by the Company of its Class C Stock. Notice of any election to redeem shall be mailed to each holder of the class of stock so to be redeemed at his address as it appears on the books of the Company not less than 30 days prior to the date upon which the stock is to be redeemed. In case less than all of the outstanding shares of Class B Stock are redeemed, or in case less than all of the eligible outstanding shares of Class C Stock are redeemed, the number of shares to be redeemed and the method of effecting such redemption, whether by lot or prorata or otherwise, may be determined by the Board of Directors. Other Restrictions and Rights (a) There are no conversion rights, sinking fund provisions, or liability to further calls or assessment by the Company in regard to any of its shares of stock. (b) As security for the payment of any indebtedness owing to the Company by any stockholder or any subscriber for shares of the Company's stock, the Company retains a first lien upon all shares of its stock held by each stockholder and upon all amounts which have been paid to the Company pursuant to a Stock Subscription agreement for shares to be issued upon the completion of payment of the purchase price of the shares. The interest of each holder of shares of the Company's stock in and to the shares issued to such holder and the interest of each subscriber for shares of the Company's stock in and to the funds paid to the Company by such subscriber shall at all times be deemed to be offset by the amount of any indebtedness payable to the Company by such holder or subscriber. In no event shall any transfer of the shares owned by any stockholder or any transfer of the stock subscription account of any subscriber for shares be made unless and until the stockholder whose shares are being transferred or the subscriber whose subscription account is being transferred is free from all indebtedness to the Company. If an installment note would be issuable in payment of a portion of the total purchase price to be paid by the Company for shares of its capital stock held by a dealer for a retail outlet whose Company membership is terminated in one of the situations described in subparagraph (h) below, the cash portion of the purchase price of said shares will be applied first toward any indebtedness payable to the Company by such dealer and the portion of the purchase price which would otherwise be paid by the issuance of an installment note will then be applied against any such indebtedness which still remains. (c) From and after the date on which shares of the Company's stock are first issued to its member dealers who subscribe for such shares, ownership of the shares of all classes of stock of the Company shall be limited to approved retail or other dealers in hardware and related products having membership agreements with the Company, and ownership of shares of Class B Stock shall be limited to dealers having membership agreements with the Company which were entered into on or before February 20, 1974. No certificate representing any issued and outstanding share or shares of any class of stock of the Company shall be pledged, mortgaged, hypothecated, sold, assigned or transferred without the prior consent of the Board of Directors of the Company. In the event that the Board of Directors shall refuse to consent to any transfer or assignment of any certificate or certificates representing any share or shares of issued and outstanding stock of the Company of any class, then the Company shall have the right and shall be obligated to purchase such stock from its owner at a price determined in accordance with the provisions of subparagraph (g) below. In no event shall any transfer or assignment of shares of any class of stock of the Company be made to any transferee who is not eligible to be a holder of such shares, that is, a dealer having a membership agreement with the Company. In the case of a proposed transfer of ownership of a store or other business outlet owned by a holder of shares of stock of the Company to a transferee which the Company has accepted or is willing to accept as a member Ace Hardware dealer, then the owner of such stock shall have the option of either (i) selling or otherwise transferring to such transferee such number of shares of stock of the Company of any class which the Company would otherwise have been required to offer to such transferee in connection with the membership granted to such transferee with respect to such store or other business outlet, or (ii) selling such shares to the Company. However, the following types of transfers of ownership of a store or other business outlet will not be recognized for purposes of determining the availability of the option of selling to the Company shares of its capital stock: (i) any transfer which is not complete, unconditional and irrevocable; (ii) any transfer to an entity in which the transferor retains an ownership interest; or (iii) any transfer to the spouse of the transferor. (d) Subject to the Company's first lien and set-off rights as described in subparagraph (b) above, in the event of the termination of the Company membership granted for a retail hardware store or other business unit for which shares of stock of the Company are held, the Company shall be obligated to purchase such shares. The Company shall also be obligated to refund all amounts which have been paid to it pursuant to a Stock Subscription Agreement for the purchase of shares which have not as yet been issued to the subscriber, subject only to the Company's first lien and set-off rights as described in subparagraph (b) above. Termination of the membership granted for a particular retail hardware store or other business outlet shall include not only any termination pursuant to a formal notice of termination given by either the Company or the holder of the membership but shall also include each of the following situations which shall be deemed to constitute such a termination: (i) The closing down of the store or other business unit with respect to which such shares of stock of the Company are held, unless such store or other business unit is merely being moved, with the Company's consent and approval, to another location or is being acquired by another dealer which the Company has accepted or is willing to accept as a member dealer for operation pursuant to the same membership at another location; (ii) The death of an individual holder of the shares of stock of the Company held for such retail store or other business unit, or of a member of a partnership which is a holder of such shares, except in a case where the store or other business unit with respect to which such shares are held continues, with the approval of the officers of the Company (which approval shall not be unreasonably withheld), to be operated under a membership from the Company by the decedent's estate or by the person or persons to whom such shares are to be distributed by the decedent's estate or by the successor or successors to the decedent's interest in the partnership holding such shares (it being immaterial for this purpose that, in connection with such continuation of operation, the legal form of ownership of the member dealer has been changed from an individual proprietorship or partnership to a corporation or from a partnership to an individual proprietorship); (iii) An adjudication of the insolvency of the dealer or of the store or other business unit for which the shares of stock of the Company are held, or the making of an assignment for the benefit of creditors or the filing of a voluntary petition in bankruptcy or similar petition under the U. S. Bankruptcy Code by or on behalf of such dealer or retail business unit, or the filing of an involuntary petition in bankruptcy or similar petition under the U. S. Bankruptcy Code against the dealer or against said business unit. (e) A transfer of shares of stock of the Company requiring the consent of the Board of Directors shall not be deemed to have occurred upon the death of a person who is the holder of shares of stock of the Company jointly with one or more other persons under circumstances whereby ownership of such shares passes automatically by operation of law to the surviving holder or holders of such shares, nor shall the Company become obligated to purchase such shares upon the death of such person unless the store or other business outlet with respect to which such shares are held either (i) closes down, or (ii) ceases to be operated under a membership from the Company. (f) In any case where the holder or holders of 50% or more of the outstanding voting stock of a corporation having membership from the Company for one or more business outlets, or the holder or holders of 50% or more of the outstanding voting stock of a corporation owning 80% or more of the outstanding stock of a corporation having such a membership, propose to sell or otherwise transfer all of the shares of capital stock (both voting and non-voting) of such corporation held by them, written notice of such proposal shall be given to the Company. Upon the consummation of such sale or transfer, the corporation whose shares have been sold or transferred shall have the option of either retaining all the shares of the capital stock of the Company then held by it with respect to each member business outlet operated by it or of selling such shares to the Company and having each Company membership held by it deemed to have been terminated by the voluntary action of said corporation, in which case no business unit for which said corporation has held a Company membership shall thereafter operate as a member of the Company unless said corporation submits a new application for a membership for such business unit and such application is accepted by the Company. However, the following types of transfers of ownership of shares of the capital stock of a corporation having a membership from the Company will not be recognized for purposes of determining the availability of the option of selling to the Company shares of its capital stock: (i) any transfer which is not complete, unconditional and irrevocable; (ii) any transfer to an entity in which the transferor retains an ownership interest; or (iii) any transfer to the spouse of the transferor. (g) The price to be paid by the Company in connection with the purchase by it of any shares of its stock shall be as follows: (i) in the case of Class A Stock, the $1,000 par value of the shares; (ii) in the case of Class B Stock, an amount per share equal to the per share price last established by the Board of Directors as the price to be paid by the Company in the event of redemption of shares of its Class B Stock (currently $2,000 per share), which price shall in no event be less than twice the $1,000 par value of the Class B Stock and shall also at all times be equal to twenty times the per share purchase price last established by the Board of Directors with respect to purchases by it of shares of its Class C Stock; (iii) in the case of Class C Stock, an amount per share equal to the per share price last established by the Board of Directors as the purchase price to be paid by the Company for shares of its Class C Stock (currently $100 per share), which price shall in no event be less than the $100 par value thereof. There is no market for the Company's stock. The redemption prices last established by the Board of Directors for Class A, B and C stock have not been adjusted since 1974 when the Company first became a cooperative organization. (h) In case of the purchase by the Company of the shares of its stock held by a dealer for a business outlet whose Company membership is terminated in either of the following situations, a portion of the purchase price will be paid in the form of an installment note payable in four equal annual installments plus accrued interest: (i) voluntary termination of the membership by the dealer under circumstances whereby the member outlet continues to engage in substantially the same business and continues to be controlled to the extent of more than 50% by the same person, partnership or corporation; (ii) termination of the membership by the Company due to a delinquency on the dealer's part in paying for goods or services supplied by the Company or due to a default on the dealer's part in performing some other obligation under his membership agreement with the Company. Even in the above situations, though, the portion of the total purchase price represented by the amount actually paid in by the dealer under a Stock Subscription Agreement for Class A Stock, Class B Stock and Class C Stock will be paid in cash, and the entire remaining portion of the total purchase price for the shares being purchased by the Company from the dealer will also be paid in cash if such remaining portion is less that $5,000. Where such remaining portion of the total purchase price is $5,000 or more in any of the above situations, then only the amount actually paid in by the dealer under the dealer's Stock Subscription Agreement will be paid in cash and the entire remaining portion of the purchase price will be paid by means of an installment note as described above. The interest rate on any such installment note will be such rate as shall have been established by the Company's Board of Directors for such purpose as of the date of the issuance of the note, but the interest rate shall in no event be less than the latest interest rate established for patronage refund certificates to be issued as a part of the annual patronage dividends payable to the Company's dealers, nor shall the interest rate ever be less than 6% per annum. After considering the financial condition and requirements of the Company, the Company's Board of Directors may authorize that payment be made in cash of all or any portion of the total purchase price which would otherwise be payable by means of such an installment note if the Board determines that the installment payment method would impose an undue hardship on the dealer. (i) There is no restriction on the repurchase or redemption of any of its shares of stock by the Company in the event that the Company shall at any time be in arrears in making any sinking fund installment payments which it may hereafter incur an obligation to make. Since the Company is prohibited from paying dividends on any of its shares of stock, there can be no arrearage in the payment of any such dividends which would impose any restriction on the repurchase or redemption of any of its shares of stock by the Company. Under the General Corporation Law of Delaware, the Company cannot repurchase any of its shares at any time when its assets are less than the amount represented by the aggregate outstanding shares of its capital stock or would be reduced below said amount as a result of a repurchase of its shares. OPINIONS OF EXPERTS The validity of shares of stock of the Company offered hereby will be passed upon for the Company by the Company's Vice President, General Counsel and Secretary, David W. League. The statements made under the subheadings "Federal Income Tax Status of Class A and Class C Shares," "Federal Income Tax Treatment of Patronage Dividends," "Income Tax Liability Incidental to Patronage Dividends" and "Patronage Dividends and Income Tax Treatment Thereof" are also his opinions. Said counsel has also passed upon legal questions relating to the effect upon the surplus or retained earnings of the Company of the fact that, in the event of the involuntary liquidation of the Company, shares of its Class B stock will have a preference exceeding the par value of said shares in the distribution of the net assets of the Company. The consolidated financial statements of Ace Hardware Corporation as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, included herein and elsewhere in the Registration Statement have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. THE COMPANY'S 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 dealers in 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. (See the heading "Factors To Be Considered," subheading "Documents Accompanying Prospectus," and the heading "The Company's Business" subheading "Membership Agreement"). 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 5067 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 281 285 198 Member outlets terminated 221 218 179 ----- ----- ----- 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 material. The proportions in which the Company's total warehouse sales were divided among the various general 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 an "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 heading "The Company's Business" subheading, "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 certain of 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 heading "The Company's Business," subheading "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 heading "The Company's Business," subheading "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," which appears following the "Notes to Financial Statements" in this prospectus. 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 charges 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 $50,000.00 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 during the year. All stores are exempted 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: Type of Registration Description of Mark 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, 2003 "ENVIRO-CHOICE" Trademark 1,811,392 December 14, 2003 "CELEBRATIONS" Service Mark 1,918,785 September 12, 2005 Repetitive Stylized "A" design Service Mark 1,926,798 October 10, 2005 "The NEW AGE OF ACE" design Service Mark 1,937,008 November 21, 2005 "ACE RENTAL PLACE" in stylized lettering design Service Mark 1,943,140 December 19, 2005 "HELPFUL HARDWARE FOLKS" Service Mark 1,970,828 April 30, 2006 "ACE HOME CENTER" Service Mark 1,982,130 June 25, 2006 "SEALTECH" Trademark 2,007,132 October 8, 2006 "GREAT FINISHES" Trademark 2,019,696 November 26, 2006 *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 related goods and "HELPFUL HARDWARE CLUB" for club services, namely providing benefits to preferred customers (consumers). 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 CompanyOs 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 1996 ---- ---- ---- 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 these 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 under the heading "The Company's Business.") 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 Nonvoting 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 the LTL Plus Program 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 heading "The Company's Business", discussion of LTL Plus program, and 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 exceed $7,500 but does not exceed $10,000; (d) an amount equal to 35% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $10,000 but does not exceed $12,500; (e) an amount equal to 40% of the portion of the total patronage dividends allocated for distribution each year to such dealer for such store which exceeds $12,500. 2. The portion of the total annual distribution allocated to any such dealer for each store owned or controlled by such dealer in excess of the amount to be distributed to such dealer for such store in cash shall be distributed to him each year in the form of shares of Class C non-voting Stock of Ace Hardware Corporation (par value $100 per share), valued at the par value thereof, until the total par value of all shares of all classes of capital stock of the corporation held by such dealer with respect to such store equals the greater of: (a) $20,000; or (b) a sum equal to the total of the following categories of purchases made by such dealer for such store during the most recent calendar year: (i) 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 and building material (excluding LTL) purchases, plus (v) 4% of the volume of LTL Plus purchases; provided, however, that no fractional shares of Class C non- voting Stock shall be issued to any dealer and that any amount which would have otherwise been distributable as a fractional share of such stock shall instead be distributed to such dealer in cash. 3. The portion of the total patronage dividends allocated each year to any such dealer for each store owned or controlled by such dealer which exceeds the sum of (a) the amount to be distributed to such dealer for such store in cash pursuant to Paragraph 1., above and (b) any amount to be distributed to him in the form of shares of Class C non-voting Stock of Ace Hardware Corporation (par value $100 per share) pursuant to Paragraph 2. above shall be distributed to such dealer in cash; provided, however, that in no event shall the total amount distributed under this plan to any such dealer for any such store in cash exceed 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 product 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 product 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 bi-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 balances, 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 such written notices of allocation are received, notwithstanding the fact that the 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, non-member 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 backup withholding. It is the opinion of counsel for the Company that this provision is not applicable to any patronage dividend distribution to a payee unless 50% or more of the total distribution is made in cash. Since all of the Company's patronage dividends for a given year are distributed at the same time and the Company's currently effective patronage dividend plan does not permit any store which is a member of the Company to receive more than 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 advance 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 Appendix A, 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 Cananda, Limited. Ace Canada merchants are not shareholders of the Company, nor do they receive distribution of patronage dividends. PROPERTIES The Company's general offices are located at 2200 Kensington Court, Oak Brook, lllinois 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. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report 32 Consolidated Balance Sheets as of December 31, 1996 and 1995 33 Consolidated Statements of Earnings for the years in the three-year period ended December 31, 1996 35 Consolidated Statements of Member Dealers' Equity for the years in the three-year period ended December 31, 1996 36 Consolidated Statements of Cash Flows for the years in the three-year period ended December 31, 1996 37 Notes to Consolidated Financial Statements 38 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 $ 1,740 $ 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. ACE HARDWARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 38. (5) & (8) Refers to Notes 5 and 8 of the consolidated financial statements beginning on page 38 of this Form S-2. 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 convenant 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. Accordingly, 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 purposes 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 22, 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 22, 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. MANAGEMENT The directors and the executive officers of the Company are: Name Age Position(s) Held ---- --- ---------------- Jennifer C. Anderson 46 Director Michael C. Bodzewski 47 Vice President-Merchandising Lawrence R. Bowman 50 Director James T. Glenn 37 Director David F. Hodnik 49 President and Chief Executive Officer Paul M. Ingevaldson 51 Vice President-Corporate Strategy and International Business Mark Jeronimus 48 Director Rita D. Kahle 40 Vice President-Finance John E. Kingrey 53 Director Richard E. Laskowski 55 Chairman of the Board and Director David W. League 57 Vice President-General Counsel and Secretary William A. Loftus 58 Senior Vice President-Retail Operations and Marketing David F. Myer 51 Vice President-Retail Support and New Business Fred J. Neer 57 Vice President-Human Resources Ray W. Osborne 60 Director Roger E. Peterson 59 Director Donald L. Schuman 58 Vice President-Information Systems Jon R. Weiss 61 Director Don S. Williams 55 Director James R. Williams, Jr. 49 Director The primary type of business in which each director other than Mr. Peterson has been engaged during the past 5 years is that of the operation of one or more retail hardware stores. Prior to his election as director in June, 1995, Mr. Peterson was President and Chief Executive Officer of the Company (December, 1989-December, 1994) and Chief Executive Officer of the Company (January, 1995-May, 1995). 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 in accordance with Article IV, Section 1 of the Company's By-laws. (See Appendix A). 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. The current geographic composition of each of the regions established by the Board of Directors for the election of directors pursuant to the applicable By-law provisions is as follows: Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, New Jersey; Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina, District of Columbia; Region 3 - Alabama, Mississippi, Georgia, Florida; Region 4 - Ohio, Indiana, Illinois; Region 5 - Iowa, Missouri, Nebraska, Kansas, Colorado; Region 6 - Arkansas, Louisiana, Oklahoma, Texas; Region 7 - Alaska, Washington, Oregon, Idaho, Montana, Wyoming, Utah; Region 8 - Arizona, New Mexico, Nevada, California, Hawaii; Region 9 - Michigan, Minnesota, North Dakota, South Dakota, Wisconsin. 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 re-election as a director commencing in 1997. The person(s) named below has 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 copy of the By-laws in Appendix A 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. INDEMNIFICATION OBLIGATIONS OF COMPANY AND S.E.C. POSITION ON SECURITIES ACT INDEMNIFICATION Under Article EIGHTH (b) of the restated Certificate of Incorporation of the Company, and Article XV, Section 1 of the By-laws of the Company, persons serving as directors, officers, employees or agents of or at the request of the Company are required to be indemnified by the Company against all expenses, liabilities and losses (including attorneys' fees, judgments, fines, excise taxes, or penalties under the U.S. Employee Retirement Income Security Act, as amended, and amounts paid or to be paid in settlement) reasonably incurred or suffered by them in connection with any action, suit or proceeding (whether civil, criminal, administrative or investigative) instituted or threatened to be instituted against them by reason of their service in any of the aforementioned capacities on behalf of the Company or at its request. The same section of the restated Certificate of Incorporation also authorizes the advancement of litigation expenses to any such person without specific approval of the Board of Directors in each specific case under certain circumstances. Also, Article EIGHTH (a) of the restated Certificate of Incorporation provides that a director of the Company shall not be personally liable to the Company or to its stockholders for monetary damages arising solely out of such director's breach of fiduciary duty as a director. This provision does not affect a director's liability for monetary damages based upon such grounds as a breach of the duty of loyalty, a failure to act in good faith, intentional misconduct, a knowing violation of law, or the receipt of an improper personal benefit. The indemnification provisions described above would extend to and include proceedings under the federal Securities Act of 1933. However, insofar as indemnification for liabilities arising under said Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being offered by this Prospectus, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in said Act and will be governed by the final adjudication of such issue. ACE HARDWARE CORPORATION 1,558 Shares of Class A (Voting) Stock $1,000 par value 62,509 Shares of Class C (Non-voting) Stock $100 par value PROSPECTUS Dated: ________, 1997 No dealer, salesman, or any other person has been authorized by the Company to give any information or make any representations other than those contained in this Prospectus in connection with the offering described herein. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, to any person in any state in which it is unlawful to make such solicitation. The delivery of this Prospectus at any time does not imply that there has been no change in the affairs of the Company subsequent to its date of issue. In Florida the securities covered by this Prospectus are being offered pursuant to a limited offering exemption which extends to Florida purchasers the privilege of electing to void their purchases within 3 days after making any payment on account of the purchase price. TABLE OF CONTENTS Item Page - ---- ---- Available Information 2 Reports to Security Holders 2 Factors to be Considered 2 Summary 3 Use of Proceeds 6 Distribution Plan and Offering Terms 7 Description of Capital Stock 9 Opinions of Experts 14 The Company's Business 14 Properties 28 Index to Consolidated Financial Statements 31 Independent Auditors' Report 32 Consolidated Financial Statements 33 Notes To Consolidated Financial Statements 38 Management's Discussion and Analysis of Financial Condition and Results of Operations 47 Management 50 Indemnification Obligations of Company and S.E.C. Position on Securities Act Indemnification 52 Appendix A - By-laws of Ace Hardware Corporation A-1 APPENDIX A BY-LAWS OF ACE HARDWARE CORPORATION (As Amended through September 19, 1995) ARTICLE I OFFICES SECTION 1. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington in said State, and the registered agent in charge thereof shall be Corporation Service Company, 4305 Lancaster Pike. In the event that the business address of said registered agent in said State shall at any time be changed, the address of the corporation's registered office shall be deemed to have changed correspondingly. SECTION 2. The corporation may also have an office or offices in the Village of Oak Brook, Illinois, and at such other places as the Board of Directors may from time to time designate. ARTICLE II CORPORATE SEAL SECTION 1. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware". ARTICLE III MEETINGS OF STOCKHOLDERS SECTION 1. The annual meeting of stockholders for the election of directors shall be held on such date between April 10 and June 10 of each year as shall be designated in a written communication mailed not less than 160 days prior to the designated date to each holder of record of a share of Class A stock of the corporation as of a date no earlier than 40 days preceding the date of such mailing. The Board of Directors shall adopt a resolution establishing each annual meeting date as designated in such communication, the purpose of which is to inform the Class A stockholders of the annual meeting date in advance of the commencement of the time period specified in Article XXIII, Section 3 of the By-laws for the submission to the President or Secretary of the corporation of proposed By-law amendments, director nominations, or other matters by a stockholder or stockholders. At each annual meeting the stockholders shall elect by plurality vote (and by written ballot unless the same shall be waived or dispensed with by a majority vote of the stockholders represented at the meeting) members of the class of directors whose terms expire at that time, and all directors so elected shall hold office until the date of the next annual meeting of the stockholders for the election of directors of such class or until their respective successors shall have been elected and qualified. SECTION 2. Special meetings of the stockholders may be called at any time by the President and shall be called by the President or Secretary on the request in writing or by vote of a majority of the whole Board of Directors or at the request in writing of stockholders of record owning ten percent (10%) in amount of the capital stock outstanding and entitled to vote. Any special meeting may be called for any specified purpose or purposes permitted by the General Corporation Law of Delaware and the Certificate of Incorporation of the corporation. SECTION 3. All meetings of the stockholders for the election of directors shall be held at the office of the corporation in Oak Brook, Illinois, or at such other place within the United States of America as may from time to time be designated by the Board of Directors and stated in the notice of the meeting to be given under Article III, Section 6 of the By-laws. All other meetings of the stockholders shall be held at such place or places in the United States of America as may from time to time be designated by the Board of Directors and stated in the notice of meeting. Each meeting of the stockholders shall be held at such time of day as shall be approved by the Board of Directors. SECTION 4. A complete list of the stockholders entitled to vote at any meeting thereof, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary or by such person as shall be designated by him to prepare such list. The list shall be kept on file at the registered office of the corporation in the State of Illinois and shall be subject to inspection by any stockholder at any time during usual business hours for a period of ten (10) days prior to the meeting, and the same shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. SECTION 5. Each stockholder entitled to vote shall, at every meeting of the stockholders, be entitled to one vote in person or by proxy, signed by him, for each share of voting stock held by him. Such right to vote shall be subject to the right of the Board of Directors to close the transfer books or to fix a record date for voting stockholders not more than sixty (60) nor less than ten (10) days before the date of the meeting as hereinafter provided, and if the directors shall not have exercised such right, no share of stock shall be voted on at any election for directors which shall have been issued or transferred on the books of the corporation within twenty (20) days next preceding such election. SECTION 6. Written notice of the time and place of the annual meeting and of any special meeting of stockholders shall be mailed or personally delivered to each stockholder entitled to vote there at not less than thirty (30) nor more than sixty (60) days prior to the date of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail in a sealed envelope addressed to the stockholder at his address as it appears on the records of the corporation, with postage prepaid thereon. Notice of any special meeting shall state in general terms the purposes for which the meeting is to be held. SECTION 7. The holders of a majority of the stock outstanding and entitled to vote at any meeting of the stockholders, represented in person or by proxy, shall constitute a quorum for the transaction of business at such meeting. In the absence of a quorum, the stockholders attending or represented at the time and place for such meeting may adjourn the meeting from time to time, without notice other than announcement of the time and place of the adjourned meeting at the meeting at which the adjournment is taken, until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally scheduled. ARTICLE IV DIRECTORS SECTION 1. The property and business of the corporation shall be managed and controlled by a Board of Directors, which shall be comprised of no fewer than 9 and no greater than 12 directors, as shall be fixed from time to time by the Board of Directors. A minimum of 9 of the directors shall be dealer directors. No person shall be eligible for election or appointment as a dealer director (whether as a regional dealer director or as a dealer director at large), or to continue to hold office as a dealer director, unless such person is either 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. Dealer directors representing the regions established under Article IV, Section 4 hereof, shall be regional dealer directors. Subject to Article IV, Section 4(b) hereof, any additional dealer director(s) may be dealer director(s) at large, rather than regional dealer director(s). A maximum of 2 of the directors of Ace Hardware Corporation may be non-dealer directors. 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. SECTION 2. The directors shall be divided into three classes, as nearly equal in number as possible, as determined by the Board of Directors. The first of said classes shall include 4 dealer directors elected for 3-year terms at the annual meeting of stockholders held in 1994. The second of said classes shall include 3 dealer directors, elected for 3-year terms at the annual meeting of stockholders held in 1993. The third of said classes shall include 3 dealer directors, elected for 3-year terms at the annual meeting of stockholders held in 1992, plus 1 non-dealer director position for a 3-year term to be filled at the 1995 annual meeting of stockholders. At each subsequent annual meeting of the stockholders, as the terms of each class of directors expire, directors of the class whose terms expire shall be elected for terms of 3 years. The directors shall be elected by the stockholders, except that if there be any vacancies in the Board by reason of death, resignation or otherwise, or if there be any newly created directorships resulting from any increase in the authorized number of directors which is to take effect prior to the next annual meeting of stockholders, a majority of the directors then in office (though less than a quorum) shall have authority to fill any such vacancy or any newly created directorship for the unexpired term. In no event shall any term for which any director is elected exceed three years. SECTION 3. In the event that, for any reason other than a revision made by the Board of Directors as to the States to be included within particular regions or a change made by the Board in the number of regions, a dealer director ceases to satisfy the eligibility requirements which are applicable to his/her position as a director, his/her membership on the Board of Directors shall thereupon immediately terminate. No director elected or appointed shall be eligible for subsequent election or appointment to any position on the Board if such election or appointment would result in his/her being elected or appointed to serve a total of more than 9 years as such a director, except (1) that a dealer director that has been elected and holds the office of Chairman of the Board shall be eligible for election for one additional 3-year term, and (2) the President of the Corporation, if elected as a director, shall be eligible for election or reelection or appointment as a director at any time without regard to the period of time during which he has previously served as a director. At all annual meetings of the stockholders, all holders of Class A stock of Ace Hardware Corporation as of the record date established for voting at the meeting shall be eligible to vote in the election for each position on the Board of Directors to be filled at such meeting. SECTION 4. The following procedure shall be utilized in determining dealer director regions: (a) The Board of Directors shall divide the United States into such number of geographic regions as it shall deem appropriate as regions from which regional dealer directors shall be chosen. (b) No later than the fifteenth day of October preceding the date of each annual meeting of stockholders, the Board shall determine the regions from which each regional dealer director to be elected at such meeting shall be chosen. No dealer director shall be eligible to serve as a regional dealer director from a particular region unless the headquarters store or office of the stockholder of Ace Hardware Corporation of which he is an owner, executive officer, general partner, or general manager is located in such region. If the Board determines that all regions have representation by regional dealer director(s) and the maximum number of directors would not thereby be exceeded, then dealer director(s) at large may be elected. (c) Each region shall consist of such of the States of the United States as shall be determined by the Board of Directors, which shall have authority from time to time to make revisions as to the States included within particular regions as well as to change the number of regions, provided that no such revision or change shall deprive any director holding office at the time the revision or change is made from continuing to serve for the balance of the term for which he was elected or otherwise chosen. SECTION 5. Without affecting the right of any Class A stockholder to nominate as a candidate for election to membership on the Board of Directors any person who would be eligible to serve as a director in accordance with the procedure specified in Article XXIII, the Board of Directors shall cause nominees to be selected for election as directors at each annual meeting of stockholders for whom proxies will be solicited on behalf of the Board. At the time that the Board determines the regions from which regional dealer directors are to be elected at the next annual meeting of the stockholders, the Board shall also determine whether each incumbent director who is eligible to be reelected for another term at such annual meeting shall be selected as a Board-endorsed nominee for reelection from any such region at said meeting. Each such determination shall be made by the Board without participation in its proceedings by the director who is eligible to be reelected at such next annual meeting. If the Board determines that proxies shall be solicited on its behalf for the election of a director at the next annual meeting of stockholders of a non dealer director or a dealer director at large, the Board shall make a timely determination to this effect. The following procedure shall be applied by the Board in selecting all other Board-endorsed regional dealer director nominees for whom proxies will be solicited on the Board's behalf at the next annual meeting. (a) A standing Nominating Committee established by the Board shall submit to the Board as soon as practicable prior to the last regularly scheduled meeting of the directors in each calendar year a list of such number of persons as the Board shall determine who are recommended by such Committee to be considered as members of a candidate selection committee for each director region from which the Board has determined that a new regional dealer director should be elected at the next annual meeting of the stockholders. (b) At or prior to its last regularly scheduled meeting in each calendar year, the Board shall create such a candidate selection committee for each such director region and shall select as members of each such candidate selection committee five of the persons recommended by the Nominating Committee plus two incumbent members of the Board. The Board may also select such alternate members, if any, of any such candidate selection committee as it deems appropriate. (c) Each candidate selection committee shall make a timely designation of one of its eligible members as the person on whose behalf proxies will be solicited at the next annual meeting as a Board-endorsed nominee for election as a regional dealer director. SECTION 6. Notwithstanding any of the foregoing provisions, in any instance where a board-endorsed nominee for election as a director becomes ineligible under the provisions of the By-Laws for election as a dealer director or shall decline to run or seek reelection or shall be unable to run or seek reelection by reason of death or disability, or shall, in the case of an incumbent director have resigned or been removed from the Board of Directors subsequent to having been named a board-endorsed nominee, or in any instance where the Board of Directors, having endorsed a nominee for election as a director shall withdraw or revoke such endorsement, then in the case of a non-dealer director nominee or a dealer director at large nominee, the Board may endorse another non-dealer candidate or dealer director at large candidate, as the case may be, on whose behalf proxies will be solicited at the next annual meeting as a Board- endorsed nominee for election as a director. In case of a regional dealer director nominee, the standing Nominating Committee established by the Board shall submit to the Board as soon as practicable, a list of such number of persons as the Board shall determine who are recommended by such committee to be considered as members of a candidate selection committee for that particular director region. The Board shall at a regularly scheduled meeting or a special meeting of the directors as soon as practicable, create a candidate selection committee for that director region and shall select as members of the candidate selection committee five persons recommended by the nominating committee plus two incumbent members of the Board. The Board may also select such alternate members, if any, of any such candidate selection committee as it deems appropriate. The candidate selection committee shall then make a timely designation of one of its eligible members as the person on whose behalf proxies will be solicited at the next annual meeting as a Board-endorsed nominee for election as a regional dealer director. SECTION 7. The number of non-dealer directors elected or appointed to office shall be limited so that non-dealer directors shall not exceed twenty-five percent (25%) of the total number of directors in office at any one time. The foregoing twenty-five percent (25%) limitation on the number of non-dealer directors may be further amended, repealed, or added to only at a regular or special meeting of the shareholders in accordance with Article XXIII, Section 2. ARTICLE V POWERS OF DIRECTORS SECTION 1. The Board of Directors shall have, in addition to such powers as are hereinafter expressly conferred on it, all such powers as may be exercised by the corporation, subject to the provisions of the statute, the Certificate of Incorporation and the By-Laws. SECTION 2. The following powers are hereby expressly conferred upon the Board of Directors: (a) to purchase or otherwise acquire property, rights or privileges for the corporation, which the corporation has power to take, at such prices and on such terms as the Board of Directors may deem proper; (b) to pay for such property, rights or privileges in whole or in part with money, stock, bonds, debentures or other securities of the corporation (secured by mortgages or otherwise), or by the delivery of other property of the corporation; (c) to create, make and issue mortgages, bonds, deeds, leases, trust agreements and negotiable or transferable instruments and securities, and to do every act and thing necessary to effectuate the same; (d) to appoint agents, consultants, advisors and trustees, and to dismiss them at its discretion, to fix their duties and emoluments and to change them from time to time and to require such security as it may deem proper; (e) to confer on any officer or officers of the corporation the power of selecting, discharging or suspending any of the persons referred to in subsection (d) of this Section; (f) to determine by whom and in what manner the corporation's bills, notes, receipts, acceptances, endorsements, checks, releases, contracts or other documents shall be signed; (g) irrespective of any personal interest of any of its members, to determine the amount of compensation, if any, to be paid to directors and to members of the Executive Committee and other Committees established by the Board of Directors for their services to the corporation as directors or Committee members. ARTICLE VI MEETINGS OF DIRECTORS SECTION 1. An annual organizational meeting of the Board of Directors as constituted after the election of directors at each annual meeting of the stockholders shall be held without call or formal notice at a time later in the same day as the annual meeting of the stockholders or during the day next following such stockholders meeting. The specific date of each such meeting of the Board, as well as the time and place thereof, shall be determined at one of the meetings of the Board held during the time between the most recently conducted annual stockholders meeting and the next scheduled annual stockholders meeting. In addition to electing officers of the corporation as provided for in Article VIII, Section 2, the Board shall select the members of its standing committees for the period until its next annual organizational meeting and shall give voting directions to the President as to the persons to be elected by the corporation as members of the Boards of Directors of each of its wholly-owned subsidiary corporations at their respective annual meeting times. SECTION 2. Additional regular meetings of the Board of Directors may be held upon such notice, or without notice, and at such time and at such place as shall from time to time be determined by the Board. SECTION 3. Special meetings of the directors may be called by the Chairman of the Board on four (4) days' notice by mail (calculated from the date of mailing) or on two days' notice by telephone to each director and shall be called by the Chairman of the Board in like manner on the written request of not less than four (4) directors. Special meetings of the directors may be held within or without the State of Delaware at such place as is indicated in the notice or waiver of notice thereof. SECTION 4. A majority of the total number of directors then holding office shall constitute a quorum for the transaction of business. If at any meeting of the Board there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is secured. ARTICLE VII COMMITTEES ESTABLISHED BY THE BOARD SECTION 1. The Board of Directors shall establish as standing committees of the Board an executive committee and such other committees as it shall deem from time to time to be appropriate. The Chairman of the Board shall be an ex-officio member of any standing committee if the resolution adopted by the Board with regard to the membership of such committee so provides, except for any committee authorized to grant or withhold consent to the transfer of shares of the corporation's stock pursuant to Article XVI, Section 9 of these By-laws. Each such committee shall have such responsibilities and duties as shall be described in a resolution or resolutions adopted by a majority of the whole Board. Such resolution or resolutions may also establish the number (or the minimum and maximum numbers) of persons to be selected to serve on each of said committees, the voting members of each of which shall be members of the Board. The Board shall also have authority from time to time to establish special ad hoc committees comprised of two or more directors, the specific responsibilities of which shall be described in the resolutions creating them. SECTION 2. One or more directors may be designated by the Board as alternate members of any standing or special ad hoc committee, who may replace any absent or disqualified committee member at any meeting of the committee. Vacancies in the membership of any committee established by the Board shall be filled only by the Board. SECTION 3. In no event shall the executive committee or any other committee established by the Board have the power or authority at any time to take any final action on behalf of the Board with respect to (a) proposing amendments to the corporation's certificates of incorporation, (b) the adoption of any amendments to the By-laws of the corporation, (c) the adoption of an agreement of merger or consolidation, (d) the making of recommendations to the stockholders for the sale, lease, or exchange of all or substantially all of the corporation's property or assets, (e) the making of recommendations to the stockholders for the dissolution of the corporation or the revocation of a dissolution, (f) the making of any proposals submitted to the Board with respect to the purchase of all or a controlling portion of the outstanding capital stock of the corporation, (g) the authorization of issuance of shares of capital stock of the corporation or (h) the filling of vacancies in the membership of the Board or any committee thereof. SECTION 4. Each standing committee of the Board (with the exception of any committee authorized to grant or withhold consent to the transfer of shares of the corporation's stock pursuant to Article XVI, Section 9 of these By-laws) shall select one of its members to act as Chairman thereof as promptly as feasible after the members of the committee are selected at each annual organizational meeting of the Board. At the time of establishment of any special ad hoc committee of the Board, the Board shall designate a member of such committee to act as its Chairman. SECTION 5. Regular meetings of each standing committee established by the Board shall be held as provided for in a resolution adopted by the Board, or by a particular committee or its Chairman if authorized in a resolution of the Board. Special meetings of any standing committee, and all meetings of any special ad hoc committee, shall be held on reasonable notice given to all members thereof by the Chairman of the committee. Even if he has not been made a member of a particular standing committee, the Chairman of the Board shall be provided with the same notice of all regular or special meetings of such committee as is provided to members of the committee, and he shall have the right to attend any of the meetings held by the committee in an advisory non-voting capacity. Subject to the provisions of the resolution describing the responsibilities and duties of a particular committee established by the Board, any such committee shall have authority to establish its own rules of procedure. The Chairman of each committee of the Board which is required by these By-laws to have one of its members designated as its Chairman shall be responsible for assuring that: (a) an appropriate agenda is prepared for each formal meeting of the Committee; (b) minutes of the proceedings of each such meeting are kept; and (c) either a copy of such minutes or a summarized written report of the meeting is submitted to the Board at or prior to the next meeting of the Board. SECTION 6. A majority of the voting members of any committee hereunder shall constitute a quorum for meetings thereof, but the affirmative vote of a majority of all voting members of the whole committee shall be necessary with respect to all actions taken by the committee. SECTION 7. With the exception of the Chairman of any committee of the type described in the first sentence of Section 4 of this Article VII, the Board may authorize the payment to the Chairman of any standing or special ad hoc committee of compensation for the services rendered by him in his capacity as Chairman in such amount as the Board shall deem to be appropriate. Such compensation shall be in addition to the compensation paid to dealer directors for their regular services as members of the Board. ARTICLE VIII OFFICERS OF THE CORPORATION SECTION 1. There shall be elected by the Board of Directors the following executive officers of the corporation: (a) a Chairman of the Board and, if deemed appropriate by the directors, a Vice Chairman of the Board, each of whom shall be elected from the membership of the Board of Directors; (b) a President; (c) a Treasurer; and (d) one or more Executive Vice Presidents, Senior Vice Presidents, or Vice Presidents as the Board shall deem the business of the corporation to require from time to time. In addition the Board of Directors shall elect as corporate (but not executive) officers of the corporation a Secretary and such Assistant Secretaries as the Board shall determine to be appropriate. The board shall also elect from time to time such other additional executive or corporate officers as in its opinion are desirable for the conduct of the business of the corporation. Any number of offices filled by election of the Board may be held by the same person, except the offices of President and Secretary. Any executive officer of the corporation may bestow upon any employee of the corporation under his supervision such title or titles descriptive of the position held by such employee as such executive officer shall deem to be appropriate, provided that no such title shall be the same as or confusingly similar to the title of any officer elected by the Board, and provided further that no such title shall be deemed to bestow the status of an executive officer or corporate officer upon such employee nor to empower him with any authority to act on behalf of the corporation other than such authority as shall have expressly been assigned to him by the executive officer bestowing such title upon him. SECTION 2. All executive officers and corporate officers of the corporation shall be elected by the Board of Directors for one-year terms at the regular meeting thereof following the annual meeting of stockholders, provided that, in any event, any such officer shall hold office until his successor has been elected and qualified or until his death, resignation or removal from office. In the case of any officer with whom an employment contract employing him to perform the functions of a specific office for a period extending beyond one year has been entered into, the office or offices to which he is elected at each such meeting of the Board of Directors shall constitute the office or offices with respect to which he is employed under such employment contract during the ensuing year. The Board of Directors shall have authority to direct that the corporation enter into an employment contract with any executive officer or other employee for the purpose of employing him for a specified period of time, and no such contract shall be legally binding upon the corporation unless the same has been expressly authorized by the Board and has been executed on behalf of the corporation by the Chairman of the Board, the President, an Executive Vice President, a Senior Vice President or a Vice President of the corporation. In no event shall any such employment contract extend for an initial term of more than five years, but any such contract may contain a provision whereby the contract is automatically renewed for additional successive terms of not less than three years each, provided that the corporation is given the right to terminate the contract at the end of the initial term or renewal term by giving notice to the executive officer or other employee involved of its intention to do so by such specific period of time prior to the last day of the initial term or the then current renewal term as shall be set forth in the contract. Authorization of any such employment contract shall require the affirmative vote of a majority of the whole Board of Directors then in office. Subject to such contractual rights (if any) as may exist with respect to his employment, any executive officer or other officer elected or appointed by the Board of Directors may be removed from office at any time, with or without cause, by the affirmative vote of a majority of the whole Board of Directors then in office. If the office of any executive officer or other officer elected or appointed by the Board of Directors becomes vacant for any reason, the vacancy shall be filled by the affirmative vote of a majority of the whole Board of Directors then in office. SECTION 3. In case of the absence or disability of any executive officer or any other officer of the corporation elected or appointed by the Board of Directors, or for any other reason deemed sufficient by a majority of the whole Board of Directors then in office, and subject to such contractual rights as may exist with respect to the employment of any such officer, the Board of Directors may delegate the powers or duties of any such officer to any other officer, or to any director, for the time being. SECTION 4. In addition to executive officers, certain employees of the corporation may be designated from time to time by the President as staff officers, that is, officers upon whom responsibility is conferred with respect to the operations of a particular department, division, branch or function of the corporation. Any such staff officer shall be appointed by the President and may thereafter be removed at any time, with or without cause, by the President. However, if the Board of Directors elects or appoints an Executive Vice President, Senior Vice President, Vice President or other officer pursuant to the authority vested in it by Section 1. above, such officer may thereafter be removed only by the affirmative vote of a majority of the whole Board of Directors then in office even though such officer's title includes one or more words which are descriptive of the particular department, division, branch or function of the corporation managed by such officer. The removal of any officer shall be subject to such contractual rights (if any) as may exist under any contract of employment which has been entered into with him. SECTION 5. Unless his compensation has been expressly specified by a contract of employment entered into with him, the compensation of any executive officer shall be such amount as shall be determined from time to time by the Board of Directors. The President shall have sole authority to determine from time to time the amount of compensation to be paid to any other officer, except in the case of an officer whose compensation has been expressly specified in a contract of employment which has been entered into with him and except in the case of any such officer whose basic annual compensation would be or is in an amount which equals or exceeds the basic annual compensation then being paid to any executive officer (exclusive of the Secretary or any Assistant Secretary or Assistant Treasurer). ARTICLE IX DUTIES OF THE CHAIRMAN OF THE BOARD, VICE CHAIRMAN OF THE BOARD AND PRESIDENT SECTION 1. The Chairman of the Board shall preside at all meetings of the stockholders and the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the By-laws. His specific duties and responsibilities shall include (a) acting as the primary liaison between the executive officers of the corporation on the one hand and its Board of Directors and its dealer-stockholders on the other hand; (b) bringing to the attention of and consulting with the corporation's executive officers with respect to any special concerns of the corporation's dealer-stockholders which come to his attention or to the attention of the Board of Directors; (c) reviewing from the perspective of the Board of Directors and the corporation's dealer-stockholders all reports, financial budgets, and corporate plans as developed and submitted to him from time to time by the corporation's executive officers; (d) overseeing and aiding in the implementation of plans for orderly successions to the positions held by the corporation's executive officers and other important staff personnel; and (e) seeing that the efforts of the various executive officers and other key management personnel of the corporation are carried out in a coordinated manner, particularly in periods when transitions in important officer or management positions occur. Except where it is provided by law that the signature of the President is required, the Chairman of the Board shall possess all of the same powers as the President to sign all certificates for shares of stock of the corporation and all contracts and other instruments of the corporation which may be authorized by the Board of Directors. SECTION 2. If the Board has elected a Vice Chairman of the Board, he shall preside at all meetings of the stockholders and the Board of Directors in the absence of the Chairman of the Board, and he shall be empowered to perform the other duties and exercise the other powers vested in the Chairman of the Board in the event that the Chairman of the Board is prevented by his absence, by disability, or otherwise from being able to perform such duties and powers in connection with a particular matter within the legally permitted period of time or within such period of time as shall be deemed to be reasonable and appropriate for action to be taken by the Chairman with regard to such matter. If there is no director holding the position of Vice Chairman of the Board, but there is a director (other than the Chairman of the Board) holding the position of Chairman of the Executive Committee of the Board, then the Chairman of the Executive Committee shall perform the duties and exercise the powers described above for the Vice Chairman of the Board whenever necessary; otherwise, upon the occurrence of any circumstance in which a Vice Chairman of the Board would have been vested with authority to perform the duties and exercise the powers of Chairman of the Board, the Board shall select one of its members as acting Chairman of the Board who shall be vested with the same authority. SECTION 3. The President shall be charged with the general and active management of the day-to-day operations of the corporation and with seeing that all orders and resolutions of the Board of Directors are carried into effect. His specific duties and responsibilities shall include (a) reporting from time to time to the Chairman of the Board on all significant matters affecting the operations and interests of the corporation which fall within his knowledge; (b) seeing that short-term and long-term corporate plans and budgets consistent with the directions of the Board of Directors are prepared and developed on a regular basis; (c) seeing that the corporation continually maintains competent personnel at all levels in order to adequately serve the needs of the retail hardware dealers supplied by it; (d) consulting with the Chairman of the Board from time to time with respect to the types of programs, products and services to be made available to the corporation's retail hardware dealers in order to serve the best interests of the corporation's entire network of dealers; (e) submitting to the stockholders at their annual meetings and/or at dealer conventions sponsored by the corporation such reports on the operations and affairs of the corporation as shall be appropriate in order to provide them with information of importance to them as both customers and stockholders of the corporation; and (f) executing on behalf of the corporation contracts and other instruments in writing, including mortgages, bonds and governmental reports of various kinds, in all instances wherein the signature of the President of the corporation is required or has been authorized by the Board of Directors or is otherwise deemed to be appropriate. The Board of Directors, in its discretion, may vest the person holding the office of President of the corporation at any given time with the additional title of Chief Executive Officer. Whenever the title of Chief Executive Officer is used as an additional title for the person holding the office of President, it shall be deemed to relate specifically to the duties and responsibilities dealing with the development of plans for orderly successions to the positions held by the corporation's executive officers and other management personnel and to the ongoing development of short-term and long-term strategic plans for the corporation to be presented to and reviewed by the Board of Directors and to the execution of all such plans as are approved by the Board. ARTICLE X DUTIES OF EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND OTHER VICE PRESIDENTS SECTION 1. Any Executive Vice President elected by the Board of Directors shall possess the power and may perform the duties of the President in his absence or disability. Each officer having the title of Executive Vice President shall perform such other duties as may be prescribed from time to time by the Board of Directors. SECTION 2. Any Senior Vice President elected by the Board of Directors shall possess the power and may perform the duties herein authorized to be performed by an Executive Vice President in the event that there is no person holding the office of Executive Vice President at the time, or in the event of the absence or disability of all persons then holding the office of Executive Vice President. Each officer having the title of Senior Vice President shall perform such other duties as may be prescribed from time to time by the Board of Directors. SECTION 3. Any Vice President elected by the Board of Directors shall possess the power and may perform the duties herein authorized to be performed by a Senior Vice President in the event that there is no person holding the office of Senior Vice President at the time, or in the event of the absence or disability of all persons then holding the office of Senior Vice President. Each officer having the title of Vice President shall perform such other duties as may be prescribed from time to time by the Board of Directors. SECTION 4. If there shall be more than one person holding the office of Executive Vice President at any time, or if there shall be more than one person holding the office of Senior Vice President at any time, or if there shall be more than one person holding the office of Vice President at any time, in each such instance the Board of Directors shall designate the order in which each of them shall possess the power and perform the duties of an officer of the next higher rank under the applicable one of the above Sections in the event of the nonexistence, absence or disability of all such higher ranking officers. SECTION 5. Notwithstanding any of the above provisions of this Article X, if the title given to any Executive Vice President, Senior Vice President, or Vice President also includes one or more words that are descriptive of a particular department, division, branch or function of the corporation managed by such officer, the duties of such officer shall consist only of the general and active management of the operations or activities of such department, division, branch or function and such other duties as shall have been specifically assigned to such officer by the Board of Directors. ARTICLE XI DUTIES OF CONTROLLER SECTION 1. In the event that a Controller shall be elected or appointed at any time by the Board of Directors, or in the event that a staff officer having the title of Controller is appointed at any time by the President, such officer shall be responsible to the Board of Directors, the President, and the Vice President-Finance (if such office has been created and filled), for all financial control and internal audit of the corporation and its subsidiaries. He shall also perform such other duties as may be assigned to him by the Board of Directors or the President. ARTICLE XII DUTIES OF THE SECRETARY AND ASSISTANT SECRETARIES SECTION 1. The Secretary (or an Assistant Secretary) shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. SECTION 2. The Secretary shall also keep, or cause to be kept by such person or persons to whom he shall delegate such duty, a register of all shares of capital stock issued by the corporation and all transfers of such shares. Such register shall be maintained in such manner and subject to such regulations as the Board of Directors may prescribe. SECTION 3. The Assistant Secretary, or if there be more than one (1), the Assistant Secretaries in the order determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE XIII DUTIES OF THE TREASURER SECTION 1. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. SECTION 2. He shall disburse the funds of the corporation, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the corporation. SECTION 3. If required by the Board of Directors, he shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. ARTICLE XIV WRITTEN CONSENTS AND CONFERENCE TELEPHONE MEETINGS SECTION 1. To the extent permitted by the General Corporation Law of the State of Delaware, and in accordance with the applicable procedure prescribed by the provisions thereof, whenever a vote or resolution of stockholders, the Board of Directors, or a committee of the Board at a meeting is required or permitted in connection with any corporate action by any provision of law, the Certificate of Incorporation, these By-laws, or any unrevoked resolution previously adopted by the Board, the meeting and vote or resolution may be dispensed with and the corporate action may be taken pursuant to written consent. The writing evidencing such consent shall be filed with the minutes of the proceedings of the stockholders, Board, or committee. SECTION 2. In accordance with the applicable procedure prescribed by the General Corporation Law of the State of Delaware, members of the Board of Directors, or of any committee of the board, may participate in a meeting of the Board, or of any such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. ARTICLE XV INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS SECTION 1. In accordance with the provisions of Section 145 of the General Corporation Law of the State of Delaware, and as more fully provided for in Article EIGHTH (b) of the restated Certificate of Incorporation of Ace Hardware Corporation, as amended, persons serving as directors, officers, employees or agents of or at the request of the corporation shall be indemnified against all expenses, liabilities and losses (including attorneys' fees, judgments, fines, excise taxes or penalties under the U.S. Employee Retirement Income Security Act, as amended, and amounts paid or to be paid in settlement) reasonably incurred or suffered by them in connection with any action, suit or proceeding (whether civil, criminal, administrative or investigative) instituted or threatened to be instituted against them by reason of their service in any of the aforementioned capacities on behalf of the corporation or at its request. ARTICLE XVI CERTIFICATES OF STOCK AND TRANSFER THEREOF SECTION 1. The shares of the corporation shall be represented by certificates signed by the Chairman of the Board or the President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the corporation and may be sealed with the seal of the corporation or a facsimile thereof. SECTION 2. The signatures of the officers of the corporation upon a certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of its issue. SECTION 3. Each certificate of stock shall have conspicuously noted or stated thereon a statement of the liens, restrictions and limitations upon the voting power, ownership, transfer or other rights and privileges of the holder thereof. All shares of stock in the corporation shall be issued and accepted in accordance with and subject to the conditions, restrictions, and offsetting liens stipulated in the Certificate of Incorporation and By-laws of this corporation and amendments thereto. SECTION 4. If a certificate of stock be lost or destroyed, another may be issued in its stead upon proof of such loss or destruction and the giving of a satisfactory bond of indemnity, in an amount sufficient to indemnify the corporation against any claim. A new certificate may be issued without requiring bond when, in the judgment of the directors, it is proper to do so. SECTION 5. The corporation shall have a first lien upon each share of its issued and outstanding stock of any class, and upon each certificate of stock representing a share or shares of stock of any class of the corporation, for the amount of any indebtedness payable to the corporation by the holder thereof, and shall have a similar first lien upon all amounts which have been paid to the corporation pursuant to a subscription agreement for the purchase of shares of stock of the corporation which will be issuable to the subscriber upon the completion of payment of the purchase price of the shares. The interest of each holder of shares of the corporation's stock in and to the shares issued to such holder and the interest of each subscriber for shares of the corporation's stock in and to the funds paid to the corporation by such subscriber on account of the purchase price of the shares being purchased by such subscriber shall at all times be deemed to be offset by the amount of any indebtedness payable to the corporation by such holder or subscriber. In no event shall any transfer of any of the shares owned by any holder or any transfer of the stock subscription account of any subscriber for shares of stock of the corporation be made unless and until the stockholder whose shares are being transferred or the subscriber whose subscription account is being transferred is free from all indebtedness to the corporation. SECTION 6. No certificate representing any issued and outstanding share or shares of any class of stock of the corporation shall be pledged, mortgaged, hypothecated, sold, assigned or transferred without the prior consent of the Board of Directors of the corporation. In the event that the Board of Directors shall refuse to consent to any transfer or assignment of any certificate or certificates representing any share or shares of issued and outstanding stock of the corporation of any class, then the corporation shall have the right and shall be obligated to purchase from the owner thereof all of the shares of its stock of any class held for the store or other retail business unit with respect to which the corporation issued the share or shares as to which such consent has been refused and the franchise granted by this corporation with regard to the operation of such retail business unit shall thereby be terminated. In no event shall any transfer or assignment of shares of any class of stock of the corporation be made to any transferee who is not eligible to be a holder of such shares under the provisions of Article Fourth of the restated Certificate of Incorporation of the corporation. In the case of a proposed transfer of ownership of a store or other retail business unit owned by a holder of shares of stock of the corporation to a transferee which the corporation has accepted or is willing to accept as a franchised Ace Hardware dealer, then the owner of such stock shall have the option of either (a) selling or otherwise transferring to such transferee such number of shares of stock of this corporation of any class which the corporation would otherwise have been required to offer to such transferee in connection with the franchise granted to such transferee with respect to such store or other retail business unit, or (b) selling such shares to the corporation. In any case where the holder or holders of 50% or more of the outstanding voting stock of a corporation having a franchise from this corporation for one or more retail business outlets, or the holder or holders of 50% or more of the outstanding voting stock of a corporation owning 80% or more of the outstanding voting stock of a corporation having such a franchise, propose to sell or otherwise transfer all of the shares of capital stock (both voting and non-voting) of such corporation held by them, written notice of such proposal shall be given to this corporation, and upon the consummation of any such sale or transfer, such corporation shall have the option of either (a) retaining all of the shares of the capital stock of this corporation then held by it or (b) selling such shares to this corporation, but in the case of such a sale of said shares to this corporation, the franchise granted to said corporation by this corporation for each retail business unit operated by said corporation shall thereupon be deemed to have terminated by the voluntary action of said corporation and no such retail business unit shall thereafter operate as a franchise of this corporation unless a new application for a franchise for such retail business unit has been submitted to and accepted by this corporation. Notwithstanding any of the foregoing provisions, this corporation shall in no event be obligated to treat any of the following types of transfers as qualifying for purposes of the options provided for in this Section 6 of selling to this corporation shares of its capital stock: (a) any transfer of ownership of a retail business outlet or unit or of shares of the capital stock of a corporation directly or indirectly owning such outlet or unit which is not complete, unconditional and irrevocable; (b) any such transfer to an entity in which the transferor retains an ownership interest; or (c) any such transfer to the spouse of the transferor. SECTION 7. Subject to the provisions of Section 5 of this Article XVI of these By-laws, in the event of the termination of the franchise granted by this corporation with regard to the operation of a retail hardware store or other retail business unit for which shares of stock of the corporation are held, the corporation shall be obligated to purchase such shares. Unissued shares which have been subscribed for with respect to any such store or other retail business unit shall also be covered by the provisions of this Section to the extent of the amounts which have been paid on account of the purchase price thereof, and the corporation shall be obligated to refund all such amounts, subject only to the provisions of Section 5 of this Article XVI. For purposes of this Section, termination of the franchise granted for a particular retail hardware store or other retail business outlet shall include not only any termination pursuant to formal notice of termination given by either this corporation or the holder of the franchise but shall also include each of the following situations which shall be deemed to constitute such a termination: (a) The closing down of the store or other retail business unit with respect to which such shares of stock of the corporation are held, unless such store or other retail business unit is merely being moved, with the corporation's consent and approval, to another location or is being acquired by another dealer which this corporation has accepted or is willing to accept as a franchised dealer for operation pursuant to the same franchise at another location; (b) The death of an individual holder of the shares of stock of this corporation held for such retail store or other retail business unit, or of a member of a partnership which is a holder of such shares, except in a case where the store or other retail business unit with respect to which such shares are held continues, with the approval of the officers of the corporation (which approval shall not be unreasonably withheld), to be operated under a franchise from the corporation by the decedent's estate or by the person or persons to whom such shares are to be distributed by the decedent's estate or by the successor or successors to the decedent's interest in the partnership holding such shares (it being immaterial for this purpose that, in connection with such continuation of operation, the legal form of ownership of the franchised dealer has been changed from an individual proprietorship or partnership to a corporation or from a partnership to an individual proprietorship); (c) An adjudication of the insolvency of the dealer or of the store or other retail business unit for which the shares of stock of this corporation are held, or the making of an assignment for the benefit of creditors or the filing of a voluntary petition in bankruptcy or similar petition under the U.S. Bankruptcy Code by or on behalf of such dealer or retail business unit, or the filing of an involuntary petition in bankruptcy or similar petition under the U.S. Bankruptcy Code against the dealer or against said retail business unit. SECTION 8. A transfer of shares of stock of the corporation requiring the consent of the Board of Directors shall not be deemed to have occurred upon the death of a person who is the holder of shares of stock of the corporation jointly with one or more other persons under circumstances whereby ownership of such shares passes automatically by operation of law to the surviving holder or holders of such shares, nor shall the corporation become obligated to purchase such shares upon the death of such person unless the store or other retail business unit with respect to which such shares are held either (a) closes down, or (b) ceases to be operated under a franchise from this corporation. SECTION 9. The Board of Directors may delegate to a committee composed of two (2) or more members of the Board authority to act on its behalf with respect to all matters where the consent of the Board is required in connection with the transfer or assignment of any shares of any class of stock of the corporation. SECTION 10. The price to be paid by the corporation in connection with the purchase by it of any shares of its stock shall be as follows: (a) in the case of Class A stock, the par value of the shares; (b) in the case of Class B stock, an amount per share equal to the per share price last established by the Board of Directors as the price to be paid by the corporation in the event of redemption of shares of its Class B stock, which shall in no event be less than twice the par value of the Class B stock and shall also at all times be equal to twenty (20) times the per share purchase price last established by the Board of Directors with respect to purchases by it of Shares of its Class C Stock; (c) in the case of Class C stock, an amount per share equal to the per share price last established by the Board of Directors as the purchase price to be paid by the Corporation for shares of its Class C stock, which price shall in no event be less than the par value thereof. SECTION 11. Any shares of any class of stock of the corporation which are purchased by it from any stockholder shall become treasury shares which shall be eligible for sale to any other person, persons or firm which shall be qualified to hold such shares. SECTION 12. Effective with respect to all purchases and redemptions of shares of its capital stock made by the corporation from its stockholders on or after December 31, 1981, the entire purchase or redemption price to be paid by the corporation for such shares shall be paid in cash except that, in any of the situations described in subsection (a) hereof, the purchase or redemption price for such shares shall be paid in the manner set forth in subsection (b) hereof. (a) The situations in which such price shall be paid in the manner set forth in subsection (b) of this Section are as follows: (1) the voluntary termination by a stockholder of this corporation of the franchise from this corporation held by such stockholder for a retail business outlet under circumstances whereby such outlet continues to engage in substantially the same business under the ownership or control of the same person, partnership or corporation that owned or controlled it immediately prior to such termination; for purposes of this paragraph: (A) control of an outlet owned by an unincorporated person or partnership shall be deemed to be the same if more than fifty percent (50%) of the assets or profit shares therein, or more than fifty percent (50%) of the capital stock of a corporation becoming the owner of such outlet, continues to be legally or equitably owned by the same person, partnership or corporation; and (B) control of an outlet owned by a corporation shall be deemed to be the same if more than fifty percent (50%) of the capital stock of said corporation, or more than fifty percent (50%) of the assets or profit shares of an unincorporated person or partnership becoming the owner of such outlet, continues to be owned by the same person, partnership or corporation. (2) the termination by this corporation of the franchise from this corporation for a retail business outlet pursuant to the provisions of the Ace Dealer Franchise Agreement authorizing such termination by reason of: (A) the failure of such retail business outlet to make any payment owing to the corporation for merchandise or services supplied by it within the time period specified in such provisions; or (B) any default of such retail business outlet in performing any obligation of such outlet under the Ace Dealer Franchise Agreement of such outlet other than the obligation to pay for merchandise or services supplied by the corporation, provided that such default is described in the corporation's notice of termination in such a manner as to reasonably apprise such retail business outlet as to the nature of such default. (b) In each of the situations described in subsection (a) above, the purchase or redemption price to be paid by the corporation for the shares of its stock being purchased or redeemed by it shall be paid in the following manner: (1) in the case of Class A stock, the entire price shall be paid by the corporation in cash; (2) in the case of Class B stock or Class C stock purchased by a stockholder as part of the shares of capital stock of the corporation subscribed for in connection with the granting of a franchise by the corporation for a retail business outlet, that portion of the purchase or redemption price to be paid by the corporation which equals the amount paid to the corporation pursuant to such subscription shall be paid by the corporation in cash and any remaining balance of the price (with interest thereon) shall be paid by the corporation in equal annual installments over a period of four years; (3) in the case of Class C stock received by a stockholder as part of the patronage dividends distributed by the corporation for a retail business outlet, the entire price (with interest thereon) shall be paid by the corporation in equal annual installments over a period of four years; (4) if the total portion of the purchase or redemption price which would otherwise be payable under the foregoing paragraphs in equal annual installments over a period of four years is less than $5,000, the entire purchase or redemption price shall be paid by the corporation in cash, notwithstanding the installment provisions of said paragraphs; (5) in any situation where a stockholder whose shares of capital stock of the corporation are to be purchased or redeemed by it is indebted to the corporation at such time, then, in accordance with the corporation's first lien and offset rights under Article XVI, Section 5, of these By-laws and Article Fourth (1) of the restated Certificate of Incorporation of the corporation, the purchase or redemption price shall in all cases be applied against such indebtedness to the extent thereof, with the portion of such price which would otherwise have been payable in cash being first applied for such purpose and, if any indebtedness to the corporation still remains, the portion of the price which would otherwise have been payable in equal annual installments then being applied for such purpose to the extent of any such remaining indebtedness; (6) the corporation's obligation to pay any portion of the purchase or redemption price of its shares in equal annual installments shall be evidenced by an installment promissory note of the corporation delivered to the stockholder whose shares are being purchased or redeemed, which note shall provide for the payment of the principal thereof in four equal annual installments commencing one year from the date of the repurchase or redemption of the shares and for the payment of interest with each annual installment payment of principal on the unpaid balance of principal from time to time at such rate as shall have been established by the Board of Directors as of the date of issuance thereof, provided, however, that said rate of interest shall in no event be less than the greater of (A) the latest interest rate as of the date of issuance of such note determined by the Board of Directors as the rate to be paid on patronage refund certificates distributed to the corporation's member-stockholders as part of their annual patronage dividends or (B) 6% per annum; (7) notwithstanding any of the foregoing provisions, the Board of Directors, in its discretion and after considering the financial condition and requirements of the corporation, may authorize and cause payment to be made in cash for all or any portion of the purchase or redemption price which would otherwise be payable in four equal annual installments if the Board of Directors determines that the prescribed method of payment would impose an undue hardship upon the stockholder whose shares are being repurchased or redeemed; (8) the Board of Directors may adopt hardship guidelines to implement the provisions of paragraph (7) of this Section and may delegate the authority to make determinations pursuant to said provisions to a committee comprised of two or more directors or to a committee comprised of two or more executive officers of the corporation. ARTICLE XVII CLOSING OF TRANSFER BOOKS AND DETERMINATION OF RECORD DATE SECTION 1. The Board of Directors shall have power to close the stock transfer books of the corporation for a period not exceeding sixty (60) days preceding the date of any meeting of stockholders or the date for the allotment of rights or the dates when any change or conversion or exchange of capital stock shall go into effect or for a period of not exceeding sixty (60) days in connection with obtaining the consent of stockholders for any purpose. SECTION 2. Notwithstanding the foregoing, in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of stockholders, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote, at any such meeting and any adjournment thereof, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at such meeting and any adjournment thereof, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. SECTION 3. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. ARTICLE XVIII FISCAL YEAR SECTION 1. Except as from time to time otherwise provided for by the Board of Directors, the fiscal year of the corporation shall end on the 3lst day of December in each year. ARTICLE XIX DIVIDENDS SECTION 1. No dividends shall ever be declared on any of the shares of any class of stock of the corporation. ARTICLE XX CHECKS FOR MONEY SECTION 1. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. ARTICLE XXI BOOKS AND RECORDS SECTION 1. The books, accounts and records of the corporation, except as otherwise required by the laws of the State of Delaware, may be kept within or without the State of Delaware, at such place or places as may from time to time be designated by the By-laws or by resolution of the directors. ARTICLE XXII NOTICES SECTION 1. Notice required to be given under the provisions of these By-laws to any director, officer or stockholder shall not be construed to mean personal notice, but may be given in writing by depositing the same in a post office or letter box, in a postpaid sealed wrapper, addressed to such stockholder, officer or director at such address as appears on the books of the corporation, and such notice shall be deemed to be given at the time when the same shall be thus mailed. Any stockholder, officer or director may waive, in writing, any notice required to be given under these By-laws, whether before or after the time stated therein. ARTICLE XXIII AMENDMENTS OF BY-LAWS AND ADVANCE NOTIFICATION BY STOCKHOLDERS OF PROPOSALS FOR AMENDMENTS, DIRECTOR NOMINATIONS OR OTHER CORPORATE ACTIONS SECTION 1. Except for any provisions hereof which shall at any time have been adopted by the stockholders in the manner prescribed in Section 2, these By-laws may be amended or repealed or added to, or new By-laws may be adopted, by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board or at any special meeting thereof called for that purpose. If any By-law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of stockholders for the election of directors the By-law so adopted, amended or repealed, together with a precise statement of the changes made. SECTION 2. These By-laws may also be amended or repealed or added to, or new By-laws may be adopted, at any regular or special meeting of stockholders at which a quorum is present or represented by the affirmative vote of a majority of the issued and outstanding shares of Class A stock of the corporation. Any amendment, repeal, addition to the By-laws, or any new By-laws, adopted by the stockholders may be further amended, repealed, or added to only at a regular or special meeting of the stockholders at which a quorum is present or represented by the affirmative vote of a majority of the issued and outstanding shares of Class A stock of the corporation in the manner prescribed herein. SECTION 3. A written notice shall be given to the President or Secretary of the corporation of the intent of one or more stockholders to submit at a forthcoming stockholders meeting (a) a proposed amendment to these By-laws; (b) the nomination of an eligible person for election as a director; or (c) any other stockholder proposal for corporate action. Such notice must be received, either by mail or by personal delivery, not less than seventy-five (75) nor more than one hundred fifty (150) days prior to the date of the annual meeting or, in the event of a special meeting of stockholders, not later than the close of the fifteenth (15th) day following the day on which notice of the meeting is first mailed to stockholders. In the case of an annual meeting, the intention of one or more stockholders to submit a proposed By-law amendment, nomination or other proposal for corporate action which is so received in proper order shall be mentioned in the formal notice of the meeting, but neither the name or names of the stockholder or stockholders intending to make any such submission nor the name of any director nominee proposed by one or more stockholders shall be mentioned in the notice. No reference of any kind to any proposal or nomination to be submitted by any stockholder pursuant to this Section shall be made in the proxy materials caused to be sent to stockholders by the Board of Directors. At all annual or special meetings the Chairman shall declare out of order any proposed amendment, any nomination, or any other stockholder proposal not presented in accordance with this Section. Every notice given by a stockholder or stockholders under this Section shall set forth: (a) the name and the business and residence addresses of the stockholder (or person authorized by such stockholder as the stockholder's voting representative) intending to submit the proposed amendment, nomination, or other matter; (b) with respect to such notice of intent to submit a nomination, information concerning the proposed nominee's business and residence addresses, age and eligibility to serve as a director; and (c) with respect to notice of an intent to propose a By-law amendment or some other corporate action, a description of the proposed amendment or other action. Notice of intent to submit a nomination shall be accompanied by the written consent of each nominee to serve as a director of the corporation if so elected. ARTICLE XXIV MEMBERS' PATRONAGE DIVIDENDS SECTION 1. A "membership" in the corporation within the meaning of the term "membership" as used in Section 1388(c)(2)(B) of the U.S. Internal Revenue Code of 1954, as amended, shall be deemed to be held by (a) each retail hardware dealer owning a share of Class A stock of the corporation and (b) each other dealer in hardware or related products which becomes an owner of a share of Class A stock of the corporation after having been expressly approved as an Ace Hardware dealer by the Board of Directors of the corporation. The term "retail hardware dealer" as used in clause (a) of the preceding sentence shall mean any person or firm purchasing merchandise from this corporation for the purpose of reselling such merchandise at retail. However, whenever the term "retail hardware dealer" is used in any of the subsequent Sections of this Article XXIV of the By-laws, such term shall be deemed to include all dealers holding memberships in this corporation except where the context in which such term appears is of such a nature that it is not practical for such term to be applied to "other dealers" as referred to in clause (b) of the first sentence of this Section. For purposes of this Article XXIV of the By-laws a "retail hardware store" shall be deemed to refer to a business location to which there is delivered for resale from such location at the retail level any merchandise purchased from this corporation. Each such retail hardware store owned or controlled, directly or indirectly, by the same person, partnership or corporation, shall be deemed to constitute only one (1) retail hardware dealer. An unincorporated person or partnership shall be deemed controlled by another person, partnership or corporation if fifty percent (50%) or more of the assets or profit shares therein are legally or equitably owned by such other person, partnership or corporation, or by the legal or equitable owner or owners of fifty percent (50%) or more of such other person, partnership or corporation's assets or profit shares (if unincorporated) or shares of capital stock (if incorporated). A corporation shall be deemed controlled by another person, partnership or corporation if fifty percent (50%) or more of the capital stock of said corporation is owned by such other person, partnership or corporation, or by the owner or owners of fifty percent (50%) or more of its capital stock (if incorporated) or fifty percent (50%) or more of its assets or profit shares (if unincorporated). SECTION 2. In accordance with the policy heretofore established by the corporation in the Amendment to its By-laws adding Article XXIV thereto by the resolution adopted by the Board of Directors on July 20, 1973, there shall be distributed on a patronage basis to such members (that is, dealers holding memberships, as hereinabove defined, in the corporation) in a manner taking into account the amount of business done by the corporation with each of them, all the net savings and overcharges effected by or resulting from the operations conducted and carried on by the corporation in connection with sales of merchandise made by the corporation after May 31, 1974, to such members which remain after paying all operating and administration expenses of the corporation and all interest on its indebtedness and after the setting aside by the Board of Directors of such reasonable reserves as they shall determine from time to time to be appropriate for the purpose of insuring the safety and welfare of the corporation and for the purpose of providing for the expectancy of any losses or contingencies. Said distributions shall be made no later than eight and one-half (8 1/2) months following the close of the year of the corporation during which the patronage occurred with respect to which each such distribution is made. In no event shall less than twenty percent (20%) of the total patronage distributions made each year to each member be distributed in cash. The remaining portion shall be distributed in cash or in written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code) in whatever proportions shall be determined each year by the Board of Directors. SECTION 3. Notwithstanding the foregoing, every such member on becoming such authorizes and directs that all net savings of every character effected by this corporation which are distributable to such member, to the extent of the excess thereof over the twenty percent (20%) minimum portion of such distributable amount required to be distributed in cash, may first be applied by the corporation to the payment of any indebtedness owed to the corporation by such member. Any such net savings which become distributable with respect to merchandise sold by this corporation for delivery to any retail hardware store owned or controlled, directly or indirectly, by the same person, partnership or corporation which so owns or controls one (1) or more other retail hardware stores may be so applied against any indebtedness owing with respect to merchandise sold by this corporation for delivery to any store which is part of any group deemed hereunder to constitute one (1) retail hardware dealer. The balance of any such net savings not so applied shall then be distributed as patronage dividends in the manner set forth in Article XXIV, Section 2, of these By-laws. SECTION 4. Each retail hardware dealer who applies for and is accepted as a member of this corporation shall, by his act of subscribing for a share of Class A stock of the corporation entitling such dealer to become such a member, consent that the amount of any patronage dividends with respect to his purchases of merchandise from this corporation occurring on or after June 1, 1974, which are made in written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code, as amended) and which are received by such member from this corporation will be taken into account by him at their stated dollar amounts in the manner provided in Section 1385(a) of said Code in the taxable year in which such notices of allocation are received by said member. The term "written notice of allocation" as used here shall be deemed to include, but not to be limited to, a letter of advice to a member which discloses to such member an amount which the corporation has elected to apply against indebtedness owed to the corporation in accordance with the first sentence of Article XXIV, Section 3, of these By-laws. SECTION 5. The aforesaid written notices of allocation shall be redeemable by the corporation in cash at the discretion of the Board of Directors and/or in accordance with the restated Certificate of Incorporation of the corporation and these By-laws. As security for the payment to the corporation of any indebtedness owing at any time to the corporation by any retail hardware dealer having membership in the corporation or by any retail hardware dealer who has subscribed for the 1 share of Class A stock of the corporation which is required to be owned in order to become a member of the corporation, the corporation shall have a first lien upon any written notice of allocation held by any such dealer (including all retail hardware stores treated as being part of a group constituting one "member" or "dealer"). The interest of each holder of any written notice of allocation in and to the same shall at all times be deemed to be offset by the amount of any indebtedness payable to the corporation by such holder. SECTION 6. Notwithstanding any other provision of these By-laws, and in accordance with the policy heretofore established by the corporation in the Amendment to its By-laws adding Section 6 to Article XXIV thereof by the resolution adopted by the Board of Directors on April 24, 1974, commencing with respect to purchases of merchandise made from the corporation after May 31, 1974 the corporation shall also make distributions on a patronage basis to those of its dealers who have franchise or membership agreements with the corporation and who have executed unrevoked and unexpired written consents of the type referred to in Section 1388 (c)(2) (A) of the U. S. Internal Revenue Code to include in their gross income all patronage dividends distributed to them in the form of written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code), even though such dealers do not then own any shares of any class of the capital stock of the corporation. Such patronage dividend distributions shall be made to such dealers in a manner taking into account the amount of business done by the corporation with each of them during the periods with respect to which said written consents are effective for each of them and shall consist of all the net savings and overcharges effected by or resulting from the business done by the corporation with such dealers which remain after paying all of the operating and administration expenses and interest on indebtedness of the corporation allocable to such business and after the setting aside by the Board of Directors of such reasonable reserves as they shall determine from time to time to be appropriate for the purpose of insuring the safety and welfare of the corporation and for the purpose of providing for the expectancy of any losses or contingencies. Each such written consent shall provide that it may be revoked at any time by the dealer, effective with respect to business done by the corporation with such dealer after the close of the taxable year of this corporation during which the revocation is filed with it. Each such written consent shall cease to be effective with respect to all business done by this corporation with any dealer who has furnished such a written consent to this corporation immediately upon said dealer's becoming an owner of a share of Class A stock of this corporation, as of which date such consent shall expire and such dealer shall be deemed to hold a "membership" in this corporation so that the provisions of this Article XXIV which are applicable to the distribution of patronage dividends to its members then become effective with respect to such dealer. Unless the same shall have been revoked or otherwise terminated, any such consent which has theretofore been executed by a dealer shall in any event be deemed to have expired and been rendered ineffective at the end of one hundred twenty (120) days following the later of (a) the date as of which an initial Registration Statement and Prospectus with respect to an offer to sell shares of the capital stock of the corporation (including shares of its Class A stock) to its dealers have become effective under the U.S. Securities Act of 1933, or (b) the date as of which such Prospectus can be used under the securities law of any state in which state registration of such stock is required. No such dealer shall be eligible to receive distributions of patronage dividends from the corporation with respect to business done by the corporation with such dealer after the expiration of such 120-day period unless such dealer either has become a member of the corporation by owning a share of its Class A stock (in which case such dealer shall thereupon be entitled to patronage dividends as provided for in Section 2 of this Article XXIV) or has executed a subscription agreement for the purchase of shares of capital stock of the corporation (including one (1) share of its Class A stock) which has been accepted by the corporation. There shall be incorporated in all such subscription agreements which include a subscription for a share of the Class A stock of the corporation a provision whereby the subscribing dealer consents to include in his gross income all patronage dividends distributed to such dealer in the form of written notices of allocation (as defined in Section 1388 of the U.S. Internal Revenue Code), and any dealer who has executed such a subscription agreement but who is not entitled to become the owner of a share of Class A stock of this corporation until he has completed payment of the purchase price for such share in accordance with such subscription agreement shall be entitled to receive patronage dividends pursuant to this Section 6 during the period for which he makes payments on account of such purchase price as required by the subscription agreement. Upon the completion of such payments and the issuance of such share of stock to him, such dealer shall then be entitled to receive patronage dividends pursuant to Section 2 of this Article XXIV. In no event shall less than twenty percent (20%) of the total patronage dividend distributions made each year to any dealer who is entitled to receive such distributions pursuant to this Section 6 be distributed in cash. Any amount in excess of said twenty percent (20%) minimum portion of the patronage dividends otherwise distributable to a dealer under this Section 6 may first be applied by the corporation to the payment of any indebtedness owed to the corporation by such dealer in the same manner as set forth in Section 3 of this Article XXIV. Any patronage dividends distributed in the form of written notices of allocation pursuant to this Section 6 shall be subject to all of the provisions with respect to distributions made in the form of written notices of allocation which are set forth in Section 5 of this Article XXIV. SECTION 7. Notwithstanding any of the foregoing provisions, the portion of any patronage dividends which would otherwise be distributable in cash under any provision of this Article XXIV to a retail hardware dealer with respect to a retail hardware store having a franchise or membership agreement with this corporation which has been cancelled or terminated at any time subsequent to the date of the annual meeting of stockholders to be held on the third Monday of May in 1980 by any means or for any reason whatsoever prior to the time of distribution of such patronage dividends shall be applied by the corporation to the payment of any indebtedness owed to the corporation by or on behalf of such store to the extent of such indebtedness instead of being distributed in cash, provided, however, that an amount equal to 20% of the total patronage dividends distributable for the applicable year to any such dealer with respect to such store shall nevertheless be paid in cash within 8 months following the close of such year if a timely written request for the payment of such amount in cash is submitted to the corporation by the dealer. However, in all events no less than 30% of the total annual patronage dividends distributable to a retail hardware dealer with respect to a retail business outlet pursuant to any provision of these By-laws shall be paid in cash if the retail business outlet is located in a jurisdiction as to which the 30% income tax withholding provisions of Section 1441 or Section 1442 of the U.S. Internal Revenue Code are applicable. SECTION 8. Effective with respect to business done by them with this corporation after December 31, 1982, each retail hardware dealer having membership in this corporation on that date and each retail hardware dealer who is a subscriber on that date or who becomes a subscriber after that date for the 1 share of Class A stock of this corporation which is required to be owned in order to become a member of this corporation shall, solely by such dealer's act of commencing or continuing to do business with this corporation after said date, be deemed to have authorized and directed that, notwithstanding any other provision of this Article XXIV of these By-laws, the distributions to be made on a patronage basis as provided for in Section 2 and Section 6 of this Article XXIV shall be made in a manner taking into account the quantity or value of business done with each dealer by each separate division of the corporation as shall be established on the books of the corporation with respect to its operations and/or the quantity or value of business done by the corporation or each such division of the corporation with each of its dealers with respect to each category of sales as shall be established on the books of the corporation. Each such dealer shall further thereby be deemed to have authorized and directed that, in any taxable year of this corporation during which it incurs a loss in connection with the operations of any such division or in connection with any such category of sales, (i) a proportionate share of such loss shall be deducted from the net earnings of the corporation on the business done during such year by each of its other divisions or with respect to each of its other sales categories with its dealers and (ii) the amount of patronage dividends which the corporation would otherwise be obligated to distribute to its dealers in connection with their purchases from each such other division of the corporation or in connection with each of the other sales categories established by the corporation (as the case may be) shall be reduced by such proportionate share of said loss. For the foregoing purposes the proportionate share of any such loss in connection with the operations of any such division of the corporation or in connection with any such category of sales which shall be deducted from the net earnings realized by it with respect to business done by each other division of the corporation or with respect to each of the other sales categories established by the corporation shall be determined by multiplying the total amount of such loss by a fraction having as its numerator the net earnings which would otherwise be distributable as patronage dividends in connection with the business done with its members by each such other division or each such other category of sales and having as its denominator the total of the net earnings which would otherwise be distributable as patronage dividends in connection with the business done with its members by all such divisions of this corporation and/or all such sales categories. ARTICLE XXV ESTABLISHMENT OF ACE HARDWARE CORPORATION DEALERSHIPS AND NON-MEMBER ACCOUNTS SECTION 1. Except as provided in Article XXV, Section 3 hereof, no person, partnership or corporation shall be authorized or permitted to use the name "Ace Hardware" or any trademark or trade name including the word "Ace" in conjunction with the sale of hardware or related merchandise, to display any identification sign or emblem indicating that said person, partnership or corporation is an authorized Ace Hardware dealer, or to purchase merchandise (including items carried under the Ace brand name) from Ace Hardware Corporation unless such person, partnership or corporation has first been accepted by Ace Hardware Corporation as a duly licensed or franchised dealer and has executed the membership or similar agreement then utilized by Ace Hardware Corporation for the establishment of such a dealer relationship and has otherwise complied with the usual requirements of Ace Hardware Corporation with respect thereto. Any such agreement may contain such reasonable provisions with respect to the termination thereof as shall be legally permitted by the laws of the United States of America and by the laws of the state or other jurisdiction in which the business of the dealer is located. SECTION 2. In order for any person, partnership or corporation to be accepted by Ace Hardware Corporation as a licensed dealer, such person, partnership or corporation shall also be required to purchase the necessary number of shares of capital stock of the corporation as required by Article Fourth (c) and Article Fourth (e) of the restated Certificate of Incorporation of Ace Hardware Corporation filed with the Secretary of State of Delaware on September 18, 1974. Accordingly, each such person, partnership or corporation shall, concurrently with the execution by such person, partnership or corporation of the Ace Dealer Membership Agreement then utilized by the corporation, also agree in writing to purchase one (1) share of Class A stock of the corporation at a price equal to the par value thereof of $1,000 per share, and forty (40) shares of Class C stock of the corporation at a price equal to the par value thereof of $100 per share or, when the store which is licensed under such Membership Agreement is not the first store owned or controlled by said person, partnership or corporation which has become accepted by Ace Hardware Corporation as a licensed dealer, to purchase fifty (50) shares of Class C stock at a price equal to the par value thereof of $100 per share. The terms of payment with respect to any shares of capital stock of the corporation purchased by any such person, partnership or corporation shall be as set forth in such resolution as shall be adopted from time to time by the Board of Directors of the corporation for the purpose of establishing such terms of payment. SECTION 3. In the case of a person, partnership or corporation operating one or more business outlets, whether located within or outside the United States of America, its territories and possessions, Ace Hardware Corporation may approve the sale of merchandise for delivery to such an outlet under the terms of a written agreement entered into with it by such party in lieu of the membership or similar agreement utilized with respect to business outlets by parties who are accepted by Ace Hardware Corporation as member dealers. No party approved as an International Retail Merchant or other non-member retail account shall be entitled to purchase or own any shares of the capital stock of Ace Hardware Corporation, nor shall any patronage dividends be paid on account of any purchases made from Ace Hardware Corporation by such party. Such purchases of merchandise shall be made in accordance with the terms of the applicable written agreement and such other terms as may be imposed by Ace Hardware Corporation from time to time with regard to particular accounts. Only with the express written consent of an executive officer whom its President has vested with authority to grant such consents, can these purchases include items carried under "Ace" or "Ace Hardware" brand names or under other private label names owned by, or licensed to, Ace Hardware Corporation. No such party shall have authority or be permitted to use names "Ace" or "Ace Hardware" or any other trade name, trademark or service mark owned or register (sic) by, or licensed to, Ace Hardware Corporation in the United States of America or elsewhere (including any translations of any of said names or marks) unless the applicable written agreement specifically grants the right to such use. All of the terms and conditions contained in the respective written agreements imposed upon such accounts (including, but not limited to, those dealing with territorial rights, duration, and service, handling, or license fees or charges, as well as any terms which vary among particular accounts) shall be established solely by the executive officer or officers of Ace Hardware Corporation vested with such authority by its President, provided, however, that no such party shall be granted any exclusive area or territorial rights without the prior approval of the Board of Directors or a committee of the Board to which the Board has delegated the authority to approve the granting of such rights. In establishing such terms, consideration shall be given to the relevant business circumstances, including, but not limited to, specific legal requirements and various costs associated with serving an account in a particular location. SECTION 4. Each person, partnership or corporation accepted by Ace Hardware Corporation as a member dealer or non-member account shall, by virtue of such acceptance, be deemed to have agreed to assume liability for and indemnify Ace Hardware Corporation and hold it harmless from and against any and all claims which may be asserted against it and from any losses sustained by it (including attorneys' fees and expenses incurred by it in defending such claims or in attempting to avoid or mitigate such losses) in connection with or resulting from billings by suppliers of merchandise purchased by or at the request of such dealer or account from or through Ace Hardware Corporation in cases where such merchandise is not to be supplied from the corporation's own inventories. ARTICLE XXVI BY-LAWS TO CONSTITUTE BINDING CONTRACT SECTION 1. These By-laws, as amended from time to time, shall constitute a binding legal contract between Ace Hardware Corporation and its stockholders, and shall be legally binding on all stockholders of Ace Hardware Corporation and the successors, heirs, executors, administrators, assigns and personal representatives of such stockholders. SECTION 2. The purchase of shares of any class of stock of this corporation and the issuance thereof to any stockholder shall constitute and be equivalent to a consent of the part of the stockholder to whom said shares are issued to be bound by these By- laws, as amended from time to time, and an agreement on such stockholder's part to be bound thereby. SECTION 3. The invalidity of any portion of these By-laws, as amended from time to time, shall in no way affect any other portion of the By-laws which can be given effect without such invalidated part, and the remaining portions of the By-laws shall continue to constitute a legally binding contract between this corporation and its stockholders. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following is an estimate of expenses in connection with the issuance and distribution of the capital stock being offered: Printing of Registration Statement and Prospectus $10,000 Accounting Fees and Expenses 12,000 Legal Fees 2,000 Fees and Expenses under "Blue Sky" Laws of Various States 3,500 Miscellaneous Expenses 500 ------- Total $28,000 ======= Item 15. Indemnification of Directors and Officers. In accordance with the authority granted by Section 145 of the General Corporation Law of the State of Delaware, under which the Registrant is incorporated, Article XV of the Registrant's By-Laws (which Article is included in the copy of the By-laws designated as Appendix A to the Prospectus constituting a part of this Registration Statement and is incorporated herein by reference) provides for indemnification by the Registrant of its directors, officers, employees or agents. The principal provisions of said By-law obligate the Registrant to indemnify any such person against expenses (including attorneys' fees) actually and reasonably incurred by any such person in connection with his successful defense of any action, suit or proceeding (whether civil, criminal, administrative or investigative) instituted against him by reason of the fact that he is or was an officer, director, employee or agent of the Registrant and further authorize the Registrant, in any situation where the Board of Directors of the Registrant, by a majority vote of disinterested directors, determines that any such person acted in good faith and in a manner he reasonably believed to be in the best interest of the Registrant, to indemnify him for the amount of any judgment or fine or settlement payment incurred by him, together with his expenses and attorneys' fees, in connection with any such action, suit or proceeding. Richard Kaup, the late Virgil Poss, and Antone Salel, who constitute the Trustees of the Ace Dealers' Perpetuation Fund prior to its termination on November 30, 1976 (as of which date all of the assets of said Fund were assigned and transferred to the Registrant and the Registrant then assumed and became responsible for any and all obligations and liabilities, contingent or otherwise, of the Trustees of said Fund), would also be afforded indemnification by the Registrant with respect to any of their activities while acting as such Trustees under the following terms included in a resolution adopted by unanimous vote of the Board of Directors of the Registrant on April 24, 1974: "... that the corporation indemnify and hold harmless each of said Trustees with respect to any claims made against any of them and any expenses thereby incurred by any of them in connection with any of their activities as such Trustees". Insofar as indemnification for liabilities arising under the federal Securities Act of 1933 may be permitted to directors, officers, or persons controlling the Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant also maintains a directors and officers liability and corporation indemnification insurance policy issued by Illinois National Insurance Company under which there are to be paid on behalf of the Registrant all amounts for which the Registrant grants indemnification to a director or officer of the Registrant with respect to any claim(s) made against him which arise out of a "Wrongful Act" (as defined in the policy) committed by such director or officer in his capacity as such a director or officer and which he has become legally obligated to pay. Said policy also insures each director or officer of the Registrant against loss arising from any claim(s) not indemnified by the Registrant which may be made against him by reason of any such "Wrongful Act" committed by him. The limits of liability under said policy are $10,000,000 for each loss and $10,000,000 for each policy year. The Registrant is subject to a $250,000 self-insured retention for a loss in which the Registrant grants indemnification to the directors and officers. Each director and officer covered by the policy has first dollar coverage with no deductible for each loss in which the Registrant does not grant indemnification. Coverage is not provided for claims under Section 16(b) of the federal Securities Exchange Act of 1934, which could not arise in any event due to the ownership limitations and restrictions on transfers which are applicable to the Registrant's stock. Among the other classes of claims which are excluded from coverage under the policy are claims based upon alleged violations of the federal Employee Retirement Income Security Act of 1974. Item 16. Exhibits (a) Exhibits: Exhibit No. -------------- 1 No exhibit. 2 No exhibit. 3 Not applicable. 4-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. 4-B By-laws of the Registrant as amended through September 19, 1995 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement). 4-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. 4-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. 4-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. 4-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. 4-G Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated June 16, 1989 filed as Exhibit 4-G to the Post Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-27790) on March 20, 1990 and incorporated herein by reference. 4-H Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated June 3, 1996. 4-I 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-J 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-K 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-L 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-M 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 March 23, 1994 and incorporated herein by reference. 4-N Copy of plan for the distribution of patronage dividends with respect to purchases of merchandise made from the Registrant on and after January 1, 1995, adopted by the Board of Directors of the Registrant on July 26, 1994 (the text of which plan is set forth under the heading "The Company's Business," subheading "Forms of Patronage Dividend Distributions" in the Prospectus constituting a part of this Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement). 5 Opinion of David W. League, Vice President, General Counsel of the Registrant, as to legality of securities being registered. 6 No exhibit. 7 Opinion of Messrs. Gatenbey, Law & League filed as Exhibit 7 to the Registrant's Form S-1 Registration Statement (Registration No. 2-82460) on March 16, 1983 and incorporated herein by reference. 8 Exhibit 5 addresses tax matters as required in Exhibit 8; the opinions of David W. League, Vice President, General Counsel and Secretary of the Registrant, as to certain tax matters are set forth in statements attributed to him under the subheading "Federal Income Tax Status of Class A and Class C Shares" and subheading "Federal Income Tax Treatment of Patronage Dividends" in the Prospectus constituting a part of the Post-Effective Amendment No. 1 to the Registrant's Form S- 2 Registration Statement. 9 Not applicable. 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 March 23, 1994 and incorporated herein by reference. 10-B Copy of resolutions amending the 1990 Incentive Plans for Executives and establishing the Executive Supplement Benefit Plans of the Registrant adopted by its Board of Directors on December 11, 1990, 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 March 23, 1994 and incorporated herein by reference. 10-F Copy of Employment Agreement dated October 4, 1994 between Ace Hardware Corporation and Paul 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 (Registration No. 33-58191) on 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 11, 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 RegistrantOs Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1992 and incorporated herein by reference. 10-O Copy of standard form of Ace Hardware International Retail Merchant Agreement adopted in 1990, filed as Exhibit 10-A-q to Post-Effective Amendment No. 2 to the Registrant's Form S- 2 Registration Statement (Registration No. 33-27790) on March 20, 1991 and incorporated herein by reference. 10-P Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P to 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 filed as Exhibit 10-Q to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-R Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued September 22, 1993 with a maturity date of June 22, 2008, and $20,000,000 Private Shelf Facility, pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance Company of America dated as of September 22, 1993 filed as Exhibit 10-R to Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on 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 the Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Regis-tration 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 filed as Exhibit 10-A-t to the 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-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 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-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 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 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 Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on March 23, 1994 and incorporated herein by reference. 10-Y Copy of Lease dated September 22, 1994 for bulk merchandise redistribution center of 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 (Registration No. 33- 58191) 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 11, 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-6 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-a-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 11, 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 11, 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 11, 1996 and incorporated herein by reference. 10-a-10Copy 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 11, 1996 and incorporated herein by reference. 10-a-11Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July 19, 1995, filed as Exhibit 10- a-18 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference. 10-a-12Copy of current standard form License Agreement for International Retail Merchants adopted in 1996. 10-a-13Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in Wilton, New York. 10-a-14Copy 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. 11 No exhibit. 12 No exhibit. 13 Not applicable. 14 Not applicable. 15 No exhibit. 16 Not applicable. 17 Not applicable. 18 Not applicable. 19 Not applicable. 20 Not applicable. 21 Not applicable. 22 Not applicable. 23 (a) Consent of KPMG Peat Marwick LLP, dated March 10, 1997. (b) Consent of Counsel, Legal Opinions-Exhibit 5 and Exhibit 7. 24 Powers of Attorney. 25 No exhibit. 26 No exhibit. 27 Financial Data Schedule. 28 Not applicable. Item 17. Undertakings. The undersigned Registrant hereby undertakes: (a) Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section; (b) To file with the Securities and Exchange Commission, during any period in which offers or sales are being made pursuant to the registration, a post-effective amendment to the Registration Statement: (i) to include any Prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii) to reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement, including (but not limited to) any addition or deletion of a managing underwriter. (c) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment to the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (d) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Post- Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Oak Brook, State of Illinois, on the day of March 12, 1997. ACE HARDWARE CORPORATION By RICHARD E. LASKOWSKI (Richard E. Laskowski, Chairman of the Board and Director) Pursuant to the requirement of the Securities Exchange Act of 1933, this registration statement has been signed below by the following persons 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 Chief March 12, 1997 (David F. Hodnik) Executive Officer Rita D. Kahle Vice President-Finance March 12, 1997 (Rita D. Kahle) (Principal Financial and Accounting Officer) Jennifer C. Anderson, Lawrence R. Bowman, Directors 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 INDEX TO EXHIBITS FILED TO THE POST-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT ON FORM S-2 OF ACE HARDWARE CORPORATION Exhibit Number Exhibit ------ ------- 4-B By-laws of the Registrant as amended through September 19, 1995 (included as Appendix A to the Prospectus constituting a part of this Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement). 4-H Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated June 3, 1996. 4-N 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, (the text of which plan is set forth under the heading "The Company's Business," subheading "Forms of Patronage Dividend Distributions" in the Prospectus constituting a part of this Post-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement). 5 Opinion of David W. League, Vice President and General Counsel of the Registrant as to legality of securities being registered. 10-a-12Copy of current standard form License Agreement for International Retail Merchants adopted in 1996. 10-a-13Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in Wilton, NY. 10-a-14Copy 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. 23 (a) Consent of KPMG Peat Marwick LLP, dated March 10, 1997. (b) Consent of Counsel, Legal Opinions-Exhibit 5 and Exhibit 7. 24 Powers of Attorney. 27 Financial Data Schedule. The various exhibits incorporated by reference are listed in Item 16 of this Post-Effective Amendment No. 2 to the Form S-2 Registration Statement of Ace Hardware Corporation. EX-4 2 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF ACE HARDWARE CORPORATION The undersigned corporation, Ace Hardware Corporation, for the purpose of amending its restated Certificate of Incorporation pursuant to the provisions of Section 242 of the General Corporation Law of Delaware, hereby executes the following Certificate of Amendment, under which Article FOURTH (a) of the restated Certificate of Incorporation of this corporation is hereby amended to read as follows: "FOURTH: (a) The total number of shares of stock which this corporation is authorized to issue is 4,016,500 shares, of which 10,000 shares, of the par value of $1,000.00 each, amounting to $10,000,000.00, are Class `A' voting stock; of which 6,500 shares, of the par value of $1,000.00 each, amounting to $6,500,000.00, are Class `B' nonvoting stock; and of which 4,000,000 shares, of the par value of $100.00 each, amounting to $400,000,000.00 are Class `C' nonvoting stock." The undersigned corporation hereby certifies that the amendment set forth above was duly proposed by a resolution adopted by the Board of Directors of the undersigned declaring its advisability and that, in accordance with Section 242 of the General Corporation Law of Delaware, said amendment was voted upon at the annual meeting of the stockholders of the undersigned held on June 3, 1996, that voting upon said amendment was conducted at said meeting by the holders of shares of the corporation's Class "A" stock and Class "C" stock, and further certifies that said amendment was duly adopted upon receiving the affirmative vote of a majority of the total of the outstanding shares of Class "A" stock and Class "C" stock which were entitled to vote at said meeting and by the separate affirmative vote of a majority of the outstanding shares of Class "C" stock which were entitled to vote at said meeting. IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Amendment to be executed in its name by its President and its corporate seal to be hereunto affixed, attested by its Secretary, this 3rd day of June, 1996. ACE HARDWARE CORPORATION Attest: By: DAVID W. LEAGUE By: DAVID F. HODNIK Secretary David F. Hodnik, President EX-5 3 GENERAL COUNSEL OPINION LETTER March 12, 1997 To the Board of Directors Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521 Re: Total Shares Offered By Prospectus 1,558 Class A 62,509 Class C Gentlemen: This opinion relates to the legality of the 1,558 shares of Class A voting stock (par value $1,000 per share) and 62,509 shares of Class C nonvoting stock (par value $100 per share) of Ace Hardware Corporation (the "Company"), a Delaware corporation, previously registered with the Securities and Exchange Commission. Of the foregoing shares, 1,500 unsold shares of Class A stock and 40,000 of Class C stock were previously registered under Registration Statement No. 33-58191, and 58 unsold shares of Class A stock and 22,509 shares of Class C stock were previously registered under Registration Statement No. 33-46449. These shares, pursuant to Rule 429 of Regulation C of the Securities Act of 1933, are being offered by the Prospectus filed as a part of the Post-Effective Amendment No. 2 to Registration Statement No. 33-58191, with respect to which said opinion is furnished. As General Counsel in the Legal Department of the Company since January 1, 1989 and as a partner in the firm of Gatenbey, Law & League which acted as general counsel to the Company and its Illinois predecessor corporation for many years prior to that date, I have examined the Company's restated Certificate of Incorporation (as amended to date), and its corporate proceedings, and have made such other investigations as I have deemed necessary or appropriate for the purpose of this opinion. VALIDITY OF SHARES OF STOCK Based upon the foregoing, I am of the opinion that: (1) The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware and is also duly qualified to do business as a foreign corporation in, and is in good standing under the laws of, the States of Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Kentucky, Maryland, Mississippi, Missouri, Nebraska, New York, North Carolina, Ohio, Oregon, Texas, Washington and Wisconsin. (2) The total authorized capital stock of the Company consists of 10,000 shares of Class A Voting Stock (par value $1,000 per share), 6,500 shares of Class B Nonvoting Stock (par value $1,000 per share) and 4,000,000 shares of Class C Nonvoting Stock (par value $100 per share). (3) All of the shares of capital stock of the Company which are to be offered by the Prospectus filed as a part of the aforesaid Post-Effective Amendment No. 2 to Registration Statement No. 33-58191 with respect to which this opinion is furnished (including any shares which may have heretofore been issued but are not presently outstanding), will, upon issuance in accordance with the terms set forth in said Prospectus, constitute legally and validly issued, fully paid and non-assessable shares. This opinion also relates to the preference in excess of par value to which shares of Class "B" stock (par value $1,000 per share) of Ace Hardware Corporation (the "Company"), a Delaware corporation, are entitled in the event of the involuntary liquidation of the Company. The restated Certificate of Incorporation authorizes the Company to issue 6,500 shares of Class "B" stock, of which 2.896 shares are presently issued and outstanding. I have examined the restated Certificate of Incorporation and the By- laws of the Company, and note that the matter of distribution of the net assets of the Company in the event of a involuntary liquidation is provided for in Article Fourth (j) of the restated Certificate of Incorporation. It is stated therein that, in the event of a liquidation (voluntary or involuntary), there shall be added together the total par value of all of the issued and outstanding shares of Class "A" stock, the total purchase or redemption price of all of the shares of Class "A" stock, the total purchase or redemption price of all of the issued and outstanding shares of Class "B" stock as last determined by the Board of Directors, and the total purchase price of all of the issued and outstanding shares of Class "C" stock as last determined by the Board of Directors. It is further provided that each share of Class "B" stock shall share in the distribution of the net assets in the proportion which the purchase price or redemption price thereof last determined by the Board of Directors bears to said total dollar amount. Since Article Fourth (g) and Article Fourth (h) of the restated Certificate of Incorporation of the Company provide that the purchase or redemption price to be paid by the Company for shares of its Class "B" stock must at all times be equal of 20 times the per share purchase price last established by the Board of Directors with respect to purchases by the Company of its Class "C" stock and that the purchase or redemption price to be paid by the Company for its Class "B" stock shall in no event be less than twice the par value thereof, the shares of Class "B" stock could have a preference in excess of par value in the event of involuntary liquidation. PREFERENCE OF CLASS B STOCK IN VOLUNTARY LIQUIDATION In my opinion the provisions of the restated Certificate of Incorporation providing for such preference with respect to the shares of Class "B" stock of the Company are legally permitted and have been legally adopted in accordance with Section 151(d) of the General Corporation Law of Delaware. It is my further opinion that the aforementioned preference of the Class "B" stock in the event of involuntary liquidation of the Company does not require, and does not have the effect of, placing any restrictions upon surplus by reason of the potential preference in excess of par value attached to the Class "B" shares. In view of the fact that Article Fourth (f) of the restated Certificate of Incorporation expressly prohibits the Company from declaring dividends on any of the shares of any class of stock of the Company, it is also my opinion that the holders of any shares of the Company would have any remedies before or after payment of any dividend which would reduce surplus to an amount less than the amount of such excess. TAX ISSUES Statements made under subheadings "Federal Income Tax Status of Class A and Class C Shares," pp. 8-9 and "Federal Income Tax Treatment of Patronage Dividends," pp. 26-28 of the Prospectus that is part of the aforesaid Post-Effective Amendment No. 2 to Registration Statement No. 33-58191 also represent my opinion concerning said matters. CONSENT I understand that this opinion is to be used in connection with the aforesaid Post-Effective Amendment No. 2 to Registration Statement No. 33-58191, and I consent to the filing of this opinion with the Registration Statement and to the reference to me in the Prospectus under the heading "Opinion of Experts". 10-K CONSENT I further consent to "Federal Income Tax Treatment of Patronage Dividends," pages 13-14 of the 10-K which is incorporated by reference into the Company's S-2 Registration Statement and which also represents my opinion concerning said matters. Sincerely, DAVID W. LEAGUE David W. League Vice President-General Counsel Ace Hardware Corporation EX-10 4 EXHIBIT 10-A-12 ACE HARDWARE CORPORATION LICENSE AGREEMENT FOR _______________________ TABLE OF CONTENTS PARAGRAPH PAGE I. APPOINTMENT 2 II. FEES 2 III. TERM & RENEWAL 3 IV. PROPRIETARY MARKS 4 V. CONFIDENTIAL INFORMATION 6 VI. COMPANY'S OBLIGATIONS 7 VII. LICENSEE'S OBLIGATIONS 8 VIII. CONFIDENTIAL OPERATIONS MANUAL 15 IX. COVENANTS NOT TO COMPETE 15 X. DEFAULT AND TERMINATION 16 XI. EXPIRATION OR TERMINATION 18 XII. TRANSFERABILITY OF INTEREST 20 XIII. NO AGENCY 21 XIV. MISCELLANEOUS 21 EXHIBITS A. ACE STORE LOCATIONS ACE HARDWARE CORPORATION LICENSE AGREEMENT This License Agreement ("Agreement"), by and between ACE HARDWARE CORPORATION, a Delaware corporation having its principal place of business at 2200 Kensington Court, Oak Brook, Illinois, 60521 ("Company") and ____________________________________, a corporation incorporated under the laws of having its general offices at ____________________________________________________________ ("Licensee") . WITNESSETH: 1. Company is in the business of selling home improvement products, tools, hardware, paint and related merchandise and products, including private labelled merchandise containing the name "ACE" or "ACE Hardware" (collectively referred to as the "Merchandise") at wholesale; and 2. Company is also in the business of granting the rights to operate businesses selling Merchandise from retail locations ("ACE Stores") under the trade names and service marks "ACE", "ACE Hardware", and "ACE Home Center" and associated logos and commercial symbols, and such other trade names, trademarks and service marks ("ACE Marks") as are now designated (and may hereinafter be designated in writing by Company) as an integral part of the ACE Stores; and 3. Licensee desires to establish and operate ACE Stores outside the United States of America in the country of ___________________ (the "Territory") as a licensee of Company and to sublicense others the right to establish and operate ACE Stores in the Territory, using procedures and standards developed and prescribed by Company; and 4. Company expressly disclaims the making of, and Licensee acknowledges that it has not received nor relied upon, any warranty or guaranty, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement. NOW, THEREFORE, the parties, in consideration of the undertakings and commitments of each party to the other set forth in this Agreement, agree as follows: PARAGRAPH I APPOINTMENT 1.01. Subject to the terms and conditions herein and during the term of this Agreement, Company grants to Licensee the exclusive right throughout the Territory to use the ACE Marks and Licensee undertakes the obligation to establish and operate ACE Stores solely in compliance with operational procedures and standards prescribed by Company from time to time. Company will not, so long as this Agreement is in force and effect and Licensee is not in default under any of the material terms hereof, license another to operate, or itself operate, any other ACE Stores within the Territory. 1.02 Company further grants to Licensee, upon and subject to the terms and conditions set forth in Section 7.03 below, the right to sublicense others to establish and operate ACE Stores in the Territory solely in compliance with operational procedures and standards prescribed by Company from time to time, and to supervise the operations of such sublicensed ACE Stores. 1.03 Company further grants to Licensee, upon and subject to the terms and conditions set forth herein, the right to purchase Merchandise from Company for resale at the ACE Stores in the Territory. 1.04 In connection with the above rights, Company grants to Licensee the exclusive right and license to use certain ACE Marks , as well as exclusive access to Company's proprietary systems, operations manuals ("Operations Manuals"), standard forms and formats, and operational knowledge within the Territory. PARAGRAPH II FEES 2.01. Licensee shall pay to Company a Royalty Fee (" Royalty Fee") in an amount equal to ____ percent (__%) of the Gross Retail Revenues generated from the sale of home improvement products, tools, hardware, paint and related merchandise and products, from whatever source, provided to customers of the ACE Stores operated by Licensee and its Sublicensees in the Territory ("Gross Retail Revenues"). For the purposes of this paragraph, the term "Gross Retail Revenues" shall exclude all sales and value added taxes actually collected by Licensee and its Sublicensees from customers and paid to any government authority in the Territory, which shall be the sole responsibility of Licensee and its Sublicensees, and any customer refund and credits. All Royalty Fees shall be due and payable to Company, in United States Dollars, thirty (30) days after the end of each calendar quarter for the calendar quarter just ended. In the event that payment of the above fees in United States Dollars is not possible by application of law, Licensee shall be entitled to make payment in ______________ currency (______) at the currency exchange rate reported in the Wall Street Journal, on the date the payment is transmitted, provided, however, that if the payment is transmitted after the date on which payment is due, the currency exchange rate used shall be the rate as of the day payment is transmitted or the date payment was due, whichever rate produces the larger amount in United States Dollars. 2.03. Licensee shall also pay to Company a sum equal to ________________ percent (___%) of any sublicense fee or similar fee charged by Licensee to its Sublicensees hereunder. 2.04. In connection with the purchase of Merchandise for resale from ACE Stores in the Territory, Licensee agrees to pay Company as follows: a. for Merchandise purchased from Company's warehouses, the cost of such merchandise, plus a _________ percent (__%) handling charge; b. for Merchandise purchased directly from Company's vendors in the United States and billed through Company, the cost of such merchandise, plus a _____ percent (__%) handling charge; c. for Merchandise purchased through Company's bulletin program (pooled merchandise), the cost of such merchandise, plus a ____ percent (__%) handling charge; and d. for Merchandise purchased directly from vendor's outside the United Sates and billed through Company, the cost of such merchandise plus a handling charge to be determined on a per purchase basis. It is mutually understood that the Company's handling charge may be changed by Company upon sixty (60) days prior written notice to Licensee. 2.05. Licensee shall pay all amounts shown as currently due on Company's billing statements for purchases of merchandise, supplies and services made by Licensee with such promptness as shall enable Company to receive payment no later than the tenth (10th) day following the date of the statement (it being understood that all invoices for merchandise purchased on extended payment terms become currently due when other items billed are not paid when due), and pay a service charge, currently .77% per bi-weekly billing statement on any past due balance in such amount as Company may from time to time impose on its dealers generally. All amounts becoming payable by Licensee pursuant to Company's billing statements shall be payable in United States currency. PARAGRAPH III TERM & RENEWAL 3.01. This Agreement shall be effective and binding from the date of its execution for an initial term equal to __________ (__) years from the date of this Agreement (the "Initial Term"). 3.02. Licensee shall have the right to renew this license at the expiration of the initial term of the license for additional terms of ____ (__) years each ("Renewal Terms"), provided that all of the following conditions have been fulfilled: a. Licensee has, during the entire term of this Agreement, complied with all the provisions hereof; b. Licensee has given Company written notice of its intent to renew the license not less than six (6) months nor more than twelve (12) months prior to expiration of the then current term; c. Licensee has satisfied all monetary obligations owed by it to Company and has paid these obligations in a timely manner as required herein throughout the term of this Agreement; d. Licensee has satisfied the performance requirements for number of square feet of retail space and dollar volume of merchandise purchases established in Paragraph 7.05 of this Agreement; and e. Prior to each Renewal Term, if any, the parties shall agree in writing upon the amount of the Royalty Fee applicable during such Renewal Term, provided, however, that in no event will the Royalty Fee be less than the Royalty Fee in effect during the Initial Term, nor shall the Royalty Fee during any Renewal Term increase by more than _____ percent (__%) from the prior term. PARAGRAPH IV PROPRIETARY MARKS 4.01. Company grants Licensee exclusive license to use the ACE Marks in connection with the retail hardware services offered and performed by Licensee at the location(s) within the Territory, and in connection with the Merchandise purchased from Company for resale from the said location(s). Licensee shall display an exterior store identification sign that shall comply with the identity standards and requirements set forth in the Operations Manual or the ACE Identity Standards Manual. 4.02. Company does not guarantee, warrant or offer any patent or trademark protection to Licensee on any of the products purchased by Licensee from Company, and Company shall not be obligated or liable in any way to indemnify Licensee for any actual or alleged violations of patent or patent rights, or trademark, service mark, trade name or other intellectual property rights arising from or in connection with the sale or use of any products, programs or services purchased from Company by Licensee or the exercise of any rights granted hereunder. 4.03. Licensee agrees to use the ACE Marks only in the form, manner, and logotype previously approved by Company in writing and to comply with all guidelines and instructions from time to time issued by Company with respect thereto. All use of the ACE Marks shall clearly and conspicuously disclose that the ACE Marks are owned by, or used under license from Company. 4.04. All services provided in connection with which the ACE Marks are used shall be of high quality as determined by Company, and otherwise in accordance with such specifications as Company may, from time to time, prescribe. 4.05. In no event shall the license herein granted be construed as authorizing Licensee to use any marks, trade names, slogans or logos of Company other than as specifically licensed hereunder. Licensee agrees that it shall not place or cause to be placed the names "ACE" or "ACE Hardware" on any merchandise without the Company's prior written consent. 4.06. Licensee agrees not to adapt or vary the ACE Marks or create or use any trademark, service marks, trade names, symbols or logos that are confusingly similar to those owned by Company, whether or not licensed hereunder. Licensee also agrees to at no time use the ACE Marks in association or conjunction with any trade name, trademark or service mark owned or registered by a competitor of Company. 4.07. Company expressly disclaims any and all liability to Licensee or to any third party with respect to any actual or alleged invalidity of the Mark or in connection with Licensee's use of the ACE Marks, or the use of the services furnished by Licensee in connection therewith. 4.08. Licensee acknowledges Company's ownership of the ACE Marks, and agrees that it will not do or permit any act to be done which may impair such ownership. Licensee agrees that all use of the ACE Marks by it shall inure to the benefit of, and be on behalf of, Company. Licensee agrees that it will never in any manner represent that it has an ownership interest in the ACE Marks, or contest the ownership of the ACE Marks by Company, or attack the validity of the license herein granted. Licensee agrees to execute, upon request, such documents as Company may deem necessary or desirable to acknowledge Company's ownership of the ACE Marks, or to register, retain, enforce or defend the ACE Marks. 4.09. Licensee agrees to notify Company of any unauthorized use of the ACE Marks by others, as promptly as such use may come to Licensee's attention. Not later than 60 days after receipt of notification from Licensee, Company shall take all practicable action deemed necessary to defend the ACE Marks in the Territory. 4.10. Licensee agrees at no time to adopt or use, or authorize, permit or condone the use by any other person or firm, of any name, word or mark which is similar to or likely to be confused with, any trade name, trademark or service mark belonging to or registered by Company, whether or not licensed hereunder, (it being understood and agreed that all variations or adaptations of any trademarks or service marks owned or registered by Company shall be the exclusive property of Company and that Company shall have the exclusive right to register the same and to license the use thereof). 4.11. In order to preserve the validity and integrity of the ACE Marks and copyrighted materials licensed herein and to assure that Licensee is properly employing the same in the operation of its ACE Stores, Company or its agents shall have the right of entry and inspection of Licensee's premises upon 10 days prior notice to Licensee and, additionally, shall have the right to observe the manner in which Licensee is conducting its operations and activities, to confer with Licensee's customers and employees and to inspect merchandise, products, reports, forms and documents and related data for test of content and evaluation purposes to make certain that the operations and activities are satisfactory and meet the Company's Ace 2000 and other performance standards. 4.12. Licensee shall not use the Marks in any advertising or any other form of promotion without appropriate registration symbols, or other designation of ownership and rights required by law in the country in which the ACE Stores is operated. PARAGRAPH V CONFIDENTIAL INFORMATION 5.01. Licensee acknowledges that its entire knowledge of the operation of an ACE Stores including the knowledge or know-how regarding the specifications, standards and operating procedures of the Company services, is derived from information disclosed to Licensee by Company and that certain of such information is proprietary, confidential and a trade secret of Company. Licensee shall maintain the absolute confidentiality of all such proprietary information during and after the term of this Agreement and shall not use any such information in any other business or in any manner not specifically authorized or approved in writing by Company. 5.02. Licensee agrees to keep in strict confidence all Operations Manuals, warehouse checklists, microfiche films, videograms, bulletins, catalogs, price lists, order forms and other documents and information furnished by Company with respect to the merchandise, programs and services which are available from Company, and at no time to divulge or display any of the foregoing, other than in connection with Licensee's transactions with Company or for the purpose of promoting Licensee's business. Licensee agrees to comply with all policy statements and guidelines communicated from time to time by Company with respect to any confidential information belonging to Company and at no time to authorize, permit or condone the use of any of the foregoing by any other person or firm. 5.03. Licensee shall divulge such confidential information only to the extent and only to such of its employees as must have access to it in order to operate the ACE Stores. Any and all information, knowledge and know-how including, but not limited to, specifications and standards concerning the operation of the ACE Stores and other data which Company designates as confidential shall be deemed confidential for purposes of this Agreement, except information which Licensee can demonstrate lawfully came to its attention prior to disclosure thereof by Company; or which, at the time of disclosure by Company to Licensee, had lawfully become a part of the public domain, through publication or communication by others; which, after disclosure to Licensee by Company, lawfully becomes a part of the public domain through publication or communication by others, or which Licensee is required to be furnished to any government or public authority pursuant to any law or judicial order applicable to Licensee. 5.04. Licensee acknowledges and agrees that Company owns or is the licensee of the owner of the Copyrighted Works and shall further create, acquire or obtain licenses for certain copyrights in various works of authorship used in connection with the operation of the ACE Stores including, but not limited to, all categories of works eligible for protection under the United States copyright law, all of which shall be deemed to be Copyrighted Works under this Agreement. Such Copyrighted Works include, but are not limited to, the Manual, advertisements, promotional materials, posters and signs, and may include all or part of the Marks, the ACE International Computer System (as defined in Paragraph 6.14. of this Agreement), trade dress and other portions of the System. Company intends that all works of authorship related to the operation of ACE Stores which are created by Company in the future shall be owned by Company. 5.05. If Licensee develops any new program, project, work of art or other material in the course of operating the ACE Stores which incorporates the ACE marks or the ACE name and Company approves the use and sale of this service in the ACE Stores, this new program, project, work of art or other material shall automatically become the property of Company as though Company had developed the program, project, work of art or other material itself ("Work for Hire") . PARAGRAPH VI COMPANY'S OBLIGATIONS Company agrees, as part of the Licensee Fee, to provide to Licensee the following: 6.01. Numerous proprietary Operations Manuals covering the functional areas within the ACE Hardware business system. 6.02. The use of Company's pre-developed formats for promotional materials, annual surveys and other operations functions. 6.03. The use of Company's extensive promotional and educational videotapes and new videotape titles as produced and developed. 6.04. The use of Company's consultants in connection with the operation of distribution centers and retail stores. 6.05. Assistance in developing a business plan detailing how to develop ACE Stores in the Territory including analysis of human resources needs, marketing strategies, cash flow requirements, and other operational needs. 6.06. Assistance in developing a marketing plan discussing the actual tactics that should be used in lead generation and follow-up for licensees. 6.07. Periodic on-going consultation and follow-up to ensure that Company's systems are being properly implemented. 6.08. On-going research and development into new suppliers, product lines, merchandising techniques and operational techniques, from a worldwide perspective. 6.09. Access to Company's existing and on-going advertising and promotional support. 6.10. Exclusive access to Company's on-going private label product lines in the Territory. 6.11. Exclusive access to Company's proprietary systems, standard forms and formats, and operational knowledge for use within the Territory. 6.12. Use of Company's numerous proprietary software systems, including customized systems for inventory control and ordering ("ACE International Computer System"),expected to be available the fourth quarter of 1996, at a cost to be determined by Company. All hardware and software adaptations compatible with and necessary to operate the ACE International Computer System shall be provided by Licensee at its expense. 6.13. An annual review of operations and a written report outlining operational deficiencies or defaults identified by such review together with a timetable for correcting such defaults which cure period in no event shall exceed six (6) months from receipt of Company's notice of such default. PARAGRAPH VII LICENSEE'S OBLIGATIONS 7.01. Licensee shall comply with all requirements set forth in this Agreement, the Operations Manual, the plans and reports set forth in sections 6.05, 6.06 and 6.13, and other written policies provided to Licensee by Company and as developed by the parties. Mandatory specifications, standards, operating procedures and rules prescribed from time to time by Company in the Manual or otherwise communicated to Licensee in writing, shall constitute provisions of this Agreement as if fully set forth herein. 7.02. Licensee shall comply with any and all laws, regulations and governmental orders of the United States of America, the several states, or the country or Territory in which Licensee's ACE Stores is located, which may be applicable to the sale and distribution of the products purchased by Licensee from Company or to the conduct of Licensee's business operations, as the case may be. Licensee agrees to order only such merchandise as may lawfully be resold without alterations in labeling or otherwise in the country or Territory in which Licensee's business is located and agrees to indemnify Company and hold it harmless from and against any and all claims, suits, proceedings, demands, actions, judgments, orders, fines or penalties arising in connection with the actual or alleged failure of such merchandise to comply with any laws, regulations or governmental requirements applicable to the sale or resale thereof. Licensee shall provide Company with copies of all licenses, permits and certificates required by applicable law for the operation of a business. 7.03. Licensee shall have the right, beginning in _____________ year following execution of this Agreement, to sublicense the ACE Marks: "ACE", "ACE Hardware", "ACE Home Center", "ACE Paint" and "ACE Rental Place" Stores within the Territory, provided that Licensee satisfies the following obligations during the first _______ (__) years following execution of this Agreement : a. Licensee personally operates ____ (__) ACE Stores in the Territory which shall total at least ___________________ square feet in the aggregate. b. Licensee satisfies the minimum annual purchase requirements set forth in Section 7.05 below. Licensee shall advise Company of the address, telephone number and size of each ACE Store opened by Licensee and its sublicensees during the term of this Agreement, a list of which shall be attached hereto as Exhibit A. Exhibit A shall be modified as each new ACE Store is opened in the Territory. 7.04. Licensee shall, at its expense, provide the following services to sublicensed ACE Stores within the Territory: a. Licensee shall develop individual license agreements for use with individual sublicensees in the Territory. Licensee shall submit a draft of such license agreement to Company for Company's prior approval. Licensee shall enter into individual license agreements with individual sublicensees for the operation of individual ACE Stores within the Territory. b. Licensee shall train all individual sublicensees with a training program supplied by or approved by Company. At a minimum, Licensee shall provide individual sublicensees and their managers or employees with a minimum six (6) week retail training program prior to commencement of operations. c. Licensee shall make periodic visits to all individual sublicensed businesses located within the Territory, for the purposes of consultation, assistance and guidance of individual sublicensees in all aspects of the operation and management of the individual ACE Stores. Licensee's representatives who visit at the individual sublicensed businesses will prepare, for the benefit of individual sublicensees, Licensee and Company, written reports with respect to such visits outlining any suggested changes or improvements in the operations and detailing any defaults in such operations which become evident as a result of any such visit. A copy of each such written report shall be provided to both the individual sublicensees and Company. Licensee's agreements with its sublicensees shall also provide that the Company may make periodic visits to sublicensed ACE Stores to ensure that they are operating in accordance with the Company's standards. d. Licensee shall advise individual sublicensees within the Territory of problems arising out of the operation of the individual ACE Stores as disclosed by reports submitted to Licensee, or to Licensee's representative, by individual sublicensees or pursuant to inspections of the individual ACE Stores conducted by Licensee or Licensee's representative. e. Licensee shall take all necessary steps to enforce the terms of each individual sublicensee's Individual License Agreement and the provisions of the Manual. f. Licensee shall coordinate, administer, supervise and otherwise monitor advertising and promotional activities of individual sublicensees within the Territory. All expenses incurred by Licensee in performing its obligations under this Agreement shall be the sole responsibility of Licensee. Licensee agrees to expend such sums for office administration, travel, promotions, and advertising as may be reasonably required to develop and supervise the Territory. 7.05. Licensee shall meet the minimum annual performance requirements for number of square feet of retail space and total annual dollar volume purchases in United States currency during the Initial Term, as follows: Total Annual Volume of Minimum Number of Purchases In United Year Total Square Feet States Dollars ---- ----------------- ---------------------- The minimum annual performance requirements for the Renewal Terms, if any, shall be mutually agreed upon by the Company and Licensee prior to the end of the then current term. 7.06 Licensee shall purchase products from Company as follows: a. Licensee shall refrain from making any representation that a product purchased from Company can be used for a purpose or in a manner not intended by its manufacturer, and Licensee assumes full responsibility for, and hereby indemnifies Company and holds it harmless from and against any and all claims asserted against Company (a) which are based upon or arise out of any such representation or (b) which are based upon or arise out of any act performed by Licensee or its sublicensees to assist Licensee's customer in using a product purchased from Company, or to alter, install, repair or service any product purchased by Licensee from Company. b. Licensee shall indemnify Company and hold it harmless from and against any and all claims for (a) charges asserted against Company by another party for services provided by such party to Licensee or its sublicensees or for merchandise shipped by another party at Licensee's or its sublicensee's request and (b) damages demanded from Company in connection with any occurrence concerning which it is alleged that Licensee functioned as an agent of the Company. c. Licensee shall indemnify Company and hold it harmless for the amount of all attorneys' fees and expenses reasonably incurred by it in: (i) enforcing compliance by Licensee with the provisions of this Agreement or enforcing collection of any past due balances owing by Licensee on Company's billing statements, (ii) defending any claims asserted against Company which are based upon or arise out of any occurrence of the types described in Paragraphs IV, V, VII and XIII hereof or in attempting to avoid or mitigate any losses to Company in connection therewith, and (iii) in protecting any security interest of Company granted in any property of Licensee in the event that Licensee becomes a debtor in bankruptcy or insolvency proceedings. d. Licensee shall furnish Company with annual financial statements of their year end and financial statements, books and records and related information including purchase and sales figures, concerning Licensee's business on a quarterly basis or as shall reasonably be requested from time to time by Company in order to confirm Licensees compliance with the terms of this Agreement. e. Licensee shall provide Company with a standby irrevocable letter of credit, issued or confirmed by a United States bank approved by Company or with such other instruments or collateral as Company shall deem to be appropriate in order to secure the prompt payment of the indebtedness to it incurred by Licensee from time to time. Company agrees to, as long as Licensee is not in breach of this Agreement, extend credit to Licensee, in such amount as Company and its credit insurance company shall, in their sole discretion, deem reasonable for sales of Merchandise and services to Licensee. Company reserves the right to change the amount of credit extended to Licensee from time to time. f. All orders for merchandise, supplies and services placed by Licensee shall be subject to acceptance or nonacceptance by Company at its corporate headquarters, now located in Oak Brook, Illinois, United States of America. Company shall cause all items ordered by Licensee to be shipped to Licensee's designated receiving terminal in the United States for shipment by Licensee only to Licensee's location listed hereinabove. Title to all such merchandise and supplies shipped to Licensee shall pass to Licensee upon delivery to such receiving terminal. Licensee shall be responsible for and agrees to pay to Company all costs and charges related to the delivery of such items to said terminal, except in the case of prepaid shipments from Company's vendors. g. Licensee shall be solely responsible for and shall pay when due all import or export permit fees, customs duties and taxes of any nature imposed upon the sales made by Company to Licensee by the United States Government or the government of the country in which Licensee's place of business is located. Licensee shall fully indemnify Company for the amount of any such fees, duties and taxes, together with any interest or penalties thereon, which Company may be required to pay as a result of Licensee's failure to do so. h. At its sole discretion and notwithstanding any other provisions of this Agreement to the contrary, Company may limit or restrict the quantities or types of merchandise sold to Licensee hereunder. i. Nothing herein shall be deemed in any way to limit the right of Licensee to determine the prices or terms at which products purchased through Company shall be resold by Licensee. It is expressly understood that Licensee may resell such products at any prices determined by Licensee, whether greater or lesser than any prices listed or suggested by Company. j. Company shall supply Licensee with such quantities of sales aids as Company, in its sole discretion, deems necessary or desirable. All such sales aids shall be in the English language. All copyrights which may be issued or applied for with respect to such sales aids or any translations thereof shall be issued or applied for in the name of Company, and shall be the sole property of Company. k. Licensee agrees to return no merchandise to Company without the written consent of Company first being obtained. l. Licensee agrees to use the Ace International Redistribution Center, expected to open on the West Coast of the United States in 1996, in connection with the export by Licensee of all merchandise purchased from Company by Licensee for itself and for resale to its sublicensees . 7.07. If requested at any time by Company, and if reasonably available to Licensee in the Territory, Licensee shall maintain at Licensee's sole expense, with a reputable insurance carrier or carriers, a policy or policies of liability insurance with commercially reasonable coverage limits as agreed upon by Company and Licensee with respect to any claims for damages to property, personal injuries or wrongful death which are based upon or arise out of any occurrence concerning which it is alleged that Licensee functioned as an agent of Company, or that Licensee, Company, or either of them is otherwise liable therefor, except for claims based on or arising out of the sole negligence of Company. Company shall be named as an additional insured party in each such policy and Company shall be furnished with a certificate of insurance evidencing such coverages as are required herein. 7.08. Licensee and its sublicensees shall participate in the following advertising and marketing programs: a. Each calendar month Licensee shall spend an amount equal to ______ percent (__%) of Licensee's Gross Retail Revenues on local marketing and advertising of Licensee's ACE Stores. Company shall provide guidelines for conducting such marketing and advertising. Licensee shall provide to Company an accounting as to its expenditures for local marketing,advertising and promotion. b. Licensee shall require each of its sublicensees to spend an amount equal to ___ percent (__%) of such sublicensee's Gross Retail Revenues on advertising in the Territory. ___ percent (__%) of such amount shall be spent directly by the sublicensee on local advertising of its ACE Store(s). The other ___ percent (__%) shall be paid by the sublicensee to Licensee and shall be spent by Licensee on institutional advertising of the ACE Stores in the Territory. c. Licensee shall submit all advertising and promotional materials promoting the ACE Stores to Company for review and approval prior to use. Company shall notify Licensee in writing of its disapproval of any such advertising or promotional materials within thirty (30) business days of receipt of such materials, or fifteen (15) business days if received via telefax, from Licensee. If Company does not notify Licensee of its disapproval of any such advertising or promotional materials within said thirty (30) business day period, such advertising or promotional materials shall be deemed approved. All advertising conducted by the ACE Stores shall be conducted in a dignified manner and shall display the ACE Marks in the manner prescribed by Company. 7.09. Licensee shall not engage in the wholesale distribution of ACE branded products throughout the Territory to non-ACE Stores, home centers and other channels of distribution. 7.10. Licensee shall operate additional Ace Stores only if (i) Licensee is in compliance with all requirements and obligations of this Agreement and all other agreements between Company and Licensee, and (ii) Licensee is in compliance with all of its performance obligations of Paragraph 7.05. of this Agreement. 7.11. Licensee shall notify Company in writing within fifteen (15) days after it becomes aware of the commencement of any action, suit or proceeding and of the issuance of any order, writ, injunction, award or decree of any court, agency or other governmental instrumentality which may adversely affect the operation or financial condition of the ACE Stores. 7.12. Licensee may, with Company's prior written consent, develop additional ACE Stores within the Territory upon the same terms and conditions set forth in this Agreement including satisfaction of the performance schedule set forth in Paragraph 7.05 of this Agreement and, provided that Licensee has made application to Company and has timely fulfilled its obligations arising hereunder and under any other agreement between the parties and is in compliance with the terms of this Agreement for each ACE Stores Licensee owns and operates. PARAGRAPH VIII CONFIDENTIAL OPERATIONS MANUAL 8.01. Company shall provide to Licensee one (1) or more manuals containing specifications, standards, operating procedures and rules prescribed from time to time by Company relative to the operation of the ACE Stores. Licensee shall, at its expense, have the Manual translated into the primary language used in the Territory. The Manual, as used herein, shall refer to the entire series of manuals detailing the operation of the ACE Stores. Company shall have the right to add to and otherwise modify the Manual from time to time to reflect changes in the specifications, standards, operating procedures and rules prescribed by Company for the ACE Stores, provided that no such addition or modification shall alter Licensee's fundamental status and rights under this Agreement. 8.02. The Manual shall at all times remain the sole property of Company and shall promptly be returned upon the expiration or other termination of this Agreement. Licensee agrees and covenants that it shall not disclose, duplicate or otherwise use in an unauthorized manner any portion of the Manual. 8.03. The Manual contains proprietary information of Company and shall be kept confidential by Licensee both during the term of this Agreement and for a period of five (5) years subsequent to the expiration or termination of this Agreement. Licensee shall at all times ensure that its copy of the Manual be available at the ACE Stores premises in a current and up-to-date manner. PARAGRAPH IX COVENANTS NOT TO COMPETE 9.01. Licensee covenants that during the term of this Agreement and any renewal thereof, except as otherwise approved in writing by Company, Licensee shall not, whether alone, as a partner, officer, director, employee, consultant or holder of any beneficial interest in any such business or activity or any person or entity engaged in any such activity, either directly or indirectly, for itself or through, on behalf of or in conjunction with any person, persons, partnership, corporation or other legal entity: a. Divert or attempt to divert any business or customer of the business licensed hereunder to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with Company's ACE Marks and the ACE Stores. b. Employ or seek to employ any person who is at that time employed by Company or by any other licensee of Company or otherwise, directly or indirectly, induce or seek to induce such person to leave his or her employment with Company or its licensee, without first obtaining the Company's or its licensee's written consent. c. Own, maintain, engage in, or have any interest in any retail hardware business utilizing a similar format as the ACE Stores licensed hereunder. 9.02. Licensee shall not for a period of two (2) years following the expiration or termination of this Agreement (or the maximum period allowable by law, if less than two [2] years), either directly or indirectly, on behalf of itself or through any other entity, engage in offering or selling home improvement products, tools, hardware and merchandise and related products pursuant to a franchise, license, or similar agreement with any U.S. competitor of the Company. PARAGRAPH X DEFAULT AND TERMINATION 10.01. Either party may terminate this Agreement upon written notice to the other for any of the following events: a. the discovery of a material misrepresentation or omission made by a party which, if known to the other party at the time of execution of this Agreement, would cause such party to elect not to enter into this Agreement; b. the liquidation, bankruptcy or insolvency of one of the parties; c. the appointment of a trustee, receiver or liquidator for all or substantially all of the assets or the business of one of the parties; d. the attachment, sequestration, execution or seizure of all or substantially all of the assets of the parties, provided that such attachment, sequestration, execution or seizure is not discharged within thirty (30) days from the institution thereof; or e. subject to section 10.02 below, a breach by one of the parties of any terms or conditions of this Agreement, such breach not being rectified (assuming it is capable of being rectified within a reasonable period of time, not to exceed sixty (60) days, following the receipt of written notice from the non-breaching party. 10.02. This Agreement shall, at the option of Company, terminate automatically upon delivery of notice of termination to Licensee, if Licensee: a. Is convicted of or pleads no contest to a felony or other crime or offense that is likely to adversely affect the reputation of Company, Licensee or the ACE Stores. b. Makes any unauthorized use, disclosure or duplication of any portion of the Operations Manual or duplicates or discloses or makes any unauthorized use of any trade secret or confidential information provided to Licensee by Company. c. Abandons, fails or refuses to actively operate any of the ACE Stores for ten (10) business days in any twelve (12) month period provided (excluding the closing of the ACE Stores for holidays recognized in the Territory, or for reasons beyond the control of Licensee, such as natural disasters), or if any of the ACE Stores are not being operated for a purpose approved by Company or fails to relocate the premises of the ACE Stores to approved premises within an approved period of time following expiration or termination of the lease for the premises of the ACE Store. d. Surrenders or transfers control of the operation of the ACE Stores, makes or attempts to make an unauthorized direct or indirect assignment of the license or an ownership interest in Licensee or fails or refuses to assign the license or the interest in Licensee of a deceased or incapacitated controlling owner thereof as herein required. e. Submits to Company on two (2) or more separate occasions at any time during the term of this Agreement any reports or other data, information or supporting records which understate by more than two percent (2%) the Royalty Fees, amounts due for merchandise purchased by Company or any fees owed to Company for any period and Licensee is unable to demonstrate that such understatements resulted from inadvertent error. f. Materially misuses or makes any unauthorized use of any of the Marks or commits any other act which can reasonably be expected to materially impair the goodwill associated with any of the Marks. A "material misuse" shall mean any use of the Marks not previously approved in this Agreement or otherwise in writing by Company, or any use other than for the promotion of the ACE Stores. g. Materially misuses or makes any unauthorized use of the ACE International Computer System. A "material misuse" shall mean any use of the ACE International Computer System not previously approved in this Agreement or otherwise in writing by Company, or any use other than for the promotion of the ACE Stores. h. Fails on two (2) or more separate occasions within any period of twelve (12) consecutive months to submit when due reports or other information or supporting records, to pay when due the Royalty Fees, amounts due for purchases from Company or other payments due to Company, or otherwise fails to comply with this Agreement, whether or not such failures to comply are corrected after notice thereof is delivered to Licensee. i. Fails to make expenditures for advertising as prescribed in Paragraph 7.08. of this Agreement. j. Fails to comply with the performance requirements in accordance with the Schedule agreed upon by the parties as prescribed in Paragraph 7.05 of this Agreement. k. Fails or refuses to make payments of any amounts due Company for Royalty Fees, purchases from Company or any other amounts due to Company, and does not correct such failure or refusal within fifteen (15) days after written notice of such failure is delivered to Licensee; or l. Fails or refuses to comply with any other provision of this Agreement, or any mandatory specification, standard or operating procedure prescribed in the Manual as developed by the parties or as otherwise agreed to by the parties in writing, and does not correct such failure within six (6) months or provide proof acceptable to Company that Licensee has made all efforts as agreed upon by the parties to correct such failure and will continue to make efforts to cure until a cure is effected as agreed upon by the parties, if such failure cannot be corrected within ninety (90) days after written notice of such failure to comply is delivered to Licensee. 10.03. If Licensee is a corporation, unless Licensee first obtain's Company's prior written approval, this Agreement shall automatically terminate upon the consummation of any sale or transfer of all of the shares of capital stock (both voting and non-voting) of such corporation held by the holder or holders of fifty percent (50%) or more of its outstanding voting stock. PARAGRAPH XI RIGHTS AND DUTIES OF THE PARTIES UPON EXPIRATION OR TERMINATION 11.01. Upon termination or expiration, this Agreement and all rights granted hereunder to Licensee shall forthwith terminate, and: a. Licensee shall immediately cease to operate the ACE Stores under this Agreement and shall not thereafter, directly or indirectly, represent to the public or hold itself out as a present or former licensee of Company. b. Licensee shall immediately and permanently cease to use, by advertising or in any other manner whatsoever, any confidential methods, procedures and techniques associated with the Marks and any distinctive forms, slogans, signs, symbols, logos or devices associated with the Marks. In particular, Licensee shall cease to use, without limitation, all signs, advertising materials, stationery, forms and any other article which displays the ACE Marks, except that Licensee may continue its internal use of personalized items such as coffee mugs, drinking glasses or notebooks . c. Licensee shall take such action as may be necessary to cancel or assign to Company or Company's designee, at Company's option, any assumed name or equivalent registration filed with governmental authorities which contains the name "ACE" or any of the ACE Marks and Licensee shall furnish Company with evidence satisfactory to Company of compliance with this obligation within thirty (30) days after termination or expiration of this Agreement. d. In the event Licensee continues to operate or subsequently begins to operate any other business, Licensee shall not use any reproduction, counterfeit, copy or colorable imitation of the ACE Marks either in connection with such other business or the promotion thereof, which is likely to cause confusion, mistake or deception, or which is likely to dilute Company's exclusive rights in and to the ACE Marks. This Paragraph XI. is not intended as an approval of Licensee's right to operate other businesses and in no way is it intended to contradict Paragraph IX. of this Agreement. Licensee shall not utilize any designation of origin or description or representation which falsely suggests or represents an association or connection with Company so as to constitute unfair competition. Licensee shall make such modifications or alterations to the premises of the ACE Stores immediately upon termination or expiration of this Agreement as may be necessary to prevent any association between Company and any business thereon subsequently operated by Licensee or others, and shall make such specific additional changes thereto as Company may reasonably request for that purpose. In the event Licensee fails or refuses to comply with the requirements of this Paragraph XI., Company shall have the right to enter upon the premises where Licensee's ACE Stores were located, without incurring any liability to Licensee, for the purpose of making or causing to be made such changes as may be required at the expense of Licensee, which expense Licensee shall pay upon demand. e. Licensee shall promptly pay all sums owing to Company as agreed upon by the parties. In the event of termination for any default of Licensee, such sums shall include but not be limited to, all damages, costs, expenses, including reasonable attorneys' fees, and lost future royalties incurred by Company as a result of the default. f. The losing party shall pay to the prevailing party all damages, costs and expenses, including reasonable attorneys' fees, incurred subsequent to the termination or expiration of the license herein granted in obtaining injunctive or other relief for the enforcement of any provisions of this Paragraph XI. or Paragraph IX. g. Licensee shall immediately turn over to Company all Manuals, customer lists, records, files, instructions, brochures, agreements, disclosure statements and any and all other materials provided by Company to Licensee relating to the operation of the ACE Stores (all of which are acknowledged to be Company's property). h. Company shall acquire all right, title and interest in and to any sign or sign faces bearing the Marks. Licensee acknowledges Company's right to have access to the premises of the ACE Stores should Company elect to take possession of any said sign or sign faces bearing the ACE Marks. Removal shall be at Licensee's expense. i. Licensee shall comply with the covenants contained in Paragraph IX. of this Agreement. 11.02. All obligations of Company and Licensee which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect subsequent to and notwithstanding its expiration or termination and until they are satisfied or by their nature expire. PARAGRAPH XII TRANSFERABILITY OF INTEREST 12.01. This Agreement and all rights hereunder may be assigned and transferred by Company and, if so, shall be binding upon and inure to the benefit of Company's successors and assigns. 12.02. Licensee agrees to notify Company in writing: a. prior to or concurrently with the effective date thereof, as to any change in the legal form of ownership of Licensee (such as, for example, a change from individual or partnership form to corporate form, or vice versa), it being understood that no such change will operate to release from liability to Company any party previously responsible for Licensee's obligations hereunder without the written consent of Company, b. as promptly as feasible, as to the death of any partner having an interest in any partnership by which Licensee is owned or the death of any stockholder owning 50% or more of the voting stock of Licensee if Licensee is incorporated, or c. not less than thirty (30) days prior to the closing of the transaction, as to the name and address of each proposed buyer or transferee in any proposed sale, assignment or transfer of fifty (50%) or more of the ownership interest(s) of Licensee or of the business operated at the location of Licensee's business indicated hereinabove or of all of the capital stock (both voting and non-voting) owned by the holder(s) in a corporation owning the business operated at such location if fifty percent (50%) or more of the outstanding voting stock of such corporation is owned by such holder(s). 12.03. Licensee shall not transfer or assign this Agreement or any part hereof without Company's written consent. Licensee shall promptly advise Company in writing of any relocation of its place of business or the closing of any existing place of business. PARAGRAPH XIII NO AGENCY 13.01. Licensee shall not have authority to represent Company in Licensee's country, the Territory or elsewhere as an agent, nor to bind Company to any contract, representation, understanding, act or deed concerning Company or any products sold by it. Neither the making of this Agreement nor the performance of any part of the provisions hereof shall be construed to constitute Licensee as an agent or representative of Company for any purpose nor shall this Agreement be deemed to establish a joint venture or partnership between the parties. All sales of merchandise by Licensee shall be for its own account, it being understood that Licensee is an independent business reselling products which are purchased from Company. 13.02. Company shall not, by virtue of any approvals, advice or services, provide to Licensee, assume responsibility or liability to Licensee or any third parties to which Company would not otherwise be subject. PARAGRAPH XIV MISCELLANEOUS 14.01. The prevailing party shall be entitled to recover reasonable attorneys' fees, experts' fees, court costs and all other expenses of litigation in any action instituted against the other party in order to secure or protect its rights under this Agreement or to enforce terms hereof. 14.02. This Agreement, any Exhibit attached hereto and the documents referred to herein, shall be construed together and constitute the entire, full and complete agreement between Company and Licensee concerning the subject matter hereof, and supersede all prior agreements. This Paragraph XIV shall not be orally modified. No other representation has induced Licensee to execute this Agreement and there are no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein, which are of any force or effect with reference to this Agreement or otherwise. No amendment, change or variance from this Agreement shall be binding on either party unless executed in writing by both parties. 14.03. The Recitals set forth in this Agreement are specifically incorporated into the terms of this Agreement and constitute a part of this Agreement. 14.04. The signing of this Agreement by Licensee constitutes an application only and this Agreement shall not be effective unless and until it has been duly accepted and countersigned by Company at its principal office in Illinois, United States of America not later than thirty (30) days after the date of signing by Licensee. All orders for merchandise, supplies and services placed by Licensee pursuant to this Agreement shall be transmitted to Company at said office and Licensee shall be deemed to have consented and agreed that: a. all provisions of this Agreement shall be interpreted and construed in accordance with the substantive laws of the State of Illinois, United States of America; and b. all controversies, disputes or claims arising between Company and Licensee arising out of or related to the relationship of the parties hereto, this Agreement or any provision hereof, or any related agreement, shall be submitted for arbitration to be administered by the office of the American Arbitration Association ("AAA") in Chicago, Illinois, U.S.A. on demand of either party. Such arbitration proceedings shall be conducted in Chicago as herein provided before a panel of three (3) neutral arbitrators and, except as otherwise provided in this Agreement, shall be conducted in accordance with the then current commercial arbitration rules of the AAA for international arbitrations. The arbitrators shall have the right to award or include in their award any relief which they deem proper in the circumstances, including without limitation, money damages (with interest on unpaid amounts from date due), specific performance, injunctive relief, legal fees and costs, but shall not have the authority to award exemplary, punitive or special damages. The award and decision of the arbitrators shall be conclusive and binding upon all parties hereto and judgment upon the award may be entered in any court of competent juris diction, including courts in the United States of America and the Territory. The parties further agree to be bound by the provisions of any applicable limitation on the period of time in which claims must be brought under applicable law or this Agreement, whichever is less. The parties further agree that in connection with any such arbitration proceeding, each shall submit or file any claim which would constitute a compulsory counterclaim (as defined by Rule 13 of the United States Federal Rules of Civil Procedure) within the same proceeding as the claim to which it relates. Any such claim which is not submitted or filed as described above shall be barred. 14.05. Except as otherwise specifically provided, all notices required or permitted to be given hereunder by one party to the other party shall be effective if personally delivered, airmailed or sent by telex or facsimile to the addresses set forth hereinabove or to such other address as either party designates to the other in writing for the receipt of notices hereunder, with receipt deemed within fourteen (14) days after airmailing or within two (2) days after sending by telex or facsimile. 14.06. The English version of this Agreement shall govern in the event of any variations between the English version and any translation hereof and shall be used exclusively in any arbitration, legal proceeding or suit hereunder. 14.07. The failure of either party to enforce its rights under any provision hereof shall not be deemed a waiver of such rights for purposes of future enforcement. No modification of this Agreement or any waiver of rights hereunder shall be of any force and effect unless in writing and signed by the party against whom enforcement of such waiver or modification is sought. 14.08. The terms and conditions set forth in any purchase order or other document shall be effective only to the extent that the same shall not be inconsistent with the terms and conditions hereof. 14.09. Any provision or provisions hereof which contravene the law of any state or country in which this Agreement is effective shall, in such state or country, to the extent of such contravention of law, be deemed separable and shall not impair the validity of any other term, condition or provision hereof. 14.10. a. Company represents and warrants that: (i) it is a corporation duly incorporated and existing under the laws of the State of Delaware, the United States of America; (ii) it has all necessary licenses to carry out its business in the United Sates of America; and (iii) this Agreement constitutes legally valid and binding obligations of Company, enforceable against Company in accordance with its terms, and the person or persons signing this agreement on behalf of Company are duly authorized to do so. b. Licensee represents and warrants that: (i) it is a corporation duly incorporated and existing under the laws of ___________________; (ii) it has all necessary licenses to carry out its business in the Territory; and (iii) this Agreement constitutes legally valid and binding obligations of Licensee, enforceable against Licensee in accordance with its terms, and the person or persons signing this agreement on behalf of Licensee are duly authorized to do so. IN WITNESS WHEREOF, this Agreement has been executed by the parties on this _________ day of _________________________, 199__. COMPANY: LICENSEE: ACE HARDWARE CORPORATION ________________________________________ By: By: Title: Title: EXHIBIT A TO THE LICENSE AGREEMENT STORE LOCATIONS Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: Address: Address: Telephone No.: Telephone No.: Commencement Date Commencement Date Of Operations: Of Operations: Number of Square Number of Square Feet: Feet: EX-10 5 EXHIBIT 10-A-13 COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AND ACE HARDWARE CORPORATION LEASE AGREEMENT DATED AS OF SEPTEMBER 1, 1996 TABLE OF CONTENTS (This Table of Contents is not part of the Lease Agreement and is for convenience of reference only) SECTION PAGE ARTICLE I 2 DEFINITIONS 2 SECTION 1.1. DEFINITIONS 2 SECTION 1.2. INTERPRETATION 4 ARTICLE II 6 REPRESENTATIONS, WARRANTIES AND COVENANTS 6 SECTION 2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LESSOR 6 SECTION 2.2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LESSEE 6 ARTICLE III 9 CONVEYANCE AND USE OF PROJECT FACILITY 9 SECTION 3.1. CONVEYANCE TO THE LESSOR 9 SECTION 3.2. USE OF PROJECT FACILITY 9 ARTICLE IV 10 ACQUISITION OF LAND; CONSTRUCTION OF FACILITY; ACQUISITION AND INSTALLATION OF EQUIPMENT 10 SECTION 4.1. ACQUISITION OF LAND; CONSTRUCTION OF FACILITY; ACQUISITION AND INSTALLATION OF EQUIPMENT 10 SECTION 4.2. COMPLETION OF PROJECT FACILITY 11 SECTION 4.3. REMEDIES TO BE PURSUED AGAINST CONTRACTORS, SUBCONTRACTORS, MATERIALMEN AND THEIR SURETIES 11 ARTICLE V 12 LEASE OF PROJECT FACILITY; RENT; CONVEYANCE OF PROJECT FACILITY 12 SECTION 5.1. LEASE OF THE PROJECT FACILITY 12 SECTION 5.2. DURATION OF TERM. 12 SECTION 5.3. QUIET ENJOYMENT 12 SECTION 5.4. RENT AND OTHER AMOUNTS PAYABLE 12 SECTION 5.5. NATURE OF OBLIGATIONS OF THE LESSEE HEREUNDER 13 ARTICLE VI 14 MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE 14 SECTION 6.1. MAINTENANCE AND MODIFICATIONS OF PROJECT FACILITY 14 SECTION 6.2. TAXES, ASSESSMENTS AND UTILITY CHARGES 14 SECTION 6.3. INSURANCE REQUIRED 14 SECTION 6.4. ADDITIONAL PROVISIONS RESPECTING INSURANCE 15 SECTION 6.5. APPLICATION OF NET PROCEEDS OF INSURANCE 16 SECTION 6.6. PAYMENTS IN LIEU OF TAXES 16 ARTICLE VII 18 DAMAGE, DESTRUCTION AND CONDEMNATION 18 SECTION 7.1. DAMAGE OR DESTRUCTION 18 SECTION 7.2. CONDEMNATION 18 ARTICLE VIII 19 SPECIAL COVENANTS 19 SECTION 8.1. NO WARRANTY OF CONDITION OR SUITABILITY BY LESSOR; ACCEPTANCE 19 SECTION 8.2. HOLD HARMLESS PROVISIONS 19 SECTION 8.3. RIGHT OF ACCESS TO PROJECT FACILITY 20 SECTION 8.4. THE LESSEE NOT TO TERMINATE EXISTENCE OR DISPOSE OF ASSETS 20 SECTION 8.5. AGREEMENT TO PROVIDE INFORMATION 20 SECTION 8.6. COMPLIANCE WITH ORDERS, ORDINANCES, ETC 20 SECTION 8.7. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS 21 SECTION 8.8. DEPRECIATION DEDUCTIONS AND TAX CREDITS 21 ARTICLE IX 22 ASSIGNMENTS; MERGER OF LESSOR 22 SECTION 9.1. RESTRICTION ON TRANSFER OF LESSOR'S INTEREST HEREUNDER 22 SECTION 9.2. ASSIGNMENT OF THIS LEASE AGREEMENT 22 SECTION 9.3. MERGER OF THE LESSOR 22 SECTION 9.4. SALE OR LEASE OF PROJECT FACILITY 22 ARTICLE X 24 EVENTS OF DEFAULT AND REMEDIES 24 SECTION 10.1. EVENTS OF DEFAULT DEFINED 24 SECTION 10.2. REMEDIES ON DEFAULT 25 SECTION 10.3. REMEDIES CUMULATIVE 25 SECTION 10.4. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES 26 SECTION 10.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER 26 ARTICLE XI 27 EARLY TERMINATION OF LEASE AGREEMENT 27 SECTION 11.1. OPTION TO TERMINATE LEASE AGREEMENT 27 SECTION 11.2. OBLIGATION TO SELL AND PURCHASE THE PROJECT FACILITY 27 SECTION 11.3. CONVEYANCE OF PROJECT FACILITY UPON PURCHASE 27 ARTICLE XII 28 MISCELLANEOUS 28 SECTION 12.1. NOTICES 28 SECTION 12.2. BINDING EFFECT 29 SECTION 12.3. SEVERABILITY 29 SECTION 12.4. AMENDMENTS, CHANGES AND MODIFICATIONS 29 SECTION 12.5. EXECUTION OF COUNTERPARTS 29 SECTION 12.6. APPLICABLE LAW 29 SECTION 12.7. RECORDING AND FILING 29 SECTION 12.8. SURVIVAL OF OBLIGATIONS 29 SECTION 12.9. TABLE OF CONTENTS AND SECTION HEADINGS NOT CONTROLLING 29 SECTION 12.10. NO RECOURSE; SPECIAL OBLIGATION 29 SECTION 12.11. SUBMISSION TO JURISDICTION 30 EXHIBIT A A-1 DESCRIPTION OF LAND A-1 EXHIBIT B B-1 FORM OF DEED TO LESSEE B-1 EXHIBIT C C-1 FORM OF BILL OF SALE TO LESSEE C-1 LEASE AGREEMENT THIS LEASE AGREEMENT dated as of September 1, 1996 ("Lease Agreement") by and between the COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AGENCY, a public benefit corporation of the State of New York having its office at Saratoga County Municipal Center, 40 McMaster Street, Ballston Spa, New York 12020 (the "Lessor") and ACE HARDWARE CORPORATION, a Delaware corporation having an address of 2200 Kensington Court, Oak Brook, Illinois 60521-2134 (the "Lessee"); W I T N E S S E T H: WHEREAS, the Lessor, by resolution adopted September 16, 1996 (the "Resolution"), resolved to undertake a project (the "Project") consisting of (A) (1) the acquisition of a certain parcel or parcels of land comprising approximately 130 acres located at Ballard Road and Northern Pines Road in the Town of Wilton, Saratoga County, New York (the "Land"), (2) the construction on the Land of an approximately 792,000 square foot Facility (the "Facility") for use as a regional warehouse and distribution facility and (3) the acquisition and installation in the Facility of certain machinery and equipment (the "Equipment" and together with the Land and the Facility, collectively the "Project Facility"); and (B) The lease of the Project Facility to the Lessee; and WHEREAS, the Lessor proposes to lease the Project Facility to the Lessee and the Lessee desires to lease the Project Facility from the Lessor pursuant to the terms and conditions hereinafter set forth; and WHEREAS, the providing of the Project Facility and the lease of the Project Facility to the Lessee pursuant to this Lease Agreement is for a proper purpose, to wit, to advance the job opportunities, health, general prosperity and economic welfare of the inhabitants of the State of New York, pursuant to the provisions of the Act (as hereinafter defined); and WHEREAS, all things necessary to constitute this Lease Agreement a valid and binding agreement by and between the parties hereto in accordance with the terms hereof have been done and performed, and the creation, execution and delivery of this Lease Agreement have in all respects been duly authorized; NOW, THEREFORE, THE LESSOR AND THE LESSEE HEREBY AGREE AS FOLLOWS: ARTICLE I DEFINITIONS SECTION 1.1. DEFINITIONS. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Lease Agreement and of any agreement supplemental hereto shall have the respective meanings specified in this Section 1.1. "Act" means Title 1 of Article 18-A of the General Municipal Law of the State, as amended from time to time, together with Chapter 855 of the Laws of 1971 of the State. "Bill of Sale to Lessee" means the bill of sale from the Lessor to the Lessee (substantially in the form shown in Exhibit "C" hereto) to be delivered to the Lessee upon satisfaction of the conditions set forth herein. "Bill of Sale to Lessor" means the bill of sale from the Lessee to the Lessor conveying the Lessee's interest in the Equipment. "Bond Counsel" means any attorney or firm of attorneys whose experience in matters relating to the issuance of obligations by states and their political subdivisions is nationally recognized and reasonably acceptable to the Lessor. "Business Day" means a day on which banks located in New York City are not required or authorized to remain closed and on which the New York Stock Exchange is not closed. "Closing Date" means the date of the execution and delivery by the Lessee of the Deed to Lessor. "Code" means the Internal Revenue Code of 1986, as amended and regulations of the Department of Treasury promulgated thereunder and under the Internal Revenue Code of 1954, as amended. "Completion Date" means the date which is certified as the date of completion of the construction of the Facility and installation of the Equipment pursuant to Section 4.2 of the Lease Agreement. "Construction Period" means the period (A) beginning on the date of commencement of construction of the Facility, and (B) ending on the Completion Date. "Deed to the Lessee" means the deed from the Lessor to the Lessee (substantially in the form shown in Exhibit "B" to the Lease Agreement) to be delivered to the Lessee upon satisfaction of the conditions set forth in the Lease Agreement. "Deed to the Lessor" means the deed from the Lessee to the Lessor conveying the Lessee's fee interest in the Land and the Facility. "Equipment" means all items of machinery, equipment, fixtures and/or furnishings installed into the Facility during the Construction Period. "Event of Default" means any of those events defined as Events of Default by the terms of any of the Leasing Documents. "Facility" means, all those buildings, improvements, structures and other related facilities affixed or attached to or to be affixed or attached to the Land, all as they may exist from time to time. "Governmental Authority" means the United States, the State and any political subdivision thereof, and any agency, department, commission, board, bureau or instrumentality of any of them. "Land" means the real property described in Exhibit "A" to the Lease Agreement. "Lease Agreement" means the lease agreement dated as of September 1, 1996 by and between the Lessor and the Lessee, as said lease agreement may be amended or supplemented from time to time "Lease" or "Leases" means any agreements of lease or sublease with respect to all or portions of the Project Facility, as said agreements of lease or sublease may have been or may from time to time be hereinafter modified, extended and revised including but not limited to, the Lease Agreement, and any future lease or sublease affecting any portion of the Project Facility. "Leasing Documents" means this Lease Agreement, the PILOT Agreement and any other document now or hereafter executed by the Lessor and the Lessee in connection with the Project Facility. "Lessor" means (A) the County of Saratoga Industrial Development Agency and its successors and assigns, and (B) any public benefit corporation or other public corporation resulting from or surviving any consolidation or merger to which the County of Saratoga Industrial Development Agency or its successors or assigns may be a party. "Lessee" means Ace Hardware Corporation, a Delaware corporation having an address of 2200 Kensington Court, Oak Brook, Illinois 60521-2134, and its successors and permitted assigns. "Lien" means any interest in Property securing an obligation owed to a Person whether such interest is based on the common law, statute or contract, and including but not limited to a security interest arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" includes reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other similar title exceptions and encumbrances, including but not limited to mechanics', materialmen's warehousemen's and carriers' liens and other similar encumbrances, affecting real property. For the purposes hereof, a Person shall be deemed to be the owner of Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Lien Law" means the Lien Law of the State. "Local Authority" means any Governmental Authority which exercises jurisdiction over the Project Facility. "Local Requirement" means any law, ordinance, order, rule or regulation of a Governmental Authority or a Local Authority, respectively. "Permitted Encumbrances" means and includes with respect to the Lessee and its Subsidiaries (if any): (i) in the case of real properties, easements, restrictions, exceptions, reservations or defects which, in the aggregate, do not interfere with the continued use of such properties for the purposes for which they are used and do not affect the value thereof; (ii) liens, if contested in good faith by appropriate proceedings as allowed pursuant to Section 8.6 of the Lease Agreement; (iii) pledges or deposits to secure obligations under worker's compensation laws or similar legislation or to secure performance in connection with bids, tenders and contracts in the ordinary course of the Lessee's business (other than contracts for the payment of borrowed money) to which the Lessee or any Subsidiary of the Lessee is a party; (iv) deposits to secure public or statutory obligations of the Lessee and any Subsidiary of the Lessee; (v) carriers' or other like liens arising in the ordinary course of business, or deposits of cash or United States obligations to obtain the release of such liens or of mechanics' or worker's liens; (vi) deposits to secure surety or appeal bonds in proceedings to which the Lessee or any Subsidiary of the Lessee is a party; (vii) existing leases by the Lessee of real and personal property; (viii) liens arising out of or created by the Leasing Documents; and (ix) such other encumbrances as may be consented to, from time to time, by the Lessor and the Lessee. "Person" shall mean any legal entity, including without limitation an individual, a corporation, a company, a voluntary association, a partnership, a trust, an unincorporated organization or a government, or any agency, instrumentality or political subdivision thereof. "PILOT Agreement" means the payment in lieu of tax agreement dated as of September 1, 1996 by and between the Lessor and the Lessee, as said payment in lieu of tax agreement may be amended or supplemented from time to time. "Project" means that project undertaken by the Lessor consisting of (A) the acquisition of the Land, (B) the construction of the Facility and (C) the acquisition and installation of the Equipment. "Project Facility" means, collectively, the Land, the Facility and the Equipment. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Requirement" means any law, ordinance, order, rule or regulation of a Governmental Authority or a Local Authority, respectively. "Resolution" means the resolution duly adopted by the Lessor on September 16, 1996 authorizing the execution and delivery of the Leasing Documents to which the Lessor is a party. "State" means the State of New York. SECTION 1.2. INTERPRETATION. In this Lease Agreement, unless the context otherwise requires: (A) the terms "hereby", "hereof", "herein", "hereunder" and any similar terms as used in this Lease Agreement refer to this Lease Agreement, and the term "heretofore" shall mean before, and the term "hereafter" shall mean after, the date of this Lease Agreement; (B) words of masculine gender shall mean and include correlative words of feminine and neuter genders and words importing the singular number shall mean and include the plural number and vice versa; and (C) any certificates, letters or opinions required to be given pursuant to this Lease Agreement shall mean a signed document attesting to or acknowledging the circumstances, representations, opinions of law or other matters therein stated or set forth or setting forth matters to be determined pursuant to this Lease Agreement. ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LESSOR. The Lessor makes the following representations, warranties and covenants as the basis for the undertakings on its part herein contained: (A) The Lessor is duly established under the provisions of the Act and has the power to enter into this Lease Agreement and to carry out its obligations hereunder. Based upon the representations of the Lessee as to the utilization of the Project Facility, the Project Facility constitutes and will constitute a "project" as such quoted term is defined in the Act. By proper official action the Lessor has been duly authorized to execute, deliver and perform this Lease Agreement and the other Leasing Documents to which it is a party. (B) Neither the execution and delivery of this Lease Agreement, the consummation of the transactions contemplated hereby nor the fulfillment of or compliance with the provisions of the other Leasing Documents by the Lessor will conflict with or result in a breach by the Lessor of any of the terms, conditions or provisions of the Act, the by-laws of the Lessor or any order, judgment, restriction, agreement or instrument to which the Lessor is a party or by which it is bound, or will constitute a default by the Lessor under any of the foregoing. (C) The Lessor will cause the Project Facility to be constructed and will lease the Project Facility to the Lessee pursuant to this Lease Agreement, all for the purpose of advancing the job opportunities, health, general prosperity and economic welfare of the people of the State and improving their standard of living. (D) Except as provided herein and in Article IX and Article X hereof, the Lessor, to the extent of its interest therein, shall not sell, assign, transfer, encumber or pledge as security the Project Facility or any part thereof. SECTION 2.2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LESSEE. The Lessee makes the following representations, warranties and covenants as the basis for the undertakings on its part herein contained: (A) The Lessee is a corporation organized, existing and in good standing under the laws of the State of Delaware, is qualified to do business within the State, has power to enter into this Lease Agreement and the other Leasing Documents to which it is a party and to carry out its obligations hereunder and thereunder, has been duly authorized to execute this Lease Agreement and the other Leasing Documents to which the Lessee is a party. This Lease Agreement and the other Leasing Documents to which the Lessee is a party and the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action. (B) Neither the execution and delivery of this Lease Agreement or the other Leasing Documents to which the Lessee is a party, the consummation of the transactions contemplated hereby or thereby, nor the fulfillment of or compliance with the provisions of this Lease Agreement or the other Leasing Documents to which the Lessee is a party will (1) result in a breach of or conflict with any of the terms, conditions or provisions of the Lessee's certificate of incorporation or by-laws or any agreement, instrument, order or judgment to which the Lessee is a party or by which the Lessee is bound, or will constitute a default under any of the foregoing, or result in the creation or imposition of any Lien of any nature upon the Project Facility under the terms of any such instrument or agreement, other than the Permitted Encumbrances, (2) require consent under (which has not been heretofore received) or result in a breach of or default under any credit agreement, indenture, purchase agreement, mortgage, deed of trust, commitment, guaranty or other agreement or instrument to which the Lessee is a party or by which it or any of its Property may be bound or affected, or (3) conflict with or violate any existing law, rule, regulation, judgment, order, writ, injunction or decree of any government, governmental instrumentality or court (domestic or foreign), having jurisdiction over the Lessee or any of the Property of the Lessee. (C) The acquisition and construction of the Project Facility will not result in the removal of a facility or plant of the Lessee or any contemplated occupant of the Project Facility from one area of the State to another area of the State or in the abandonment of one or more plants or facilities of the Lessee or any contemplated occupant of the Project Facility located within the State, except to the extent to which such relocation or abandonment is reasonably necessary to discourage the Lessee or any Project occupant from removing a facility or plant of the Lessee or any Project occupant to a location outside the State of New York or is reasonably necessary to preserve the competitive position of the Lessee or any Project occupant in its respective industry. (D) The Leasing Documents to which it is a party constitute, or upon their execution and delivery in accordance with the terms thereof will constitute, valid and legally binding obligations of the Lessee, enforceable in accordance with their respective terms. (E) So long as the PILOT Agreement shall be outstanding, the Project Facility is and will continue to be a "project" as such quoted term is defined in the Act, and the Lessee will not take any action (or omit to take any action required by the Leasing Documents or which the Lessor, advises the Lessee in writing should be taken), or allow any action to be taken, which action (or omission) would in any way (1) cause the Project Facility not to constitute a "project" as such quoted term is defined in the Act. (F) The Lessee shall cause all notices required by law to be given, and shall comply or cause compliance with all laws, ordinances, municipal rules and regulations and requirements of all Governmental Authorities applying to or affecting the conduct of work on the Project Facility, and the Lessee will defend and save the Lessor and its officers, members, agents and employees harmless from all fines and penalties due to failure to comply therewith. (G) The acquisition and construction of the Project Facility will not have a significant impact on the environment within the terms of SEQRA and the statewide and local regulations thereunder. The Lessee hereby covenants to comply with all mitigation measures, requirements and conditions, if any, enumerated in the negative declaration issued by the Wilton Planning Board under SEQRA with respect to the Project Facility and in any other approvals issued by any other Governmental Authority. (H) The Project Facility and the operation thereof complies and will comply with all applicable building, zoning, environmental, planning and subdivision laws, ordinances, rules and regulations of Governmental Authorities having jurisdiction over the Project Facility. (I) The Lessee shall (1) cause any new employment opportunities created in connection with the Project to be listed with (i) the Regional Office of the New York State Department of Economic Development serving Wilton, New York, (ii) the New York State Department of Labor Jobs Service Division, and (iii) the local service delivery area administrative entity created pursuant to the United States Job Training Partnership Act (P.L. 97-300) serving Wilton, New York, (2) the Lessee shall file with the Lessor on or before January 1 of each year during which the Lease Agreement remains in effect the status of its employment plan with respect to the Project, including the number of employment opportunities created, the number of employment openings listed in accordance with (i) above and the number of employment positions filled, and (3) the Lessee agrees, subject to the terms of any existing collective bargaining agreement(s), to first consider for such new employment persons eligible under the United States Job Training Partnership Act. (J) The Lessee shall deliver to the Lessor a notice, within five (5) days of its occurrence, or as soon thereafter as the Lessee becomes aware of, or should have become aware of, the same, any Event of Default, material litigation or failure to observe any covenant in the Financing Documents. (K) Not more than one-third of the total Cost of the Project shall be used to provide facilities primarily used in making Retail Sales (as such term is defined in Section 862 of the General Municipal Law of the State) to customers who personally visit such facilities. ARTICLE III CONVEYANCE AND USE OF PROJECT FACILITY SECTION 3.1. CONVEYANCE TO THE LESSOR. The Lessee has conveyed or will convey, or will cause to be conveyed, all of its right, title and interest in and to the Project Facility to the Lessor pursuant to the Deed to Lessor. The Lessee hereby represents and warrants that it has good and marketable title to the Project Facility, free and clear of all Liens except for Permitted Encumbrances and agrees that it will defend, indemnify and hold the Lessor harmless from any expense or liability due to any defect in title thereto. The Lessee shall pay all (i) costs, expenses, taxes and charges incurred in connection with such conveyance and transfer, including, without limitation, the cost of recording of the warranty deed in the Saratoga County Clerk's Office and (ii) taxes, assessments and other charges and impositions of the Project Facility attributable to periods prior to the date of this Lease Agreement. SECTION 3.2. USE OF PROJECT FACILITY. Subsequent to the Closing Date, the Lessee shall be entitled to use the Project Facility in any manner not otherwise prohibited by the Leasing Documents, provided that such use (1) causes the Project Facility to qualify or continue to qualify as a "project" under the Act and (2) does not tend, in the reasonable judgment of the Lessor, to bring the Project Facility into disrepute as a public project. ARTICLE IV ACQUISITION OF LAND; CONSTRUCTION OF FACILITY; ACQUISITION AND INSTALLATION OF EQUIPMENT SECTION 4.1. ACQUISITION OF LAND; CONSTRUCTION OF FACILITY; ACQUISITION AND INSTALLATION OF EQUIPMENT. (A) The Lessee shall, on behalf of the Lessor, promptly (1) acquire the Land, (2) construct the Facility or cause the Facility to be constructed and (3) acquire and install the Equipment or cause the Equipment to be acquired and installed. (B) The Lessor shall enter into, and accept the assignment of, such contracts as the Lessee may request in order to effectuate the purposes of this Section 4.1; provided, however, that the Lessor shall have no liability under such contracts. (C) The Lessor hereby appoints the Lessee its true and lawful agent during the Construction Period to perform under the following authority in compliance with the terms, purposes and intent of the Leasing Documents, and the Lessee hereby accepts such agency: (1) to acquire the Land, construct the Facility and acquire and install the Equipment, (2) to make, execute, acknowledge and deliver any contracts, orders, receipts, writings and instructions with any other Persons, and in general to do all things which may be requisite or proper, all for the acquisition, construction and installation of the Project Facility, with the same powers and with the same validity as the Lessor could do if acting in its own behalf, provided that the Lessor shall have no liability under such contracts, orders, receipts, writings and instructions, (3) to pay all fees, costs and expenses incurred in the acquisition, construction and installation of the Project Facility and (4) to ask, demand, sue for, levy, recover and receive all such sums of money, debts, dues and other demands whatsoever which may be due, owing and payable to the Lessor under the terms of any contract, order, receipt or writing in connection with the acquisition and construction of the Project Facility and to enforce the provisions of any contract, agreement, obligation, bond or other performance security in connection with the same. (D) The Lessee has given or will give or cause to be given all notices and has complied or will comply or cause compliance with all laws, ordinances, rules, regulations and requirements of all Governmental Authorities applying to or affecting the conduct of work on the Project Facility, and the Lessee will defend, indemnify and save the Lessor and its officers, members, agents, servants and employees harmless from all fines and penalties due to failure to comply therewith. All permits and licenses necessary for the prosecution of work on the Project Facility shall be procured promptly by the Lessee. (E) To the extent required by applicable law, the Lessee, as agent for the Lessor, will cause (1) compliance with the requirements of Article 8 of the Labor Law of the State, and (2) any contractor, subcontractors and other Persons involved in the acquisition, construction and installation of the Project Facility to comply with Article 8 of the Labor Law of the State. The covenant in this subsection is not intended as a representation that Article 8 of the Labor Law of the State applies. (F) The Lessee agrees to file with the Department of Taxation and Finance of the State in a manner and at the time prescribed thereby, information relating to the extent of exemption from sales and use tax claimed with respect to the construction of the Project Facility all in compliance with Section 874 of the General Municipal Law of the State. THE LESSEE ACKNOWLEDGES THAT THE FAILURE TO COMPLY WITH THE PROVISIONS OF SAID SECTION 874 SHALL RESULT IN A REVOCATION OF THE AUTHORITY GRANTED PURSUANT TO SUBSECTION (C) OF THIS SECTION 4.1. SECTION 4.2. COMPLETION OF PROJECT FACILITY. The Lessee will proceed with due diligence to complete the acquisition of the Land, the construction of the Facility and the installation of the Equipment. Completion of the same shall be evidenced by a certificate signed by an Authorized Representative of the Lessee delivered to the Lessor stating (A) the date of such completion, (B) that all labor, services, materials and supplies used therefor and all costs and expenses in connection therewith have been or will be paid, (C) that the acquisition of the Land, the construction of the Facility and the installation of the Equipment have been completed with the exception of ordinary punchlist items and work awaiting seasonal opportunity, (D) that the Lessee or the Lessor has good and valid title to all Property constituting a portion of the Project Facility, and that the Project Facility is subject to this Lease Agreement and (E) that the Project Facility is ready for occupancy, use and operation for its intended purposes. Notwithstanding the foregoing, such certificate may state (1) that it is given without prejudice to any rights of the Lessee against third parties which exist at the date of such certificate or which may subsequently come into being, (2) that it is given only for the purposes of this Section 4.2, and (3) that no Person other than the Lessor may benefit therefrom. Such certificate shall be accompanied by a certificate of occupancy, if required, any and all permissions, licenses or consents required of Governmental Authorities for the occupancy, operation and use of the Project Facility for its intended purposes. SECTION 4.3. REMEDIES TO BE PURSUED AGAINST CONTRACTORS, SUBCONTRACTORS, MATERIALMEN AND THEIR SURETIES. In the event of a material default by any contractor, subcontractor or materialman under any contract made by it in connection with the construction of the Facility or in the event of a breach of warranty or other liability with respect to any materials, workmanship or performance guaranty, the Lessee may proceed, either separately or in conjunction with others, to exhaust the remedies of the Lessee and the Lessor against the contractor, subcontractor or materialman so in default and against each surety for the performance of such contract. The Lessee may, in its own name or, with the prior written consent of the Lessor, in the name of the Lessor, prosecute or defend any action or proceeding or take any other action involving any such contractor, subcontractor, materialman or surety which the Lessee deems reasonably necessary, and in such event the Lessor hereby agrees, at the Lessee's sole expense, to cooperate fully with the Lessee and to take all action necessary to effect the substitution of the Lessee for the Lessor in any such action or proceeding. The Lessee shall immediately advise the Lessor of any actions or proceedings taken hereunder. ARTICLE V LEASE OF PROJECT FACILITY; RENT; CONVEYANCE OF PROJECT FACILITY SECTION 5.1. LEASE OF PROJECT FACILITY. The Lessor hereby leases the Project Facility to the Lessee, and the Lessee hereby leases the Project Facility from the Lessor, for and during the term hereinafter provided and upon and subject to the terms and conditions hereinafter set forth. The Lessee assumes and agrees to perform and discharge all of the Lessor's obligations under the Lease Documents during the Lease Term, and shall enforce all claims arising under any representation, warranty, covenant, indemnity, guarantee or agreement in the Lease Documents. SECTION 5.2. DURATION OF TERM. The term of this Lease Agreement shall become effective upon its delivery and shall expire on September 1, 2007, or such earlier date as this Lease Agreement may be terminated as hereinafter provided. The Lessor shall deliver to the Lessee and the Lessee shall accept sole and exclusive possession of the Project Facility simultaneously with the execution of this Lease Agreement. SECTION 5.3. QUIET ENJOYMENT. So long as no Event of Default shall have occurred and be continuing, and except as otherwise expressly provided herein or in the Leasing Documents, the Lessor will not disturb the Lessee in its peaceful and quiet enjoyment of the Project Facility, which shall be free from any interference, repossession or disturbance by the Lessor. SECTION 5.4. RENT AND OTHER AMOUNTS PAYABLE. (A) The Lessee shall pay rent for the Project Facility as follows: (A) On the Closing Date, the Lessee shall pay to the Lessor the agreed upon administrative fee of the Lessor in an amount not to exceed $161,125.00. (B) Within seven (7) days after receipt of a demand therefor from the Lessor, the Lessee shall pay to the Lessor the sum of the reasonable expenses of the Lessor and the officers, members, agents and employees thereof incurred by reason of the Lessor's ownership or lease of the Project Facility or in connection with the carrying out of the Lessor's duties and obligations under this Lease Agreement or any of the other Leasing Documents and any other fee or expense of the Lessor, including reasonable attorneys' fees, with respect to the Project Facility, the sale of the Project Facility to the Lessee, any of the other Leasing Documents, the payment of which is not otherwise provided for under this Lease Agreement. (C) The Lessee agrees to make the above mentioned payments, without any further notice, in lawful money of the United States of America as, at the time of payment, shall be legal tender for the payment of public and private debts. In the event the Lessee shall fail to make any payment required by this Section 5.4 for a period of more than thirty (30) days from the date such payment is due, the Lessee shall pay the same together with interest thereon at the Default Rate or the maximum permitted by law, whichever is less, from the date on which such payment was due until the date on which such payment is made. SECTION 5.5. NATURE OF OBLIGATIONS OF THE LESSEE HEREUNDER. The obligations of the Lessee to make the payments required by this Lease Agreement and to perform and observe any and all of the other covenants and agreements on its part contained herein shall be general obligations of the Lessee and shall be absolute and unconditional irrespective of any defense or any rights of set- off, recoupment or counterclaim the Lessee may otherwise have against the Lessor. The Lessee agrees that it will not suspend, discontinue or abate any payment required by, or fail to observe any of its other covenants or agreements contained in this Lease Agreement, or terminate this Lease Agreement for any cause whatsoever, including, without limiting the generality of the foregoing, failure to complete the acquisition of the Land, the construction of the Facility or the acquisition and installation of the Equipment, any material defect in the title, design, operation, merchantability, fitness or condition of the Project Facility or any part thereof or in the suitability of the Project Facility or any part thereof for the Lessee's purposes or needs, failure of consideration for, destruction of or damage to, Condemnation of title to or the use of all or any part of the Project Facility, any change in the tax or other laws of the United States of America or of the State or any political subdivision thereof, or any failure of the Lessor to perform and observe any agreement, whether expressed or implied, or any duty, liability or obligation arising out of or in connection with this Lease Agreement. ARTICLE VI MAINTENANCE, MODIFICATIONS, TAXES AND INSURANCE SECTION 6.1. MAINTENANCE AND MODIFICATIONS OF PROJECT FACILITY. The Lessee agrees that during the period that the Lease Agreement is outstanding it will (1) keep the Project Facility in good condition and repair and preserve the same against waste, loss, damage and depreciation, ordinary wear and tear excepted, (2) make all necessary repairs and replacements to the Project Facility or any part thereof (whether ordinary or extraordinary, structural or nonstructural, foreseen or unforeseen), and (3) operate the Project Facility in a sound and economic manner. SECTION 6.2. TAXES, ASSESSMENTS AND UTILITY CHARGES. The Lessee shall pay or cause to be paid, as the same respectively become due, (1) all taxes and governmental charges of any kind whatsoever which may at any time be lawfully assessed or levied against or with respect to the Project Facility, (2) all utility and other charges, including "service charges", incurred or imposed for the operation, maintenance, use, occupancy, upkeep and improvement of the Project Facility, (3) all assessments and charges of any kind whatsoever lawfully made by any Governmental Authority for public improvements, and (4) all payments required under Section 6.6 hereof; provided that, with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Lessee shall be obligated hereunder to pay only such installments as are required to be paid during all periods that sums payable by the Lessee hereunder or under any of the other Leasing Documents are due and owing. SECTION 6.3. INSURANCE REQUIRED. At all times that the Lessor is the owner of the Project Facility, the Lessee shall maintain or, with respect to the insurance required by subsection (D) of this Section 6.3, cause the general contractor to maintain insurance with respect to the Project Facility against such risks and for such amounts as are customarily insured against by businesses of like size and type, paying, as the same become due and payable, all premiums with respect thereto, including, but not necessarily limited to: (A) (1) Insurance protecting the interests of the Lessee as insured against loss or damage to the Project Facility by fire, lightning, vandalism, malicious mischief and other perils and casualties normally insured against with a uniform extended coverage endorsement, such insurance at all times to be in an amount consistent with applicable commercial standards. (B) To the extent applicable, workers' compensation insurance, disability benefits insurance and such other forms of insurance which the Lessee is required by law to provide, covering loss resulting from injury, sickness, disability or death of employees of the Lessee who are located at or assigned to the Project Facility or who are responsible for the construction of the Facility, including, but not limited to, all contractors and subcontractors. (C) Insurance protecting the Lessee and the Lessor against loss or losses from liabilities imposed by law or assumed in any written contract (including, without limitation, the contractual liability assumed by the Lessee under Section 8.2 of this Lease Agreement) and arising from personal injury or death or damage to the property of others caused by any accident or occurrence, with limits of not less than $1,000,000 per person per accident or occurrence on account of personal injury, including death resulting therefrom, and $1,000,000 per accident or occurrence on account of damage to the property of others, excluding liability imposed upon the Lessee by any applicable workers' compensation law, and a separate commercial umbrella liability policy in excess of the basic coverage stated above protecting the Lessee and the Lessor with a limit of not less than $5,000,000. (D) During any construction period, the general contractor and any subcontractor constructing and equipping the Project Facility shall be required to carry workers' compensation and general comprehensive liability insurance containing coverages for premises operations, products and completed operations, explosion, collapse and underground damage hazard, contractor's protective, owner's protective and coverage for all owned, non- owned and hired vehicles with non-ownership protection from the general contractor or subcontractor's employees providing the following minimum limits: (a) Workers' compensation and employer's liability - in accordance with applicable law, covering loss resulting from injury, sickness, disability and death of employees located at or assigned to the Facility or who are responsible for the construction of the Facility. (b) Comprehensive general liability: (i) Bodily injury liability in an amount not less than $1,000,000 for each accident and not less than $5,000,000 for injuries sustained by two or more persons in any one accident. (ii) Property damage liability in an amount not less than $1,000,000 for each accident and not less than $5,000,000 in the aggregate for each year of the policy period. (c) Comprehensive automobile liability: (i) Bodily injury liability in an amount not less than $1,000,000 for each accident and not less than $5,000,000 for injuries sustained by two or more persons in any one accident. (E) Other insurance coverage required by any Governmental Authority in connection with any Requirement. (F) THE LESSOR DOES NOT IN ANY WAY REPRESENT OR WARRANT THAT THE INSURANCE SPECIFIED HEREIN, WHETHER IN SCOPE OR IN LIMITS OF COVERAGE, IS ADEQUATE OR SUFFICIENT TO PROTECT THE LESSEE'S BUSINESS OR INTERESTS. SECTION 6.4. ADDITIONAL PROVISIONS RESPECTING INSURANCE. All insurance required by Section 6.3 hereof shall be procured and maintained in financially sound and generally recognized responsible insurance companies selected by the Lessee and authorized to write such insurance in the State and satisfactory to the Lessor. The company or companies issuing the policies required by Sections 6.3(C) shall be rated "A" or better by A.M. Best Co., Inc. in the most recent edition of Best's Key Rating Guide. Such insurance may be written with deductible amounts comparable to those on similar policies carried by other companies engaged in businesses similar in size, character and other respects to those in which the Lessee is engaged. All policies evidencing such insurance shall name the Lessee and the Lessor as insureds, as their interests may appear, and provide for at least thirty (30) days' written notice to the Lessee and the Lessor prior to cancellation, lapse, reduction in policy limits or material change in coverage thereof. The insurance required by Sections 6.3(A), 6.3(C), 6.3(D) and 6.3(F) hereof shall be fully paid for. All insurance required hereunder shall be in form, content and coverage satisfactory to the Lessor. Certificates satisfactory in form and substance to the Lessor to evidence all insurance required hereby shall be delivered to the Lessor on or before the Closing Date. The Lessee shall deliver to the Lessor on or before the first Business Day of each calendar year thereafter a certificate dated not earlier than the immediately preceding December 1 reciting that there is in full force and effect, with a term covering at least the next succeeding calendar year, insurance in the amounts and of the types required by Sections 6.3 and 6.4 hereof. At least thirty (30) days prior to the expiration of any such policy, the Lessee shall furnish to the Lessor evidence that the policy has been renewed or replaced or is no longer required by this Lease Agreement. In addition, in the event of a change of use, operation or value of the Project Facility, or in the availability of insurance in the area in which the Project Facility is located, the Lessee shall, within five (5) days after the Lessor's request, take out such additional insurance as the Lessor may reasonably require. (B) All premiums with respect to the insurance required by Section 6.3 hereof shall be paid by the Lessee; provided, however, that if the premiums are not timely paid, the Lessor may pay such premiums and the Lessee shall pay immediately upon demand all sums so expended by the Lessor, together with interest, to the extent permitted by law, at the Default Rate from the date on which such payment was due until the date on which the payment is made. (C) (1) The Lessee shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under Section 6.3 unless the Lessor is included therein as a named insured. The Lessee shall immediately notify the Lessor whenever any such separate insurance is taken out and shall promptly deliver to the Lessor the policy or policies of such insurance. (2) Each of the policies required pursuant to Section 6.3 hereof shall waive any right of subrogation against any Person insured under such policy, and shall waive any right of the insurers to any set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of any Person insured under such policy. SECTION 6.5. APPLICATION OF NET PROCEEDS OF INSURANCE. The Net Proceeds of the insurance carried pursuant to the provisions of Section 6.3 hereof shall be applied as follows: (A) the Net Proceeds of the insurance required by Section 6.3(A) hereof shall be paid to the Lessee and applied as provided in Section 7.1 hereof, (B) the Net Proceeds of the insurance required by Section 6.3(B), 6.3(C), 6.3(D) and 6.3(E) hereof shall be applied toward extinguishment or satisfaction of the liability with respect to which such insurance proceeds may be paid. SECTION 6.6. PAYMENTS IN LIEU OF TAXES. (A) It is recognized that, under the provisions of the Act, the Lessor is required to pay no taxes or assessments upon any of the property acquired by it or under its jurisdiction, control or supervision or upon its activities. It is not the intention, however, of the parties hereto that the Project Facility be treated as exempt from real property taxation. Accordingly, the parties acknowledge that a Payment In Lieu of Tax Agreement (the "PILOT Agreement") has been executed with respect to the Project Facility. Until the expiration date of the PILOT Agreement, the Lessor and the Lessee hereby agree that the Lessee (or any subsequent user of the Project Facility under this Lease Agreement) shall be required to make or cause to be made payments in lieu of real estate taxes in the amounts and in the manner set forth in the PILOT Agreement. (B) In the event that (1) the Project Facility would be subject to real property taxation if owned by the Lessee but shall be deemed exempt from real property taxation due to the involvement of the Lessor therewith, and (2) the PILOT Agreement shall not have been entered into by the Lessor and the Lessee, or, if entered into, the PILOT Agreement shall for any reason no longer be in effect, the Lessor and the Lessee hereby agree that the Lessee, or any subsequent user of the Project Facility under this Lease Agreement, shall in such event be required to make or cause to be made payments in lieu of taxes to the school district or school districts, city, town, county, village and other political units wherein the Project Facility is located having taxing powers (such political units are hereinafter collectively referred to as the "Taxing Entities") in such amounts as would result from taxes being levied on the Project Facility by the Taxing Entities if the Project Facility were privately owned by the Lessee and not deemed owned by or under the jurisdiction, control or supervision of the Lessor, but with appropriate reductions similar to the real property tax exemptions and credits, if any, which would be afforded to the Lessee if it were the owner of the Project Facility. It is agreed that the Lessee, in cooperation with the Lessor, (a) shall cause the Project Facility to be valued for purposes of determining the amounts due hereunder as if owned by the Lessee as aforesaid by the appropriate officer or officers of any of the Taxing Entities as may from time to time be charged with responsibility for making such valuations, (b) shall cause to be appropriately applied to the valuation or valuations so determined the respective tax rate or rates of the Taxing Entities that would be applicable to the Project Facility if so privately owned, (c) shall cause the appropriate officer or officers of the Taxing Entities charged with the duty of levying and collecting such taxes to submit to the Lessee, when the respective levies are made for purposes of such taxes upon Property privately owned as aforesaid, statements specifying the amounts and due dates of such taxes which the Taxing Entities would receive if such Property were so privately owned by the Lessee and not deemed owned by or under the jurisdiction, control or supervision of the Lessor, and (d) shall file with the appropriate officer or officers any accounts or tax returns furnished to the Lessor by the Lessee for the purpose of such filing. (C) The Lessee shall pay or cause to be paid to the Taxing Entities when due all such payments in lieu of taxes with respect to the Project Facility required by Section 6.6(B) of this Lease Agreement to be paid to the Taxing Entities, subject in each case to the Lessee's right to (a) obtain exemptions and credits, if any, which would be afforded to a private owner of the Project Facility, including any available exemption under Section 485-b of the New York Real Property Tax Law with respect to the Project Facility, (b) contest valuations of the Project Facility made for the purpose of determining such payments therefrom (provided, however, no such contest shall entitle the Lessee to defer payments in lieu of taxes by reason of any such contest), and (c) seek to obtain a refund of any such payments made. In the event the Lessee shall fail to make or cause to be made any such payments in lieu of taxes, the amount or amounts so in default shall continue as an obligation of the Lessee until fully paid, and the Lessee hereby agrees to pay or cause to be paid the same, together with late charges and interest thereon as provided for in subsection (5) of Section 874 of the General Municipal Law of the State (or any successor provision). ARTICLE VII DAMAGE, DESTRUCTION AND CONDEMNATION SECTION 7.1. DAMAGE OR DESTRUCTION. If the Project Facility shall be damaged or destroyed, in whole or in part, the Lessee shall give the Lessor prompt written notice thereof. As between the Lessor and the Lessee, the Lessee shall have sole right to and control over the use of the Net Proceeds of any insurance settlement. The Lessee shall not be obligated to replace, repair, rebuild or restore the Project Facility, and the Net Proceeds of any insurance settlement shall not be applied to replace, repair, rebuild or restore the Project Facility if the Lessee shall notify the Lessor that, in the Lessee's sole judgment, the Lessee does not deem it practical or desirable to so replace, repair, rebuild or restore the Project Facility. The Lessor shall have no obligation to rebuild or restore the Project Facility, and upon payment of all payments due pursuant to Section 5.4 hereof, the Lease Term shall end and the obligations of the Lessee hereunder (other than any such obligations expressed herein as surviving termination of this Lease Agreement) shall terminate as of the date of such payment and the Lessor shall transfer to the Lessee, without recourse or warranty, all right, title and interest of the Lessor in and to the Project Facility. SECTION 7.2. CONDEMNATION. If title to, or the use of, the Project Facility shall be taken by Condemnation, the Lessee shall give the Lessor prompt written notice thereof. As between the Lessor and the Lessee, the Lessee shall have sole right to and control over the use of the Net Proceeds of any insurance settlement. The Net Proceeds of any Condemnation award shall not be applied to restore the Project Facility if the Lessee shall notify the Lessor that, in the Lessee's sole judgment, the Lessee does not deem it practical or desirable to restore the Project Facility. The Lessor shall have no obligation to restore the Project Facility, and upon payment of all payments due pursuant to Section 5.4 hereof, the Lease Term shall end and the obligations of the Lessee hereunder (other than any such obligations expressed herein as surviving termination of this Lease Agreement) shall terminate as of the date of such payment and the Lessor shall transfer to the Lessee, without recourse or warranty, all right, title and interest of the Lessor in and to the Project Facility. ARTICLE VIII SPECIAL COVENANTS SECTION 8.1. NO WARRANTY OF CONDITION OR SUITABILITY BY LESSOR; ACCEPTANCE "AS IS". THE LESSOR MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE CONDITION, TITLE, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS OF THE PROJECT FACILITY OR ANY PART THEREOF OR AS TO THE SUITABILITY OF THE PROJECT FACILITY OR ANY PART THEREOF FOR THE LESSEE'S PURPOSES OR NEEDS. THE LESSEE SHALL ACCEPT TITLE TO THE PROJECT FACILITY "AS IS", WITHOUT RECOURSE OF ANY NATURE AGAINST THE LESSOR FOR ANY CONDITION NOW, HERETOFORE OR HEREAFTER EXISTING. NO WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY ARE MADE. IN THE EVENT OF ANY DEFECT OR DEFICIENCY OF ANY NATURE, WHETHER PATENT OR LATENT, THE LESSOR SHALL HAVE NO RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO. SECTION 8.2. HOLD HARMLESS PROVISIONS. (A) The Lessee hereby (i) releases the Lessor and its members, officers, agents (other than the Lessee) and employees from, (ii) agrees that the Lessor and its members, officers, agents (other than the Lessee) and employees shall not be liable for, and (iii) agrees to indemnify, defend and hold the Lessor and its members, officers, agents (other than the Lessee) and employees harmless from and against: any and all claims, causes of action, judgments, liabilities, damages, losses, costs and expenses arising as a result of the Lessor's undertaking the Project, including, but not limited to, (1) liability for loss or damage to Property or bodily injury to or death of any and all Persons that may be occasioned, directly or indirectly, by any cause whatsoever pertaining to the Project Facility or arising by reason of or in connection with the occupation or the use thereof or the presence of any Person or Property on, in or about the Project Facility, (2) liability arising from or expense incurred by the Lessor's acquiring, constructing, reconstructing, installing, owning or selling the Project Facility, including, without limiting the generality of the foregoing, any sales or use taxes which may be payable with respect to goods supplied or services rendered with respect to the Project Facility and any and all claims for brokerage, leasing, finders or similar fees which may be made relating to the Project Facility, all liabilities or claims arising as a result of the Lessor's obligations under this Lease Agreement or any of the other Leasing Documents or the enforcement of or defense of validity of any provision of any Leasing Documents, and any and all liability arising out of environmental matters with respect to the Project Facility, and (3) all causes of action and reasonable attorneys' fees and other expenses incurred in connection with any suits or actions which may arise as a result of any of the foregoing; provided that any such claims, causes of action, judgments, liabilities, damages, losses, costs or expenses of the Lessor are not incurred or do not result from the intentional wrongdoing of the Lessor or any of its members, officers, agents (other than the Lessee) or employees. The foregoing indemnities shall apply notwithstanding the fault or negligence in part of the Lessor or any of its officers, members, agents or employees and notwithstanding the breach of any statutory obligation or any rule of comparative or apportioned liability. (B) In the event of any claim against the Lessor or its members, officers, agents (other than the Lessee) or employees by any employee of the Lessee or any contractor of the Lessee or anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, the obligations of the Lessee hereunder shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for the Lessee or such contractor under workers' compensation laws, disability benefits laws or other employee benefit laws. (C) To effectuate the provisions of this Section 8.2, the Lessee agrees to provide for and insure, in the liability policies required by Section 6.3(C) of this Lease Agreement, its liabilities assumed pursuant to this Section 8.2. (D) Notwithstanding any other provisions of this Lease Agreement, the obligations of the Lessee pursuant to this Section 8.2 shall remain in full force and effect after the termination of this Lease Agreement until the expiration of the period stated in the applicable statute of limitations during which a claim, cause of action or prosecution relating to the matters herein described may be brought and the payment in full or the satisfaction of such claim, cause of action or prosecution and the payment of all expenses, charges and costs incurred by the Lessor, or its officers, members, agents (other than the Lessee) or employees, relating thereto. SECTION 8.3. RIGHT OF ACCESS TO PROJECT FACILITY. The Lessee agrees that the Lessor and their duly authorized agents shall have the right at all reasonable times to enter upon and to examine and inspect the Project Facility. SECTION 8.4. THE LESSEE NOT TO TERMINATE EXISTENCE OR DISPOSE OF ASSETS. The Lessee agrees that, so long as the Lease Agreement is in effect, it will maintain its existence and will not dissolve or otherwise dispose of all or substantially all of its assets absent the prior written consent of the Lessor, which consent will not be unreasonably withheld or delayed. SECTION 8.5. AGREEMENT TO PROVIDE INFORMATION. The Lessee agrees, whenever requested by the Lessor, to provide and certify or cause to be provided and certified such information concerning the Lessee, its finances and other topics as the Lessor from time to time reasonably consider necessary or appropriate, including, but not limited to, such information as to enable the Lessor to make any reports required by law or governmental regulation. SECTION 8.6. COMPLIANCE WITH ORDERS, ORDINANCES, ETC. (A) The Lessee agrees that it will, during any period in which the Lease Agreement is in effect, promptly comply with all statutes, codes, laws, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all Governmental Authorities, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Lessee or the Project Facility or any part thereof, or to any use, manner of use or condition of the Project Facility or any part thereof. (B) Notwithstanding the provisions of subsection (A) of this Section 8.6, the Lessee may in good faith actively contest the validity or the applicability of any requirement of the nature referred to in such subsection (A), provided that the Lessee (1) first shall have notified the Lessor in writing of such contest, (2) is not in default under any of the Leasing Documents and (3) shall have set aside adequate reserves for any such requirement. Otherwise, the Lessee shall promptly take such action with respect thereto as shall be satisfactory to the Lessor. (C) Notwithstanding the provisions of subsection (B) of this Section 8.6, if the Lessor or any of its members, officers, agents, servants or employees may be liable for prosecution for failure to comply therewith, the Lessee shall promptly take such action with respect thereto as shall be satisfactory to the Lessor. SECTION 8.7. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS. Should the Lessee fail to make any payment or to do any act as herein provided, the Lessor may, but need not, without notice to or demand on the Lessee and without releasing the Lessee from any obligation herein, make or do the same, including, without limitation, appearing in and defending any action purporting to affect the rights or powers of the Lessee or the Lessor, and paying all expenses, including, without limitation, reasonable attorneys' fees; and the Lessee shall pay immediately upon demand all sums so expended by the Lessor under the authority hereof, together with interest thereon at the rate of two percent (2%) per month or the maximum permitted by law, whichever is less. SECTION 8.8. DEPRECIATION DEDUCTIONS AND TAX CREDITS. The parties agree that as between them the Lessee shall be entitled to all depreciation deductions and accelerated cost recovery system deductions with respect to any portion of the Project Facility pursuant to Sections 167 and 168 of the Internal Revenue Code of 1986, as amended (the "Code"), and to any investment credit pursuant to Section 38 of the Code with respect to any portion of the Project Facility which constitutes "Section 38 Property" and to all other state and/or federal income tax deductions and credits which may be available with respect to the Project Facility. ARTICLE IX ASSIGNMENTS; MERGER OF LESSOR SECTION 9.1. RESTRICTION ON TRANSFER OF LESSOR'S INTEREST HEREUNDER. Except as otherwise specifically provided in this Article IX hereof and except for a conveyance by the Lessor in accordance with the provisions of Section 10.2(A)(4) hereof, neither the Lessor nor the Lessee shall sell, assign or otherwise dispose of any of their rights under this Lease Agreement, without the prior written consent of the Lessee or the Lessor, as the case may be, which consents shall not be unreasonably withheld or delayed. SECTION 9.2. ASSIGNMENT OF THIS LEASE AGREEMENT. This Lease Agreement may be assigned by the Lessee, in whole or in part, but only with the prior written consent of the Lessor, which consent shall not be unreasonably withheld or delayed, and provided that: (1) no assignment shall relieve the Lessee from primary liability for any of its obligations hereunder; (2) the assignee shall be qualified to transact business in the State of New York and shall assume the obligations of the Lessee hereunder to the extent of the interest assigned; (3) the Lessee shall, within ten (10) days after the delivery thereof, furnish or cause to be furnished to the Lessor a true and complete copy of such assignment and the instrument of assumption; and (4) the Facility shall continue to constitute a "project" as such quoted term is defined in the Act. SECTION 9.3. MERGER OF THE LESSOR. (A) Nothing contained in this Lease Agreement shall prevent the consolidation of the Lessor with, or merger of the Lessor into, or assignment by the Lessor of its rights and interests hereunder to, any other public benefit corporation of the State or political subdivision thereof which has the legal authority to perform the obligations of the Lessor hereunder, provided that upon any such consolidation, merger or assignment, the due and punctual performance and observance of all of the agreements and conditions of this Lease Agreement to be kept and performed by the Lessor shall be expressly assumed in writing by the public benefit corporation or political subdivision resulting from such consolidation or surviving such merger or to which the Lessor's rights and interests hereunder or under this Lease Agreement shall be assigned. (B) As of the date of any such consolidation, merger or assignment, the Lessor shall give notice thereof in reasonable detail to the Lessee. The Lessor shall promptly furnish to the Lessee such additional information with respect to any such consolidation, merger or assignment as the Lessee reasonably may request. SECTION 9.4. SALE OR LEASE OF PROJECT FACILITY. Except as provided for below, the Lessee may not otherwise sell, lease, transfer, convey or otherwise dispose of the Project Facility or any part thereof without the prior written consent of the Lessor, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, the Lessee may sell or otherwise dispose of any items of personal property constituting Equipment without obtaining the prior consent of the Lessor. The Lessor agrees to execute any documents and instruments as may be reasonably required in order to effectuate any such sale or disposal, upon written request of the Lessee and at no cost or expense to the Lessor. ARTICLE X EVENTS OF DEFAULT AND REMEDIES SECTION 10.1. EVENTS OF DEFAULT DEFINED. (A) The following shall be "Events of Default" under this Lease Agreement, and the terms "Event of Default" or "Default" shall mean, whenever they are used in this Lease Agreement, any one or more of the following events: (1) A default by the Lessee in the due and punctual payment of the amounts specified to be paid pursuant to Section 5.4 (A) hereof, and the continuance thereof for a period of ten (10) days. (2) A default in the performance or observance of any other of the covenants, conditions or agreements on the part of the Lessee in this Lease Agreement and the continuance thereof for a period of thirty (30) days after written notice is given by the Lessor to the Lessee; provided, however, that if such default cannot reasonably be cured within said thirty (30) day period and the Lessor or the Lessee shall have commenced action to cure the breach of covenant within said thirty (30) day period, and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for so long as the Lessor or the Lessee shall require, in the exercise of due diligence, to cure such default, it being agreed that no such extension shall be for a period in excess of sixty (60) days. If any conflict shall exist between the provisions of this Subsection (2) and the immediately following Subsection (3) as to when an Event of Default has occurred, the provisions of such Subsection (3) shall govern. (3) The occurrence of an Event of Default under any of the other Leasing Documents. (4) Any representation or warranty made by the Lessee herein or in any other Leasing Document proves to have been false in any material manner at the time it was made. (5) (a) The filing by the Lessee (as debtor) of a voluntary petition under Title 11 of the United States Code or any other federal or state bankruptcy statute, (b) the failure by the Lessee within ninety (90) days to lift any execution, garnishment or attachment of such consequence as will impair the Lessee's ability to carry out its obligations hereunder, (c) the commencement of a case under Title 11 of the United States Code against the Lessee as the debtor or commencement under any other federal or state bankruptcy statute of a case, action or proceeding against the Lessee and continuation of such case, action or proceeding without dismissal for a period of ninety (90) days, (d) the entry of an order for relief by a court of competent jurisdiction under Title 11 of the United States Code or any other federal or state bankruptcy statute with respect to the debts of the Lessee, or (e) in connection with any insolvency or bankruptcy case, action or proceeding, appointment by final order, judgment or decree of a court of competent jurisdiction of a receiver or trustee of the whole or a substantial portion of the Property of the Lessee, unless such order, judgment or decree is vacated, dismissed or dissolved within ninety (90) days of such appointment. (6) If by order of a court of competent jurisdiction, a trustee, receiver or liquidator of the Lessee or the Project Facility or any part thereof, shall be appointed and such order shall not be discharged or dismissed within ninety (90) days after such appointment. (7) The dissolution of the Lessee. (8) If a Lien for the performance of work or the supply of materials is filed against the Project Facility and is not satisfied or bonded within sixty (60) days after notice of filing thereof is received by the Lessee or if the Project Facility is encumbered by any other Lien or encumbrance not approved by the Lessor for sixty (60) or more days after the Lessee has actual knowledge or written notice of the existence of such Lien or encumbrance. (9) If at any time any insurance policy required to be maintained pursuant to any of the Leasing Documents shall be canceled, terminated or lapse and shall not have been replaced prior to the effective date of such cancellation, termination or lapse by a policy covering the same matters as the lapsed policy, which new policy shall comply with all requirements in the Leasing Documents relating to such type of insurance. (10) If any real estate tax, payment in lieu of tax or assessment payable with respect to the Project Facility is not paid before any fine, penalty or interest shall be due with respect thereto. SECTION 10.2. REMEDIES ON DEFAULT. (A) Whenever any Event of Default shall have occurred, the Lessor may, to the extent permitted by law, take any one or more of the following remedial steps: (1) Declare, by written notice to the Lessee, to be immediately due and payable, whereupon the same shall become immediately due and payable, (a) all unpaid payments payable pursuant to Section 5.4(A) hereof, and (b) all other payments due under this Lease Agreement or any of the other Leasing Documents. (2) Enforce or terminate this Lease Agreement. (3) Take any other action at law or in equity which may appear necessary or desirable to collect any amounts then due or thereafter to become due hereunder and to enforce the obligations, agreements or covenants of the Lessee under this Lease Agreement. (4) In the event of a default by the Lessee in the payment of any amounts due and owing under the PILOT Agreement, terminate this Lease Agreement and the PILOT Agreement and reconvey the Project Facility to the Lessee. The Lessee hereby consents to said reconveyance and appoints the Lessor its attorney-in-fact, which appointment is coupled with an interest and is irrevocable, to execute any and all instruments and documents in its name as may be necessary, in the sole discretion of the Lessor, to effectuate such transfer. (B) No action taken pursuant to this Section 10.2 shall relieve the Lessee from its obligations to make all payments required by this Lease Agreement and the other Leasing Documents. SECTION 10.3. REMEDIES CUMULATIVE. No remedy herein conferred upon or reserved to the Lessor is intended to be exclusive of any other available remedy, but each and every such remedy shall be cumulative and in addition to every other remedy given under this Lease Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Lessor to exercise any remedy reserved to it in this Article X, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. SECTION 10.4. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. In the event the Lessee should default under any of the provisions of this Lease Agreement and the Lessor should employ attorneys or incur other expenses for the collection of amounts payable hereunder or the enforcement of performance or observance of any obligations or agreements on the part of the Lessee herein contained, the Lessee shall, on demand therefor, pay to the Lessor the reasonable fees of such attorneys and such other expenses so incurred, whether an action is commenced or not. SECTION 10.5. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event any agreement contained herein should be breached by either party and thereafter such breach be waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. ARTICLE XI EARLY TERMINATION OF LEASE AGREEMENT SECTION 11.1. OPTION TO TERMINATE LEASE AGREEMENT. The Lessee shall have, if there exists no Event of Default hereunder, the option to cancel or terminate this Lease Agreement, subject to the survival of those obligations of the Lessee which are intended to survive the term of this Lease Agreement, upon payment of all payments currently due and owing pursuant to Sections 5.4 and 6.6 hereof, and by giving the Lessor notice in writing of such termination and thereupon such termination shall forthwith become effective. SECTION 11.2. OBLIGATION TO SELL AND PURCHASE THE PROJECT FACILITY. Upon termination of this Lease Agreement in accordance with Section 5.2 or 11.1 hereof, the Lessor shall be obligated to sell the Project Facility to the Lessee, and the Lessee shall be obligated to purchase the Project Facility from the Lessor for the purchase price of One Dollar ($1.00) plus payment of all sums due and payable to the Lessor hereunder. SECTION 11.3. CONVEYANCE OF PROJECT FACILITY UPON PURCHASE. (A) At the closing of any purchase of the Project Facility pursuant to Section 11.2 hereof, the Project Facility shall be conveyed from the Lessor to the Lessee subject only to Permitted Encumbrances. The Lessee agrees to prepare the Deed to Lessee together with all gains tax affidavits, equalization and assessment forms and other necessary documentation and to forward same to the Lessor at least thirty (30) days prior to the date that the Project Facility is to be conveyed to the Lessee. The Lessee will pay all expenses and taxes, if any, applicable to or arising from such transfers of title. (B) The sale and conveyance of the Lessor's right, title and interest in and to the Land and the Facility shall be effected by the execution, delivery and recording by the Lessor of the Deed to Lessee (in substantially the form attached hereto as Exhibit "B" and by this reference made a part hereof). (C) The sale and conveyance of the Lessor's right, title and interest in and to the Equipment shall be effected by the execution and delivery by the Lessor of the Bill of Sale to Lessee (in substantially the form attached hereto as Exhibit "C" and by this reference made a part hereof. (D) The Lessee hereby agrees to pay all expenses, filing and recording fees and taxes, if any, and the reasonable attorneys' fees of the Lessor applicable to or arising from the transfers contemplated by this Section 11.3. (E) If, upon conveyance of the Project Facility to the Lessee pursuant to this Section 11.3, the Lessor has failed to comply with the covenant set forth in Section 2.1(D) hereof, the Lessee may, at its option, accept the conveyance subject to the Lessee's right to seek redress as against the Lessor for such failure to comply with Section 2.1(D). ARTICLE XII MISCELLANEOUS SECTION 12.1. NOTICES. All notices, certificates and other communications hereunder shall be in writing and shall be sufficiently given and shall be deemed given when (A) sent to the applicable address stated below by registered or certified mail, return receipt requested, or by such other means (including overnight delivery) as shall provide the sender with documentary evidence of such delivery, or (B) delivery is refused by the addressee, as evidenced by the affidavit of the person who attempted to effect such delivery. The addresses to which notices, certificates and other communications hereunder shall be delivered are as follows: IF TO THE LESSEE: Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521-2134 Attention: George H. Harris Ace Hardware Corporation 2200 Kensington Court Oak Brook, Illinois 60521-2134 Attention: John J. Van Zeyl IF TO THE LESSOR: County of Saratoga Industrial Development Agency Saratoga County Municipal Center 40 McMaster Street Ballston Spa, New York 12020 Attention: Chairman WITH A COPY TO: Snyder, Kiley, Toohey & Corbett 160 West Avenue P.O. Box 4367 Saratoga Springs, New York 12866 Attention: Michael J. Toohey, Esq. The Lessor and the Lessee may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates and other communications shall be sent. SECTION 12.2. BINDING EFFECT. This Lease Agreement shall inure to the benefit of the Lessor and the Lessee, and shall be binding upon the Lessor, the Lessee and, as permitted by this Lease Agreement, their respective successors and assigns. SECTION 12.3. SEVERABILITY. If any one or more of the covenants or agreements provided herein on the part of the Lessor or the Lessee to be performed shall, for any reason, be held or shall, in fact, be inoperative, unenforceable or contrary to law in any particular case, such circumstance shall not render the provision in question inoperative or unenforceable in any other case or circumstance. Further, if any one or more of the phrases, sentences, clauses, paragraphs or sections herein shall be contrary to law, then such covenant or covenants or agreement or agreements shall be deemed separable from the remaining covenants and agreements hereof and shall in no way affect the validity of the other provisions of this Lease Agreement. SECTION 12.4. AMENDMENTS, CHANGES AND MODIFICATIONS. This Lease Agreement may not be amended, changed, modified, altered or terminated, except by an instrument in writing signed by the parties hereto. SECTION 12.5. EXECUTION OF COUNTERPARTS. This Lease Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 12.6. APPLICABLE LAW. This Lease Agreement shall be governed exclusively by the applicable laws of the State. SECTION 12.7. RECORDING AND FILING. The Deed to Lessor and this Lease Agreement (or a Memorandum thereof) shall be recorded by the Lessor at the expense of the Lessee in the office of the Clerk of Saratoga County, New York, or in such other office as may at the time be provided by law as the proper place for the recordation or filing thereof. SECTION 12.8. SURVIVAL OF OBLIGATIONS. The obligations of the Lessee to make the payments required by Section 5.4(A) hereof and to provide the indemnity required by Section 8.2 hereof shall survive the termination of this Lease Agreement, and all such payments after such termination shall be made upon demand of the party to whom such payment is due. SECTION 12.9. TABLE OF CONTENTS AND SECTION HEADINGS NOT CONTROLLING. The table of contents and the headings of the several sections in this Lease Agreement have been prepared for convenience of reference only and shall not control, affect the meaning of or be taken as an interpretation of any provision of this Lease Agreement. SECTION 12.10. NO RECOURSE; SPECIAL OBLIGATION. The obligations and agreements of the Lessor contained herein and in the other Leasing Documents and any other instruments or documents executed in connection therewith or herewith, and any other instrument or document supplemental thereto or hereto, shall be deemed the obligations and agreements of the Lessor, and not of any member, officer, agent (other than the Lessee) or employee of the Lessor in his or her individual capacity, and the members, officers, agents (other than the Lessee) and employees of the Lessor shall not be liable personally hereon or thereon or be subject to any personal liability or accountability based upon or in respect hereof or thereof or of any transaction contemplated hereby or thereby. The obligations and agreements of the Lessor contained herein and therein shall not constitute or give rise to an obligation of the State of New York or the County of Saratoga, New York, and neither the State of New York nor the County of Saratoga, New York shall be liable hereon or thereon, and, further, such obligations and agreements shall not constitute or give rise to a general obligation of the Lessor, but rather shall constitute limited, special obligations of the Lessor payable solely from the revenues of the Lessor derived and to be derived from the sale or other disposition of the Project Facility (except for revenues derived by the Lessor with respect to the Unassigned Rights). No order or decree of specific performance with respect to any of the obligations of the Lessor hereunder shall be sought or enforced against the Lessor unless (A) the party seeking such order or decree shall first have requested the Lessor in writing to take the action sought in such order or decree of specific performance, and ten (10) days shall have elapsed from the date of receipt of such request, and the Lessor shall have refused to comply with such request (or, if compliance therewith would reasonably be expected to take longer than ten [10] days, shall have failed to institute and diligently pursue action to cause compliance with such request) or failed to respond within such notice period, (B) if the Lessor refuses to comply with such request and the Lessor's refusal to comply is based on its reasonable expectation that it will incur fees and expenses, the party seeking such order or decree shall have placed in an account with the Lessor an amount or undertaking sufficient to cover such reasonable fees and expenses, and (C) if the Lessor refuses to comply with such request and the Lessor's refusal to comply is based on its reasonable expectation that it or any of its members, officers, agents (other than the Lessee) or employees shall be subject to potential liability, the party seeking such order or decree shall (1) agree to indemnify, hold harmless and defend the Lessor and its members, officers, agents (other than the Lessee) and employees against any liability incurred as a result of its compliance with such demand, and (2) if requested by the Lessor, furnish to the Lessor satisfactory security to protect the Lessor and its members, officers, agents (other than the Lessee) and employees against all liability expected to be incurred as a result of compliance with such request. Any failure to provide the indemnity required in this Section 12.10 shall not affect the full force and effect of an Event of Default under any of the Leasing Documents. SECTION 12.11. SUBMISSION TO JURISDICTION. The Lessee hereby irrevocably and unconditionally agrees that any suit, action or proceeding arising out of or relating to this Lease Agreement shall be brought in the state courts of the State of New York or federal district court for the Northern District of New York and waives any right to object to jurisdiction within either of the foregoing forums by the Lessor. Nothing contained herein shall prevent the Lessor from bringing any suit, action or proceeding or exercising any rights against any security and against the Lessee personally, and against any property of the Lessee, within any other jurisdiction and the initiation of such suit, action or proceeding or taking of such action in any such other jurisdiction shall in no event constitute a waiver of the agreements contained herein with respect to the laws of the State of New York governing the rights and obligations of the parties hereto or the agreement of the Lessee to submit to personal jurisdiction within the State of New York. IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease Agreement to be executed in their respective names by their respective Authorized Representatives, all as of the day and year first above written. COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AGENCY By:______________________________________________ Floyd H. Rourke, Chairman ACE HARDWARE CORPORATION By:______________________________________________ Name:___________________________________________ Title:____________________________________________ STATE OF NEW YORK ) ) SS.: COUNTY OF ) On the ____ day of ____________, 1996, before me personally came FLOYD H. ROURKE, to me known, who being by me duly sworn, did depose and say that he resides in Ballston Spa, New York, that he is the CHAIRMAN of the COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AGENCY, the public benefit corporation of the State of New York described in and which executed the foregoing instrument, and that he signed his name thereto by authority of said public benefit corporation. _______________________________________ Notary Public STATE OF ILLINOIS ) ) SS.: COUNTY OF DUPAGE ) On this __ day of ___________, 1996, before me personally came ________________, to me known, who being by me duly sworn, did depose and say that he resides in ________________________, that he is the _________________ of ACE HARDWARE CORPORATION, the corporation described in and which executed the foregoing instrument, and that he signed his name thereto by order of the Board of Directors of said corporation. _______________________________________ Notary Public EXHIBIT "A" DESCRIPTION OF LAND EXHIBIT "B" FORM OF DEED TO LESSEE THIS INDENTURE made __________________, ____, between COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AGENCY, a public benefit corporation organized under the laws of the State of New York, with offices at Saratoga County Municipal Center, 40 McMaster Street, Ballston Spa, New York 12020, party of the first part, and ACE HARDWARE CORPORATION, a Delaware corporation and having an address of 2200 Kensington Court, Oak Brook, Illinois 60521- 2134, party of the second part WITNESSETH that the party of the first part, in consideration of One and 00/100 dollars ($1.00), lawful money of the United States, and other good and valuable consideration paid by the party of the second part, does hereby grant and release unto the party of the second part, its successors and assigns all the following described premises: [Insert description of Land from Deed to Lessor] TOGETHER with the appurtenances and all the estate and rights of the party of the first part in and to said premises, TO HAVE AND TO HOLD the premises herein granted unto the party of the second part, the heirs or successors and assigns of the party of the second part forever. The word "party" shall be construed as if it read "parties" whenever the sense of this Indenture so requires. IN WITNESS WHEREOF, the party of the first part has duly executed this deed the day and year first above written. COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AGENCY By:______________________________________________ , Chairman EXHIBIT "C" FORM OF BILL OF SALE TO LESSEE County of Saratoga Industrial Development Agency, a public benefit corporation of the State of New York (the "State") having its office at Saratoga County Municipal Center, 40 McMaster Street, Ballston Spa, New York 12020 (the "Grantor"), for the consideration of One Dollar ($1.00), cash in hand paid, and other good and valuable consideration received by the Grantor from Ace Hardware Corporation, a Delaware corporation having an address of 2200 Kensingston Court, Oak Brook, Illinois 60521-2134 (the "Grantee"), the receipt of which is hereby acknowledged by the Grantor, hereby sells, transfers and delivers unto the Grantee, and its successors and assigns, all those machinery, equipment, fixtures or furnishings installed into the Facility (as defined in the lease agreement dated as of September 1, 1996, [the "Lease Agreement"] by and between the Grantor and the Grantee) and such additions thereto and substitutions therefor as may be made from time to time. TO HAVE AND TO HOLD the same unto the Grantee, and its successors and assigns, forever. THE GRANTOR MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE CONDITION, TITLE, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS OF ANY OF THE EQUIPMENT DESCRIBED ABOVE. THE GRANTEE ACCEPTS TITLE TO SUCH EQUIPMENT "AS IS", WITHOUT RECOURSE AGAINST THE GRANTOR FOR ANY CONDITION NOW OR HEREAFTER EXISTING. IN THE EVENT OF A DEFICIENCY OR DEFAULT OF ANY NATURE, WHETHER PATENT OR LATENT, THE GRANTOR SHALL HAVE NO RESPONSIBILITY OR LIABILITY WHATSOEVER WITH RESPECT THERETO. IN WITNESS WHEREOF, the Grantor has caused this bill of sale to be executed in its name by its duly authorized officer on the date indicated beneath the signature of such officer and dated as of the _____ day of __________, ____. COUNTY OF SARATOGA INDUSTRIAL DEVELOPMENT AGENCY By:______________________________ , Chairman EX-10 6 EXHIBIT 10-A-14 ACE HARDWARE CORPORATION $30,000,000 6.47% Series A Senior Notes Due June 22, 2008 $70,000,000 Private Shelf Facility AMENDED AND RESTATED NOTE PURCHASE AND PRIVATE SHELF AGREEMENT Dated as of August 23, 1996 ACE HARDWARE CORPORATION 2200 Kensington Court Oak Brook, Illinois 60521 As of August 23, 1996 The Prudential Insurance Company of America ("Prudential") Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter provided (together with Prudential, the "Purchasers") c/o Prudential Capital Group Two Prudential Capital Group Suite 5600 Chicago, Illinois 60601 Ladies and Gentlemen: The undersigned, Ace Hardware Corporation (herein called the "Company"), is a party with you to that certain Note Agreement dated as of September 22, 1993 (as amended, modified or supplemented from time to time, the "Agreement"). The Company desires to amend and restate the Agreement as set forth below. 1. AUTHORIZATION OF ISSUE OF NOTES. 1A. Authorization of Issue of Series A Notes. The Company has authorized and issued its senior promissory notes (the "Series A Notes") in the aggregate principal amount of $30,000,000, to be dated September 22, 1993 issue thereof, to mature June 22, 2008, to bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable at the rate of 6.47% per annum and on overdue principal, Yield-Maintenance Amount and interest at the rate specified therein, and are substantially in the form of Exhibit A-1 attached hereto. The terms "Series A Note" and "Series A Notes" as used herein shall include each Series A Note delivered pursuant to any provision of this Agreement and each Series A Note delivered in substitution or exchange for any such Series A Note pursuant to any such provision. 1B. Authorization of Issue of Shelf Notes. The Company has authorized the issue of (but, except as provided in paragraph 2(B)7 will not be obligated to issue) its additional senior promissory notes (the "Shelf Notes") in the aggregate principal amount of $70,000,000 (or the Canadian Dollar Equivalent), to be dated the date of issue thereof, to mature, in the case of each Shelf Note so issued, no more than 5 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than 15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in the Confirmation of Acceptance with respect to such Shelf Note delivered pursuant to paragraph 2B(5), and to be substantially in the form of Exhibit A-2 attached hereto in the case of Notes denominated in American Dollars and substantially in the form of Exhibit A-2 attached hereto in the case of notes denominated in Canadian Dollars. The terms "Shelf Note" and "Shelf Notes" as used herein shall include each Shelf Note delivered pursuant to any provision of this Agreement and each Shelf Note delivered in substitution or exchange for any such Shelf Note pursuant to any such provision. The terms "Note" and "Notes" as used herein shall include each Series A Note and each Shelf Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods and (vi) the same date of issuance (which, in the case of a Note issued in exchange for another Note, shall be deemed for these purposes the date on which such Note's ultimate predecessor Note was issued), are herein called a "Series" of Notes. 2. PURCHASE AND SALE OF NOTES. 2A. Purchase and Sale of Series A Notes. The Company has sold to you $30,000,000 aggregate principal amount of Series A Notes at 100% of such aggregate principal amount. On September 22, 1993 (herein called the "Series A Closing Day"), the Company delivered to Prudential at the offices of Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, one or more Series A Notes registered in your name, evidencing the aggregate principal amount of Series A Notes purchased by Prudential and in the denomination or denominations specified in the Purchaser Schedule attached hereto as Annex 1, against payment of the purchase price thereof, the receipt of which is hereby acknowledged, by transfer of immediately available funds for credit to the Company's account #94064 at The Northern Trust Company, Chicago, Illinois, ABA Routing Number 071000152. The purchase by Prudential of the Series A Notes pursuant to the Agreement was subject to certain conditions which were either satisfied or waived. 2B. Purchase and Sale of Shelf Notes. 2B(1). Facility. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential and Prudential Affiliates from time to time, the purchase of Shelf Notes pursuant to this Agreement. The willingness of Prudential to consider such purchase of Shelf Notes is herein called the "Facility". At any time, the aggregate principal amount of Shelf Notes - 2 - stated in paragraph IB, minus the aggregate principal amount of Shelf Notes purchased and sold pursuant to this Agreement prior to such time, minus the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time, is herein called the "Available Facility Amount" at such time. For purposes of the preceding sentence, all aggregate principal amounts of Notes shall be calculated in American Dollars (the aggregate principal amounts of any Note denominated in Canadian Dollars being converted into American Dollars at the rate of exchange used by Prudential to calculate the Canadian Dollar Equivalent at the time the Company accepts the relevant Quotation pursuant to paragraph 2D(3). NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER PURCHASES OF SHELF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE SHELF NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF SHELF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE. 2B(2). Issuance Period. (a) Shelf Notes denominated in American Dollars may be issued and sold pursuant to this Agreement until the earlier of (i) August 23, 1999 and (ii) the thirtieth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, a notice stating that it elects to terminate the issuance and sale of Notes pursuant to this Agreement (or if such thirtieth day is not a Business Day, the Business Day preceding such thirtieth day). The period during which Notes denominated in American Dollars may be issued and sold pursuant to this Agreement is herein called the "American Dollar Issuance Period". (b) Shelf Notes denominated in Canadian Dollars may be issued and sold pursuant to this Agreement until the later of (i) August 23, 1999 and (ii) if the Acceptance Day for such Notes is on or before August 23, 1999, the Closing Day specified in the relevant Request for Purchase (as such Closing Day may be rescheduled in accordance with paragraph 2B(7) hereof. The period during which Notes denominated in Canadian Dollars may be issued and sold pursuant to this Agreement is herein called the "Canadian Dollar Issuance Period" (together with the American Dollar Issuance Period, the "Issuance Period"). 2B(3). Request for Purchase. The Company may from time to time during the relevant Issuance Period make requests for purchases of Shelf Notes (each such request being herein called a "Request for Purchase"). Each Request for Purchase shall be made to Prudential by telecopier or overnight delivery service, and shall (i) specify the currency (which shall be American Dollars or Canadian Dollars) of the Notes, (ii) specify in American Dollars the aggregate principal amount of Shelf Notes (or the American Dollar equivalent of Notes to be denominated in Canadian Dollars covered thereby, which shall not be less than $5,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (iii) specify the principal amounts, final maturities and principal 'payment dates and amounts of the Shelf Notes covered thereby, (iv) specify the use of proceeds of such Shelf Notes, (v) specify the 3 - proposed day for the closing of the purchase and sale of such Shelf Notes, which shall be a Business Day during the relevant Issuance Period not less than 10 days and not more than 25 days after the making of such Request for Purchase (the "Shelf Closing Day"), (vi) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Shelf Notes are to be transferred on the Shelf Closing Day for such purchase and sale, (vii) certify that the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase and that there exists on the date of such Request for Purchase no Event of Default or Default, (viii) specify whether the fee to be due pursuant to paragraph 2B(8)(ii) should be included in the rate quotes Prudential may provide pursuant to paragraph 2B(4) or will be paid separately by the Company on the Shelf Closing Day for such purchase and sale, and (ix) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2B(4). Rate Quotes. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2B(3), Prudential may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:00 P.M. New York City local time (or such later time as Prudential may elect) interest rate quotes for the currencies, principal amounts (or the approximate Canadian Dollar Equivalent in the case of Notes to be denominated in Canadian Dollars as estimated by Prudential), maturities, principal prepayment schedules, and interest payment periods of Shelf Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Shelf Notes at which Prudential or a Prudential Affiliate would be willing to purchase such Shelf Notes at 100% of the principal amount thereof. 2B(5). Acceptance. Within 30 minutes (or 15 minutes, in the case of Notes denominated in Canadian Dollars) after Prudential shall have provided any interest rate quotes pursuant to paragraph 2B(4) or such shorter period as Prudential may specify to the Company (such period herein called the "Acceptance Window"), the Company may, subject to paragraph 2B(6), elect to accept such interest rate quotes as to not less than $5,000,000 aggregate principal amount of the Shelf Notes specified in the related Request for Purchase (or the Canadian Dollar Equivalent, as the case may be). Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window (but not earlier than 9:30 A.M. or later than 2:00 P.M., New York City local time) that the Company elects to accept such interest rate quotes, specifying the Shelf Notes (each such Shelf Note being herein called an "Accepted Note") as to which such acceptance (herein called an "Acceptance") relates. The day the Company notifies Prudential of an Acceptance with respect to any Accepted Notes is herein called the "Acceptance Day" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Shelf Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2B(6) and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a 4 - Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a "Confirmation of Acceptance"). If the Company should fail to execute and return to Prudential within three Business Days following receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Prudential may at its election at any time prior to its receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing, 2B(6). Market Disruption. Notwithstanding the provisions of paragraph 2B(5), if Prudential shall have provided interest rate quotes pursuant to paragraph 2B(4) and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in accordance with paragraph 2B(5) the domestic market for US Treasury securities or derivatives shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption of (i) trading in securities generally on the New York Stock Exchange, (ii) in the case of Notes to be denominated in American Dollars, in the domestic market for US Treasury securities or derivatives, or (iii) in the case of Notes to be denominated in Canadian Dollars, in the forward currency market or the interest rate Swap Market, then such interest rate quotes, shall expire, and no purchase or sale of Shelf Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2B(6) are applicable with respect to such Acceptance. 2B(7). Facility Closings. Not later than 11:30 A.M. (New York City local time) on the Shelf Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of the Prudential Capital Group, Two Prudential Capital Group, Suite 5600, Chicago, Illinois 60601, the Accepted Notes to be purchased by such Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Shelf Closing Day, dated the Shelf Closing Day and registered in such Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Shelf Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Shelf Closing Day for such Accepted Notes as provided above in this paragraph 2B(7), or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Shelf Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Shelf Closing Day notify Prudential (which notification shall be deemed received by each Purchaser) in writing whether (X) such closing is to be rescheduled (such rescheduled date to be (i) in the case of a Note denominated in American Dollars, a Business Day during the relevant Issuance Period not less than one Business Day and not more than 30 Business Days after such scheduled Shelf Closing Day or (ii) in the case of a Shelf Note denominated in Canadian Dollars, a Business Day not less than 1 Business Days and not more than 30 Business Days after the Acceptance Day (the "Rescheduled Closing Day"), and certify to Prudential (which certification shall be for the benefit of each Purchaser) that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Shelf Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2B(8)(ii) or (Y) such closing is to be canceled. For the avoidance of doubt, in the event that a Rescheduled Closing Day is established pursuant to the preceding sentence in respect of Shelf Notes denominated in Canadian Dollars, the Shelf Notes to be issued on such Rescheduled Closing Day shall have the same maturities, installment payment schedules and interest payment dates as if such Shelf Notes had been issued on the original Shelf Closing Day. In the event that the Company shall fail to give such notice referred to in the preceding sentence, Prudential (on behalf of each Purchaser) may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Shelf Closing Day, notify the Company in writing that such closing is to be canceled. Notwithstanding anything to the contrary appearing in this Agreement, the Company may elect to reschedule a closing with respect to any given Accepted Notes on not more than one occasion, unless Prudential shall have otherwise consented in writing. 2B(8). Fees. 2B(8)(i). Issuance Fee. The Company will pay to Prudential in immediately available funds a fee (herein called the 'Issuance Fee') on each Shelf Closing Day in an amount equal to 0.15% of the aggregate principal amount of Shelf Notes sold on such Shelf Closing Day, unless the Company shall have requested pursuant to the applicable Request for Purchase that such fee be included in the rate quotes Prudential may provide pursuant to paragraph 2B(4). 2B(8)(ii). Delayed Delivery Fee. (a) If the closing of the purchase and sale of any Accepted Note denominated in American Dollars is delayed for any reason beyond the original Shelf Closing Day for such Accepted Note, the Company will pay to Prudential on the last Business Day of each calendar month, commencing with the first such day to occur more than 30 days after the Acceptance Day for such Accepted Note and ending with the last such day to occur prior to the American Cancellation Date or the actual date of such purchase and sale (if such American Cancellation Date or closing date occurs more than 30 days after the Acceptance Day for such Accepted Note), a fee (herein called the "American Delayed Delivery Fee") calculated as follows: (BEY - MMY) X DTS/360 X PA where "BEY' means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note, "MMY" means Money Market Yield, i.e., the yield per annum on a an alternative investment selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Note having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the original Shelf Closing Day with respect to such Accepted Note (in the case of the first such payment with respect to such Accepted Note) or from and including the date of the next preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "PA" means Principal Amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. (b) If the closing of the purchase and sale of any Accepted Note denominated in Canadian Dollars is delayed for any reason beyond the original Shelf Closing Day for such Accepted Note, the Company will pay to Prudential on the Canadian Cancellation Date or actual closing date of such purchase and sale, a fee denominated in Canadian Dollars (herein called the "Canadian Delayed Delivery Fee", and together with the American Delayed Delivery Fee, the "Delayed Delivery Fee") which shall be (x) the amount equal to the product of (i) the difference between the Rate of Interest and the Overnight Investment Rate on funds deposited on each day from and including the Shelf Closing Day, (ii) the aggregate principal amount of the Shelf Notes for which the coupon was fixed, and (iii) a fraction the numerator of which is equal to the number of actual days elapsed from and including the Shelf Closing Day but excluding the date of such payment hereunder, and the denominator of which is 365, plus (y) any cost or expense (if any) incurred by Prudential with respect to any interest rate and/or currency exchange agreement entered into by the Prudential in connection with a delayed closing in relation to the Shelf Notes. In no case shall the Canadian Delayed Delivery Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Shelf Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2B(7). 2B(8)(iii). Cancellation Fee. (a) If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note denominated in American Dollars, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2B(5) or the penultimate sentence of paragraph 2B(7) that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the American Dollar Issuance Period (the date of any such notification, or the last day of the American Dollar Issuance Period, as the case may be, being herein called the "American Cancellation Date"), the Company will pay the Purchasers in immediately available funds an amount (the "American Cancellation Fee") calculated as follows: PI X PA where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (X) the excess of the ask price (as determined by Prudential) of the Hedge Treasury Note(s) on the American Cancellation Date over the bid price (as determined by Prudential) of the Hedge Treasury Notes(s) on the Acceptance Day for such Accepted Note by (Y) such bid price; and "PA" has the meaning ascribed to it in paragraph 2B(8)(ii). The foregoing bid and ask prices shall be as reported by Telerate Systems, Inc. (or, if such data for any reason ceases to be available through Telerate Systems, Inc., any publicly available source of similar market data). Each price shall be based on a US Treasury security having a par value of $100.00 and shall be rounded to 7 - the second decimal place. In no case shall the American Cancellation Fee be less than zero. (b) If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note denominated in Canadian Dollars, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2B(5) or the penultimate sentence of paragraph 2B(7). that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Canadian Dollar Issuance Period (the date of any such notification, or the last day or the Canadian Dollar Issuance Period, as the case may be, being herein called the "Canadian Cancellation Date" and together with the American Cancellation Date, the "Cancellation Date"), the Company will pay Prudential in immediately available funds, no later than the Business Day immediately succeeding such Canadian Cancellation Date, an amount denominated in American Dollars (the "Canadian Cancellation Fee", and together with the American Cancellation Fee, the "Cancellation Fee") equal to all unwinding costs incurred by Prudential on positions executed by or on behalf of Prudential, in contemplation of the transactions to take place on the Shelf Closing Day, in connection with fixing the coupon on any Shelf Notes under the Pru-Shelf Facility denominated in Canadian Dollars. Such positions include currency and interest rate swaps and currency exchange contracts which are subject to substantial price volatility. Such costs may also include losses (if any) incurred by Prudential as a result of fluctuations in exchange rates. All unwinding costs incurred by Prudential will be determined by Prudential in accordance with generally accepted financial practice. In no case shall the Canadian Cancellation Fee be less than zero. 3. CONDITIONS OF CLOSING. The obligation of any Purchaser to purchase and pay for any Shelf Notes, is subject on each case to the satisfaction, on or before the applicable Shelf Closing Day for such Shelf Notes, of the following conditions: 3A. Certain Documents. Such Purchaser shall have received the following, each dated the date of the applicable Closing Day: (i) The Shelf Note(s) to be purchased by such Purchaser. (ii) Certified copies of the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Amended and Restated Agreement and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Amended and Restated Agreement and the Notes. (iii) A certificate of the Secretary or an Assistant Secretary and one other officer of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Amended and Restated Agreement and the Notes and the other documents to be delivered hereunder. 8 - (iv) Certified copies of the Certificate of Incorporation and By-laws of the Company. (v) On each Shelf Closing Day, such Purchaser shall have received from David W. League, general counsel to the Company, or, at the Company's election, other counsel designated by the Company and acceptable to such Purchaser, a favorable opinion satisfactory to the Purchaser and substantially in the form of Exhibit D-1 attached hereto. (vi) A good standing certificate for the Company from the Secretary of State of Delaware dated of a recent date and such other evidence of the status of the Company as such Purchaser may reasonably request. (vii) Additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may be reasonably requested by such Purchaser. 3B. Representations and Warranties; No Default. The representations and warranties contained in paragraph 8 shall be true on and as of such Shelf Closing Day, except to the extent of changes caused by the transactions herein contemplated; there shall exist on such Shelf Closing Day no Event of Default or Default; and the Company shall have delivered to such Purchaser an Officer's Certificate, dated such Shelf Closing Day, to both such effects. 3C. Fees. On or before each Shelf Closing Day, the Company shall have paid to the Purchasers any fee required by paragraphs 2B(g)(i) and 2B(g)(ii). 3D. Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in substance and form to each Purchaser, and each Purchaser shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 3E. Purchase Permitted by Applicable Laws. The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G, T or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as it may request to establish compliance with this condition. 4. PREPAYMENTS. The Series A Notes and any Shelf Notes shall be subject to required prepayment as and to the extent provided in paragraphs 4A and 4B, respectively. The Series A Notes and any Shelf Notes shall also be subject to prepayment under the circumstances set forth in paragraph 4C. Any prepayment made by the Company pursuant to any other provision of this paragraph 4 shall not reduce or - 9 - otherwise affect its obligation to make any required prepayment as specified in paragraph 4A or 4B. 4A. Required Prepayments of Series A Notes. Until the Series A Notes shall be paid in full, the Company shall apply to the prepayment of the Series A Notes, without Yield-Maintenance Amount, the sum of $2,000,000 on June 22 and December 22 of each year, commencing June 22, 2001 and to and including December 22, 2007, and such principal amounts of the Series A Notes, together with interest thereon to the payment dates, shall become due on such payment dates. The remaining unpaid principal amount of the Series A Notes, together with interest accrued thereon, shall become due on June 22, 2008. 4B. Required Prepayments of Shelf Notes. Each Series of Shelf Notes shall be subject to required prepayments, if any, set forth in the Notes of such Series. 4C. Optional Prepayment With Yield-Maintenance Amount. The Notes of each Series shall be subject to prepayment, in whole at any time or from time to time in part (in integral multiples of $100,000 and in a minimum amount of $1,000,000), at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note. 4D. Notice of Optional Prepayment. The Company shall give the holder of each Note of a Series to be prepaid pursuant to paragraph 4C irrevocable written notice of such prepayment not less than 30 Business Days prior to the prepayment date, specifying such prepayment date, the aggregate principal amount of the Notes of such Series to be prepaid on such date, the principal amount of the Notes of such Series held by such holder to be prepaid on that date and that such prepayment is to be made pursuant to paragraph 4C. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date and, as to principal, applied to required payments thereon in the inverse order of maturity. 4E. Application of Prepayments. In the case of each prepayment of less than the entire unpaid principal amount of all outstanding Notes of any Series pursuant to paragraphs 4A, 4B or 4C, the amount to be prepaid shall be applied pro rata to all outstanding Notes of such Series (including, for the purpose of this paragraph 4E only, all Notes prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A, 4B or 4C) according to the respective unpaid principal amounts thereof. 4F. Retirement of Notes. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraphs 4A, 4B or 4C or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes of any Series held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay . 10 - or otherwise retire or purchase or other-wise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes of such Series held by each other holder of Notes of such Series at the time outstanding upon the same terms and conditions. Any Notes so prepaid or other-wise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4E. 5. AFFIRMATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note is outstanding and unpaid, the Company covenants as follows: 5A. Financial Statements; Notice of Defaults. The Company covenants that it will deliver to each significant Holder in triplicate: (i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of income and cash flows of (a) the Company and its Subsidiaries and (b) for each such subsidiary for quarterly period, and a consolidated balance sheet of (y) the Company and its Subsidiaries and (z) each such subsidiary as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, consolidated statements of income and cash flows of (a) the Company and its Subsidiaries and (b) each such subsidiary for such year, and a consolidated balance sheet of (y) the Company and its Subsidiaries and (z) each such subsidiary as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual financial statements (which, in the case of the consolidated statements of the Company and its Subsidiaries, shall be the preceding annual audit, all in reasonable detail and satisfactory in form to the Required Holder(s) and, as to the consolidated statements of the Company and its Subsidiaries, certified to the Company, by independent public accountants of recognized standing selected by the Company whose certificate shall be in scope and substance reasonably satisfactory to the Required Holder(s) and, as to the consolidated statements of each Subsidiary, certified by an authorized financial officer of the Company; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its public stockholders, if any, and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); and (iv) with reasonable promptness, such other financial data as such significant Holder may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each significant Holder an Officer's Certificate (a) demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraphs 6 hereof, (b) listing all Subsidiaries and (c) stating that there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each significant Holder (y) a written statement of the Company's independent public accountants acknowledging that the holders of the Notes are entitled to rely on such auditor's certification of such suited financial statements and (z) a certificate of such accountants stating that, in making the audit necessary the certification of such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. The Company also covenants that forthwith upon the chief executive officer, principal financial officer or principal accounting officer of the Company obtains knowledge of an Event of Default or Default, it will deliver to each significant Holder an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. 5B. Information Required by Rule 144A. The Company covenants that it will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to and in compliance with the reporting requirements of section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. 5C. Inspection of Property. The Company covenants that it will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the chief executive officer, principal financial officer or principal accounting officer of the Company (or any other officer or employee designated by any of them) and its independent public accountants, all at such reasonable times and as often as such Significant Holder may reasonably request. 5D. Covenant to Secure Notes Equally. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6B (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Debt thereby secured so long as any such other Debt shall be so secured. 5E. Maintenance of Insurance. The Company covenants that it and each Subsidiary will maintain, with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily is maintained by other companies operating similar businesses. Together with each delivery of financial statements under clause (ii) of paragraph 5A, the Company will, upon the request of any Significant Holder, deliver an Officer's Certificate specifying the details of such insurance in effect. 5F. Compliance with Environmental Laws. The Company covenants that it will, and will cause each of its Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Environmental Laws, except where noncompliance would not adversely affect the business, condition (financial or otherwise) or operations of the Company or its Subsidiaries. 5G. Cooperative Status. The Company covenants that it will at all times maintain its status as a Cooperative for purposes of Subchapter T of the Code. 6. NEGATIVE, COVENANTS. During the Issuance Period and so long thereafter as any Note or other amount due hereunder is outstanding and unpaid, the Company covenants as follows: 6A. Current Ratio; Fixed Charge Coverage. The Company will not permit (i) consolidated current assets to be less than 110% of consolidated current liabilities as of the last day of any fiscal quarter, or (ii) for any rolling four fiscal quarter period, Adjusted Net Earnings for such period to be less than 175% of the sum of interest expense, lease expense and scheduled principal payments made by the Company and Subsidiaries on a consolidated basis on all Debt and Patronage Indebtedness for such period. 6B. Lien,, Debt and Other Restrictions. The Company covenants that it will not and will not permit any Subsidiary to: 6B(1). Liens. Create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Note in accordance with the provisions of paragraph 5C), except: (i) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings, (ii) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection 13 - with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business, (iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary, (iv) Liens consisting of capitalized leases if (a) the Funded Debt represented by the related Capitalized Lease Obligations is permitted by the provisions of paragraph 6B(2), and (b) such Lien would be permitted by the provisions of clause (v) of this paragraph 6B(1), and (v) other Liens (including existing Liens), provided that the aggregate amount of Debt secured by all such Liens and any Liens permitted by clause (iv) above shall at no time exceed an amount equal to 15% of Member Dealers' Equity, and further provided that such Debt is permitted by the provisions of paragraph 6B(2); 6B(2). Debt. Create, incur, assume or suffer to exist any Debt, except: (i) Funded Debt represented by the Notes and the 1991 Agreement Notes, (ii) Debt of any Subsidiary to the Company or any other Subsidiary, (iii) additional Funded Debt of Subsidiaries, provided that the aggregate principal amount thereof shall at not time exceed $3,000,000, (iv) additional Funded Debt of the Company, provided that Consolidated Funded Debt shall at not time exceed 40% of Total Capitalization, and (v) Current Debt of the Company, provided that commencing on December 31, 1991, and at all times thereafter there shall have been a period of at least 45 consecutive days during each period of 12 consecutive calendar months on each day of which either there shall be no Current Debt outstanding or the Company could incur pursuant to clause (iv), above, additional Funded Debt in an amount equal to the maximum amount of Current Debt of the Company outstanding during such clean-down period; 6B(3). Sale of Stock and Debt of Subsidiaries. Sell or otherwise dispose of, or part with control of, any shares of stock or Debt of any Subsidiary, except to the Company or another Subsidiary, and except that all shares of stock and Debt of any Subsidiary at the time owned by or owed to the Company and all Subsidiaries may be sold as an entirety for such consideration which represents the fair value (as - 14 - determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock and Debt so sold, provided that, the assets of such Subsidiary, together with the assets of any other Subsidiaries sold or otherwise disposed of during the most recent 36-month rolling period, do not constitute a Substantial Part of the consolidated assets of the Company and its Subsidiaries and that such Subsidiary, together with any other Subsidiaries sold or otherwise disposed of during the most recent 36-month period, shall not have contributed a Substantial Part of Consolidated Net Earnings for any of the three fiscal years then most recently ended, and further provided that, at the time of such sale, such Subsidiary shall not own, directly or indirectly, any shares of stock or Debt of any other Subsidiary (unless al of the shares of stock and Debt of such other Subsidiary owned, directly or indirectly, by the Company and its Subsidiary are simultaneously being sold as permitted by this paragraph 6B(3)); 6B(4). Merger and Sale of Assets. Merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all of the consolidated assets of the Company and its Subsidiaries, or assets which, together with all assets of the Company and Subsidiaries sold, leased or otherwise disposed of during the most recent 36-month rolling period, constitute a Substantial Part of the consolidated assets of the Company and its Subsidiaries or shall have contributed a Substantial Part of Consolidated Net Earnings for any of the three fiscal years then most recently ended, to any Person, except that: (i) any Subsidiary may merge or consolidate with the Company (provided that the Company shall be the continuing or surviving corporation), or with any one or more other Subsidiaries, (ii) any Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to the Company or another Subsidiary, (iii) any Subsidiary may sell or otherwise dispose of all or substantially all of its assets subject tot he conditions specified in paragraph 6B(3) with respect to a sale of the stock of such Subsidiary, and (iv) the Company may merge or consolidate with any other corporation, provided that (a) the Company shall be the continuing or surviving corporation, (b) after giving effect to such merger or consolidation, no Default or Event of Default shall exist under this Agreement and (c) assuming that the effective date of such merger or consolidation was the last day of a fiscal quarter, no Default or Event of Default would exist under clause (i) of paragraph 6A: 6B(5). Restrictions on Transactions with Affiliates and Stockholders. Directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property (other than shares of stock of Company) to, or otherwise deal with, in the ordinary course of business or otherwise (i) any Affiliate or Substantial Stockholder, or (ii) any corporation in which an Affiliate, Substantial Stockholder or the Company (either directly or through Subsidiaries) owns 5% or more of the outstanding voting stock, except that (a) any such Affiliate or Substantial - 15 - Stockholder may be a director, officer or employee of the Company or any Subsidiary and may be paid reasonable compensation in connection therewith and (b) such acts and transactions prohibited by this paragraph 6B(5) may be performed or engaged in if (x) specifically authorized by the Company's Board of Directors (exclusive of any Affiliate or Substantial Stockholder who is a director and who may have a direct or indirect interest in such transaction) and (y) upon terms not less favorable to the Company or a Subsidiary (as the case may be) than if no such relationship described in clauses (i) and (ii) above existed 6C. Issuance of Stock by Subsidiaries. the Company covenants that it will not permit any Subsidiary (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any class of its stock (other than directors' qualifying shares) except to the Company or another Subsidiary. 6D. Compliance with ERISA. The Company will not, and will not permit any Subsidiary to, engage in any transaction in connection with which the Company or any Subsidiary could be subject to either a civil penalty assessed pursuant to section 502(i) of ERISA or a tax imposed by section 4975 of the Code, terminate or with draw from any Plan (other than a Multiemployer Plan) in a manner, or take any other action with respect to any such Plan (including, without limitation, a substantial cessation of operations within the meaning of section 4062(f) of ERISA), which could result in any liability of the Company or any Subsidiary to the PBGC, to a trust established pursuant to section 4041(c)(3)(B)(ii) or (iii) or 4042(i) of ERISA, or to a trustee appointed under section 4042(b) or (c) of ERISA, incur any liability to the PBGC on account of a termination of a Plan under section 4064 of ERISA, fail to make full payment when due of all amounts which, under the provisions of any Plan, the Company or any Subsidiary is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency, whether or not waived, with respect to any Plan (other than a Multiemployer Plan), if, in any such case, such penalty or tax or such liability, or the failure to make such payment, or the existence of such deficiency, as the case may be, could have a material adverse effect on the Company and its Subsidiaries taken as a whole. 6E. No change in Subordination Terms, etc. The Company covenants that (i) no certificate representing Patronage Indebtedness will be amended or re-issued with the effect of eliminating or in any way altering the subordination language appearing therein, (ii) no amendment shall be adopted to its By-laws or any other governing document, and no agreement shall be entered into with any of its stockholders, which would entitle a stockholder, upon termination of his or its franchise in any of the circumstances described in Section 12(a) of Article XVI of the By-laws of the Company, as in effect on the date of this Agreement, to receive consideration for his or its shares in a form other than a promissory note of the Company with a term of, or in excess of, four years and providing for payments in equal annual principal installments, except to the extent specifically provided in clauses (7) and (8) of Section 12(b) of Article XVI of the By-laws of the Company as in effect on the date of this Agreement and (iii) notwithstanding the foregoing clause (ii), in no fiscal year shall cash payments in excess of $5,000,000 be made under circumstances described in clauses (7) and (8) of Section 16 - 12(b) of Article XVI of the By-laws of the Company as in effect on the date of this Agreement. 6F. Nature of Business. The Company will not, and will not permit any Subsidiary to, (i) engage in the business of underwriting risks for insurance purposes, or in any other aspect of insurance related business other than the sale of insurance on an agency or brokerage basis, or (ii) purchase and sell real estate (other than on an agency basis) for purposes other than those relating directly to its principal business. 7. EVENTS OF DEFAULT. 7A. Acceleration. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of, or Yield Maintenance Amount payable with respect to, any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than 5 days after the date due; or (iii) the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or repurchase by the Company or any Subsidiary) shall occur and be continuing exceeds $3,000,000; or (iv) any representation or warranty made by or on behalf of the Company herein or in any writing furnished by any Officer of the Company on behalf of the Company in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made and, in the case of a misrepresentation in the second sentence of paragraph 8A, such falsity shall result - 17 - in a liability of the Company under the Code in an amount in excess of $10,000,000; or (v) the Company fails to perform or observe any agreement contained in paragraph 5F or paragraph 6 hereof; or (vi) the Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any officer obtains actual knowledge thereof-, or (vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "Bankruptcy Law'), of any jurisdiction; or (ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any Substantial Part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings arc commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstated and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days: or (xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a Substantial Part, or the divestiture of the stock of a Subsidiary whose assets represent a Substantial Part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a Substantial Part of the consolidated net income of the Company and its - 18 - Subsidiaries (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) one or more final judgments in an aggregate amount in excess of $10,000,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, any such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or then (a) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (b) if such event is any other Event of Default, the Required Holder(s) of the Notes of any Series may at its or their option by notice in writing to the Company, declare all of the Notes of such Series to be, and all of the Notes of such Series shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note of such Series, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, provided that the Yield-Maintenance Amount, if any, with respect to each Note shall be due and payable upon such declaration only if (x) such event is an Event of Default specified in any of clauses (i) to (vi), inclusive, of this paragraph 7A, (y) the Required Holder(s) of the Notes of such Series shall have given to the Company, at least 10 Business Days before such declaration, written notice stating its or their intention so to declare the Notes of such Series to be immediately due and payable and identifying one or more such Events of Default whose occurrence on or before the date of such notice permits such declaration and (z) one or more of the Events of Default so identified shall be continuing at the time of such declaration. 7B. Notice of Acceleration or Rescission. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A, the Company shall forthwith give written notice thereof to the holder of each Note of each Series at the time outstanding. 7C. Other Remedies. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. - 19 - 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows): 8A. Organization and Cooperative Status. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware and each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated. At all times since January 1, 1975, the Company has been a cooperative for federal income tax purposes pursuant to Subchapter T of the Code. 8B. Financial Statements. The Company has furnished each Purchaser of Series A Notes and any Accepted Notes with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at December 31 in each of the five fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and a consolidated statement of income and statement of cash flows of the Company and its Subsidiaries for each such year, all certified by KPMG Peat Marwick and (ii) consolidated balance sheets of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 45 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of income and statements of cash flows for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of income, and statements of cash flows fairly present the results of the operations of the Company and its Subsidiaries for the periods indicated. There has been no material adverse change in the business, condition or operations (financial or otherwise) of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished. 8C. Actions Pending. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which might result in any material adverse change in the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. - 20 - 8D. Outstanding Debt. Neither the Company nor any of its Subsidiaries has outstanding any Debt except as permitted by paragraph 6B(2). There exists no default under the provisions of any instrument evidencing such Debt or of any agreement relating thereto. 8E. Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all foreign, federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment except, in any such case, where failure to comply would not result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8F. Taxes. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company and its Subsidiaries, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. 8G. Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, or financial condition. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Exhibit E attached hereto. 8H. Offering of Notes. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of Section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction. 21 - 8I. Regulation G, etc. Neither the Company nor any Subsidiary owns or has any present intention of acquiring any "i-margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called "margin stock"). The proceeds from the sale of the Notes will be used to refinance bank debt and fund capital expenditures and acquisitions. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock or for any other purpose which might constitute the purchase of such Notes a "purpose credit" within the meaning of such Regulation G. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, Regulation T or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange Act of 1934, as amended, in each case as in effect now or as the same may hereafter be in effect. 8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the Pension Benefit Guaranty Corporation has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9B as to the source of funds to be used by it to purchase any Notes. 8K. Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Amended and Restated Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes. The representation by the company in this paragraph 8K is made in reliance upon and subject to the representation in paragraph 9. - 22 - 8L. Hostile Tender Offers. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer. 8M. Subordination. All indebtedness identified as "Patronage refund certificates payable" on the Company's most recently furnished balance sheet is effectively subordinated to the Notes pursuant to subordination language identical to that set forth in Exhibit F hereto, which language appears on all certificates evidencing such indebtedness. The subordination language set forth in Exhibit F hereto effectively subordinates to the Notes all indebtedness evidenced by instruments bearing such language. 8N. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished by or on behalf of the Company in connection herewith or in connection with the issuance of the Notes contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future would (so far as the Company can now foresee) materially adversely affect the business, property or assets or financial condition of the Company or any of its Subsidiaries and which has not been set forth in this Agreement or in other documents, certificates and statements furnished in connection herewith by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby. 9. REPRESENTATIONS OF THE PURCHASERS. Each Purchaser represents as follows: 9A. Nature of Purchase. Such Purchaser is not acquiring the Notes purchased by it hereunder with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the disposition of such Purchaser's property shall at all times be and remain within its control. 9B. Source of Funds. The source of funds being used by each Purchaser to pay the purchase price of the Notes being purchased by each Purchaser hereunder constitutes assets allocated to the "insurance company general account" of each Purchaser (as such term is defined under Section V of the United States Department of Labor's Prohibited Transaction Class Exemption ("PTCE") 95-60), and as of the date of the purchase of the Notes each Purchaser satisfies all of the applicable requirements for relief under Sections I and IV of PTCE 95-60. 10. DEFINITIONS. For the purpose of this Agreement, the terms defined in the text of any paragraph shall have the respective meanings specified therein, and the following terms shall have the meanings specified with respect thereto below: 10A. Yield-Maintenance Terms. "American Cancellation Date" shall have the meaning specified in paragraph 2B(8)(ii)(a). 23 - "American Cancellation Fee" shall have the meaning specified in paragraph 2B(8)(iii)(a) "American Delayed Delivery Fee" shall have the meaning specified in paragraph 2B(8)(ii)(a). "American Dollars" or "$" shall mean and indicate the lawful currency from time to time of United States of America. "American Dollars Issuance Period" shall have the meaning specified in paragraph 2B(2)(a). "American Dollar Reinvestment Yield" shall mean, with respect to the Called Principal of any Note denominated in American Dollars, the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace page 678 on the Telerate Service) for actively traded US Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded US Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting US Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities. "Called Principal" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4C (any partial prepayment being applied in satisfaction of required payments of principal in inverse order of their scheduled due dates) or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "Canadian Cancellation Date" shall have the meaning specified in paragraph 2(B)(8)(iii)(b). "Canadian Cancellation Fee" shall have the meaning specified in paragraph 2(B)(8)(iii)(b). "Canadian Delayed Delivery Fee" shall have the meaning specified in paragraph 2B(8)(ii)(b). "Canadian Dollars" or "C$" shall mean and indicate the lawful currency from time to time of Canada. 24 - "Canadian Dollars Equivalent" shall mean the principal amount of Notes specified by the Company in a Request for Purchase (expressed in American Dollars), converted into Canadian Dollars at the rate of exchange determined by Prudential at the time the Company accepts the relevant Quotation pursuant to paragraph 2B(5). "Canadian Dollars Issuance Period" shall have the meaning specified in paragraph 2B(2)(b). "Canadian Dollar Reinvestment Yield" shall mean, with respect to the Called Principal of any Note denominated in Canadian Dollars, (i) (a) the rate (as reported on "Page 40950" of the Telerate Service) for actively traded Canadian Government Bonds or (b) in the event that such Called Principal is less than 1 year, the rate (as reported on "Page 3190" of the Telerate Service) for Canadian Bankers Acceptances, in each case having an interpolated final maturity approximating the Remaining Average Life of such Called Principal as of such Settlement Date, or if such rates shall not be reported as of such time or the rates reported as of such time shall not be ascertainable, (ii) the average of rates reported by three Recognized Market Makers in such securities as of the Business Day next preceding the Settlement Date with respect to such Called Principal, for actively traded Canadian Government Bonds having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by interpolating linearly between yields reported for various maturities. "Cancellation Date" shall have the meaning specified in paragraph 2B(8)(iii)(b). "Cancellation Fee" shall have the meaning specified in paragraph 2B(8)(iii)(b). "Delayed Delivery Fee" shall have the meaning specified in paragraph 2B(8)(ii)(b). "Discounted Value" shall mean, with respect to the Called Principal of any Note denominated in American Dollars, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor applied on the same periodic basis as that on which interest on such Note is payable equal to the American Dollar Reinvestment Yield (in the case of Notes denominated in American Dollars) or the Canadian Dollar Reinvestment Yield (in the case of Notes denominated in Canadian Dollars) with respect to such Called Principal. "Issuance Fee" shall have the meaning specified in paragraph 2B(9)(i). "Issuance Period" shall have the meaning specified in paragraph 2B(2). "Overnight Investment Rate" shall mean the actual rate of interest, if any, received by Prudential on the overnight deposit of the Canadian Dollar funds designated 25 - for the purchase of the Notes, it being agreed by Prudential that reasonable efforts will be made by or on behalf of Prudential to make such deposit in an interest bearing account. "Rate of Interest" shall mean the Canadian Dollar rate of interest as determined by Prudential based on the swap conversion of the US dollar rate of interest applicable to the Notes as agreed to by Prudential and the Company in connection with fixing the US coupon on the Notes. "Recognized Market Makers" shall mean, two nationally recognized dealers of United Kingdom gilt-edged securities, as determined by Prudential. "Remaining Average Life" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one- twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. "Settlement Date" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4C or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "Yield-Maintenance Amount" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield- Maintenance Amount shall in no event be less than zero. 10B. Other Terms. "Acceptance" shall have the meaning specified in paragraph 2B(5). "Acceptance Day" shall have the meaning specified in paragraph 2B(5). "Acceptance Window" shall have the meaning specified in paragraph 2B(5). "Accepted Note" shall have the meaning specified in paragraph 2B(5). - 26 - "Adjusted Net Earnings" shall mean Consolidated Net Earning plus amounts deducted in the calculation thereof for depreciation, amortization, interest expense, and lease expense. "Affiliate" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Authorized Officer" shall mean (i) in the case of the Company, its chief executive officer, its chief financial officer, any vice president of the Company designated as an "Authorized Officer" of the Company in the Information Schedule attached hereto or any vice president of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by the Company's chief executive officer or chief financial officer and delivered to Prudential, and (ii) in the case of Prudential, any officer of Prudential designated as its "Authorized Officer" in the Information Schedule or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential. "Available Facility Amount" shall have the meaning specified in paragraph 2B(1). "Bankruptcy Law" shall have the meaning specified in clause (viii) of paragraph 7A- "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which commercial banks in New York City are required or authorized to be closed. 'Capitalized Lease Obligation" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expenses) in accordance with such principles. "Closing Day" shall mean, with respect to the Series A Notes, the Series A Closing Day and, with respect to any Accepted Note, the Business Day specified for the - 27 - closing of the purchase and sale of such Accepted Note in the Request for Purchase of such Accepted Note, provided that (i) if the Company and the Purchaser which is obligated to purchase such Accepted Note agree on an earlier Business Day for such closing, the "Closing Day" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2B(7), the Closing Day for such Accepted Note, for all purposes of this Agreement except references to "original Closing Day" in paragraph 2B(8)(ii), shall mean the Rescheduled Closing Day with respect to such Accepted Note. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Company" shall have the meaning specified in the introductory paragraph of this Agreement. "Confidential Information" shall mean any written information delivered or made available by or on behalf of the Company or any Subsidiary to a Purchaser or a Transferee (as the case may be), including without limitation any non-public information obtained pursuant to paragraph 5A or 5B, in connection with or pursuant to this Agreement which is proprietary in nature and clearly marked or labeled as being confidential information, but in no event shall include information (i) which was publicly known or otherwise known to such Purchaser or Transferee (as the case may be) at the time of disclosure (except pursuant to disclosure in connection with this Agreement), (ii) which subsequently becomes publicly known through no act or omission by such Purchaser or Transferee (as the case may be), or (iii) which otherwise becomes known to such Purchaser or Transferee, other than through disclosure by the Company. "Confirmation of Acceptance" shall have the meaning specified in paragraph 2B(5). "Consolidated Funded Debt" shall mean, as of the time of any determination, the sum of (i) all Funded Debt of the Company and Subsidiaries determined on a consolidated basis and (ii) all Funded Debt of the Company owed to Subsidiaries. "Consolidated Net Earnings" shall mean: (i) consolidated gross revenues of the Company and its Subsidiaries less (ii) all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earning which are included in gross revenues, and current additions to reserves), but not including in gross revenues: 28 - (a) any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets); (b) any gains resulting from the write-up of assets; (c) any equity of the Company or any Subsidiary in the unremitted earnings of any corporation which is not a Subsidiary; (d) any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any period prior to the date of acquisition; or (e) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary; all determined in accordance with generally accepted accounting principles. "Consolidated Net Worth" shall mean, as of the time of any determination, the sum of (i) Patronage Indebtedness, and (ii) Member Dealers' Equity. "Current Debt' shall mean any obligation for borrowed money (and any notes payable and drafts accepted representing extensions of credit whether or not representing obligations of borrowed money) payable on demand or within a period of one year from the date of the creation thereof; provided that any obligation shall be treated as Funded Debt, regardless of its term, if such obligation is renewable at the sole option of the Company pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the date of the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement. Any obligation secured by a Lien on, or payable out of the proceeds of production from, property of the Company or any Subsidiary shall be deemed to be Funded or Current Debt, as the case may be, of the Company or such Subsidiary even though such obligation shall not be assumed by the Company or such Subsidiary. "Debt" shall mean Current Debt and Funded Debt. "Environmental Laws" shall mean all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including without limitation ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, - 29 decrees, judgments, injunctions, notices or demand letters issued, entered, promulgated or approved thereunder. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code. "Event of Default" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "Facility" shall have the meaning specified in paragraph 2B(l). "Funded Debt" shall mean and include without duplication, (i) any obligation payable more than one year from the date of creation thereof, which under generally accepted accounting principles is shown on the balance sheet as a liability, including Capitalized Lease Obligations, (ii) indebtedness payable more than one year form the date of creation thereof which is secured by any Lien on property owned by the Company or any Subsidiary, whether or not the indebtedness secured thereby shall have been assumed by the Company or such Subsidiary, (iii) guarantees, endorsements (other than endorsements of negotiable instruments for collection in the ordinary course of business) and other contingent liabilities (whether direct or indirect) in connection with the obligations, stock or dividends of any Person, (iv) obligations under any other contract which, in economic effect, is substantially equivalent to a guarantee, and (v) any obligation which, regardless of its term, is renewable pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement; all as determined in accordance with generally accepted accounting principles; provided, however, that Funded Debt shall not include Patronage Indebtedness or up to $35,000,000 of contingent recourse obligations of the Company incurred in connection with its sale from time to time of notes receivable due from the Company's dealers. - 30 - "Hostile Tender Offer" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note. "Institutional Investor" shall mean any insurance company, pension fund, mutual fund, investment company, bank, savings bank, savings and loan association, investment banking company, trust company, or any finance or credit company, any portfolio or any investment fund managed by any of the foregoing, or any other institutional investor, and any nominee of the foregoing. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Member Dealers' Equity" shall mean, as of the time of any determination, the total of (i) the par value (or stated value on the books of the Company) of the capital stock of all classes of the Company, plus (or minus in the case of a surplus deficit) (ii) the amount of the consolidated surplus, whether capital or earned, of the Company and its Subsidiaries; provided that in no event shall amounts attributable to treasury stock be included in Member Dealers' Equity. "Multiemployer Plan" shall mean any Plan which is a "Multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA. "1991 Agreement Notes" shall mean the notes of the Company issued pursuant to the Note Purchase and Private Shelf Agreement dated as of September 27, 1991 between the Company and Prudential, as amended from time to time. "Note" and "Notes" shall have the meaning specified in paragraph 1B. "Officer's Certificate" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company. "Patronage Indebtedness" shall mean subordinated indebtedness of the Company issued to its members as all or part of a patronage dividend and evidenced by - 31 - a certificate bearing subordination language identical to that set forth in Exhibit F hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any of its functions under ERISA. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Plan" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. "Price Increase" shall have the meaning specified in paragraph 2B(8)(iii)(a). "Prudential" shall mean The Prudential Insurance Company of America. "Prudential Affiliate" shall mean any corporation or other entity all of the Voting Stock (or equivalent voting securities or interests) of which is owned by Prudential either directly or through Prudential Affiliates. "Purchasers" shall mean Prudential with respect to the Series A Notes and, with respect to any Accepted Notes, Prudential and/or the Prudential Affiliate(s), which are purchasing such Accepted Notes. "Request for Purchase" shall have the meaning specified in paragraph 2B(3). "Required Holder(s)" shall mean the holder or holders of at least 51% of the aggregate principal amount of the Notes or of a Series of Notes, as the context may require, from time to time outstanding. "Rescheduled Closing Day" shall have the meaning specified in paragraph 2B(7). "Securities Act" shall mean the Securities Act of 1933, as amended. "Series" shall have the meaning specified in paragraph 1B. "Series A Closing Day" shall have the meaning specified in paragraph 2A. "Series A Note(s)" shall have the meaning specified in paragraph 1A. "Significant Holder" shall mean (i) Prudential and any other Purchaser, so long as Prudential, any Prudential Affiliate or such Purchaser shall hold (or be committed under this Agreement to purchase) any Note, or (ii) any other holder of at - 32 - least 5% of the aggregate principal amount of the Notes of any Series from time to time outstanding. "Subsidiary" shall mean any corporation shall, at the time as of which any determination is being made, be owned by the Company either directly or through Subsidiaries. "Substantial Part" shall mean (i) in the context of the consolidated assets of the Company and its Subsidiaries, assets which constitute 10% or more thereof and (ii) in the context of assets' contribution to Consolidated Net Earnings, assets which contributed 15% or more thereof "Substantial Stockholder" shall mean (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating 5% or more of such voting power or (ii) any person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this paragraph. "Total Capitalization" shall mean, as of the time of any determination, the sum of (i) Consolidated Net Worth and (ii) Consolidated Funded Debt. 'Transferee" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement. 'Voting Stock" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 11. MISCELLANEOUS. 11A. Note Payments. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Yield-Maintenance Amount payable with respect to, such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 12:00 noon, New York City local time, on the date due) to (i) the account or accounts of such Purchaser specified in the Purchaser Schedule attached hereto in the case of any Series A Note, (ii) the account or accounts of such Purchaser specified in the Confirmation of Acceptance with respect to such Note in the case of any Shelf Note or (iii) such other account or accounts in the United States as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any - 33 - Transferee which shall have made the same agreement as the Purchasers have made in this paragraph 11A. 11B. Expenses. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges and the fees and expenses of any special counsel engaged by the Purchasers or any Transferee in connection with this Agreement, the transactions contemplated hereby and any subsequent proposed modification requested by the Company of, or proposed consent under, this Agreement, whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including attorneys' fees, incurred by any Purchaser or any Transferee in enforcing (or determining whether or how to enforce) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby or by reason of any Purchaser's or any Transferee's having acquired any Note, including without limitation costs and expenses incurred in any bankruptcy case. Notwithstanding the foregoing, the Company shall not be obligated to reimburse a Purchaser or any transferee for expenses incurred in connection with the sale or transfer of a Note. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note. 11C. Consent to Amendments. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes of each Series except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest on or any Yield-Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential (and not without the written consent of Prudential) the provisions of paragraph 2B may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2 and 3 may be amended or - 34 - waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended Or supplemented. 11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The Notes are issuable as registered notes without coupons in denominations of at least $1,000,000, except as may be necessary to reflect any principal amount not evenly divisible by $1,000,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute arid deliver the Notes which the holder making the exchange is entitled to receive. Each installment of principal payable on each installment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the installment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any installment or installments of principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. Notwithstanding anything to the contrary herein, each Purchaser agrees, and each Transferee by its acceptance of an interest in any Note agrees, that no Note (or any interest therein) shall be transferred to any Person which is not an Institutional Investor. 35 - 11E. Persons Deemed Owners; Participations. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield- Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion. 11F. Survival of Representations and Warranties; Entire Agreement. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. 11G. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not; provided, however, that the Company may not assign its rights or obligations hereunder to any Person. 11H. Disclosure to Other Persons. Each Purchaser agrees (and each Transferee by its acceptance of an interest in any Note agrees) to use its best efforts to hold in confidence and not disclose any Confidential Information; provided that nothing herein shall prevent the holder of any Note from delivering copies of any financial statements and other documents delivered to such holder, and disclosing any other information disclosed to such holder, by or on behalf of the Company or any Subsidiary in connection with or pursuant to this Agreement to (i) such holder's directors, officers, employees, agents and professional consultants, (ii) any other holder of any Note, (iii) any Person to which such holder offers to sell such Note or any part thereof, (iv) any Person to which such holder sells or offers to sell a participation in all or any part of such Note, (v) any federal or state regulatory authority having jurisdiction over such holder, (vi) the National Association of Insurance Commissioners or any similar organization or (vii) any other Person to which such delivery or disclosure may be necessary or appropriate (a) to effect compliance with any law, rule, regulation or order applicable to such holder, (b) in response to any subpoena or other legal process, (c) in connection with any litigation to which such holder is a party or (d) in order to protect such holder's investment in such Note. 11I. Notices. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, - 36 - addressed as specified for such communications in the Purchaser Schedule attached hereto (in the case of the Series A Notes) or the Purchaser Schedule attached to the applicable Confirmation of Acceptance (in the case of any Shelf Notes) or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois 60521, Attention: Treasurer, provided, however, that any such communication to the Company may also, at the option of the Person sending such communication, be delivered by any other means either to the Company at its address specified above or to any Authorized Officer of the Company. Any communication pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which is listed for the party receiving the communication in the Information Schedule or at such other telecopier terminal as the party receiving the information shall have specified in writing to the party sending such information. 11J. Descriptive Headings, The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11K. Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, to any holder of Notes or to the Required Holder(s), the determination of such satisfaction shall be made by such Purchaser, such holder or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 11L. Accounting Terms and Determinations. All references in this Agreement to "generally accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof, subject to the next sentence. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles, applied on a basis consistent with the audited consolidated financial statements of the Company and its Subsidiaries delivered pursuant to clause (ii) of paragraph 5A. 11M. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, - 37 - or Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the succeeding Business Day. If the date for any payment is extended to the succeeding Business Day by reason of the preceding sentence, the period of such extension shall be included in the computation of the interest payable on such Business Day. 11N. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAW OF THE STATE OF ILLINOIS. 11O. Counterparts. This Agreement may be executed in any number of counter-parts, each of which shall be an original, but all of which together shall constitute one instrument. 38 - If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the Company, whereupon this letter shall become a binding agreement between you and the Company. Very truly yours, ACE HARDWARE CORPORATION By: Name: Gary A. Hunt Title: Treasurer The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: Vice President 38 - EXHIBIT A-1 [FORM OF SERIES A NOTE] ACE HARDWARE CORPORATION 6.47% SENIOR SERIES A NOTE DUE JUNE 22, 2008 No. [Date] $ FOR VALUE RECEIVED, the undersigned, ACE HARDWARE CORPORATION (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to or registered assigns, the principal sum of DOLLARS on June 22, 2008, with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the rate of % per annum from the date hereof, payable quarterly on the day of February, May, August and November in each year, commencing with the February, May, August or November next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) -% or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Note Purchase and Private Shelf Agreement, dated as of September 22, 1993 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes party thereto, on the other hand, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part, in certain cases without Yield Maintenance Amount and in other cases with the Yield Maintenance Amount specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. The Company agrees to make prepayments of principal of this Note on the dates and in the amounts specified in the Agreement. In case an Event of Default as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. ACE HARDWARE CORPORATION By: Title: EXHIBIT A-2 [FORM OF SHELF NOTE] ACE HARDWARE CORPORATION SENIOR SERIES NOTE No. ORIGINAL PRINCIPAL AMOUNT: ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES- FINAL MATURITY DATE: PRINCIPAL PREPAYMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, ACE HARDWARE CORPORATION (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to , or registered assigns, the principal sum of DOLLARS [on the Final Maturity Datespecified above, payable on the Principal Prepayment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Resated Note Purchase and Private Shelf Agreement, dated as of August 23, 1996 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. The Company agrees to make principal payments of this Note on the Principal Installment Dates (if any) specified above. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. ACE HARDWARE CORPORATION By: Name: Title: EXHIBIT A-3 [FORM OF SHELF NOTE] ACE HARDWARE CORPORATION SENIOR SERIES NOTE No. ORIGINAL PRINCIPAL AMOUNT: C$ ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES: FINAL MATURITY DATE: PRINCIPAL PREPAYMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, ACE HARDWARE CORPORATION (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to , or registered assigns, the principal sum of CANADIAN DOLLARS [on the Final Maturity Date specified above],[payable on the Principal Prepayment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year --30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) the rate. Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in [Toronto/New York City] or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of Canada. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Restated Note Purchase and Private Shelf Agreement, dated as of August 23, 1996 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. The Company agrees to make principal payments of this Note on the Principal Installment Dates (if any) specified above. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. ACE HARDWARE CORPORATION By: EXHIBIT C [FORM OF CONFIRMATION OF ACCEPTANCE] ACE HARDWARE CORPORATION Reference is made to the Note Purchase and Private Shelf Agreement (the "Agreement"), dated as of September 22, 1993, and as amended and restated as of August 23,1996 between ACE HARDWARE CORPORATION (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Prudential or the Prudential Affiliate which is named below as a Purchaser of Notes hereby confirms the representations as to such Notes set forth in paragraph 9 of the Agreement, and agrees to be bound by the provisions of paragraphs 2B(5) and 2B(7) of the Agreement relating to the purchase and sale of such Notes and by the provisions of the penultimate sentence of paragraph I 1A of the Agreement. Pursuant to paragraph 2B(5) of the Agreement, an Acceptance with respect to the following Accepted Notes is hereby confirmed: 1. Accepted Notes: Aggregate principal amount $ or C $ (A) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal prepayment dates and amounts-. (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule (B) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal prepayment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule (C), (D)..... same information as above.] C - I II. Closing Day: 111. Currency Exchange Rate Dated: ACE HARDWARE CORPORATION By: Title: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: Vice President [PRUDENTIAL AFFILIATE] By: Vice President C - 2 EXHIBIT D-1 [FORM OF OPINION OF COMPANY'S COUNSEL] [Date of Closing] [Name(s) and addressees) of purchaser(s)] Ladies and Gentlemen: I have acted as counsel for Ace Hardware Corporation (the "Company") in connection (the "Company"), with the Note Purchase and Private Shelf Agreement, dated as of September 22, 1993, as amended and restated as of August 23, 1996 (the "Agreement") between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes a party thereto, on the other hand, pursuant to which the Company has issued to you today Senior Series Notes of the Company in the aggregate principal amount of $ (the "Notes"). Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This letter is being delivered to you in satisfaction of the condition set forth in paragraph 3A(2) of the Agreement and with the understanding that you are purchasing the Notes in reliance on the opinions expressed herein. In this connection, I have examined such certificates of public officials, certificates of officers of the Company and copies certified to my satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as I have deemed relevant and necessary as a basis for my opinion hereinafter set forth. I have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, I have also relied upon the representation made by you in paragraph 9A of the Agreement. Based on the foregoing, it is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. Each Subsidiary is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation. The Company and its Subsidiaries have the corporate power to carry on their respective businesses as now being conducted. D - 2 - 1 2. The Agreement and the Notes have been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and are valid obligations of the Company, legally binding upon and enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 4. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of regulation G, T or X of the Board of Governors of the Federal Reserve System. 5. The execution and delivery of the Agreement and the Notes, the offering, issuance and sale of the Notes and fulfillment of and compliance with the respective provisions of the Agreement and the Notes do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or (insofar as is known to me after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Exhibit E to the Agreement), instrument, order, judgment or decree to which the Company or any of its Subsidiaries is a party or otherwise subject. 6. The Note constitutes "other indebtedness" as that term is used in the subordination language appearing in the Company's outstanding patronage refund certificates (which subordination language is attached to the Agreement as Exhibit F), and all indebtedness of the Company evidenced by such certificates is subordinate to the Note as provided in such certificates. Very truly yours, D - 2 - 2 EXHIBIT E LIST OF AGREEMENTS LIMITING DEBT AGREEMENT RESTRICTION Bond Purchase Agreement, dated Not permit the ratio of Total Liabilities December 22, 1981 between Anne to Net Worth to exceed 2.9 to 1. ArundeL County, Maryland and Ace Hardware Corporation and The Northern As of 8/31/93: Trust Company Liabilities $462,245,000 Net Worth $182,257,000 Ratio 2.5 to 1. Note Purchase and Private Shelf Consolidated Funded Debt shall at no Agreement, dated September 27, 1991 time exceed 35% of Total Capitalization. between Ace Hardware Corporation and The Prudential Insurance Company of As of 8/31/93: America Funded Debt $109,505,000 Total Capitalization $354,027,000 Percent 31% D - 2 - 3 EXHIBIT F This Certificate is subordinated to all the rights and claims of all secured, general and bank creditors against Ace Hardware Corporation and no payment hereon shall be made if, at the time of such proposed payment, there exists a default in the payment of principal or interest on any indebtedness secured by any mortgage now or hereafter made by Ace Hardware Corporation or any other default under any such mortgage or any default in payment of any other indebtedness now or hereafter incurred by Ace Hardware Corporation until such default has been cured or waived, or if such proposed payment would cause a default in any such mortgage or any other indebtedness or result in the nonpayment thereof; and in the event of foreclosure, if the property securing any such mortgage or other indebtedness is sold pursuant to such proceedings or in lieu thereof, and a lesser sum is realized than the amount due on such debt, this Certificate is subordinate to any such deficiency and such deficiency on any such mortgage or other indebtedness shall first be paid in full before any payment hereon; and in the event of voluntary or involuntary liquidation of Ace Hardware Corporation, or in any bankruptcy, reorganization, insolvency, insolvency or receivership proceedings, such mortgage or such other indebtedness shall first be paid in full before any payment hereon. D - 2 - 4 PURCHASER SCHEDULE Series B Notes Ace Hardware Corporation Aggregate Principal Amount of Notes to be Note Denom- Purchased ination(s) THE PRUDENTIAL INSURANCE COMPANY OF AMERICA $20,000.000 $20,000,000 All payments on account of Notes held by such purchaser shall be made by wire transfer of' immediately available funds for credit to: Account No. 050-54-526 Morgan Guaranty Trust Company of' New York 23 Wall Street New York, New York 10015 (ABA No.: 021-000-238) Each such wire transfer shall set forth the name of the Company, a reference to "7.49% Series B Senior Notes due June 15, 2011, Security No. !INV4571!", and the due date and application (as among principal, interest and Yield-Maintenance Amount) of the payment being made. 2) Address for all notices relating to payments: The Prudential Insurance Company of America c/o Prudential Capital Group Four Gateway Center 1OO Mulberry Street Newark, New Jersey 07102 Attention: Investment Administration Unit Telecopy: (201) 802-7551 Address for all other communications and notices: The Prudential Insurance Company of American c/o Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Attention: Managing Director Telecopy: (312) 540-4222 4) Recipient of telephonic repayment notices: Manager, Asset Management Unit Telephone: (201) 802-6429 Telecopy: (201) 802-7551 Recipient of telephonic prepayment notices: Manager, Asset Management Unit (201) 802-6429 6) Tax Identification No: 22-1211670 INFORMATION SCHEDULE Authorized Officers for Prudential Allen A. Weaver P. Scott von Fischer Managing Director Senior Vice President Prudential Capital Group Prudential Capital Group Two Prudential Plaza Two Prudential Plaza Suite 5600 Suite 5600 Chicago, Illinois 60601 Chicago, Illinois 60601 Telephone: (312) 540-4211 Telephone: (312) 540-4225 Facsimile: (312) 540-4222 Facsimile: (312) 540-4222 Mark A. Hoffmeister Marie I. Fioramonti Senior Vice President Senior Vice President Prudential Capital Group Prudential Capital Group Two Prudential Plaza Two Prudential Plaza Chicago, Illinois 60601 Chicago, Illinois 60601 Telephone: (312) 540-4215 Telephone: (312) 540-4216 Facsimile: (312) 540-4222 Facsimile: (312) 540-4222 Senior Vice President Central Credit Prudential Capital Group Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 Telephone: (201) 802-6429 Facsimile: (201) 624-6432 Authorized Officers for the Company David F. Hodnik Rita D. Kahle David W. League President & CEO Vice President, Finance Vice President, General Ace Hardware Corporation Ace Hardware Corporation Counsel & Secretary 2200 Kensington Court 2200 Kensington Court Ace Hardware Corporation Oak Brook, Illinois 60521 Oak Brook, Illinois 60521 2200 Kensington Court Oak Brook, Illinois 60521 Telephone: (708) 990-6600 Facsimile: (708) 571-4512 EX-23 7 AUDITOR'S CONSENT Consent of Independent Auditors The Board of Directors Ace Hardware Corporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Opinion of Experts". KPMG Peat Marwick, LLP Chicago, Illinois March 10, 1997 EX-24 8 POWERS OF ATTORNEY EXHIBIT 24 ACE HARDWARE CORPORATION: POWER OF ATTORNEY -------------------------------------------- KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors of ACE HARDWARE CORPORATION, a Delaware corporation, hereby constitutes and appoints DAVID F. HODNIK and RITA D. KAHLE, and each of them, his true and lawful attorneys-in-fact and agents, each with full power to act without the other, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Post-Effective Amendment No. 2 to the Registration Statement on Form S-2, and any and all amendments thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has set his or her hand and seal as of this 12th day of March, 1997. JENNIFER C. ANDERSON RAY W. OSBORNE Jennifer C. Anderson Ray W. Osborne LAWRENCE R. BOWMAN ROGER E. PETERSON Lawrence R. Bowman Roger E. Peterson MARK JERONIMUS JON R. WEISS Mark Jeronimus Jon R. Weiss JAMES T. GLENN DON S. WILLIAMS James T. Glenn Don S. Williams JOHN E. KINGERY JAMES R. WILLIAMS, JR. John E. Kingrey James R. Williams, Jr. RICHARD E. LASKOWSKI Richard E. Laskowski EX-27 9 FDS
5 This schedule contains summary financial information extracted from SEC Form S-2 Post-Effective Amendment No. 2 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1996 DEC-31-1996 12,657 0 348,948 1,700 327,145 698,930 364,395 150,861 916,375 550,462 0 0 0 233,652 502 916,375 2,742,451 2,742,451 2,535,014 2,535,014 0 0 11,855 73,425 1,118 72,307 0 0 0 72,307 0 0
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